3 votes

Challenge: Are you smarter than a talking head?

According to this talking head, the economy is not growing because CEO's have been hoarding money instead of investing it.

http://money.msn.com/top-stocks/video.aspx?videoid=3b3bd060-...

I'd love to take apart his argument, but I'm out of town for a couple of days. Can the DP community rebut this?




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Cyril's picture

And how about the economy isn't growing simply because IT CAN'T?

And how about the economy isn't growing simply because IT JUST CAN'T?

***Clue Time !!!***

Stunningly beautiful charts of huge Himalayas of printed money heading to favorite, lucky "too big to fail" accounts (too bad, it's not yours or mine, right?) ... that can't produce sh.i.t to put on shelves :

http://dotxml.brinkster.net/2012/Misc/G4_Charts.pdf

Workforce participation (by the Bureau of Lying Statisticians themselves) :

http://data.bls.gov/timeseries/LNS11300000

Shadowstats inflation data :

http://www.shadowstats.com/alternate_data/inflation-charts

The more you redistribute, the more you have to, seemingly :

http://en.wikipedia.org/wiki/Supplemental_Nutrition_Assistan...

No-nonsense entrepreneurs vs. retarded, fraudulent, accomplice academia :

http://www.dailypaul.com/273083/peter-schiff-responds-to-pau...

But, hey, maybe I'm just exaggerating the concerns and relevance of the clues.

Granted, I'm just a nobody / no-economist.

Still,

'Hope it helps :)

"Cyril" pronounced "see real". I code stuff.

http://Laissez-Faire.Me/Liberty

"To study and not think is a waste. To think and not study is dangerous." -- Confucius

It can't because we have to

It can't because we have to compete with 50 cent an hour Chinese labor and other wage arbitrage countries. All the so called free trade agreements, NAFTA, CAFTA, GATT/WTO removed virtually all consumer products manufacturing plants from the USA. Consumer purchases are 70% of the economy. The total number of paychecks earned today is about the same as in 1979, despite there being a 50 million increase in population. That's what so called free traders want, that's what we get. It's just math calculations.

Wiseguy don’t ever repeat that statement again,

, it makes you sound ignorant.

You have fallen in to the nonsense of Keynesianism without the knowledge to refute it. Productivity through better management and invocation of automation would put output per hour on par with 50 cents an hour wages. The reason the manufacturing base has left this country is because of the perverse Pre Revolutionary War British Mercantilism system of manipulating the dollar to finance the USG debt. NO OTHER REASON PERIOD. The USG needed to have this debt financed without the natural responses of either raising interest rates or monetizing the debt, so they choose to export our inflation along with the manufacturing base. This wasn’t the plan, to export the M-base, it was an unintended consequence. It happen so gradually, they never understood it. Another unintended consequence (though not in contradiction because these are service jobs that cannot be automated) was the decimation of the low scale wage rate by allowing the free flow of low wage workers over the border, which took the purchasing power out of the average consumer’s pocket. You could not have screwed this up more if you had planned it (and no I don’t believe in conspiracies…..I believe in the corruption of everything government). But It’s just not the end manufacturing base jobs being lost, but also what Von Mises referred to as the "upper level" jobs of manufacturing. The companies that build the automation machines and equipment that the end manufacturing base jobs need in order to compete. This is what has wrecked this country…..the government put their interest ahead of the country, in order to pander for votes. All the consequence Peter is talking about in that video is a result of the root problem I just laid out……the root problem in government never ending need to grow by pilfering the pocket of the citizenry and the primary tool is………INFLATION.

Cyril's picture

Yes... ALSO !

Yes... ALSO !

Thanks for the refresher. Forgetful me.

"Cyril" pronounced "see real". I code stuff.

http://Laissez-Faire.Me/Liberty

"To study and not think is a waste. To think and not study is dangerous." -- Confucius

Yeah probably

OK here’s the deal

In order to refute his hypothesis you would have to refute his information because the theory is basically correct. I will address the theory first. The whole reason to calculate GDP is to measure the gain in wealth based on the productive capacity of the country.

