Job recovery? or "statistics don't lie, people do"

[Wes Bucey]

Maybe you'd like to clarify that sentence. I took a risk in buying physical metals. Look back to the late 1970's when gold soared then crashed. I am still taking a risk in holding what I have. I also have quite a bit in cash. I'm taking a risk by holding it especially considering the continuing devaluation of the dollar. I took a risk in buying my current house. I knew it at the time and that was in 1996. People kept telling me what a good investment a house is. When I explained my only goal was to have a place that I owned outright which was cheap to maintain to live out my senior years in people chuckled. They looked at their house(s) as assets that would *always* increase in value. Most used them to bet on their future just as they took out second mortgages and home improvement loans. They did the same thing with their credit cards. Many of them bet on their future and lost.

I have taken an opposite view. I didn't look at my house as an income by way of appreciation in value when I bought it in 1996. I have long had a budget and I planned for times of no income. I also kept my house on my books as an asset at US$20K less than I paid for it. I wasn't betting my house would go down in value - I was betting it wouldn't appreciate and that if worse came to worst case I could sell it quickly at US$20K less than I paid for it.

My bet was and is I will make less money (US$) in the future than now. As others have bet on an improving future, I have bet my income will decline and eventually disappear. I have saved and kept to my relatively austere budget. I stay out of casinos. I don't even buy lottery cards...

I'm sort of laughing as I write this because my lady friend used to kid me about my budget and how pessimistic I was (and am) with regard to income. It was a regular thing when I went through my weekly budget. She's usually around as I do it every weekend. She doesn't kid me any more. She's seeing more and more of her friends go under water, and she her self isn't doing as well as she thought she would be by now - Over 7 years with the same medical group and only a couple of very small raises in all that time. And while my income stream has been increasing for about 8 years (I had 2 very bad years - 2000 and 2001), my budget is still keyed on my 2003 income. I hope my income stream will continue to increase, but the reality is it won't. I'm 60 years old, remember. In the mean time, I pack away my savings while I stick to my budget.

I think you mean that if people don't *invest* in some things (such as food production) no crops would be sown, no grain harvested, no bread made except in tiny quantities at vastly inflated prices. I point this out because there's not a thing in the world you do which isn't a risk. As I said, my holding gold and cash is a risk every bit as much as if I would sell my PMs and invest the cash from the sale in something else such as the stock market. The corporations and people with megabucks are the ones who will keep that stuff going. They don't need the relatively little cash I and people like me have.

You see - That's the problem. Creating new wealth vs. holding on to existing wealth is something people (well, particularly Wall Street et al.) say when they want you to spend or invest your money. No matter what you do it's a risk. Personally I don't have a need to "create new wealth". I'm happy where I am. That may change, but my bet (I'm taking a risk) is my present course is stable. The presented argument is Wall Street BS used to convince people investing is good for the country and all that.

Also, as to "creating new wealth", what do you mean by that? What is "creating new wealth"? To me it means increasing one's net worth. Nothing more, and nothing less. When you say: As far as I can tell all you are doing is saying I should make more money and spend it. That of course brings me to ask, why should I spend if I don't need or want to? That's what has gotten so many people in over their heads in the first place. That is also why tax cuts for the rich don't do anything. They can and will only spend so much no matter how much they make and no matter how much they're taxed. And no matter how much they're taxed, their lawyers will find ways to reduce or nearly eliminate taxes they have to pay anyway.

As to: Those holding stocks and bonds may not be able to afford that one piece of bread at all. I hold PM's because I believe PM's (particularly silver and gold) will at least keep up with inflation.

If the inflation rate is going to spiral up (aka rampant inflation) as you allude to, it isn't going to be because of little guys like me not spending what we have and what we make in the future.

You say, in so many words, that the "risk takers" are what keeps things going. I don't buy it any more than I buy into the Chicago School of Economics theories.

Of course, our basic difference is that I AM a product of the Chicago School of Economics - it's an integral part of the General Studies curriculum at the University of Chicago, even for science geeks like me.

Also, as to "creating new wealth", what do you mean by that? What is "creating new wealth"?

