There have been a number of reports that Americans are saving more. Most recently, the U.S Department of Commers Beureau of Economic Analysis (BEA) had this to say in its Sept. 30, 2009 report.
Personal saving -- DPI less personal outlays -- was $324.1 billion in August, compared with $436.0 billion in July. Personal saving as a percentage of disposable personal income was 3.0 percent in August, compared with 4.0 percent in July.
Ref:
http://www.bea.gov/national/nipaweb/Nipa-Frb.asp
The "bottom line"; Americans have been saving for all of 2009. A real turn around, as the personal savings rate was actually near or at zero earlier in this decade.
I also saw this in a Morningstar article. Something to think about:
"Bloomberg recently referenced data from ICI detailing money market accounts flush with a whopping $3.5 trillion. This elevated historical number comes despite a $439.5 million drop from the record highs experienced in January of this year.
From a broader perspective, if you include cash, money-market, and bank deposits, the nation's cash hoard reached $9.55 trillion in September." (The bold text is mine).
Link to the Morningstar article:
http://news.morningstar.com/articlenet/article.aspx?postId=2714714
Link to the Bloomberg article:
http://news.morningstar.com/articlenet/article.aspx?postId=271471
Sunday, October 11, 2009
Friday, August 7, 2009
Comment on "The Five Most Crucial Problems Facing the U.S."
Recently, I received a paper describing the “Five Most Crucial Problems Facing the U.S.”. I was asked to comment on the contents of the document.
Those problems were stated to be:
First, it is important to realize the political reality. I was once told that politicians have two purposes in life. First, to get elected and second, to stay elected. We cannot expect any resolution of the problems facing our country and the planet by our politicians. Why? Because Americans don’t want “change”. They want to maintain the status quo and a continuation of their lifestyle. They want cheap gasoline and energy, cheap groceries, free health care as in paid by the employer or the government (that is, paid for by someone else), etc. etc. As politicians have simply their own skins at heart, then the answer to all of these problems, which is “just say NO”, is not possible. No politician will be re-elected if he says “NO” to his constituents. When travelling a few years ago, I observed billboards by a U.S. Representative who was courting re-election. The message was “Vote for me and I’ll raise your Social Security”. That despite the well known financial problems of the system. And yes, that politician was re-elected.
Second, the UN’s earlier stance on “climate change” indicated that the only way to sustain the planet was a huge decrease in living standards for most of the people in the western world. While many people got on that bandwagon, very few took on the reality of changing their carbon footprint. For example, most of us won’t do something as simple as consistently combining driving trips to reduce gasoline consumption. Even with a large spike in gasoline prices, etc., Americans had difficulty achieving more than a 2% reduction in gasoline consumption.
Good luck in attempting the serious stuff such as smaller and higher density housing, living close to cities or mass transit hubs and improved mass transit, huge efficiency upgrades to existing dwellings, car pooling, reducing personal water consumption, driving substantially more efficient vehicles, etc. These are impossible programs in the US. If you doubt me, consider what was purchased with all of the money spent on home upgrades in the past decade. Did it include simple efficiency upgrades such as improved roofing insulation and Energy Star appliances? Was it spent on more expensive high efficiency upgrades such as Energy Star certified appliances including furnaces, hot water heaters, air conditioning, windows, TVs, PCs, etc.? Have walls and foundations been insulated or re-insulated? In the period 2000 to 2007, were the bulk of new houses high efficiency and smaller, or were they larger and less efficient dwellings? How many people in the US drive automobiles with better than 25 MPG combined efficiency, a very easy achievement? Consider that in 2004 and 2005, if you added up the total number of vehicles purchased of the top 20 vehicles types and calculated the average MPG of the resulting pool of vehicles, you would find it was 21.9 MPG!
Ultimately, it seems that the core issue is entitlements. We are entitled to everything, which includes an incredible living standard. According to Census Bureau 2007 data, the median family annual income in the U.S. for 2006 and 2007 was $50,059. According to the “Global Rich List” that puts the median family in the top 1% annual income on the planet. I admit, the list is primarily for entertainment. However, the question is, why do Americans feel so “poor”? Of course, if all of that income is spent and additional funds are borrowed via credit cards, or squandered for the purchase of outsized and expensive housing, fancy automobiles, etc. and the other attributes of an incredible lifestyle, then people really are poor. So why do they do it? Societal norms, greed, entitlement and education are possible factors.
Returning to the document, the problem is systemic in nature and singling out specific industries is counterproductive. In the scenario of dwindling resources, all consumers are the “bad guys”. As has been noted repeatedly in the press and even by the “economists”, at least 66% of the U.S. economy is based upon purchases by the “consumer”. Our economy runs on “consumption” and the rest of the planet is willing and able to produce things for us to consume.
The recent planet wide “reset” may provide temporary relief. However, given the recent history of the U.S., and its response to various problems including oil embargoes, economic disruptions, etc. it is unlikely that any current changes will be lasting. However, are the problems solvable? Technically, they are, but there are obstacles of our own making to be overcome. My position is stated at the conclusion of this document. The American way of life is incredibly inefficient and wasteful. Unless that efficiency is significantly improved in the period 2010 to 2020, Americans will find themselves living in a cesspool of their own making. Currently, it seems most Americans are waiting for someone else to take the initiative and for someone else to make the sacrifices that are necessary.
Let me state that I see real opportunities in the near future. Some companies are re-organizing to take advantage of the crisis and have learned a lot from the problems. For example, Morningstar had this to say about GE on March 3, 2009: "General Electric positions itself to be a leader in whatever market it competes in. After shedding underperforming businesses during the past couple of years, the firm has energy infrastructure square in its sights. We believe that GE will emerge as a leader in the power infrastructure market, which will be the backbone for the firm's growth."
There are tremendous opportunities for individuals, too. So, while you might read this as being pessimistic, in fact, I am slightly optimistic. The issues facing the planet and its population are solvable. It is up to the U.S. to jump to the forefront and take the initiative. My pessimism is based upon our population which in my lifetime seems to have gradually morphed from "I can" to "I won't".
Item 1: Over Population. Currently, the world population is estimated to be 6.7 billion. I have read documents elsewhere which imply that this planet can comfortably sustain 2 to 3 billion human beings. Sorry, but I can’t provide references for that figure. However, the important phrase here is to “comfortably sustain”.
At some level, the planet can sustain all human life comfortably and for an indefinite period. At that population level, and with modest ongoing technological improvements, there is sufficient fossil fuel, water, food supplies, etc. to maintain the population. We have exceeded that number. That’s the core problem. How to resolve this? Re-distribution of wealth will lower some standards and increase others, but it will not solve the root cause. Redistribution will probably result in a faster increase in the world population, as the “have not’s” attempt to achieve the same living standards as the “haves”. Such re-distribution will lower the standards of many people in the western world. It may actually exacerbate the problem and accelerate the demise of the planet. For example, consumption is increasing in India and China as their population attempts to move to the “middle class”. The combined populations of those countries is 2.5 billion. The population of the U.S. is 307 million. If we took one half of the resources and wealth consumed in the U.S. and “redistributed” it equally among the populations of India and China, the result would be possibly lowering our living standards by up to 50%. However, this distributed “wealth” would raise the standards of each Indian and Chinese by only 6%! That’s the problem. Our population is about 12% of theirs.
Here’s another way to look at it. Residential drivers in America drive a total of about 2,300 billion miles per year. If that were reduced by 50%, and the savings transferred to the growing economies of China and India, it would permit each person in those countries to drive about 460 miles per year! I don’t have accurate numbers readily available on the number of residences in those countries, but if we assume the average family in those countries is 4 people, each would average about 1,800 miles per year! Americans, meanwhile would have reduced their annual driving to over 6,000 miles per year. I’m sure we’d be complaining about our “suffering” just as we complain about everything else we feel entitled to.
I don’t see anyone jumping on the bandwagon and clamoring to have their living standards reduced. I don’t see anyone begging for less medical care, or lowered Social Security benefits, etc. Quite the contrary.
There is no doubt that the “American Ideal” is an impossible dream. As the author stated, this ideal has “deadly” effects. Simple arithmetic supports that statement. In the U.S., a lot of people are attempting to achieve or maintain the status quo. For the American voter, the simple goal is to elect politicians who maintain our lifestyle, at the expense of the other 6 billion human beings on the planet.
On the subject of “Population” and as a pre-requisite you might be interested in a series of talks by Dr. Al Bartlett at the University of Colorado. His subject is “Arithmetic, Population and Energy”. This is available on YouTube and is a one hour lecture broken into eight parts. His arguments are simple and straightforward. Go to:
Arithmetic, Population and Energy by Dr. Al Bartlett
Currently, the world population is growing at about 1.3% per year, which means it will double in 54 years.
I agree, this will result in extreme political unrest. It will probably result in war, famine and acute poverty. No one will be spared. Meanwhile, our youth are preparing for a world which will not exist. They are preparing or being prepared for something reminiscent of the 1990s. Too bad for them. What type of education do people get in the U.S. that they expect no change, expect that things will always work out and they feel that it should be so?
We had about 650,000 financial advisers in the U.S. prior to the recent financial melt down. That’s more than the total number of engineers. What are the chances of retraining most of these people for work in other areas, where we need talent? What jobs and what future should they be preparing for? Are they willing and do they have the necessary talent?
The Chinese government seems to be the only ones on the planet who grasp the severity of the situation. They are corralling fuel and all manner of commodities. The economists and political pundits consider this to be a currency play, avoiding a decline in the dollar. That’s a very near sighted view. Of course, the Chinese stepped into a trap and are now grappling with the issues inherent in upgrading the lifestyle of 1.3 billion in their country to some sort of “middle class” standard. This will require increased energy production.
Many Americans do realize something is off. But as I stated in 2005, we are a nation of Katrina Victims. We are gamblers who think we can dodge the bullet, as gamblers always do. The crash of 2008 was simply another wake up call. So people are now saving at a rate of 5%. They’ll need it. But if the dollar tanks, inflation will eat up those savings in months; save 5% of disposable income annually for 10 years and you have savings equivalent to 6 months of disposable income, assuming interest earned equals inflation. That’s a drop in the bucket. Things will get ugly. How ugly? That’s the big question. How fast? That’s another question. It is quite possible that the unwinding of the world as we know it will occur slowly, with occasional shocks to remind everyone that our way of life is dying.
However, it is important to realize that about 25% of the people living on this planet live in very basic conditions. No electricity, minimal health care, etc. It is possible that this number will decrease in the future, and some of these will move up the ladder. However, that will only occur if the top 50% give something up. That will be the cause of the wars and famines. We will not surrender our “birthright” and entitlements. Nor will we willingly give up our food. Of course, we will expect our descendants to do so. That is essentially what most of the talk is about. Maintaining our standard of living while contributing to the demise of our children’s.
Item 2: Coal. I think this is simplified. The issue is all resources. That includes water, energy and minerals. As time goes on, more and more energy is spent harvesting the resources that remain on the planet. The author got that right.
There are no clean industrial processes. They all require extensive energy consumption and the exploitation of raw materials requires water. Those processes exist to maintain our living standard and to provide us with the goods and services we clamor for. Industrial processes and power plants are not evil. They exist to support our lifestyle. But Americans always want it both ways. Build those ugly belching power plants somewhere else, and transport the “clean” energy to us via long distance transmission lines, while we live sequestered in our “clean” cities. How disingenuous! The statistics are simple. About 31% of the electrical energy capacity in the U.S. is via coal fired generating plants.
