December 2019 – From the Desk of Robert Williams Jr.

12/31/201912/31/2019

Is College A Good “Investment”?

At the time of this writing, many graduates are concerned about the burden of their student loans. Albeit student loans make an undergraduate degree more financially attainable, the expansion of these loans has driven up the prices of tuition, along with other factors. Consequently, loan balances are increasing, translating into more student loan debt—a bubble waiting to pop.
This, along with a myriad of other factors, raises the question if college education still is a worthy long term investment.

In this paper titled, “Is College Still Worth It? A New Calculus of Falling Returns.” explores this topic in more detail.

12/25/201912/25/2019

The Scam called “Inflation”

In this article, “The Wealth Redistribution Scam that is “Inflation”, Dr. Thorsten Polleit lays out a compelling case on how Inflation usurps wealth from one group of individuals, as the second group benefits from the debasement of the money supply.

An excerpt:
“As money loses its purchasing power, income and wealth are stealthily redistributed. Some individuals and groups of people are enriched at the expense of others. Savers and workers are swindled out of their deserved income and retirement benefits, while those who own goods that rise in value or who borrow money typically reap a windfall profit. Clearly, the banking industry is a major beneficiary of monetary debasement.”

Here is a way to translate this: If you are saving your way to retirement, it’s a highly risky project employing the commonly used strategies to save for retirement. As the units of fiat currency are devalued, with loose monetary policy, it requires more units of currency to purchase goods and services—the prices of those goods seem higher, thanks to the devaluation of the monetary base. In the article, Dr. Polleit breaks down the illusion that the stock market can “beat inflation”. This is false, as rising stock prices are an indicator of inflation, and the true prices of stock are not as high as it seems.

On top of all of this, many Americans are saving for retirement using qualified plan vehicles, such as 401(k) plans. The investments used inside of these plans used to “save” for retirement are typically as follows: Mutual funds, stocks, and the like. The appeal of these vehicles are obvious: All contributions, for the current tax year into the 401(k) type plan, are tax deductible or done Pre tax from payroll deduction. Upon retirement, after 59 1/2, the owner of this plan begins to withdraw the funds, and will be taxed earned income tax on ALL funds. Yes, the original principle AND the gains are taxed. In short, the upward pressure on stock prices, thanks to inflation, benefit the IRS since the funds will be taxed at retirement.

The financial institutions also benefit from the inflation, as equity prices are pushed upwards; this yields higher commissions, higher valuations for assets under management, and higher profits. Consider this: With these investments, all the risk is transferred to the investor, who has little or no control on the investments inside his qualified retirement account, but has the tax burden.

Good luck living off that money during retirement..

Read the rest of the article here: https://mises.org/wire/wealth-redistribution-scam-inflation

12/25/201912/25/2019

Savings and the Expansion of Government

A very profound quote from Ludwig von Mises regarding the relationship between Economic Savings and the Expansion of the State:

“The policies advocated by the welfare school remove the incentive to saving on the part of private citizens. On the one hand, the measures directed toward a curtailment of big incomes and fortunes seriously reduce or destroy entirely the wealthier peoples power to save. On the other hand, the sums which people with moderate incomes previously contributed to capital accumulation are manipulated in such a way as to channel them into the lines of consumption.”

This chart below shows the decline of the savings rate since the 1960s in the United States.

This chart below shows the expansion of Government spending since the 1940s. This chart shows the political party in the White House, but it most be noted that the Congress also plays a role in the budgetary process. The majority party in Congress during the respective time intervals is not listed in this graph.

Yes, there are other variables to consider in this simplistic analysis, but the question remains: Is there a direct correlation as Mises suggests in his quote?

12/23/201912/23/2019

70% of Americans have Less than $1000 in Savings

Yes, you read that correctly. Well, let’s be more precise: Per the survey done by GObanking Rates, 69% of Americans have less than $1,000 in savings. Erratum: My title has 70%, so I’m sure that 1% makes a huge statistical difference for some. This survey has been done each by this organization since 2014, and for the 2019 survey, it contains 846 respondents.

An argument can be made that they only polled 846 individuals. Fair point. But, I would not be surprised if more respondents were polled, the percentage would not change. There is a myriad of reasons why, but I will mention some here.

50 Percent of Americans Earn $33,000 per year or Less

I recently reported that 50% of Americans earn $33,000 per year or less. This analysis was provided by the United States Social Security Administration. Yep, that is correct: $2,750 per month. This amount is before taxes. Consider housing, food, transportation, child care, and etc, as the expenditures eat into the gross/net income. Since this is the case, it makes it difficult to save money due to the next point…

Rising Cost of Living aka Inflation

The issue of the rising cost of living, specifically for those earning less than $33,000 per year, makes it increasingly difficult to develop any sort of savings. The core issue of the increased cost of living is due to inflationary measures. If you have read the articles on this page, the issues surrounding inflation are constantly addressed. Inflation is not the rise in prices, although the economic actor will see prices rise. When The Federal Reserve continues with loose monetary policy, the winners are the large financial institutions, the cost of inflation is paid by those who earn less than $33,000 per year.

