Gas Prices And Change

The Bauman Society warns of the problems related to falling oil costs:

As you likely realize every time you pump gas into your car, the cost of fuel has dropped by about 50% over the last two years.

The Fall of Crude

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This is great news for consumers, but it’s bad news for the exploration companies extracting black gold from rocks and sand. 

And as bad as it is for those companies, it’s absolutely awful news for the states that have been collecting “severance” payments from all that oil being recovered. Oil provided a massive tax base for these states. Alaska, for example, made so much money from crude, it’s been known to pay residents an oil dividend every year.

This year, the governor said he’s going to give residents half as much as they received last year and cap the total payout to just $1,000. Yet this actually understates their problem: Alaska has a $4 billion hole to patch up thanks to lost oil-severance payments.

In an interview with MarketWatch, Alaska’s director of Office Management and Budget said: “We could close every school in the state and that still wouldn’t be enough to close the budget gap.”

While Alaska has the biggest problem, it’s not alone. Oklahoma and North Dakota each have a $1.3 billion deficit to fill. Louisiana’s is $2 billion.

So how will these budget gaps be rectified? By cutting spending and raising taxes, that’s how. That means more unemployment and less spending. In other words, these four states — which previously led the U.S. economy — will now become a drag.

That’s terrible news when the GDP of our nation is barely growing at a 1% clip. The last thing we need are more problems to hold back our economic potential.

And I’m afraid things are going to get worse before they get better. As James Dale Davidson and Charles DelValle have mentioned countless times, we are in the midst of a major shift in the global economy. The rules that were once considered “conventional wisdom” are fading away.

 All the various economies around the world are increasingly intertwining and becoming more complex. As author and historian Joseph Tainter pointed out in his book The Collapse of Complex Societies, the deeper the integration between these various economies, the more susceptible they become to a major problem.

So now, rather than wonder about what’s happening in the oil patch exclusively, we have to worry about what China’s future monetary policies will be … what Russia may do with its hoard of treasury bonds … or whether the European Union will splinter apart and push the entire globe into a new financial crisis.

We are heading full steam toward a collapse. And while we don’t have a crystal ball to tell us precisely when this will all take place, we do know that it’s inevitable. Because as every day goes by, we see more and more pieces falling apart.

All of which could mean big changes for the local real estate market...stay tuned!

Happy Investing! 

Preventing the Crash

In a recent blog, I began a review of the book The Crash of 2016 by Thom Hartmann. As promised, there are recommendations on what we must do to end the historical boom and bust cycle he describes in this book.

Here are some of his thoughts on how to do this.

--Get rid of the whole idea of corporate personhood

--Address the Supreme Court's power grab and strengthen our system of checks and balances in our government to empower organized people over organized money.

--Adopt a single-payer health care system

--Place a financial transaction tax on every single security bought or sold

--Make it easier for labor to organize

--Reinvest government funds into education, green energy, infrastructure, and social spending that generates lasting wealth for our entire nation

--Outlaw billionaires

Each of these recommendations and more, come with thoughtful ideas about how to approach and implement each agenda. The book is thought-provoking, scary but also promising some possible solutions. I'd highly recommend reading it.

Happy Investing!

The Crash of 2016

The Crash of 2016 is a book by NY Times best-selling author Thom Hartmann that outlines the economic cycles and history around the rise and fall of the middle class. Former US Presidential candidate Bernie Sanders says, "I hope his thoughtful ideas about what America needs and... where America is headed will wake us up before his prediction comes true."

Lots of eye-opening statistics and historical references that have long-since been forgotten. For example:

In his 1888 State of the Union address, President Grover Cleveland stated,"The gulf between employers and the employed is constantly widening, and classes are rapidly forming, one comprising the very rich and powerful, while in another are found the toiling poor."

Cleveland added, "Corporations, which should be the carefully restrained creatures of the law and the servants of the people, are fast becoming the people's masters."

Sound familiar?