A report in July 2009 by McKinsey & Co. had the following conclusion. The U.S. can reduce its energy use 23% below the projected U.S. demand level in 2020 by boosting efficiency. In the process it can save $1.2 trillion in energy costs. To achieve that will require immediate action and expensive investments in new equipment.
Want to cut coal generation in half? Then reduce commercial and residential electricity consumption by 15% or so. How to do that? Upgrade the furnace and HVAC systems and the refrigerator to the most energy efficient available, turn off appliances when not in use, and reduce lighting by about 25%. Voila! Is it really that difficult? Consider that a 20 cu. ft frostless refrigerator consumes about 33% more energy than a 16 cu. ft. refrigerator. So switch to a smaller refrigerator and save 1/3 of the electricity. Want to save more? Go to a 16 cu. ft non-frost free model. The 20 cu. ft. frost free model will consume over twice the energy. According to the U.S. government, replacing a central air conditioning system that is 12 or more years old with a higher efficiency “energy star” unit could reduce the energy consumption by 30%. Currently, the U.S. government estimates that 25% of the furnaces in homes in the U.S. are at least 20 years old. This is not rocket science, by any means.
The EIA 2009 International Energy Outlook states that “World marketed energy consumption is projected to increase by 44 percent from 2006 to 2030.”
Coal may be a problem, but it is abundant and cheap. That’s why even the Chinese are using it, and it is the source of about 70% of the electricity generated in China. It is expected that Chinese consumption of coal will increase at 3.5% per year until 2030. To achieve this, the current Chinese stimulus plan includes significant upgrades and even the expansion of rail lines. Coal requires rail. India too is counting on coal for its economic growth.
However, I don’t think coal is the culprit. The myth of coal is one of the culprits. In that myth, coal, tar sands and shale oil are considered to be our big energy source “saviors”. In truth, they are incapable of satisfying our need for energy, if the growth rates continue. But they do provide straws for politicians to grasp at, and an opportunity for individuals to make money. They also provide false hope, and with that hope, the need for change is negated.
It takes energy and water to harvest the resources of the planet. We are running out of both. The result is more and more resources are spent to achieve the current production levels. This implies that we are expending and consuming ever greater quantities of resources to maintain the status quo. Agriculture is energy and water intensive. In the American southwest, they persist in attempting agriculture in the desert. The former governor of the state of New Mexico tried his best to get the federal government to run a pipe line from the Great Lakes to his state for that very purpose. His final solution was an attempt to win his party’s nomination for U.S. President.
As stated earlier, the Chinese now find themselves in a trap. Growing expectations of improved life style dictates huge investments. It was relatively easy to get western technology and build a juggernaut of low skilled workers in factories no American would work in. However, it will take longer and is apparently proving to be difficult to grow a society which is self generating and can simultaneously build and consume the goods that are produced. This is, I think the main source of the anger expressed by the Chinese leaders. They know they have a serious problem, they realize that they cannot continue to rely on their mercantilism and yet they find themselves halfway across the stream. They perceive the promise of a western economy as a false one with serious implications that they previously ignored.
The author promotes a “crash program of energy conservation”. The question I ask is, by whom? Or perhaps I should ask, “what are we, as individuals, waiting for?”. Of course, the problem could be that very, very few of us in the U.S. really see any need for conservation, and the few that do are unwilling to act on a personal level.
If we agree that more and more resources are being spent to maintain natural resource and energy production levels, then it would seem that it essential to reduce the consumption of natural resources. This is easier and sometimes less intuitive than one would think. Most people are unawares of how much energy it takes to make something as simple as a porcelain cup. But many homes upgrade dishware on a regular basis, simply because of the urge to redecorate.
In America, we are in our own trap. It is called “the consumer” and as many of us are now aware, our economy runs on “the consumer”. For years, our politicians extolled the wonders of consumption and facilitated our spending ways. Cheap credit, homes for everyone, etc., etc., etc. They did so because if they did not, the result would have been an economic recession. So politically, there was no choice but to continue this folly. Politicians extolled us to save, but in reality, they needed us to spend, and designed all manner of programs to facilitate that, and spend we did. In the process, we consumed.
In the 1960s and 1970s there were numerous studies which hypothesized the results which we are now experiencing. They projected a decreasing standard of living. That future, once remote, is now immediate for many of us. How many stock brokers and financial advisers do we need in this country? Apparently, fewer than we currently have. Ditto for bankers, auto dealerships, Realtors, construction workers, and so on. What occupation will these people now perform? Are they skillful enough to be retrained? Are they hungry enough to do what is necessary? Do we have industries for them to work in? Ergo the concern of some economists that we now have a million “workers” in their 40s and 50s who are chronically unemployable. Inflexibility is another handicap of our educational system. So too the lack of critical thinking skills.
The issues extend to water and the University of Nebraska in Lincoln monitors drought conditions in the U.S. Individuals at the UNL have been stating that within 5 years an additional 30 states will experience significant water shortages. This due to dwindling water reserves and rising populations. This alarm has been generally ignored.
Automobiles are a major energy problem. Only about 10% of the energy spent in propelling an automobile is used to move the occupants! How inefficient that is. So the basic premise of a vehicle made of steel or other metals is faulty. It is all so “iron age”. The great Japanese manufacturing machine hasn’t cracked this one, either. They perfected iron age technology and made a mint doing it. Good for them, bad for the planet! GM worked hard to maintain the status quo; rust buckets which needed to be replaced every 10 years, or sooner, if possible. Good for unionized worker, bad for the planet! The U.S. government has been all talk and no walk. Even the U.S. Postal Service boasts of the “largest private fleet of vehicles” in the country, which is comprised of over 260,000 mostly gas and diesel fueled vehicles, and this ignores the transportation used by subcontractors. Postal Service vehicles consumed over $2.6 billion in fuel in 2006 according to a 2007 GAO report.
Note that the same GAO report stated that the Postal Service “has incomplete information for most of its transportation and facility fuel consumption…the Service does not know how much fuel is being consumed at the majority of its facilities, for fuel used to service nearly 55,000 rural routes, or through most of its air transportation contracts. The service currently has metering systems at only a few of its over 34,000 occupied facilities.”
I use this as an example of a lack of “leadership by example”.
The Postal Service is planning on purchasing up to 150,000 delivery vehicles in 2015 and intends to evaluate hybrid SUVs, an electric vehicle and a GM hydrogen fuel cell vehicle; generally “iron age” transportation with improved engine technology. The bottom line is this. To significantly improve the efficiency of automobiles requires a like reduction in the weight of the vehicle. That means, bodies and supports made out of something other than metal, perhaps carbon fiber. To do so requires a complete reengineering of the entire process. Perhaps a frame and body capable of a 50 year life. That may mean no more vehicle ownership, but lifetime leases with upgrades via drop-in power plants, as improvements are developed.
Meanwhile, even with all of the hoopla about energy efficiency, there are projections that U.S. gasoline consumption will increase and will reach 156 billion gallons in 2015!
If we want to reduce automobile fuel consumption, this is best achieved by weight reduction. That means reinventing the automobile. If we had a crash program to reduce automobile fuel consumption by 66%, through improved efficiency and reduced usage, we could stop importing oil. There would be a similar reduction in CO2 emissions. That is impossible, you might say. But let’s assume that 50% of that reduction were achieved in improved gasoline powered vehicles. How is that possible? It’s not as difficult as it would seem. For example, in 2005, the average fuel efficiency of the combined pool comprised of the 20 best selling vehicles (cars and pickups) in the U.S. was 21.9 MPG. A 50% improvement would require a vehicle capable of 43.8 MPG. It would take time to replace all of the vehicles on the road today. But it is doable. Our government’s solution is a “cash for clunkers” program wherein it is possible to purchase a new Hummer H3 and meet the requirements of the program. Of course, that program is a stimulus program and it is a “short term” solution in every way thinkable. Simply another method to burn through cash. Another short sighted political solution, this one designed to help the automobile manufacturers maintain the status quo and deplete current new automobile inventories, many of which are inefficient pickup trucks and SUVs. Unless we are really willing to accomplish real change, there will be no change. Just political slogans and flushed money. It was free homes. Now it’s subsidized pickup trucks. What’s next?
Item 3: HMOs. Health care costs are rising at a rate greater than earnings. That is the core problem. How to solve it?
People like to look at the Canadian and various European models. However, no one wants rationed care. At some point, people are told they are not entitled to a heart transplant, or a new knee or a hip replacement. In effect, people are told that the money is better spent on a sick youth than a sick elderly person.
That is something no one in the U.S. wants to hear. There is a lot of rhetoric about the rising cost of drugs, but drug expenditures are something like 10% of the total U. S. annual medical bill. Let me repeat that: If we made all drugs free, all we would accomplish is reducing the health care tab by 10%.
According to a European study, the U.S. spends 10% on pharmaceuticals, 7% on administrative costs, 31% on hospital care, 21% on physician services, 8% on nursing homes. The remaining 23% goes to diagnostic laboratory services, pharmacies, medical device manufacturers, etc. And our overall health keeps declining.
One advantage to having a system like Medicare is that the U.S. government keeps statistics on health care costs. This provides some insights into where the money is spent. It reveals that one percent of the U.S. population consumes 30 percent of the U.S. health care. Nearly a third of all Medicare dollars are spent on patients in their last year of life. Over half of all Medicare dollars are spent on patients in their final two months of life. We are literally spending a fortune each year in an attempt to keep the dying alive. How much? About $250 billion a year, which is equivalent to about a 2.5% of disposable income. But who has the courage to tell the dying that they aren’t worth it? Obviously, no one is willing to take the heat for that one. The ethics of the health care system requires the prolonging of life, at any price. Quite a profitable system.
According to the World Health Organization, the U.S. government contributes about 45% of the expenditures for health care in the U.S. In Canada it is about 70% and in France it is about 80% and in the UK it is about 81%. However, when comparing government expenditures for health as compared to overall expenditures, the U.S. spends more than the counterparts listed above!
Obviously, we simply aren’t getting sufficient bang for the buck. This is per the latest WHO data available, which is 2006. In 2005, France spent $3,962 per capita on health care. The U.S. spent about $7,000 per capita during the same period. According to 2009 OECD data, France spent about 32% less of its GDP on health care than the U.S.
As for the costs, these are some figures for France, which was reputed to have the best overall health care system in the world by the WHO. You will note these are substantially lower than fees here in the U.S.:
General Practitioner visit = 22 Euros.
Specialist visit = 25 Euros.
Cardiologist visit = 49 Euros.
In France, costs are born by the patient, who is then reimbursed for a portion of the costs. That is a significant difference from the U.S. system.
Here in the U.S., everyone profits from sick patients. Hospitals, doctors, pharmaceutical companies, all profit from the misfortune of others. Americans talk about their doctor in ways similar to politicians. Most loath Congress, which has an incredibly low approval rating, but approve of their members of Congress. Similarly, many Americans have little good to say about the health care system. But if asked about their doctor, many have good things to say! Is it any wonder the system can’t be fixed?
