“The Great Depression of Debt” is a hardcover updated edition of “The Second Great Depression, Starting 2007, Ending 2020.” “The Great Depression of Debt” can be purchased at most bookstores or at Amazon.com: http://www.amazon.com/Great-Depression-Debt-Survival-Techniques/dp/0470423714
WHY THE ECONOMY FEELS WORSE TO WORKERS THAN 9.1% UNEMPLOYMENT
The Official unemployment rate is 9.1%. The broader U-6 unemployment rate is 16.5%. Both of those numbers are understated because since the year 2000, 3.1% of the population (which equates to a 4.7% reduction in the workforce) has dropped completely out of the workforce for various reasons. So, realistically, these two numbers should be 13.8% and 21.2%.
But an additional sinister change has been happening that gets far less publicity than a small change in unemployment. Companies have been reducing real wages dramatically! Per a recent article in The NY Times (http://www.nytimes.com/2011/10/10/us/recession-officially-over-us-incomes-kept-falling.html), when I correct for any change in workers per household, real individual wages have fallen 4.9% in the last 4 years (since the start of the recession). In fact, the rate of real wage decline has actually increased since the recession was declared officially over!
Since from a workers’ standpoint these reductions in real wages have about the same overall effect on their economy as an equivalent increase in unemployment, let’s do a pretend. Imagine the attention this would be getting if the U-6 unemployment number was 25.3%, which is the above number plus the effect of the 4.9% real wage reduction. This would be approaching Great Depression type numbers! This is what workers sense and what their purchasing power actually feels like! That is why we are starting to see widespread unrest, as is being expressed by the Occupy Wall Street movement.
Wall Street has not felt this effect because companies actually gain by real wages falling. And sourcing to other countries has enabled companies to keep profits high despite the negative effect on current and former employees.
WHERE ARE CONSUMERS GETTING THEIR SPENDING MONEY?
Americans spent 0.6 percent more in September, three times the increase from the previous month. So where are they getting their money if real wages are dropping? They financed the gains from savings, dropping the savings rate down to 3.6%, the lowest level since Aug 2008, the start of the recession. (http://ycharts.com/indicators/personal_saving_rate#startDate=10/31/2001&endDate=9/30/2011&zoom=). You can see the recent trend in savings rate: June 5.3%, July 4.5%, Aug 4.1%, Sep 3.6%. At this rate, we will be down to the 2005 low of 0.8% by February, 2012.
This sounds like the same kind of scenario that caused me to write my first book on the coming Depression. There is a brick wall that consumers are going to hit on drawing down their savings rate to support their lifestyle. And this time there is no housing ATM to go to for additional funds. Consumers will literally have to go into existing savings or reduce their lifestyle.
I believe that, given all the concerns of having enough to retire or pay their kids’ way to college, that consumers will cut down on their spending, further slowing the economy. At that point companies will start feeling the effect on their profits, and by the middle of 2012 (at the latest) the market will start to fall. Of course, the Fed may come to the rescue again with QE?. But each one of these Fed “rescues” becomes less and less effective; so any positive effect of the Fed is likely to be short-lived.
We now have two economies. The economy sensed by Wall Street is still doing reasonably well, with corporate profits holding their own or rising. The other economy is that felt by the middle class and by the poor. Their alternative economy is really sick. But right now, the Wall Street economy is driving Congressional actions.
EDITORIAL ON THE OCCUPY WALL STREET MOVEMENT
I have visited several times with our local contingent of this protest. I took along my dogs, including a beautiful 120 lb. Newfoundland which attracted a lot of people and enabled a lot of very casual conversation. Dogs do that! Here is what I found on these visits. The protestors included a broad mix of people that seemed to represent overall society, with the exception that probably few Republicans were present. Some of the people were educated, some not. Age was diverse, but with the young being predominately the 24 hour people. Some protestors were driven by personal needs (they couldn’t get a job); others were driven by some sense that there was a major problem with our society, with disproportionate wealth among the favored few being identified as a key component. Some were there just because that is where the action was. But the majority had some defined motivation.
Most of the people did not seem to be naïve. They knew that this protest must continue for a long time to have a lasting effect; nor did the protestors pretend to have a simple solution to our economic problems. They just felt that with all the lobbyists and money influencing those in government, the ordinary people had not had a voice. They just wanted to be heard and hopefully have an effect.
The protesters are going to have a hard time surviving the winter, and those against this movement are betting on this. But I sense that this movement will survive and affect the next elections. Even without having a specific agenda, they are forcing politicians to make some sort of statement as to the protestors’ concerns. This is being contrasted by several members of Congress, and some Republican candidates, saying that the solution to our problems is to tax the poor and middle class even more so “they pay their fair share”! Reading virtually every public poll, these politicians and presidential candidates are out of touch with reality and suicidal as far as their political aspirations.
I encourage every reader of this blog to go and spend some time with these protestors. Even if you don’t believe in what they are protesting, it is hard to walk away without the feeling that this is a true democratic expression of beliefs; without big money, lobbyists, and other power groups dominating. How refreshing!
THE STOCK MARKET NUMBERS
The Price/Dividend (P/D) ratio for the S&P 500 is now 50.8. The current P/D of 50.8 can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market. At current dividends, the market will have to drop 49% to get down to its median P/D and drop 66% to get to my own entry target P/D.
Do not interpret the P/D ratio as a predictor of the direction of the economy. It is a historical unemotional measure that I believe reflects whether the market is overpriced. The P/D ratio can stay very high for many years with little rationale, as it did in the nineties.
Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.
As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information. Intelligent people can, and do, disagree.
October 31, 2011 at 3:47 am |
Warren–
You might be interested in looking at the data this UC Santa Cruz professor has compiled:
http://sociology.ucsc.edu/whorulesamerica/power/wealth.html
http://sociology.ucsc.edu/whorulesamerica/power/investment_manager.html
Thanks again for the fascinating analysis!
-Greg
October 31, 2011 at 6:48 pm |
Hi Warren,
I usually enjoy your blog, but the NYT references explicitly says
“Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent”
and references the 9.8 % for 4 years. It reflects the US drop in employment, which is larger than your official unemployment rate.
But real wages per job is constant. Soo, US AD (aggregate demand) is 8 % under long term trend (which in my view was credit inflated about 4 % prior crisis), but not more.
One more thing, I originally came for here today, in order to make good on a promised analysis. I looked on the pre Great Depression data on private credit in the US and elsewhere. Problem at that time is that a large number of households was still farms, and that mixes “commercial” with “consumer” credit, in the sense of today. Sooo, the problem is best described by the Barry Eichengreen 2003 paper “BIS Working Papers No 137 The Great Depression as a
credit boom gone wrong”.
That makes all the 3 major events I looked on in detail: US Great Depression 1 + 2 and Japanese decompression after 1990, which you took for your first book,
credit bubbles,
popped violently in the US, and still slowly decompressing in Japan.
In all cases it was accompanied with public debt increases as well (little for the first US depression), making it difficult to impossible to shift the public burden on private households, but especially pronounced for many of the european countries nowadays.
Solution is simple but brutal:
keep rates near zero (bad for retirees),
raise taxes on everybody, and balance the budget
If there is a social minimum payment, like in all northern european countries, long years of high unemployment during structural change are not the gruel end of the world.
In northern europe about one third each dropped out of the workforce permanently, got a real job finally, or started with substantially lower wages (“precarious” as we say, or “working poor” in the US)
October 31, 2011 at 7:45 pm |
Hi Warren and all:
Thanks for the update.
My calculation is that a 9.9% decrase in real income at about 60% employment participation rate adds about 5.4% to the real unemployment number.
Which puts the true U-6 at about 27%.
In any case this is a depression theritory.
“This sucker will go down”…….:):):):):):):)
October 31, 2011 at 10:42 pm |
genauer says, regards the 9.8 % for 4 years: “It reflects the US drop in employment, which is larger than your official unemployment rate. But real wages per job is constant.”
Go to the graph at the end of this site:
http://www.sentierresearch.com/pressreleases/SentierResearch_PressRelease_October_10_2011.pdf
Note how the real median income has dropped dramatically even when the unemployment has been rather ‘steady” between 9% and 10%. Note that these are medians, not averages, so these numbers are not dramatically influenced by those people losing their jobs except to show that the remaining jobs are lower paying. This is not evidenced in the number of people unemployed. It reflects that the remaining jobs are lower paying and thus affecting the purchasing power of the workers. So this is over and above the effect of the unemployment level itself.
The graph does not explain why the remaining jobs are lower paying. It could be that high paid manufacturing jobs are being replaced by low paying service jobs. Or that raises on existing jobs are not keeping up with inflation. Or most likely, some combination of both! In any case, I stand by my numbers.
You also say, “I usually enjoy your blog, but the NYT references explicitly says…”
I don’t do this blog for other’s enjoyment. I do it to share my observations on the economy with those who are interested, and it really doesn’t matter to me if others “enjoy it.” I will be happy to give you a full refund!
October 31, 2011 at 11:35 pm |
Peter Says: “My calculation is that a 9.9% decrease in real income at about 60% employment participation rate adds about 5.4% to the real unemployment number.
Which puts the true U-6 at about 27%.”
