Real World GDP Since 1969-2010

Looks like world GDP has continued to grow since 1969 in real terms. Despite what people say it looks like the whole world is adding $50 trillion of value every year.

Debt Ceiling Debacle

Recently, the House of Representatives passed a deal a day before the August 2nd deadline to raise the debt ceiling. The debt ceiling will cut $2.1 trillion over a 10 year period. Only $210 billion per year but that still is something. I am suspicious of what “cuts really mean”. Looking at the deal it looks like most of the “cuts” are smoke and mirrors and are do not start any time soon. The debt ceiling would be increase immediately by $400 billion. The problem is that the money is spent right away however the cuts don’t come until years later.

Discretionary programs (includes defense spending) would be cut by $741 billion. The discretionary cuts for 2012 would decrease by $21 billion and $42 billion in 2013. Yes, these numbers do seem large however in the context of $14 trillion in debt they would be just chairs on the Titanic. In addition to this, $156 billion would be saved in interest because the United States would have a lower interest rate. This is where I am a little lost because unless the government can refinance its debt I don’t understand how they will save money. Standards & Poor’s and Moody’s I would imagine are on the verge of downgrading the United States credit rating to AA or possibly lower. If the credit rating of the United States were downgraded it would increase the cost of interest not save money. Another problem is how spending cuts are defined. An important question is what is the baseline for the cut? If politicians are saying we get cuts from things we were already were cutting to begin with or used overstated figures to begin with it could look like there is a cut when in reality nothing really happened.

One of the biggest problems we have is not discretionary spending but non discretionary spending. This includes programs like Medicare, Social Security, and Medicaid. In 2010 the United States government spent $3.45 trillion on payments to individuals. People can get paid through Social Security, Medicare, unemployment benefits, and federal assistance programs. The GDP for the United States was around $14 trillion in 2011. This would say that close to a quarter of all of GDP is just the government sending checks to individuals. In fact, payments to individuals were 2/3 of all spending for 2010. In 1952, payments to individuals were under 20% of all federal spending.

The government holds over $1 trillion assets in building and equipment. In addition to this there is around $919 billion of assets in land. Also the government owns $392 billion of mineral rights. These assets consume even more government resources since they have associated maintenance and replacement costs. The assets could be sold off to private investors who would pay taxes on them, create jobs, and increase productivity. One great idea is for the government to trade people government owned assets for Social Security benefits. The Social Security beneficiaries would have assets that they could use or sell if they wanted to and the government would be putting wasting assets to better use. Another idea for Social Security is to allow people to opt out of it. The idea would be to phase out Social Security over time since it takes money from the young to pay for the old. Privatizing or changing the age people can retire will prolong the solvency of Social Security a few years but the solution to solving Social Security is to phase it out.

Around 7.54 million people are on unemployment benefits. I would be interested to see what would happen if unemployment benefits were cut 10% or even 20% to see how people would respond. It would be wiser to set up the unemployment benefits would be to pay 100% of the benefits for a few months and then start lowering the percentage of benefits by 15% or so every month so people didn’t become dependent on it. I would much rather spend the unemployment benefit money on training out of work people than just paying people to do nothing.

I unfortunately I don’t see a brighter future on the horizon in the United States unless politicians take serious steps in order to get our fiscal house in order. I am really surprised neither party talked about this during the debt talks. Politicians talk about raising revenue. This could easily be accomplished by getting rid of the arcane and complex tax code we have and replacing it with a flat tax that would tax everyone at the same rate without deductions. Doing this would save everyone time and money and bring in more revenue since people wouldn’t be trying to shift income or assets to avoid paying taxes. Time will only tell our destiny though.

Myriad Owns Your Genes

Yesterday a federal appeals court ruled that companies could patent genes. The U.S. Court of Appeals agreed with Myriad Genetics in the case. Myriad has a patent that tests for the gene BRCA1 and 2 which tests for breast and ovarian cancer. If a woman has the BRCA1 they are 60% more likely to develop breast cancer before they hit 90.

