Why I Think The Economy Is Broken

There is not a single factor, but myriad factors which holds down wages and stunts the progress of the entire economy. And in order for us to fix it, we need to fully grasp this. Because until we do all we will continue to get is nowhere.

Let me just say that mostly on both sides there are misunderstandings of what needs to be done. For the liberals and democrats, of course, their solution is to simply mandate wage increases—such as to the minimum wage—and to raise taxes on the corporations and the rich. For the conservatives and republicans they're still believing that global trade is the answer. If we can sell stuff to the rest of the world that will create jobs and increase wages.

We know, however, that neither of these solutions really work.

First of all, you cannot artificially raise wages without there being rippling consequences within the economy. As I have said many times before, corporations and small businesses are not ATM machines. And certainly they are not the Fed that simply prints more money when it needs to. So, in comes the union machine. Folks, take a look at Detroit as one of the best examples of artificially increasing wages—and even benefits for that matter. But of course this was not the government who did this, although factions of the government certainly did and do encourage it. Not only did unions demand higher wages for employees, and not only did they fight for more health benefits, pensions, and other monetary things which cost a ton, but they also contributed to bylaws which turned otherwise efficient operations into unmanageable, and ultimately unprofitable ones.

In any business there is a rule of thought that you charge a customer what he or she is willing to bear.

But it is not just a matter of what the customer is willing to pay. It is a matter of what a customer can pay in realistic and reasonable terms. In other words, a business knows that there is a fine line

between trying to get more than what they are entitled to for their product or service and outright pricing themselves right out of business.

You can apply this simple idea to the unions. The difference between the business machine and the union machine is that a business knows what a customer is willing to bear, and it also knows how much a customer can afford to pay. In the case of unions, many of the monetary demands were made without anyone on the union side, and especially the employees, knowing what was even on the balance sheet.

The unions, in my opinion, should have had two jobs. One of those jobs was to make a stand for the interests of employees of course. Their job was to create an environment whereby employees could be reasonably compensated for the work they did, and that they would enjoy some of the benefits of a thriving corporation through wages and benefits. Something I think is important, by the way, despite my misgivings about unions in general. But their other job was to also be the spokesperson for reason and rational thought. Their job was, essentially, to educate the workforce they were representing on the reality of the situation.

There is a danger, I think, when we become so convinced that the rich and the corporations they own are simply greedy. Somehow we have come to a place where when we think of the rich and the corporations we think of the giant in the Jack and the Beanstalk story sitting in his castle above the clouds hoarding and counting his golden coins with no regard for anything but the fact that he has the golden coins.

The rich do not sit on their money. It is part of the reason not only do they become rich. But it is a part of the reason they become richer.

In other words, the rich invest their money. And even when it comes to common shareholders they have one simple demand of the corporations for which they hold a stake in.

Make more profits.

But in order to do that that really doesn't mean lower worker's wages, fire workers, send jobs overseas, reduce benefits, and gouge the customers who buy their products or services. Granted, there may be some who believe that way, but I would call them the minority. What any common shareholder—or major shareholder—wants is a growing and thriving business to continue to deliver dividends and profits. For a lot of us that means growing the business and expanding the markets we operate in.

If you talk to many employees the one common theme always seems to be that they are just a number, that the fat cats really don't need them, that they are a burden and that for that reason corporations will go to any length to shut them down and send them packing.

For me that's a false reality, and a silly way to think. Because anyone who understands business also understands that yes, employees do fall onto the liability side of the ledger. But, they are as necessary as any other cost of doing business. The reality is that a business indeed wants to focus on growth and expanding their markets—but when employees walk out the door and when employees have to be replaced, there are two things that come out of this.

Distraction and cost.

For one, when you have to spend time in the day strategizing over how to bring in replacement

workers, and when you have to spend time in the day seeking out new workers and being engaged in the hiring process, you are going to have less time in the day to focus on strategizing keeping the machines running and expanding the business. It's a distraction. And then there's the cost. Even in unskilled labor, you have to train the workers. And during that process there is going to be some level of transition and downtime whereby the operation will not be at its optimum efficiency.