But we wanted a service economy, didn’t we? That’s what we got.
What people in the U.S. want is essentially free medical care. After they pay for an insurance or Medicare premium, they expect to be fully covered, with no limit to expenditures. Differences between premiums collected and actual costs are to be born by “someone else” just as is the case with all other entitlement programs.
Let’s take Social Security as an example of how these systems work. If I earn $1,090 a quarter in 2009, I’ll earn four “credits”. The amount to be earned changes each year varies; in 2008, it was $1050 per quarter. Meet the minimums for ten years, earn 40 “credits” and one is eligible for social security benefits. If the beneficiary has an non-working spouse, the family benefit increases to 150% upon retirement of the spouse. How much is paid in by the worker? 6.2% of the employees wages. If I were to earn the minimum of $1,090 per quarter in 2009 and if I earned the minimums for each of the final ten years of employment prior to achieving my “full retirement age” (a simplification) then I would have earned about $43,600 in that ten years. I would have paid about $2,678.40 in Social Security taxes in that period. At my full retirement age of 66 I would be given $244 in retirement benefits each month, or $2,928 per year, according to the SS website. If I live to reach the life expectancy of 76, I would have collected for 10 years or an amount of $29,280. If my spouse retired at the same age I did and we both lived to reach 76, we would have collected $43,920. Not a bad return on an investment of $2,678. Of course, if I lived to be 86 the benefit would be over twice as much; an even better return. This is a simplification, because I probably will work and pay SS taxes for more than 40 quarters. If a family exceeds a certain income level, then up to 85% of SS income is taxed, and the tax collected is returned to General Revenues, where it can be spent by our ever eager politicians.
Consider the revolt, when all of those young people, who are expecting a life in the world similar to that which existed in the 1990s are faced with a much bleaker reality. Consider what happens when they realize that a lot of “gray hairs” are taking money from their paychecks in the form of higher SS and Medicare taxes, and then realize that they are paying taxes solely to maintain someone else’s life style. That is the revolution that is coming!
The problem with medical costs is the same as that with population growth. Doubling the price of health care every 7 years benefits only those who are employed by the health care system. This is unsustainable and eventually we will run out of resources.
In the mean time, politicians will backpedal and will come up with means testing and other initiatives to charge those who are able to pay, and recoup a small portion of the ever escalating costs. The current initiative in Washington is a work in progress and it is too early to determine the program that will be produced.
Item 4. A rigged financial system. I agree, it is rigged. But again, everyone in the system profits. That is the goal. Brokers and financiers collect fees based on transactions, not on performance. It’s an incentivized system based on sales numbers rather than results. A system similar to the health care system.
Even the government has rigged the tax system. If I make a profit on the sale of a stock, I pay a tax on the “gain” in the year in which the gain is realized. However, if suffer a loss on the sale of that same stock, I can’t realize that loss, if it is more than $3,000 in any one year. Instead, the IRS lets me “carry the loss forward” and dribble it against my gains in future years.
If I save money, I am taxed on any interest I receive. That tax ignores the effect of inflation. In effect, I lose money each and every year that I save. At present, banks can borrow money at unrealistically low levels. Meanwhile, savers get a paltry 0.1 or 0.15% on their savings. Savers support the banks and the spenders. However, recently 24 month CDs are up to about 2.65% in anticipation of increased inflation.
Item 5. Education. Well, where to start? One of the great problems facing the country is most certainly an under performing population. The problem is not simply education. It’s the quality of the education. According to a 2005 Business Week article “America the Uneducated”, America’s workforce is the most educated in the world. According to the article, 85% of adult Americans have at least a high school degree and 28% have a college degree. But obviously, that education seems to lack simple skills and common sense.
But what type of education are we really talking about? Are we considering educating people to be a viable and contributing member of society? Are we educating our youth to make a difference on the planet?
No. We are educating our youth to be a part of a system in which the sharks thrive at the expense of others. If you can’t do well as a shark, then perhaps be a parasite. That also works well.
Most young people have no idea how wealth is created. They have no idea of how to raise a family, of how to budget, how to save and how to plan for retirement, etc. etc. This persists even after completing college. It isn’t just youth. Studies by the SS administration revealed that most Americans can’t correctly answer three simple financial questions. All the better for the sharks, who thrive on the population.
Our education system increased the number of financial planners from about 50,000 to 650,000 in a decade. So it failed in two ways. First, these “financial planners” have done an abysmal job of assisting people in planning and second, these same “financial planners” seem to have assisted in the recent financial meltdown.
But again, who is going to raise the red flag and give people “bad news”? The system is designed to perpetuate the current perception of reality. That reality assumes a certain world order, a certain financial complex, and a certain skill set.
The current world order requires “continuous education” for many of the top careers. Do parents prepare their children for a life of work and continuous education? Do they enforce the disciplines of reading and mathematics in daily life? The buck starts at home. Schools cannot raise someone else’s children. If that is a requirement, then the entire structure must change. Perhaps that is what is needed. Child “education factories” in which children are picked up early each morning, and are returned each night to their “parents”. Upon leaving and arrival at “school” the child is fed, bathed, groomed and spends the entire day in a class with 8 other students and is spoon fed all the things the child should learn, is taught to read, to write, the arts, science and so on and is given every opportunity to participate in what we call “extra” activities. At the end of the day the child is fed, put into a new, clean set of pajamas and driven back to sleep in the home of the “parents”. All paid for by the government or “someone else”.
Returning to the current reality. As was pointed out over a decade ago, once manufacturing leaves a community, it seldom returns. The “service sector” jobs were determined to be the “future” by the politicians and the elite. Here are the top 25 paying jobs, according to Bureau of Labor data. It predates 2008 and the recent financial “crisis”. The data shows the relative wages as percentages. Interestingly, the highest paying wage actually goes to airline pilots, who aren’t on the table below. This list includes the best paying jobs that our youth should be aspiring to, and to which the entire educational system is geared, if we are to entertain being part of the American reality. This table reflects the reality, not the pap that our children are given by their parents and by others. To use the table, assume each position makes $1000 for each percentage point. This is a gross simplification and understates the actual earnings about 30%, but it does give a quick idea of the differences. Using this method a Physician would earn 100 x $1000 or $100,000. A speech therapist would earn 43.65 x $1000 or $43,650. It is interesting that 9 of the top 25 are in the health field:
Physicians 100.00%
Dentists 96.88%
General Managers 74.33%
Professors 63.74%
Lawyers 63.34%
Optometrists 62.97%
Judges 62.00%
Managers (Marketing, Advertising, PR) 60.86%
Physicists / Astronomers 59.91%
Financial Managers 55.35%
Actuaries 53.93%
Physician Assistants 52.92%
Engineers (see list) 52.17%
Chiropractors 51.32%
Chemists 51.04%
Pharmacists 50.83%
Surveyors / Mapping Scientists 50.74%
Securities / Financial Sales 49.21%
Geologists 48.78%
Computer Systems Analyst 47.98%
Secondary School Teachers 47.65%
Economists 47.51%
Psychologists 44.17%
Dental Hygienists 44.27%
Speech Therapists 43.65%
Based upon what we are paying these workers, the preceding jobs are those which our economy values the most. These are the wage earners that make the money.
The Department of Labor has predicted that the health care industry will account for 19 percent of all new jobs created in the ten year period 2004 and 2014. According to the AMA, there are 690,000 doctors in the U.S. and 2.5 million registered nurses. RN’s didn’t make it to the top 25; they were 46th on the list and at 35.45% wage level, and they earned an average of $45,115 a year. The number of nurses needed in the workforce must grow by 236,000 new nurses per year to keep up with increasing care demands and nurse retirement.
It’s too bad the U.S. health care system, although having the highest paid workers and costing so much for the citizens of the U.S. is so poor at providing that care. If it were a better system, perhaps wealthy foreigners would come here for medical care. We could thereby recoup some of the costs. But that isn’t so.
Only 19 of the top paying 73 jobs does not require some college. However, high school drop out rates are increasing. The U.S. high school completion rate is 10th in the world. In 2003, the data indicates that the U.S. had 3.5 million young people in the age group 16 to 24 who did not have a high school diploma.
According to data, in 2000, nearly 18% of community college entrants took a remedial reading class and nearly 16% a remedial math class.
If a youth lacks the intelligence or work ethic to make it through high school, there aren’t many opportunities. It is difficult to overcome habits acquired as a child and as a young adult. Even the lowest paying job on the list, a Plumber at 22.39% is likely to require a high school diploma, and if not, then reading and math skills. For example the UA association of plumbers and fitters has a five year apprenticeship program. Apprentices learn through both classroom and on-the-job training in one-year segments, each of which includes 1,700 to 2,000 hours of on-the-job training and a minimum of 216 hours of related classroom instruction. Can you see a slacker youth, who can’t make it in the other 72 job classifications, going for the plumber’s apprentice program and working an eight hour day and then one night a week attending a 4-1/2 hour classroom? So what’s left? A job at Wal-mart or a fast food restaurant.
Of course there are other jobs that don’t require college. According to the Bureau of Labor list, these include:
Rail Transportation Worker (#38 at 38.01% wage level)
Postal Employee (#48 at 33.63% wage level)
Police Officer (#45 at 35.97% wage level)
Paralegal (#57 at 28.70 % wage level)
Firefighter #59 at 28.47% wage level)
Executive Secretary or Administrative Asst (#65 at 26.25% wage level).
Truck Driver (#66 at 26.20% wage level)
Real Estate Agent #70 at 24.02% wage level).
Conclusion
The problems faced are solvable. However, to do so will require willingness on the part of our political leaders and a majority of Americans to face reality.
That includes realistic expectations for health care, particularly in old age. It will require honesty with our children and a willingness to share this planet with them and their descendents. It will require an awareness of the jobs that are available and of the earnings that can realistically be achieved in fulfilling them. It will require the reduction of consumption on all fronts. It will require realistic expectations for what this planet can provide and a willingness to face the reality that we are living a better lifestyle than 90% of the other people on the planet, and that we have achieved that standard of living by denying others their basic needs and requirements. It will require a willingness to live the life that is available to each of us, and not exceed what is available.
By acknowledging the reality of the world around us, we can then grasp what is necessary to solve the problems. Until that time, it will be “business as usual”.
Finally, it is apparent that the basic premise for "life in America" is the pursuit of happiness. This has gradually morphed into "the Entitlement to happiness". In a New York Times article dated August 7, Norman Fischer, a Zen Buddhist Priest, had this to say about "The Pursuit of What Matters in Troubled Times":
"We want enjoyment, we want to avoid pain and discomfort. But it is impossible that things will always work out, impossible to avoid pain and discomfort. So to be happy, with a happiness that doesn’t blow away with every wind, we need to be able to make use of what happens to us — all of it — whether we find ourselves at the top of a mountain or at the bottom of the sea."
The article is at:
http://happydays.blogs.nytimes.com/2009/08/07/for-the-time-being/?em
Those problems were stated to be:
- Overpopulation.
- Coal.
- HMOs.
- A rigged financial system.
- Education.
