Inflation? Deflation? In these perplexing economic times it is hard to predict what might happen next. I certainly don't know. There are so many opposing forces pushing against each other it is hard to say which ones are strongest.
From the perspective of Warren Buffett, inflation is going to be the economic right cross to hit us next. According to this article on seeking alpha, Buffett has been banging the inflation drum for a few years. His reasoning is simple and not at all uncommon. He says that there are three ways for the government to deal with it's debt issues: 1) It can default, 2)It can raise taxes/reduce spending, 3)It can inflate its way out. Since the government's debt is in US currency, he doesn't see default as a viable option since the U.S. can simple print more money. He doesn't see the politicians raising taxes/cutting spending since these actions are unpopular and thus will damage their chances of re-election. With only one option left, he believes politicians will take the easy way out and resort to inflationary measures.
Back in February, I wrote this paper/blog entry considering the same three possible methods of dealing with the debt but came to the conclusion that it was more likely that the government would raise taxes/reduce spending rather than pursue inflationary measures. My reasoning was that the negative effects this sort of policy (rolled over outstanding debts and all future debts would have to be financed at higher rates to compensate investors for inflation)would be enough to persuade politicians to pursue the tax and cut option. Though I still feel this will be the predominant measure taken, I am a little less sure after witnessing the debt ceiling debacle we just went through. As Buffett predicted, during the debt ceiling debates neither side wanted to do what they thought would be politically harmful. Republicans did not want to increase taxes and democrats did not want to cut spending. I'm not trying to make a point here regarding the right amount of taxes vs. spending cuts, only that a great deal of political fighting resulted in very little action.
Since the passing of the debt ceiling bill, nothing has really changed. We still have a massive debt problem which could explode tomorrow or 30 years from now. So what are we going to do about it?
Tuesday, August 9, 2011
Thursday, August 4, 2011
The Wonder of it all1
Though it is easy to get bogged down by the nuts and bolts of our daily lives, I think it is important to step back and reflect upon all the beautiful and amazing things this world has to offer. I believe that doing so helps to free us from our monotonous routines and allows us to cultivate a sense of wonder. So to help facilitate that cultivation, I am going to start a series of post sharing some of the various things I have come across which leave me feeling a sense of wonder.
I saw this on TED talks and found it to be amazing:
And this beautiful cyr wheel performance
I saw this on TED talks and found it to be amazing:
And this beautiful cyr wheel performance
Thursday, July 28, 2011
I'm afraid its a downgrade
There's no more wishes in the well
No more dreams to sell
No time in the hourglass
There's no more lies for you to tell
Your heaven is your hell
Your future dying in the past
-Evergreen by Echo & The Bunnymen
I borrowed the format from Mind & Market since I felt the lyrics were a perfect fit for our current economic situation.
Recently, the top three nationally recognized credit rating agencies have been threatening to lower the United States' credit rating if there is even a temporary delay in interest payments due to the debt ceiling not being raised on time. But there are actually ten of these credit rating agencies recognized by the securities and exchange commission. On July 16, one of these agencies, Egan-Jones, actually downgraded the U.S. from a AAA to a AA+ rating.
Here is an interview on CNBC where they announced the downgrade
It is not surprising that Egan-Jones would be the first NRSRO to make a move. Unlike most of the other nationally recognized rating agencies which are paid by issuers (the companies they are supposed to rate) they are paid by investors (those that need unbiased information). As a result, they were able to foresee problems with Enron and companies involved in the credit crisis that the other major rating agencies missed. Its important to note that Egan-Jones decided to downgrade the U.S. because of structural problems and the country's rising debt-to-GDP rather than a delay in raising the debt ceiling.
Higher interest rates here we come.
No more dreams to sell
No time in the hourglass
There's no more lies for you to tell
Your heaven is your hell
Your future dying in the past
-Evergreen by Echo & The Bunnymen
I borrowed the format from Mind & Market since I felt the lyrics were a perfect fit for our current economic situation.
Recently, the top three nationally recognized credit rating agencies have been threatening to lower the United States' credit rating if there is even a temporary delay in interest payments due to the debt ceiling not being raised on time. But there are actually ten of these credit rating agencies recognized by the securities and exchange commission. On July 16, one of these agencies, Egan-Jones, actually downgraded the U.S. from a AAA to a AA+ rating.
