The Exit Window Will Be Small

With so much going on in the world – China, Puerto Rico, Greece, all of Europe in a crisis of some sort or another – it can make your head spin. How do you make sense out of all of this?

While this crisis is playing out differently in different locations it all is rooted in the same policy – cheap or free credit. The world is awash in liquidity while facing the persistent threat of running out of liquidity. Why is this?

Due to laws passed in the 1990’s, banks and other institutions no longer make money in the manner that they traditionally made money. In essence they have been allowed to become giant hedge funds. As such where a bank used to make money by lending you money and then counting on you paying that money back plus interest, they can now monetize that transaction in entirely different ways that means that you paying back the loan is secondary to the bank making the loan in the first place.

This has resulted in countries, states, territories, counties, cities, corporations and individuals being loaned money that there is no reasonable expectation of repayment.

Another part of this equation is the voters and political constituents who want nice things. Cheap or free credit allowed governments to borrow and borrow and borrow to provide the voters all sorts of benefits and nice things with cheap or free credit.

Yet another part of this equation is the easy money to be made in stock markets the world over. From a corporate perspective developing new products is risky, expensive and time consuming. It is easier to simply borrow money to buy your own stock, therefor driving the price of your own stock higher and providing profit and dividends to your shareholders than it is to develop a new product or service.

For some perspective, the world-wide equities markets are leveraged at about 30:1. That means 30 out of every 31 dollars invested in stock markets world-wide is a borrowed dollar.

Due to cheap and free credit, the world is awash in debt. It is becoming increasingly obvious that many of the entities that took on this debt cannot pay it back. We are seeing this first in Greece and Puerto Rico for a very good reason – they cannot print money and they cannot manipulate a currency to make paying that debt look more favorable.

While the math here is immutable there is another factor to consider – that is psychology and emotion. Debt that cannot be paid back will eventually be defaulted on. When people believe that the debt cannot be paid back for a particular entity that holds that debt they will respond in what they feel is their best interest. We saw this in the Puerto Rican default.

Once people believe that the debt cannot be paid back and that there are actual consequences for default they will generally behave in a way that accelerates that process. That holds true for countries, states, cities, corporations and individuals. What is more there is a factor generally called ‘contagion’. For example it is likely that a default in Greece will cause people in Portugal to rethink keeping their money in Portuguese banks because Portugal is in a worse debt position than Greece is. This would accelerate the economic difficulties in Portugal.

The other part of this is collapsing dominos. For example we all know the Greek banking system is in collapse – but Spain lent money to Greece. A Greek default is likely to cause a very weak Spanish banking system to get even weaker. Italy lent money to Spain and Greece, France lent money to Italy, Spain and Greece, so on and so forth. That is how it domino’s.

Keep your eyes open. We are all connected now and the real thing you need to watch for with defaulting debt is what that debt was used as collateral for and the counter party failures associated with that collateral. Cascading counter party failure is what could cause this to spin out of control very quickly.

The exit window will be very small if that were to occur.

The Greed Of The Left

Find the most virulent anti-capitalist, left-wing socialist person you can and then check and see if they ever made any of the following statements:


“I really hope the value of my house drops by half.”

“I really hope that when I retire my 401(k) is worth a quarter of what it is now.”

“I really hope the government slashes my benefits.”


Of course they have never made a statement like that. The anti-capitalist, left-wing socialist believes that greed is something someone else is plagued by. It does not apply to them!


Reality is, they want the value of what they own to rise and they want their income to rise just like everyone else. They just want to use the power of government to make sure no one doing better than they are will have values and incomes rise.


This is a good example of the nonsense in our culture and our politics.


“Anyone who has more than me is greedy, anyone who has less than I do is lazy and this government needs to remedy this right now!”


Pretty much it.


Do you want prices to drop, quality to improve and value to rise? We have an actual solution to that. The solution is competition. We see that everyday with companies like Airbnb, Uber and Netflix. They devised new ways to compete in established markets and they have dropped the cost, raised the quality and provided value to their investors.


The more that competition is interfered with then the higher the prices, the lower the quality and the less the value. Taxes, regulation, licensing and government mandates are all methods which inhibit competition. Of course these are exactly the methods the statist embrace. By forcing you to pay more for less they argue that they are making it ‘fair’. In reality they are making nothing ‘fair’, they are simply using force to transfer your money into the pockets of their friends.


If you stand back a bit and look at it, you have to laugh at those who decry the ‘greed’ of capitalism while voting themselves more money that other people earned. Treat them as the greedy hypocrites that they are.

Income Mobility

In yesterdays post I discussed income disparity. To review some quick numbers: the last nine years we have seen the bottom 93% of the people lose 9% of their wages and 37% of their net wealth while we have increased the number of billionaires and those billionaires have collectively doubled their net wealth. We also discussed how those considered ‘middle class’ have lost about 30% of their net wealth the last nine years while those considered ‘poor’ have lost 45% of their net wealth over that period of time.