The court claimed that if the DNA is isolated from the body it can be patented. So in essence, our DNA once it becomes isolated can become patented. Blood tests are like this except I don’t know anyone that has a blood test patent per se. The important question however is will this genetic test inhibit growth within the genetic testing industry. Myriad has somewhat of a monopoly since if women get tested for this one gene they have to get a specific test done. The test costs around $300-$3,000 which in the grand scheme of things doesn’t seem a lot if it can accurately tell you whether or not you have cancer. I say Myriad has somewhat of a monopoly because there are other companies out there that can sequence the genome, analyze the genome, and predict what diseases you may or may not have. This is an alternative and perhaps in time will be a better one as genome sequencing will become cheaper and more companies will be created to figure out how to interpret the results of the genome.

Technology seems to always improve while coming down in price. I have a feeling genetics and biotech will be the next wave, however I have no idea when the wave will flood the market or crash. Sequencing the genome has become relatively cheap in recent years. As more people get their genome encoded the need to interpret and predict what the genome means becomes very valuable. This process could take a decade or longer but once it happens we will have more data than ever before.

George Soros-Now A Family Office

Recently, George Soros told investors of his hedge fund that he is returning around $1 billion and turning $24.5 billion into a family office. One of the main reasons Soros is turning his family worth into a family office is because hedge funds will now be regulated under the Dodd-Frank financial reform. The regulation forces hedge funds to register with the SEC by March of 2012. Compliance is a subject everyone in the financial industry knows about. If anything I would argue the financial services is one of the heaviest regulated industries. The argument for Soros going with becoming family office is family offices don’t have to register with the SEC which is somewhat weird because of the way family offices are run. Family offices are in essence financial concierge for family with above $100 million. The costs to run a family office can run around 3% of net worth or $3 million per year. Family offices are no picnic. People who have earned amassed sums of wealth are usually not the easiest people to work with. My theory on why these people are not easy to work with is because the people that have earned a lot of money have done so by usually having high standards, attention to detail, and hard work. These people couldn’t get rich by not caring (unless they inherited the money).

Usually they are created once people realize they have a lot of money and have a lot to manage. The family office pays all the credit card bills, manages investments, teaches the family about philanthropy, and even plans travel arrangements. According to a Wharton Study as of 2008 there were only 1,000 family offices. Nearly half of these family offices had over $1 billion.

What is strange however is why family offices would be exempt from registering with the SEC? I would imagine family offices have access to personal of funds of people with loads of money. This could give way to serious fraud or embezzlement on the advisors part. Maybe the SEC thinks that well these people have enough money so we shouldn’t really worry about them.

What I find the most interesting is that George Soros who talked about how he wanted regulations put on banks and the financial sector is now trying to dodge those very same regulations he was in favor of. This reminds me of people who are in favor of higher taxes yet never voluntary pay higher taxes. People can always voluntary pay the Clinton tax rates if they want to or send their money to IRS. It is interesting how what people say and what they do or completely different things.

Post Office Cutting Service = Time to Privatized

The U.S. Post Office is now considering closing 3,700 post offices. The post office last week said they soon they will cut Saturday mail service and could go to mail service three days a week by 2025. In 2011, the Post Office is expected to lose $8.3 billion. The U.S. Post Office employs over 583,000 people. What is really bizarre is why so few people are talking about getting rid of it or drastically scaling it back. The Post Office has been in business since 1789. If you added took the income-expenses since 1789 the total $13 trillion. Yes $13 trillion or a little less than the total U.S. GDP for one year has been spent on mail. So the United States would have been better off never have creating the Post Office and using a private organization.

A no brainer is to let the government to privatize the mail and let FedEx and UPS to work their magic. FedEx moves 3.4 million packages a day. UPS delivers 15.6 million packages and documents a day. I am here to inform you that these companies also make a profit. UPS made a profit in 2010 of $3.49 billion. FedEx made a net profit of $1.18 billion.

