Congress narrowly passed a cap & trade bill that the Congressional Budget Office has estimated to cost more than $600 billion over 10 years. Who will pay the cost of this federal mandate? It depends on the industry.
For products for which the consumer is relatively insensitive to price hikes or there are few competitors, such as electricity, the consumer will pay most of the burden as the producer passes on the increased cost to its customers. For products for which the consumer is much more responsive to price increases or there are many competitors, such as food, the producer will absorb the increase in cost.
Thus it is clear that contrary to the bluster from politicians, Americans, both rich and poor will experience an increase in their costs in the next ten years. Whether one calls that a tax hike is irrelevant.
Ernie Goss
Wednesday, July 01, 2009
Monday, June 22, 2009
Why Are Oil Prices Higher?
Despite evidence from Creighton’s three monthly surveys showing no immediate end to the recession (www.outlook-economic.com ), many economists, pundits and analysts contend that the economic downturn is over. What evidence do they have?
It’s hidden in the price of oil, they say. In the past six months, oil prices (in dollars) have soared by more than 80 percent. The bulls contend that this is a signal that the economy is once again on the mend with U.S. economic growth driving prices higher. The bears, on the other hand, argue that this rapid expansion is the result of a weaker dollar and speculator oil buying. So which side has it right?
First, oil prices measured in Euros have risen by 27 percent. Thus, a large share of the increase in oil prices stemmed simply from a weakening U.S. dollar. Next using a simple economic model to explain oil prices since 1999, I conclude that almost none of the run-up in oil prices resulted from improvements in the economy. Instead, I find that of the 27 percent change in oil prices (in Euros), fully 10 percent can be explained by global investors desire to invest in oil rather than U.S. debt. That is, due to looming multi-trillion dollar federal deficits, investors have chosen to sell U.S. Treasury bonds of dubious value and buy oil. Of the remaining 17 percent increase, 4 percent, 7 percent and 6 percent are accounted for by seasonal factors, supply cutbacks and other unidentified factors, respectively.
In conclusion, the largest contributors to soaring oil prices over the past six months have been a weakening U.S. dollar and international investors selling bonds to buy oil.
Ernie Goss
It’s hidden in the price of oil, they say. In the past six months, oil prices (in dollars) have soared by more than 80 percent. The bulls contend that this is a signal that the economy is once again on the mend with U.S. economic growth driving prices higher. The bears, on the other hand, argue that this rapid expansion is the result of a weaker dollar and speculator oil buying. So which side has it right?
First, oil prices measured in Euros have risen by 27 percent. Thus, a large share of the increase in oil prices stemmed simply from a weakening U.S. dollar. Next using a simple economic model to explain oil prices since 1999, I conclude that almost none of the run-up in oil prices resulted from improvements in the economy. Instead, I find that of the 27 percent change in oil prices (in Euros), fully 10 percent can be explained by global investors desire to invest in oil rather than U.S. debt. That is, due to looming multi-trillion dollar federal deficits, investors have chosen to sell U.S. Treasury bonds of dubious value and buy oil. Of the remaining 17 percent increase, 4 percent, 7 percent and 6 percent are accounted for by seasonal factors, supply cutbacks and other unidentified factors, respectively.
In conclusion, the largest contributors to soaring oil prices over the past six months have been a weakening U.S. dollar and international investors selling bonds to buy oil.
Ernie Goss
Thursday, June 18, 2009
Federal Incentives for Auto Purchases Are Inconsistent
As part of the 2009 Stimulus Bill, consumers are able to deduct state and local sales and excise taxes paid on the purchase of a new foreign or domestic vehicle costing up to $49,500 that weighs no more than 8,500 pounds.
http://www.driveclassic.com/blog/?p=132
On the other hand, the federal government also allows consumers to deduct up to $25,000 on the purchase of an SUV weighting at least 6,000 lbs. Termed a Section 179 purchase, the bill was intended to assist GM, Ford and Chrysler in the sale of the more profitable large SUVs. Well it failed to prevent the bankruptcy of both GM and Chrysler, but continues to encourage Americans to buy the behemoth SUVs.
http://www.section179.org/section_179_vehicle_deductions.html
If the federal government is serious about cutting gasoline consumption and green house gases, it should first insure that current policies are consistent before embarking on passing new legislation.