Let’s walk through the numbers. Government U-6 unemployment is 16.5%. That means that 83.5% are employed, or 835 out of 1000 potential workers. If the wages on those jobs go down 9.9%, that 9.9% reduction goes against the 835 jobs. That is the same equivalent total wage loss as eliminating 9.9% of those 835 jobs, which is equivalent of eliminating 83 jobs. So, rather than 165 people without jobs (1000 – 835), it would be 248 people without jobs (165 + 83). 248/1000 = 24.8%. Adding in the 4.7% of the potential workforce who have dropped out, we get 24.8% + 4.7% = 29.5%
So you are correct in that I overstated the resultant U-6 number when I said that it would be 31.1%. The correct U-6 equivalent number would be 29.5%. Good catch! I will change it.
November 1, 2011 at 3:06 am |
Hi Warren:
I hope you understand that I am not trying to be a “smart” guy!!!
I am a big fan of your SIX-sigma based analysis as at the end all that matters is numbers.
Europe and their EU Comissars will be the first to find that the hard way…….everyone else will follow shortly there after.
November 1, 2011 at 10:00 am |
Sorry,
I should have been more clear.
Your last source also cites income per HOUSEHOLD.
Assuming that the number of households is roughly growing with population (1 % per year, in good years household size got a little smaller),
if the number of jobs (http://data.bls.gov/timeseries/CES0000000001?output_view=net_1mth) is dropping, by now integral 5 %
jobs popul employment
100 100 2006
101.1 101 1.001 2007
97.5 102 0.956 2008
92.4 103 0.897 2009
93.4 104 0.898 2010
94.4 105 0.899 2011
this means that there are 10 % less jobs per capita or per household.
Even with the real wage per JOB staying constant (http://data.bls.gov/timeseries/CES0500000003?output_view=net_1mth)
the number of jobs per household dropped,
and therefore the median hosuehold income.
Why was I interested in this ? The Austrian school argument was,
if their is a crisis, the cost of labor (errrm, our wages) will fall, making it more interesting to hire people, and things will be fine ….
Errrm, dropping wages happen in our real world only after many years, and without social minimum payments, like in the US, that reflects a very gruel situation.
With the most jobs lost until mid 2009, and unemployment benefits not too generous, the question is, why this shows up in household income numbers only now, 2 years later.
With things like that some folks get some strange feeling about US Statistics. They also found a 2 % error in the GDP statistics a few months ago.
Well, in my “disciplined” Germany they also discovered 55 billion Euro more in a state owned bank over the weekend.
For these numbers with “head of household working”, if the employment chance of his wife is dropping by 10 %, then the household income is expected to fall by half of that, 5 %, roughly, makes sense.
I hope this is more understandable now.
November 1, 2011 at 3:40 pm |
Hi Warren,
I always enjoy your commentary…thanks for putting it out there.
I have attended several ows rallies, spoken to many people, and find your analysis dead on. Though people attend for many reasons, all of these seem to fall under the banner of growing income inequality and the capture of our political system by corporations and the elite. With any level of objective analysis, this should be pretty clear. The mainstream media either doesn’t want to provide the in-depth analysis to understand this, or they are intentionally obfuscating under direction of their corporate masters. Being congenitally averse to “conspiracy theories”, I find myself amazed to be writing these words, but it is hard to draw any other conclusion. Our government and our media have been captured, at least on some level, and the people are getting fed up.
Cheers,
Michael
November 1, 2011 at 4:28 pm |
Hi Warren–
Your analysis is spot on, as usual.
I wanted to mention a dialogue I had with one of the writers at Zacks– actually, one of the head analysts there. I’m not sure if you’re familiar with Zacks, but they provide stock and market analysis. I have learned some good things from them over the years. Anyway, his recent analysis was that he was wrong– he had called this a bear market in the past, but now has decided that there is actually no bear market– and we will continue in a muddle along economy since the GDP is now growing at 2.5% and doubling quarter to quarter and corporate profits are up by the most recent numbers. The danger in Europe has been averted as well. Therefore, although unemployment is high, corporate profits can continue to grow because GDP is growing. These will grow slowly— 0-3%– but will grow. Therefore, it is time to invest in the market.
I was curious about this: how could GDP be growing if so many people aren’t working? Doesn’t GDP grow when people BUY stuff? Who is doing the buying if so many people are out of work?
His answer to me was “The GDP is growing because IT IS.” This is not an answer to me.
What do you think? Why is the GDP growing? Is it because of the drop in the savings rate? Is there some other reason? Is it foreign sales? If it IS because of savings rate, where is the limit? I mean, we dropped below 0.8% in 2005 and the world didn’t implode— yet in 2008 savings rates were 3.6% at the start of the recession, four times as high. At what savings rate will the party come to an end?
The Zacks analyst was also not concerned about the Occupy Wall Street movement. He said “most of their concerns are not legitimate.”
Basically, though, I want to know what are the main drivers of GDP growth.
Here’s the website:
http://www.zacks.com/stock/news/63543/I+Was+Wrong
http://www.zacks.com/stock/news/63543/I+Was+Wrong
-Greg
November 1, 2011 at 4:56 pm |
genauer Says: “Your last source also cites income per HOUSEHOLD. Assuming that the number of households is roughly growing with population (1 % per year, in good years household size got a little smaller)…the number of jobs per household dropped, and therefore the median household income.”
Okay, you have a point. The best I can find from census data (some data is only available through 2010), the number of employed in Dec 2007 was 146,272,000 and the number of households was 116,783,000. That makes the number of employed persons per household 1.25. In June 2011, the number of employed was 139,334,000 and the number of households was 117,538,000. That makes the number of employed per household 1.19. So, you are correct, the number of employed per household has gone down 5%. So, half the 9.9% loss of wages per household was due to less people working per household, which presumably was already accounted for in either the U-6 unemployment numbers or in the percent of people who are no longer in the work force. So my correction for individual wage loss should be only 4.9%, not 9.9%. I will correct that, thanks.
As for the remaining 4.9% correction, there is another study that shows that people who lost their jobs but then found another job, on the average, took a 20% cut in pay. That would account for part of the wage loss. Another thing to note is that the sites you noted were not inflation adjusted; and they were averages not medians. When you adjust the numbers for inflation they do indeed show that hourly wages have been constant. But doesn’t mean that the wages per job have been constant! Low paying jobs have been hit by lay offs more than higher paying jobs. That would make you normally expect that the average pay of the remaining jobs would be higher. Since this is not so it must mean that any raises on remaining jobs are not keeping up with inflation. In fact, the most recent government numbers (http://www.bls.gov/news.release/pdf/realer.pdf) show that real average hourly wages fell 1.9% in the last year.
You also ask, “With the most jobs lost until mid 2009, and unemployment benefits not too generous, the question is, why this shows up in household income numbers only now, 2 years later.” Again, as I noted above, this is consistent that lost jobs have been replaced by lower paying jobs, and wage increases on current jobs are not keeping up with inflation. Neither of these involves reducing the number of jobs.
November 1, 2011 at 5:12 pm |
Greg,
you asked Warren for comment, and it is his blog.
So it might seem to be somewhat unpolite, when I comment now.
But “The danger in Europe has been averted as well” has crashed in the last 2 days. This will become a really incredible mess in the next weeks, Greek doing a really hard bankruptcy, Portugal maybe following. What I realized in the last few weeks, most southern europe is still in a mindset, growth history like the US in the 1960ties, many years of huge gains (6 %) in real consumption, due to their catching up with the more mature US and DE. And now you tell them, cut 20 % and stable afterwards, best case. This would be as they had just 10 years ago. Rationally, would that be the end of the world ? But to except this emotionally, takes years.
There will be riots, dead people, and huge frustration for many years. People are blaming everybody else, but themselves, and their overconsumption, the European Union in general, Germany specific, the bankers, the hedge funds, the rich in general.
Just avoiding war is a result in the upper half of my expectations.
With respect to “conspiracy theories” I tend much more to the “general stupidity” interpretation. Selling your news outlet by appealing to the general stereotypes is much more profitable than telling people, what they dont want to hear, things like that:
In Germany, over the years, people got used to stable or slightly falling wages, it doesnt “depress” them anymore.
People are used to “balanced budget comes first” and go on with their lives. Just uttering “I dont like it, give me my raise, a job”, like OWS, is understandable, but it doesnt contribute to a solution.
And the poor, high tax paying Germans will not bail out rich tax cheaters in the south, no matter what South park “Timmie” Geithner wants. Personal wealth in Italy is higher than in Germany. Let them tax their own people.
November 1, 2011 at 6:01 pm |
Hi Genauer–
Thanks for the input. Not impolite at all!
