Thursday, May 22, 2008

Econ 101

Economics is one of those subject that most people zoned out on. Is something elastic or not? Is it macro or micro that matters?

Well, this week we have a clear lesson in economics. It was the Congressional grilling of the Oil Company execs. This has become an annual event. Congress brings in these executives and asks them the big questions. How come your company made so much money last quarter/year? Don't you thing that making $10 Billion a quarter, (see I can use commas) more than any other company ever makes is bad? And then, the big question we are all waiting for ... why does gasoline cost so much at the pump and what will it be 1 month, 3 months, 6 months and 12 months from now?

The answers ... (1) because we were lucky, remember you did not call us in when we were not making a lot of money to ask us why, (2)no and (3)I don't know.

See its all economics.

First, if you are a normal person, you know that things in demand have a higher cost. Oil is in demand. Remember Cabbage Patch Kids? When they first came out and were a "must have toy", you had to pay a premium to get one, if you could even find one in the store.

Second, a normal person understands that if you have bad credit, you will pay more for insurance, a mortgage or a loan.

If your a little slow, you do not understand why because you made a few late payments on your credit cards that you should be punished with a higher auto insurance premium. Well, its economics and another course you slept through statistics. Statistically speaking, and it is a language that normal people of even high intelligence do not understand, if you pay your debts late chances are you will drive your car into your neighbor's car. Pay your credit card late and your an insurance risk ... higher insurance premiums. So, bad credit is not good. Simple, you understand? You still with me?

Well, we elect people who demonstrate that they are not normal. These individuals continually demonstrate that they are a little slow. We elect the bottom of the class. Democrat or Republican when they get to D.C. they leave what ever intelligence they had at the door. The mantra seems to be "I am a Representative or Senator and now I am an idiot with privileges".

Seems Congress can not understand, despite their large staff to write memos in simple words, why oil costs more. Obviously they live in a cloud of polluted air.

Point One: China and India have started to come of age. What does that mean? Well, China has 1.5 billion people and India 1.1 billion. India alone has a new middle class of 300 million people. Their middle class is as large as the entire U.S. China's middle class also exceeds the size of the U.S. Now, surprisingly enough, these new middle class people want to own things. Things like cars. Cars need gas. These two countries will have or already have more drivers than the U.S. So, point one: there is more demand.

Now point one is hard to deal with except to reduce our demand. So, why doesn't Congress call in the auto makers and ask why they still sell 12 mpg SUVs? Make SUVs illegal. Change the highway to have an SUV only lane and make it a single lane on the right ... the slow lane. Why not ask the auto makers why they scream when asked to increase the mpg (miles per gallon) of the cars they manufacture? Why not increase the tax on gas to reduce consumption? Why not allow Americans to pay the same high price that the rest of the world is privileged to pay? Oh, stop supporting food into gasoline, this is ridiculous and only makes food cost more with zero benefit.

Point Two: Remember that bad credit? Well, how do you get bad credit? One way is to take on more debt than you can ever repay. Even more so, take on debt to pay the interest on the debt you can't afford. Well, that would be the U.S. Congress. Seems the concept of fiscal prudence went out with "oh my how am I going to get reelected?"

Congress routinely spends more than it takes in. Why? Well, raising taxes to pay for programs would hurt reelection chances. Stopping wasteful programs that benefit those voters back home would hurt reelection chances. But those things are not in your district, well you owe favors to your friends for helping you get your pork, so you owe them your vote for their pork.

Congress has run up deficits in the last seven years alone totally $4 Trillion Dollars. The U.S. national debt is now around $9+ Trillion and growing.

Now add to that our trade deficit. We, you and me, buy more things made oversees than we do "made in the U.S." So, on a monthly basis we send $60 Billion more dollars away than we earn, or $720 Billion per year. Doing the math, in the last seven years that would be $5 Trillion. The total $9 Trillion Dollars more in debt than we were seven years ago. The seven years is just so happens to coincide with the current administration but the problem did not start with them. The lack of planning has only increased at a gallop.

Remember economics? America is a debtor nation. America has lousy credit. China alone has a couple trillion dollars sitting in its retirement account. Your a prudent investor making a prudent decision. Dollars are not something you want to own, so you sell dollars and buy other currencies to protect yourself. You buy Euros. The dollar, once the king of currencies, is now a bad thing. Thank you Congress. The dollar was .97 to 1 Euro equals "dollar strong" is now 1.57 to 1 Euro translates into "dollar weak and getting weaker". The dollar we use to buy oil now is worth fifty percent less, so oil costs 100% more. Thank you Congress. Can you spell "bad credit?"

Back to oil. There is more demand, more competition for limited item. We are trying to buy the harder to get oil with our worthless dollars ... so price is higher. Remember limited supply combined with bad credit makes things cost more.

Well, Congress what can you do? Take actions to make the dollar stronger, balance the budget, stop borrowing, bring your debt into line with your means, stop buying things you can not afford. Then you can help the U.S. go back to producing things that U.S. consumers can buy "made in U.S." Congress can take actions to make this country more manufacturer friendly.

This later takes help from the American worker. Simple rules. Skilled labor pays more than unskilled labor. Labor in areas of higher demand or limited supply should pay higher than lower demand and higher supply. So, wages for factory unskilled labor should be low and not artificially high. Finally, businesses could afford to pay workers a higher wage if they stopped paying executives exorbitant salaries. An executive earning more than $10 million a year should have to pay 100% tax penalty on wages above $10 million and that number would include all compensation including stock options. Please send me the executive who can not live on $10 million a year.

Its all economics. Don't spend more than you can afford, control your spending, and make your purchases from the best place you can.

Finally, vote Congress out of office since they can not do the job. Send only intelligent people to D.C. and if those people can not do the job vote them out and try again.

No comments: