Two decades ago, my boss pulled into the sheltered parking garage next to our leased office space driving a new automobile that cost more than seventy-five grand in today’s dollars. I had to shake my head in wonder. I had only been working for him about six months, but that was long enough to determine that the only thing standing between him and bankruptcy was the paperwork being filed.
He was maxed out on all of his credit cards and owed all the relatives that would loan him money. Not to mention the banks, etc… where he was overextended. And this was not just his personal situation. The business where I worked and where he was CEO and majority stockholder was just as broke, with bigger numbers.
I knew it was probably best to keep my mouth shut, but I had to ask him why he decided to buy such an expensive auto when he could have had a reliable ride for half the bucks. He said, “Perception is everything. I have to keep up a good front.”
I asked, “Yes, but considering the precarious state of your finances, what happens when perception collides with reality?”
He answered, “Perception always wins. Put another way, perception becomes reality.”
I didn’t want to get fired, so I just nodded. But I did not believe him. Of late, however, I have come to think he might have been right. He retired, by the way, a very, very rich man.
Most of you who read my stuff know that I spent three decades advising clients on investments and taxes. I still try to stay abreast of things, and actually have more time now to listen to and read the experts. I am astounded by what they write and say. Here’s what I noticed in just one week of news.
On a recent news/business channel, the host interviewed another financial guru who said that the Fed’s pumping billions into the economy would eventually cause inflation. When you print and infuse money into the economy that has not been generated through the creation of goods and services but printed (digitized) out of thin air, the value of all money must go down. That’s reality (arithmetic), and economics (the law of supply and demand).
The guru mentioned that the cost of purchasing a cab medallion now is a million dollars in New York City. He also mentioned how fine art is soaring in price. The host remarked, “When it works its way to the grocery store and the gas pump, I’ll start worrying. Right now, we just don’t have inflation.”
Apparently, this host neither shops for groceries nor fills his car with gas. Reality: groceries have soared in the last four years. So has gasoline. Oil is over $100 a barrel as I write this. But the perception that we don’t have inflation is caused by what Fed Chairman Ben Bernanke says the rate is. When the government and Fed don’t like the inflation rate, they just change the way it’s calculated. Voila. Inflation is low or non-existent. Perception wins. Most of us start to believe it even when we know better.
Think inflation doesn’t hurt? A new high end Ford cost about $3500 fifty years ago. Today, one costs anywhere from 12 to fourteen times as much. Okay, you say, you make fourteen times as much in salary. Maybe you do, but median wages for men have actually decreased from 1968 to 2012.
Bernanke, arguably the second most dangerous man in America, is out of bullets on the interest rate front and he has made it easy for the national debt to balloon to previously unheard of levels. He used all of his bullets foolishly. There is only one direction rates can go now. They can’t drop below zero.
The inevitable rate increase that is coming will focus our attention on 17 trillion in debt because the cost of servicing that debt will become impossible to manage (and that could happen very quickly).
Perception: The Federal Reserve pumping money is going to make the economy recover. Reality: The Fed is stealing from savers and investors just as if it were holding guns to our heads and asking us to empty our wallets. In the nineteenth century, most banks paid 2.5 to 2.7% on savings. Now, the average is one percent or below.
In the last twenty years, savers who invested in “safe” investments like Bank CD’s have taken an 80% cut in pay. Retirees living on interest have been devastated. Got a job? What if your boss told you were going to have to take an 80% haircut on your salary?
Think old savers don’t matter? Think again. They fuel growth when they invest and the economy needs their money to grow. More on this later.
Tax rates: Perception: Raising them will increase tax revenue. Makes sense, doesn’t it? Reality: They might raise revenue the first year, but then taxpayers will change their behavior. That change in behavior will result in less income to tax and a negative impact on the economy. Tax revenue will go down. How do I know? A century of history and I spent three decades helping folks change their behavior to lower taxes.
The stock market: Perception: Traders (most have the attention span of a gnat) love how Bernanke is keeping interest rates artificially low, because that positions stocks as the only alternative for investors who have to earn income from their savings. Reality: The market has been thinly traded since the debacle in 2007. The guys who move it now are traders, not investors.
That means that big banks (that used to be brokerage houses) and big government can almost control the direction of the market, and certainly the price of a stock or group of stocks. Today, good news for the economy is usually bad news for stocks because stock prices are fueled by the fed’s money pump. A growing economy means that pump might be turned off.
Traders say, “To hell with its long term deleterious effects, just give me my money for today.” Ever see the zoo that is the floor of the NY Stock Exchange?
But if one keeps on drinking too much alcohol long enough, he will become an alcoholic who can’t function. Interest rates will someday have to be based on the free market if we want to keep free enterprise in America. After a probable debacle that will be blamed on the wrong people, the market will have to return to being driven by profits and real economics.
This is just a few days of news. More later.