Ernie Goss
http://www.driveclassic.com/blog/?p=132
On the other hand, the federal government also allows consumers to deduct up to $25,000 on the purchase of an SUV weighting at least 6,000 lbs. Termed a Section 179 purchase, the bill was intended to assist GM, Ford and Chrysler in the sale of the more profitable large SUVs. Well it failed to prevent the bankruptcy of both GM and Chrysler, but continues to encourage Americans to buy the behemoth SUVs.
http://www.section179.org/section_179_vehicle_deductions.html
If the federal government is serious about cutting gasoline consumption and green house gases, it should first insure that current policies are consistent before embarking on passing new legislation.
Ernie Goss
Wednesday, May 27, 2009
U.S. Auto Bankruptcy: Good Money Chasing Bad
On December 4, 2008, my colleague, Ed Morse, and I wrote an essay calling on the U.S. federal government to let the marketplace work in terms of the potential bankruptcy of GM and Chrysler. Since that essay was written, the federal government has funneled good money after bad to the tune of $20 billion to $30 billion.
http://economictrends.blogspot.com/2008/12/reid-pelosi-co-are-not-investment.html
and
http://www.youtube.com/watch?v=RL4MDmaXX7M
As of this writing, Chrysler is in bankruptcy proceedings and there is a 99 percent likeihood that GM will likewise declare bankruptcy. GM's bankruptcy is moving quickly forward due to GM bondholders rejecting the plan to exchange their bonds for GM stock. The GM bondholders have correctly assessed that they will do better under bankruptcy proceedings than under ownership of the "sinking ship." Who could blame them? Well the Obama Administration could and does.
In the Chrysler crisis, the Obama Administration forced secured bondholders to accept a deal that only a Washington Mutual stockholder would agree to. Essentially, the Obama Administration is attempting to abrogate bankruptcy law by strong arming Chrysler bondholders into accepting less than they would have received in statutory bankruptcy proceeding. Well, it is not working with GM as GM bondholders reject the extortion attempts from the Administration.
The Obama Administration must accept the fact that not only does this activist policy approach not work, it produces exorbitant costs for the taxpayer. "Too big to fail" should be replaced by the shorter and more accurate "just too big."
Ernie Goss
http://economictrends.blogspot.com/2008/12/reid-pelosi-co-are-not-investment.html
and
http://www.youtube.com/watch?v=RL4MDmaXX7M
As of this writing, Chrysler is in bankruptcy proceedings and there is a 99 percent likeihood that GM will likewise declare bankruptcy. GM's bankruptcy is moving quickly forward due to GM bondholders rejecting the plan to exchange their bonds for GM stock. The GM bondholders have correctly assessed that they will do better under bankruptcy proceedings than under ownership of the "sinking ship." Who could blame them? Well the Obama Administration could and does.
In the Chrysler crisis, the Obama Administration forced secured bondholders to accept a deal that only a Washington Mutual stockholder would agree to. Essentially, the Obama Administration is attempting to abrogate bankruptcy law by strong arming Chrysler bondholders into accepting less than they would have received in statutory bankruptcy proceeding. Well, it is not working with GM as GM bondholders reject the extortion attempts from the Administration.
The Obama Administration must accept the fact that not only does this activist policy approach not work, it produces exorbitant costs for the taxpayer. "Too big to fail" should be replaced by the shorter and more accurate "just too big."
Ernie Goss
Wednesday, April 29, 2009
Will Obama’s Plan Help Real Estate and Banking?
