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Quantum Economics

Jul 09
0

Proof (well…circumstantial evidence) Social Security Implemented As Stealth Income Tax

By | Commentary

A while back I wrote a post titled Uncle Madoff Sam’s “Social Security Trust Fund” which was a tongue in cheek look at Social Securities Ponzi beginnings… excerpt below

Bernie Madoff Sr. 1935 (BM) : Ok everybody step right up. Have I got a deal for you today!! All you have to do is give me 15% of your paycheck from the day you turn 18 until the day you turn 62, 65, 67, 70?? In exchange for this modest contribution, I will, at my sole discretion, give you a meager monthly benefit until the day you die.

To back up a bit, it has been a hypothesis of mine that Social Security was invented not as a program to help the all the poor widows living in poverty like the history books say, but instead, as a disguise to pass a broad income tax that would (at least temporarily) bring in far more revenue than outlays, allowing the government to spend that revenue wherever they wanted, leaving future elected officials to worry about the promises being made.

The story line kind of fits….right in the middle of the depression, people are generally unhappy with the government and probably not in the mood for a tax hike. However, revenues are depressed, and outlays are surging….what to do? Create a fake program to help widows and the elderly and a broad based tax to pay for it. Then…set the retirement age so high…most people will die before they are old enough to collect and voila!! It’s not like the public could download the data into excel and crunch the numbers themselves back then, who was gonna know the difference?

So that has been my hypothesis, but I never had any raw data to correlate with it…until now. Over at SSA.gov I found a neat little table showing Social Security’s  annual cash inflows and outflows…all the way back to 1937. Then, at findthedata.org I found the total US government historical revenues and outlays. Put them together, and the evidence is pretty convincing.

First, lets set the backdrop…From 1920 to 1930, the government ran 11 consecutive surpluses averaging $4.3B in revenues and $3.5B in outlays. Just scaling that up to 2012, that would have been like pulling in $4.7T of revenues on 3.9T of outlays…good for a $900B annual surplus….instead of the $1.1T deficit we actually recorded. Then…just do that 11 years in a row.

Then…the Depression hits. Revenues fall more than half from $4.1B in 2030 to $2.0B in 2032. Outlays…$3.3B in 2030 grow 40% to 4.7B by 2032, on their way to 8.2B in 1936. All of a sudden, after more than a decade of healthy surpluses, the government is spending more than twice what it brings in. By the end of 1934, the surpluses of 1920-1930 have been more than wiped out, with nothing but huge deficits on the horizon. They can only issue so much debt (Quantitative Easing hadn’t been invented yet)…they desperately need a new revenue stream, but raising taxes on a pissed off population doesn’t always end well. Enter Social Security. Passed in 1935….implemented in 1937.

So…anyone want to guess what the payout in year one was? Today it’s roughly 1:1. in 1937, according to the SSA, the SS tax brought in $737M of revenue..a full 14% of the federal government’s $5.4B total revenues in 1937. That would be equivalent to today, a $420B per year tax hike. Does anyone think Obama could get that passed? Total Social Security outlays that year… $1M. That’s right…they brought in 737M, and paid out $1M.

Ok…maybe it was just a fluke, maybe you had to wait a year or something, and Y1 only had admin expenses. Let’s look at Y2. $10M paid out on $375M of revenues…2.3% payout. Between 1937 and 1950, SS brought in $18.1B of revenues, and paid out $4.4B…paying out less than 25% of revenues. Not exactly what you expect from a Ponzi pay as you go program to help widows. No…Social security was designed from the start to be a broad based income tax to fund general government, and on the side (as a cover)… they would use a very small % of proceeds to take care of the few who managed to live to retirement age and fill out the right paperwork (typically before dying a few months later)

After a great start… by 1957 (Damn you FDR!!!), the math was starting to catch up and Social Security was running a deficit. And so it started. Taxes were raised… problem solved for a few years, until the math caught up again. Rinse, repeat, and here we are again… What will we do with the “Little Ponzi Scheme That Could”?

Hell if I know!! How do you tell 40M voting seniors and 60M  near retirement Boomers they’ve been paying into a Ponzi scheme 10,000X bigger than Bernie Madoff’s for their entire lives. The money is gone, and the only way to continue it is to screw over the younger generation even more than they already did with Obamacare. Also…they(the young) are young and stupid…you are old and frail…. (so it’s even right 🙂 ) I don’t know how it ends, but I am sure it’s gonna be bad for someone.

