A View From the Ridge, Part 3

This afternoon marks Youngest’s final Blue-Gold Banquet as a cub scout, the one at which he formally leaves because he’s now too old.  He has chosen to move on to boy scouts and part of the ceremony will involve him and his four compatriots officially becoming members of different troops and when he crosses that bridge, ten years of cub scouting for the PracticalDad family will be finished.  Raising kids is a forest-for-the-trees experience except for the moments when you reach a ridge that permits you to view you to see where you are on the journey, providing a panoramic view of where we’ve been with the kids and where we still need to go.

As the literal and figurative greybeard for this particular pack, I’ve taken on much and have planned the actual ceremony; walking through the ceremony has struck me as to the passage of time.  When we began this process, Eldest was in elementary school and herself a girl scout.  Middle began scouting in the first grade and Youngest was only a baby in Mom’s arms.  What I’ll see this afternoon is Eldest back from college as a surprise for Youngest, and Middle in the audience as a high school student.  Another trail from the road is circling back onto itself, closing the loop and a look back from the ridge reveals any number of looped trails that we’ve encountered and passed.  Looking ahead shows more valleys with the road but the road itself is changing as the kids continue to age, grow and even mature into adults. 

You don’t realize the passage of time and how things change until you reach those ridgelines when the trees have thinned out for a short period.  When you do reach that point, take a few moments to pause and appreciate both what you’ve had as well as what you have. 

Then plunge down the hill and back into the forest amidst the trees. 

Forest Fires

I was taken aback to read Paul Krugman’s recent column, Kick That Can, over the weekend.  There’s been considerable press and debate over the economic necessity – or not – of austerity and the events taking place in Greece put a very human face upon it.  Austerity is now in the pipeline here at home and the debate is on over how much debt is supportable and at what point the plug is pulled on further spending.  Krugman’s stance is that the damage of reducing government spending – remember C+I+G+(X-M) – with no other driver available would be too much for the economy.  Of course, the bulk of government spending at the moment is directed towards either the sandbox wars or untouchable entitlement spending which add nothing to reinvestment.  After reading his column, all that I could think of were forest fires.

The US Forest Service was founded by Teddy Roosevelt as we’d gone through our lumber resources like a hot knife through butter.  Protecting the forests meant protecting it from any threat, including that of forest fire.  Fire killed trees and left areas denuded for years to come.  But through decades of study and experience, the Forest Service learned that there was actually a place and a purpose for fire; while it did damage, it also cleared away the undergrowth that clogged the forest floor and prevented substantive new growth if left untreated.  My family and I have driven through smoke-choked areas, the roads marked with signs advising that there were controlled fires ahead.  Clear away the debris and invasives and set the stage for the real new growth.

This is also the way of capitalism and why capitalism has proven to be such a good economic model for real growth.  Credit is misallocated over time and even with real growth, there is a considerable amount of deadwood that builds up.  The downturns are occasions when the deadwood is cleared away and the stage is set again for further growth.  In terms of humanity, the effect is one of job loss and economic pain and those are the realities that have to be addressed by public assistance programs and personal preparation.  It’s not an idea that is popular or pleasant, but it is the reality in which we have to live.  Despite our best public and private efforts, things are messy and there will be real-life pain.

Some argue that we haven’t had true capitalism for more than a decade and I can ascribe to the idea of bifurcated capitalism, capitalism for the masses who must pay for their financial errors while the Too-Big-To-Fail institutions are protected from their excesses and errors.  So much has been spent, so much debt incurred, in preventing any failure that might clear away the undergrowth – and yes, even good wood – that the economic forest is thoroughly dense with should-be dying businesses and kudzu-like predatory practices that siphon off so much real wealth.  What’s happening now is the opposite of forest fires; it’s the rampant addition of fertilizing liquidity across the financial spectrum in the hope that the good wood will somehow grow fast enough that it will eventually actually overtake the forest again.  But this is impossible since the fertilizer not only goes to the invasives as well, but they gain even more by leeching onto the healthy growth and siphoning off of them until they finally succumb.  The result is a blighted, tangled mess that produces nothing of value. 