First, it is important to realize the political reality. I was once told that politicians have two purposes in life. First, to get elected and second, to stay elected. We cannot expect any resolution of the problems facing our country and the planet by our politicians. Why? Because Americans don’t want “change”. They want to maintain the status quo and a continuation of their lifestyle. They want cheap gasoline and energy, cheap groceries, free health care as in paid by the employer or the government (that is, paid for by someone else), etc. etc. As politicians have simply their own skins at heart, then the answer to all of these problems, which is “just say NO”, is not possible. No politician will be re-elected if he says “NO” to his constituents. When travelling a few years ago, I observed billboards by a U.S. Representative who was courting re-election. The message was “Vote for me and I’ll raise your Social Security”. That despite the well known financial problems of the system. And yes, that politician was re-elected.
Second, the UN’s earlier stance on “climate change” indicated that the only way to sustain the planet was a huge decrease in living standards for most of the people in the western world. While many people got on that bandwagon, very few took on the reality of changing their carbon footprint. For example, most of us won’t do something as simple as consistently combining driving trips to reduce gasoline consumption. Even with a large spike in gasoline prices, etc., Americans had difficulty achieving more than a 2% reduction in gasoline consumption.
Good luck in attempting the serious stuff such as smaller and higher density housing, living close to cities or mass transit hubs and improved mass transit, huge efficiency upgrades to existing dwellings, car pooling, reducing personal water consumption, driving substantially more efficient vehicles, etc. These are impossible programs in the US. If you doubt me, consider what was purchased with all of the money spent on home upgrades in the past decade. Did it include simple efficiency upgrades such as improved roofing insulation and Energy Star appliances? Was it spent on more expensive high efficiency upgrades such as Energy Star certified appliances including furnaces, hot water heaters, air conditioning, windows, TVs, PCs, etc.? Have walls and foundations been insulated or re-insulated? In the period 2000 to 2007, were the bulk of new houses high efficiency and smaller, or were they larger and less efficient dwellings? How many people in the US drive automobiles with better than 25 MPG combined efficiency, a very easy achievement? Consider that in 2004 and 2005, if you added up the total number of vehicles purchased of the top 20 vehicles types and calculated the average MPG of the resulting pool of vehicles, you would find it was 21.9 MPG!
Ultimately, it seems that the core issue is entitlements. We are entitled to everything, which includes an incredible living standard. According to Census Bureau 2007 data, the median family annual income in the U.S. for 2006 and 2007 was $50,059. According to the “Global Rich List” that puts the median family in the top 1% annual income on the planet. I admit, the list is primarily for entertainment. However, the question is, why do Americans feel so “poor”? Of course, if all of that income is spent and additional funds are borrowed via credit cards, or squandered for the purchase of outsized and expensive housing, fancy automobiles, etc. and the other attributes of an incredible lifestyle, then people really are poor. So why do they do it? Societal norms, greed, entitlement and education are possible factors.
Returning to the document, the problem is systemic in nature and singling out specific industries is counterproductive. In the scenario of dwindling resources, all consumers are the “bad guys”. As has been noted repeatedly in the press and even by the “economists”, at least 66% of the U.S. economy is based upon purchases by the “consumer”. Our economy runs on “consumption” and the rest of the planet is willing and able to produce things for us to consume.
The recent planet wide “reset” may provide temporary relief. However, given the recent history of the U.S., and its response to various problems including oil embargoes, economic disruptions, etc. it is unlikely that any current changes will be lasting. However, are the problems solvable? Technically, they are, but there are obstacles of our own making to be overcome. My position is stated at the conclusion of this document. The American way of life is incredibly inefficient and wasteful. Unless that efficiency is significantly improved in the period 2010 to 2020, Americans will find themselves living in a cesspool of their own making. Currently, it seems most Americans are waiting for someone else to take the initiative and for someone else to make the sacrifices that are necessary.
Let me state that I see real opportunities in the near future. Some companies are re-organizing to take advantage of the crisis and have learned a lot from the problems. For example, Morningstar had this to say about GE on March 3, 2009: "General Electric positions itself to be a leader in whatever market it competes in. After shedding underperforming businesses during the past couple of years, the firm has energy infrastructure square in its sights. We believe that GE will emerge as a leader in the power infrastructure market, which will be the backbone for the firm's growth."
There are tremendous opportunities for individuals, too. So, while you might read this as being pessimistic, in fact, I am slightly optimistic. The issues facing the planet and its population are solvable. It is up to the U.S. to jump to the forefront and take the initiative. My pessimism is based upon our population which in my lifetime seems to have gradually morphed from "I can" to "I won't".
Item 1: Over Population. Currently, the world population is estimated to be 6.7 billion. I have read documents elsewhere which imply that this planet can comfortably sustain 2 to 3 billion human beings. Sorry, but I can’t provide references for that figure. However, the important phrase here is to “comfortably sustain”.
At some level, the planet can sustain all human life comfortably and for an indefinite period. At that population level, and with modest ongoing technological improvements, there is sufficient fossil fuel, water, food supplies, etc. to maintain the population. We have exceeded that number. That’s the core problem. How to resolve this? Re-distribution of wealth will lower some standards and increase others, but it will not solve the root cause. Redistribution will probably result in a faster increase in the world population, as the “have not’s” attempt to achieve the same living standards as the “haves”. Such re-distribution will lower the standards of many people in the western world. It may actually exacerbate the problem and accelerate the demise of the planet. For example, consumption is increasing in India and China as their population attempts to move to the “middle class”. The combined populations of those countries is 2.5 billion. The population of the U.S. is 307 million. If we took one half of the resources and wealth consumed in the U.S. and “redistributed” it equally among the populations of India and China, the result would be possibly lowering our living standards by up to 50%. However, this distributed “wealth” would raise the standards of each Indian and Chinese by only 6%! That’s the problem. Our population is about 12% of theirs.
Here’s another way to look at it. Residential drivers in America drive a total of about 2,300 billion miles per year. If that were reduced by 50%, and the savings transferred to the growing economies of China and India, it would permit each person in those countries to drive about 460 miles per year! I don’t have accurate numbers readily available on the number of residences in those countries, but if we assume the average family in those countries is 4 people, each would average about 1,800 miles per year! Americans, meanwhile would have reduced their annual driving to over 6,000 miles per year. I’m sure we’d be complaining about our “suffering” just as we complain about everything else we feel entitled to.
I don’t see anyone jumping on the bandwagon and clamoring to have their living standards reduced. I don’t see anyone begging for less medical care, or lowered Social Security benefits, etc. Quite the contrary.
There is no doubt that the “American Ideal” is an impossible dream. As the author stated, this ideal has “deadly” effects. Simple arithmetic supports that statement. In the U.S., a lot of people are attempting to achieve or maintain the status quo. For the American voter, the simple goal is to elect politicians who maintain our lifestyle, at the expense of the other 6 billion human beings on the planet.
On the subject of “Population” and as a pre-requisite you might be interested in a series of talks by Dr. Al Bartlett at the University of Colorado. His subject is “Arithmetic, Population and Energy”. This is available on YouTube and is a one hour lecture broken into eight parts. His arguments are simple and straightforward. Go to:
Arithmetic, Population and Energy by Dr. Al Bartlett
Currently, the world population is growing at about 1.3% per year, which means it will double in 54 years.
I agree, this will result in extreme political unrest. It will probably result in war, famine and acute poverty. No one will be spared. Meanwhile, our youth are preparing for a world which will not exist. They are preparing or being prepared for something reminiscent of the 1990s. Too bad for them. What type of education do people get in the U.S. that they expect no change, expect that things will always work out and they feel that it should be so?
We had about 650,000 financial advisers in the U.S. prior to the recent financial melt down. That’s more than the total number of engineers. What are the chances of retraining most of these people for work in other areas, where we need talent? What jobs and what future should they be preparing for? Are they willing and do they have the necessary talent?
The Chinese government seems to be the only ones on the planet who grasp the severity of the situation. They are corralling fuel and all manner of commodities. The economists and political pundits consider this to be a currency play, avoiding a decline in the dollar. That’s a very near sighted view. Of course, the Chinese stepped into a trap and are now grappling with the issues inherent in upgrading the lifestyle of 1.3 billion in their country to some sort of “middle class” standard. This will require increased energy production.
Many Americans do realize something is off. But as I stated in 2005, we are a nation of Katrina Victims. We are gamblers who think we can dodge the bullet, as gamblers always do. The crash of 2008 was simply another wake up call. So people are now saving at a rate of 5%. They’ll need it. But if the dollar tanks, inflation will eat up those savings in months; save 5% of disposable income annually for 10 years and you have savings equivalent to 6 months of disposable income, assuming interest earned equals inflation. That’s a drop in the bucket. Things will get ugly. How ugly? That’s the big question. How fast? That’s another question. It is quite possible that the unwinding of the world as we know it will occur slowly, with occasional shocks to remind everyone that our way of life is dying.
However, it is important to realize that about 25% of the people living on this planet live in very basic conditions. No electricity, minimal health care, etc. It is possible that this number will decrease in the future, and some of these will move up the ladder. However, that will only occur if the top 50% give something up. That will be the cause of the wars and famines. We will not surrender our “birthright” and entitlements. Nor will we willingly give up our food. Of course, we will expect our descendants to do so. That is essentially what most of the talk is about. Maintaining our standard of living while contributing to the demise of our children’s.
Item 2: Coal. I think this is simplified. The issue is all resources. That includes water, energy and minerals. As time goes on, more and more energy is spent harvesting the resources that remain on the planet. The author got that right.
There are no clean industrial processes. They all require extensive energy consumption and the exploitation of raw materials requires water. Those processes exist to maintain our living standard and to provide us with the goods and services we clamor for. Industrial processes and power plants are not evil. They exist to support our lifestyle. But Americans always want it both ways. Build those ugly belching power plants somewhere else, and transport the “clean” energy to us via long distance transmission lines, while we live sequestered in our “clean” cities. How disingenuous! The statistics are simple. About 31% of the electrical energy capacity in the U.S. is via coal fired generating plants.
A report in July 2009 by McKinsey & Co. had the following conclusion. The U.S. can reduce its energy use 23% below the projected U.S. demand level in 2020 by boosting efficiency. In the process it can save $1.2 trillion in energy costs. To achieve that will require immediate action and expensive investments in new equipment.
Want to cut coal generation in half? Then reduce commercial and residential electricity consumption by 15% or so. How to do that? Upgrade the furnace and HVAC systems and the refrigerator to the most energy efficient available, turn off appliances when not in use, and reduce lighting by about 25%. Voila! Is it really that difficult? Consider that a 20 cu. ft frostless refrigerator consumes about 33% more energy than a 16 cu. ft. refrigerator. So switch to a smaller refrigerator and save 1/3 of the electricity. Want to save more? Go to a 16 cu. ft non-frost free model. The 20 cu. ft. frost free model will consume over twice the energy. According to the U.S. government, replacing a central air conditioning system that is 12 or more years old with a higher efficiency “energy star” unit could reduce the energy consumption by 30%. Currently, the U.S. government estimates that 25% of the furnaces in homes in the U.S. are at least 20 years old. This is not rocket science, by any means.
The EIA 2009 International Energy Outlook states that “World marketed energy consumption is projected to increase by 44 percent from 2006 to 2030.”
