Archive for category economics
Oh, no . . . wait a minute. Maybe the celebration should to turn to mourning and another push to vote the Obama administration straight out of here and send them on their way to a utopian communist land they would all love.
According to this short article on Zero Hedge, due to today’s $35,000,000,000 auction on 2 year bonds, America’s debt has, now officially broken the $16 trillion mark! That looks like this: $16,000,000,000,000!!! Check out the article here to see the projected debt at this record-breaking pace.
If the Eurozone is on the brink of collapse due to debt and all kinds of economic problems, what does that say about the U.S.? Well, first we must have a clue where our debt ranks and where we are headed. In a chart (below) provided by Senate Budget Committee Republican staff under Ranking Member Jeff Sessions (R-AL), we see that things don’t look so hot for us. Why are we not busting our back ends to get things straightened out?!
If you’d like to read the article, it is here at The Blaze.
In light of this week’s podcast episode, I had to link this article from The Blaze. It is a short article with a slideshow to scroll through. Please take a moment to check out. This is the work of a former hedgefunder, Raoul Pal. As The Blaze states,
Mr. Pal, who writes for The Global Macro Investor, a research publication intended only for larger institutions, hedge funds, and family offices, believes that a global banking collapse and massive defaults will bring about “the biggest economic shock the world has ever seen” — and there’s nothing we can do to stop it.
Well, another day and another threat to a Euro Zone problem. To everyone out there that actually thinks that the recent elections are the answer to the Euro Zones problems I salute you. Not to say that you are on the right track and to a mission well done, but more so to a farewell good-bye off the cliff of oblivion. Yes, the Euro Zone elections are in and it seems the general population has voted on the side of giving themselves massive spending increasing from the government. They all want the government to spend more money to stimulate the economy. I love that general term…stimulate the economy. In further posts I can explain what that means in real terms, but right now I can explain what that means in real time. Governments around the world are going to need money to do this thing called “stimulate the economy”. So, they are going to hold what is called bond elections…usually heard about on Fox Business or Money MSN. You usually hear about bond sales from governments all the time, but do not realize how related they are to how well an economy does and to what end it dictates to what an economy can do. Let me spell it out for you on the Euro Zone.
Yes these socialists did win. Yes they promised more spending and more debt. Yes they will get more spending and more debt. Yes they will increase their countries’ debt to levels never heard of before in history. Yes they will create such a bubble of government spending we will never have known in history. Yes there will be a major fallout from this. Yes they did follow the American “Obama” concept of spending. Yes the world is on a course of debt..Or deficit…spending that will lead to a backlash that we have never seen before. However, what we will see is a short term of prosperity that will seem like the markets are doing well. We will see people investing and making good returns. It will seem like the markets have corrected themselves and that we are out of the woods as far as the housing bubble that killed us in 2007/2008. However, what has actually happened is that we replaced debt with an insurmountable pile of debt. If you have money, invest it now. Yes you will make some great returns. However, pull out within the next six months or less. This is how it works, great amounts of spending from the government makes it look like the economy is getting better, but it doesn’t create sustained growth. It only means that the numbers look good as long as the government spends, so analysts misinterpret how the macroeconomics are playing out, and so people with money fail to invest in the actual growth industries. What will happen is government money will dry up…REAL quick. I’ll explain why shortly.
Once government money dries up then there will be a major drop in GDP for all countries across the globe, which means a major recession will happen overnight. Government spending ends overnight for a couple of simple reasons. With the Euro Zone, it will end soon (this could happen in a week, 6 months, even a couple years but it will happen), because these countries will go to borrow money for their bonds (which is the process for any country to borrow money to spend beyond its means), and investors will require a certain amount of money in return (which is represented by an interest rate). The more money they borrow the higher the interest rate. Most of the Euro Zone’s borrowing limits are not just maxed out, they are in crisis mode.
So let’s say today that I have $100 to invest. I can invest in stocks or bonds. Well let’s just take for example that I lost all my life savings of $10,000 in the US stock market in 2007 and I am a little burnt out on that solution. So I look to bonds. So I want to make sure I make some kind of return in this volatile market we are in right now. I look at bonds across the board and the steadiest bond right now is the US bond. However, it is less than 1%. But I look at the Euro Zone bonds and it is up around like 6-10%. Why is that? Well, the interest is what we like to call the likelyhood of you getting paid back. It is high because it is that much more risky in which you will never see your money again. The more a country borrows, the higher the riskiness, and as we see more Euro debt accumulate it will be costly for them to borrow. Do not just take my word for it, Bill Fleckenstein also feels this way, who is a contributor for Money MSN. So I say let these crazy people get elected with these crazy ideas about spending. Once they go to borrow money that no one is willing to loan them, they will see a massive default on their sovereign debt, and there will be a massive sell off of Euro Zone debt and a flight to the American Dollar we have never seen before.
