Friday, January 14, 2011

My View

Random ruminations from your resident curmudgeon...

Economists often refer to wages as "sticky", simply meaning that once a wage level has been established for a job, it does not tend to come down. History bears out this fact; past recessions have failed to drop wage levels. The result is that unemployment would spike, but wages would not drop. The last time wages fell during a recessionary period was during the 1981-82 recession. During our current recession, however, wages are starting to fall dramatically. Unemployment has been nominally over 9% for 20 months now and is likely to remain at those levels for 2011. This has put significant downward pressure on wages. According to the U.S. Department of Labor, between 2007 and 2009, more than 50% of new full time hires had lower wages/salaries than they did in their previous job. 36% reported that their wages were at least 20% less than in their old job. This means that it may be years before we see the income levels where they were before the recession began. While companies may show improved profitability because of reduced personnel expense, the economy will continue to limp along because of the weakened consumer, who drives the economy through their spending.

I have a friend who is a Buddhist. Recently, he went in for a root canal, and refused the Novocaine. When I asked him why, he said he wanted to transcend dental medication.

One of the effects of quantitative easing- the introduction of new money into the economy by the Federal Reserve- has been to create inflation induced profits and and rising asset values in our economy. Right now, we are hearing of companies reporting healthy increases in year over year profitability. Some of that is due to good management, some of it due to a falling dollar which allows companies to translate foreign sales into U.S. dollars at a favorable conversion rate. Don't forget, however, the effect of more dollars floating around in our banking system, and ultimately in our economy. The cheapened dollar will naturally drive up asset prices as it takes more dollars to purchase any good or service. This is the tactic that the Fed is using to try to stimulate the economy. In an effort to revive the economy, the Fed is attempting to re-introduce inflation.Their conceit is that they believe they can manage this action with precision. I do not believe they can. As consumers, we are already seeing the effects of the weakened dollar and subsequent inflationary pressure as food cost are soaring and oil is approaching $100 per barrel. Pay close attention to this. You and I will feel the pernicious effects of inflation long before the Fed acknowledges it.

Does the Little Mermaid wear an algebra?

The recently completed U.S. census shows that the U.S. population grew by 9.7% over the past decade, to a total of 308,745,538. For years, that growth was fueled by population increases in the northeast- Boston, New York, Washington, and other major metropolitan areas in that corridor. Later, growth was centered in California and secondarily some other Western States. No longer. The state with the biggest increase in population? Texas. The population in Texas grew more than 21% in the past decade to more than 25 million residents. Texas has the largest absolute growth number for population, but ranked only 5th in the U.S. in terms of percentage growth behind Nevada, Arizona, Utah, and Idaho. There are a number of contributing factors for the growth that these states have experienced, but the common thread among all of them is that they are low tax states with a business friendly environment. Don't believe me? 35% of the nations population growth occurred in the 9 states that have the lowest tax burden, according to the Census Bureau. For those that seem to miss the fact that people- and businesses- respond to incentives such as a fair and favorable tax environment, it might serve you well to dig into the recently completed census numbers.

They say a smile is a gift which is free to the giver and precious to the recipient. Giving the finger is free, too, and I find it much more personal and sincere.

And that, my friends, is my view.

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