Wednesday, November 16, 2011

Inflation and Black Friday

Planet Money's Adam Davidson has a interesting post comparing Black Friday and inflationary policy decisions.

His basic premise is that the US may have to resort to inflation as an "economic boost". This gets around parliamentary deadlocks around spending increases by simply forcing more money into the economy.

The goal here would be simple (emphasis mine):
With, say, 5 percent inflation — a bit more than double the current rate — $100 today will only buy $95 worth of stuff next year. That's frightening, which is the point. We actually want consumers to realize that prices are rising and that money in their bank accounts is losing value if they don't start spending. The same goes for companies too, which will be compelled to build and hire rather than sit on earnings, as many are now.
It's classic inflation, we steal value from the savers and make them generate more to reclaim that value. Obviously this sucks for people on fixed incomes and people close to retirement who now need a lot more money to retire. But that's frankly a necessary trade-off, we can't afford to give everyone a 20 year retirement on 40 years of work.

Instead let's tackle the two major problems Adam doesn't address:

  1. Flight of money.
  2. China (and other debtors)
#1: Flight of money

The premise of inflation is that "companies will be compelled to build and hire rather than sit on earnings". But it's not clear that this is really the case. Frankly, companies are already compelled to do this by their investors. If companies felt they could make healthy margins by investing some of their cash, they would be doing that right now.

At best, inflation may encourage companies to invest where they could make "unhealthy" margins. This may put some people to work. But businesses with unhealthy margins generally don't pay very well and they don't tend to be a good store of permanent jobs.

At worst, it would scare companies away from US dollars all together. If companies responded to increased inflation by simply ridding themselves of US dollars, it would increase circulation, but it's not clear that it would actually increase jobs.

#2: China and other debtors

The US has lots of debtors who have been promised a relatively low return on their government bonds.

Let's say you bought a 10 year, 3% government bond in 2006. Target inflation at the time was 2%, so you're expecting to make 1% real return on the bond.

Now it's 2011 and the US Fed says that target inflation is now 5%. All of a sudden, you're losing 3% / year in real value. In fact, that loss for the next 5 years is so big it's going to wipe out all real gains.

Put differently, you gave the US government an ounce of gold in 2006 and it gives you back slightly less than an ounce in 2016. You were expecting slightly more than ounce and you actually got less. The US government actually stole your gold while using it for 10 years.

This is a really terrible and poisonous feeling.

Now imagine that you're China and you have $1,000,000,000,000 in government bonds. Imagine how betrayed you feel now.


While #1 is not an absolute problem, it's definitely a gamble. However, #2 is a complete show-stopper.

Screwing over your lenders is a great way to kill an economy.

Friday, November 4, 2011

Fixing The Education System

This article by Time, brings up a great question of what priorities we need to make in our education system.

What should we train for in the "new economy"?

Well, basically everything :)

But if we want to get specific, let's start with the easy, universally applicable skills.

#1: Math

People in the Ukraine graduate high school at 16 having done Integrals and Derivative (what we call first year university calculus). And then there's first-year stats, which is pretty straightforward.

The standard for "high school" math should really be closer to what we currently think of as "second-year university" math.

Tools like Khan Academy are trying to do exactly this.

Solid math & stats skills are key component of everything from healthcare to science to engineering to sales & marketing to construction to politics, etc... Basically every well-paying white collar job has some essential math component.

#1a: Science training

Everyone should be equipped with the mental tools to both perform and evaluate scientific tests. In theory we learn all of this stuff, but we don't really practice it. How many people can say that they had performed even 50 controlled scientific tests before graduating from high school?

In University, most classes will do things like weekly labs, but most high schools I've known do not do this or do it to the level where it's "mastered" rather than just "known".

Lack of access to well-understood scientific method and stats is a major societal barrier. From politics to business to health, humans consistently demonstrate poor math/science reasoning skills.

This is a major barrier to top-level employment.

#2: Communication skills

Both written and spoken.