Jul 09
0

For Every Debit….A Credit (somewhere) – Accounting For Stock Gains

By | Commentary

I always get a kick out of this type of article “Dow Will Hit 60,000 In 20 Years“. Hooray…we’re all saved right….all you have to do is keep pouring 5-10% of your income into your 401k, and we will all retire like kings…say the current kings…happy to get rich skimming a bit off the top.

So…let’s imagine for just a moment that we woke up tomorrow, and the DOW…along with the rest of the stock market pulled a clean quadruple…and we hit Dow 60,000. Hooray…we’re all rich. We can all hire maids, nannies, gardener’s, and best of all, a couple Bugatti Veyrons to park in the garage of our fancy new houses. Right??

That sound great, and kinda makes sense, but to the accountant in me…I’m always wondering…what’s the other side of the entry, because for every debit, there must be a credit. So let’s think our way through it. We wake up in the morning, and the stock market has quadrupled, but nothing else has changed. We still have the same factories, machinery, buildings and shops. The stock of tangible assets is the same.

So….let’s look at two nearly identical families who have made different investment decisions. Family A has decided to invest their savings in real estate, owning free and clear a $250k home. Family B, on the other hand, has decided to invest their savings in the stock market…also $250k.

When these families wake up the next morning….they suddenly find themselves very unequal. Family A more or less feels the same….for now. Family B, on the other hand feels like they have won the lottery…just like every other owner of stock. Family B’s wealth is now 4X of Family A….all else equal. On this, I think we can agree. What may not be so apparent is that while Family A’s wealth…as measured in dollars appears to have stayed the same, the truth is, their wealth has been severely diminished by the rise in the stock market.

Lets step back and look at the economy as a whole. Assume that before the stock market quadrupled, there was $20T of wealth…$10T tangible (physical assets), and $10T intangible (stocks) After the event, the measured wealth is $50T…$40T intangible, and $10T tangible. At least…measured in dollars. But currency is…as a measuring tool, a pretty piss poor device. Over time, a secondary reallocation event will occur, making it crystal clear that no new wealth has been created. The spike in the stock market simply results in a transfer of real wealth to stock owners, at the expense of non stock owners.

Let me present another similar example…lets go back to the 2003-2008 time period…where the price of oil went from $30-150 (and ultimately back to $30) Economists and pundits screamed as each milestone was broken. $40, $50, $100, $125…. They would go on and on about how this hurt the consumer, and was hurting the economy. They obviously hadn’t been to Houston. I was in oil and gas at the time, and while the pain the consumers were seeing were real….there is a debit for every credit. As the price of oil rose…consumers saw their wealth decreasing….it took more hours of work to pay for the same amount of fuel. The oil business saw the other side of the equation….Our work was suddenly valued more…the one bbl of oil that used to only buy a dinner at Chili’s with the missus….could now buy dinner and booze at the nicest steakhouse in town. Wealth had been transferred from one large diverse population…consumers, to producers of oil. Ignoring the international aspect and looking globally….I would say that more or less…no wealth was created or destroyed. Wealth remained the same, but was reallocated among the”winners” and “losers”

Now, our two examples have used very large divergances…the price of oil going from $30 to $150 and a theoretical quadrupling of the stock market to illustrate the mechanism of what is going on at a much smaller scale all day every day….prices of everything are constantly in flux….both against the dollar (which itself changes), and more importantly, against each other. All of these result in small, and typically invisible transfers in wealth from the losers to the winners.

So…let me wrap this up and try to make my point. I guess I am saying that from a global perspective….it makes absolutely no difference what the stock market does….certainly not in the short run, and probably not in the long run. Today…the stock market is up about 0.5%. So owners of stock are obviously a little bit richer, and not so obviously non stock owners are a little bit poorer. If tomorrow stocks are down 0.5%…the exact opposite will happen. This is a completely different reality than the market myth that has been perpetuated for nearly a century….that a rising stock market creates genuine wealth for all. It doesn’t, it never has, and it never will. Economists, like most homo sapiens are quick to count the debit they can see while ignoring the credit just out of sight. The truth is, the stock market is just like the horse track, only the race never ends. Every day, there are winners and losers, but they all net to zero.


