The US has raised the debt ceiling and avoided defaulting on its debt. That’s a good thing, right?
“Living day to day isn’t living, it is surviving with no regard for tomorrow.” John Dutton For the 90th time or whatever the number is now, we have raised the debt ceiling. America always pays its debts is a popular rhetoric, but I have to give credit to Peter Schiff who likes to say, “America never pays its debts, that’s why we have $32T in debt.” It is clear that we have some unpacking to do with regard to the debt ceiling, but first we need to do some simple economics. On my first day at university, my macroeconomics teacher had us discuss numbers. For example, did you know that I raised the day’s ceiling on my life today? I set a new record for number of days lived. All true, but pretty silly right? How about this one, we have more people living in poverty in America than at any time in history. That sounds awful right? Well, we also have more people not living in poverty as well. That is because we have more people in total. Numbers can be accurate but not tell a whole truth. Let’s say a stock is worth $100 a share and it drops 20% on bad news, and the next day the news turns out to be false and rises 20%. The stock is back to where it was two days ago right? Wrong, it is 4% less. 100 less 20% or 20 is 80. 80 plus 20% is 16 and 80 plus 16 is 96 which is $4 per share less than 100. We need to be very thoughtful when we read numbers in the government sanctioned media less we be led astray and down the road to bad thinking. Which brings us to ceteris paribus the word of the week.
Ceteris paribus- from the Latin meaning all other things being equal.
As students in this professor’s class we would have to write ceteris paribus on every single answer for every class we took from him or he would dock our answers’ points. He said the reason that he did so was to ingrain in us an understanding that in economics in a classroom the theory can be right, but in the real world there is no ceteris paribus, everything is always changing. His message was to use frameworks of logic and not just stock responses because everything is changing. Charlie Munger often says “the same man never enters the same stream twice.” This is instructive because both the man and the stream are always changing, two variables. It is the same in trying to measure economies with only more variables. Ben Franklin said “a penny saved is a penny earned.” Well a penny is pretty god damned worthless as most people throw them in wishing wells and certainly won’t pick them up off the ground.
From 1886 until 1959 a 6.5 oz Coca-Cola was priced at a nickel. Through the depressions of 1893 and the 1930s, through the roaring 20s, through two world wars and it wasn’t until Alaska became a state in 1959 did the price of Coca Cola go up. It is all Alaska’s fault right? Wrong, that is correlation not causation, another fun little trick of the media to confuse the general public. Just because something happens that doesn’t mean it caused it. Coca- Cola kept its prices steady for all of those years for a lot of reasons: they got better at producing, they developed economies of scale, and they benefited from a money supply that was pegged to gold. The government couldn’t expand the money supply at its whim. For 70 years the price of a Coke stayed steady because the money supply was fairly in line with ceteris paribus. It wasn’t exactly equal as it had fluctuations, but it was close. In the last 70 years the price of a Coca-Cola has gone up over 2000%. That’s right it cost 20 times more than in 1959. Last week, we talked about how governments were always after the power, the power to spend. The 1960s ushered in JFK and LBJ and their Great Society spending programs and a 27% increase in manufacturing jobs good for political popularity, moon travel, and the Vietnam war. America was spending money and our money, which said redeemable in gold, was being redeemed in gold. Gold was flowing out so fast that in 1971 President Nixon took us off the gold standard. We defaulted on our own money, it said it was redeemable in gold but it was not. So much for the US never defaulting on its debts but I digress. The government took that gold standard power with the swipe of a pen. Many swipes of many government pens have gotten us where we are today. Immediately after Nixon did that, the 1970s inflation devalued the pennies that used to buy Cokes. We started a 40 year export of apparel manufacturing jobs overseas because if those companies didn’t lower their costs, they would go bankrupt. Phil Knight and Nike needed young girls to manufacture Nikes in Asia or the costs of production would make his shoe prices unaffordable. Reuters reports that as recently as 2018 Nike was paying factory workers in Indonesia $102 a month. Can you imagine what they were paying workers in the late 1970’s when they started manufacturing overseas? It was pennies in comparison to what American workers would have been making.
My focus today isn’t on Nike’s labor practices as the market will bear what the market will bear but instead to point out that the American consumer isn’t the same man and isn’t entering the same stream. We have had a 40 years decrease in interest rates led by the expansion of the global business environment. The largest economy and producer exported its jobs and expertise to 3rd world countries. Since 1980 the US has lost 1/3 of its 20 million manufacturing jobs which had grown steadily for decades. Detroit Michigan, St. Louis Missouri, Youngstown Ohio, Gafney South Carolina- you can follow the job losses and off-shoring and see the hollowing out effect of these communities. The cost for cheaper products is real, tragic, and subsidized by the debt of the government today. Here is what happened in textiles as Stephanie Vatz writes for KQED…
“In 1960, an average American household spent over 10 percent of its income on clothing and shoes – equivalent to roughly $4,000 today. The average person bought fewer than 25 garments each year. And about 95 percent of those clothes were made in the United States.
Fast forward half a century.
Today, the average American household spends less than 3.5 percent of its budget on clothing and shoes – under $1,800. Yet, we buy more clothing than ever before: nearly 20 billion garments a year, close to 70 pieces of clothing per person, or more than one clothing purchase per week.
Oh, and guess how much of that is made in the U.S.: about 2 percent.”