Here is an interview on CNBC where they announced the downgrade
It is not surprising that Egan-Jones would be the first NRSRO to make a move. Unlike most of the other nationally recognized rating agencies which are paid by issuers (the companies they are supposed to rate) they are paid by investors (those that need unbiased information). As a result, they were able to foresee problems with Enron and companies involved in the credit crisis that the other major rating agencies missed. Its important to note that Egan-Jones decided to downgrade the U.S. because of structural problems and the country's rising debt-to-GDP rather than a delay in raising the debt ceiling.
Higher interest rates here we come.
Thursday, July 21, 2011
False Dichotomy
Also known as the false dilemma, either-or fallacy and black and white thinking . The argument is presented in such a way to as to suggest that there are only two possible options. The arguer then presents their evidence against the disfavored option and so it is then reasoned that the favored option must be accepted. It takes the form of: Either X or Y is true. X is false so Y must be true. This sort of reasoning is fine as long as there are truly only two possibilities, but if other alternatives exist then it is possible that both X and Y are false.
The false dichotomy may be used intentionally by an arguer to influence a debate or to force a course of action. An example would be: "Ann, I need you to donate $15 to the starving children of the world fund, unless you don't care about starving children." The two options presented are that Ann gives $15 and cares for starving children or she doesn't care for starving children. Of course a third possibility is that Ann cares for starving children but cant or doesn't want to give $15.
The false dichotomy can also arise unintentionally simply by not considering additional possible options. For instance "Silvia Brown can either talk with the dead or she is a con woman. She passed the lie detector test I gave her so she can talk with the dead." Of course another possibility is that she cannot talk with the dead but truly believes she can.
I see this kind of thinking all the time in political discussions. This is probably due to the fact that we only have two major parties, which I think tends to have a polarizing effect on our thinking (Regulation is good or regulation is bad, welfare is good or welfare is bad).
Other examples would include: "If we don't raise taxes, our government will collapse", or "you are either with us or against us" or "Which would you rather have, better schools or lower taxes".
The false dichotomy may be used intentionally by an arguer to influence a debate or to force a course of action. An example would be: "Ann, I need you to donate $15 to the starving children of the world fund, unless you don't care about starving children." The two options presented are that Ann gives $15 and cares for starving children or she doesn't care for starving children. Of course a third possibility is that Ann cares for starving children but cant or doesn't want to give $15.
The false dichotomy can also arise unintentionally simply by not considering additional possible options. For instance "Silvia Brown can either talk with the dead or she is a con woman. She passed the lie detector test I gave her so she can talk with the dead." Of course another possibility is that she cannot talk with the dead but truly believes she can.
I see this kind of thinking all the time in political discussions. This is probably due to the fact that we only have two major parties, which I think tends to have a polarizing effect on our thinking (Regulation is good or regulation is bad, welfare is good or welfare is bad).
Other examples would include: "If we don't raise taxes, our government will collapse", or "you are either with us or against us" or "Which would you rather have, better schools or lower taxes".
Thursday, July 14, 2011
Regulation: Its for your own good
Government regulation is a provocative topic. Many people seem to hold one of what they perceive to be only two possible opinions, either 'regulation is good' or 'regulation is bad'. Depending on which of these two opinions they may hold, the natural next step is 'more regulation would be good' or 'more regulation would be bad'.
Of course the real world is not quite as simple as our dualistic natures would like it to be. Things are messy and costs and benefits are not always easy to quantify. There is a lot of grey in between the black and white. Having said that, there is also a lot of what I would consider to be obviously silly and damaging government regulation. In particular, some of the state licensing of pretty benign professions is distressing.
For example, here is an article from USA today which reports on a law in Louisiana which requires florist to pass a test and get a license to arrange and sell flowers. Really? You need a license to arrange flowers? Or this article about the Arizona Board of Cosmetology requiring 'threaders' (people who use a piece of thread to remove eyebrow hair) to acquire an aesthetician license. To obtain the license requires schooling (which doesn't teach you how to thread) which can cost over $10,000. Or this article regarding Utah's requirement to obtain a cosmetology license in order to braid hair, a process which requires about 2000 hours of classwork at a cost of something between $9,000 to $19,000. Or this hilarious video from Reason TV regarding the licensing requirements of interior designers (at least watch the first 3 minutes for some comedy).
So is it really necessary for governments to institute licensing laws on these kind of low risk professions? Is the reason behind it really to promote public health and safety? Well I can't see the potential harm done by a florist arranging flowers. But I do see the harm to the economy this sort of regulation causes. First, it creates a barrier to entry making it more difficult to enter these professions, especially for low income workers. This suppresses competition allowing for those already in the industry to demand higher prices upon consumers. This is why trade organizations and professional associations often lobby for such regulation. Of course the obvious benefit to the states is the increased revenue they receive from licensing fees and penalties imposed upon those who are in violation of such laws.
