I don’t think so! In other words when I become a millionaire, I’m not guaranteed the ranking for the rest of my life?
The chart below is from Veronique de Rugy at the Mercatus Center, George Mason Uiversity and is based on the same study I sited in my previous post.
Unemployment June 2011: The Scariest Jobs Chart Ever Is Now Scarier Than Ever
How could Jeffrey Immelt, CEO of General Electric and Chairman of President Obama’s Council on Jobs and Competitiveness, stand before the Chamber of Commerce Conference as the keynote speaker and tell large and small businesses they should stop complaining about government and just boost the recovery by hiring new workers (whether they can use them or not). His company, GE, has decreased its number of employees by 40,000 since 2008. In 2008 they had 327,000 employees and in 2011 they have 278,000.
QE2: The Term
QE2—no, I’m not talking about the famous luxury cruise ship, nor am I talking about the Queen of England. QE2 is the new buzz word for the Federal Reserve’s attempt 
to stimulate the economy by increasing the amount of cash in circulation. QE stands for Quantitative Easing—money easing. The 2 indicates this is the second time the Fed has used this technique. The first QE took place from December 2008 through March 2010; the Fed added $1.7 trillion to the economy. Did QE work the first time? Did the economy begin to grow? Did we have job growth? Over the coming 8 months the Fed will add $850 billion to the money in circulation—a newly created $600 billion plus $250 billion left over from TARP. Will QE2 boost business and employment?
QE2: The Process
How does the Fed (the central bank of the United States) use QE2 to place additional cash in the system to stimulate spending, borrowing, and expansion? The Fed introduces the money through our nationwide banks, the ones you and I use every day. No, the Fed doesn’t walk through a bank’s side door nor in its back door carrying a suitcase of dollars. The Federal Reserve is a bit more sophisticated than that. They use a three step process.
To encourage banks to sell their short-term bonds, the Fed is offering to buy the bonds for a higher price than the banks paid for them. The increased price also lowers the bond’s yield. As the price of a bond goes up, its yield goes down. Many everyday interest rates are based on the yield of these bonds. A major goal of the Federal Reserve is to keep interest rates low. The Fed has already used its standard approach for keeping interest rates low to stimulate the economy, and unemployment remains at 9.6 percent.
QE2: Why
Why is the Federal Reserve resorting to QE2? Previously, the U.S. government tried to stimulate the economy with the TARP monies through “shovel ready” projects and additional government hiring, but so far the economy has been uncooperative; unemployment remains at 9.6 percent. What are the hoped for and possible outcomes of QE2?
Stimulate the economy by providing additional money for banks to lend
The banks receive the newly created money from the Fed for a specific number of their U.S. Treasury bonds. Thus, the Fed creates additional money for loans. But, do banks lack the money to loan? Reportedly, banks are holding $1 trillion versus the normal $4 to $8 billion.
Or is the issue a lack of demand for loans from creditworthy borrowers? Why aren’t creditworthy businesses borrowing and expanding? Perhaps it is because companies are uncertain about the future—taxes, consumer demand, government action, regulations on the horizon, and general economic conditions. Reportedly, non-financial corporations are holding nearly $837 billion is cash as of the second quarter of 2010.
Why aren’t individuals borrowing and spending? Remember, 9.6 percent are out of work, people have seen the value of their 401Ks drop, and many are living in houses that are worth less the amount of their loans. They are uncertain what the future holds. Individuals are holding $8 trillion in cash and savings; furthermore, their savings increased 6.1 percent during the second quarter of 2010. Is there a lack of money in the system? Maybe there is a lack of money circulating. I, for one, am holding a significant amount of cash because of uncertainties—tax increases, a decline in the stock market, unrevealed effects of the health care bill, the possibility of Cap and Trade and its unknown effects. I may need my cash as cash. I’m holding it as a fear hedge against an unknown future. Did the Fed do any market research before it decided to implement QE2?
Maintain low interest rates
The Fed’s standard method of lowering interest rates—directly cutting them—has been exercised fully. The Fed is now resorting to its other tool, QE2. QE allows the Fed to adjust bond yields by choosing how much to pay for the bonds they buy from the banks—the more they pay, the lower the yield. The Fed feels it is important to keep interest rates low to encourage business and consumer borrowing. The interest rates are already at record lows, and the lack of borrowing and expansion continues. Is the lack of available loans at low interest rates the problem? Perhaps business and individuals are quietly waiting to see what happens? Companies and individuals seem reluctant to incur debt at this time.