As the dollar is devalued based upon the implementation of loose monetary policy by The Fed, it takes more dollars to buy the goods these people want and need— giving the illusion that prices are actually rising. Due to this economic phenomenon, people in this economic income segment have almost no savings to cover for emergencies. When those emergencies come, these individuals must lean on credit to cover these unforeseen expenses. Once the crisis has ended, the user is stuck with a credit card balance, as this adds to their monthly expenses—these expenditures are currently very close to their income. At this point, many can not continue to pay the regular expenses, and the mounting credit card debt. What happens next? The credit card is defaulted.

Credit Card Default Rates Rising

Due to the lack of income, coupled with the lack of savings, it is no shocker that credit card default rates are on the rise. To be specific, the credit card default rates are on the rise for sub prime borrowers. This trend isn’t exclusive to just credit cards, it is also expanded to other sub prime lending sources such as pay day loans, auto loans, and the like. As previously mentioned, these types of credit are used to help cover the income gap in expenses or cover emergencies. Another source will be for medical expenses as well, due to the rising prices of health care.

Conclusion

At the time of this writing, political pundits will remark how fine the economic metrics look, namely how unemployment is so low. Kudos. Yet, there signs of things that could lead to a market correction, namely in the capital markets. Some of the prime reasons, in my opinion, is based upon Americans not having enough in savings, and the central banks pumping more currency into the banking system. However, since we are living in a consumption based economy(meaning consumption now versus later), there is very little incentive to save..thanks to inflation.

Excursus

Survey 69% of Americans have less than $1,000 in savings: https://www.gobankingrates.com/saving-money/savings-advice/americans-have-less-than-1000-in-savings/

Fifty Percent of Americans Earn Up to $33,000 per Year

12/19/201912/19/2019

More On Repurchase Agreements: Excessive Government Spending and the Liquidity Crisis

My apologies are given in advance. Why? I’m presenting more information regarding repurchase agreements. As a reader, it is should be simple to deduce that recent extreme use of repurchase agreements is worthy of strong consideration and concern. If this your first time reading about these, feel free to read this article, written by me, describing repurchase agreements(repos). If needed, read that article first, then return back to this writing.

In this blog entry, “How Excessive Government Spending Sparked a Liquidity Crisis”, Craig Eyermann lists how the implementation of the use of repos makes, since September 2019, The Federal reserve is the largest holder of United States Government debt. Many of the points made in his article should raise some concerns; which is why I continue to repost articles related to this subject.

Regardless how the mainstream news media spins this, inflation is a monetary phenomenon. Of course, these individuals will state that inflation is low citing the Consumer Price Index as support of this spurious claim. Rising prices do not always constitute inflation, due to the fact the prices of all goods are not homogeneous.

The expansion of the monetary base(inflation)is directly correlated to the overspending by the federal government. With this over spending, deficits are generated, and debt is used to balance the budget. The budget never is balanced since the behavior is rewarded. The losers, in this scenario, are the individuals who are savers or on a fixed income stream. Also: The individuals who are lower income earners.

12/17/201912/17/2019

Where is the Inflation?

“Where is the Inflation?” A fine question typically posed by those who look at the Consumer Price Index as a way of measuring inflation. There are many flaws in using this as an means of determining inflation, as a full blown analysis shall be saved for another point in space and time. Strictly speaking, inflation is monetary phenomenon.

Back to the initial question, This answer is explored with a result of an increase of the money supply: inflation as it relates to price increases. With inflation, it can push prices of goods and services out of reach of average income earners. As for savers, they see the currency lose value over time. The answer to our question is addressed here: https://mises.org/wire/wheres-inflation-its-stocks-real-estate-and-higher-ed

12/14/201912/14/2019

Exponential Growth in Fiscal Irresponsibility: Federal Deficit Grows $342 Billion in First Two Months of 2020 Fiscal Year

Introduction

Congress, the Grand Stewards of the Federal Government’s treasure chest, have continued down the road of fiscal perdition. How? For the first two months of the Fiscal year of 2020, the United States Federal Government’s deficit has grown $342 billion, per the Congressional Budget Office. This represents a 12 percent increase over previous periods. Based upon the CBO, the Federal Deficit will average $1.2 Trillion per year between 2020 and 2029.

What Does This Mean?