Of course the real world is not quite as simple as our dualistic natures would like it to be. Things are messy and costs and benefits are not always easy to quantify. There is a lot of grey in between the black and white. Having said that, there is also a lot of what I would consider to be obviously silly and damaging government regulation. In particular, some of the state licensing of pretty benign professions is distressing.
For example, here is an article from USA today which reports on a law in Louisiana which requires florist to pass a test and get a license to arrange and sell flowers. Really? You need a license to arrange flowers? Or this article about the Arizona Board of Cosmetology requiring 'threaders' (people who use a piece of thread to remove eyebrow hair) to acquire an aesthetician license. To obtain the license requires schooling (which doesn't teach you how to thread) which can cost over $10,000. Or this article regarding Utah's requirement to obtain a cosmetology license in order to braid hair, a process which requires about 2000 hours of classwork at a cost of something between $9,000 to $19,000. Or this hilarious video from Reason TV regarding the licensing requirements of interior designers (at least watch the first 3 minutes for some comedy).
So is it really necessary for governments to institute licensing laws on these kind of low risk professions? Is the reason behind it really to promote public health and safety? Well I can't see the potential harm done by a florist arranging flowers. But I do see the harm to the economy this sort of regulation causes. First, it creates a barrier to entry making it more difficult to enter these professions, especially for low income workers. This suppresses competition allowing for those already in the industry to demand higher prices upon consumers. This is why trade organizations and professional associations often lobby for such regulation. Of course the obvious benefit to the states is the increased revenue they receive from licensing fees and penalties imposed upon those who are in violation of such laws.
Thursday, June 30, 2011
Baby Boomers vs Generation X
Sometimes it seems like saving for retirement is an impossible mission. We are constantly being hit with bad economic/investment news such as " social security to run out by 2037" or "stocks take a nosedive as unemployment rises" or "still no recovery in housing". This got me wondering, how different (if at all) saving for retirement has been for generation X than it has been for the baby boomers?
Though dates seem to differ from website to website, generally baby boomers were born from 1946 to 1965 and generation Xers from 1966 to 1982.
Since the stock market is typically a large part of a retirement portfolio, I first looked at the performance of the S&P 500 from 1965 to the present.
If we make the assumption that most people do not really start saving for retirement until they are at least 25 then the youngest boomer doesn't start saving till 1971 and the oldest until 1990. During this time period stocks were mostly flat from 1971 to 1981 then more than doubled from 1981 to 1990. Also, this is a period of little volatility. Of course there are small rises and dips but for the most part things are fairly calm.
Using the same assumption above, the first gen-Xer doesn't start saving until 1991 and the last one until 2007. In contrast to the period where the boomers were entering the market, here we see great volatility, as the S&P sharply increases and sharply decreases. It really does look like a roller coaster ride.
So far, the boomers have really made out a lot better than the Xers, especially the older ones. The older boomers who started investing in the 1970's had over two decades to buy stocks at consistently lower prices between 100 to 450. In contrast, the first Xers began saving for retirement in 1991. From 1991 to 2000 the S&P moved from about 340 to just over 1500. This sounds good but remember that Xers are just starting to save for retirement during this period so each time they make a contribution to their retirement accounts, they are buying at higher prices. In 2000 the tech bubble burst and the S&P drops like a lead balloon for two years down to almost 800. This two year period was of course a good time to buy but the psychological effect of the sharp prolonged drop caused many people to temporarily stop contributing to their retirement accounts (Dalbar QAIB 2004). In 2003 the S&P again began a steep five year climb reaching over 1500 only to have it nosedive down to below 800 over the next two years due to the housing crisis. We are once again making another climb back up with the index currently at 1330.
To sum it up many boomers were able to build up their portfolios in their early years due to a long period of market stability with stocks at relatively low prices. Xers started contributing during a long period of volatility, often buying at highs and pulling back on retirement contributions during declines (loss aversion).
For better or worse, another major part of many retirement portfolios is our homes. To analyze this I used the Case-Shiller index.
I got the graph here
According to this article, first time home buyers are on average 33 years old. Perhaps boomers bought their first house at a younger age so lets just use 30 years old to keep it simple. Using the same analysis as above we find that the first boomers start buying houses around 1976 when the case-shiller was at about 108. For the next twenty years the index moves up and down moderately somewhere between 108 to 125 before it starts a very steep climb around 1996.
1996 is also the year that the youngest members of generation X begin buying homes.