Boost the stock market
Federal Reserve Chairman Ben Bernake has suggested that by adding money to the banking system, the banks will take the money they don’t loan and will use to buy stocks and corporate bonds rather than low interest U.S. Treasury bonds. Increased demand for stocks means increased stock prices. If the stock market goes up, it creates the impression the economy is recovering. If the economy looks like it is recovering, we will feel that we have more money and will begin to spend; that will lead to increased employment. The Fed is simply creating demand for stocks by keeping bond yields very low and by adding money to the system. If this occurs, investors should be aware that this demand for stocks may not be built on strong company fundamentals such as increasing sales and earning growth rates.
Monetize the U.S. debt
Monetizing the debt means the U.S. government buys its own debt. The Fed creates money out of “thin air” and buys the U.S. debt held by nationwide banks. This puts newly created money into circulation and keeps interest rates low—aka money easing—while decreasing bank-held U.S. debt. QE2—monetizing the debt—is the only method the Fed has left to use to stimulate this economy and keep interest rates low.
Throughout history and around the world monetizing debt has been a “no-no.” What’s wrong with monetizing the debt? It devalues the currency; it devalues the dollar by putting extra dollars in circulation—dollars that come from a nonproductive event. Monetizing our debt does not raise our gross domestic product (GDP).The new dollars do not come from the production of a product or a service.
When the dollar is devalued, each dollar buys less, which leads to inflation and often hyper-inflation. Governments find it difficult to control inflation and painful to wring high inflation out of the economy. All goods and services become more expensive and their prices keep going up. Inflation is particularly difficult for people living on fixed incomes.
Globally, a weaker dollar—a less valuable dollar—makes our goods less expensive for other countries to buy. This may increase out exports which in turn may put more people to work in these industries—civilian aircraft, semiconductors, vehicle parts and accessories, industrial machinery, organic chemicals, telecommunications equipment, plastic materials, and medicinal, dental and pharmaceutical preparations. Yet, a devalued dollar makes everything we import more expensive—crude oil, cars, medicinal preparations, automotive accessories, cotton apparel.
In Conclusion
In the final analysis, the Fed anticipates that buying $600 billion of existing U.S. Treasury bonds from banks and paying for them with newly printed money will supply cheaper and additional loan resources for businesses, consumers, and home buyers. The Fed believes this will stimulate additional borrowing, spending, and growth. Also, the Fed hopes the lower interest rate and return on government bonds will push investors into stocks. The increased demand for stocks will drive the market higher and help us feel wealthier so we resume spending.
I’ve closed out the grades for the bonds class—the last of my one-credit classes I teach each semester through UAA and the Alaska Council on Economic Education as the Alaska coordinator for the Stock Market Game. I was fortunate to have a core group that took all three classes, Econ and Stocks, Mutual Funds, and Bonds; what fun that was! They were attentive (or at least acted attentive), asked great questions, and are using the info in their own lives and sharing their knowledge.
I love the investing and intellectual stimulation that people in my classes provide. As a result of the comments of one of my Stocks class students, Husband and I spent some time last evening watching Frontline: The Meltdown (via an instant gratification Netflex download). It was a well-done recap of the Bear Stearns, Lehman Brothers two-or-three week banking meltdown in September 2008. I had read Too Big To Fail; last night’s video was a quick review of some of the events the book so carefully and entertainingly recorded. Husband and I then watched Frontline: Warning, the story—the explanation—-of the over-the-counter derivatives market and Brooksley Born’s (Chairperson of the Commodities Futures Trade Commission) warning of the potential disaster for banks. The derivative speculation and the credit swaps-of-credit swaps ultimately became the final nail in the coffin that created the 2008 banking crisis.