In the age of communication, this is more important than ever (not less). Whole businesses fail solely because of poor communication. People lose their jobs because of such nebulous things like "e-mail tone".

Relationships are fraught by poorly worded text message or just complete misunderstanding of word meaning.

Communications really has two parts:

  1. Composition construction: this goes beyond just spelling / grammar, beyond confusing homonyms. When you spend your life sending words (and not sending body language), you are bound by those words. We really need to walk people through major parts of the dictionary so that they can understand these words clearly
  2. Literature reading and comprehension. Humans communicate heavily through shared story and it's really up to us as educators and parents to expose children to those stories. 
Other stuff

Honestly, I would to teach a lot of other stuff do. Basic construction, soldering, electronics, programming, cooking, personal finance, etc.

But I really think the things above are the core features. You can work something like soldering into a good "science training" plan.

As always, I'm open to and would love to hear other thoughts on priorities :)

Sunday, October 9, 2011

Coming around to new economic realities

Sometimes, I think I give too much traffic to Time magazine's economics blog. But every once in a while I catch a nugget like this one:
Perhaps the most disturbing thing about the jobs report is that it is clear we are no longer in an economy where a rising tide lifts all boats.
I've saying for a while that this whole economic crash was about much more than just a depression. It was an overdue correction towards a new reality. Throughout the 2008 news year, press people pushed on about "when does the economy recover?", "when do things go back to normal?", as if somehow 2006 was "normal".

I said then and continue to stand by the fact that we're in a new economic reality. The quote above really summarizes this problem.

Policy makers and economists and much of the populace have been operating under the assumption that the US is simply suffering from a demand crisis. If big companies just spend more money and hire more people, unemployment will drop, profits will rise and everyone will be happy again.

But this is not what's happening. Companies took a brief dip in 2008, laid off a bunch of people and now profits are rising again. But US corps are holding on to that money, they're not hiring.

Let's take a look at one current example of this problem. Here's NPR's broadcast on "The Economic Realities of Tough Immigration Laws".

As with most stories there are two sides to this coin and the Senator backing the bill argues his point and his side impeccably. This isn't just blind jingoism, he clearly understands the economic risks and implications.
"There may have to be some differences in pay scale ... but Alabamians and Americans will do those jobs," he says.
The flip side is far less encouraging though, especially from the farmer:
"Since this law went in to effect, I've had a total 11 people that were Americans come and ask for work," Boatwright says. "A total of one of those actually came back the next day."
And that guy didn't make it through day two.

And this is where the shift comes in. Picking tomatoes is not only a very difficult job, it really doesn't pay very well. We can definitely force documented Americans to do this job, but it's going to be a struggle to make this change and for many workers it may be the single worst job they've ever had.

And this is not just the new reality for immigration laws, I think this is the new reality for the US as a whole. Stagnant wages for most and a stagnant quality of life for most. But hey, this is what they voted for.

Monday, October 3, 2011

Obama's Plan, American Reality

So first, a link to the very good Vanity Fair article, "California and Bust".

I think the real key is his last paragraph that really sums up the current debt problem.
When people pile up debts they will find difficult and perhaps even impossible to repay, they are saying several things at once. They are obviously saying that they want more than they can immediately afford. They are saying, less obviously, that their pres­ent wants are so important that, to satisfy them, it is worth some future difficulty. But in making that bargain they are implying that, when the future difficulty arrives, they’ll figure it out. They don’t always do that... 
Lots of future promises have been made, but there's really no way to pay for them all.

So Obama has come out with a plan hoping to tackle both the unemployment crisis and the debt crisis. On the surface, this is really a "give up nothing" plan. And the problem here, as evidenced in the Vanity Fair article, is that something has to be given up somewhere.

Politicians are in the process of playing this shell game of needing to cut while pretending that everything is important. They're doing this in an attempt to keep their jobs and submarine fiscal change without forcing cultural change. But the problem here is cultural that is driving the fiscal. Until the culture starts driving fiscal change, all of these proposals are unlikely to work.