Despite the best efforts of Forest Service and Federal Reserve, there will be forest fires.  But so many aspects have come together that I fear a true conflagration, an economic burn that will lay waste to the nation’s economy:

  • The repeated deficits that ratchet up the national debt to levels that are simply unpayable;
  • The failure of the Congress to even pass a rudimentary budget that actually addresses our priorities;
  • The willingness of the Federal Reserve to abet this travesty by expanding their balance sheet to handle the newly printed government debt;
  • The continuing uncontrolled actions of the Too-Big-To-Fail institutions that further lever themselves to levels of derivatives that make the levels of 2008 pale;
  • The unwillingness or inability of the government to regulate these institutions and bring their actions to heel;
  • Further, the failure to meaningfully prosecute for the financial crimes – and yes, they are crimes – so that a truly painful punishment is exacted and a lesson is taught;
  • The willful compliance of the business networks in propagating a view that all is well and that is out of touch with the reality on Main Street.

Bad news sells but in my worst moments, I have to concede that the next forest fire could rival that which struck the 1920s German Weimar Republic or the 1990s Soviet Union. 

While this kind of view is often nay-sayed and derided, the reality is that this concern is permeating our society and especially in how it impacts families and child-rearing.  There’s been an awareness of helicopter parenting and well-deserved criticism of it since it doesn’t augur well for children who must move into adulthood.  Sites such as Free Range Kids question whether we’ve become too over-protective and promote a more balanced view of society’s threats.  There’s an understanding that the economy has shifted tectonically and the conventional wisdom of how to succeed is actually hurting our young people by saddling them with toxic debt.  Even before they reach that young-adult level, we’re becoming aware that our teens are financially illiterate, even for surviving in an economic consumption model that’s simply unsupportable moving forward. The upshot is that while nobody in the mainstream is willing to say it, the concerns are circling at the family level. 

As parents, our role is to not just to provide food and shelter, but ultimately to raise children who have the resiliency to survive what life throws at them.  There will always be forest fires and it’s our jobs to give them the character and tools to manage through them.  But our collective failure to press for action only sets the stage for fires that will burn through everything and scar our children for generations. 

CIGXM at the Family Level

So the Keynesian view of macroeconomics is based upon the simple formula of C + I + G + (X – M) and the reality is that the Consumer (C) and the Government (G) are tapped out.  The business sector with cash is sitting on the sidelines. We’re watching multiple countries – principally the US and Japan – setting the scuttling charges on their currencies as they sink them in pursuit of devaluation to spur exports; the fact that the system is cluttered with so much debt that nobody is really going to buy makes the policy folks look dumb.  How does this macro play effect my family at the micro level?

If there were an abracadabra solution, I’d  send you shill messages with the promise of the real information for only $29.95.  But there are no magic answers, no way to fully innoculate yourself unless you opt to move to a doomstead in the midst of Montana and buy your kids their own personalized .38 snubnoses.  Mommy!  Daddy!  The Tooth Fairy brought me a shiny new hollowpoint!!  When that idea truly circulates at a mass level, then even the doomsteads won’t be safe because we’ll have regressed to the most primal level and it’s the director’s cut of Mad Max at your neighborhood…neighborhood.  The solutions are so mundane – like, sooooo not abracadabra – that I’ve pondered for a week whether to even finish this article.

The management of CIGXM at today’s family level is about preparing the kids for that great oxymoron, the constancy of change.  People will adapt and change as the fabric of society warps and yaws to the greater movements that occur in the world.  In the case of CIGXM, there are three great movements. 