People might say something like “I don’t want a business seeking profit delivering my mail”. However, we meet people every day in profit seeking businesses that deliver high quality with low prices. If anyone has been to the post office they know of the long lines, employees who seem too busy to help you, and inferior service. I never notice long lines at a FedEx or UPS store. As a general rule I don’t notice any long lines at profit seeking entities. An employee that has worked for the Post Office has never been laid off. What incentives do Post Office workers have if they can never be fired?

On the books is a law that makes it a felony to allow anyone to deliver first class mail except for the U.S. Postal Service. It is somewhat strange that this is still in effect today. FedEx and UPS handle millions of pieces of mail. I see no reason why UPS or FedEx wouldn’t be able to handle the job of the U.S. Postal Service since they already handle millions of pieces of mail every day. Communities could work deals with any mail carrier they wanted for their mail like they do with trash and recycling. More than half a million people would be out of work if the U.S. Post Office was shut down. However, some of these people could work for a for-profit company and be required to create value. Some of these people would have not had jobs for long if they spent one day in the private sector.

Very few people I think realize how much money the U.S. Post Office is losing every year. If the American people realized how much U.S. taxpayers are subsidizing the mail I believe they would be more in favor with getting rid of it and privatizing it. The Post Office could have never in a million years dreamed of FedEx or UPS.

Netflix Higher Prices

Netflix, recently announced they were going to increase prices for their service. People under the new plan will have to pay $7.99 per month to just stream (or watch movies online). The cost of renting movies is an additional $7.99 per month. Usually companies over time lower their prices if they know what they are doing. Somehow I get the feeling that some people in the finance department are just now realizing they can charge more money and they believe customers will stay or they are losing money with the postage they have to pay for on mailing DVD’s and need to recoup their costs. The question however is will Netflix get more for their dollar with the price hike?

For me personally I think Netflix a wide variety of DVDs that you can choose from to be mailed to you. However, the streaming service is somewhat lacking. The first time I was able to use streaming on Netflix I was amazed about how many movies were available. After about a year or so the novelty wore off. One of the problems is that the cost to bring content to customers is pretty high. The idea is to have great content to attract customers and use that money to attract more customers. Last year, Netflix signed a deal where Netflix would pay $200 million per year to stream movies from Paramount, Lionsgate and MGM. This year Netflix signed a deal with CBS for an undisclosed amount to stream. The trend has been for Netflix to spend a lot of money on streaming. In the first six months of 2010 Netflix spent $117 million for content. Netflix supposedly has a library to around 20,000 as of last year from streaming. However only around less than 9% of popular movies can be accessed through streaming. The question however is will Netflix still have customers after they increase prices. Demand curves do slope downward. After Netflix announced they were increasing prices there were 80,000 negative comments on their Facebook page.

At the end of the day Netflix has to please consumers. Streaming movies should be cheaper than sending movies through the mail because of postage. Hopefully, Netflix will figure out what movies people want and deliver.

Netflix, recently announced they were going to increase prices for their service. People under the new plan will have to pay $7.99 per month to just stream (or watch movies online). The cost of renting movies is an additional $7.99 per month. Usually companies over time lower their prices if they know what they are doing. Somehow I get the feeling that some people in the finance department are just now realizing they can charge more money and they believe customers will stay or they are losing money with the postage they have to pay for on mailing DVD’s and need to recoup their costs. The question however is will Netflix get more for their dollar with the price hike?