I have a friend from Greece who I went to grad school with here in the US. We had a long talk about a year ago, and he blamed his fellow Greeks for the problems– the “Greek attitude” he called it. He said that when he moved back to Greece after his PhD, he was looking for a job. Many of his friends from high school worked for the government as did his father, but he didn’t want to work for the government. His friends couldn’t understand this. He said the way it works in the Greek government is, you do as little work as possible and collect as much as possible in benefits. It is a sweet deal, and his friends had no idea why, given his PhD, he wouldn’t want in on it. He could gave gotten a job in government easily. He gave me the story of his father, who, I recall, worked for some government department, maybe the post office (I can’t recall exactly.) He said that when his father first started working there, he was very motivated and would get through his weekly work in a day and half. This caused him all kinds of troubles with both his superiors and his co-workers. His co-workers looked bad when he did all his work in so short a time period and they didn’t, and his bosses as well were upset with him because then they would have to hire fewer people and their departments would lose money if everyone got all their work done– and they would need fewer bosses then, too! So his hard work was a threat to EVERYONE else’s job! So, basically, he had a week to do a day and half’s worth of work. After he saw the writing on the wall and was reprimanded, in order to keep his job he had to basically only work 3 hours a day, then take long lunches and just relax, take afternoons off, and go home early, then collect state benefits and pension. My friend with the PhD said the whole system disgusts him. He wants to make a useful impact on society, not be a leech— so he did not apply for government jobs. This has actually made his life harder— but now everyone else in Greece is seeing what he saw a couple years ago— the system is not sustainable. He also had some choice words to say about the Greek government.
This is only one personal story, so take it as that. I have no idea if this is a pervasive Greek problem. But it still is interesting.
November 1, 2011 at 5:16 pm |
Peter Says: “I hope you understand that I am not trying to be a “smart” guy!!!
Not at all! It certainly is possible for me to make an error on my numbers. In fact, here is the calculation I did earlier but including the correction that genauer pointed out.
Government U-6 unemployment is 16.5%. That means that 83.5% are employed, or 835 out of 1000 potential workers. If the wages on those jobs go down 4.9%, that 4.9% reduction goes against the 835 jobs. That is the same equivalent total wage loss as eliminating 4.9% of those 835 jobs, which is equivalent of eliminating 41 jobs. So, rather than 165 people without jobs (1000 – 835), it would be 206 people without jobs (165 + 41). 206/1000 = 20.6%. Adding in the 4.7% of the potential workforce who have dropped out, we get 20.6% + 4.7% = 25.3%
November 1, 2011 at 5:49 pm |
greg Says: “…the GDP is now growing at 2.5% and doubling quarter to quarter and corporate profits are up by the most recent numbers. The danger in Europe has been averted as well. Therefore, although unemployment is high, corporate profits can continue to grow because GDP is growing. These will grow slowly— 0-3%– but will grow. Therefore, it is time to invest in the market.”
Where to start??? First, as to GDP growth! 1st qtr 0.4%; 2nd qtr 1.3%; 3rd qtr 2.5%. These are not strong numbers, and every one of them is weaker than a year before, which is a better way to look at trends. Also, most economists think that inflation is understated by about 1% due to hedonistic adjustments (a computer bought this year for the same price as last year but with a bigger memory is counted as a lower price when calculating inflation). So, look at GDP with a 1% reduction and you get a truer perspective: growth is close to nil! And, once people can no longer reduce their savings rate, they will spend even less, causing the GDP to drop.
I hope you realize by now that the Euro issue is far from over. Even if they can solve the Greece issue, which is doubtful, Italy is right behind and far more difficult to solve.
As for now being the time to invest in the market, in my opinion that is absolutely crazy! But note, that is only my opinion based on what you can read in my updates!
November 1, 2011 at 6:08 pm |
Hi Warren–
Of course I agree with you! Entirely.
The only real question I had was what was causing the GDP growth. That is what confused me. Your answer seems to be: people spending the money they have saved. When this approaches zero, the tap will run dry and GDP should drop.
Is that accurate?
I suspect that when the savings rate was so low in 2005 the system didn’t implode because people had other access to money— namely, credit card and mortgages. Now they don’t.
And, the other reason I mentioned this post was to show that there are still many people in the financial industry who seem very clueless about the whole thing, but yet seem to be honest in their beliefs— honest, but clueless.
November 1, 2011 at 6:29 pm |
SGS estimates current real unemployment at about 23.5%, in line with Warren:
http://www.shadowstats.com/alternate_data/unemployment-charts
November 1, 2011 at 7:11 pm |
greg Says: “The only real question I had was what was causing the GDP growth. That is what confused me. Your answer seems to be: people spending the money they have saved. When this approaches zero, the tap will run dry and GDP should drop.”
Actually it is the savings RATE that I am referring to, not what people actually have already saved. People seem more ready to reduce how much money they take out of their paychecks for savings, including towards 401k plans, than to withdraw money out of their existing accumulated savings. As soon as people get close to zero coming out of their paychecks for savings, they will start to reduce spending. At least that is what happened a few years ago.
As long as they are reducing their savings rate, their available spending money is regularly going up and that can be used to drive the economy. As soon as they can no longer reduce their savings rate, their available money for spending is no longer increasing. And, with any inflation at all, available money actually begins to go down.
November 1, 2011 at 10:02 pm |
Hi Warren,
real wages falling this year is still somehow at least 1 year delayed to what you would have expected from traditional views. But this would now go into petty technicalities of statistics and obviously doesn’t address the real problem.
This per capita /per household /per hour thing you can realistically only catch, when you already very precisely know, what you are looking for. happens as well to people like Barro, Romer, (available on request, but with many pages of explanations necessary), who I hold in higher regard than most US economy nobel price winners.
The result of all this search and data comparisons is painful.
Most folks claim, that there is a 2 % productivity gain per year, for the most mature country on earth, the US, at least the last 50 years.
1.5 % population growth.
Take into that some one-time factors: getting people off the farm, more women into the workforce, longer education, adding another 1 – 1.5 % to real GDP growth, adding to 4.5 – 5 % real GDP growth as seen after WWII.
Now the number of retirees is growing rapidly, in itself a sign of good health care, a good thing, but financially an increased burden.
If real productivity growth is actually closer or lower than 1 %, and all other one-time factors dried up (only 1 % left on the farm, all women working, longer education doesn’t provide any benefit any more) there is no way any more to “grow your way out of debt” as after WWII. In the US with a 1 % population growth, wages can be stable, in EU countries with a 1 % working population decrease, they must fall, steadily, a totally new experience, at least for the South.
brutal.
bottomline is, you caught this private debt problem way before all this nobles. And I realized that e.g. your hands on direct contact with OWS is for me, across the pond, more important than what a Paul Krugman, a Stiglitz says.
November 1, 2011 at 10:54 pm |
genauer,
The sad thing for me is that I see the U.S. has having far more opportunity to get out of this mess with a minimum of pain versus Europe. When the Euro was set up, there was a severe error made in that there was no way to enforce member countries to live within their budgets. And by agreeing to the way the Euro was set up, countries like Germany were much to blame for enabling this, just as banks in the U.S. were to blame for giving out sub-prime mortgages when it was obvious that people getting those mortgages were unlikely going to be able to pay them back. Germany certainly knew the history of member Euro countries regards to living within their means, so they have to take a degree of responsibility for this mess.
The U.S. in contrast has enough wealth and the central power to retrieve that wealth through taxation such that we could be controlling our deficit while creating all sorts of jobs for the future. We just are choosing not to do this due to pressure on Congress from lobbyists and others in the power of industry and the wealthy few. I don’t see us turning this around so we will probably join Europe in experiencing a second Great Depression!
November 2, 2011 at 1:03 pm |
Thanks for clearing that up, Warren.
May I ask how you know that “People seem more ready to reduce how much money they take out of their paychecks for savings, including towards 401k plans, than to withdraw money out of their existing accumulated savings.” Is there data?
Also, isn’t it possible that in THIS case, people might do just that once the savings rate hits zero percent? That is, draw down savings?
Finally, is there a place to find average US total savings? I guess that relates to net worth as well.
-Greg
November 2, 2011 at 1:29 pm |
Greg Says: “May I ask how you know that “People seem more ready to reduce how much money they take out of their paychecks for savings, including towards 401k plans, than to withdraw money out of their existing accumulated savings.” Is there data?”
Because that is what happened last time! Look at the graphs in my book and you will see that the savings rate got down to 0.5% in 2005 and at the same time GDP growth started to go down.
You also ask, “…isn’t it possible that in THIS case, people might do just that once the savings rate hits zero percent? That is, draw down savings?”
Sure, anything is possible. But why would it be different this time?
November 2, 2011 at 1:55 pm |
It might be different this time because last time people had other avenues for securing cash— namely, credit cards and home equity loans. This time those avenues are not open to them.
It didn’t make sense last time— people don’t have money, so instead of stopping spending, they first stopped saving, then they went into debt, then the system imploded.
This time, they might stop saving, then go into savings instead since they don’t have access to credit.
I’m not saying it WILL happen, but it might because the situation is different this time.
November 2, 2011 at 4:25 pm |
I know I have probably contributed to the “positive” GDP numbers, by having to prematurely start withdrawing funds from my IRA, this year after losing my job in 2009 at age 62, to buy groceries, and gas for my car to get to the grocery store. My plan had been to start withdrawing at age 70, to get it to last until age 90. I now fear the consequences these premature withdrawals might have down the line if I live more than 10 more years. Especially with the interests rates at next to nothing, and my planning had been for laddered CDs at 5%.
November 2, 2011 at 9:15 pm |
Warren,
when the Euro was setup in the Maastricht treaty, 1992, there was the 60 % debt/gdp target, the max 3 % deficit, and surviving 10 years alignment of european currencies, until the formal introduction of Euro paper money in 2002.
.
In addition the no bail out clause, and that the ECB can not print money even with a solid majority, like 13 to 4 (germany, finland, dutch, austrians), as now. How that works in detail, I actually have to find out.