The first is that the systemic model of consumption – existing for about three generations now – is exhausted and the efforts to continually stimulate consumption simply and boldly illustrate that we the people have simply become fodder for the greater benefit of a system.  We must understand that the majority of policy actions are designed to separate us from our money for the benefit of an economic system whose wealth is predominantly controlled by a very small percentage of the population.  If it sounds overtly political, the simple reality is that it is; money and power for certain people are attractors to one another akin to crap and stink.  The effective neutering of the regulatory structure via the repeal of Glass-Steagal and the uncontrolled entry of dollars into political coffers has allowed a stench that permeates society and actively affects the health of our younger generations. Understand that the constant ring of buy! buy! support the economy! only serves the true interests of a relatively few.

The second is that in the age of globalization, increases in business spending don’t automatically mean an increase in American jobs.  The short-term drive for profits means that the cost of labor has become a more flexible factor in cost control than retooling and reinvestment.  As with the consumption model, the unfettered access to political votes that comes from uncontrolled campaign finance means that tax advantages also accrue regardless of where the jobs are located.

The final is that we’re going to be entering a true national dialogue over the real role of government, particularly at the federal level.  The Keynesian model of government spending as an economic driver is also exhausted as the federal debt – nominal and real (accounting for the true unfunded liabilities) – has reached the point that the dollar itself is endangered.  Issues such as the legalization of marijuana and gun control will beg the question whether the government exists to serve the people as set out by the founding fathers, or whether it exists to serve itself at the expense of the people.  What does it mean if the government propounds the view for decades that a substance is inherently harmful and dangerous but alters that view within the course of weeks with an eye to taxation?  What does it mean when local police departments are forced to announce that it cannot or will not answer certain crime calls but the people are actively discouraged from owning the means through which they can protect themselves?  Further, what does it mean that the federal government simultaneously purchases immense quantities of ammunition for it’s own internal security arm?  What is the perceived threat that justifies such prosaic, yet vital, actions?

What this means is that what the family is undergoing isn’t recessionary, but actually regressionary.  The discretionary spending patterns of past decades are falling away with each thousand dollars of family income lost.  Parents will have to be conscious of how their income is spent, knowing that the kids have to be educated with as little debt as possible, the house paid for and their own elder years covered with little expected help from the future government.  There will have to be a greater awareness of the world around them and an explicit examination of their own values as those values are expressed in how the family monies are spent. 

 

CIGXM

If you want to have a sense of what’s going on at the moment with the economy and what the fuss is about with currency wars, it’s helpful to understand the five letters CIGXM.  They’re aren’t random letters and it isn’t an acronym; these are the five variables for a basic economics formula for the determination of a country’s Gross Domestic Product:  C + I + G + (X – M).  These aren’t random variables but instead delineate the five core categories of aggregate spending that drive a nation’s economy.  The five are:

C = Consumer Spending

I = Investment Spending (aka business investment, what companies spend in order to earn money)

G = Government Spending

X = eXports Earnings

M = iMport Spending

While they’re listed in a particular order, it’s more helpful to think of them in some historical context.  Each plays a role but not always in equal portions; each however, has provided an outsized contribution in a period of our history so let’s look at them in order of history so that it makes some sense.  Rewritten as development drivers, the equation could be I + (X – M) + G + C.

Remember that for the first 60 or so years of our nation’s history, we were mostly an agrarian nation.  The industrial aspect didn’t truly take off until around the 1840s when innovations in manufacturing and transportation gave the first outsized push to the national economy.  We’d grown beforehand, but it was largely on the back of our agriculture and harvesting of our natural resources until then.  But the industrialization began in earnest in the 1840s, especially with the textile industry as mills grew up in river towns across the country, fed by the cheap cotton that now came up in bulk from the south.  This was the first stirring of the I – Investment – portion; spending by businesses to domestically produce what was needed by a growing nation.  It was one thing to build a transcontinental railroad, but the businesses that built them needed the items to make them run:  locomotives, steel, and even the machinery necessary to build them in the first place.  Likewise with textiles, guns, and everything else that grew with the young, spreading nation.  This I portion drove the economy through the First World War and into the 1920s before it finally collapsed with the Great Depression. 