Apr 02
0

Fairy Tales: Stock Market

By | Quantum Economics
The Fairy Tale goes something like this…a rising stock market is good for the economy. As the market goes up, people have more money, spend more money, and the cycle continues. Sounds believable enough. Taking a step back in time back to the 90’s… I was in high school, and according to the news, everyone was getting rich investing in stocks. I recall one friend telling a story about an uncle or 3rd cousin or something who had gotten into day trading…apparently he could make $30k a day. It probably wasn’t true (or was only half true…he also lost $30k a day), but it just didn’t make any sense to me. I understood how companies made money…they produced a product and sold it. But when a stock goes up, where does the money come from? It just didn’t make any sense…it seemed like money was just being created out of thin air.
It wasn’t until much later, armed with the tools of the accounting trade that I was able to work my way through this logical fallacy. So let’s imagine that on a particular trading day, the entire stock market is complately flat, with the exception of one stock that pulls a clean double. It starts the day at $50 a share and a market cap of $1B, and ends the day at $100 a share and a $2B market cap. Hooray right? Without a doubt, the fortunate owners of this stock are ~$1B better off. But….back to accounting 101… for every debit…there exists an evil twin….a credit…somewhere. The reason the fairy tale persisists is because the credit is not as obvious as the $1B debit the owners of the doubling stock, but it exists nonetheless. The credit manifests itself as a type of inflation….while the owners of the stock are $1B better off….after this trading day, the owners of all the other stocks in the universe, and generaly every other person in the world, is just a tiny bit poorer.
The day before, anyone could have purchased the stock for $50…..now it costs $100. Nothing has physically changed in the economic universe. It is the same company, same employees, same manufacturing facility, same revenues, same cash flow….If the price of gasoline doubled, you would immediately recognize this as inflation, and feel a bit poorer, and while the mechanics in the stock market are identical, we tend to categorize this differently.
So I guess what I am getting at is that changes in the stock market do not create wealth, they simply reallocate wealth. We can see this in the clearly by looking at price fluctuations in a single commodity. When the price of oil rises, the relative wealth of owners/producers of oil goes up, while the relative wealth of consumers of oil goes down. These more or less wash, though I won’t pretend the economic system is so perfect that they wash to the penny. The exact same thing happens with individual stocks, or the market as a whole. So as we sit here in April 2013 with the DOW and S&P500 pretty close to “record” high’s (unadjusted for inflation of course), there is no doubt that for owners of stock, this is a good thing. But for the economy as a whole, it’s pretty much a wash. High stock prices are only good for the economy in the same sense that high oil prices are good for the king of Saudi Arabia. If you are the King…it’s not so bad at all. If you aren’t the king, and your tank is empty, it can kinda suck.
You probably are not convinced…a 5 minute blog post isn’t going to change decades of stock market mythology….all I’m saying is think about it. If the entire stock market doubled tomorrow…..would anything really change? Or would the rich just be richer and the poor that much poorer? let it marinate…I’ll probably bring this up again some day.
For bonus points…think about the inverse…the stock market instead tanks…90% tomorrow. Nothing else is changed. The factories, the infrastructure, profits revenues ect…. are all the same, but nobody wants stock anymore…Is it the end of the world, or just a reallocation event? What if it happens over a 10 year period instead of overnight. Write in complete sentences 🙂
Mar 24
0

