Fun With Math: National Net Worth 2/12/2014

It’s probably been five years since I looked in detail at this series, but just for fun, I downloaded the latest Fed Z1 report and flipped down to table B.100 which gives us the balance sheet…Assets/Liabilities/Net Worth of the country…actually…just households and non-profits, though that should pretty much cover everything…since you would expect the value of corporations to be included in the balance sheets of households…right?? In any case, it contains great news…the Net Worth increased $2T from Q2-2013 to Q3…up to an all time high of $77.3T

But remember, this is a balance sheet so let’s start at the top. Total assets ring in at $90.9T. Is it just me, or does that sound like a really big number? How about per capita? $90.9T divided by 316M people….gives us $287k of assets per person in the US….on average of course. So…for my family of five…just to be average…I have about $1.4M of assets under my control right? Yeah….not hardly. Now admittedly…I’m not a 1%er by any stretch…but that number seems pretty damned ridiculous to me.

For comparison…let’s look at the value of only real estate assets..$21.611T. Lets say there are 117M households….that would put the value of real estate in the US at $185k per household….for all of it…not just homes, but acreage as well. I guess can buy that. According to Yahoo answers, there are 2.4B acres of land in the US….so on average…land cost is $9,080 per acre. Of course that includes a lot of uninhabitable land with limited value mixed in with Manhattan skyscrapers. Also note we haven’t taken into account that much land is owned by the government.

Rounding out “Nonfinancial Assets” is primarily consumer durable goods….cars…refrigerators, TV’s, furniture ect at about $5T…or $$43k per household. This too seems quite reasonable for a household with a few late model cars and a big screen TV in the furnished game room. All together, nonfinancial assets total $27B.


That of course leaves us with a full $63.9T of “financial assets”. Think cash, stocks, bonds, and of course $19.1T of “pension entitlements” Before we investigate this…let’s take a trip back in time to the late 1800’s a la “Little House on the Prairie”. What would a typical family think of as their assets? Their land, their buildings, equipment, animals, and perhaps a small amount of cash(or gold/silver) and stored goods. Primarily anything tangible right? Lets just say, that added all up, the net worth of our Prairie family is $1,000.

Now lets send back in time a few corporate lawyers, MBA’s, accountants and economists. Wait just a minute they explain to Papa….you are selling yourself short. You see…using modern financial and economic theories…let’s expand the definition of wealth beyond just tangible accumulated wealth….let’s monetize your future wealth….and of course…add that to the total. So your little farm here generates $2,000 worth of goods per year in the form of grain, meat, and peach cobbler, at a cost of only $1000. So let’s incorporate you in the state of Delaware, and have an IPO offering and sell for future earnings at a PE of 20….so $20,000. So you see….your real net worth…after some financial trickery we skim a big chunk of isn’t $1000…the value of all that you own….it’s $21,000(at this point who really cares if you are double counting)

And there you have it…voila….nonfinancial wealth….up from $21T in 1995 to almost $64T as of Q3-2013. This, it would seem is the real story of the last 30 years of “growth”. So ask yourself…are we really any better off? The stock market is up pretty big in the last 12 months….but the truth is, we have all of the same factories, all the same employees we did a year ago. Sure…things are always changing, but not that much. Do you really believe auctioning off and bidding up the price of our future cash flows really make us better off? The net benefit to society is the same regardless of whether the government Z1 shows Papa’s net worth at $1k or $21k….

Don’t get me wrong…looking back to 1995, when Net Worth (assets less liabilities…well except the government’s $17T of liabilities of course…those are “assets” for your pension fund) was a mere $28T(vs $77T now) I will grant you that things seem better to me personally. The houses are bigger and they all have granite countertops. The cars are faster, and safer, and they seem to get better gas mileage. The TV is definitely larger, and while I wouldn’t want to go back…the 19” mostly color TV my parents had for the first 15 years of my life never bothered me back then. It would be hard for me to say things aren’t better in some ways…just not $49T better…maybe $10T or so.