For those who say unskilled labor is a job even a monkey can do let me just say this.

I have worked in many "unskilled labor" jobs during my tenure in the workforce. I have seen workers come in who worked in similar settings prior to their working alongside me who were still not able to simply walk onto the production line and run the operation flawlessly. You still had to have other employees showdow them, and you still had wrong buttons pushed, and problems within the process which ultimately slowed things down—and cost the company money.

It is better to have a strong and reliable and fully trained workforce committed to the process and committed to the company than to have a revolving door. Smart businessmen know this, and so therefore it is misnomer that employers simply do not care about the people who work for them.

It's a very small example, but say you own several rental properties. What's more efficient and cost effective for your business? Keeping tenants over the long haul, or constantly having to find new ones to rent to?

Of course there is a need to always evaluate the workers you already have and determine whether or not they are serving the best interests of the business. For those that are not, of course you have to make decisions about whether they stay or go. The same would apply to my tenant example. If the renter is consistent in paying but breaks windows, knocks holes in the walls, or otherwise jeopardizes the business—they are no longer an asset. It is common sense really.

Unions essentially created bad tenants. So many, in fact, that at some point in time it makes more sense to simply shutter the doors than to coninue to seek out new tenants—or be burdened by the cost of keeping the bad tenants you already have.

And then you have the matter of taxes.

It has always amazed me how many people think that by simply raising taxes, you, and I do mean you will somehow benefit better by it. The reality is that taxes, just like employees, are a cost. And when you are spending money in one place, you obviously cannot spend it in another place. And again, the rich and the corporations are not the giant in the Jack and the Beanstalk story. Their money will be worthless if all they do is hoard it. In order to get richer the rich and the corporations must find ways to make their money grow. And that means investing those dollars into more factories, more retail outlets, more products or services in their lines, and it means it will take more people—workers—to get it done.

And by the way, those additional workers will pay more taxes. The more product or service moving through the economy the more sales tax revenue. The more workers with money to spend will also contribute more to the tax rolls as a whole. Lowering taxes does one primary thing. It encourages the flow of real dollars into the real marketplace and when you do that, even if taxes are lower, more tax revenues will be reaped simply because there are more dollars moving around in the real economy to tax.

Why does the Fed lower interest rates when the economy is in a slow down? To encourage more money to enter into the real economy. Lower taxes does the same thing. It speeds up the process of free money flow in the economy.

When interest rates are lower more people will buy cars, more people will use credit cards, more people will buy houses, and thus the markets move upward in a fluid fashion. Raising the interest rates slows the economy down in much the same way that the example I provided about a business pricing itself out of the marketplace ultimately shuts it all down.

Raise taxes and you slow it all down. Lower taxes and it all speeds up. It's not rocket science. It is very basic economics, folks.

The more money you have to spend to fuel your car, and to keep the lights on in your house, the less money you will spend on newer cars, adding square footage to your house, or simply going out for a dinner night with the family.

Everything slows down when certain dollars are siphoned into one pool for which all other pools suffer as a result.

And then there are regulations.

Regulations can be put into two categories. Those that are created through government policy, and

those that are created out of those bylaws I was talking about as it applies to unions. You can make rules that allow businesses to freely and openly compete, and expand, or you can create rules that make it harder, or impossible, to do that.

If you look at the macro here what you begin to see are those myriad issues I was referring to at the start of this. Higher taxes, unruly unions with bylaws that scrape away at efficiency, higher costs of wages and benefits for less work, and rules and regulations put forth by the government and the unions—and laws created in the interest of global trade have all worked to hurt the American worker, and to dissolve what were otherwise good paying jobs, only to be left with an economic disaster. Workers make less, and therefore can not spend as much, and because corporations can no longer reasonably compete, since the door was open to go elsewhere for their labor, they have done so.