Coal may be a problem, but it is abundant and cheap. That’s why even the Chinese are using it, and it is the source of about 70% of the electricity generated in China. It is expected that Chinese consumption of coal will increase at 3.5% per year until 2030. To achieve this, the current Chinese stimulus plan includes significant upgrades and even the expansion of rail lines. Coal requires rail. India too is counting on coal for its economic growth.
However, I don’t think coal is the culprit. The myth of coal is one of the culprits. In that myth, coal, tar sands and shale oil are considered to be our big energy source “saviors”. In truth, they are incapable of satisfying our need for energy, if the growth rates continue. But they do provide straws for politicians to grasp at, and an opportunity for individuals to make money. They also provide false hope, and with that hope, the need for change is negated.
It takes energy and water to harvest the resources of the planet. We are running out of both. The result is more and more resources are spent to achieve the current production levels. This implies that we are expending and consuming ever greater quantities of resources to maintain the status quo. Agriculture is energy and water intensive. In the American southwest, they persist in attempting agriculture in the desert. The former governor of the state of New Mexico tried his best to get the federal government to run a pipe line from the Great Lakes to his state for that very purpose. His final solution was an attempt to win his party’s nomination for U.S. President.
As stated earlier, the Chinese now find themselves in a trap. Growing expectations of improved life style dictates huge investments. It was relatively easy to get western technology and build a juggernaut of low skilled workers in factories no American would work in. However, it will take longer and is apparently proving to be difficult to grow a society which is self generating and can simultaneously build and consume the goods that are produced. This is, I think the main source of the anger expressed by the Chinese leaders. They know they have a serious problem, they realize that they cannot continue to rely on their mercantilism and yet they find themselves halfway across the stream. They perceive the promise of a western economy as a false one with serious implications that they previously ignored.
The author promotes a “crash program of energy conservation”. The question I ask is, by whom? Or perhaps I should ask, “what are we, as individuals, waiting for?”. Of course, the problem could be that very, very few of us in the U.S. really see any need for conservation, and the few that do are unwilling to act on a personal level.
If we agree that more and more resources are being spent to maintain natural resource and energy production levels, then it would seem that it essential to reduce the consumption of natural resources. This is easier and sometimes less intuitive than one would think. Most people are unawares of how much energy it takes to make something as simple as a porcelain cup. But many homes upgrade dishware on a regular basis, simply because of the urge to redecorate.
In America, we are in our own trap. It is called “the consumer” and as many of us are now aware, our economy runs on “the consumer”. For years, our politicians extolled the wonders of consumption and facilitated our spending ways. Cheap credit, homes for everyone, etc., etc., etc. They did so because if they did not, the result would have been an economic recession. So politically, there was no choice but to continue this folly. Politicians extolled us to save, but in reality, they needed us to spend, and designed all manner of programs to facilitate that, and spend we did. In the process, we consumed.
In the 1960s and 1970s there were numerous studies which hypothesized the results which we are now experiencing. They projected a decreasing standard of living. That future, once remote, is now immediate for many of us. How many stock brokers and financial advisers do we need in this country? Apparently, fewer than we currently have. Ditto for bankers, auto dealerships, Realtors, construction workers, and so on. What occupation will these people now perform? Are they skillful enough to be retrained? Are they hungry enough to do what is necessary? Do we have industries for them to work in? Ergo the concern of some economists that we now have a million “workers” in their 40s and 50s who are chronically unemployable. Inflexibility is another handicap of our educational system. So too the lack of critical thinking skills.
The issues extend to water and the University of Nebraska in Lincoln monitors drought conditions in the U.S. Individuals at the UNL have been stating that within 5 years an additional 30 states will experience significant water shortages. This due to dwindling water reserves and rising populations. This alarm has been generally ignored.
Automobiles are a major energy problem. Only about 10% of the energy spent in propelling an automobile is used to move the occupants! How inefficient that is. So the basic premise of a vehicle made of steel or other metals is faulty. It is all so “iron age”. The great Japanese manufacturing machine hasn’t cracked this one, either. They perfected iron age technology and made a mint doing it. Good for them, bad for the planet! GM worked hard to maintain the status quo; rust buckets which needed to be replaced every 10 years, or sooner, if possible. Good for unionized worker, bad for the planet! The U.S. government has been all talk and no walk. Even the U.S. Postal Service boasts of the “largest private fleet of vehicles” in the country, which is comprised of over 260,000 mostly gas and diesel fueled vehicles, and this ignores the transportation used by subcontractors. Postal Service vehicles consumed over $2.6 billion in fuel in 2006 according to a 2007 GAO report.
Note that the same GAO report stated that the Postal Service “has incomplete information for most of its transportation and facility fuel consumption…the Service does not know how much fuel is being consumed at the majority of its facilities, for fuel used to service nearly 55,000 rural routes, or through most of its air transportation contracts. The service currently has metering systems at only a few of its over 34,000 occupied facilities.”
I use this as an example of a lack of “leadership by example”.
The Postal Service is planning on purchasing up to 150,000 delivery vehicles in 2015 and intends to evaluate hybrid SUVs, an electric vehicle and a GM hydrogen fuel cell vehicle; generally “iron age” transportation with improved engine technology. The bottom line is this. To significantly improve the efficiency of automobiles requires a like reduction in the weight of the vehicle. That means, bodies and supports made out of something other than metal, perhaps carbon fiber. To do so requires a complete reengineering of the entire process. Perhaps a frame and body capable of a 50 year life. That may mean no more vehicle ownership, but lifetime leases with upgrades via drop-in power plants, as improvements are developed.
Meanwhile, even with all of the hoopla about energy efficiency, there are projections that U.S. gasoline consumption will increase and will reach 156 billion gallons in 2015!
If we want to reduce automobile fuel consumption, this is best achieved by weight reduction. That means reinventing the automobile. If we had a crash program to reduce automobile fuel consumption by 66%, through improved efficiency and reduced usage, we could stop importing oil. There would be a similar reduction in CO2 emissions. That is impossible, you might say. But let’s assume that 50% of that reduction were achieved in improved gasoline powered vehicles. How is that possible? It’s not as difficult as it would seem. For example, in 2005, the average fuel efficiency of the combined pool comprised of the 20 best selling vehicles (cars and pickups) in the U.S. was 21.9 MPG. A 50% improvement would require a vehicle capable of 43.8 MPG. It would take time to replace all of the vehicles on the road today. But it is doable. Our government’s solution is a “cash for clunkers” program wherein it is possible to purchase a new Hummer H3 and meet the requirements of the program. Of course, that program is a stimulus program and it is a “short term” solution in every way thinkable. Simply another method to burn through cash. Another short sighted political solution, this one designed to help the automobile manufacturers maintain the status quo and deplete current new automobile inventories, many of which are inefficient pickup trucks and SUVs. Unless we are really willing to accomplish real change, there will be no change. Just political slogans and flushed money. It was free homes. Now it’s subsidized pickup trucks. What’s next?
Item 3: HMOs. Health care costs are rising at a rate greater than earnings. That is the core problem. How to solve it?
People like to look at the Canadian and various European models. However, no one wants rationed care. At some point, people are told they are not entitled to a heart transplant, or a new knee or a hip replacement. In effect, people are told that the money is better spent on a sick youth than a sick elderly person.
That is something no one in the U.S. wants to hear. There is a lot of rhetoric about the rising cost of drugs, but drug expenditures are something like 10% of the total U. S. annual medical bill. Let me repeat that: If we made all drugs free, all we would accomplish is reducing the health care tab by 10%.
According to a European study, the U.S. spends 10% on pharmaceuticals, 7% on administrative costs, 31% on hospital care, 21% on physician services, 8% on nursing homes. The remaining 23% goes to diagnostic laboratory services, pharmacies, medical device manufacturers, etc. And our overall health keeps declining.
One advantage to having a system like Medicare is that the U.S. government keeps statistics on health care costs. This provides some insights into where the money is spent. It reveals that one percent of the U.S. population consumes 30 percent of the U.S. health care. Nearly a third of all Medicare dollars are spent on patients in their last year of life. Over half of all Medicare dollars are spent on patients in their final two months of life. We are literally spending a fortune each year in an attempt to keep the dying alive. How much? About $250 billion a year, which is equivalent to about a 2.5% of disposable income. But who has the courage to tell the dying that they aren’t worth it? Obviously, no one is willing to take the heat for that one. The ethics of the health care system requires the prolonging of life, at any price. Quite a profitable system.
According to the World Health Organization, the U.S. government contributes about 45% of the expenditures for health care in the U.S. In Canada it is about 70% and in France it is about 80% and in the UK it is about 81%. However, when comparing government expenditures for health as compared to overall expenditures, the U.S. spends more than the counterparts listed above!
Obviously, we simply aren’t getting sufficient bang for the buck. This is per the latest WHO data available, which is 2006. In 2005, France spent $3,962 per capita on health care. The U.S. spent about $7,000 per capita during the same period. According to 2009 OECD data, France spent about 32% less of its GDP on health care than the U.S.
As for the costs, these are some figures for France, which was reputed to have the best overall health care system in the world by the WHO. You will note these are substantially lower than fees here in the U.S.:
General Practitioner visit = 22 Euros.
Specialist visit = 25 Euros.
Cardiologist visit = 49 Euros.
In France, costs are born by the patient, who is then reimbursed for a portion of the costs. That is a significant difference from the U.S. system.
Here in the U.S., everyone profits from sick patients. Hospitals, doctors, pharmaceutical companies, all profit from the misfortune of others. Americans talk about their doctor in ways similar to politicians. Most loath Congress, which has an incredibly low approval rating, but approve of their members of Congress. Similarly, many Americans have little good to say about the health care system. But if asked about their doctor, many have good things to say! Is it any wonder the system can’t be fixed?
But we wanted a service economy, didn’t we? That’s what we got.
What people in the U.S. want is essentially free medical care. After they pay for an insurance or Medicare premium, they expect to be fully covered, with no limit to expenditures. Differences between premiums collected and actual costs are to be born by “someone else” just as is the case with all other entitlement programs.
Let’s take Social Security as an example of how these systems work. If I earn $1,090 a quarter in 2009, I’ll earn four “credits”. The amount to be earned changes each year varies; in 2008, it was $1050 per quarter. Meet the minimums for ten years, earn 40 “credits” and one is eligible for social security benefits. If the beneficiary has an non-working spouse, the family benefit increases to 150% upon retirement of the spouse. How much is paid in by the worker? 6.2% of the employees wages. If I were to earn the minimum of $1,090 per quarter in 2009 and if I earned the minimums for each of the final ten years of employment prior to achieving my “full retirement age” (a simplification) then I would have earned about $43,600 in that ten years. I would have paid about $2,678.40 in Social Security taxes in that period. At my full retirement age of 66 I would be given $244 in retirement benefits each month, or $2,928 per year, according to the SS website. If I live to reach the life expectancy of 76, I would have collected for 10 years or an amount of $29,280. If my spouse retired at the same age I did and we both lived to reach 76, we would have collected $43,920. Not a bad return on an investment of $2,678. Of course, if I lived to be 86 the benefit would be over twice as much; an even better return. This is a simplification, because I probably will work and pay SS taxes for more than 40 quarters. If a family exceeds a certain income level, then up to 85% of SS income is taxed, and the tax collected is returned to General Revenues, where it can be spent by our ever eager politicians.