Well…I’m clearly rambling now…perhaps the point of all of this is that just about any report the government puts out is a bogus piece of crap. Don’t be fooled….rising prices for “financial” assets or even homes on net don’t actually create any wealth…it can only transfer it. If the price of housing doubles….wealth is transferred from those who own those houses to those who would like to buy those houses. At the end of the day…you have the same house that provides the same shelter….just one family is $150k richer, and one family is $150k poorer. Same goes with the stock market.

Perhaps the real lesson of the last 30 years is that we as a species are pretty easy to fool. Put a chart in front of us with a nice positive slope and more often than not…we’ll believe whatever you say.

Does College Still Pay Off??

Does College Still Pay Off?” asks  Pat Regnier  over at CNN Money. Of course it does assures the president of Arizona State University.

Our calculations and those of economists say the return on investment for a college education, in terms of additional earnings, is about 12% per year over your lifetime. The answer is unequivocally yes.

Honestly…that doesn’t sound like much, but I thought there was a very interesting statistic about halfway through the article…after 6 years, only 57% of ASU students have managed to graduate. I’m quite curious…are those remaining 43% included in the population included in the calculation? I seriously doubt it.

So a better way of looking at this is…If I take a random 18 year old high school graduate and send her to ASU, there are a handful of potential outcomes.  In scenario 1, the student makes it through the program and earns a degree. Lets just say it takes an investment…five years of her life, plus $60k. For this…she goes on and earns 12% more than she otherwise would have. This is the outcome a little over half… 57% ….of the time. Hooray!!

Now…Scenario 2 is not as pretty. 43% of the time…the student will invest at least a couple of years, and lets just say $30k….and end up with no degree. In the oil business, we call that a dry hole, and while it sure does make your performance numbers look better if you can ignore them and focus on the home runs, odds are, your CEO is going to call BS if he sees you trying to pull that in your annual performance review.

But then…this isn’t the real world…it’s education, where you get to make up whatever statistics you want in order to perpetuate the myth that keeps the money rolling in. More or less, the myth goes like this. Send us your 18 year old kid, and $50-100k…or more….and in 4-6 years we’ll send him back…he will no longer be a dumbass.

Of is just a myth. If you send them your lazy dumbass 18 year old, and $100k…odds are, in 4 years, they keep the $100k and send lil’ dumbass home to live with you (and drink your beer).

So…here is my answer. College does pay off….if the kid already has the right combination of raw intelligence and ambition. Raw intelligence…by itself, is of little use….you need the complete package. It’s the complete package that matters most. A lot of ambition and hard work, plus moderate intelligence could very well be a more successful combination than a lot of raw intelligence and a little bit of ambition.

Furthermore…for these students, perhaps 30% of the population…Whatever success they achieve after college can be 99% attributed to their natural talents…not their education. Employers hire people with college degrees not because of what they think they may have learned in school, but because of the credential. If you have a college degree in engineering from a state university, it tells potential employers something about you they didn’t know before. It tells them you probably have above average intelligence. It tells them you have the ability to set and achieve short, medium, and long term goals. It tells them you have the ability to be taught, and more importantly to teach yourself. And since you have demonstrated these skills….there is a much better chance you will be successful in their organization than some random 18 year old kid….even the same kid 4 years prior.

The college degree itself proves only that you may have potential. The company knows damn well that the 22 year old petroleum engineering graduate knows almost nothing about the real world of petroleum engineering or the oil business. That kind of  valuable knowledge will never be attainable in a classroom. However…they are willing to hire the 22 year old because of what they will be able to do after a decade of training.