The latest incantation of the U.S. Treasury plan announced by Secretary of Treasury Geithner, while addressing the problem, focuses on the symptom, not the problem. The real “banking” problem is that housing prices continue to move lower thus reducing the value of the assets on banks’ balance sheets. The median price of houses sold in the nation declined by approximately 18 percent last year. My own estimates indicate that average home prices across the U.S. need to drop by another 14 percent to get back to the long term sustainable ratio between housing prices and income.
So what needs to be done? In order to underpin the housing market, President Obama’s 2009 Stimulus Package provides an $8,000 tax credit to first- time home buyers. This is inadequate since many of those who qualify do not currently have the resources to make the purchase, nor do they have the tax liability to fully benefit from the credit. Instead, the Obama
Administration’s 2009-10 budget proposal should provide a tax credit of $15,000 for all 2009 home purchases, not just first-time buys. Additionally, President Obama’s 2009-10 budget propsal has proposed a reduction in the mortgage interest rate deduction for families earning more than $250,000. This will have a negative impact on housing sales, prices, and ultimately the health of the banking industry.
The Obama Administration’s plan to cut agricultural support payments will more directly affect RM banks. The plan that has been advanced calls for limiting agriculture support payments for farms with revenues greater than $500,000. This ceiling would snare about half of the farms in Nebraska, for example, and place even more downward pressure on farm land prices, and ultimately the profitability of RM banks. During these fragile economic times, this is no time to be placing additional financial stress on rural communities dependent on farm income.
As an additional step to improve the banking industry, “mark to market” accounting should be abandoned for two years. In 2007, the Securities and Exchange Commission (SEC) implemented what was termed “mark to market” requiring that financial institutions mark or write down assets to market value. This has meant that, due to the inability to price or value packages of mortgages on their balance sheets, these institutions have marked them to practically zero in some cases under the overly restrictive assumption that they will collect nothing from the disposition of these assets. This is clearly draconian and reduces the ability of the financial institutions to make loans thus further weakening the economy.
As indicated by Dale Torpey, president of Federation Bank in Washington, Iowa in our February 2009 survey, “Land prices have leveled off and in some instances have dropped slightly. If some of the farmers can’t renegotiate their rent prices we could be looking at losing some of them in 2010.” Thus, banks, even in those in agriculturally dependent parts of the nation, likely face challenges for 2009 that call for greater attention.
Ernie Goss
So what needs to be done? In order to underpin the housing market, President Obama’s 2009 Stimulus Package provides an $8,000 tax credit to first- time home buyers. This is inadequate since many of those who qualify do not currently have the resources to make the purchase, nor do they have the tax liability to fully benefit from the credit. Instead, the Obama
Administration’s 2009-10 budget proposal should provide a tax credit of $15,000 for all 2009 home purchases, not just first-time buys. Additionally, President Obama’s 2009-10 budget propsal has proposed a reduction in the mortgage interest rate deduction for families earning more than $250,000. This will have a negative impact on housing sales, prices, and ultimately the health of the banking industry.
The Obama Administration’s plan to cut agricultural support payments will more directly affect RM banks. The plan that has been advanced calls for limiting agriculture support payments for farms with revenues greater than $500,000. This ceiling would snare about half of the farms in Nebraska, for example, and place even more downward pressure on farm land prices, and ultimately the profitability of RM banks. During these fragile economic times, this is no time to be placing additional financial stress on rural communities dependent on farm income.
As an additional step to improve the banking industry, “mark to market” accounting should be abandoned for two years. In 2007, the Securities and Exchange Commission (SEC) implemented what was termed “mark to market” requiring that financial institutions mark or write down assets to market value. This has meant that, due to the inability to price or value packages of mortgages on their balance sheets, these institutions have marked them to practically zero in some cases under the overly restrictive assumption that they will collect nothing from the disposition of these assets. This is clearly draconian and reduces the ability of the financial institutions to make loans thus further weakening the economy.
