Month: February 2013

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 primary 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-Steagall 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.  Understand this:  to an accountant or financial executive, labor is considered a variable cost.  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 reversionary.  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.

 

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.

 

 

 

 

 

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.