What's It all About Alfie?

That title is misleading but those words came to mind as I was thinking of a title. It was a good movie and a great song. 

Maybe a simpler title would be What's It All About? More specifically, I was born in 1946 and I was wondering what I should have learned during all those years between then and now. 

I will admit that one personal issue is memory. What I learned is not necessarily what I remember. But that's another issue that we can leave aside today. 

Being born in 1946 means that World War II had passed and is only a story that my parents told me. I read about it in school too. But WWII was not really my thing. It was before me. I am not trying to diminish WWII as I know it had big impacts on many of you who are still alive. It just wasn't my thing. My Dad came back from the war and life went on. 

Hopefully wars and similar one-time events do not define us nor tell us what it is all about. I went to Vietnam in an Air Force uniform but I lived and I don't think it defines me in any particular way. Luckily I spent most of my time there in an office and was not involved with with fighting. So I don't think Vietnam defined me. It did cause me to have an international experience and to meet and get to know some really special Vietnamese people. 

There is always religion. For many people accepting Christ or otherwise following spiritual paths is what its all about. In college I was mesmerized by a Christian evangelist but that didn't last very long.  I like to think I am a good person even though I am pretty much an agnostic. I doubt that tells me what its all about. 

It could be all about fame and riches. I doubt either one of those dimensions defines me. I am pretty much in the middle of the road on either of those scores. Some friends would acknowledge that I am famous but only in my own mind. :-)

Another value might relate to being a good family member. Maybe that's the toughest one of all. Divorces are on my permanent record and I doubt I have been the model father or grandfather. I'd like to think I have tried but some would say I didn't try hard enough. 

What it is all about might be finding a way to make use of the precious time we have to live life in a way that let's us sleep at night. Few of us will get it right the first time. But hopefully we converge on something good. 

As in baseball, we come to bat and strike out. We try to learn from out mistakes so next time we get a walk or a hit. Unless we do something really terrible most of us get a second or third chance. 

Seems to me -- that's what is is all about. We get a chance to bat and we try to learn from our mistakes and failures. So long as we keep trying, that seems to me to be the best we can do.  

Biden and Inflation Policy

President Biden recently gave a speech in which he outlined his plans to combat rising inflation. Below are the major elements in his plan.  

The interesting common denominator among these items is that Biden assumes absolutely no blame for inflation. He is going to ride in on his dragon and save the damsel in distress.

 

The other thing to note is his preference for an approach that makes no economic sense. There are remedies that make more sense.  

The first three items (below see Major Elements of Biden's Plan) focus on his government working with other governments to intercede into petroleum and gas markets. It’s as if the people who manage those commodities suddenly decided to gouge the world.

There is little understanding of the economics of those markets by Biden and he doesn’t explain to us what will happen when the government waddles into something it really doesn’t understand.  

In his speech he says nothing – nada – about what factors are part of the supply chains of the items he intends to control. Does he really know enough to not screw up those supply chains?Does he explain whose ox is going to get gored as the heavy hand of government intercedes in complicated markets?  

As for “giving the Fed more room to fight inflation,” that is the biggest piece of misinformation (malarky) in the speech.

The Fed gets more room to fight inflation when the government takes its foot off the pedal. When the government instead spends huge amounts – that puts pressure on the Fed to monetize that debt. Monetary policy is much affected by government fiscal policy. If the Fed puts on the monetary brakes while Biden’s friends slam down the spending accelerator – it is not going to be a pretty picture.  

That's about it. It might sound good to Biden to point his boney finger of blame at providers of oil, gas, healthcare and a few other sectors. But the country would do better if he would look in the mirror and ask himself why he is unable to put a lid on government spending.

 

Major Elements of Biden's Plan to Reduce Inflation

Release more oil from reserve 

Put cap on the price of Russian Oil 

Translate lower oil prices into lower gas prices 

Work with Congress to reduce everyday expenses for drugs, utilities, and health insurance 

Stop Republicans from reducing Social Security and Medicare – and from raising taxes generally. 

Give the Fed the room it needs to combat inflation. 

 

Da Market

Da Market is discussed a lot. I guess those two words can mean a lot of things. 

In the old days when there weren't giant super stores near our neighborhoods, we went to an outdoor market and bought things. That was before my time. Then grocery chains opened up large stores that constituted our idea of Da Market. Nowadays, groovy parts of our towns and cities have something more like the old fashioned outdoor markets. It's fun to hang out in those places and you can buy just about everything there. You can also buy fresh foods that a local farmer brought to the market that day.  Local musicians provide entertainment at some markets and you might even be entertained by a local magician. Call it community. How nice. 