Consider the revolt, when all of those young people, who are expecting a life in the world similar to that which existed in the 1990s are faced with a much bleaker reality. Consider what happens when they realize that a lot of “gray hairs” are taking money from their paychecks in the form of higher SS and Medicare taxes, and then realize that they are paying taxes solely to maintain someone else’s life style. That is the revolution that is coming!
The problem with medical costs is the same as that with population growth. Doubling the price of health care every 7 years benefits only those who are employed by the health care system. This is unsustainable and eventually we will run out of resources.
In the mean time, politicians will backpedal and will come up with means testing and other initiatives to charge those who are able to pay, and recoup a small portion of the ever escalating costs. The current initiative in Washington is a work in progress and it is too early to determine the program that will be produced.
Item 4. A rigged financial system. I agree, it is rigged. But again, everyone in the system profits. That is the goal. Brokers and financiers collect fees based on transactions, not on performance. It’s an incentivized system based on sales numbers rather than results. A system similar to the health care system.
Even the government has rigged the tax system. If I make a profit on the sale of a stock, I pay a tax on the “gain” in the year in which the gain is realized. However, if suffer a loss on the sale of that same stock, I can’t realize that loss, if it is more than $3,000 in any one year. Instead, the IRS lets me “carry the loss forward” and dribble it against my gains in future years.
If I save money, I am taxed on any interest I receive. That tax ignores the effect of inflation. In effect, I lose money each and every year that I save. At present, banks can borrow money at unrealistically low levels. Meanwhile, savers get a paltry 0.1 or 0.15% on their savings. Savers support the banks and the spenders. However, recently 24 month CDs are up to about 2.65% in anticipation of increased inflation.
Item 5. Education. Well, where to start? One of the great problems facing the country is most certainly an under performing population. The problem is not simply education. It’s the quality of the education. According to a 2005 Business Week article “America the Uneducated”, America’s workforce is the most educated in the world. According to the article, 85% of adult Americans have at least a high school degree and 28% have a college degree. But obviously, that education seems to lack simple skills and common sense.
But what type of education are we really talking about? Are we considering educating people to be a viable and contributing member of society? Are we educating our youth to make a difference on the planet?
No. We are educating our youth to be a part of a system in which the sharks thrive at the expense of others. If you can’t do well as a shark, then perhaps be a parasite. That also works well.
Most young people have no idea how wealth is created. They have no idea of how to raise a family, of how to budget, how to save and how to plan for retirement, etc. etc. This persists even after completing college. It isn’t just youth. Studies by the SS administration revealed that most Americans can’t correctly answer three simple financial questions. All the better for the sharks, who thrive on the population.
Our education system increased the number of financial planners from about 50,000 to 650,000 in a decade. So it failed in two ways. First, these “financial planners” have done an abysmal job of assisting people in planning and second, these same “financial planners” seem to have assisted in the recent financial meltdown.
But again, who is going to raise the red flag and give people “bad news”? The system is designed to perpetuate the current perception of reality. That reality assumes a certain world order, a certain financial complex, and a certain skill set.
The current world order requires “continuous education” for many of the top careers. Do parents prepare their children for a life of work and continuous education? Do they enforce the disciplines of reading and mathematics in daily life? The buck starts at home. Schools cannot raise someone else’s children. If that is a requirement, then the entire structure must change. Perhaps that is what is needed. Child “education factories” in which children are picked up early each morning, and are returned each night to their “parents”. Upon leaving and arrival at “school” the child is fed, bathed, groomed and spends the entire day in a class with 8 other students and is spoon fed all the things the child should learn, is taught to read, to write, the arts, science and so on and is given every opportunity to participate in what we call “extra” activities. At the end of the day the child is fed, put into a new, clean set of pajamas and driven back to sleep in the home of the “parents”. All paid for by the government or “someone else”.
Returning to the current reality. As was pointed out over a decade ago, once manufacturing leaves a community, it seldom returns. The “service sector” jobs were determined to be the “future” by the politicians and the elite. Here are the top 25 paying jobs, according to Bureau of Labor data. It predates 2008 and the recent financial “crisis”. The data shows the relative wages as percentages. Interestingly, the highest paying wage actually goes to airline pilots, who aren’t on the table below. This list includes the best paying jobs that our youth should be aspiring to, and to which the entire educational system is geared, if we are to entertain being part of the American reality. This table reflects the reality, not the pap that our children are given by their parents and by others. To use the table, assume each position makes $1000 for each percentage point. This is a gross simplification and understates the actual earnings about 30%, but it does give a quick idea of the differences. Using this method a Physician would earn 100 x $1000 or $100,000. A speech therapist would earn 43.65 x $1000 or $43,650. It is interesting that 9 of the top 25 are in the health field:
Physicians 100.00%
Dentists 96.88%
General Managers 74.33%
Professors 63.74%
Lawyers 63.34%
Optometrists 62.97%
Judges 62.00%
Managers (Marketing, Advertising, PR) 60.86%
Physicists / Astronomers 59.91%
Financial Managers 55.35%
Actuaries 53.93%
Physician Assistants 52.92%
Engineers (see list) 52.17%
Chiropractors 51.32%
Chemists 51.04%
Pharmacists 50.83%
Surveyors / Mapping Scientists 50.74%
Securities / Financial Sales 49.21%
Geologists 48.78%
Computer Systems Analyst 47.98%
Secondary School Teachers 47.65%
Economists 47.51%
Psychologists 44.17%
Dental Hygienists 44.27%
Speech Therapists 43.65%
Based upon what we are paying these workers, the preceding jobs are those which our economy values the most. These are the wage earners that make the money.
The Department of Labor has predicted that the health care industry will account for 19 percent of all new jobs created in the ten year period 2004 and 2014. According to the AMA, there are 690,000 doctors in the U.S. and 2.5 million registered nurses. RN’s didn’t make it to the top 25; they were 46th on the list and at 35.45% wage level, and they earned an average of $45,115 a year. The number of nurses needed in the workforce must grow by 236,000 new nurses per year to keep up with increasing care demands and nurse retirement.
It’s too bad the U.S. health care system, although having the highest paid workers and costing so much for the citizens of the U.S. is so poor at providing that care. If it were a better system, perhaps wealthy foreigners would come here for medical care. We could thereby recoup some of the costs. But that isn’t so.
Only 19 of the top paying 73 jobs does not require some college. However, high school drop out rates are increasing. The U.S. high school completion rate is 10th in the world. In 2003, the data indicates that the U.S. had 3.5 million young people in the age group 16 to 24 who did not have a high school diploma.
According to data, in 2000, nearly 18% of community college entrants took a remedial reading class and nearly 16% a remedial math class.
If a youth lacks the intelligence or work ethic to make it through high school, there aren’t many opportunities. It is difficult to overcome habits acquired as a child and as a young adult. Even the lowest paying job on the list, a Plumber at 22.39% is likely to require a high school diploma, and if not, then reading and math skills. For example the UA association of plumbers and fitters has a five year apprenticeship program. Apprentices learn through both classroom and on-the-job training in one-year segments, each of which includes 1,700 to 2,000 hours of on-the-job training and a minimum of 216 hours of related classroom instruction. Can you see a slacker youth, who can’t make it in the other 72 job classifications, going for the plumber’s apprentice program and working an eight hour day and then one night a week attending a 4-1/2 hour classroom? So what’s left? A job at Wal-mart or a fast food restaurant.
Of course there are other jobs that don’t require college. According to the Bureau of Labor list, these include:
Rail Transportation Worker (#38 at 38.01% wage level)
Postal Employee (#48 at 33.63% wage level)
Police Officer (#45 at 35.97% wage level)
Paralegal (#57 at 28.70 % wage level)
Firefighter #59 at 28.47% wage level)
Executive Secretary or Administrative Asst (#65 at 26.25% wage level).
Truck Driver (#66 at 26.20% wage level)
Real Estate Agent #70 at 24.02% wage level).
Conclusion
The problems faced are solvable. However, to do so will require willingness on the part of our political leaders and a majority of Americans to face reality.
That includes realistic expectations for health care, particularly in old age. It will require honesty with our children and a willingness to share this planet with them and their descendents. It will require an awareness of the jobs that are available and of the earnings that can realistically be achieved in fulfilling them. It will require the reduction of consumption on all fronts. It will require realistic expectations for what this planet can provide and a willingness to face the reality that we are living a better lifestyle than 90% of the other people on the planet, and that we have achieved that standard of living by denying others their basic needs and requirements. It will require a willingness to live the life that is available to each of us, and not exceed what is available.
By acknowledging the reality of the world around us, we can then grasp what is necessary to solve the problems. Until that time, it will be “business as usual”.
Finally, it is apparent that the basic premise for "life in America" is the pursuit of happiness. This has gradually morphed into "the Entitlement to happiness". In a New York Times article dated August 7, Norman Fischer, a Zen Buddhist Priest, had this to say about "The Pursuit of What Matters in Troubled Times":
"We want enjoyment, we want to avoid pain and discomfort. But it is impossible that things will always work out, impossible to avoid pain and discomfort. So to be happy, with a happiness that doesn’t blow away with every wind, we need to be able to make use of what happens to us — all of it — whether we find ourselves at the top of a mountain or at the bottom of the sea."
The article is at:
http://happydays.blogs.nytimes.com/2009/08/07/for-the-time-being/?em
Friday, May 15, 2009
Notable Quote
"Some people are more teachable than others. This is also true of dogs, however, so take it as you wish. [The executive level] should be a tough meritocracy. It shouldn't be easy. I look for people I can trust. Hiring people you can't trust is like starting off by dropping a spider in your bosom."
--- Charlie Munger of Berkshire Hathaway on Executive Leadership
--- Charlie Munger of Berkshire Hathaway on Executive Leadership
Thursday, April 30, 2009
Personal Savings Rate Hits a High!
The personal savings rate hit a high according to the U.S. Government Bureau of Economic Analysis. The rate, as a percent of disposable income, hit 4.2% in March, which was greater than the February 2009 rate of 4.0%. As can be seen in the following chart, this not only reverses a trend, but is the highest since 2000. It seems the American Consumer has gotten the gospel. Can "Living Below Our Means" be a possibility? Nah! I assume as soon as the fear moves away, that the greed will return and spending will ramp up. Same as after each previous recession. However, saving is a good thing in the long run. We'll need that money to pay the increased taxes for the bail outs. Unfortunately, at present the reduced spending is wreaking havoc with the economy.
My personal stimulus plan is to frequent some of local restaurants and to increase my tipping. One reported a 70% decrease in business in January; a combination of nasty winter weather and the pinch of the panic.
According to the BEA: "Personal outlays -- [Personal Consumption Expenditures] PCE, personal interest payments, and personal current transfer payments -- decreased$24.5 billion in March, in contrast to an increase of $38.7 billion in February."
"PCE decreased $24.2 billion, in contrast to an increase of $39.1 billion. Personal saving -- [Disposable Personal Income] DPI less personal outlays – was $455.3 billion in March, compared with $432.6 billion in February. Personal saving as a percentage of disposable personal income was 4.2 percent in March, compared with 4.0 percent in February."
For a comparison of personal saving in BEA’s national income and product accounts with personal saving in the Federal Reserve Board’s flow of funds accounts and data on changes in net worth, go to http://www.bea.gov/national/nipaweb/Nipa-Frb.asp.