Now…it is by no means a fool proof selection system. Plenty of sub par candidates manage to get a college degree and into an entry level  position. If they never had the right stuff in the first place…they are not going to make it in the workplace…regardless of the degree. So…say Ivy League Jr. Gets into Harvard because of Mommy and Daddy’s contacts, but unfortunately for lil’ Johnny…he’s just not college material. When he gets out of Harvard 5 years later thanks to a few hundred k of Daddy’s money and a lot of “tutoring”…he very well may get that first job….but odds are…he’s going to get fired sooner or later. The employer hired Johnny because statistically…hiring a Harvard grad gets you a lot of intelligence and a lot of potential. As soon as they figure out Johnny can’t hack it without a tutor holding his hand…he’s done. So in this case…even though Johnny got the highest “quality” education possible…in the end it didn’t make one bit of difference.

I am quite confident that the inverse is also true. Take a kid who grew up in poverty, but blessed with incredible intelligence and a hard work ethic and send him anywhere…community college…or maybe even ASU 🙂 Ten years after college….this kid is going to be working side by side with the Harvard grads of equal skillset.

So…bottom line, as I discussed here, college is not about education at all, it is about credentialing. Basically, College is a 4(-6) year comprehensive IQ test employers use to identify candidates who have the potential to perform complicated, and thus high $ tasks. So…if you have a smart kid, who is highly motivated to succeed…by all means…send them to college (any college) to get a degree in math, science, engineering, medicine, education…or maybe even accounting 🙂 For them, if they are successful, the degree will get their foot in the door and allow them to prove (or disprove) to the world they have the right stuff.  For these kids…the payoff for a college degree  is huge. However…if the kid just doesn’t have it….you can send them to Harvard for that Liberal arts degree…and in 5 years they will be back at home working at JC Penny or if they are lucky…Starbucks, and they will have essentially wasted 5 years of their lives, and a whole lot of your money.

**Just a quick clarification…obviously we are discussing the monetary return of going to college. It has been my experience in life that intelligence and  certainly income have absolutely zero correlation with character. So, let me be perfectly clear…An individual’s intelligence…be it 80 or 120, is simply a measurement of a physical different than height, weight, shoe size, or beauty. None of these tell us anything about the quality of the character or value as a human being. However…it is naïve to think that our physical characteristics do not influence our earning capability. At 5’8″, and 170#…my odds of ever playing in the NBA, or becoming an offensive lineman in the NFL were infinitesimally small from the moment I was conceived….I simply lack the genetic profile to exceed at these high paying professions. Same goes for countless other professions. Forget the arts…I can’t sing and my six year old son makes fun of the stick figures I draw. Construction…not a chance. About 10 years ago I bought a $10 book with plans for building a shed…and about $1000 of materials to complete the job. A few months later, I had the ugliest most poorly constructed shed in town. As it turns out…about the only thing I am professionally competent to do…is accounting and finance. Fortunately for me, this seems to be a rare talent that happens to pay well enough to keep a roof over my head and a protector in my pocket. Let’s just get it out there…the whole system is screwed up and beyond repair. Companies are to blame, government is to blame, colleges are to blame, and parents are to blame. Sending a kid in the bottom quartile of his class to college to get a degree in liberal arts benefits nobody but liberal arts professors and the colleges that employ them. Not everybody can grow up and become a rocket scientist….We need to start being honest with our 18 year olds about their prospects before we let them become slaves to their student loan debt. There are plenty of paths to financial and nonfinancial success in life that do not require a college degree.

Fun With Math: 8/1/2013

Per the June Monthly Statement of Public Debt, of the $11.9T of public debt outstanding, about $1.568T of it is bills…that is 12 months or less, and about $1.320T of it is 30 year bonds. So the $ of bonds outstanding  are roughly about the same…just a $250B difference…. a rounding error really 🙂

This is what I find amazing….the annual interest paid on the 30 year bonds is about $68B per year according to my calculations. Anybody wanna guess the annualized interest on the bills? A mere $1.5B….for an effective interest rate a little less than 0.1%. The weighted average rate on the 30 year bonds is about 5.12%….54X higher!!

That blows my mind…the annualized interest paid on this $1.6T of debt is a mere $1.5B. Where do I sign up? Anybody think the Bugatti Dealership will float me a $2M interest only loan for a Veyron??