But this is Europe. This is not “one nation ….”.
But many proud nations who did fight each other nearly constantly.
When Chancellor Merkel suggested April 2011, that we might have to raise the retirement age of the aid recipients to the one in the aid giver countries, they cried “colonialism”. If somebody else wants to have a say over German fiscal policy, I would ask him, how many tank divisions he has.
The Euro was meant to get some control over a special situation (high interest rates after reunification and its HUGE financial need 100 % German GDP up to now, and Germany de facto controlling that), to say it nicely
.
More German rules were totally impossible at that time. Remember Mitterand and Thatcher trying to obfuscate reunification ?
With “no bail out”, consequences seemed to be clear, and limited for Germany. Adults have a free will and the freedom to screw up themselves.
With the eastern German industry breaking down completely, we suddenly had to feed 25 % more people, on the same GDP. You just raise the tax on everybody, up to what is required.
Why should that not work in southern Europe or in the US?
The US was happy with the Clinton level of taxes, why is that not possible today?
Germany is not richer than our European neighbours, but people are more willing to do what is necessary, the “right” did raise taxes up to 62 % marginal, starting at 2.5 median income, and the left did cut benefits. Finland, Sweden, Dutch, Canada did the same before us.
Now I said it. Well, only 2 years ago, if somebody would have suggested, that I recommend raising taxes, I would have called him nuts.
Only 20 years ago we admired the US bipartisanship
November 2, 2011 at 10:09 pm |
genauer Says: “With the eastern German industry breaking down completely, we suddenly had to feed 25 % more people, on the same GDP. You just raise the tax on everybody, up to what is required. Why should that not work in southern Europe or in the US? The US was happy with the Clinton level of taxes, why is that not possible today?
When you get the answer to that let me know. It seems, at least in the U.S., that people (politicians) are willing to risk our country going into a depression rather than to raise taxes on the reasonably wealthy to what they were in previous years. I truly do not understand it! Is it ignorance? Is it greed? Is in naïveté? No one, absolutely no one, can site one study that shows that such a return to prior tax levels will hurt job growth, cause companies to leave the country, slow job creation, or do anything but embarrass the lobbyists and politicians who promised their wealthy clients/backers that this would not happen.
November 3, 2011 at 3:52 pm |
Must be sun spots!
http://www.foxnews.com/opinion/2011/11/02/why-buy-american-is-dumb-idea/
November 3, 2011 at 6:05 pm |
Genauer:
Very well said. I wish your Germany/Euro story could be told to more people as it is the simple truth.
All that has happend is that by creating the Euro they broadend the base of the euro debt pyramid.
But because of lack of physical reasources and wealth to back the new debt-pyramid it was relativley short lived.
Now as the major debt pyramids are not functioning anymore the next goal is the have something that was never ried before.
The mother of all debt pyramids is to be created based on the G-20 economies.
Check the new global SDR under the G-20 and the so called “Palais-Royal Initiative”.
This could prolong the current situation for at least another 30 years.
November 3, 2011 at 8:30 pm |
Warren,
http://www.taxfoundation.org/publications/show/151.html
might be an interesting source on tax rates for you, especially with regard to this topic. Excel table to be build into other calculators, wonderful.
Unfortunately I cant give you any thing similar for Germany or Europe. There is always this tendency to discontinue long term series, obfuscate the real tax rate with e.g. Solidarity contribution.
like the “official max tax rate is 42 %”, but above 300k it is 45 %,
plus 5.5 % solidarity, plus 9 % church tax, the last 2 relative to the former calculation. Europe.
But when I look up US tax rates in 1939, 40, 41, inflation adjusted, I see significant tax increases in 1941 for everybody, the first year unemployment really dropped significantly. Which I interpret as that the decision for that tax change was made in 1940.
With the regard to the “hen and egg problem”, I would say the tax raise was first.
I am interested in your comment.
Peter,
I tried to look up your “Palais-Royal Initiative”. But more serious sources like CFR or Bruegel have links to dead ends, and the rest seems to be goldbugs.
Which leads me to another statement. A currency is only as strong as the will and ability of the sovereign behind it, to produce the value to back it up. Remember in the 1500s (Europeans can write something like that : – ) , it was Spain which defaulted, despite all the silver and gold wealth extracted from the New World, and poor England made good on its debts ever since.
After WWII the US had 160 % GDP debt and UK 220%, but nobody doubted their will to honor their obligations.
And the current interest rates demanded from Italy, Spain, Portugal reflect the doubts of lenders about that will, based on their behavior.
Warren,
The US raised the retirement age to 67 back in 1983, gradually
http://ssa.gov/pubs/background.htm
and some are now discussing to go to 69.
Germany did so as well, after a lot of discussion in 2003, just 20 years later, and again, like all europeans, but Ireland, with a much more serious demography problem (fertility 1.4 vs 2.1) than the US .
Italy has 4 % higher interest rates, CDS quotes since that imply a 5 year default probability of > 25 %), after 4 month relying on ECB support, which for my understanding is borderline to EU treaties. The 2 German members have resigned in protest.
But they still have no majority in Italy to raise their retirement age up to the same. Please take a look at “Retirement in specific countries” in http://en.wikipedia.org/wiki/Retirement
Who wants to lend to this kind of people, if they have alternatives?
I say that mainly, to illustrate to you and your readers, why Germans start to get ballistic, when people try to “blame Germany” like you did a little bit above, and a Ryan Avent does in “The economist” http://www.economist.com/blogs/freeexchange/2011/10/euro-crisis
In case you are interested, some more discussion on that:
http://kantooseconomics.com/
They are just trying endlessly to get the German tax payer on the hook for unlimited liability for the debt of our neighbours, against extremely clear and simple (Maastricht 1992) treaties. No bail out.
Bringing this back to your first book, when you talked about the US at the end being more modest and content with a little lower income. What I see here around in Eastern Germany are people who live happy lives with incomes often starting at 6 or 7 per hour, as long as you don’t mention, that you make > 5 times more, to keep this a little bit unspecific.
But I think part of this parcel is also, that everybody knows, that she can not fall below a certain social minimum, including the same standard health care I have.
This was the last so long posting on euro stuff here, I promise !
November 3, 2011 at 8:51 pm |
Greg,
your personal story on “the greek attitude” is not unusual. I heard similar stories as well, and could contribute at least 4 stories on my own.
November 3, 2011 at 9:54 pm |
genauer Says: “…when I look up US tax rates in 1939, 40, 41, inflation adjusted, I see significant tax increases in 1941 for everybody, the first year unemployment really dropped significantly. Which I interpret as that the decision for that tax change was made in 1940.”
Tax rates and unemployment were greatly distorted by war preparations, so I don’t think that we can learn much from those years.
You also say, “I tried to look up your “Palais-Royal Initiative”. But more serious sources like CFR or Bruegel have links to dead ends, and the rest seems to be goldbugs.” Try:
http://62.23.12.117/smi/gb/telechar/news/Rapport_Camdessus-integral.pdf
You also say, “The US raised the retirement age to 67 back in 1983, gradually
and some are now discussing to go to 69.” Both of my books say that full retirement age has to be raised to age 70 soon to solve the funding problem. However, I still recommended that they keep an age 62 early retirement option, but with a much reduced payout versus now.
Also, “I say that mainly, to illustrate to you and your readers, why Germans start to get ballistic, when people try to “blame Germany” like you did a little bit above, and a Ryan Avent does in “The economist” http://www.economist.com/blogs/freeexchange/2011/10/euro-crisis”
Yes, I did put some blame on Germany. But not in the way that Avent does in the article. My observation was that Germany went into an unhealthy currency marriage with partners known to be unreliable. Therefore, Germany can not feign surprise or protest a virgin’s innocence at the predictable results. However, I DON’T hold Germany responsible for a complete bailout of Greece, Italy, and all the other countries that persist in not doing what is required internally to get their economies under control. And those internal measures also include getting their citizens to stop shutting down their economies every other week with strikes. I believe that it is inevitable that Greece will default and leave the Euro. And they will enter into a period of hyperinflation of their own currency followed by inner turmoil that may very well tear their country apart. Perhaps that will make Italy, Spain, etc. take notice and get their houses in order. Germany can not do it with bailouts.
You also say, “Bringing this back to your first book, when you talked about the US at the end being more modest and content with a little lower income. What I see here around in Eastern Germany are people who live happy lives with incomes often starting at 6 or 7 per hour, as long as you don’t mention, that you make > 5 times more, to keep this a little bit unspecific. But I think part of this parcel is also, that everybody knows, that she can not fall below a certain social minimum, including the same standard health care I have.”
The problems are SO much easier to solve here than in Europe, if we choose to address them. Being one country (I will even include Texas) with our own currency and the largest economy in the world in the world gives us all kinds of power if we choose to use it. For example, I just finished reading Amory B. Lovins’ “Reinventing Fire.” It is extremely well documented, so even harder to read than my books! But he concludes that it is inevitable that the U.S. will be off of oil by 2050 because the economics have already reached the tipping point in favor of solar and wind. Yes, there are still problems, but none where the solutions are already not available. No new technology is needed. But, Lovins also emphasizes that if the U.S. doesn’t get off its duff, it will be buying all this stuff from China! We EASILY have the knowledge, resources, etc. to take the leadership on this, but instead we are afraid to raise the minimal amount of taxes to make this happen.
