Craig W

U.S. Wages Are Out of Balance, As We Well Know

I just spent the last week traveling around Monterrey, MX . . . the industrial growth down there is shocking. It is one thing to read about growth in emerging markets, but it is another thing entirely to see it for yourself. The understanding that American workers, primarily blue collar, are getting out competed has fully hit home in my mind. In the last few years, we have begun to see these forces start to impact the educated professional class as well.

The government's response has been to serve up the necessary real pay cuts through a weak dollar policy, and the workers have responded by borrowing to maintain their standard of living. This worked for a while, but those days are coming to an end.

Cash for Clunkers: Short-Term Gain = Long-Term Pain

Mad Hedge States: "Assuming that the average car drives 10,000 miles a year, and the average swap generates a mileage improvement from 15 mpg to 27 mpg, junking 750,000 clunkers will save 30 million barrels of crude a year, 1.5 days of our total annual consumption, or three days of imports."

These assumptions are absolutely ridiculous. The supposed “savings” of the program is more like 2-4 mpg given that you can qualify for the program by trading in an older SUV for a new SUV that gets only 2 mpg better. Using your 10000 miles per year number, a 2mg savings results of about $139/year at current fuel prices ($2.5/gal). . . hardly enough to offset even a couple of months interest payments. But then you have to take into account all the energy it takes to build the new cars. By the numbers, it is never economical to trade in a perfectly good old car for a new one even if the new one got 27 mpg better which is an outrageously optimistic estimate of the average fuel efficency increase that will result from the program. So by simply applying remedial math to your assumptions (a 27 mpg improvement would result in $833/year fuel savings at 10000 miles/year and $2.5/gal), we can see that even if the program resulted in a 27 mpg improvement, you will never save enough in fuel to offset the depreciation of the new car (much less the interest payments, the increased insurance expenses, and let’s not forget the opportunity cost) such that your investment would be recovered in a reasonable amount of time . . . say seven years. In order for this to be an economical viable proposition you would need to save about $4000 per year in fuel to pay off the $25000 in depreciation you will see in the first seven years on a $35000 car . . . so maybe this would be a good deal when fuel gets to $12/gal.

In the modern world we live in, if a project is not economic, it is not energy efficient.


On Aug 04 11:39 AM Mad Hedge Fund Trader wrote:

> I'll take the short term gain. Perhaps it was the newspaper gene
> in me that made me screech my car to a halt when I saw a near riot
> in progress at my local Toyota (seekingalpha.com/symbo...)
> dealer. The showroom was more jammed than the unemployment office,
> with eager salesmen recalled from vacations, manning card tables
> set up in every available space. I managed to grab one peripatetic
> salesman by a lapel, who gushed that they sold 45 cars yesterday,
> compared to ten for a normal Friday, and that 35 of these were the
> fruit of the “Cash for Clunkers” program. Sure I could get a $4,500
> credit for my 1995 BMW (17 mpg), and apply it to a new Prius (50
> mpg), taking the price down to $19,500 and the monthly payment to
> $450/month for five years. In fact, the government stimulus program
> was so successful, that it ran out of money in the first four days,
> and congress rushed to triple it to $3 billion on Friday. It was
> like the survivors of a ship torpedoed at sea were swimming frantically
> for the only piece of wreckage that floated. Assuming that the average
> car drives 10,000 miles a year, and the average swap generates a
> mileage improvement from 15 mpg to 27 mpg, junking 750,000 clunkers
> will save 30 million barrels of crude a year, 1.5 days of our total
> annual consumption, or three days of imports. I asked to see the
> cars that were traded in and was told that the lots for the dealer,
> the used cars, and the detailer were all full, but I could see some
> if I went to the Target nearby where they were renting extra spaces.
> There I saw the fleet condemned to clunkerdom, GM Safari’s, Jeep
> Cherokees, Buick Regals, Dodge Ram pickup trucks and vans, and Chrysler
> minivans by the dozen, all with “CFC” marked on their windshields,
> a certain death sentence. These sorry excuses for transportation
> will never belch blue smoke, nor drip oil on our interstates again.
> I can’t imagine a sorrier commentary on the management failure of
> the US car industry for the last 30 years.