In todays post I will discuss income mobility, which is the ability to move up (or down) within the economic tiers.

If you were to divide the people of the United States into three tiers; an upper third, middle third, and lower third sorted by income and wealth then you would find that historically a majority of Americans would find themselves in each tier at some point in their life however brief the stay was.

This is one of the things that made the United States the United States. If you were born poor there is the opportunity to escape poverty and if you are born rich there is no guarantee you will stay rich. This is a characteristic of a free market.

In 2008 we had 28 million people on food stamps, now it is 46 million. In 2008 we had 75 million people not engaged in the world force, today we have 94 million people not engaged in the work force. In 2008 we had 92 million full time private sector jobs, today we have 84 million full time private sector jobs. Of the 50 million people working part time, the average annual income is $6000 a year and one third of those part time workers make $2000 a year or less. The amount of money Federal regulations cost a family, on average, has gone from $22,000 a year to $29,000 a year, there are now (for the first time ever) more businesses going out of business in the United States than into business in the United States. The last nine years we have had $15trillion of net wealth disappear from the middle class and we have had $15trillion in net wealth added to the top 7%. The zero interest rate policy, not allowing interest rates to go to a market rate, of necessity requires and is central planning.

The farther we have moved from a free market to a centrally planned economy the greater the chances of moving down a tier but the less chance one has to move up a tier.

Historically what it took to move from the lower third to the middle third was education. We have certainly been creating a lot of college graduates but these new graduates have been harder hit by the decline in full time private sector jobs than any other group. The number of college graduates working minimum wage jobs is nearly 71 percent higher than it was in 2003, according to the Bureau of Labor Statistics. Those with Masters degrees are now three times more likely to be working a minimum wage job than in 2006 according to the Federal government. A recent study shows that half of all college graduates are working jobs that do not require a degree, 38% are working jobs that do not require a high school diploma. What is more, college graduates have an average of $27,000 in student debt when they graduate.

A college graduate is fifteen times more likely to be driving a taxi today than in 1970.

These numbers are not showing any improvement as time goes along.

A college degree is no longer a ticket from the lower third to the middle third.

Historically what was required to move from the middle third to the top third of income earners was starting a business. According to Gallup, “We are behind in starting new firms per capita, and this is our single most serious economic problem. Yet it seems like a secret. You never see it mentioned in the media, nor hear from a politician that, for the first time in 35 years, American business deaths now outnumber business births. The U.S. Census Bureau reports that the total number of new business startups and business closures per year — the birth and death rates of American companies — have crossed for the first time since the measurement began. I am referring to employer businesses, those with one or more employees, the real engines of economic growth. Four hundred thousand new businesses are being born annually nationwide, while 470,000 per year are dying.”

The lack of business start up is directly tied to the lack of mobility from the middle tier to the top tier. The lack of business start up, and the lack of jobs those businesses would provide, is directly tied to the lack of mobility from the lower tier to the middle tier.

As I have said many times, what you subsidize you get more of and what you tax and regulate you get less of. We will subsidize people to be in that lower tier. We will tax and regulate business and hiring. The net effect of that policy is more people in the lower tier and fewer people in the middle and top tier.

Not rocket science.

There Is A Trend Here

One of the most written about topics you will see is income disparity, which is the gap or difference between the rich and the poor.

Let me explain when this does and does not matter; when everyone has income and wealth that is increasing it matters very little. In other words when the economy is growing top to bottom it is normal to expect some to increase their wages and wealth at a more rapid rate than others do. It is impossible not to have that situation occur.

The key there is that the economy is growing top to bottom.

Income disparity matters quite a bit when the economy is only growing for those at the top and when those not at the top are losing income and wealth.

The last nine years we have seen the bottom 93% lose 9% of their wages and 37% of their net wealth while we have increased the number of billionaires and those billionaires have collectively doubled their net wealth.

In this situation income disparity matters quite a bit because it is not a matter of some being more adept at taking advantage of a growing economy but it is a matter of a wealth transfer due to government policies. This is a problem.

Within those numbers things are not equal. Those considered ‘middle class’ have lost about 30% of their net wealth the last seven years while those considered ‘poor’ have lost 45% of their net wealth over that period of time.

This problem is not new but it is accelerating.  In 1971 the ‘middle class’ included 61% of all adults, now it is about 49% of all adults.  The lowest income tier in 1971 included 25% of all adults and it is now 29% of all adults and a majority of children.

The middle class now takes in 45% of all income, in 1971 it was 62%.

The good news from 1971 until 2008 was that many more people were moving from the middle class in to the upper economic tier than were sliding out of the middle class into poverty. Unfortunately the last nine years that trend has reversed and more people formerly in the middle class are now becoming poor than are becoming wealthy.

There is a trend here. That trend reflects the effect of greater taxation, regulation, oppressive policies and government central planning and control of our lives. It is now much more common to move from middle class to poor than it is to move from middle class to rich in the United States and that is something new.