The national development was also spurred through this period by an increasing drive to export American products abroad – the X variable.  Developing and spanning a nation required vast amounts of basic manufactured goods, such as steel.  With the natural resources here, these industries grew dramatically so that we needed less imported machinery as we manufactured more and more of our own necessary materials.  By the First World War, we’d developed a huge export driven machine, especially to the British and French  as they desperately fought the Germans.  We lent money to them in huge amounts and with the end of WWI, we took over as exporter to the world and ran a massive trade surplus (X – M, with X > M).  The thrifty Chinese have used the same mercantilist policies as we did during those years, actually lending us the money – via purchasing of US Government debt and subsequent federal deficit spending – to purchase their goods at Walmart.  For about the past two decades, we’ve imported far more and run chronic trade deficits (X – M, with X < M).

The economy was mired through the first years of the Great Depression as everything – and I mean everything – literally collapsed.  Hoover actually did some basically good things, but was constrained by the notion that the government had to balance the books and if there were no tax revenues then there could be no spending.  FDR’s arrival in Washington led to the adoption of deficit spending that was proposed by John Maynard Keynes, who used this very formula as the basis of Keynesian economics.  Keynes was literally saying Dude, if C and I are shot and nobody’s got the money for anything, then G is the only gun left in the arsenal, so go for it.  In his defense, Keynes didn’t mean that the government should go hogwild like a horny cowboy just paid after a cattle drive up the Chisholm trail; he was clear that when things were back on an even keel, the government should pay off the debt.  Shore, Jethro, hit the town but jes’ ‘member that youse gotta set some money aside fore when yer too old to be a-drivin’ herd

Good luck with that.  Like PJ O’Rourke once wrote:  giving money and power to politicians is like giving whiskey and car keys to teenage boys.

The truth is that the government continued spending through the Second World War and actually did try to control itself at the end of the war.  The budget had to be balanced and that naturally led to huge slashes in defense spending and the question, if G is no longer the driver to pay for I and the world is literally wrecked, what variable becomes the driver?  Oh yeah, C – us.  There has been a deliberate effort to get the American consumer to part ways with the income in the past three generations and it’s been wildly successful as first credit card and then student debt hit massive levels.  As the consumer began to actually max out in the 1990s, the federal government’s spending reached massive levels and it too began running chronic budget deficits but this government spending helped mask the increasingly tapped-out consumer condition. How?  Via immense spending with funding courtesy of the Chinese and easy credit courtesy of the Federal Reserve. 

Are you seeing where we now are and where this is going?  C is now as tapped as G.  There is some controversy as some American businesses – I – have significant money parked offshore and aren’t truly using it productively and members in G want to see it come home.  But the folks in I – companies like Caterpillar and Apple – are resistant because they simply aren’t stupid.  Aw hell, Jethro wants more money but if I let him have it, he’ll jes’ spend it a-whorin’ and drinkin’ up in Abilene…  They recognize that things won’t end well and are trying desperately to hang onto the money to tide them over.

So if the domestic C and G are tapped, and I is keeping it locked up away from G because G is a horny drunk.  The only driver left is X and the new currency wars of nations actively devaluing their currency are an effort to make their products more affordable to other nations.  This is the impetus of Japan as it devalues the currency to keep business flowing to it’s export driven economy.  This is also partially our strategy, although the other intent is to pay off the debt with a devalued dollar.  More countries will take this approach – Venezuela’s overnight devaluation of 46% is the newest example -and what some term the race to the bottom will continue.  But as everybody pursues X, the value of any trade surplus is negated as the respective currencies are destroyed.  Everybody’s come to Abilene for one last mind-bending debauch

Any cowboy with a lick of sense knew that an Abilene bender would be followed by a blistering hangover.  But the thinking of our present crop of hands in G is this:  Hangover?  Hell, I caint get no hangover ifen I jes’ keep a-drinkin’. 