On the other side of the equation, bonds make up only 11% of the debt outstanding, but their $68B of annualized interest expense makes up a full 31% of the $220B of interest paid over the last 12 months.

It has never been clearer to me that the whole point of all the interest rate manipulation…QE 1,2,3,XX ect… has absolutely nothing to do with stimulating the economy, stimulating lending, the housing market, the jobs market ect… No, the singular point of all that nonsense is simply to keep the budget deficit from exploding. It’s hard to go technically bankrupt if you can borrow an infinite amount of money at effectively 0%. But when they lose control…and they will…it’s game over. Effective rates on the debt outstanding are under 2%….even a mild increase to 4% and boom….it’s over. Just imagine if one day the world woke up and realized that lending $11.9T unsecured debt to the morons that run our government (with an astounding 15% approval rating) at effectively 0% (after inflation) is a pretty stupid thing to do. Don’t get me wrong…I’m not holding my breath. 30 years of stupid isn’t going to fix itself overnight…but it will work itself out someday.

College: Education

We have all seen hundreds of stories over the last 5 years or so….college students graduating with tens, or hundreds of thousands in debt, only to be unable to find a job….ultimately settling for jobs in retail, coffee shops, and restuarants.

So…what is going on? Let’s start with the myth we’ve been telling high school kids and their parents for 3 or 4 decades now. All you have to do is go to college (and graduate) and the world is your oyster. You will walk off of campus, get a good job, and go on to make millions more than you would have if you had skipped college and learned how to weld, fix cars, or be a plumber. It’s all a huge lie….taking advantage of the confusion between correlation and causation.

You see…it is completely factual that if you compare the income of college graduates to high school drop outs, college graduates will have a commanding lead. However, that income gap has absolutely nothing to do with the fact that one group went to college. The truth is…and as a society, we are far from being able to accept this, but the truth is…the college degree or not, people who make more money…do so because they are simply more talented. They were talented before they ever stepped foot on a college campus…and whether or not they ever went….it is their natural talent that will ultimately be responsible for their success….not the fact that they got the “education”…or the supposed quality of that education.

So…if this is true…that 18 year old kid with let’s just say talent in whatever field happens to be in the top 10% or so of the population(in that field)…is going to go on and be successful regardless of what “education” he gets along the way. On the other side….the kid who is not particularly talented….is unlikely to attain classically defined (aka monetary) success….regardless of what kind of educational opportunities he is given. This is perhaps the part of the myth we want to believe the most…that we can take any kid…regardless of his natural intelligence and aptitude….educate him (throw public money at him) and end up with an above average result.

So…the real problem is….parents have bought into this myth, and instead of only sending say the top 25% or so of the most academically gifted…we end up sending a full 60%. So…when these lower tier students do manage to graduate…either with a degree in history, liberal arts, or basket weaving from the University of Pheonix…it really shouldn’t surprise anyone that they end up working at McDonalds….for a 21 year old manager who wasn’t foolish enough to waste 4+ years of his life and tens of thousands of dollars on college.

So…confession time… I have a bachelors degree in accounting and an MBA, and while I have no regrets, the truth is…I learned very few real life skills in the pursuit of either degree that have been instrumental to my professional success. I learned more in my first 3 months on the job as a 21 year old accountant than I learned in all the classes combined in my undergraduate studies. My MBA…well, I learned more reading “The Economist” and The Oil And Gas Journal” in the library between classes than I did in class. You see….college is not about learning at all…it’s about credentialing.

So…say I am an employer…looking for, let’s just say an intro level accountant. Obviously…I’m going to seek out and hire somebody with a bachelors degree in accounting. However…not because I believe that the new graduate has learned much of anything…it’s for something quite different. See..I already know that any fresh accounting grad…whether they are from State U or an Ivy League…are going to be fairly clueless. But…the fact that they have a college degree does tell me something about them. It tells me first and foremost…that they probably have an above average IQ. Second, it tells me that this young individual has more than just raw intelligence…they have the ability to set, and achieve short medium and long goals. It also tells me there is a good chance they have an acceptable level of interpersonal skills to work well in a corporate environment. Now…I am fully aware that many people without degrees also have these exact same characteristics, but statistically, my odds of finding a good fit for my company are much higher if I just pick a random person out of the population of accounting graduates than picking a random person from the general population. It just makes sense for me to take advantage of the admittedly flawed credentialing process in place.