With the proliferation of federal government spending, combined with ever increasing budget deficits, this leads to more activity of the growth of the government debt. Debt security instruments, such as United States treasuries, are sold to obtain cash in order to “true up” the deficit. Purchasers of Government debt can be foreign nations, but on the domestic side, The Fed is the largest purchaser of Government Securities. Back to the transaction, once this transaction takes place, this expands the money supply. It is expanded with injecting the cash, by the sale of the treasuries, into the money supply when the fed purchases them. The Fed’s balance sheet continues to grow along with the ongoing purchasing of debt securities. A quick reminder of the concept of inflation: It is the expansion of the monetary base.

The Road of Fiscal Perdition

With the expansion of the federal government entitlement programs, such as Medicare, Medicaid, and Social Security, it only makes sense that the deficit will average $1.2 trillion per year over the next decade. As the baby boomers begin to draw down social security benefits, the demand for health care will rise. This will place a strain on resources, pushing health care costs upward.
Also: Inflation has a deleterious impact upon savers and individuals that are on a fixed income. Since the value of the currency declines, this reduces the purchasing power for goods. This creates a situation that more individuals become more dependent on Medicaid and other Government social programs.

Conclusion

Due to the overwhelming use of government resources, the deficit will continue grow. This will lead to more borrowing, which will lead to more inflation, which leads to more individuals struggling to cover their expenditures. Good luck building wealth in this economic environment.

Excursus

Read the CBO report here: https://www.cbo.gov/publication/55551%20%C2%A0

12/10/201912/11/2019

Repurchase Agreements Are On The Rise: Who Cares? You Should

Since September 2019, The Federal Reserve has cranked up its repurchase agreement operations(Repo), after a period of dormant activity. In the recent past, since 2009, The Fed was engaging in more Quantitative Easing(QE). As a result, the Fed has been buying back the cash from the banks as a means to offset the QE.
While you are reading this, you maybe asking yourself: “What is this jobberwocky regarding repurchase agreements? Why should I care?” Both are excellent questions, and they deserve an answer. For starters, let’s discuss the concept of a repurchase agreement.

The Pawn Shop Transaction
Imagine you are short on cash, and you have some urgent expenses that require your immediate attention. Let’s assume, for this example, the amount needed is $1,000, and your next payday is in 7 days. You are feeling anxious. However, you begin to rise out of your lugubrious mental state, and you recall that you own a fine musical instrument. Bubbling over with excitement, you scurry over to the local pawn shop, hoping to get some cash to help you in your current plight. You enter the pawn shop, and you are shocked to the fact they can give you the $1,000 for the instrument. But, you suddenly realize: There is no free lunch. The pawn shop operator reviews the condition of the instrument, as he checks to see if its value is worth the exchange. The pawn shop operator agrees to the deal, but you must pay him back $1,300 in a week. The pawn shop gives you the cash, which helps your cash position for the short period until the next payday. In the exchange, the Pawn Shop takes control over the Musical Instrument.
You are okay with these terms despite the interest rate charged because you really need to cover these urgent expenses. In a week, you pick up the instrument and pay back the pawn shop $1,300. The $1,300 represents the original amount plus interest. If you never payback the Pawn Shop, then the shop keeps the Musical Instrument. Most likely, in this hypothetical scenario, the musical instrument is worth well more than the $1,000. The pawn shop’s risk is mitigated by following: (1) their proper valuation of the instrument, and (2) the interest charged to you for your repayment.

A Repo: The Pawn Shop Transaction…with a twist
A repurchase agreement works in a similar fashion, but there is a slight twist: The ownership of the collateral does change hands, but there is an agreement for the receiver of the money to purchase back the asset in a short period of time. The assets sold, in the repo, can be US Treasuries, Mortgage Backed Securities, or the like. The Federal Reserve will provide the bank the cash for the asset. The bank agrees to purchase back those securities at a later date, for a higher price. That buy back price is driven by the Federal Funds lending rate, which is established by the Federal Reserve. Side note: That rate is the amount used to factor how much interest to charge when banks borrow from each other. Once this occurs, the bank has more cash on the balance sheet. A reverse repo is simply the opposite transaction, from the bank’s perspective. The Fed will simply sell to the bank those assets/securities, in exchange for cash.

Why would a bank engage in a Repo transaction with the Fed? For starters, this helps maintain the proper cash reserves for the bank. Next, since the Federal Reserve sets the Federal Funds lending rate, perhaps the bank can take advantage of some arbitrage opportunities. A conceptual example to consider: If the funds rate is 1.75%, perhaps the bank feels it can earn 2.00% on another investment. Another reason: A bank could have liquidity issues from a group of loans that have defaulted, and they lack the cash to move forward. The reasons to enter a repo with the Fed are not limited to simply a few. With any economic transaction, there are costs, and the repo transaction is not immune to this.

