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Economic Facts that Aren't

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August 17, 2012 – Comments (11)

Location: Jerryguru69's CAPS Blog

Author: Jerryguru69

GDP IS THE ONLY GAME IN TOWN

I trust Chinese Communists party bigwigs about as far as I can throw them. However, I read a quote by one who had a really good idea: he judges economic activity by looking at electricity usage, rail traffic, and loans. Perhaps a bit more noise than the GDP, but they can be measured daily and are hard facts not prone to 'adjustments'.

US TAXES ARE AT HISTORIC LOWS

This is one of those curious, crayon-pancakehouse-paper-placemat calculations. They take total tax receipts, and calculate it as a % of the GDP. By this measure, yes, US taxes are at historic lows; however, this ignores the math that unemployed adults are not paying payroll or income tax, therefore reducing tax receipts.

UNEMPLOYMENT IS 8.3%

At the cost of ending up in the weeds: every month, the BLS calculates no less than 6 different unemployment rates. The % reported in the press is the “U3” rate. However, the “U6” is more accurate, in that it includes people whose hours have been cut back and those who have given up trying to find a job. Currently, the latter unemployment rate is 15%.

THE INFLATION RATE IS 1.7%

The 'official' number reported by the media specifically does not include food or fuel; the stated reason is that it makes the % too volatile to be a useful policy tool. Well, perhaps, but this means that the reported inflation rate has nothing to do with the increase in the cost of living experienced by ordinary families.

SSI STANDS FOR “SOCIAL SECURITY INSURANCE”

This is a rather interesting and deceptive bit of verbal jujitsu. When a taxpayer hears this term, it invokes something like a whole life insurance policy, i.e. you pay into it all your life, and when it is your turn, you get back the money you have 'invested'. In fact, it stands for 'Supplementary Security Income': 'income' as in a voluntary payment by the payer, and 'supplementary' as in it is not supposed to be your only source of income in your old age.

GOLD IS A RELIABLE PROXY FOR INFLATION

If you chart the latter against the former, the correlation is not very good. Gold has had its peaks and valleys, but these often do not match that of inflation. Sometimes the 2 match, but not very often.

CAPITALISM CAN THRIVE ANYWHERE

Capitalism has been transplanted in a couple of unlikely places, read: Communist countries. It has, however, wilted in both cases: Russia is a state-sanctioned kleptocracy where laws have no meaning or force, and Red China has only as much freedom as the Politburo thinks its peasants should have.

INCREASING TAXES BRINGS PROSPERITY AND STABILITY

No, no, I am not referring to the well-worn debate between Keynes and Hayek, but the 'austerity' measures being forced upon the PIIGS by Euroland bureaucrats in Brussels. This entails, in part, increasing taxes. Thus far, this has failed to revive the GDP of any of the PIIGS.

QE3 WILL BRING US OUT OF RECESSION

Helicopter Ben has tried monetary stimulus twice before to no avail. What makes him think that round 3 will be any different?

BUY WHAT YOU KNOW

Just because you are trained pastry chef who makes donuts that causes lines out the door, you are not therefore qualified to judge whether KKD or DNKN are good investments.

BE FEARFUL WHEN OTHERS ARE GREEDY AND GREEDY ONLY WHEN OTHERS ARE FEARFUL

What the Oracle of Omaha really said: “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to...”

11 Comments – Post Your Own

#1) On August 17, 2012 at 4:17 PM, Goofyhoofy (< 20) wrote:

What a load of lard.

US taxes ARE at historic lows. The fact that people are unemployed is irrelevant. If they were employed, GDP would be higher, taxes collected would be higher. It wouldn't change anything.

The inflation rate doesn't include food and fuel precisely because they ARE volatile, and give a wildly inaccurate view of what is happening. What is true is that inflation in those areas "bakes" into the rest of the economy over several months, as transport costs seep into everything delivered - including food. A graph from the St. Louis Fed illustrates the volatility, and the irrelevance: http://tinyurl.com/29rxlj9

Capitalism has been transplanted into more than "a couple" of places. Vietnam, for instance. East Germany is doing well. So is Yugoslavia. Likewise Czechoslovakia, Romania, Latvia, Romania, Albania and others. And if they are not as rich as we are, well, they've been at it for 10 years, and we have had 200. And China is doing spectacularly, despite your gloomy assessment. Maybe that's why there are over 3,000 KFC's in China. McDonald's abound. As do Starbucks. WalMart is moving in, along with hundreds of other multi-nationals inclluding GE, Apple, and more. Do you think that would be happening if they didn't have some assurance of property protections? And if China isn't where we are with regard to "freedom" and "human rights", well, they've been at it for ten years, and... well, you get the idea. (Life in the early US wasn't a picnic, exactly. You were required to attend church, in many places there was no "right to trial", things were settled at High Noon with a six-gun, and so on. Get a grip, here.