If you look at the “Occupy Wall Street” people, they are not asking for handouts, welfare, unemployment, etc. Mostly they want jobs! These are not lazy people. The U.S. has the money to invest for the future, both in innovation, good education, some minimal level of healthcare, etc. We could get most people to some basic modest level of living, and the relatively wealthy would barely notice the change in their lifestyle!
November 3, 2011 at 9:54 pm |
Genauer:
Links:
http://global-currencies.org/smi/gb/telechar/news/Rapport_Camdessus-integral.pdf
November 3, 2011 at 9:58 pm |
Genauer:
Link #2:
http://www.bis.org/review/r111007b.pdf
This one is a must read as it comes from the former crew of the new ECB chief.
Also follow the coming G-20 meeting and agenda very closely.
I am not a gold bug or a conspiracy guy I just work with the facts and numbers.
This is why I have a very high regard for Warren and his work: The numbers do not lie.
Peter
November 4, 2011 at 12:38 am |
just a few comments:
If you love Amory Lowins, you might also like Jeremy Rifkins, e.g. “The european dream” and this is NOT an endorsement.
To the BIS paper, page 2
“What is wrong with the present international monetary system?
a). Their volatility has exceeded what could be justified by shocks to
fundamentals.
b). Persistent misalignments have emerged among the major currencies.
c). Partly as a result, many countries have been reluctant in practice to allow full exchange rate flexibility (“fear of floating”), resorting to various forms and degrees of exchange rate management.”
a,b,c, added by me to relate the following arguments.
I disagree with all 3 of the arguments.
For a) and b) I think I understand, why EUR and JPY vs USD behaved like they did, since 1980. The temporary misalignments are not “persistent”, see e.g. http://www.slideshare.net/genauer/currencies, page 2
For c) The only major country, at least until 3 years ago, is China,
which has a strongly managed currency, and this can be understood pretty well with their political situation.
The massive accumulation of USD deposits in many emerging asian states was the result of the 1998 crash
Singapore, Taiwan, Korea behaving this way doesn’t really cause problems. Japan had to realize 1985 that it had become to big, to go on with that. For the US trade deficit, looking like Barry Eichengreen on “dark matter” and that the interest / gain balance of the US is still positive, at least according to NIPA accounts, puts that into a very different light.
The CNY exchange rate is definitely not a “discipline” problem, but strategic. And, as a German, you know, I cherish “discipline”, when it is appropriate : – )
The present undervaluation of the USD is the consequence of very deliberate acts of the FED, quantitative easing.
For the CNY to become a major medium of exchange it must become freely tradable in volume, and without full control by the communist party, but …. they dont like that part, so far. Their choice. But the extremely predictable rise by 4.3 % per anno is pretty close to what it should be in models like GSEMDEER, Bassa- Samuelson.
All that stuff is in very general, unspecific language.
All more specific proposals, I have seen so far, always result in practically forcing severe inflation on folks like Germany.
All other folks can run their economies with any inflation they want. Their freedom. But I have the inalienable right to run mine with a stable 2.0 % inflation. For the EUro, we have an iron clad treaty on that. Those who don’t like it, didn’t join, or should get out. There is nothing new, surprising, unfair about that.
What is pretty dishonest about it, that folks constantly try to break the treaty permanently through the back door. “Crisis, Armageddon, give me unlimited amounts of your money, quick, but without strings attached”, I cant hear it anymore.
Southpark “Timmie” Geithner wants to tax countries with “too much” trade surplus, well knowing that Germany is a perfectly behaving trade partner, in contrast to the US. Southern europeans complaining that we dont play the uberfather to their politics, at the same time claiming their budgetary independence.
This year has stiffened the determination of former pro integration folks like me a lot to keep to treaties and our present independence.
With solar and wind, who promotes this with huge burdens on the german consumer over many years, without any national strings attached ? Feed in tariffs ? Electricity at .40 $/kwh instead of .07 in the US. 8 $ /gal gasoline
November 6, 2011 at 7:49 pm |
I agree with your first paragraphs. Here’s a report that also agrees,
“The Jobless” and “Wageless” Recovery”, http://www.employmentpolicy.org/topic/research/jobless-wageless-recovery-great-recession
Andrew Sum, professor of economics, with other contributors, created it. It shows that since the end of the recession, June 2009, 92% of the gain in GDP is due to corporate profits. (page 20) “while aggregate wages and salaries declined by $22 billion and contributed nothing to growth.” During the 18 month recession wage income decreased by $453 billion, and since the end of the recession corporate profits increased by $465 billion. In effect 5% of the workforce were placed on the sidelines, and productivity increased (people worked harder). There was a survey that asked if the respondent could deal with a $2,000 emergency expense within 30 days. It was a study by the NBER, the organization that determines the beginning and end of the recession. Half of respondents said NO. You said mid 2012 “at the latest” corporate profits would dive. I wonder. I’ve read some high-sounding economic forecast claiming over 10% growth in profits. My latest blog entry, http://benL8.blogspot.com shows two reports: the median income in 2010 was $26,362 according to Soc.Sec. Administration numbers, and the Federal Reserve Bank of S.F. says that $109,000 is the average output per worker. I link to both sites. The point is, why is output value 4 times higher than the middle income? I know output total and income total are not same, but I think the total income is about 80% of output. (If only I had studied economics!) This huge discrepancy if fueling the real protest in our nation. More importantly, it is shaving the economy down relentlessly as purchasers cannot buy all the goods and services they potentially could produce. Glad to read your analysis.
November 6, 2011 at 8:10 pm |
Hi Warren:
Have you given it a thought to write an update which incoroporates the new plan for a G-20 backed SDR issue?
I think that you as a reconized writer might want to shed a light on this development for the broader public trought a media apperance such as the Financial Sense News Hour.
The faster people around the globe are told what has been in the works the better.
I am very upset about it, as it will not resolve anything.
It will just allow the current situation to continue for another 20-30 years at best.
I guess this is how far the ruling elite imagination goes- building paper/electronic currency pyramids.
Very shalow indeed if I may…..:):):):):):):).
Peter.
November 6, 2011 at 9:58 pm |
Peter Says: “Have you given it a thought to write an update which incorporates the new plan for a G-20 backed SDR issue…It will just allow the current situation to continue for another 20-30 years at best. I guess this is how far the ruling elite imagination goes- building paper/electronic currency pyramids.”
I find it quite easy to criticize the Euro, the dollar, and “the new plan for a G-20 backed SDR.” My problem is that I don’t how to come up with anything any better. No matter what you use as a means of trade/exchange, it has weaknesses that can be exploited. Countries can always borrow beyond reason, spend beyond reason, promise future benefits to their citizens beyond reason, etc. And as countries in Europe have discovered, it is pretty hard to stop. And we in this country have certainly found the same thing, even when we are one country and control the currency.
Right now I am sure that a lot of readers are banging on their computers yelling “go back to the gold standard.” Long time readers know that I don’t think that would work any better than fiat currencies, especially with global trade. First, actual transactions can not occur using physical gold. Would people carry around slivers of gold in their pockets? There would have to be some electronic or paper contract that represents an amount of gold. Gee, that sounds a lot like fiat currency which countries love to print.
November 6, 2011 at 10:21 pm |
Ben Leet Says: “…the median income in 2010 was $26,362 according to Soc.Sec. Administration numbers, and the Federal Reserve Bank of S.F. says that $109,000 is the average output per worker…The point is, why is output value 4 times higher than the middle income?”
These two numbers can not be compared, nor any value related to them such as output, because one is based on “average” and the other is based on the “median,” which is the middle value. For example, in the following number string: 1,8,3; the average is 4 whereas the median is 3.
November 7, 2011 at 3:38 am |
Warren ,
You have been prescient in your recommendation on tip etf,as i gained modest but steady return over few years. Do you still consider this a safe option relative to equities and other investments ,given current volatile economy?Also, your thoughts on excess money on sideline and its potential dyanamics?
November 7, 2011 at 7:52 am |
Peter,
now you get a glimpse of the German feeling, when you have such lovely neighbours, who come every week with a new idea, how to get their fingers into your wallet. If they would use that work and imagination to come up with new products …..
SDR
The SDR thing is even more sinister beyond the amount of money. First the new drawing rights would go to China and the likes, bringing the US fraction below 15 %, effectively eliminating the US veto right, second they tried to use it to effectively steal Germany’s gold (http://www.prisonplanet.com/g-20-demands-german-gold-to-keep-eurozone-intact-german-central-bank-tells-g-20-where-to-stick-it.html), and third so far the IMF with a small sum is first in line (with smaller sums) if a country goes bankrupt, the Eurozone with most of the credits second, and third is private debt, which is now planned to be stiffed by 50 %, “voluntarily”, so that the CDS are not triggered (then Goldman, Morgan and BofA would need urgent money from the Fed). With the EFSF plan, Germany would guarantee to somebody 3rd in line only the first 20 %, something China doesnt like (cant understand why, ROFL)
With the SDR they would not only cut first into the line, before the Eurozone) they would put the whole world on the hook, something I would also like as a creditor.