When I hear the words Da Market it often brings to mind stock markets. Most of us don't physically go to a stock market. Most of us call our broker or we can make trades -- sales or purchases -- sitting on a chair in our living room typing on our Internet-connected computers. Some of us have very short-term goals. We try to buy low and then sell high. In that way we hope to make capital gains. Unfortunately, that's a tough call and might even be impossible for most of us. I seem to be very good at buying high and selling low. If only I could predict the future.

Most of us stay away from the lure of capital gains. Instead we SAVE. Saving means that we don't spend all the money we earn. What fun is that? Why not just spend it all right now? Maybe we need it for the proverbial "rainy day". Maybe we will need money after we retire. Saving helps us spend when our incomes are low. 

Saving can take on many forms. We can save money by leaving it in a bank account.  We can save by buying a bond or a stock. We could save by buying a durable good -- any good that lasts a while that we could later sell. So long as you can find a way to sell any of these items when you need some cash down the road, we can call that saving. 

That's a lot of boring background to get to the idea of Da Market. Most of us use those words to describe the stock market. Many of us are invested in the stock market and the main characteristic of the stock market is that it unpredictably goes up and down. Imagine being on a roller coaster with a blindfold on. Crazy. But another truth of the roller coaster is that if you just leave your mask on and if you wait long enough, the coaster will stop and you can get off.

The stock market is the same way. You can get bowled over by all its twists and turns or you can instead put your money in some nice stocks and go back to your knitting. Its called the "buy and hold". Put a little bit of money away each month, wait until retirement, and then take your money out. For most long periods of time, you would have been blessed by a nice gain. 

Which gets us to right now. I spent my life doing the buy and hold thing. When I retired I had a nice nest egg. But in the last couple of years I saw a lot of my money disappear. Wam bam thank you Larry. Gone. 

What to do now? Luckily I have enough income off what's left to keep me going. Luckily I understand that panicking is not good. Panic means I might look at declining values and sell my remaining stocks at ridiculously low prices. I don't want to do that! So I guess I will hold a while longer!

Investment

Today's topic is investment.

Investment is one of those words that means many things to many people. A popular meaning of investment relates to buying financial assets like bonds and stocks.  Today's regurgitation is not about buying financial assets. Instead, what I delve into is investment as it refers to the buying of productive assets by firms and new houses by households.. If you took a macro course you might remember the equation: 

Y = C+I+G+NX

That equation says that the output of a nation is composed of goods (and services) purchased for consumption (C), for investment (I), by the government (G), and purchased by the foreign sector (NX). 

That I is the I that I am writing about today. As the table below shows you, investment can be either residential or nonresidential. The later is what we think of as investment spending by firms as it includes their purchases of structures, equipment, and intellectual property. The former includes purchases of houses, apartment buildings, and other residences.

As I was thinking of choosing a topic for today's blog I wondered what was going on with respect to investment in the USA. As we all know we have been through some rough times in the economy of late. The news media is very focused on topics like consumer spending, overall output, and inflation. I wondered about what has been happening to investment. Investment must have bit someone on the hand lately because it gets very little attention. 

One reason for focusing on investment is that it is the key to the future. You buy a new plant today or add on to an existing one makes it possible to increase output in the future. The new plant might also be composed of the latest equipment, technology,  and productive methods thereby allowing for an increase in national productivity. Higher productivity not only allows for more output per employee but it also can lead to higher wages without higher inflation. 

Below is a table I created using data from the US Bureau of Economic Analysis https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey

What does the table say?

In 2021 investment was $3.6 trillion. The table also shows you that 10 years before, in 2011 it was $2.4 trillion. The fourth column calculates the percentage change over those 10 years to be 54%.  That's a pretty healthy increase. Consumer spending grew by 25% over those 10 years. Export sales by only 8%. Overall real GDP increased 22%. Investment's faster growth took it from 15% of real GDP to almost $20%. 

Equipment was the largest category in investment at $1.3 trillion in 2021. It rose by 47% over the decade. New housing or residential investment grew even faster at 85%.  

If you sum investment in structures, equipment, and intellectual property, you get a measure of the kinds of spending that increase business and national productivity. In 2021 those three parts of investment totaled $2.9 trillion, up from $1.9 trillion in 2011. That extra trillion dollars -- or 50% increase -- gave firms more and better capital to work with. 

There is a lot more that can be said about the table. But today's topic is investment. Investment in the USA is a good story. We need to figure out how to make the next decade as good or better! Clearly, business optimism helps. If only our government could figure out how not to damage that fragile forward thinking.