My personal stimulus plan is to frequent some of local restaurants and to increase my tipping. One reported a 70% decrease in business in January; a combination of nasty winter weather and the pinch of the panic.
According to the BEA: "Personal outlays -- [Personal Consumption Expenditures] PCE, personal interest payments, and personal current transfer payments -- decreased$24.5 billion in March, in contrast to an increase of $38.7 billion in February."
"PCE decreased $24.2 billion, in contrast to an increase of $39.1 billion. Personal saving -- [Disposable Personal Income] DPI less personal outlays – was $455.3 billion in March, compared with $432.6 billion in February. Personal saving as a percentage of disposable personal income was 4.2 percent in March, compared with 4.0 percent in February."
For a comparison of personal saving in BEA’s national income and product accounts with personal saving in the Federal Reserve Board’s flow of funds accounts and data on changes in net worth, go to http://www.bea.gov/national/nipaweb/Nipa-Frb.asp.
Thursday, March 19, 2009
Notable Quote
"Like the generals who are always trying to fight the last war, the regulators are always trying to fight the last crisis."
- Heiner Schultz, Assistant Professor, Univ. Penn.
- Heiner Schultz, Assistant Professor, Univ. Penn.
Wednesday, March 11, 2009
Update Mid-March 2009
If anyone was wondering, I haven't gone away!
I've been catching up on "business" and dealing with issues out there in the "real" world.
I also wanted to give the economy and our new congress and President some time to allow the "dust to settle". There has been more info available in the popular press than has been possible to digest.
The economy continues is decline, in fits and starts, toward a 10% national unemployment rate, and our government continues to throw the bulk of its financial support to the banks and financial institutions. The experts, who for the most part missed all of the signals leading to the current situation are now saying it may be late 2009 or 2010, or later for a recovery to begin, in earnest. Why should I believe them now?
Today the U.S. Labor Department reported that in January four states had unemployment rates above 10% and two other were close behind. Highest unemployment reported:
California 10.1%
Georgia 8.6%
Michigan 11.6%
North Carolina 9.7%
Oregon 9.9%
South Carolina 10.4%
Rhode Island 10.3%
Note: If you want a job, go to Wyoming. The jobless rate was reported as 3.7% for January, 2009, which is the lowest in the nation!
The stimulus promoted by the government, including the new Obama administration, includes what I would classify as a lot of "earmarks" which will not stimulate the economy and will burden our future with debt. Is it any wonder that many people are so morose?
My "personal" recession began in 2006 when my clients, all of whom are involved in heavy industry as it applies to construction, rapidly cancelled or postponed projects and contracts. MBA programs have been teaching the technique which Jack Welch of G.E. fame used during the period 1981-1985 and the related recession. Jack cut jobs deep and hard; it is my understanding that 100,000 jobs were eliminated by "Neutron Jack " as he was called, apparently in reference to his similarity to the Neutron Bomb, which destroys people but leaves factories intact. CEOs and managers emulated this technique in the 1990s and it worked very well, and I also think it contributed to the depth of that recession, as it is, now.
An associate made the statement to me on Monday "Don't I know what's going on out there?" Wake up, Virgil, as the saying goes, I have not been sleeping nor has my head been embedded in the sand! I suspect that associate hasn't been listening during our conversations, or simply rejected what I was saying at the time. He does have the opinion that I am off my rocker, most of the time.
So I'll be posting my updated perspective on the economy in the very near future. However, we are on track per my blog of October 21, 2008:
http://letmethinkaboutthis.blogspot.com/2008/10/how-bad-recession.html
Meanwhile, while our politicians debate, the government continues to send money to bail out banks, bankers and investment companies. Very little of this is apparently finding its way to the millions of distressed homeowners. In Obama's stimulus package, there is $75 billion earmarked for "distressed homeowners". I am not entering the debate about whom deserves or doesn't deserve government bailout money. It is apparent that a lot of people were greedy, a lot of people made mistakes or were simply stupid, and a lot of people perpetrated various frauds.
I am looking at this from the perspective of spending as little as possible to resolve the problem. We have about 7.3 million homeowners who have defaulted or are at risk of default. If these people were given a stipend by the government which was applied against their mortgages, this money would be passed to the banks who would be forced to lower the balance on their mortgages, it would find its way to those who hold the notes, etc. and should stabilize the system.
But how much money would it take? Or, how far could a trillion dollars, which is the amount routinely used as fodder for the pigs at the toughs, go? I'll round up the number of mortgages to 10 million. Well, one Trillion dollars = $1,000,000,000,000. If I were to divide that by 10 million distressed mortgages (10,000,000) I would have $100,000 per mortgage.
So which has been more effective? Throwing several trillion dollars at the banks and investment bankers, or throwing $50,000 at each homeowner? We could bail out 10 million homeowners and the entire banking system directly tied to these failed mortgages, using "only" one-half trillion dollars, which is $500 billion.
So now you know why am so cynical about our politicians. they could get the job done and they should know what I know. But they don't operate accordingly. So looking beyond all the rhetoric and the politicians and their media pundits, who is really being served? I'll let you draw your own conclusions.
Note: one trillion is a really big number. How big? Let's do a little arithmetic and answer the question "how many seconds is a trillion?" There are 365 days each year, 24 hours each day, 60 minutes each hour and 60 seconds each minute. So a year is 365 x 24 x 60 x 60 seconds = 31,536,000 seconds. If I divide 1 trillion by the number of seconds in a year, I'll know how many years contain 1 trillion seconds. The answer is 31,709 years.
I've been catching up on "business" and dealing with issues out there in the "real" world.
I also wanted to give the economy and our new congress and President some time to allow the "dust to settle". There has been more info available in the popular press than has been possible to digest.
The economy continues is decline, in fits and starts, toward a 10% national unemployment rate, and our government continues to throw the bulk of its financial support to the banks and financial institutions. The experts, who for the most part missed all of the signals leading to the current situation are now saying it may be late 2009 or 2010, or later for a recovery to begin, in earnest. Why should I believe them now?
Today the U.S. Labor Department reported that in January four states had unemployment rates above 10% and two other were close behind. Highest unemployment reported:
California 10.1%
Georgia 8.6%
Michigan 11.6%
North Carolina 9.7%
Oregon 9.9%
South Carolina 10.4%
Rhode Island 10.3%
Note: If you want a job, go to Wyoming. The jobless rate was reported as 3.7% for January, 2009, which is the lowest in the nation!
The stimulus promoted by the government, including the new Obama administration, includes what I would classify as a lot of "earmarks" which will not stimulate the economy and will burden our future with debt. Is it any wonder that many people are so morose?
My "personal" recession began in 2006 when my clients, all of whom are involved in heavy industry as it applies to construction, rapidly cancelled or postponed projects and contracts. MBA programs have been teaching the technique which Jack Welch of G.E. fame used during the period 1981-1985 and the related recession. Jack cut jobs deep and hard; it is my understanding that 100,000 jobs were eliminated by "Neutron Jack " as he was called, apparently in reference to his similarity to the Neutron Bomb, which destroys people but leaves factories intact. CEOs and managers emulated this technique in the 1990s and it worked very well, and I also think it contributed to the depth of that recession, as it is, now.
An associate made the statement to me on Monday "Don't I know what's going on out there?" Wake up, Virgil, as the saying goes, I have not been sleeping nor has my head been embedded in the sand! I suspect that associate hasn't been listening during our conversations, or simply rejected what I was saying at the time. He does have the opinion that I am off my rocker, most of the time.
So I'll be posting my updated perspective on the economy in the very near future. However, we are on track per my blog of October 21, 2008:
http://letmethinkaboutthis.blogspot.com/2008/10/how-bad-recession.html
Meanwhile, while our politicians debate, the government continues to send money to bail out banks, bankers and investment companies. Very little of this is apparently finding its way to the millions of distressed homeowners. In Obama's stimulus package, there is $75 billion earmarked for "distressed homeowners". I am not entering the debate about whom deserves or doesn't deserve government bailout money. It is apparent that a lot of people were greedy, a lot of people made mistakes or were simply stupid, and a lot of people perpetrated various frauds.
I am looking at this from the perspective of spending as little as possible to resolve the problem. We have about 7.3 million homeowners who have defaulted or are at risk of default. If these people were given a stipend by the government which was applied against their mortgages, this money would be passed to the banks who would be forced to lower the balance on their mortgages, it would find its way to those who hold the notes, etc. and should stabilize the system.
But how much money would it take? Or, how far could a trillion dollars, which is the amount routinely used as fodder for the pigs at the toughs, go? I'll round up the number of mortgages to 10 million. Well, one Trillion dollars = $1,000,000,000,000. If I were to divide that by 10 million distressed mortgages (10,000,000) I would have $100,000 per mortgage.
So which has been more effective? Throwing several trillion dollars at the banks and investment bankers, or throwing $50,000 at each homeowner? We could bail out 10 million homeowners and the entire banking system directly tied to these failed mortgages, using "only" one-half trillion dollars, which is $500 billion.
So now you know why am so cynical about our politicians. they could get the job done and they should know what I know. But they don't operate accordingly. So looking beyond all the rhetoric and the politicians and their media pundits, who is really being served? I'll let you draw your own conclusions.
Note: one trillion is a really big number. How big? Let's do a little arithmetic and answer the question "how many seconds is a trillion?" There are 365 days each year, 24 hours each day, 60 minutes each hour and 60 seconds each minute. So a year is 365 x 24 x 60 x 60 seconds = 31,536,000 seconds. If I divide 1 trillion by the number of seconds in a year, I'll know how many years contain 1 trillion seconds. The answer is 31,709 years.
Tuesday, March 10, 2009
Update to Mileage Statistics and Gasoline Costs
I have updated the gasoline costs and related information for my automobile:
http://letmethinkaboutthis.blogspot.com/2008/09/cost-of-gasoline-for-my-subaru.html
http://letmethinkaboutthis.blogspot.com/2008/09/cost-of-gasoline-for-my-subaru.html
Wednesday, March 4, 2009
An Alternative Method for Arriving at Assessment Adjustments
I am a condominium unit owner. I have observed the planning process used by our association in determining assessments. There are a range of emotions displayed by the board and by unit owners when the subject of assessments is discussed. I concluded there must be a better way and I have written to the board about analysis I have made and of my opinions derived on how we got to where we are. In October, 2008, I began a study to assess using different techniques to determine our monthly assessments. I determined that there was an alternative method that would have yielded lower assessments had the boards consistently adhered to a simple schedule of adjustments using data published by the U.S. government.
What follows is that method which can provide a simple, reliable tool for use in determining assessment adjustments. Of course, board members and unit owners may choose to ignore the data.
The following charts are derived from spread sheets I have made, which included the actual assessment amounts, the percentage of adjustment voted by the board each year, and the COLA or cost of living adjustment determined by the U.S. government. The U.S. government has different legal and economic bodies that generate this information. Most COLA data is backward looking, i.e. published after the fact. My spreadsheets and the resulting charts use data which is forward looking. They use the Social Security Administration annual benefit adjustment. This is a percentage, issued in the fall of each year by the SSA, which determines the increase in SS benefits for the following year. It is an attempt to anticipate cost adjustments on a year to year basis. For example, in 2008 this was published as a 5.8% increase, applied in 2009.