As indicated by Dale Torpey, president of Federation Bank in Washington, Iowa in our February 2009 survey, “Land prices have leveled off and in some instances have dropped slightly. If some of the farmers can’t renegotiate their rent prices we could be looking at losing some of them in 2010.” Thus, banks, even in those in agriculturally dependent parts of the nation, likely face challenges for 2009 that call for greater attention.
Ernie Goss
Tuesday, April 14, 2009
Obama and Stock Market Commentary [stop now please]
Today Obama came out with another downbeat message on the economy. “By no means are we out of the woods,” he said. Yet in the latest 30% run up, he had more of a “glass half full” mentality. And earlier in his presidency, many thought he was far too negative about the economy, adding negative momentum to our already beaten down markets. Does anyone else feel like he isn’t quite sure which side to take? His advisers have yet to find the right balance between being optimistic but not too optimistic to push to markets up 30% in weeks [where we are now] and being pessimistic but not too pessimistic to push the markets down 30% [where we were a few months back]. His comments up to this point have only added momentum (volatility) to market movements in both directions. So until they figure this balance out, how about taking a neutral position and letting the markets work themselves out? The president has many responsibilities, but lets’ leave stock market commentary up to stock market participants.
Thursday, March 19, 2009
AIG Execs should keep their bonuses....what?
I was at a kindergarten class yesterday listening to kids talk about what they wanted to be when they grew up. One child surprised me by saying he wanted to work in Credit Default Swap Risk Management at AIG. I was thoroughly surprised. In the network of people I know, I’m not aware of anyone with even a hint of interest in working at AIG. The little tike surprised me. [JOKE]
Then I started to wonder, why would anyone want to work for AIG? One might expect the reason AIG execs continue to plug away is because they feel personally responsible for losing billions of dollars. Yet in the era of mis-aligned pay structures and leaders refusing to take responsibility for any of our economic problems (i.e. Bush, Greenspan, numerous CEOs), I doubt this is the case.
It certainly isn’t a feel good job either. And your neighbors wouldn’t be impressed. Actually they may downright despise you for working at AIG. Now that we have seemingly donated $200 billion to the company (without that warm-fuzzy feeling you usually get from charity work), every AIG exec’s move is under intense public scrutiny. This certainly doesn’t make the job any easier. In summation, I could only think of 1 reason why I would work for AIG—money. And lots of it.
We shouldn’t force AIG to reduce wages (including bonuses) below market rates. When the ultimate motivating factor [money] is taken away, the talented ones will flee the company. Few people understand the intricacies of AIG’s business, and without high pay, why would anyone who does understand them consider working there, especially when they can find work elsewhere for higher pay and less scrutiny? If all the talented and intelligent people leave for more pay and less scrutiny, I would argue that taxpayers will be on the hook for even more money. Time will tell.
Then I started to wonder, why would anyone want to work for AIG? One might expect the reason AIG execs continue to plug away is because they feel personally responsible for losing billions of dollars. Yet in the era of mis-aligned pay structures and leaders refusing to take responsibility for any of our economic problems (i.e. Bush, Greenspan, numerous CEOs), I doubt this is the case.
It certainly isn’t a feel good job either. And your neighbors wouldn’t be impressed. Actually they may downright despise you for working at AIG. Now that we have seemingly donated $200 billion to the company (without that warm-fuzzy feeling you usually get from charity work), every AIG exec’s move is under intense public scrutiny. This certainly doesn’t make the job any easier. In summation, I could only think of 1 reason why I would work for AIG—money. And lots of it.
We shouldn’t force AIG to reduce wages (including bonuses) below market rates. When the ultimate motivating factor [money] is taken away, the talented ones will flee the company. Few people understand the intricacies of AIG’s business, and without high pay, why would anyone who does understand them consider working there, especially when they can find work elsewhere for higher pay and less scrutiny? If all the talented and intelligent people leave for more pay and less scrutiny, I would argue that taxpayers will be on the hook for even more money. Time will tell.
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