The stimulus packages used before were far too small to accomplish anything, and every macro-economist who looked at them said so at the time. It was political opposition that limited the response of the government, not the fact that it was a bad idea. (You might note that England, champion of austerity, is now in a severe double-dip recession, and most of the economists who were against stimulus packages there have - wow - suddenly changed their minds.) Anybody want to look at Spain, with 25% unemployment, and tell me that austerity is just dandy?

Well, there's more, but this is already too long. You managed a batting average of about .187. Shameful that the Motley Fool would make this tripe the "Post of the Day" when it is so factually error-ridden.

Oh, and technically speaking, the monies in Social Security ARE "invested" in the same bonds that governments and investors around the world clamor for (and which we sell trillions of dollars to), bonds backed by the full faith and credit of the US government. Nobody I know thinks there are piles of greenbacks in a basement vault somewhere, but US bonds are considered the safest in the world by investors around the globe - to the point where they are willing to buy them even with minimal or even negative interest. That ought to count for something, don't you think? (Yes, there are actual file cabinets full of bonds, redeemable in the same way corporate bonds are. Whether the monies will be there depends on the future, which is inherently unknowable, but tell me who thinks IBM bonds or GE bonds are safer than US bonds and I'll show you an idiot.) 

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#2) On August 17, 2012 at 7:28 PM, jerryguru69 (97.73) wrote:

Great comments, so here ya' go:

1) a person who becomes employed pays more tax % than the GDP avg %, therefore increasing tax/GDP %. 

2) the major source of inflation seen by a family is food and energy, regardless of what it does to inflation as a policy tool.

3)  many oil companies (in Mexico, Venezuela, Russia) have had their assets nationalized with low or no compensation. The presence of a large multinational in a country is no guarantee that it won't be 'taken' at some point down the line.

4) ummm...I think you are confusing fiscal stimulus by the Administration and Congress ($800b if memory serves) with QE, which cranking up the printing presses: Helicopter Ben has already made historic increases in M/M2/M3 to no avail. The only power he has is to increase the number of dollars in circulation, totally unrelated to fiscal stimulus.

5) I believe that you are referring to 'Social Security Bonds' (yes, there is such a thing: Google it); SSI borrowings are not invested in Treasury paper. These are not real monetary instruments, but the famous gov't accounting gimmick. The SSI trustee cannot sell, nor can you or anyone else buy them. Try this link: http://mises.org/daily/1820 .

Thank you for your comments: keep us bloggers honest.

 

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#3) On August 18, 2012 at 1:19 PM, MadCapitalist (< 20) wrote:

"US taxes ARE at historic lows. The fact that people are unemployed is irrelevant. If they were employed, GDP would be higher, taxes collected would be higher. It wouldn't change anything."

Not surprisingly, you are missing the point. The point is that the "historic lows" of federal tax revenues are not a result of a change in tax law. Tax revenues as a percentage of GDP are volatile within the same tax framework.

For example, individual income tax revenue increased from 7.8% of GDP in FY 1994 to 10.2% in FY 2000, despite no "tax increase" during this time (actually, there was a capital gains "tax cut" during this time). I used quotation marks because I used the sloppy ambiguous language that is so popular these days. Capital gains tax revenue increased dramatically after the so-called "tax cut."

Democrats like to use the cyclical drop in tax revenues as a percentage of GDP as one excuse (of many) to permanently increase taxes. They try to confuse citizens into believing that cyclical drops in tax revenue are somehow related to "tax cuts," which is obviously not the case.

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#4) On August 18, 2012 at 9:32 PM, rd80 (98.23) wrote:

@Googyhoofy

"Oh, and technically speaking, the monies in Social Security ARE "invested" in the same bonds that governments and investors around the world clamor for"

No, they're not.  It's a special class of bonds and I'll explain why they have no value (because the money's already been spent).

1. Current system:  When SS expenditures exceed income, the SSA takes some of the special bonds to Treasury to redeem them.  There are three options:  Default, pay out of general US tax revenues or issue new bonds to borrow the money needed to redeem the SS bonds.  By far, the most likely outcome is issuing new bonds to borrow the money needed.

2. Assume there were no SS bonds:  When SS expenditures exceed income, the SSA goes to Congress to ask for money.  There are three options:  Default, pay out of general US tax revenues or issue new bonds to borrow the money needed to redeem the SS bonds.  By far, the most likely outcome is issuing new bonds to borrow the money needed.

Same outcome in either scenario just a little different path to get there, so the special SS bonds add zero value to the system.

