Friday, October 2, 2015

Carl Icahn’s Warning


Well, the other day I warned that too many people discuss economics, actually argue economics, based on mistaken theories.  The primary problem, in my opinion, is that micro economic principles are attempted to be overlaid on macro economic topics. And vice versa. These elements are not mixable. Like oil and water, micro and macro economics each deal with completely separate economic DNA's. Both may live on the same planet and occur at the same time, but they are separate. They do have an effect on one another, but they are not inter-related.

Carl Icahn worries about the too low interest rates; he thinks they will cause real estate bubbles like they did the last time. First of all, there is no relationship between low interest rates having caused the bubble last time (2007-2008). It wasn’t interest rates that attracted foolish investment in an overheated real estate market. It was the promise of ever rising prices for the property in the first place. Too many people were seeking to buy a fixed quantity of properties then available on the market. Result: prices spiked; over and over again. If the properties were flipped, buyers made a killing, until the bubble burst, and the last buyer got stuck with rapidly deflating prices. Too few buyers for too many available properties on the market. Classic bubble scenario.

Icahn thinks interest rates dragged us into this. No; they didn’t. Interest rates were much higher then than now. People were not making money on interest rates; they were making it on inflating prices for the properties themselves.

Interestingly, Icahn wants interest rates to rise. Why? Because then he can idly invest his money in financial instruments bearing interest rates as the core earning element. Very little risk in that, especially so if the instruments are insured by the Federal Government. This is the manner in which most investments were made in the past. Certificates of Deposits were a primary investment. Treasury notes and bills were another classic investment vehicle. Corporate bonds is yet another investment vehicle to pursue, but those embrace more risk should the corporate governance miscalculate their own markets, return on investment, and such. Not much guarantee for your invested dollars if the company goofs. You may end up owning a piece of the company but if it is failing, that’s not much security.

An individual wanting to earn money on his idle funds is looking for an easy investment vehicle (a financial instrument) carrying a stated return (interest rate). A person who is a billionaire and wishes to do the same thing is still an individual. He is not an institution or government making market wide policy or rate settings. He may be bigger than an institution because of the size of his wealth, but he is still one person. That is the definition of micro economics – the economics having to do with the individual or home, family, very small enterprise or retail shop. Macro economics has to do with money, banking, dollar values, interest rate setting, policies which control inflation and deflation, and other policies which will spur employment higher or dampen over heated labor markets. Governments on the international financial markets respond to macro economics. So do large institutions and corporations.

Mixing micro with macro will mess things up worse than they already are. And if Carl Icahn falls into this trap, what do you think Donald Trump will do with it?  Yes; he will become entrapped as well.

So, Icahn’s recent video supporting Trump’s candidacy is completely backward. They are both self serving personal interests, not interests of our society.

We have little inflation. In many respects we have deflation, primarily labor rates. Salaries and wages are very low in the current economy compared to where they have been in the past. The only people earning much higher incomes are the wealthy. Average workers have suffered through enormous financial pressures without much adjustment upwards in their household incomes. Too many people were forced to take low paying jobs, some two for each bread winner, with many homes covering four jobs (two for the husband, two for the wife). You know that. I know that. Do Carl and Donald know that?  I doubt it very sincerely.

Lowering taxes? Both Carl and Donald say that’s what’s needed. Of course the wealthiest first, so they will do more with their money and cause benefits to trickle down to the rest of us. It doesn’t work that way. Ronald Reagan tried it and it failed. George H W Bush tried it and it failed. Bush junior tried it in a big way and it failed big as well. Even bigger!

No, lowering taxes on the wealthy only starves government of the revenues it needs to perform the functions expected of it – education, health and welfare, military defense, money and banking systems, etc.  In the past trickle down eras only the rich got richer. Government was downsized, but in Reagan’s era the functions were defunded at the federal level but mandated at the state level. The result: states raised taxes to do the things the fed used to pay for. Money saved by Reagan was spent in increased budgets for the military. No economic expansion was truly recognized. And living standards began their slide.

Lowering taxes for corporations is only more of the same. The wealthy own the corporations so they gain with increased corporate earnings, dividends, and stock prices. They continue to gain over and over again on many fronts. The Average Joe, of course, is missing in this equation. And he gets poorer. Besides, corporate tax rates have already been lowered several times. Again, we starve tax revenues in favor of corporate treasuries. That has not worked well, plus the same companies still seek tax havens outside the country.

Now do you see why Trump and Icahn like their own policies? They win; we lose. But so does the nation. A weak electorate, labor force and institutions lowers the nation’s ability to excel and build strong futures.

It’s time for politicians to support what does work and avoid the panaceas that don’t work. Trickle down economics was a disaster. Let’s correct past mistakes and rebuild the nation on proven principles of economics.

October 2, 2015


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