David Kotok on Clunker-nomics

Mad Hedge States: "Assuming that the average car drives 10,000 miles a year, and the average swap generates a mileage improvement from 15 mpg to 27 mpg, junking 750,000 clunkers will save 30 million barrels of crude a year, 1.5 days of our total annual consumption, or three days of imports."

These assumptions are absolutely ridiculous. The supposed “savings” of the program is more like 2-4 mpg given that you can qualify for the program by trading in an older SUV for a new SUV that gets only 2 mpg better. Using your 10000 miles per year number, a 2mg savings results of about $139/year at current fuel prices ($2.5/gal). . . hardly enough to offset even a couple of months interest payments. But then you have to take into account all the energy it takes to build the new cars. By the numbers, it is never economical to trade in a perfectly good old car for a new one even if the new one got 27 mpg better which is an outrageously optimistic estimate of the average fuel efficency increase that will result from the program. So by simply applying remedial math to your assumptions (a 27 mpg improvement would result in $833/year fuel savings at 10000 miles/year and $2.5/gal), we can see that even if the program resulted in a 27 mpg improvement, you will never save enough in fuel to offset the depreciation of the new car (much less the interest payments, the increased insurance expenses, and let’s not forget the opportunity cost) such that your investment would be recovered in a reasonable amount of time . . . say seven years. In order for this to be an economical viable proposition you would need to save about $4000 per year in fuel to pay off the $25000 in depreciation you will see in the first seven years on a $35000 car . . . so maybe this would be a good deal when fuel gets to $12/gal.

In the modern world we live in, if a project is not economic, it is not energy efficient.

David Kotok on Clunker-nomics

The Cash for Clunkers plan is idiotic in every respect. They would pay me $3500 to crush my perfectly good 2000 Ford Windstar mini-van with only 82000 miles on it for a new Honda Odyssey mini-van that gets a whopping 2 mgp better. How is destroying perfectly good cars good for the environment? How would saving 2 mpg ever offset the depreciation on the new car? What business person with would ever do this? How is it in my economic self interest? Last winter when they were discussing this plan, the KBB interparty value of by Windstar was $2000 . . . now the KBB interparty value is $3500. I’m seeing a 75% increase in the value of my car in just six months even without the government plan! With all the idiots having their old cars destroyed the value of my car should continue to increase . . . why would I want to sell and appreciating asset? Even if I wanted a new car now, I would just sell it to someone else for $3500 so as to avoid having the car destroyed for no reason. Does it occur to anyone that it is more energy intensive to build a new car than it is to use up one that is already built? It takes energy to build new cars you know. Look, the number of new cars being sold is down around 50% and people are driving their old cars longer which is far more economical than constantly paying the depreciation on new cars. People making wise choices to drive their cars longer is good for American in the long run.

My point is, the press and the politicians should call this plan what it is . . . and attempt bail out the auto makers and encourage people to get further in debt. Claiming that it is good economics or pro-environment is moronic.

Will 'Cash for Clunkers' Bring the Feared Double Dip?

The Cash for Clunkers plan is idiotic in every respect. They would pay me $3500 to crush my perfectly good 2000 Ford Windstar mini-van with only 82000 miles on it for a new Honda Odyssey mini-van that gets a whopping 2 mgp better. How is destroying perfectly good cars good for the environment? How would saving 2 mpg ever offset the depreciation on the new car? What business person with would ever do this? How is it in my economic self interest? Last winter when they were discussing this plan, the KBB interparty value of by Windstar was $2000 . . . now the KBB interparty value is $3500. I’m seeing a 75% increase in the value of my car in just six months even without the government plan! With all the idiots having their old cars destroyed the value of my car should continue to increase . . . why would I want to sell an appreciating asset? Even if I wanted a new car now, I would just sell it to someone else for $3500 so as to avoid having the car destroyed for no reason. Does it occur to anyone that it is more energy intensive to build a new car than it is to use up one that is already built? It takes energy to build new cars you know. Look, the number of new cars being sold is down around 50% and people are driving their old cars longer which is far more economical than constantly paying the depreciation on new cars. People making wise choices to drive their cars longer is good for American in the long run.