Each chart has two trends. One is derived from the actual decisions made by the board. The other is an alternate, derived from the COLA adjustment, and indicates the result if the boards had based the annual assessment adjustment solely using the government COLA adjustment.
The first chart is a comparison of the monthly assessments using the two methods. It has two trends; one is the actual, average monthly unit assessment and the second is an alternative COLA based assessment. The alternative assessment replaces the percentage increase voted in 1982 by the board, with the percentage calculated by the U.S. government for SS benefits in 1982. This is repeated each year from 1982 to 2008. This is chart No. 1 “The High Price of Avoiding Assessment Increases” so named because prior to 1995 the board chose zero or negative adjustments for several years. You will note that the trends cross in collection year 2001. Prior to that time, our assessment increases consistently lagged those deemed necessary by the government COLA method. If left unchecked, this would result in deficits, i.e., the inability to meet financial needs. Later boards, anticipating this, have since 2001 raised our assessments annually by a rate above that of the COLA percentage. This resulted in today’s higher monthly assessments as compared to using the alternative, COLA method. I chose 1982 to begin because this is the first year the board chose a negative or zero assessment adjustment. Assessments began in 1979 and the interval until 1982 provides too unstable a starting point, as boards attempted to find their footing and establish assessments that would fund ongoing needs.
Chart No. 2 “Annual Assessed Amounts Collected” depicts the total assessments collected annually from the period 1983 to projected 2009. The amounts collected annually are trended using the two methods, and the trends cross in 2001. The amounts collected using the percentages chosen by the boards were lower during the years prior to 2001 than the amounts that would have been collected using the U.S. government percentages. As the assessments have increased each month, so too have the amounts collected. The amounts collected annually are now much greater than they would have been had the U.S government percentages been used. However, the space between the trends to the left of the point of crossing is nearly equal to the space to the right of that point.
Chart No. 3 “Accrued Amounts Using Actual Assessments and Alternative COLA Method” shows the long term effects, the sum of all assessments collected from 1983. It compares the sums collected using the board selected percentage adjustment to the sums collected using the U.S government SSA COLA method. The U.S. government COLA percentages consistently grew the savings at a higher rate. By December 31, 2009, the actual, total assessments collected at the association, for the period 1983 through 2009 is projected to be $16,028,211. During that same period, using the COLA method $15,910,181 would have been collected. This is a difference of 0.74%. The trends do not include interest accrued on saved funds.
Chart No. 4 “Monthly Assessments Using Actual Method and Alternative COLA Method“ compares the average monthly amounts collected per unit using the board selected adjustment method and alternative COLA adjustments from 1982 to the present. If it looks familiar, it is! Chart No. 4 is identical to Chart No. 1 and I repeat it here to provide this information: In 1999 the assessments at our association began to rise at a faster rate. Prior to 1999 the assessments consistently lagged those which would have been collected, had the U.S. government COLA SSA adjustment percentages been used. In 1999 the average assessment was about $135 and had increased to about $291 by 2009. Today, my actual assessment is $308.57, but had the U.S. government alternative percentages been consistently used, my actual assessment today would be a much lower $216.90. The reason is simply this: our current assessments are an attempt to collect in the period 1999 to the present, the sums of money that were not collected in the prior period 1983 to 1998. This difference is the space between the two trends on the graph below:
The final chart trends the assessment adjustments as percent change voted by the board, compared to the percent change which the U.S government COLA method used for the same period of 1982 to 2009. You will observe that the percentages voted by the board were quite erratic prior to 1995. You will also observe that the U.S. government method was nearly always below 5%, and was as low as 1.3% in 1986 and 1998. There is one caution. In the period 1978 to 1982, prior to the trends and during a period of pronounced inflation, the U.S. government COLA percentages were above 8.0% for four years.
What follows is that method which can provide a simple, reliable tool for use in determining assessment adjustments. Of course, board members and unit owners may choose to ignore the data.
The following charts are derived from spread sheets I have made, which included the actual assessment amounts, the percentage of adjustment voted by the board each year, and the COLA or cost of living adjustment determined by the U.S. government. The U.S. government has different legal and economic bodies that generate this information. Most COLA data is backward looking, i.e. published after the fact. My spreadsheets and the resulting charts use data which is forward looking. They use the Social Security Administration annual benefit adjustment. This is a percentage, issued in the fall of each year by the SSA, which determines the increase in SS benefits for the following year. It is an attempt to anticipate cost adjustments on a year to year basis. For example, in 2008 this was published as a 5.8% increase, applied in 2009.
Each chart has two trends. One is derived from the actual decisions made by the board. The other is an alternate, derived from the COLA adjustment, and indicates the result if the boards had based the annual assessment adjustment solely using the government COLA adjustment.
The first chart is a comparison of the monthly assessments using the two methods. It has two trends; one is the actual, average monthly unit assessment and the second is an alternative COLA based assessment. The alternative assessment replaces the percentage increase voted in 1982 by the board, with the percentage calculated by the U.S. government for SS benefits in 1982. This is repeated each year from 1982 to 2008. This is chart No. 1 “The High Price of Avoiding Assessment Increases” so named because prior to 1995 the board chose zero or negative adjustments for several years. You will note that the trends cross in collection year 2001. Prior to that time, our assessment increases consistently lagged those deemed necessary by the government COLA method. If left unchecked, this would result in deficits, i.e., the inability to meet financial needs. Later boards, anticipating this, have since 2001 raised our assessments annually by a rate above that of the COLA percentage. This resulted in today’s higher monthly assessments as compared to using the alternative, COLA method. I chose 1982 to begin because this is the first year the board chose a negative or zero assessment adjustment. Assessments began in 1979 and the interval until 1982 provides too unstable a starting point, as boards attempted to find their footing and establish assessments that would fund ongoing needs.
Chart No. 2 “Annual Assessed Amounts Collected” depicts the total assessments collected annually from the period 1983 to projected 2009. The amounts collected annually are trended using the two methods, and the trends cross in 2001. The amounts collected using the percentages chosen by the boards were lower during the years prior to 2001 than the amounts that would have been collected using the U.S. government percentages. As the assessments have increased each month, so too have the amounts collected. The amounts collected annually are now much greater than they would have been had the U.S government percentages been used. However, the space between the trends to the left of the point of crossing is nearly equal to the space to the right of that point.Chart No. 3 “Accrued Amounts Using Actual Assessments and Alternative COLA Method” shows the long term effects, the sum of all assessments collected from 1983. It compares the sums collected using the board selected percentage adjustment to the sums collected using the U.S government SSA COLA method. The U.S. government COLA percentages consistently grew the savings at a higher rate. By December 31, 2009, the actual, total assessments collected at the association, for the period 1983 through 2009 is projected to be $16,028,211. During that same period, using the COLA method $15,910,181 would have been collected. This is a difference of 0.74%. The trends do not include interest accrued on saved funds.Chart No. 4 “Monthly Assessments Using Actual Method and Alternative COLA Method“ compares the average monthly amounts collected per unit using the board selected adjustment method and alternative COLA adjustments from 1982 to the present. If it looks familiar, it is! Chart No. 4 is identical to Chart No. 1 and I repeat it here to provide this information: In 1999 the assessments at our association began to rise at a faster rate. Prior to 1999 the assessments consistently lagged those which would have been collected, had the U.S. government COLA SSA adjustment percentages been used. In 1999 the average assessment was about $135 and had increased to about $291 by 2009. Today, my actual assessment is $308.57, but had the U.S. government alternative percentages been consistently used, my actual assessment today would be a much lower $216.90. The reason is simply this: our current assessments are an attempt to collect in the period 1999 to the present, the sums of money that were not collected in the prior period 1983 to 1998. This difference is the space between the two trends on the graph below: The final chart trends the assessment adjustments as percent change voted by the board, compared to the percent change which the U.S government COLA method used for the same period of 1982 to 2009. You will observe that the percentages voted by the board were quite erratic prior to 1995. You will also observe that the U.S. government method was nearly always below 5%, and was as low as 1.3% in 1986 and 1998. There is one caution. In the period 1978 to 1982, prior to the trends and during a period of pronounced inflation, the U.S. government COLA percentages were above 8.0% for four years.
All of this is exploring possibility using “what may have been”. However, several observations and conclusions can be drawn from the data shown in the charts.
- Had the association boards used a simple method of calculating assessment adjustments based on U.S. government SSA COLA and collected assessments consistent with inflation increases, we would have today achieved the same balance sheet. However, in the process we would have had smoother, consistently smaller assessment increases and would today have lower monthly assessments.
- Using assessment increases below the COLA percentages is an inferior method.
- The pace of assessment adjustments should moderate to the COLA rates, and has.
- The COLA method may not assure sufficient funding for large capital projects, such as the planned roofing and paving projects. This is because specific, actual costs are unknown. Further analysis is required.
- The association is now collecting funds at a rate greater than the COLA method would, because our monthly assessments are higher. The impact on future balance sheets cannot be determined with certainty until the true costs and timelines of capital projects is known.
- To avoid large “spikes” using the COLA method (e.g. 14.3% as in 1980) and consequential disruption to the budgets of unit owners, it is advisable to adjust very low COLA percentages upwards to provide some short term smoothing and avoid large increases. This requires analysis of future, anticipated balance sheets.
- This data can empower condominium boards to consider using the U.S. government COLA percentage increases as basis for the minimum for assessment adjustments, if that method is not now used.
I provided this data to our board on March 4, 2009 and I hope that this is useful and will have some influence on the predilection of the board when the time comes to vote for assessment adjustments. I will be doing additional analysis and I welcome comments.
The following is the SSA website which includes the COLA data I used.
http://www.ssa.gov/OACT/COLA/colaseries.html
Thursday, January 8, 2009
The Perils of Ignoring the Past
We can't say that we haven't been warned about the perils of ignoring the past. More than 2,000 years ago, the Roman orator Cato noted that, "there must be a vast fund of stupidity in human nature, or else men would not be caught as they are, a thousand times over, by the same snares . . . while they yet remember their past misfortunes, they go on to court and encourage the causes to what they were owing, and which will again produce them."
The above is John Bogle in the Wall Street Journal January 8, 2009. Mr. Bogle is the founder and former chief executive of the Vanguard Group of Mutual Funds. His newest book, "Enough. True Measures of Money, Business, and Life," was published by Wiley in November.
The above is John Bogle in the Wall Street Journal January 8, 2009. Mr. Bogle is the founder and former chief executive of the Vanguard Group of Mutual Funds. His newest book, "Enough. True Measures of Money, Business, and Life," was published by Wiley in November.
Tuesday, January 6, 2009
The Tab for the Current Economic Crisis
Well, the tab is finally coming in for the "economic crisis". So far, the goverment has spent or is planning on spending $8.5 trillion in bailouts and "economic stimulus".
The tab works out to about $142,000 per American household. This is debt, that will have to be repaid at some point in the future. This figure does not include the "evaporation" of wealth that accompanied this "economic crisis".
The tab works out to about $142,000 per American household. This is debt, that will have to be repaid at some point in the future. This figure does not include the "evaporation" of wealth that accompanied this "economic crisis".
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