I have long held that the idea of global trade was a good one when it became the "law of the land." But somewhere along the line it got away from us. Before it was a convenience and a novelty to be able to expand our personal dollars by having the opportunity to buy that cheaper item made in Japan or some other place. And it was a "feel-good" moment to think that by putting out dollars into those other countries would also lift their economies, thereby making it more possible for them to buy what we made. What we saw in all of this was a win-win.

Going back to my tenant example, what better opportunity to raise your rent than when your tenant gets a pay raise. If one person is making more money, then everyone ultimately makes more money. If global trade would have worked, we'd all have been making more money. Us and the Japanese and the Chinese, and whoever else you want to throw into the equation.

Why did Detroit fall? Why is our entire economy falling? Again, there are myriad factors to consider in all of this. High taxes, over regulation, and stifling of efficiency—it has essentially shut the whole thing down. And what we're left with is a horrible situation where half of the workforce is on government assistance, and the other half is working for pennies on the dollar. Those who are making it, by the way, are having to support the half that aren't.

And also by the way, we used to do it that way before this all happened. We did. The difference was that we did it by our earned wages being used to support the earned wages of another. Paul worked on the production line making beds and mattresses and used that money to buy cars from John who worked on the production line making cars. And John went out and bought a new TV with the money he earned making cars that supported Joe who made TVs. And all three of them supported Tom who drove the trucks to get the products moved, and Sally to stock the shelves, and Roderick who made the sale.

These days who is their to support? Paul doesn't make beds and mattresses anymore. John doesn't make cars anymore. Joe doesn't make TVs anymore. The jobs left don't pay as much, and when any one of these guys buys a bed or mattress, or a car, or a new TV, it takes a much greater chunk out what they can spend on other things—like even a hamburger at Burger King.

And now for something completely different:

Taking "Pay Yourself First" One Step Further

The age-old adage in the art of saving away a few bucks for a rainy day and beyond, pay yourself first, is still one of the best ideas to not only plan for, spend around, but to also live by with absolute determination and commitment. For years I have advocated what I like to call the 80/20 rule which basically states that you only live on 80% of your means, and save and invest the 20% you don't need. These days the amount I save is actually higher since the 20% affords, eventually, an increase in your means through dividends, capital gains, and other things that the money "in the bank" tends to generate.

Money makes money is another thing everybody says, but that is also absolutely true.

Something that I find often gets overlooked in all of these concepts surrounding saving money is actually a very important factor that can, if not considered, eat away and terribly counter a great deal of the effort you put into your savings commitments.

The COST of money.

Where this factor is most encountered, it is when we are dealing with how we manage and use credit. Most people who understand credit also understand that there is a difference between good debt and bad debt. Naturally there are some people who will tell you that there is no such thing as any good debt. I am not in that camp. By my definition good debt is debt which leverages an  appreciating asset such as your home. In this instance the cost of the debt is typically negated by the appreciating value of what has been financed. Bad debt is debt that is used to leverage depreciating assets, such as a vehicle. But even I am guilty of making use of this kind of debt—although I do everything I can to minimize the impact. For example when my wife and I purchased our Ford Edge a few years back we put down $10,000 to keep the monthly payments down and reduce the overall interest we would pay. I did the same thing recently when I replaced my old Ford Sport Trac with a newer Ford F-150 and laid out $14,000 cash at the bargaining table.

But the worst debt is the credit card.

Credit cards can be used in ways that actually help you toward your savings goals. For example, I use a Discover card which pays me cash back on every purchase. The trick here is to pay the card as you use it otherwise the cash back rewards are really worthless.

But rather than use credit cards, and finally we're getting to the meat of what I meant when I said let'syour own line of credit? I call this little concept the Credit Savings Account, or CSA. Key here is that if you are following strict savings plans, there should be plenty of money sitting around somewhere that you can allocate to a "credit card" where you are your own bank. My CSA sits in my checking account and when I use it, it is as simple as swiping my debit card.

take the concept of paying yourself first one step further, why not simply establish

And by the way, this is a great way to also avoid overdraft fees, and WORSE, paying for overdraft protection which is absolutely a total waste of money.