You see…It isn’t important to me what you learned in your advanced accounting class senior year….truth be told….the odds of me personally passing that exam on any given day are slim to none. What is important to me…is that you were able to demonstrate you have the ability to master a complicated subject…even if you proceeded to forget it all after your finals were complete.

So let’s take this full circle….There isn’t a doubt in my mind that the large oil and gas company that hired me out of college…could have hired me right out of high school, and taught me, within 4-5 months’s or so…how to do my first job. With good mentors, and maybe some occasional book lernin…I see no reason that I could not have proceeded on the same career path that led me to where I am today…just with a four year head start.

Obviously…they didn’t do that, and it’s not hard to understand why. Even though I may have been perfectly capable of performing at that point….they had no good way to differentiate potential high performers from the rest. SAT scores??? maybe…but that’s more of a measure of raw intelligence…a good thing, but in itself, not nescesarily indicative of the “total package”. Class rank…..perhaps a broader metric….showing not only raw intelligence, but also motivation, hard work and persistence. But…how a kid performs with mommy over their shoulder…constantly nagging, and who knows…maybe writing those essays herself….it’s still a crapshoot. Finally…perhaps most importantly, the truth is…a substantial majority of all 18 year olds…including myself at that age… regardless of their natural talents…are just straight up dumbasses, and few of them are mature enough at that age to seriously start pursuing a career.

Colleges provide the answer for both parents and corporations. For a fee….they will babysit your kids for 4-6 years. After that…for the half of them that manage to pass the not so rigorous criteria, perhaps 30% of the total population will emerge with a degree… From there, businesses can just eliminate all the liberal arts and other useless degrees, to get down to the true top 15% or so of the population they really want to hire. Is it perfect?….of course not….no system ever will be.

There will always be those individuals (probably millions) with the “right stuff” who never had the opportunity to go to college, and were therefore eliminated from potential career tracks they may have otherwise found great success. However…before we get too sad about these poor souls…don’t. I personally know a lot of very intelligent people without college degrees, and the vast majority of them have done quite well…further evidence in my mind that college, while not useless (the credential itself clearly has some value) is not quite the indicator of success.

This is already quite long…so let me just wrap it up with a summary. First, talented individuals at 18 are likely to go on to be successful…regardless of what education they do or do not get. Likewise…individuals who are not so fortunate…having an inherently lower natural talent….will likely go on to achieve lower levels of success….regardless of the whether they get an Ivy League education…or none at all. Next, college serves not as a system for learning, but rather as a system for credentialing. By age 22-23 or so… ~15% or so of the population has a degree in a useful field (engineering, math, science, medicine…and of course accounting 🙂 ) This population isn’t perfect…it likely includes a lot of people who aren’t bona fide top 15%…and conversely excludes a lot who are. But…for all it’s flaws….it is a far better tool for corporate America than random selection, and better yet…it doesn’t cost them a penny. It’s like Angie’s list for young employees…sure, there are no guarantees, but it’s better than randomly picking a contractor out of the phone book.

Colleges, over the last 30-40 years, in my opinion have taken advantage of parents and students by perpetuating the myth…that it is college itself that is responsible for the relative success of the population of college graduates, rather than their inherent natural talents. The truth is, no college could ever take a lazy kid with an 85IQ, and turn him into a successful engineer, physicist, or accountant….yet, this is what they promise parents. Just send us your kid, and say $20k per year, and your lazy stupid kid will turn out just fine. It’s all a complete lie, and the statistics prove this out. In four years….that lazy stupid kid is going to be living at home with his parents, working at McDonalds, probably without a degree at all, but almost certainly with $80k of student loan debt. The college, of course has the $80k, and absolutely no accountability.

