Rumination of 99%

The law of supply and demand which is a part of any economics basic course suggest that if a demand is in excess and the supply does not fulfill the demand then there is a imbalance which the free markets will try and come up to the state of equilibrium and the invisible hand will try to make it better.
The issue I am grappling with at this juncture is that of a ordinary middle class American who is out of job and to top it off has his house under water . These are the only 2 foremost things they are struggling with on a day to day basis and nothing else because those were two of the major things an middle class American or for that matter any one is concerned about. These are the major things which bother us on an existential level . let me state theoretically that someone is out of job and he is searching for one , he goes out daily and searches for one but when at the end of day he does not get a chance to prove himself again in job market he comes back to his home and family which he is built over years and finds out his home is under water and is about to be foreclosed , just imagine for a couple of minutes what this person feels. We have all the major news channels pondering over the intricacies of numbers and how to make it right but do we know what goes on in that mind of the one who is trying hard and does not get the second chance .
On the other hand lets hypothesize a situation with a person whose house is under water but is still holding a reasonable job and gets food on the table , do you think how much of his waking hours he is devoting to the fact that his house is under water but has that confidence that he will be able to pull off this bad time with the feeling that he is wanted in the market and the skills he have will get him through this bad time sand some where he sees the light at the end of the tunnel.
All I am suggesting is that we will have to address one of the two imminent concerns , getting an employment to pay my bills and put food on the table or with my existing occupation making me feel cheerful about my life savings which has transcended in this small dwelling which we call home
Now thinking about these 2 different conditions and how to mend them is the colossal debate which is going on in this nation in recent times and has become a sadly fashionable small talk in every social gathering where everyone has his or her 2 cents to suggest.
My theory and the premise which I am suggesting can be construed as trite and commonplace but the idea to pen down my thoughts came from the urge of a common man who desires to propose something which will throw a new light on the complex economic issues which are conferred endlessly and still remain vague and intricate for a ordinary mortals like us.
And some still wonder what the silent revolutions going on around us is all about …

Spending ,Spending ...

Looking at the numbers from current economic trends we see total GDP (as of last quarter i.e. June 11) in tune of 15 trillion USD and it can be broadly stated to be calculated from the following components
• • Personal Consumption expenditure (10.6 trillion)
• • Gross Private domestic investments(1.8 trillion)
• • Net exports of goods and services (-606 billion)
• • Government consumption expenditures and gross investment(3 trillion)

Now if we say there is a 5 % increase in GDP I assume it is ( 5% of 15 trillion) around 750 billion and will have to be reflected in one of the major components mentioned above .Logically thinking the easy way of achieving this number is to go after Personal consumption expenditure(approx 7.5 % increase) than the Gross private domestic (approx 42% increase). And hence sending money to the main street via all possible schemes (tax rebates , cash for clunkers, first time home buyers credit etc)

My question would be where are we going to see the 5% increase ? Has to be Spending , Spending ..

Touchpad Firesale

From economics 101 we know initial price can be calculated by adding the cost price plus a mark up that would attract a consumer to buy the product. There can be several factors affecting this equation like break even time, branding of product, competition , value add of product .
A study of consumer behavior would give me a lot of information to price the product because at the end of day that will be a major driver in pricing.
A recent case to study on these lines would be of HP touchpad ,the new tablet was sold at 499$ and with a decision to move away from PC business and stopping support on WebOS , HP started selling the same model for 99$.There were lines of folks outside bestbuy and other retailers and it sold out in one day. HP must have done a good initial pricing due diligence effort to begin with but one still wonders what was the real reason ?

Are Corporate Profits related to Employment ?

I don’t see a direct correlation between corporate profits and employment and in fact would suggest that when the world is becoming flatter and flatter and technology advances at a high-speed this basic notion of “If a company is doing well it will hire more” will slowly taper out.
Take for example Consulting and Professional services sector which has done well and thus Big 5 are hiring in India and China at breakneck speed .Same goes to Manufacturing sector where technological advancements and outsourcing have kept the company profits buoyant where as hiring is down. I think this is a fundamental supply problem, think of it as this way , If Walmart gets a product manufactured for lesser cost than doing it in China why would it not change its procurement policies ?