Wealth
And all that for people who have more gold and private wealth per capita than Germany, and who say, they cant raise their retirement age to a level, the US decided 30 years ago. But, you know, those little Italians are so sensitive and precious. Gotta go and buy some rope.
last week
But something has changed last week. We (FR & DE) spelt out clearly, that somebody going bankrupt and leaving the Euro, maybe the EU, is not longer “impossible” and taboo to talk about, but that it is possible, and that we are prepared for, and that this will happen, if Greece doesn’t fulfil the D’Accord 100 %.
Gold
The Gold standard is impossible, there is simply not enough Gold to even cover the inter government obligations, not to mention private holdings, by far. The Gold standard did also not prevent bank runs and financial crisis as the UK had every 10 years until 1866, and the US until 1913. Depending on how much Gold and silver is discovered it can trigger inflation and deflation even on its own, and does not prevent them.
Palais-Royal-Initiative
With respect to international institutions “to know it best”.
A few years ago the UNESCO came and that, Oh you have such a lovely Elbe valley here, let me give you a certificate, that you are a “World cultural Heritage site” and you might get a few more tourists. OK, nice. Then, after 10 years of public bickering about a new bridge, one side had enough, put it to a public vote, over 50 % participation, over 2/3 voted yes, done deal, shouldnt it ?
Well then this UNESCO came, and said, we override your people, we have here some obscure treaty, which somehow says, we can veto your bridge and any decision we think infringes on the this cultural heritage, as we, some anonymous experts, think. And they actually fought that all the way to the German Supreme Court.
Peter,
and now you come and say that some anonymous “experts” at the BIS in Geneva (this Palais Royal Initiative) want to decide over German fiscal policy with “punishments” ?
My Answer is not “over my dead body”, but “before this we will burn the BIS to the ground, and, if necessary, Geneva with it”.
Your congress is now moving forward on China because of “unfair exchange rates”. A number of people, like Roach and the Goldmans, the Economist with his Big Mac Index, actually do think, that the Yuan is not undervalued that much.
Warren,
that you said that Germyn still has to take some blame for our neighbours, even after I explained the Maastricht treaty, really got me thinking. I think there really is some profound difference between German and American judicial thinking. And the consequence is, that this Euro integration has already gone too far, and that we will decrease integration, and strongly and visibly strengthen personal and national responsibility.
November 7, 2011 at 1:10 pm |
genauer “I think there really is some profound difference between German and American judicial thinking. And the consequence is, that this Euro integration has already gone too far, and that we will decrease integration, and strongly and visibly strengthen personal and national responsibility.”
Okay, I can’t resist. An old joke: How do you know when you die if you are in heaven or hell? If the cops are British, the food is French, and the cars are German, you know you are in heaven. If the cops are German, the food is British, and the cars are French, you are clearly in hell!
November 7, 2011 at 7:56 pm |
Warren, good point.
I think lenders prefer a lot debt guaranteed by Germans, who bicker already whether just adjusting tax rate levels to inflation, is a “tax reduction, we cant afford now”, despite having a balanced budget, and Germans increasing consumption would be very good for everybody, more vacations in the PIIGS states. Even I go through the supermarket and look what “produced in Greece” stuff I can buy, to help them pay their debt.
The last week was the tipping point. It is now in the open, Europe is not a Nibelung “Schicksalsgemeinschaft”, but a limited liability corporation. Somebody actually suggested that the next ESxx, whatever, should incorporate in Delaware.
I repeatedly hesitated to come here with more of this euro stuff.
And with this now more than enough of all my euro melancholy in your blog, I read and do not write.
Now, lets bitch about the character quality of all these US sub prime mortgage signers. No, not today, not from me.
Actually, I do prefer German cops strongly. They never drew a gun on me, like US ones, despite my corporate mandatory “intercultural training” , and they dont call before Xmas to ask for “voluntary” contributions to their local widow and orphan fund. And dont get me started at the NYPD, from the perspective of a low LOVING german.
Aaargh, I do it again. (Just shut up : -)
November 7, 2011 at 8:23 pm |
genauer Says: “Actually, I do prefer German cops strongly. They never drew a gun on me, like US ones, despite my corporate mandatory “intercultural training” , and they don’t call before Xmas to ask for “voluntary” contributions to their local widow and orphan fund. And don’t get me started at the NYPD, from the perspective of a low LOVING German.”
If you notice, American cops were not included in the joke. For good reason! It is a lot more fun to pick on other countries! But the times I was in Germany, I was always somewhat frightened/intimidated by the attitude/stance/bearing of German police. Whereas in England, the Bobbies seemed a lot more friendly! Maybe it was just me, but the joke seemed to have a degree of reality. Can we at least agree on the cooks (French versus British) and the cars (German versus French)?
As for “Now, lets bitch about the character quality of all these US sub prime mortgage signers.” Nah! Too easy!
November 7, 2011 at 10:39 pm |
Warren,
LOL, I like it, you asked for it. When was your last contact with a German Cop? Anything specific, or just some general feeling?
I actually do perceive German cops as too lenient, lazy, slow nowadays, and a quarter century ago.
I had the hooves of the NYPD cavalry just 2 feet away from my nose, as a very law abiding, peaceful demonstrator, I think you can believe me that, and I didn’t like it. When I came over to the US I was really “sitting on the porch and reading The Federalist Papers”.
When there were the London Riots this summer, I was first stunned, and second surprised, that the UK justice system handed out more than a thousand long prison terms within just four weeks.
So much for national stereotypes.
I cant imagine that happening in Germany so far, but it certainly fits “a fair and speedy public trial by a jury of peers”.
The last point was, why I didn’t have to serve my invitation to jury duty over in NY State. An expat German PhD is not exactly “peer” to whatever that trial was about. But I could sign for a colleague to get his hand gun permission.
And just to exercise my role as a naysayer a little more,
french against german cars, I give you that.
But back 15 years ago, in a us-jp-de industrial cooperation in IBM land, the US guy (indian descent) bought a DE car (BMW), the DE guy bought JP (Nissan, recommended by resale value, etc. by the Edmunds list ???), and the JP guy bought a US SUV, he could never drive at home.
Sometimes I think, the (global) engineers like you and me should take over, and the world would be fine
November 7, 2011 at 10:46 pm |
Aargh, I forgot to say,
that I do ridicule regularly Germans who pay 20 % more for the same car with a VW “Volkswagen” sticker, against basically the same car from Skoda, same corporation, same production.
November 7, 2011 at 11:24 pm |
genauer Says: “When was your last contact with a German Cop? Anything specific, or just some general feeling?”
My experience is dated and mostly just a general feeling. In my early twenties, I hitchhiked across a part of Europe, including into Germany. I went into Berlin when you had to go through the corridor controlled by East Germany. I also went into the Russian controlled section of Berlin (the other side of the Wall) and had an East German cop, who looked like he was 15 years old, hold a machine gun on me because I went where I was not supposed to go. I acknowledge that the experience has little relevance now. Still, I remember. I am not much of a gun guy. Guns, and 15 year olds that carry them, scare me!
My oldest daughter went to school in Germany for two years and seriously dated a German engineer who came to visit us in the U.S. We actually talked about the German police, because my daughter had the same fear of them I felt. The German engineer agreed that you would not talk back to, or argue with, a German policeman without risking a lot of trouble. I also was in Germany several times on business, and my general feeling of German police was always the same. I wonder if you don’t notice because it is part of your culture.
Here is an interesting aside. The several times I met with German engineers in meetings, they always sat with the highest level manager in the middle of the table, and I never remember a younger German engineer ever saying anything but to agree with his boss. We Americans quite often disagree with our bosses in meetings. I mentioned my observation to the German engineer that visited with us, and he agreed that what I observed in the meeting was SOP. I asked him if this bothered him and he said no, that he expected someday to be that manager that all the other engineers were afraid to disagree with.
Incidentally, I took a year of German in college and could read, write, and converse reasonably well afterward. Alas, after many years of non-use, the ability has completely vanished.
November 8, 2011 at 12:42 am |
No one talking about China any more? Hard landing countdown sequence has been initiated. 2012 will be messy. The Chinese economy is built on property, and it has officially rolled over now (finally), with volumes tumbling. Banks here cant cut rates any further, so all they can do is let you borrow more. But who wants to catch a falling knife?
http://www.ft.com/cms/s/0/328123ce-ff0a-11e0-9b2f-00144feabdc0.html#axzz1d4NfR4BB
http://online.wsj.com/article/SB10001424052970204554204577023123449783572.html
http://business.blogs.cnn.com/2011/11/02/is-chinas-property-bubble-about-to-burst/
November 8, 2011 at 1:30 am |
I can assure you, you can talk a lot back to german police nowadays. People are running around with ACAB “All cops are bastards” and are “outraged” that the response is then not totally courteous.
German engineers not disagreeing with the Boss in meeting with the outside ?, could that be like:
Remember when partisan politics stopped at the water’s edge?
http://www.usatoday.com/news/opinion/columnist/benedetto/2005-11-18-benedetto_x.htm (just the first roughly suitable link I found, nothing special, I didnt even read it fully)
Vandenberg:
“to unite our official voice at the water’s edge so that America speaks with one voice to those who would divide and conquer us and the free world”.
This is actually one of the many things we admire(d) the US for.