Shortly after the crash of 1929, when one-in-four Americans were out of work, Franklin Delano Roosevelt was elected President. "The money changers have fled from their high seats in the temple of our civilization," he said in his first Inaugural Address. Now it was time to restore "social values more noble than mere monetary profit."

FDR implemented sweeping social reforms which led to the rise of the middle class and national prosperity. Some of his changes included the Federal Emergency Relief Administration, passing federal money out to the states for jobs and benefits for the unemployed; the Public Works Administration, building major projects such as power plants, water and waste water facilities, schools and hospitals; banking reassurances through the Federal Deposit Insurance Corporation; the Civilian Conservation Corps and the Works Progress Administration which put people to work.

His programs worked. In just four short years, from 1933-1937, the national unemployment rate dropped from over 24 percent to below 13 percent. From 1947 through 1979, all classes of Americans saw their incomes grow together. The middle class flourished.

Milton Friedman had a different perspective on economics. He was hired by General Augusto Pinochet to build a new economy in Chile in 1973. He and his associates would privatize government industries, cut spending, and open up Chilean markets to free trade. "As a result, the Chilean economy collapsed...and this time there was no social safety net to help the people...inflation had reached 341 percent...the price of goods increased by 375 percent...GDP decreased by 15 percent...Chile acquired a $280 million trade deficit. And to top everything off,[unemployment] skyrocketed from 3 percent...before Friedman...to more than 10 percent...after Friedman left."

Milton Friedman was later to become an economic advisor to President Ronald Reagan. The first major piece of legislation by Ronald Reagan slashed the top income tax rate from 79 to 50 percent - and the Reagan succeeded in dropping it to 28 percent a few years later - where it had not been since before the Great Depression. "It was the second largest tax cut in history. And it was nearly identical to the largest tax cut ever...the one that created the bubble known as the Roaring Twenties, which eventually burst in 1929."

Why were tax cuts to the rich so counterproductive to the American economy?

Because at a 70 percent tax rate, CEOs were more likely to "keep more money in their businesses, invest in new technology, pay their workers more, hire more workers and expand." At the lower tax rate, CEOs were more likely "to pull profits out of the company and pocket them...And that's exactly what they did."

After 1979, "the middle 20 percent of Americans saw their income grow only 11 percent [compared to 111 percent in thirty years prior]...The poorest 20 percent of Americans, meanwhile, saw their incomes decrease by 7 percent [compared to a 118 percent increase in the thirty years prior]...Meanwhile, the top 1 percent have seen their incomes increase 275 percent...Today, workers wages as a percentage of GDP are at an all-time low. Yet corporate profts...are at an all-time high."

"...just 400 Americans own more wealth than 150 million other Americans combined." And the middle class is disappearing.

In his first Inaugural Address in 1981, Ronald Reagan warned of a growing mountain of debt. "For decades, we have piled deficit upon deficit, mortgaging our future and our children's future for the temporary convenience of the present...To continue this long trend is to guarantee tremendous social, cultural, political and economic upheavals."

Yet Reagan piled on more debt than every single president before him combined; George H.W. Bush added more than a trillion more debt; and George W. Bush added on more than six trillion.

"Since Reagan, Republican presidents have combined to add nearly $10 trillion to our national debt...yet each [promised] to lower deficits and reduce the national debt."

Manufacturing jobs have been disappearing as free trade agreements have outsourced industry to low-wage factories. "Over the last decade, fifty thousand manufacturing plants in the United States have closed down and five million manufacturing jobs have been lost." Monopolies are back, and banks are 'too big to fail.'

Poverty rates have increased as a result of welfare reform, and the middle class is disappearing, as income inequality grows.

Our US history is full of boom and bust economic cycles, often followed by war. And the same forces that have led to economic ruin in the past are with us again, thanks to the "Great Forgetting" that occurs when previous generations die out and memories of economic ruin are forgotten.

This is the cheery beginning of the book...there are recommendations on what we must do to end this cycle --wait for a future blog to find out.

Happy Investing!