Bottom line…the College Education system in this country is completely broken, and there is plently of blame to go around, starting with the colleges themselves, our government, corporations, and last but not least, parents and students who bought the myth hook line and sinker without ever asking any critical questions. Fixing it all..well, that’s going to take a whole new essay…maybe next time 🙂

Do Federal Employees Pay Taxes? Kinda, But Not Really

One of the first challenges I faced when I decided to use the treasury department’s “Daily Treasury Statement” was to reconcile the thing to other external data points like the debt outstanding and cash balances as well as internally reconciling the tables within it to make sure I understood the report inside and out, and furthermore, trusted it. In this quest I ended up stumbling on one thing I could not answer…the “Cash FTD(federal tax deposits)” category in table II…which makes up over 2/3 of all cash deposits never tied to table IV, which summarizes tax deposits by type, like withheld income, corporate taxes ect… It was perpetually short by a category labeled “Inter-Agency Transfers”

It took some back and forth, but the good folks at Treasury provided the clues I needed. This imbalance..$82B over FY 2012 is due primarily to the affect of FICA taxes and Income taxes withheld from the paychecks of federal employees.

Before we look at that, lets start by looking at a regular employee of a fortune 500 company. Say the person has an annual salary of $100k, $25k of which is withheld from the paycheck and submitted to the federal government by the company. This $25k (plus another $7650 for FICA) shows up on the DTS as cash received in the “CASH FTD” category.

Now….let’s use the same example, but this time the employee works for the federal government. Each year…the government sends the employee his $75k of cash….but what to do with the $25k of taxes withheld? Transfering $ from one bank account to another has no net affect on cash in this scenario…unlike when it was submitted by the fortune 500 company. The plug is “Inter-Agency Transfer…essentially an intercompany elimination. This is why we have the $82 difference. That $25k of taxes “paid” by the employee show up in the official tax receipts number…even though no marginal cash is ever received…it just gets shuttled around from one federal bank account to the next…netting out to zero. 82B per year!!

Looking at this from another angle…say the federal government has revenues of exactly $1T, and the economy is perfectly stable…no change in employment, no raises ect…everything is constant. Then, the government decides to hire our employee for $100k per year. When all is said and done…government revenues have stayed exactly the same, even though income is up $100k, and reported income taxes are up $25k. Contrast that to if the employee was hired by a company…then government revenues would have increased by $25k+. Isn’t that something? The federal government could go out and hire 5M people….and it would have exactly no direct increase in cash inflows. Or…you could fire all of the current employees…and cash inflows would not drop a penny.

So what is going on here? Essentially, the cost associated with federal employees income and payroll taxes, and the revenue they represent, net to zero. The affect is…that the federal government can essentially hire identical employees, yet effectively pay quite a bit less than a company would bringing up an interesting point….that in the end, consumers pay all taxes. In order to get $75k of cash to the employee, a company has to pay $100k because Uncle Sam want’s his “rent”….as if he owned you. That cost…is pushed all the way through the value chain and ultimately ends up on the retail shelf, raising the cost of everything…probably by a factor of nearly 2 when all is said and done. Ponder on that for a while….you can raise taxes on whoever or whatever you want in the short run, but in the long run, the economy re-adjusts back to equilibrium…with higher prices for everything as the plug.

So…to answer our question…while government employees end up with the same after tax pay as a corporate employee with similar gross pay does, their income taxes more or less manifest themselves as a discount to the federal government rather than cash receipts or actual revenues. I think that the reality is…not only do Federal employees not pay income/payroll taxes…none of us as individuals do. Instead…our employers essentially pay a consumption tax on our labor pushing the cost of a $75k per year employee up over $100k.  If there were no income/payroll taxes, our employee’s take home salary would still be around $75k…but it would go a lot further because the price of everything would be 25-50% lower. Instead….consumers simply pay more. Our employer pays over $100k for a $75k employee just like at the grocery store, you pay $2, for a $1 loaf of bread.