Now this can be done either 2 ways one is to increase our population and thus the add cheaper workforce (which is not practical) or get the use of technology to reduce the price to produce. The demand is there but supply of labor force is short

Unemployment and potential areas for growth

For a substantial increase in GDP we agree that we need increased consumer spending and for increasing consumer spending we need to put money in people’s pockets and for that we need folks to get jobs.
This train of thoughts led me to see which occupational areas are promising and see a potential growth and here is what I pulled from a couple of sites
Unemployment statistics
• Number of unemployed = 14 million
• % Unemployed Present = 9.1
• Long term unemployed (27 weeks and over)= 6 million
• % Long term unemployed = 49.2 % of Unemployed
• % Unemployed Jan 08 = 5 %
From the U.S. Department of Labor, U.S. Bureau of Labor Statistics the fastest growing occupations from the year 2008 and projected to year 2018
I have shortlisted this list only for folks with Moderate to Short-term on-the-job training (the reason being we cannot send masses to a 4 year degree and short to moderate on the job training would be practical way forward).
Here are the areas of occupation and % increase we see majority of jobs being created in the Healthcare sector so in case we focus on this area more than other areas we can see a substantial growth in job market
• Home health aides 50%
• Personal and home care aides 47%
• Physical therapist aides 36%
• Medical assistants 33%
• Physical therapist assistants 30%
• Occupational therapist aides 30%

Source of my data : http://www.bls.gov/emp/ep_table_103.htm

Credit Crisis and its roots ...

If we were put things in perspective and chronologically enumerate the actions they would be like ..
• THE GLB Act of 1999 allowing commercial and investment banking to merge which in turn allowed risky investment vehicles to start running at full speed ( the birth of CDO and MBS)
• 2001 – 2002 Historically Low interest rates by FED to spur easy credit and interbank loans
• With all the above things and media promotion and an average Americans dream of owning a home which was construed as safe investment finally led to subprime crisis
• Finally when the bubble crashed ,t he excess inventory started showing up with home prices declining and inability to refinance led downward spiral with banks failures leading to liquidity crunch and high unemployment

Savings– In 1960 average American saved 11 % of paycheck , in 1990 decreased to 5 % and in 2003 fell to 2.5% but due to economic situation its increased to around 6%
Investment- 401K and IRA have been affected by the crisis but if we look at it from long term we have seen growth in this investment, The house which was supposed to be the safest of all has declined substantially Unemployment The drastic rise in this area averaging about 4% in Q1 2000 to 6% in 2003 and 9.1 % present is probably the biggest indicator of economic crisis and can be linked as directly proportional to savings and investment combined

Presidents Job Plan

On the President’s address to nation last night .Let me know if I got this right?
Presidents latest job speech suggested many big items involving amounts to hundreds of billions, but there was a small item which proposes that companies will get 4000$ one time money to hire workers who are out of job for period of six months ( 8 billion $ div by 4000$ = 2 million jobs) . Now for low tech jobs this can be an impetus to hire but think about how an mid to big sized organization would behave (in fact this will work in any sized business if there was a back fill position and hiring is on for that position).But would a small business owner hire a new person pay him a salary, healthcare, etc (I am not even going on the length of employment) for this one time 4K
Corporate America is not very forgiving for people who are out of job(coming from personal experience as some of my family/friends are in job market) ,so my question is would the ethos of companies change for 4000$ ? The reason I am asking this question is for 2 million jobs to be created the big guns of the industries have to be a part of this equation and only small business would not alone work out.
Viewing this from our "supply and demand" lens if a new job created is the end product on demand axis and labor force on the supply axis, I think this "4K per new job created" capital injection will not be potent enough to move the equilibrium.
Your thoughts....

Health Care Reforms

Obama Care means more people, including those with medical problems, could get all inclusive health coverage — (analyst say about 30 million more by 2013) which means demand increases drastically where as McCain’s plan would add about 4.5 million more . Looking at this issue from a pure supply and demand vision adding new members who can get coverage can be good for insurance business though the policy to insure people with preexisting conditions could drive the price up for everyone. Ideally more business should drive the insurance companies to get more customized health care plans at a lower cost rather than having pre cut plans which would does not suit everyone but we will have to see how the insurance sectors behaves this time.