Sunday, September 11, 2011

Fix the economy - Step #1b more retirement

OK, so I've asked our older populace to take a hit and accept a later start to SS. What about the younger populace?

Well, I think the first big thing to recognize is that we're looking to live even longer than our parents. (I'm 30) So if 65 is too young for our parents to retire, then it's going to be way too young for us to retire. Fortunately, I know lots of people my age who seem to inherently understand this conundrum.

But understanding doesn't necessarily solve the problem. Lots of people my age are also graduating with record student debts and have spent a decade being priced out of homes. Retirement savings are not just low with 60-somethings, it's low with 20-somethings.

There have already been proposed plans for "mandatory retirement accounts" to be offered by employers and I think this is a step in the right direction. However, I think it's "too little" in a couple of directions.

Mandatory Retirement Accounts - Improvement One

First off, the proposed plan creates forced IRA accounts to be set up by employers. These are not the people you want managing this process. Employers are already over-burdened with major benefits like healthcare, dental, disability, etc. On top of that, the average worker will cycle through multiple employers in their lifetime, especially with my generation. If each employer is setting up a new IRA with their provider of choice, you create a giant paperwork mess.

In fact, it's already a paperwork mess. I still haven't rolled over my 401k from 2 jobs ago and pulled it in with the current one. It's all just a pain, shouldn't I just own the 401k and let the employers plug in to my provider of choice? Why does my employer choose my 401k provider?

So this needs to go the other way.

Each person needs to "own" their 401k and government-mandated transfers should happen directly to those portfolios. If the employee doesn't have an IRA, then those dollars are thrown into a government account in their name/SSN to be invested in government notes.

In the electronic era, this whole process is relatively simple.

Mandatory Retirement Accounts - Improvement Two

The second fix here is really to fix the whole [Roth] IRA / 401k / Defined Benefit mess. Why do we have these all of these confusing options? Why do we have the choice between Roth or non-Roth? Do we really want people guess between "tax now" and "tax later"? Does it make anything better?

I think the US needs to look towards a system like the Canadian RRSP for retirement savings. The RRSP system is simple to set up and simple to envision / manage.

The basic premise is that you have two investment "buckets", one bucket registered for retirements and the other bucket for "regular" investments. Money going in to the retirement bucket goes in un-taxed and gets taxed on the way out. To avoid people from "churning" money, the RRSP bucket has a growing lifetime max based on your income. To avoid tax cheaters, withdrawals have some %  held back.

And yes, we should have the usual "out of work" or "back to school" allowances for withdrawals.

In either case, the tax retirement mess should not require a book to explain. It all be explainable in a 5-minute video. In fact, the government should actually produce this 5-minute video :)

Isn't this all Socialist?

Did I mention I'm from Canada? It depends on your take here. Isn't Social Security socialist?

Yes, my whole proposal is "government meddling".

But there's a clear trade-off here. People are notoriously bad at thinking for the long-term and saving for a rainy day. We currently have a entire generation of voters who don't have anywhere near enough money for retirement, so we have living proof of our capacities here.

The goal of my proposal is to set small measures now to prevent larger problems later. If you don't think this is a good thing, then it's easy to call this socialist. But that same measure could apply to lots of existing programs that help provide stability.

I firmly believe that what the public seeks from government programs is some basic form of stability. This program is the type of program that actively promotes that stability, which is why I think it's important.

Saturday, August 13, 2011

Fix the economy - Step #1: Retirement

So we know the US economy has major problems. High unemployment, likely structural, definitely hurting the youth. Aging infrastructure. Large debts + a large deficit. Very large unfunded liabilities like medicare and social security.

Oh yeah, and let's not forget that whole housing thing. The one where the banks are only solvent because they changed the accounting rules while they slowly liquidate their losses. It's clear that stuff needs to change, but where do we start?

Obviously, the Tea Party has made this whole "brouha" about a "balanced budget", but there's no clear plan to deal with any of the issues above. So it's time to start making some serious decisions. So this is the first of several steps I suggest for repairing the US economy.