What Does Deficit Spending Accomplish

By | Commentary, Quantum Economics
I wanted to expand a bit on my earlier post. The economic Witch Doctors are firm in their belief that deficit spending is the cure to jumpstart an ailing economy. They promise that at some point, the spending can be weaned, and the economy can stand on it’s own. We’ve been trying this for a decade and are now working on our 5th straight trillion dollar deficit, with no weaning in sight. I think it’s time to think just a little bit harder about the true affect of deficit spending. The symptom deficit spending tries to cure is declining GDP, or even just a reduction in the rate of growth….in other words, people are deciding not to transact.
In a prior article, we looked at a scenario where a buyer and a seller had a desire to transact, but were simply too far apart on price for a transaction to occur.
After haggling for a bit, the buyer is at $25, and the seller is still at $75….no transaction occurs. Oh no…GDP is crashing…prepare the soup kitchens right? Well…no. You see, the buyer has determined that the value of a massage to him is only $25. Spending $75, would mean taking a loss….which he won’t do, because he can take his $75, and get something he personally values at greater than $75…even if that something is nothing at all. On the other side of the transaction, the seller values his time at greater than $25. He would rather call it a day and spend the extra time with his kids…or watching TV, or sleeping….all things he may personally value more than the marginal $25. In this case, a non-transaction is the optimal economic outcome.
I would offer that this scenario…the decision not to transact is the natural state of things. For example…the Bugatti Veyron is a phenomenal machine, one that I would love to drive and park in my driveway, and yet…I drive a substantially less phenomenal vehicle. The problem, you see, is price, and utility. While I would surely have a blast driving a Veyron, to me, those occasional adrenaline rushes simply are not really worth a decade or two of pay…at least not to me. And if I walked into a dealership…and offered say $25k….they would almost certainly politely, or not so politely decline. And so…Bugatti, and I, though never having met, have collectively decided not to transact. The same thing happens every time you go to the grocery store. Out of tens of thousands of potential products…you politely decline on all but a few dozen….And yet the world keeps turning.
Deficit spending, in one way or another, alters this equation by temporarily subsidizing either the buyer, or the seller, or both.  This initiates transactions that otherwise wouldn’t have taken place, spiking GDP, which sounds fine…except that it leaves an extra trillion of debt on the federal governments balance sheet each year. So back to our Bugatti example, maybe the government offers Bugatti a rebate…$1.5M per vehicle sold. Now, Bugatti can afford to sell them for $25k, and with the government’s rebate, make enough to cover production cost and a healthy profit. GDP increases, Bugatti hires thousands of new employees, and all is right with the world right? Well…no, because someday…all of the new Bugatti owner’s kids and grandkids have to pay back the Billions borrowed. Furthermore….we know that the amount of marginal enjoyment these owners will get from their cars us substantially less than $1.5M….or else they would have bought them before, so while we get a temporary increase in GDP and employment, over the long term, the losses are huge.
Now of course, our Bugatti example may be a bit silly. (or is is…anyone remember the Chevy Volt?) Rather than handing out high performance sports cars, our government tends to be a little more subtle. Typically, they will just buy things nobody needs or wants, and hire people to do things that don’t really need to be done. It doesn’t have to be something completely useless…it will generally be something we would all like….just not at the going price… They will send $100 a month to a family for food…which frees up $100…now they can go buy an I-phone, which helps Apple and AT&T. They can send the money to schools, so they can buy overpriced laptops for students to misuse…saving parents money, and helping out computer manufacturers like Dell.. Or…they could just offer to give everyone over 65 a stipend and more or less free medical care…for about $1.5T per year….so those people, rather than saving for retirement over their career…can spend that money on other things.
 While all of these things do increase GDP and employment, they all actually result in suboptimal economic outcomes….overriding optimal decisions not to transact by hiding and shifting the true cost. My theory is…that you can never wean, because if you stop paying sellers to sell and buyers to buy…those transactions would simply cease. GDP would revert back to its natural, and optimum state. Only the debt would remain. Since there is no capacity, or even intention to repay, every dollar of deficit spending simply devalues the dollar. Now, official statisticians cleverly hide this in CPI, but it is quite obvious…just look at this selection of commodities from 2002-2012:

2013-03-23 Commodities 2002-2012

So…over this 10 year period, deficit spending was about $10T…and coincidentally, the price (in $) of this selection of commodities just so happened to increase…excluding natural gas, from 200% to 700%, averaging a 332% increase? This isn’t your grandfather’s inflation….this is a government intentionally debasing it’s currency based on the advice of economists who clearly have no friggin clue what they are doing…If you haven’t seen some iteration of this…it’s worth a view. It’s a series of clips of Ben Bernanke before the last financial crisis…Basically whatever this guy predicts based on his models and fancy book lernin…the complete opposite actually happens…this from the cream of the crop….best of the best of what modern economics has to offer. Get ready kids…this fairy tale will not have a happy ending.