Archives For May 2010

As you can see from the following graphic, this May’s return ranks as the 5th worst in the history of the S&P 500 Index and the worst since 1962. Not a good start for the summer.

I have a pretty cool follow-up to this post coming. Stay tuned…

I’m not posting this to discuss her remarks about the rich and taxes. Rather, I want to discuss the following comment made by hillary in this video:

“Brazil has the highest tax-to-GDP rate in the Western Hemisphere and guess what — they’re growing like crazy,” Clinton said. “And the rich are getting richer, but they’re pulling people out of poverty.”

Hillary makes it sound as though higher taxes are the REASON for Brazil’s booming economy. I do know that when an economy is booming, higher taxes are easier to stomach. This reminds me of a time when a variable annuity sales rep came to our office during the late 90s when the market was booming. He was talking about how great his VA was and that people wouldn’t balk at his VA’s very high expense ratio because they would be getting a very high returns. A 2.5% expense ratio is nothing when you’re getting a 24% return. But, when the market turns sour, that 2.5% expense ratio is very hard to accept.

I also know that it’s very hard to kickstart an economy with higher taxes. I’m not familiar enough with Brazil to be able to discuss their economy. I’m hoping one of you guys know something about Brazil. Anyone want to tackle this one?

This is Awesome…

May 26, 2010

Saw this over on Greg Mankiw‘s blog. Pretty funny but it makes you think:

Here is the definition of deflation according the Barron’s Finance and Investment Handbook* (Fourth Edition):

“…decline in the prices of goods and services. Deflation is the reverse of inflation; it should not be confused with disinflation, which is the slowing down in the rate of price increases. Generally, the economic effects of deflation are the opposite of those produced by inflation, with two notable exceptions: (1) prices that increase with inflation do not necessarily decrease with deflation—union wage rates, for example; (2) while inflation may or may not stimulate output and employment, marked deflation has always affected both negatively.”

Now here is what Peter and Andrew Schiff have to say regarding deflation on pages 59 – 61 of How an Economy Grows and Why It Crashes*:

“There is no greater propaganda victory in economics today than the complete vilification of deflation (and the relative acceptance of inflation). As far as economists and politicians are concerned, deflation, which is defined as the overall decline of prices over time, is the economic equivalent of the bubonic plague. As the slightest whiff of deflation, governments will typically enact policies to push prices back up.

“But what’s wrong with falling prices? Habituated as we have become to steadily rising prices, it would shock just about everyone to know that prices in the United States fell steadily for almost 150 years…from the late 1700s all the way to 1913! But during that time we experienced some of the fastest economic growth in the history of the planet. This was made possible for the precise reasons described in this chapter: increased efficiency. When combined with a stable supply of money (as existed in the United States until the establishment of the Federal Reserve), efficiency will push prices down.

“The vastly increased productivity of the industrial revolution made it possible for working-class people to afford all kinds of goods, like upholstered furniture, tailored clothing, plumbing, and wheeled transportation, that were previously available to the rich. Deflation meant that $100 saved in 1850 could buy many more goods and services in 1880. Why is this not a good thing?”

He goes on…

“Yet despite the obvious benefits of lower prices, we still fear deflation. We are told that if prices were to fall, people would stop buying, companies would stop spending, workers would lose their jobs, and we would all return to the economic dark ages.”

One last thing he says and then I’ll move on:

“Modern economists mistakenly assume that spending drives growth, and that when deflation is present, people tend to defer purchases (to allow prices to fall); and when they do spend, the diminished price makes less of an ecomonic impact. This is absurd.

“As we’ve said before, it’s not the spending that means anything. It’s the production that counts!

“People do not need to be persuaded to spend. Given that human demand is essentially endless, if people don’t want something there is likely a good reason. Either the pruduct is no good or the consumer simply cannot afford to buy it. Either way, the act of deferring a purchase, or saving instead of spending, is made for rational reasons and tends to benefit the economy as a whole.”

This most certainly goes against what we read every day in the newspapers and hear on the news. Rising prices seem to be the norm.

I pulled out my old college macroeconomics text book and did a little more reading on deflation. The text book is pretty technical but the author, Greg Mankiw, mentions that deflation is really tough on debtors. This makes sense since periods of inflation tend to help debtors. I’ll give it to you in his words:

“If a debtor owes a creditor $1,000, then the real amount of this debt is $1,000/P, where P is the price level. A fall in th eprice level raises the real amount of this debt—the amount of purchasing power the debtor must repay the creditor. Therefore, an unexpected deflation enriches creditors and impoverishes debtors.”

I think in a perfect world, Schiff’s thoughts make sense. But, since we are a nation of debtors, deflation would be a bad thing for our economy—at least initially.

Thoughts? I’m not an economist so please feel free to add to the discussion.

*Affiliate Link

Dave Ramsey has a program where he refers people to Endorsed Local Providers. An ELP is someone who has submitted an application to get on his list. I’m not sure how stringent the application process is. However, I have read that applicants must pay a fee to get on Dave’s list.

To all us Dave Ramsey skeptics, that brings up a question:

Is it a conflict of interest to pay to become one of Dave’s Endorsed Local Providers?

I say it is UNLESS they inform prospects that they did in fact pay a fee to be on the list.

I first learned of this in this article that Dylan posted in the comments section of this post.

Anyway, what are your thoughts?

Ouch…

The total return for the S&P 500 Index for the month of May (through May 20th) is -9.54%! If it stands for the rest of the month, it will go down as the 4th worst May in the history of the index. In fact, it will be the worst May since 1940.

The index is also down 3.17% for the year.

1. you reach into the 12-pack box for a Coke and it’s empty…

2. you see a glass full of orange juice sitting on the counter that one of the kids poured (to the brim) but didn’t bother to drink…

3. you find your tools out in the front yard (usually AFTER a good rain)…

4. most of your tools are rusty (see number 3)…

5. you find sucker sticks stuck to the carpet in the car…

6. you lift the toilet lid to find a nice present that never got flushed…

7. you lift the toilet lid to find it full of toilet paper because IT COULDN’T FLUSH…

8. you find CLEAN clothes in the dirty clothes hamper because they were too lazy to put them up…

9. you find your little tree (that you’ve been nursing along) without any leaves because your daughter picked them all off so that she could make a “salad.”

10. your computer keyboard smells like peanut butter…

11. there’s a nice long scratch down the side of your car that JUST HAPPENS to line up with bicycle handlebars…

12. you hear someone running on your roof and look outside just in time to see them jumping to the ground…

13. your son comes to you in tears, holding his arm, because he fell while jumping off a ramp in INLINE SKATES!…

14. you catch one of your kids trying to talk the other kid into holding onto the garage door as he’s about to push the “up” button…

15. one of your sons nearly cracks his head open because he tried to stand on a basketball…

I’m sure there are more but my head is starting to hurt…