Here is how I set up my CSA:

• Establish an amount to fund the account with and determine this to be the credit limit.
• Establish a day each month when you will make payments. Mine is on the 20th of each month.
• Establish an interest rate you will charge yourself. This can be whatever you want it to be. I typically charge myself anywhere from 15%-29.9% depending on the balance, but I never pay myself less than 15% interest.
• ALL INTEREST PAYMENTS MUST BE EITHER PUT INTO SAVINGS, OR USED TO INCREASE THE CREDIT LIMIT. THIS SHOULD NOT BE SPENDING MONEY.
• Establish a minimum payment based on at least 3%-5% of the balance. But of course you can repay yourself any way you want.

When I calculate the interest I don't bother with how credit card companies actually do it, using daily periodic rates and average daily balances etcetera. But of course if you want to you can do it this way—but it is naturally much more time consuming. Here is an example of how I will determine my payment and interest:

• Balance ($300) x 15% interest =  $45 / 12 months = $3.75 (this is my interest charge). Balance ($300) x 5% minimum payment = $15. In this example I will pay $15 on the 20th (my due date). Of the $15 I will apply $11.25 to the principle (balance) and direct $3.75 to interest (which will be deposited to my savings).

There is a caveat here. When you set up this account for yourself you must avoid playing games with yourself, such as forgoing making a payment, or playing around with the interest you charge yourself. This will foil any benefit a CSA will afford you. You are the banker. Act like one and fiercely demand payment and interest, and penalties when you don't pay.

Establishing a CSA takes paying yourself first one step further because it will accomplish two very important things. 1) it will force you to save more money away and 2) it will reduce your cost of money since you are using the CSA in lieu of traditional credit cards.

Perhaps even when I bought my vehicles I should have simply paid cash and set up a loan for myself.

Hmm. Something for me to consider on the next set of wheels I think. Let's keep our fingers crossed that Ford doesn't actually come out with a new Bronco or I may have to revisit this idea sooner than I would like.

Sharp Decline In Markets an Overreaction

If you are a fundamental investor, today's sharp decline following comments by Fed Chairman Ben Bernanke that the Fed will not change its current plan to buy bonds and continue to print money, should be taken with a grain of salt. This is largely because the Fed was also upbeat, for the most part on their overall projections of the economy, saying much the same thing they said in May about where they thought things were going.

I would take this as a signal that the Fed believes that the market is on track to meet or exceed projections, but it is still a wait and see game.

I do not like the idea that the Fed wants to continue to print money since this leads to dilution when it comes to how much a dollar happens to be worth, and I think there could have been many more, more effective policy issues that could have curtailed the perceived need by the Fed to prop up the economy through its efforts. But barring that, and of course the Obama administration has only engaged in policies that are frankly, in my opinion, negative toward the prospect of real growth, I don't really believe that the Fed was left with much else of a choice.

My reaction to Wall Street's reaction is that it was an overreaction. And this is something I see as an opportunity to buy more shares of great companies at a discount. The fundamentals of the markets continue to be strong, even if the economy is still lagging, almost staggering behind.

What I drew from Bernanke's remarks is that the Fed will continue on it's current path until such time that some of the projections get closer to becoming foreseeable as becoming true. But to pull the plug too early is perhaps not the best plan...

Especially considering the slow growth we've seen in this recovery, and the fact that, so far as I can tell, Obama has no good policy decisions forthcoming that will speed things up at all. In fact, there may still be some heavy weights put on the economy, especially as Obamacare begins to get closer to full implementation.

Despite today's sharp decline I am bullish on the markets, and I am bullish on the economy as well. I don't expect anything robust economically speaking. But that's the point. I am certain that the economy will continue slowly, very slowly upward. At some point the Fed will leave go of the reigns and allow more natural forces to work. Again, nothing robust. But whatever growth will come more naturally. I think that's a positive. It also, for me, gives a sense of certainty, the counter of which is negative to the markets. I am comfortable with slower growth, because I can see that's the direction. If the economy gets closer to projections, I am confident that Bernanke will leave go of the training wheels, and let the economy do its own thing on its own terms.