My point is, the press and the politicians should call this plan what it is . . . and attempt bail out the auto makers and encourage people to get further in debt. Claiming that it is good economics or pro-environment is moronic.

Winter's Coming for the Boomers: Part 2

Your description of the Christian world view as linear shows a lack of Biblical understanding. The cycle, as demonstrated by the Hebrew people as a picture of the human condition in general, should be plain to any student of the Bible. This concept permeates through both the Jewish Bible and the Christian New Testimate. We live the cycle in our own lives individually just as we live it as a people. There is nothing new under the sun.

I also struggle with the notion that an societal/economic breakdown necessarily leads to a failed-state, violent form of anarchy. Perhaps with the moral state of America today, that could happen; however, a more Libertarian view of anarchy, as was held by the Founders, is one were the citizens operated under the concept of Natural Law. The Founders felt that only a moral and virtuous people could successfully self-govern. That is to say, the less virtuous the people, the greater the need for government. The source of their view of Natural Law was that of a Creator to whom the people would ultimately be accountable for their actions in this life in an afterlife. Weather you yourself accept the concept of Natural Law or not is not especially relevant, only it is important to realize that the Founders did and those views shaped their view of government. More to the point, those views of government, while not often articulated as such, are still held to by the majority of the citizens even today. I feel that the average people in towns and cities across this land would quickly regain order at a local level if the doomsday scenario of a failed state were to occur, and life will go on as it has for thousands of years.

Increasing Taxes in the U.S.: Accepting the Inevitable

I should have included inflation as a third "whip" used by the state to grind down and suppress the people.

Increasing Taxes in the U.S.: Accepting the Inevitable

Well, another potential upshot of raising taxes, at least from the governments perspective, is that it would reduce the funds available for individuals to pay down debt and/or increase their personal savings. We wouldn't want people to accumulate wealth and repair their balance sheets because then they would no longer be dependent on the government and the banks. Not only that, wealthy people often cease to be significant payers of income and payroll taxes. If you pay off your debt and build up a lot of wealth, you wouldn't have to work anymore, and at some point the taxes get to a point where people with wealth decide it is better to spend their time fishing or golfing. The media and politicians like to mix the terms "income" and "wealth", though they are not the same thing. That is why we often see mega-wealthy people in favor of high taxes on income . . . everyone is in favor of raising taxes that they don’t have to pay. Income is the means that most of us use to accumulate wealth. While wealth itself isn't taxed, the means to obtain wealth is taxed. Debt and taxes are the “whips” that the modern state use to compel their people into working as long as possible. Some might call that slavery.

Is Inflation a Fact… Or Just Opinion? Part 3

Great article. The deflationary forces are very strong, but as long as the banks maintain the huge reserves at the Fed, inflation will remain a threat. The banks are paying interest on those Fed loans . . . even if it is at a really low rate. At some point, the banks will have to repay the loans, deploy those funds to realize a positive return, or slowly bleed to death. Even a small interest rate, when applied to a TRILLION dollars, begins to add up to BIG numbers.

As I commented on your first article in the series, I'm still not sure you showed that the public believes inflation has taken hold. The “folks” behavior of increasing savings and paying down debt is the opposite of what one seriously fearful of inflation would do. Perhaps it's a minor point, but it would be great to see some public opinion polls or something to quantify the inflation expectations of “regular people”. TIPS yields indicate that the market is not pricing in significant inflation.

Can the Fed Regulate Systemic Risk?

I imagine that any efforts by the Fed and/or the Government to regulate systemic risk that do not entail breaking up banks that are "too big to fail" will result in still more systemic risk. If a financial enterprise to too big to fail, it is too big . . . I think that principle should apply to the Fed as well.

Why Stop at 'BBB' for California Debt?

If I were a resident of California, I would be demanding the state treasurer to pay all elected officials and political appointees with their junk IOUs until they get the budget balanced. But then again, if I were a resident of California, I would likely be more focused on getting the hell out.

Is Inflation a Fact… Or Just an Opinion? Part I

The author offers anecdotal evidence that “the masses” are talking about inflation/devaluation. Maybe true, maybe not.