Why trust me? Well you are reading my blog :) But frankly, I just live here. I can't vote, don't make campaign contributions and will probably leave in a few years (bad economy or no).

My only vested interest is that I don't like to see people suffer needlessly. Don't get me wrong, people are going to suffer as part of "fix the economy", I'm just trying to avoid the "needlessly" part.

Step #1: Retirement

Here's the deal, we cannot all retire at 65 if we plan to die at 85. We cannot have a population that spends 20+ years getting educated and 20 years "doing nothing" with only 40 years in between. 20 years of "nothing" is far too long for the average person, it's just too much "unproductivity".

It especially won't work with the upcoming Baby Boomer crisis. We can't have a giant chunk of people are retiring at once and we can't have them retiring for 20 years. The economy will suffer heavily from the productivity loss and the social security system will simply "run out" of money (i.e.: need to print money).

Of course, we may avoid the "rush of retirees" simply because many people near their sixties are nowhere close to retirement. We're talking about boomers with $50-110k to their name (including home equity). That either means stretching social security and praying for the best with inflation, or it means working longer.

For the country as a whole though, we don't have enough money to support Social Security at current levels. Especially when the big boat of baby boomers beat a path to the SS offices. So let's fix a couple of problems.

#1a: increase Social Security age

The US should definitely push this back to 67 or 68 ASAP. Several other countries have already done this, so it's not really ground-breaking.

Yep, this is going to be unpopular, but I think it's the least painful way to curtail the debt crisis.  It's also kind of fair. The people who are losing a few years of SS are also the same people who voted throughout the period leading up to the whole crisis. They were an entire generation born into and raised with the possibility of receiving SS. The current under-funding is the result of years and decades of poor fiscal planning, so at the least the planners are "reaping what they sow" here.

#1b:  consider "rolling down" SS

SS is a neat concept, but it's basically a pyramid scam. It's unlikely that my 20 & 30-something will ever see any SS payments come our way, the whole system is going to implode long before then. Most of my peers have already accepted that.

So maybe it's time to draw a line and start a new program for people under 40... but that's the next post :)

Any thoughts on changing retirement / SS age? Should it be higher (70)?

Tuesday, August 9, 2011

Is inflation the answer?

The Curious Capitalist explores the Fed's options, including having the Fed raise "target inflation" from 2% to 4% or even 6%.

So pushing up "target inflation" rates may seem like a good idea, but there are definitely a few hazards here.

Hazard #1: Seniors

Pushing up inflation means raiding those who have cash. The goal is to raid the coffers of big companies just enough to push them into spending that cash. You're basically trying to "scare" people into spending to produce.

The side effect here is that inflation affects all cash.

Targeting 5% inflation hurts people planning to retire soon (i.e.: baby boomers), but it also really hurts those who are already retired. These people already live off of cash and they've stopped producing. They have way to counter the effects of such growth, they cannot grow their income.

It also sucks for the unemployed who were already falling behind.

Hazard #2: Anger investors

Investors are not stupid, they can calculate the effect of inflation. The 10-year treasuries are currently under 3%. Investors are honestly accepting that this is basically zero growth. You're not moving forward much, but at least you're not losing ground.

Changing the inflation plan to 5% means that 3% investment is effectively losing ground. What's more, everyone who bought these sub-3% bonds in the last 3 years is going to end their 10-year holding at a real loss.

China will not be happy about this move. Forcing inflation is raiding cash. This would be raiding China's coffers in a very real way.

Hazard #3: The gig is up

The long term plan has always been to inflate away some portion of the debt. Everyone is doing it, but there's definitely an aspect of "chicken" going on. No one wants to inflate too much.

Well jumping inflation to 4% or 6% on purpose pretty much ends the game. Then everybody knows the plan. Fiat currency is all about trust. Raiding the savings of hundreds of millions of people is not a great way to engender further trust.

Maybe I should buy gold... or bitcoins... or both :)