There are three types of capital, human capital, natural resources and capital formation. Think of it this way. A wheat farmer owns the land that he farms, he owns all the equipment and he owns himself, he has all the capital he needs to generate further wealth. So he plants the seeds and harvests his crops, using his equipment and his labor and at the end of the season he generates a profit greater then he would have using his capital resources for other opportunities……he has generated an accounting profit as well as an economic profit. By taking his past profits and investing is capital equipment that makes him more productive his profits are quite possibly greater then had he invested the money in another opportunity……say like a small startup company in the next town. He would calculate what his “internal rate of return” is using a “discounted cash flow analysis” in the two opportunities and he probably decided he would get a greater IRR investing in capital equipment for himself not only for this year be for years to come.

Sounds like an easy decision but it’s not and these decisions are made every day by CEO’s. This is why companies sit on cash…..because there are not enough opportunities to invest in that return a IRR greater than where they have it invested now. This is what he is referring to when he states that the CEO’s are eating their “seed corn”. But what he is stating is correct that the “seed corn” is vital to future wealth generating activates. The CEO’s are not investing even in the companies they run because the IRR tell them the returns are too low. This is really the bases for what called the “opportunity cost of capital”. Capital will flow to where it is treated best…..the essence of Adam Smith's “invisible hand”.

An analogy of someone “eating their seed corn" would be someone that has put a down payment on house then uses cash out refinancing to go on vacation….you are eating your seed corn. If you put 50k down on a 150k house and the selling prices have gone up to 200k in your neighborhood you now have 50% equity. Let say you use 50K of the equity to just go out and have a good time. So you want to now sell and you get your 200k asking price, but your payoff is now 150k……and you get your original 50k back to put in your next house, but now you can’t move lateral or up, because all houses, along with yours, have gone up…..you have eaten your seed corn and now must buy less house…..this is why I couldn’t ever understand people using cash out refinancing, unless it was to do home improvements.

An increase in wealth is not measured as an increase in consumption, but that’s the way GDP is calculated, at least when using Keynes’ “expenditure model”.

But in order to analyze what he said you have to understand where he got his information.

So allow me to introduce the two different methods of GDP calculation. There is the “Income Model” (IM) and the “Expenditures Model”(EM). The reason I bring these up is because it is important to know how to understand the difference to explain the manipulation of the GDP in the Keynesian model. I am sure most people know the EM the one that Keynes made famous C+I+G+(X-M)=Y which breaks down to:
• C= consumption
• I= business investment
• G= government expenditures
• (X-M) net exports/imports ( if you run a trade deficit this is a drag on you GDP….we run constant trade deficitsin this country, also effects your currency exchange and external debt position….none of it is good,see my post "the deficit no one talks about"

The Income model looks like this:
• Interest income
• Depreciation
• Wages
• Business profits
• Indirect business taxes
• Rental income
Check this web site for a better comparison.

http://econport.org/content/handbook/NatIncAccount/Calculati...

Here why this matters to me. Like I said earlier an increase in consumption is not the same and an increase in wealth. Nowhere in Keynes Expenditure model does it account for the increase in indebtedness as a cause for an increase in consumption, it assumes that borrowing comes from saving but Keynes confuses himself with his “paradox of thrift”. Doesn’t hold water if you ask me. But let’s examine one component of the “Keynes Expenditure Model”……. Household consumption. Do you know how they come up with this figure? They take the employment report x the number of hours worked x the average wage rates= household consumption. This is important because this supposedly makes up 70% of the GDP Expenditure Model. Does anyone in this world TRUST the employment numbers?

Look if you really want to know what going on in the economy, you must find one source that you trust and stop watching ever news headline. The headlines are for the market (the Casino) to trade around; you want accurate information that has not been statically manipulated you have to join John Williams at Shadowstats.com. It's a pay service that I have used in the past and have recently joined again because I just can't stand all the BS. I trade the headlines…..I just need the reality too.