Again, it looks to me as if the boomers have made out much better that the Xers. Most boomers bought their first homes some time during a twenty year period when prices where relatively low and they have had a great deal of time to pay down or off their mortgages. In contrast, over half the genXers bought their first homes during the housing boom between 1996 and 2006. This means that many of them were entering the market when prices were incredibly high. Since during the early years of a 30 year mortgage most of your payment is going toward interest, these genXers had very little equity in their homes when the housing bubble burst in 2006. This left many of them in a situation where they owed more on their homes than they were worth. Of course the oldest genXers that are just now entering the market should fair much better as many believe we are at or near the bottom.
In summary, most boomers were able to buy low and then enjoyed good economic times where they were able to build up equity while a majority of Xers bought high and now have little to no home equity.
On top of the difficulties discussed above is the fact that social security doesn't look so secure for us, but that is a topic I have already delved into with my federal debt entries. So the future isn't looking too bright for genX. What do you think, is it time to panic yet?
Though dates seem to differ from website to website, generally baby boomers were born from 1946 to 1965 and generation Xers from 1966 to 1982.
Since the stock market is typically a large part of a retirement portfolio, I first looked at the performance of the S&P 500 from 1965 to the present.
If we make the assumption that most people do not really start saving for retirement until they are at least 25 then the youngest boomer doesn't start saving till 1971 and the oldest until 1990. During this time period stocks were mostly flat from 1971 to 1981 then more than doubled from 1981 to 1990. Also, this is a period of little volatility. Of course there are small rises and dips but for the most part things are fairly calm.
Using the same assumption above, the first gen-Xer doesn't start saving until 1991 and the last one until 2007. In contrast to the period where the boomers were entering the market, here we see great volatility, as the S&P sharply increases and sharply decreases. It really does look like a roller coaster ride.
So far, the boomers have really made out a lot better than the Xers, especially the older ones. The older boomers who started investing in the 1970's had over two decades to buy stocks at consistently lower prices between 100 to 450. In contrast, the first Xers began saving for retirement in 1991. From 1991 to 2000 the S&P moved from about 340 to just over 1500. This sounds good but remember that Xers are just starting to save for retirement during this period so each time they make a contribution to their retirement accounts, they are buying at higher prices. In 2000 the tech bubble burst and the S&P drops like a lead balloon for two years down to almost 800. This two year period was of course a good time to buy but the psychological effect of the sharp prolonged drop caused many people to temporarily stop contributing to their retirement accounts (Dalbar QAIB 2004). In 2003 the S&P again began a steep five year climb reaching over 1500 only to have it nosedive down to below 800 over the next two years due to the housing crisis. We are once again making another climb back up with the index currently at 1330.
To sum it up many boomers were able to build up their portfolios in their early years due to a long period of market stability with stocks at relatively low prices. Xers started contributing during a long period of volatility, often buying at highs and pulling back on retirement contributions during declines (loss aversion).
For better or worse, another major part of many retirement portfolios is our homes. To analyze this I used the Case-Shiller index.
I got the graph here
According to this article, first time home buyers are on average 33 years old. Perhaps boomers bought their first house at a younger age so lets just use 30 years old to keep it simple. Using the same analysis as above we find that the first boomers start buying houses around 1976 when the case-shiller was at about 108. For the next twenty years the index moves up and down moderately somewhere between 108 to 125 before it starts a very steep climb around 1996.
1996 is also the year that the youngest members of generation X begin buying homes.
Again, it looks to me as if the boomers have made out much better that the Xers. Most boomers bought their first homes some time during a twenty year period when prices where relatively low and they have had a great deal of time to pay down or off their mortgages. In contrast, over half the genXers bought their first homes during the housing boom between 1996 and 2006. This means that many of them were entering the market when prices were incredibly high. Since during the early years of a 30 year mortgage most of your payment is going toward interest, these genXers had very little equity in their homes when the housing bubble burst in 2006. This left many of them in a situation where they owed more on their homes than they were worth. Of course the oldest genXers that are just now entering the market should fair much better as many believe we are at or near the bottom.
In summary, most boomers were able to buy low and then enjoyed good economic times where they were able to build up equity while a majority of Xers bought high and now have little to no home equity.
On top of the difficulties discussed above is the fact that social security doesn't look so secure for us, but that is a topic I have already delved into with my federal debt entries. So the future isn't looking too bright for genX. What do you think, is it time to panic yet?