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#5) On August 18, 2012 at 9:51 PM, TMFMorgan (< 20) wrote:

<< The 'official' number reported by the media specifically does not include food or fuel;>>

Yes, it does. Core-CPI doesn't, but it's not the official inflation reading. CPI-U is: http://www.bls.gov/news.release/cpi.t01.htm

Credible media outlets report both and expain both, such as here:

http://www.bloomberg.com/news/2012-06-14/consumer-prices-in-u-s-declined-in-may-by-most-in-three-years.html 

 

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#6) On August 18, 2012 at 10:05 PM, TMFMorgan (< 20) wrote:

Here's BLS:

 "In addition to the All Items CPI, BLS publishes thousands of other consumer price indexes. Some users of CPI data use this index because food and energy prices are relatively volatile, and these users want to focus on what they perceive to be the "core" or "underlying" rate of inflation. While we publish many indexes, our broadest measure of inflation includes all items consumers purchase, including food and energy."

http://www.bls.gov/cpi/cpifaq.htm 

 

 

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#7) On August 18, 2012 at 10:15 PM, TMFMorgan (< 20) wrote:

In theory GDP should equal the sum of everyone's income (GDI), so as someone else pointed out GDP is depressed in the tax/GDP calculation, offsetting the rise in unemployment. Tax/GDP is most effective way to measure the tax burden across time. 

Another way is the nationwide average effective rate. Here's the Tax Foundation earlier this year: "Nationally, average effective income tax rates were at their lowest levels since the IRS began tracking them in 1986."

http://taxfoundation.org/article/summary-latest-federal-individual-income-tax-data-0 

 

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#8) On August 19, 2012 at 7:49 AM, Goofyhoofy (< 20) wrote:

 

**No, they're not.  It's a special class of bonds and I'll explain why they have no value (because the money's already been spent).**

OK, sloppy verbiage on my part.  Let me put it this way. They are bonds from the same issuing authority (the US Government) with the same redemption guarantees as the other bonds that authority offers, on varying time frames, some of which coincide with bonds being offered - and snapped up - by investors around the world. (If "the money has already been spent" is important, how is that different from the US Savings Bonds, T-bonds, or anything else being sold today? Do you think when you buy a Savings Bond they take your greenbacks and stick them in a box in the basement?

 

 

 


 

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#9) On August 19, 2012 at 8:08 AM, Goofyhoofy (< 20) wrote:

Madcap, Madcap, you are too funny. The increase in taxes was a result of a large increase in asset values (the stock bubble) which resulted in huge increases in capital gains. This is out of all proportion to traditional GDP gains, and resulted in dramatically increased tax receipts without a parallel increase in overall economic activity. But you know that, right?

Jerry, Jerry, Jerry: I guess you're unfamiliar with "capitalist" history, as well. In the US, thousands of independent telephone systems were "nationalized", which is how AT&T came to be.  US Railroads were nationalized in 1917. The TVA was created in the 1930's to end the recalcitrant electric company monopolies in the Southeast (and to build dams, end malaria, and more), and by the way, have you looked for a Savings and Loan anywhere lately? And hey, tried to start a private airport security company recently?

Don't take that as a defense if communist countries' nationalization of certain industries, but maybe you should start recognizing that "them all bad" and "us all good" isn't so viable out here where people who know how the world works.

And using an explanation from Mises.org to elucidate an economic issue. Hilarious. Try reading from sources without such a terribly rigid, dogmatic, predetermined economic philosophy and maybe someone will take you seriously.

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#10) On August 19, 2012 at 8:03 PM, jerryguru69 (97.73) wrote:

 

@MadCapitalist

entirely correct, but perhaps he was making a tactical, spreadsheet argument about %.

@rd80

yes: I wish more everyday investors like you and me understood the difference between SS bonds and treasury paper.

@TMFMorgan

spot on, my friend. I only wish (the original source of my complaint) that the talking heads on nightly news programs understand as much as you.

@Goofyhoofy

nope, you are still wide of the mark. TVA, Ma Bell, and the Transcontinental Railroad were fairly compensated; tell that to XOM about its assets in Venezuela.

 

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#11) On August 20, 2012 at 11:27 AM, 82574 wrote:

UNEMPLOYMENT IS 8.3%

At the cost of ending up in the weeds: every month, the BLS calculates no less than 6 different unemployment rates. The % reported in the press is the “U3” rate. However, the “U6” is more accurate, in that it includes people whose hours have been cut back and those who have given up trying to find a job. Currently, the latter unemployment rate is 15%. - the POD 19 August 2012

Actually most people do not know that there are multiple Unemployment rates -- generally only the rate that is reported by the generally "Know Nothing" lazy Pres. Corps.

The youthful unemployment rate is over 20% as is the returning Military Veteran's Unemployment Rate which is simply unconscionable..

Kahuna, CFA

Kailua-Kona 96745

Investment Professional

1974 - Present 

 

 

 

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