Oil and Gold

Demand for Oil –Recent economic downturns have slowed the demand and to top this sluggish demand Mid East turmoil has not helped in a steady supply. The growing economies will push the demand for oil slower than past years. Let’s break the oil consumption and tackle the top 5 consumer’s demands one by one.
1. US :The IEA data shows that the consumption is going to fall about a 1% and remain there till end of 2012
2. EU : Again with the economic disasters and EU’s pledge to reduce oil consumption by 20% ,will reduce the demand by about a 1%
3. China :Double digit growth rates, surpassing US consumption by 4% and interestingly the majority of consumption is from heavy industry and not like consumer demand as in US.This will fuel the demand by at least a couple of percentage points as demand in heavy industry does not fluctuate as much
4. Japan: The Japanese utility companies have been utilizing more oil as the nuclear utilization has fell to 3o year low because of recent earthquakes. Only one of the nuclear reactors has been allowed to reopen and all others are in a holding pattern. We can expect a growth of around 1% till next year.
5. India:The demand will increase though the domestic oil covers only around 20% of consumption recent economic sluggishness has not decreased the demand for oil
With OPEC being a swing producer and the majority of members residing in Middle East, and the recent uprising in an autocratic regime, OPEC’s resolution and steadfastness in maintaining a credible pricing structure is key to the economics of oil
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Demand for Gold: The consumption of gold produced in the world is about 50% in jewelry, 40% in investments, and 10% in industry .Lets break gold consumption to see
1. India, China and Turkey who represent more than 50 % of consumption have shown a growth of 16% over last quarter.
2. Much of the new investment demand has come from the gold-backed ETFs and new investment vehicles around Gold which has been a traditional inflation hedge.
3. Gold has a little industrial or intrinsic value as compared to other metals and has always been a piece of jewelry or in personal savings in countries like India, Turkey etc.

Investors have been trying to drill the fact that gold is not an investment but a speculation and with this adage catching on in common investors psyche, if we mainly rely on ornamental and industrial use of gold we should see a normal growth in demand for gold (mainly from the Jewelry facet of consumption rather than jumpy investors escalating prices in order to hedge their bets)

Was TARP too large or too small ?

It was neither large or small but did its work partially. Troubled Asset Relief Program was to give relief to Troubled assets now if we think of
Troubled Assets = (CDO and toxic assets which banks held + Average American home ).
First goal ( not in that order tough)was to stabilize financial institutions and to get banks lending again and prevent a systemic collapse and it did that. It was always thought of as a temporary thing and folks were supposed to return the money when markets stabilized and it worked.
Second goal was to keep folks in their homes , so far that is clearly not the case , housing market is a clear indication of that goal and its failure to stop the foreclosure crisis calls for some serious contemplation
Verdict : Depending on which goal we value more our verdict on TARP size and goal can go either way

Did some one gain from Crisis of 08

Who made money ?

In my honest opinion the people who shorted their positions were the biggest gainers .This group which can be thought of as a eclectic mix of individual investors(very rare) , hedge-fund managers like Steve Eismen, traders like Greg Lippmann, Hedge fund companies like Cromwall Capital and Scion capital . Basically everyone who knew it was coming and shorted .. ( I know i sound like someone who will benefit monetarily from people buying and reading The Big Short but honestly i do not ..)

QE and the FED

QE Explained :In normal times the FED will try and intervene in the market economic activity by targeting the FED rates , typically the FED does the open market operations (FED interventions by buying large amount of short term treasuries from general market) increasing the supply which decreases the demand for cash and thus lowering the interest rates. The idea of open market operations is to lower the interest rates.
Now rather than traditional open market operations the FED is not just buying just short term treasury securities, but going after long term treasury securities ,mortgage backed securities again mainly to inject cash in the market (Quantities Easing)

History : Japan did this back in 2001(from where the QE term is derived) and we are doing the same (Credit easing ) but with a little difference essentially we are printing money and rather than buying short term treasury assets we are spreading the composition of our shopping (MBS,AAA Corporate debt,long term treasury securities) which will affect the credit conditions for households and business.