Let’s explore the possibility that the anecdotal evidence is true and that the majority of Americans are in fact concerned about inflation/hyperinflation. I would think that if lots of people are sold on the hyperinflation argument, they would be borrowing as much as they could and purchasing hard assets (kind of like what happened in the real estate market, except driven by fear instead of greed/stupidity). Instead we observe that the savings rate of dollars in going up and the demand and supply of personal credit is going down. There is no doubt that the government is desperately trying to kick-start inflation, and they may be succeeding, but so far, the pesky savers have not been cooperating.

This conflict seems to suggest one or more of several possibilities. Here are a few of them:

1) The authors assertion is not true, the majority of “regular” people are not talking about inflation . . . they have no idea what is going on.
2) The author’s observation is representative of the majority of people: the fear of inflation in the near term is real and widespread, but the folks are behaving contrary to their own self interest . . . maybe they are concerned, but the real point of recognition hasn’t hit yet.
3) The business community and/or government and/or press are talking up inflation in an attempt to push people into riskier assets so banks and other corporations can raise capital via secondary offerings (presumably because they are worried about solvency).

Time for California Muni Bond Investors to Take a Stand

It's none of my business (for now) as I live in a "fly-over" state, but if I were a resident of California, I would be demanding the state treasure to pay all elected officials and political appointees with IOUs until they get the budget balanced. Now I say that it’s none of my business for now because I fear the Feds will make it my (our) business the same way they made banks and auto makers my(our) business.

On another note, LilGuy says " . . . I have shifted out of stocks and don't plan to return until the playing field is level, transparent, and robust."

I wouldn't hold my breath that that day will come anytime soon.

The Next Major Financial Crisis

Note that though CC debt is unsecured, it is not “no-recourse”. Sure you could just blow them off and take the phone off the hook for a year or two. Eventually you’ll probably get another job (see comment above) and get back on your feet. In a few years, you’ll have forgotten all about that unpaid debt and you will be happy and merry. You’ll maybe have a kid or two . . . what the heck. Being debt free is great right? That’s about the time the court summons will hit. Here is how the court case will go:

Judge: Is this your signature on this CC contract?
Debtor: yes
Judge: Are these charges yours?
Debtor: yes (you could lie here, but the CC company has copies off all those receipts you signed, so it is probably best not commit purgery here).
Judge: do you have records showing that you repaid this debt?
Debtor: no

About this time the gavel will come down with a ruling in favor of the CC company. All that’s left to talk about now is at what rate to garnish your wages.



On Jun 29 06:28 AM xpatriot wrote:

> If your credit card company won't cut your balance by at least 50%,
> just quit paying them. Unsecured debt is a gift.

The Next Major Financial Crisis

True indeed, but there is another cost to defaulting and letting your credit go to hell . . . especially if you are unemployed. With the labor market as soft as it is, I'd wager that potential employers will be taking a long look at credit scores. Hey, if you can't manage your own money, why would they want to hire you to manage theirs? A poor credit score could hamper ones job search. It would be better to try to negotiate a settlement with the lender(s) for ten or twenty cents on the dollar.

That said, if you don’t have the money to pay for your basic needs, you have to do what you have to do irrespective of the consequences. One of the great things about this county is that you don’t get thrown in jail for defaulting.




On Jun 29 01:44 AM WAKEUP wrote:

> Marc: These two statements, "The worst-case scenario is if credit-card
> losses rise to a point where banks are forced to repay bondholders
> early... " and "Credit-card defaults and unemployment are highly
> correlated" will turn out to be true insights. A great deal of credit
> card debt is unsecured, of course, and it will be these debts that
> unemployed people will simply stop paying. Once a cardholder's credit
> rating is zapped, Mr. Unemployed will say, "The hell with it; I'm
> not going to pay, now, because it won't do me any good, anyway."
> And he will have a point (albeit not an honorable one); it will take
> him years to rebuild his credit score, and hardscrabble efforts to
> send a couple of hundred bucks to the credit card company once in
> a while won't do anything appreciable to help Mr. Unemployed. With
> his back against the wall, he will buy groceries, and the credit
> card company can go fishing, for all he cares. Given his situation,
> it's hard to see a flaw in his reasoning, there. This situation is
> only months from full-blown maturity.