Fixed Costs and Variable Costs, and how they affect Price
To help understand basic economics we need to begin with an understanding of how prices are determined. Let’s start with a lemonade stand. Little Sue decides to go into business and sell lemonade in her neighborhood. She starts out with buying materials for the stand for $10 (or what is also called making capital expenditures). Also, lemonade ingredients for ten dollars $10 (these items are also called cost of goods sold) making her total initial investment of $20. Now, let’s assume that Sue has to pay rent for her space of $1 a day. The rent paid here is known as fixed costs, or items whose cost does not increase as volume increases (some other examples would be salaries, leases, or insurance). The lemonade ingredients are known as variable costs, or items whose cost increases as volume increases (other examples would be labor or utilities). Understanding these elements will be important later in the blog. With every $10 of ingredients she can make 10 cups of lemonade so her per unit cost is $1. Sue then decides to sell her lemonade for $2 making a profit of $1 per cup, or if she sells out a total profit of $10, which would be 10 cups x $1 (revenue – cost of goods sold or $20 – $10= $10 and her marginal profit which is profit/units sold is $10/10=$1. (It is important to note here that in some instances the capital expenditure would need to be factored in when determining at what price to sell at. For simplicity we will only go on fixed and variable costs). She opens up shop and sells out of lemonade in the first hour of business. After subtracting her fixed costs of $1 for rent, Sue makes a decent profit of $9. In this case she knows she could have sold a lot more lemonade and made a lot more money, so Sue goes to the store and buys $20 worth of ingredients. However, she can’t make all the ingredients by herself and needs help. So she hires a friend for $1 a day to help make lemonade. Again she sells out of lemonade. So, with $20 worth of ingredients she made 20 cups of lemonade which sold at $2 each cup making her $40 in total sales. Her variable costs were the ingredients that cost her $20 and the $1 in labor. So $40-$20 gave her a profit of $20. After fixed expenses (sometimes called overhead) is subtracted out, $20 profit – $1 labor -$1 rent = $18 net, or a marginal profit of $0.90 per cup sold ($18/20 cups = $0.90). Even though Sue made more in total profit by adding labor, she decreased how much she made on each cup of lemonade. You can see here as demand (or sales) increase so does variable costs. Companies generally will keep growing their sales and variable costs until they reach a breakeven point in which they are making no profit. At each increased level of sales Sue’s per unit profit margin falls like when it went from $1 a cup to $0.90 a cup. Eventually demand for Sue’s lemonade will cause her to not make any money on each cup sold while she is trying to supply everyone with lemonade that she could possibly sell to. In order to stay profitable and not go bankrupt Sue has to eventually raise her price.
I (Dave) am excited to tell you that Unapologetically Right is having another growth spurt. Today, I introduce you to our newest friend and contributor, Mike. Mike has a passion for finance, economics, and the like. Being that I’m usually an idiot when it comes to numbers, I wanted someone that believes in Biblical, conservative principles and the American way (capitalism) and can articulate these matters better than I. While I’m a numbers idiot, it seems our government, labor unions, and many others in our country are complete idiots when it comes to the simple math in economics (at least I can figure out the most basic addition and subtraction!). Therefore, we hope to use this blog as an educational tool, as well – or at least a reminder of some fundamentals. We will eventually be remembering our great founders and all the things that made America great from the beginning. However, Mike is ready to go by starting us off with the most basic of Economics 101 information. We’ll be introducing Mike on the podcast soon, too, so stay tuned for that! Without further ado, here is the inaugural Econ 101 blog entry:
Supply and Demand
Let’s begin by the simple concept of supply and demand. Let’s take lemons for example. In the chart above price for lemons will be along the Y axis and demand will be along the X axis. The line thru the middle of the chart is the amount of supply needed at any given time. Let’s say a grocery store sells lemons to its customers for $1 each. At this price there are 20 people in the market for lemons. However, as you can see in the chart, there are not enough lemons to supply everyone. In this sense, the low price for lemons causes a shortage of supply of them. So the grocery store restocks on lemons and raises its price to $2 for lemons. Now at this price only 10 people want to buy them, which causes some of your supply to be left at the end of the day. Here, the higher price causes an overage in supply. The red line in the chart denotes the price point in which the exact amount of lemons can serve exactly the right amount of people who want to buy lemons. This point is known as the equilibrium for the market. In the real world equilibrium is a mere fantasy. There is no possible way a grocery store will be able to predict the exact price and the exact supply to satisfy the exact right amount of customers wanting lemons. Markets will always gravitate towards equilibrium and hover around that point until some major cause happens. Let’s say for lemons a freeze happens and kills most of the supply for lemons. This causes that supply line in the graph to move upwards, which inadvertently causes the prices to go up. Farmers have to make back what it costs to produce the lemons plus some kind of profit so those costs and profit have to be factored into the sellable supply of lemons. The concept here is that price drives demand, which in turn drives supply. The cheaper something is more people want or has the ability to buy it. The more expensive something is less people want or can afford to buy it.