The stock market is not the ONLY route for investment. Buying an existing business or starting a new one is an investment in money, time, and energy, fraught with risk. Such activity, however, along with farming, manufacturing, construction, even art and music, are the real generators of wealth in that, unlike buying and trading stock, they add value to raw materials, creating wealth. Putting money aside and hoping interest will increase it isn't creating wealth. Buying and trading stock is NOT a zero sum game, it is a negative sum game because, like playing poker in a casino in Las Vegas, the house (in this case the stock broker) takes an "edge" out of both sides of a sale and purchase of stock, continually diminishing the presumed "value."

In point of fact, by your description of your life style, you have many things in common with the "millionaire next door" - until your retirement, you had a relatively high earning profession and you did not go into debt to finance an extravagant lifestyle. Like it or not, you do have an investment other than gold specie and/or bullion: in the Cove. Over the years I have known you, you have continually poured money into maintaining and expanding the Cove, adding technical improvements as you became aware of their availability. In the early years, it was essentially a hobby, supported by your professional income. More recently, with the addition of Google's Ad income, it has become self-sustaining, perhaps even offering a small return on the thousands and thousands of invested capital and sweat equity you poured in over the last 15 years. The Cove provides a service and value to the general Quality profession far beyond the money and effort you have supplied. It is a truism that many Cove readers owe their jobs to the good information they are able to get here.

Far from being an enemy of the Chicago School of Economics, you are really a prime example of how it works. You provide a product and the Market finds its way to that product. You and the Board of Moderators and Administrators continually monitor and evaluate the effectiveness of the system and track any changes to affirm their effectiveness. It's really the ideal of Change Management - continual evaluation and change, not just wholesale change because some guy heard a snippet from some talking head on TV last night.

As for the regulars who come to the Cove day after day to answer questions and offer advice - we get an audience for our thoughts most authors only dream about. Some of us coincidentally gain prestige and job offers by virtue of our postings here in the Cove. Guys like you and me get upwards of 30,000 Google hits by virtue of our presence on the Cove: some get upwards of 50,000 hits. Inevitably, those hits and notoriety translate into value as people google for an answer to their problems and a Cover's name pops up. Hey - we do all that without engaging in any conscious SEO!

 

[Bill Pflanz]

Lot of interesting discussion. I take a more practical view. Yes unemployment is 9% but that means 91% are employed. Yes many workers have also been afraid of losing their jobs over the last few years but the job losses are slowing if not reversing. People have dramatically reduced spending and lowered debt over the last few years because of the economy but they will not do that forever. They are starting to spend again because they have pent up desires and money now. Recessions are cyclical not permanent. This recession has already been long with a slow recovery but the economy will recover.

Bill Pflanz

 

[bobdoering]

People have dramatically reduced spending and lowered debt over the last few years because of the economy but they will not do that forever. They are starting to spend again because they have pent up desires and money now. Recessions are cyclical not permanent. This recession has already been long with a slow recovery but the economy will recover.

We are not sure if this recovery will benchmark past recoveries. People may have finally gotten to the point where they realize the risk of spending with 30% credit card interest, and much like those that felt the pain of the last depression, spending may take much longer to recover -even with some cooked up "consumer confidence" number. With housing depressed, equity loans dried up, the spending will be mostly out-of-pocket cash, and that is usually not in the boat and RV type of spending.

 

[Bill Pflanz]

Much of the spending of the last 10 years was for bigger, more expensive houses or for a house that you paid too much for and can't afford. The spending for housing used up a lot of cash not only for necessities but also for discretionary spending. Equity loans were just another form of debt and turned out to be very expensive when it resulted in more mortgage debt than the value of the house. Any cash used to pay down debt leads to more cash for future spending.

Bill Pflanz

 

[bobdoering]

Much of the spending of the last 10 years was for bigger, more expensive houses or for a house that you paid too much for and can't afford. The spending for housing used up a lot of cash not only for necessities but also for discretionary spending. Equity loans were just another form of debt and turned out to be very expensive when it resulted in more mortgage debt than the value of the house. Any cash used to pay down debt leads to more cash for future spending.

Actually, since that was mostly credit rather than spending, it may not be as big of an impact as the usage of increased housing value for home equity loans - which did fuel a lot of discretionary spending. Of course, now it is mortgage debt as the values drastically declined. Let's consider that option gone...and therefore any discretionary spending is going to be drastically throttled back for years (since there is nothing to replace this cash source), slowing and economic growth to a crawl out of the deep, dark, well that we might have hit the bottom of.