Consequences :Direct injections of money into the economy can have a number of effects. The sellers of the assets have more money so may go out and spend it. That will help to boost growth. Or like in reality they may buy other assets instead, such as shares (share buy back policies) or company bonds which we have seen in past, the corporations have money ,they are already sitting on a lot of cash.

Buying MBS,AAA Corporate debt,long term treasury securities the FED’s anticipation of reenergizing economic activities looks too audacious

Inflation, Inflation,Inflation....

Zero Inflation or stable price level policy norm goes back to classical economics and has inspired many governmental policies over last decades
In this economic situation price stability goes hand in hand with total spending or aggregate demand measured in dollar terms .Producers usually like this because puts them in a comfort zone of avoiding shortages or excess inventories in the products they produce.
This stability in aggregate demand avoids fluctuations in the real market and thus this idea works in a stationary economy only and advantages of this policy only in a stationary economy would be as follows
• This claims to stop unfair transfer of wealth from creditors and borrowers (when prices fall creditors profit and when they rise debtors profit and stability in prices halts these movements)
• This will allow the price –system to do its job by minimum of money price changes by purging any need for general price changes to compensate changes in the supply of or demand for money.
• Uncertainty in markets
Issues with Zero inflation
• Suggested salary increases are not quantifiable
• Investments halt or slowdown
• Would work in a stationary economy which is not practical

Real Unemployment

In service based economy , the real capacity of what we produce is service based , industrial utilization is good for industrial manufacturing based economy . The best measure for utilization in service based economy is employment and therefore unemployment in this
Unemployment statistics
• • US population = around 300 million
• • Adult population ( 16 yr older + old folks) = 240 million
• • Labor force (working force) = 150 million
• • Number of unemployed(no job and have looked for 4 weeks) = 14 million
• • % Unemployed Present ((number of unemployed/total labor force)) = 9.1 %
• • Long term unemployed (27 weeks and over)= 6 million
• • % Long term unemployed = 49.2 % of Unemployed
• • % Unemployed Jan 08 = 5 %
• • Marginally attached workers (want to work have looked in past 12 months are not counted as unemployed)
• Discouraged workers is subset of marginally attached workers ( not actively looking for more than 5 weeks) and thinks there are no jobs available
US Total Unemployment Rate - Including Marginally Attached Workers Plus Total Employed Part Time for Economic Reasons =16%

http://metricmash.com/unemployment.aspx?code=LNS13327709

Unemployment ,

Situation :Teenage unemployment rate increased from 13.2% in 2000 to 28 % in 2011 . For much of the past 60 years, the proportion of 16-to-19-year-olds who held jobs — either part or full time — was around 40%. In fact, in 2000 it was a relatively high 45%. In all, nearly 7.3 million teens were getting a regular paycheck..
Facts:Older workers are not exiting the workforce and in some situations are getting back in the workforce after a decade of hiatus The retail and construction sectors, which are usually key employers of young workers, have been among the hardest hit.
Potential outcome The only plus of this grim circumstances is teenage students are staying back in school in fact the school enrollment rate for 16-to-19-year-olds has risen to 83%, up from 78% in the mid-1990s which in turn can lead us to believe that we might have an increase in skilled labor force n coming years

Quantitative Easing

Direct injections of money into the economy can have a number of effects. The sellers of the assets have more money so may go out and spend it. That will help to boost growth. Or like in reality they may buy other assets instead, such as shares (share buy back policies) or company bonds which we have seen in past, the corporations have money ,they are already sitting on a lot of cash.
By buying MBS,AAA Corporate debt, long term treasury securities the FED’s anticipation of reenergizing economic activities needs to be closely watched

Freshwater Vs Saltwater Economists

http://www.nytimes.com/1988/07/23/business/fresh-water-economists-gain.html

While reading this article , I was remembering the East Coast–West Coast hip hop rivalry which resonated at some level with the cotemporary different schools of thoughts of Economists pointed out in this article.

By far the biggest difference between the 2 school of thoughts is the explanation of recessions and associated issues like persistence of recessions.

The equilibrium model from the freshwater economists advocate that economy is self stabilizing and will return to equilibrium in its due course and that there is inherently no need of any policy interventions to achieve full employment
The general malaise around economic conditions cannot be quantified by the hypothesis of equilibrium model and we have to be mindful that any economic model needs calibration and fine tuning