The tagline in the blogosphere is that this isn’t going to end well.  And it won’t. 

 

 

 

 

 

PracticalDad Price Index:  February 2013 Declines

The most recent talk in the macro world is now about currency wars as nations devalue their currencies in a race to the bottom with the goal of making their products more attractive to overseas buyers.  The offshoot of devalued currencies can be inflation, which is what the central bankers and treasury folks want.  But while all of that is in the macro world, what’s happening in the micro world of the grocery shelf in front of you?  If the bankers saw the 47 item PracticalDad marketbasket, they’d waste a bit more ink because the February 2013 index fell to 107.81 from January’s 108.01 (November 2010 = 100).  Strip out the non-food items to isolate the 37 food items themselves and they would see a point rise from January’s 113.24 to February’s 113.59 (November 2010 = 100).  The Food-only Index is still three quarters of a point below the high of 114.33 reached in December 2012.

Month          Total Index          Food-only Index          Spread

11/12           107.06                113.04                           5.98

12/12           108.07                114.33                           6.26

01/13           108.01                113.24                           5.23

02/13           107.81                113.59                           5.78

Note that the "spread" between the Total Index and the Food-only Index did rise so that there was greater activity amongst foodstuffs themselves, but again, it’s still almost a half point beneath the apogee reached in December 2012.

I recommend that you spend a few minutes and check out the link above.  The short video – produced by a Brit – is a good basic explanation of the currency war concept.

 

Legalizing Pot:  The ATM

Nobody’s gonna look out for you, kid.

        – PracticalDad’s Father

My father’s comment to me as a teenager came back to me when I read that there was a move afoot in Congress to tax legalized marijuana after passage of the legalization referendums in Washington and Colorado.  After decades of demonization and imprisonment, the federal government is simply going to shift gears and tax it for the revenues.  My father’s message was that the system was built to look out for others, and in the 1970s, others meant minorities and women.  But the message is still pertinent even if heavily modified.  The system now is built to look out for itself and the people – regardless of race, religion or gender – exist to serve this equal-opportunity system.  This latest iteration is a message that I’ve passed along to my own kids on several occasions. 

This article prompted several things to occur to me as I was otherwise occupied today.

  • The article referenced that probable jurisdiction for the regulation of legalized marijuana would reside with the ATF (aka the Bureau of Alcohol, Tobacco and Firearms) although it could be renamed the Bureau of Alcohol, Tobacco, Marijuana and Firearms.  If it does reside there, a little honesty – like that’s going to happen – would be refreshing:  rename it the Bureau of Alcohol, Tobacco and Marijuana, aka The ATM. 
  • Successful politicians understand the importance of the care and feeding of their constituencies. A significant constituency in the law-and-order world is the private prisons lobby, which contributes millions to politicians; they strongly oppose legalization since a fair minority of the inmates are there for marijuana related offenses.  Legalization is a threat to their revenue stream and if the Congress is to successfully feed and care for the prison lobbyists, then something must replace the lost revenue stream.  If pot is legalized, what’s criminalized?
  • With all of the concern over terrorists – foreign and domestic – and homegrown whackos toting real hardware, then firearms might shift from the ATF to the Department of Homeland Security.  DHS has significantly upgraded their weaponry with thousands of real automatic weapons and millions of hollow-point bullets; they sorely need a reason to justify this.  Securing and maintaining control of the sheer number of weapons domestically requires the administrative heft of a larger DHS instead of the ATF.  If the government can work with the media to sufficiently scare the populace, then having one of the targeted guns could become a truly criminal offense.  Wait a minute…  Now there’s a win-win scenario.

It’s our responsibility as parents to look out for the well-being of our children.  Make sure that you don’t start believing that the government is your ever-dependable ally.