In th old days, you would save money, and the bank would give you money for that savings because it had to have those savings as the source for loans. Since fees and interest replaced it, you get paid fractional percentage for saving (because savigns are just a pain in the butt for banks) - making saving far less effective. Therefore, savings can not build to fuel spending. Again, lost opportunity to fuel spending and economic growth. So, even the "right" way is not to an option these days. Only thing left is gambling (e.g. lottery, stocks and bonds.)

Actually, cash used to pay down debt is cash gone. Only savings and its pitiful interest is cash for later spending....much later.

 

[Wes Bucey]

Actually, since that was mostly credit rather than spending, it may not be as big of an impact as the usage of increased housing value for home equity loans - which did fuel a lot of discretionary spending. Of course, now it is mortgage debt as the values drastically declined. Let's consider that option gone...and therefore any discretionary spending is going to be drastically throttled back for years (since there is nothing to replace this cash source), slowing and economic growth to a crawl out of the deep, dark, well that we might have hit the bottom of.

In th old days, you would save money, and the bank would give you money for that savings because it had to have those savings as the source for loans. Since fees and interest replaced it, you get paid fractional percentage for saving (because savigns are just a pain in the butt for banks) - making saving far less effective. Therefore, savings can not build to fuel spending. Again, lost opportunity to fuel spending and economic growth. So, even the "right" way is not to an option these days. Only thing left is gambling (e.g. lottery, stocks and bonds.)

Actually, cash used to pay down debt is cash gone. Only savings and its pitiful interest is cash for later spending....much later.

Even though the cost of education has spiraled much higher than general inflation, it is still a viable place to "gamble with your money" on your future and has a better chance to provide a return on investment than buying lottery tickets.

It is a statistical fact that, for most people, more education translates into more earnings over a lifetime. Education includes not only general college, professional degrees, but includes trade schools, special certification courses, independent study (the investment is not so much in cash for independent study, but in time spent away from earning money [or personal recreation] while pursuing the independent study.)

 

[bobdoering]

Even though the cost of education has spiraled much higher than general inflation, it is still a viable place to "gamble with your money" on your future. has a better chance of provide a return on investment than buying lottery tickets.

It is a statistical fact that, for most people, more education translates into more earnings over a lifetime. Education includes not only general college, professional degrees, but includes trade schools, special certification courses, independent study (the investment is not so much in cash for independent study, but in time spent away from earning money [or personal recreation] while pursuing the independent study.)

Agreed - but education is a long term expenditure and many people are being put into significant debt based on the assumption it is a "good bet", further extending any impact on current economic growth from discretionary spending. My point is that significant discretionary spending that would be the source of economic growth is currently not available nor sustainable in the current conditions. That will prevent a true recovery, rather than a couple of positive bumps to tease people. In fact, people that have given up on getting an affordable education might just spend their money on discretionary items until they feel education is affordable, but I think at this point that is still the minority of people in a position to decide.

 

[optomist1]

Hi To All,

I am a relative newbie, the site is great and the thread better.

Hopefully, a touch or scorching sarcasm is welcome. This sarcasm is well founded. For those of us who viewed the "your house is worth $200k we will loan you $250K debacle", with humor and skepticism here is a link to an article in Der Spiegel the German weekly. An interview with a world reknowned economist from the Universtiy of Chicago, who was booed off the stage during several pre-housing bust financial industry conventions. Strange is it not, that it appears in Der Spiegel and not the WSJ, correct me if I am wrong.

Der Spiegel Link
https://www.spiegel.de/international/business/0,1518,722520,00.html

This whole problem could be solved if we just printed more money to further prop up the real economy...the one that drives the U.S. economy- Wall Street aka "parasitic drag". Why put government into those low skill, low paying Aero/Electronics/Manufacturing jobs? We will get a bigger bang for the buck by helping the plain folk, the Boy Scouts of Wall Street....here's to Kenneth Lewis, Lloyd "Black Swan" Blanfien: and Vikram Pandit, and of course Messrs. Frank and Dodd.

No offense intended to those in the financial industry; for in most cases you are not or were not at the switch.

Fridays are great...

Marty