This looks good on the surface because the American consumer gets more bang for their buck. We get to buy more, and it costs less. That is deflationary and it is by a cheaper price definition. What’s the problem C Thomas? The problem is what about the money that would have flowed to factory workers to be spent in the community instead flowed out of the community and directly to people like Phil Knight. Where is Bill Gates’ Microsoft products created? How about Apple? It also flowed to Chinese manufacturers making them billionaires as well. How could the US government sell out its cities, workers, and its sound money policy? When China became too expensive, they moved to cheaper countries like Vietnam or Indonesia. Like the Saudis and the Petrodollar, the Asian countries bought US treasuries allowing our government to continue spending. Who is going to buy the bonds, and at what price? This haunts my dreams and I repeat it again. The US government wanted to spend but needed buyers of its debt, so the Saudis and the Asian buyer allowed the US debt to grow and it grew about 20x. Let’s look at the number of billionaires in the world since the 1980’s and they have also grown about 20x. I will attach the two charts and darn if they don’t look just like Coca-Cola’s price increase. Is this correlation or causation?
Inflation is the growth of the money supply. “Inflation is always and everywhere a monetary phenomenon.” That quote is attributable to economist Milton Friedman but today we only think of inflation as rising prices. However, as John Williams and his site Shadow stats so diligently follows, the US is no longer the same man or the same stream. The US government has changed the numbers to hide the inflation. If you measure inflation the same way as we did in the 1970’s the inflation didn’t peak at 9.1% on the CPI but at a rate almost double that. Now imagine if our country hadn’t exported production of our goods overseas? The inflation has gone overseas with our jobs and in return we get cheaper products. If we are able to buy the same product at a cheaper price then it must be deflationary right? Do we see how much money the government is spending to prop up the people that they took jobs from? Governments’ power grab could continue as long as they could find more places to keep the charade going and to print money to appease the people at home, but now they have gone too far and prices are rising at home.
The obtuseness of the government to see the consequences of their actions is not surprising. Every government in history does what the US government is doing-spending. The elected officials are enriching themselves by creating policy, distributing favors, and changing definitions to appease their benefactors, the lobbyists who enrich themselves at the behest of industry. This is nothing new, but the scale of the problem is new because in the last 50 years the shackles of the gold standard have come off. This is why our country was founded on sound money and our founding fathers required it. They knew the dangers of government, which is why they created a limited government, a republic that guaranteed individual freedoms.
In biology, a phasmid is an insect that disguises itself as a stick to confuse its predators. The government is disguising itself and its actions to confuse its predators. The government’s predators are the people. Our very own Declaration of Independence states, “governments are instituted among men, deriving their just powers from the consent of the governed, that whenever any form of government becomes destructive to these ends, it is the right of the people to alter or to abolish it and to institute a new government.” That sounds bad for the government so bad that I call it the great problem after the world conqueror Alexander the Great. Like him, the government has disguised the inflation by going to the four corners of the earth to search for cheaper and cheaper costs of production to limit price increases and they have stomped on human rights of the rest of the world to do so. Using our military and our economy as a stick of their own to ensure their very own survival just a little while longer.
Hans Gruber stated that
“when Alexander (The Great) saw the breadth of his domain he wept, for there were no more worlds to conquer." Our government officials are becoming filthy rich by conquering all potential areas in which to hide their inflation, and our industry leaders are becoming filthy rich and our workers and producers acting as the losers; their standards of living are declining, their communities are declining, their children’s futures are declining. They distract themselves with ball games, cat videos, and whatever other distractions the complicit media places before them as a diversion. The problem with exporting our policies to other countries is that they have studied us and learned from us and now are doing what our forefathers did to King George. They are pushing back and deciding to not trade in dollars for oil and trade, they are deciding to not buy our bonds, and they are forcing us to do our own manufacturing. When is China going to have its own Boston tea party? They almost collided with a Philippine Coast Guard boat a few weeks ago and just last Friday they almost rammed into an American warship in Taiwanese waters. Didn’t see or hear about that did you? Were you on social media or watching Succession or the NBA finals? Diversion successful.
One question to conclude, If we lose our foreign production supply chains, what is a pair of Nikes that currently cost $150 and are made by Indonesians that make $102 a month, what would the cost of a pair of Nikes be if they produce them in the US at $20 an hour, but oh wait we have the lowest unemployment rate in the last 50 years so let’s make that $30 an hour. My guess is about 3 grand or 20x a la Coca-Cola, that’s true American inflation, ceteris paribus.
Sincerely Yours,
C Thomas Printer
On this date in history
79 years ago to be exact, one of the most courageous acts in the history of the world took place when Allied forces invaded the beaches of Normandy. Young seasick men were asked to run out of boats and into entrenched enemy forces. God bless their sacrifice.
No more financial tips since you are in possession of an emergency fund and/or continuing to add to it. We don’t give any more financial advice other than common sense from here. We will give thought exercises instead. Here is today’s thought exercise- since we talked about inflation today, what would you do to protect yourself and your family’s finances from hyper-inflation? 26% inflation or higher for 3 or more years or 100% inflation for a year. Imagine buying a car for $50,000 this year, but if you wait it is $100k next year. What would you do? Next week we discuss hyper-inflation and its insidiousness from those that lived it.
Also born on this date
No one worth mentioning in the same breath as those heroic soldiers. Their courage liberated Europe from evil. My own thought exercise is to identify with whom such courage might exist today.
Resources
Why America Stopped Making Its Own Clothes
Forty years of falling manufacturing employment
Adidas, Nike urged to ensure fair wages for Asian workers making World Cup kits
Forbes’ 35th Annual World’s Billionaires List: Facts And Figures 2021
Chinese warship cuts off US Navy ship, marking 2nd military provocation in week