And strive for, and actually do succeed to a still significantly improvable degree today.
http://en.wikipedia.org/wiki/United_we_stand,_divided_we_fall
All major Decisions in Germany in recent times have been taken with broad majorities (remember: we have 5-6 parties)
I was told that my first names / Initials were chosen for
John F Kennedy :
http://en.wikipedia.org/wiki/Kennedy_Doctrine
“Pay any price, bear any burden”
update 2011: but not to squeeze poor german taxpayers, retiring age 67, for rich southern tax cheaters, retiring age 52
“We have decided to put a man on the moon and bring him back safely, before the decade is up. Not because it is easy, but because it is hard.” (this is not exact citation)
What has become of America, the land of my dreams ?
Bickering about a few percent more or less taxes.
Internally, in crass contrast to this “Befehl und Gehorsam” picture, many have painted on the prussian military, there was always a much more subtile structure.
Auftragstaktik, Cohesion, individual incentives… Wall Street?:
Bassford, 1990, Military Review
http://cgsc.contentdm.oclc.org/cdm/singleitem/collection/p124201coll1/id/541/rec/11
Fukuyama
http://www.rand.org/pubs/monograph_reports/MR863.html
Cohesion is often a strength, but dissenters suffer
November 8, 2011 at 2:16 pm |
genauer Says: Vandenberg:“to unite our official voice at the water’s edge so that America speaks with one voice to those who would divide and conquer us and the free world”.
My example of disagreement during a business meeting with outsiders perhaps was not the best; but in general, I question whether speaking in public with one voice is a good thing. Sure, it may help things happen in an orderly and efficient manner, but at what price? Just looking at recent history, it enabled Bush to invade Iraq (anyone against the war was foolishly risking the mushroom cloud and not supporting our troops), it enabled Jack Welch to bleed GE for short-term profits (any one who spoke out against him was fired), it enabled banks to give foolish subprime mortgages (it was helping a broader group of people own homes and helped bank profits and how could that be bad), and on and on. Large numbers of people knew that all those activities were stupid, yet many of them said nothing because they did not want to risk public ridicule or their jobs.
We have recently gone through a period in the U.S. that has discouraged public dissent, in the names of national security, job growth, preventing class warfare, and so on. This still continues in our government. Look how Republicans vote in lock-step on almost every issue.
I believe that a culture that overly emphasizes discipline to get short-term results precludes the likes of a Steve Jobs or Bill Gates. It also encourages wars that are generally foolish, which includes all the recent wars fought by the U.S. If employees at companies were more vocal about the outrageous pay of their leaders, and refused to participate in projects that outrageously pollute our environment or endanger workers, and refused to import items from slave shops of foreign countries, we would be better off. Maybe less efficient, but better off! And if more of our leaders took responsibilities for this, then protests in the streets would not be necessary.
We have lost what we had in the sixties, but I sense that because of misuse of those in power, we are about to rediscover it. Obviously there is a risk of protests getting out of control, as they have in Greece. But the responsibility for out-of-control riots can not be put just on the rioters. It has to be shared by those in power who set up the conditions to cause those riots in the first place.
You and I obviously have several areas of strong disagreements. But I feel that both of us try to make our points with data and logic. Perhaps we will never agree on everything, but through public disagreement done with courtesy, at least some broader understanding of each ones point of view is obtained, and probably a softening of each ones position.
November 9, 2011 at 12:46 am |
Hi Warren,
I think we have some misunderstanding here. But those can also help to clarify language, when followed up.
I think, we have much larger areas of agreement, and that it is less about softening, but to reduce misunderstandings
Looking at the hooves of the NYPD was in protest to the looming Iraq war, early 2003, and I thought a while about participating in it, without a US passport. But I looked at the Colin Powell Presentation at the UN (I taped it), and said, those are all lies, I checked everyone of them, in detail, as an active citizen. And I went to the New York City demonstration (it was the only moment in my whole life, when I carried a German flag larger than the small sign on the shoulder of my soldiers uniform) and I stood before the local supermarket in Poughkeepsie, with an older, more experienced guy.
People told me later on, after a photo, it was Pete Seeger, who played at the Obama inauguration
The story of Neutron-Jack (Welch) I do know for a very long time, I think for more than a quarter century, from many different angles, often from the angle that Siemens (nyse.SI) the German main competitor, was endlessly beaten up for not being more like GE. Take a look at long term performance comparison now.
It is this long term thinking, what I miss in the US now.
With national stereotypes, I have thought some time, whether there is something special about certain nations, and mostly I dont think so. If Germany wouldnt have got out of sync with the reunification, we would have had our real estate bubble too, just like the rest of the western world. Actually our private debt bubble was more severe in 2000, do you remember this plot?
http://www.slideshare.net/genauer/consumer-debt-9349151
November 14, 2011 at 1:16 am |
Over 100 yrs ago, Vilfredo Pareto observed that a few people had most of the money. When he studied he compared the data for every country that collected statistics, he found the same thing. This observation gave rise to the 80/20 rule.
Countries have gone from a policy of very low taxes to confiscatory tax policies where money is taken from the rich and given to the poor, but the relationship still holds: The world’s richest 25% control 85% of the wealth.
Warren, as a student of statistics, why do you think that raising taxes will solve the distribution of wealth issue you perpetually harp on?
November 14, 2011 at 1:56 pm |
Vinnie Says: “Over 100 yrs ago, Vilfredo Pareto observed that a few people had most of the money…This observation gave rise to the 80/20 rule. Countries have gone from a policy of very low taxes to confiscatory tax policies where money is taken from the rich and given to the poor, but the relationship still holds: The world’s richest 25% control 85% of the wealth. Warren, as a student of statistics, why do you think that raising taxes will solve the distribution of wealth issue you perpetually harp on?”
There is lot of variation around that 80/20 “rule,” as U.S. data supports. And that variation can have huge ramifications for society, as we are seeing. For example, in 1983, the top 20% had 81.3% of the wealth. But by 2007, the wealth of that top 20% had climbed to 85.0%, a huge difference from the 80/20 rule. And, if you look at the tax changes over that time period, you will see that they favored the rich and likely contributed to this change.
If you look over an even wider time period and at the very wealthy, you can see the great variation of wealth over time. For example, in 1929 the top 1% had 44.2% of this country’s wealth. This had dropped down to 19.9% in 1976 (a drop of 55%). It was back up to 34.6% by 2007. (Sources: 1922-1989 data from Wolff (1996). 1992-2007 data from Wolff (2010). And the estimates for 2011 for the top 1% vary between 38% and 40%. Note that we are getting back to the wealth discrepancy numbers that we had just before the Great Depression.
So, wealth discrepancy is certainly not stable at 80/20, nor is it immune to taxation policy. But your choice of words, that I “harp on“ these numbers, indicates that you either don’t believe these numbers or you feel that they are meaningless. Since either is beyond my comprehension, please explain!
November 14, 2011 at 3:18 pm |
Warren, the 80/20 Rule is an approximation, it is not absolute number. It is a shorthand for the lopsided relationship between causes and results.
The point is, wealth distribution follows the 80/20 rule whether you have low taxes or confiscatory tax policies.
I think that the numbers are meaningless because regardless of government policy you will always have a disproportion between rich and poor.
You want to think of money as a zero sum game. It’s not. Let’s raise the boat for everyone and stop the divisive class warfare!
November 14, 2011 at 4:18 pm |
Vinnie Says: “The point is, wealth distribution follows the 80/20 rule whether you have low taxes or confiscatory tax policies.”
Well, I just gave you all kind of numbers that show that the wealth distribution varies all over the place, and there certainly is a correlation to tax policy (note that I said correlation; no one can prove cause-and-effect of most natural data). But you just choose to ignore the data. I guess you have a more valid input than data, but you are choosing not to share.
You also say, “I think that the numbers are meaningless because regardless of government policy you will always have a disproportion between rich and poor.” Okay, I am right! You choose to ignore the numbers! But, tell me when I have ever, ever, ever, said that we would not “always have a disproportion between rich and poor?” But, doesn’t the degree of disproportion matter? Would it be okay, and good for the economy, if the top 1% owned 99% of the wealth? Would there not be some point where it would be both immoral and harmful for our society?
You also say, “You want to think of money as a zero sum game. It’s not. Let’s raise the boat for everyone and stop the divisive class warfare!” At any point of time, it IS a zero sum game. And, the whole issue is how to raise the boat for the future. It certainly is NOT going to happen by continuing to flow money into the hands of the very wealthy where it is largely dormant, tied up in wealthy toys. Poor people spend their money and therefore drive the economy. And, you will not find any study that supports that accumulation of excessive wealth for the few drives innovation or job creation. Goodness, if it did, we would have been creating countless jobs over the last twenty years.
Quit using terms like “class warfare.” As Warren Buffett said, if anything it is currently class warfare of the wealthy against the have-nots. Overly simplistic labels like class warfare have only one purpose, to stir up anger and emotions.
Now, in my last two replies I have given you data and logic to support my stand. Do not answer by making more statements that you cannot support by data and logic. Otherwise you will get an automatic membership into the flat world society. They ignore all data too!
November 14, 2011 at 4:49 pm |
I provided data, the distribution of wealth is roughly the same as it was 100 years ago.
You say, “And, the whole issue is how to raise the boat for the future.It certainly is NOT going to happen by continuing to flow money into the hands of the very wealthy where it is largely dormant, tied up in wealthy toys. Poor people spend their money and therefore drive the economy.”