Concern One: Moral Hazard
The concerns regarding these transactions can be many, I will simply cover two. First, since the Federal Reserve acts as “The Lender of Last Resort”, this repo transaction acts as a moral hazard. The banks can engage in all sorts of risky business knowing that The Fed is going to bail them out. If the banks decide to invest into a bundle of a certain type of investments, and that tranche goes sour, their liquidity is compromised. The Fed can come in, engage in a repo agreement, and liquidity is restored. If banks had no “safety net” for their investing behavior, they would be forced to moderate their investment risks accordingly.

Concern Two: Inflation
Once the funds are injected into the banking system, this expands the money supply instantly. With inflation, the economic value of the currency drops as each piece of the monetary unit is added to the money supply. Since banks operate with a fractional reserve model, once the funds are given to the banks, they show higher cash reserves on their financial statements. For example, a deposit of $1.00 can be expanded to show $10 on the bank’s books. Imagine that with billions of dollars. That becomes massive.
As with all inflationary measures, the first recipients of the cash are the main benefactors. In this case, it is the banks. The interesting thing about inflation: It acts as another tax on everyone else, mainly savers and individuals on a fixed income. A few benefit from the expansion of the money supply, and the economic cost of this monetary expansion is spread all throughout the rest in society.

Why Should You Care?
If you are on the quest of building wealth, knowledge about the financial world around you is important. With regards to monetary policy, and even fiscal policy, it impacts your ability to build and accumulate wealth. The insidious combination of loose monetary policy, and the federal government spending at egregious levels, makes it increasingly difficult to save and build wealth.
With the expansion of the money supply, it can develop asset bubbles. In the last 2O years, we have seen two different bubbles burst, due to loose monetary policy. With both bubbles, the warning signs were there, many continued with their investments and lost. If the investors who were wiped out could see the signs, perhaps things could have been different.

Conclusion
With the expansion of repo operations, the Fed’s balance sheet continues to grow. Some traditional economists may see this as necessary due to the fact the Fed must be able to maintain and smooth out the economy when needed. This activity comes with a tremendous cost, as individuals are feeling the squeeze of inflationary risk. Something to consider: Inflation is not really about prices rising, but it’s more about the monetary base being devalued. Since it takes more monetary units to by more goods, it gives the illusion that goods prices are rising, when it’s really the fact that the currency is loosing value over time. This is the surreptitious nature of inflation as it relates to these sort of central bank policies.

Excursus
Here is an article ink that covers this matter in more detail. It also provides graphs of the Federal Reserve’s balance sheet mix comprising Treasury Bills and Mortgage Backed Securities. The ratio blend of these assets fluctuate daily, as repos can activated and unwind overnight or in weeks. The point is the growing balance sheet, as it relates to the Fed’s increased activity with repo operations. The link: https://wolfstreet.com/2019/12/05/fed-goes-hog-wild-with-t-bills-but-repos-drop-from-a-month-ago-and-mbs-shrink-by-22-bn/

The Federal Reserve website providing an explanation of asset balances: https://www.federalreserve.gov/releases/h41/current/default.htm

An article describing the renewal of the repo operations: https://mises.org/wire/ghosts-failed-banks-have-returned

How the Fed has Boxed themselves into a corner, as they did before the Housing Market crash: https://mises.org/power-market/3-charts-showing-just-how-boxed-fed

12/07/201912/07/2019

Turo: The Peer to Peer Car Rental Platform Angers Traditional Car Rental Firms

Turo: A magnificent invention spawned out of the creative process of voluntary exchange. It’s concept is simple: It allows individuals car owners to rent out their vehicles to others seeking to rent their cars for a period of time. This is a win/win for those involved: The owner of the vehicle earns cash from his car, and the renter can use the car to fulfill their needs. Sounds perfect? Not so quite..if you asked the traditional car companies.

Turo has raised the awareness of the mainstream rental car companies. The reason is quite simple: Turo is able to provide a similar service at a lower cost. Note: Cost does not always mean price. It could be more convenient. And that is subjective to the people involved in the transaction.

Having lower costs can come from increased competition. This increased competition benefits consumers, as firms seek to become more efficient, and attempt to provide a higher quality product at a lower cost. Still sounds great? For the consumers and Turo..YES! Avis et al…NO.

The issue with traditional rental car companies: They feel they can not compete effectively with the myriad of regulations they must contend with to stay in business, yet Turo’s car owners do not have to contend with this regulations. So, is it the fact Turo is competitive in the marketplace, or is it that the Government regulations are highly costly? I say the latter.

If I were a betting man, and I’m not by the way, the traditional car companies will lobby to make Turo have the same regulations as the main line firms. This sort of economic madness has been seen with other similar scenarios. It would make more economic sense to have the regulations reduced or removed! Oh no..to the traditional firms, the status quo is benefiting them. It also demonstrates that the economic cost of government regulation hurts smaller businesses and consumers. Allowing the creativity and ingenuity to prosper can produce more firms like Turo, and consumers will benefit from having reduced regulations and economic costs.