Tuesday, June 28, 2011
Argument From Ignorance
The argument from ignorance (also known as ad ignorantium or appeal to ignorance) is the argument that a proposition is true because it has not yet been proven false or that it is false because it has not yet been proven true. The basic form of the argument is either:
P1. Statement A is not known (proved) to be true
C. Therefore it is false
or
P1. Statement A is not known (proved) to be false
C. Therefore it is true
For example:
"We do not know that there is life in the universe outside of that found on earth. Therefore, it does not exist."
This example can be seen as a fallacy of irrelevance in that the premise refers to our lack of knowledge which does not provide support for the substantive conclusion that there is no life outside of earth. The fact that we do not know one thing is not a relevant reason for believing another.
Yet there are occasions when a failure to find evidence can be seen as significant evidence in itself. For instance, if you were to search carefully in a small park for a bulldozer and fail to find one, you could argue:
"There is no evidence that there is a bulldozer in the park, therefore there is no bulldozer in the park."
The difference between the life outside of earth example and the bulldozer example has to do with what is sometimes called negative evidence. Negative evidence (or evidence of absence) is evidence that can be used to infer the non-existence or non-presence of something. The difference between the fallacious use of arguments from ignorance (an absence of evidence) and negative evidence (evidence of absence) can be nuanced and at times difficult to establish but in general it has to do with whether or not a careful, thorough search has been made. A bulldozer is a conspicuous object you'd expect to easily detect in a small city park if you conducted a search. The negative evidence of having conducted the search and not finding the bulldozer would be considered strong evidence that it is not there.
A Practical Study of Argument
Wikipedia: Evidence of absence
The Appeal to Ignorance or Argument Ad Ignorantiam
P1. Statement A is not known (proved) to be true
C. Therefore it is false
or
P1. Statement A is not known (proved) to be false
C. Therefore it is true
For example:
"We do not know that there is life in the universe outside of that found on earth. Therefore, it does not exist."
This example can be seen as a fallacy of irrelevance in that the premise refers to our lack of knowledge which does not provide support for the substantive conclusion that there is no life outside of earth. The fact that we do not know one thing is not a relevant reason for believing another.
Yet there are occasions when a failure to find evidence can be seen as significant evidence in itself. For instance, if you were to search carefully in a small park for a bulldozer and fail to find one, you could argue:
"There is no evidence that there is a bulldozer in the park, therefore there is no bulldozer in the park."
The difference between the life outside of earth example and the bulldozer example has to do with what is sometimes called negative evidence. Negative evidence (or evidence of absence) is evidence that can be used to infer the non-existence or non-presence of something. The difference between the fallacious use of arguments from ignorance (an absence of evidence) and negative evidence (evidence of absence) can be nuanced and at times difficult to establish but in general it has to do with whether or not a careful, thorough search has been made. A bulldozer is a conspicuous object you'd expect to easily detect in a small city park if you conducted a search. The negative evidence of having conducted the search and not finding the bulldozer would be considered strong evidence that it is not there.
A Practical Study of Argument
Wikipedia: Evidence of absence
The Appeal to Ignorance or Argument Ad Ignorantiam
Wednesday, June 22, 2011
The Unemployment Problem
I re-read a NY Times article I came across sometime ago regarding Denmark Shrinking its Unemployment Benefits. Denmark lowered it's unemployment benefits period from four years down to two years after studies indicated that many people will wait until just before benefits run out before getting a job. The green line on the graph on the left shows that during the four year period from 2005 - 2007, some people got jobs within the first few months of being unemployed but then the percentage drops and stays flat for the next few years. Then just before and just after the fourth year, when benefits run out, there is a huge spike in the number of people finding jobs. The red line shows a similar pattern from a study back in 1998 when Denmark's unemployment benefits period was five years. This seems to confirm what anecdotally I have observed of the behavior of friends and acquaintances that were on unemployment. Some of them found jobs shortly after being laid off but the ones that didn't tended to only find jobs either just before their benefits expired or just afterwards.
I can think of a number of possible reasons why this pattern exists. First, many people on unemployment tend to procrastinate. Some of these people use the time as a long paid vacation. Some are mentally tired of trying to find a job and become discouraged. Others take a real hit to their self-esteem and spiral into a state of depressed non-action.
I suspect another reason is that people do not want to take jobs which they perceive is be below them. It might be a position which they feel is beneath them, a job which they foresee will be dissatisfying, or a wage which is lower than what they made in their prior job. The incentive, especially in the earlier part of the benefit period, would be to pass up these jobs, holding out for something better. Only when the benefits are about to expire do they accept the less than ideal jobs.
So how long should the unemployment benefits period be? How should the program be structured to get people back to work as quickly as possible? I really dont have any answers and only brought it up because I find it to be an interesting puzzle. What do you think?
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