Please show me your data to support your contention that the money of the rich is “tied up in wealthy toys”! Wow, what causes you to have so much anger that you are so resentful?
The fact is, the wealthy are movers and shakers, and job creators. The poor have money to spend because the wealthy create jobs and opportunities.
If you are poor and want to be wealthy, there’s a simple formula: have a novel idea that satisfies an unmet need. As they say, build a better mouse trap, and the world will beat a path to your door!
November 14, 2011 at 6:23 pm |
Vinnie,
As I stated earlier, in 1976 the top 1% had 19.9% of this country’s wealth. For 2011 they have approximately 40% of the wealth. That is a doubling of wealth for the top 1%. So don’t give me that silly statement that the disproportion of wealth has been constant. And if indeed, the wealthy are, as you say “…job creators,” then how come the unemployment rate in 1976 was 7.7% (per the U.S. Department of Labor: Bureau of Labor Statistics) and it is currently at 9.0%? Where are all the jobs the wealthy have created with all their growth of wealth since 1976? Note my use of specific data, not generalities!
You also say, “If you are poor and want to be wealthy, there’s a simple formula: have a novel idea that satisfies an unmet need. As they say, build a better mouse trap, and the world will beat a path to your door!” Nice of you to give me this fatherly advice, but, thanks anyway; I am not poor. I have been very successful and do quite well, thank you. And I have quite a few patents and inventions, so I suspect that I understand inventors and entrepreneurs better than most. Read my most recent book “A Step Beyond Six Sigma: Manufacturing Innovation” and you will find that, in contrast to what some in government are saying and you apparently believe, being a millionaire or having the drive to be a millionaire is NOT the primary motivation for innovators. Read about Steve Jobs or Bill Gates and see if that was even on their minds in the early part of their innovation processes. Nor were Jobs or Gates being backed by millionaires when they started down their innovative paths that created so many jobs.
You also ask, “…what causes you to have so much anger that you are so resentful?” Anger perhaps; resentful no! When I wrote my first book on the coming depression, I thought that, with data and logic, people’s mindsets can be changed and perhaps we, as a country, can quit doing such stupid things as we have in our recent past. I see that in exchanging comments with people like you that you are immune to the power of logic or data. And yes, it frustrates me to the point that I regularly feel “the hell with it, let them continue in their foolish ways comforted with their blinders to reality. After all, I am very secure and comfortable, why worry about the future for others!”
Then my Grandchildren visit!
November 14, 2011 at 7:43 pm |
Warren,
I love you recent comments and agree a lot.
And I did realize here as well that my personal behavior (protesting against wrong wars and serving in my nation’s Air Force, in close time proximity) is not exactly typical, but in fact something we (in reality a very few of us, who read things like the federalist papers) admire(d) as good citizenship, like the Americans (in the 60ties, it somewhat seems to turn out).
One thing, which came to my mind again:
how did you come to compare US private debt to Japanese data,
for your very impressive 2007 prediction, which were, at that time, not exactly broadly discussed.
From what I take from this blog is, that this is for you not asking for your “secret sauce”
November 15, 2011 at 12:54 am |
genauer asks: “…how did you come to compare US private debt to Japanese data,
for your very impressive 2007 prediction, which were, at that time, not exactly broadly discussed.”
There were quite a few books out before my book “predicting a downfall of our economy sometime in the future.” But most were light on supporting data, and those that used data often used them incorrectly. So, with my background on writing books on Six Sigma, I decided that it would be interesting to look at this problem with the same questioning attitude someone uses when doing a Six Sigma project. “In God We Trust, Everyone Else Must Bring Data!” Also, I wanted to see if by examining the data I could not only predict our economic future but also make some reasonable forecast of timing other than “some time in the future.”
Many articles/books opined that we were economically following the path of Japan. So, I was not the first with this observation. But I wanted to see if there were data on Japan that we could expect to replicate with a time delay, which included consumer debt. I could see that we were tracking Japan with a delay. It is always dangerous to extrapolate data into the future. But in this case, logic supported this extrapolation. Also, other data supported the same time frame, such as when adjustable rate mortgages were to be reset, when savings rate reductions would hit zero at the rate they were going down, etc. As for using the consumer debt maximum that Japan reached as my prediction for the U.S., I believe that there are enough cultural motivation similarities between the U.S, Japan, Germany, Canada, Britain, Australia, etc. that we can learn from each other’s follies. That would NOT be true for countries like France and Italy that have more of a laissez-faire attitude toward life in general.
So there really was no “secret sauce” other than being willing to dig out the data and examine it.
November 15, 2011 at 5:35 pm |
Warren, you say, “the money of the rich is “tied up in wealthy toys”.
You say that you are data driven and you criticize Vinnie, yet you provide no data supporting this statement.
What do you base this statement on?
November 15, 2011 at 7:01 pm |
Jasper Says: “Warren, you say, “the money of the rich is “tied up in wealthy toys”.You say that you are data driven and you criticize Vinnie, yet you provide no data supporting this statement.
You are correct in that I gave no data supporting that the money was “tied up in wealthy toys”. But, I was answering his comment that the wealthy create jobs, and I did give data that actually showed a negative correlation. Yes, I can only show negative correlations because cause and effect can not be proven with real world data. But having data showing a negative correlation is a much stronger argument than having no data at all supporting the wealth/job creation. So my criticism holds! No supportive data at all was supplied showing a positive correlation between excessive wealth accumulation and job creation whereas I did give data showing the opposite!
But you are right that I don’t know that the money is “tied up in wealthy toys.” It could be hid in mattresses, buried as gold bullion, hung on the wall as Picassos’s, or whatever.
November 15, 2011 at 8:29 pm |
Wonderful,
“In God we trust, everybody else must bring data” lead me to http://en.wikipedia.org/wiki/W._Edwards_Deming
good thing, highly recommended reading ! I had read and heard of Deming before, in SPC books.
Any comments from you about Taguchi ?
In Germany even conservative folks quote Lenin for this:
“Vertrauen ist gut, Kontrolle ist besser”.
Trust is good, control is better, with “Kontrolle” here more used as “checking” than “Command & Control”, but is has both meanings.
November 15, 2011 at 11:25 pm |
Warren, Europe has a more equitable distribution of wealth than the US yet it traditionally has much higher unemployment.
How do you explain that?
The super wealthy have created quite a few jobs, just look at Bill Gates, Warren Buffet, Steve Jobs, etc.
How many jobs have the super poor created?
So with your plan, the gov’t takes in more money from the rich. Then what, more Solyndras?
I’ll take my chances with the rich versus the gov’t.
November 16, 2011 at 12:53 am |
Will Says: “Europe has a more equitable distribution of wealth than the US yet it traditionally has much higher unemployment. How do you explain that?”
Please supply supportive data. Also, you are adding in countless other variables, like different political systems and cultures. You would be wise to stick to the U.S. for comparisons rather than include other countries unless you are just trying to support a preconceived notion.
You also say, “The super wealthy have created quite a few jobs, just look at Bill Gates, Warren Buffet, Steve Jobs, etc.”
How come Warren Buffet generally agrees with everything I say?
You also say, “I’ll take my chances with the rich versus the gov’t.” The CEO’s at all the large banks and corporations just LOVE people like you! Jack Welch would literally adore you and probably invite you to his home!
November 16, 2011 at 1:57 am |
Warren, didn’t you work for Jack Welch? Apparently your conscience didn’t bother you enough to quit!
November 16, 2011 at 5:25 pm |
Will,
just like Warren, I would be very interested in your data about wealth distribution, especially between the US and some Euro countries. Please make sure, that you compare in the same year, which shouldnt be 2000 or 2007
For income distribution I looked at the US and DE in quite some detail. And when you do this, and factor in all taxes, other government payments, health care etc. to arrive at the net, you get a pretty simple picture:
the 10th percentile gets about half the median, the 90th twice.
And when you think a little more, than you know that the upper percentile “income” depends on whether it was a good year for stocks or not, and this usually shows up only years later in the tax receipts. For the lower 10 %, the question is, how much of this is declared, and this can be very different over time or between countries. .
This overall picture was not much different a 50 and a 100 years ago. And the upper 1 or 2 % get about 15 % of the total on top.
But you have to look pretty careful. In the US everything is taxable
(not the Munis, but their yield is lower for that), long term capital gains. Selling houses.
In Germany, for everything bought before End of 2008, long term capital gains (lets assume 8% minus dividend) are not taxed, and the dividend (2%) or interest was taxed this way: divide the gain by half, and then tax this half fully (45%) In this way you pay effectively 45 % * 2 % = 0.9 % tax (relative to the 8%), but it shows up in the tax statistics as “fully 45% taxed”. Looks much more “just”
In the US you pay 15 % fed + 10 % state (NY, CA) = 25 % on the 8% = 2 % tax, but it shows up as 15% taxed in the fed tax statistics, which most people look on only, like Piketty / Saez.
Real relation and the picture people have is completely turned on its head.
If real incomes in the US were really higher and more skewed toward the rich, then as experienced PhD I should be much better of in the US, right ? Why did I then move back?
last thing, if you would always leave a company, you have worked for for many years, because you don’t like the new CEO, o my.