For me personally I think Netflix a wide variety of DVDs that you can choose from to be mailed to you. However, the streaming service is somewhat lacking. The first time I was able to use streaming on Netflix I was amazed about how many movies were available. After about a year or so the novelty wore off. One of the problems is that the cost to bring content to customers is pretty high. The idea is to have great content to attract customers and use that money to attract more customers. Last year, Netflix signed a deal where Netflix would pay $200 million per year to stream movies from Paramount, Lionsgate and MGM. This year Netflix signed a deal with CBS for an undisclosed amount to stream. The trend has been for Netflix to spend a lot of money on streaming. In the first six months of 2010 Netflix spent $117 million for content. Netflix supposedly has a library to around 20,000 as of last year from streaming. However only around less than 9% of popular movies can be accessed through streaming. The question however is will Netflix still have customers after they increase prices. Demand curves do slope downward. After Netflix announced they were increasing prices there were 80,000 negative comments on their Facebook page.
At the end of the day Netflix has to please consumers. Streaming movies should be cheaper than sending movies through the mail because of postage. Hopefully, Netflix will figure out what movies people want and deliver.

Downsize Government & Raise Revenue: Sell Government Owned Assets

One way government could easily raise revenue is to sell government owned assets. Strange that I don't here either party talking about this. Here is a quote from CATO's Downsizing Government website.

"At the end of fiscal year 2007, the federal government held $1.2 trillion in buildings and equipment, $277 billion in inventory, $919 billion in land, and $392 billion in mineral rights. The federal government owns about one-fourth of the land in the United States."

At the same time we could also privatize roads, air traffic control, airports, and anything else that doesn't impose negative externalities.

Thomas Sowell: Debt Ceiling

Thomas Sowell talking to Dennis Prager on July 20, 2011...

Number of Pages of Federal Tax Regulation From 1913-2011

Seems as if spending has not only dramatically increased over time, but also the amount of federal regulations businesses have to comply which has increased exponentially. In 1913, there were only 400 pages of federal regulations to comply with. This year there are over 72,000 pages of federal regulations to comply with. Increasing the amount of regulations is a tax increase for businesses which pass along the costs to consumers. I wonder how many pages of regulations would equate just one percentage point in a tax hike.

Borders, Amazon, & E-Books

this week Borders announced it was going out of business. Borders was a bookstore that was popular in the 1990s and now is going to vanish. Most people forget Borders use to sell movies and music along with books. Borders from what I remember had a pretty good café that was somewhat of a Waldenbooks which was a bookstore that usually was located in malls was a subsidiary of Borders will also be going out of business. Borders had 399 stores and close to 11,000 employees. The store should finally be out of business in September.

Some people are saddened that Borders is going out of business, however I view Borders going out of business as an overall positive. The marketplace lets people know when they are doing the right or wrong thing. Even though people are claiming e-books are what caused Borders to go out of business I would argue Borders has been in trouble ever since Amazon. E-books as of 2010 made up 9% of all consumer book sales. The Kindle has been attracting attention for readers. The first Kindle sold in 2007 for 2007 for $399. Right now someone can buy a Kindle for $139. Not only has the Kindle become cheaper but the quality has improved. The Kindle is smaller, has built in Wi-Fi, and can be read in sunlight. The number of books that can be read on the Kindle has also dramatically increased from when it debuted. When the Kindle first launched people could only download 88,000 books. In July of 2011 people could download more than 950,000 books (including free books). Over time the number of books will no doubt increase. I have a feeling out of print books could be republished since anyone with a Kindle and could download it. Another benefit is e-books allow people to download books in a minute which is much faster than getting in the car and driving to the bookstore. The downloadable books also seem to be cheaper than the physical copy of the book. Profit margins should be going up for e-books since the cost of the marginal cost of an e-book is nothing (just the file). The only major costs I could see would be the rights to the ownership of the work.

At any rate, book stores maybe extinct in the next 10 years. However, I think we will have more books than ever available. The Kindle 2 can hold around 1,500 books which could save a lot of book shelves. Since the data is electronic it would also be easier to store notes and information instead of highlighting like people usually do.

If anything the e-book would put more book stores out of business in the long term. The benefit though will be more reading done by everyone which is a positive thing. Knowledge is power.