So let me take a stab at some of this guy’s information. I think he is getting his information from an Income model reporting site. I will look for a reporting site but i don't hold out much hope.

He stated
“Cost cutting, not hiring, cut the number of investment to boost profitability that way.

These are productive enhancement and the strategy used when you top line revenue growth is not improving. Case in point, here is a chart of sales growth of the S&P 500.

http://www.multpl.com/s-p-500-real-sales-growth

Capital formation lowest rate in 60 years 12% since 2006.
Ok I can’t comment on the capital formation rate falling 12% since 2006, but the lowest rate in 60 years is easy to explain.

How many times have you heard someone say “we just don’t make anything in this country anymore”. This is because of the strong dollar policy of the 80’s and 90’s that allowed our government to finance their deficits. If they would have let the dollar fall without interference in the market the dollar would have fallen, imports would have been more expensive and domestic businesses would have been able to compete. Ok prices would have been higher but then you would have got a more honest reading on domestic inflation. Those dishonest reading on inflation are over stating GDP too.

Corporate profitability hit peak of 11% as share of the economy average 5.5%

I know where he got this, it’s a component of the “Income model”, I just can’t find a good reporting site. If the reporter sees this post and want to go one on one, I will look at his data and give an honest answer. I just disagree based on the links I have provided below.

Cash on balance sheet 11% avg 6.6%

Don’t have an answer…..because I am too lazy to look for this one

Capital base across the country is unchanged before recession

Ditto
Economy 8% larger

In nominal terms (not adjusted for inflation) I see 12% larger ( see table 16.01-14.25/14.25)

http://www.multpl.com/us-gdp/table/by-year

in real terms 3.1% larger (adjusted for inflation) (see table 13.75-13.33/13.33)

http://www.multpl.com/us-gdp-inflation-adjusted/table

Corporate profitability is 60% higher

I just don’t know where they get these numbers, I am assuming he talking about profitability growth.

But there hasn’t been an increase of profits of 60%
http://www.multpl.com/s-p-500-earnings/
http://www.multpl.com/s-p-500-earnings-growth
http://www.multpl.com/s-p-500-real-earnings-growth

Productivity has pulled down growth to 1.8%, was 4%
The understating of inflation overstates GDP therefore overstates productivity.

Look if you really want the real information based on the methodology that was used before 1980 (yes Ragan started all this) I hate to keep saying it but shadowstats is the best source. You can’t prove they are lying without accurate information.

Probably the best response, ever

THAT's the kind of response that makes us all smarter. I read it and understood almost all of it on the first read-through. Thank you for you explication.

Thanks Ron

But I don’t think I write very well, I do have a lot of knowledge and experience in the financial world. Here are some other things I have written and posted on here.

The Winter of my Discontent, This is about boom bust cycles monetary expansion and super cycle of injecting a new medium of exchange in to an economy.http://www.dailypaul.com/292626/where-is-the-economic-recovery#comment-3138557

Rollover risk in the bond market……kinda speaks for itself.http://www.dailypaul.com/292067/rollover-risk-in-us-bond-market

Thanks DDuck for posting this……this is on bond valuation……the original post was about the 10yr bond, this got a lot of up arrows.

yield.http://www.dailypaul.com/288528/bond-market-tremors-get-louder?page=1

Someone else posted this one but I thought it was important to repost it and try and get more hits.
http://www.dailypaul.com/227924/the-best-visual-explanation-...

I have been thinking about the stock market valuation and putting something on here about it. Would that be something you would be interested in seeing? Is it over priced and why and may be something along the lines of how it’s just a giant casino now a days…..just thoughts rolling around in my head right now.

Also may be doing something along the lines of tying this all together.

If you could spread the word on the response to your question……It would help if more than just you and I knew this information……feel free to write me an e mail if you want to talk about financial stuff……I prefer to stick with that, but sometime I see things on here that I just can’t resist spouting off about.