Also, my class participants kept using the word greed. That term has bothered me for sometime. Its concept doesn’t seem to fit the category of “fair” or “unfair”—– if you agree with an outcome, it’s “fair”; if you disagree with the outcome, it’s “unfair” (if you’re adding to your pot of money, it’s not greed; if someone else is adding to their pot of money and their pot seems larger than your pot, it’s greed.) Because one of my students considered doing his stock analysis worksheet on Jon Huntsman’s chemical company (unusual to find someone else who had heard of him), I decided to read Huntsman’s book Winners Never Cheat. Saturday night after the let down of finishing my teaching and the downward spiral of the election ads and news, I wanted something uplifting—-two minutes later I had downloaded Winners Never Cheat to my Kindle (thank you Daughter for my Kindle) and began reading; I finished it before the night was over and had developed a definition of greed. For me greed is the gaining of more and more money through cutting ethical corners. The method of making the money may be within the bounds of the law, but the means does not pass the integrity smell test. For example, someone knows the deal is shady, but declares it is a case of buyer beware; that’s greed. Using my definition, greed was probably a large part of the sub prime loan business and the derivative and credit swap market! Which, by the way, seems to be still going on.
I’ll miss the stimulation of no investment class teaching until January 11th.
The above is a quote from Herbert E. Meyer 
made during his presentation at an Alaska World Affairs luncheon more than a year ago. My notes and his quotes have survived several paper purges. Obviously, what he said made an impression and provided food for thought.
The following are some of his on-the-money points:
The World’s Operating Systems
• In our operating system, Western Civilization, the individual and the individual’s rights are the center; the state and church are separate. It is history’s most extraordinary accomplishment; no, it is not perfect.
• Two other operating systems are fascism (dictatorial government, centralized control, repression of opposition) and Islam.
• Islam: the church and state are combined; the individual is subservient; women are treated as property; the system is incompatible with the modern world; and that is the problem.
• Islam attacked the Western world in the 7th and the 17th centuries. The current terrorism is their third attack on the West.
• Muslims are the last group to have not joined the modern world.
• The question is how to reconcile the Muslim world with the modern world.
• Iraq and Israel are the only two modern countries in the Middle East.
• The modern world has learned to temper faith with reason.
• Most people are moderates; they just want to live their life without major disruptions that mess things up.
Iran
• They will have the bomb soon.
• The rest of the world has two choices; (1) take out the regime, (2) take out the nuclear plant.
• “When crazy people tell you what they are going to do, believe it.”
• They would be willing to give up their cities in exchange for ours.
• If you play defense, you’ll lose because you have to win 100 percent of the time.
• The alternative is to knock out the radicals so the moderates can gain power and move into the modern world. This would allow 1.5 billion people to rapidly shift from the 8th century to the 21st century.
Economics
• From 50 to 100 million people, the world over, come out of poverty every year. The rule of law, property rights, free enterprise, entrepreneurship, moderate taxes, and competent regulation pull people out of poverty.
• A growing middle class and a growing economy requires energy.
• Energy is to an economy as blood is to an individual—a small child/small economy requires less blood/energy than a larger person/economy requires.
• A growing economy also needs protein.
• The market for protein and energy will explode.
• The trick is to bring people out of poverty without trashing the planet.
• The emerging global middle class will be our market. It is a growing market for products that are green, clever, needed, and inexpensive—examples are IKEA (they even build put-together houses), e-books, and nano cars.
India
• India wants to be part of the leading economic countries.
• It will eventually surpass China economically because of its democracy.
Demographics
• The Western world’s birth rate is declining while the total world’s population is still increasing. Western civilization has stopped having children—their birth rate has fallen to 1.5. The world’s population will top out and begin to decline about 2045 because the old will outnumber the young.
• The replacement birth rate is 2.1.
• 1.3 is the birth rate below which a country cannot recover or regenerate/replenish its national population.
• The largest population drop has been in Italy and Spain. Seventeen modern countries have a birth rate at or below 1.3.
• The U. S. birth rate is 2.0.
• The Muslim birth rate is from 2.4 to 6.8.
• Western European countries import Muslims as workers to take the place of having children. Western European countries will loose/are loosing their cultural identities through the influx of Muslims and multiculturalism and non integration.
In Conclusion
• A pessimist can describe the problem.
• An optimist solves the problem.
• First, explain what is going on, then reach a common understanding of what the problem is.
• Look at the problem and say, “This is what is going on. What do you want to do about it?”
• Extremes exist at either end of any political and religious spectrum; deal with the people in the middle
• “If you can explain to people what is going on and what it means, then you can make intelligent decisions.”
• “If you can see the future soon enough and clearly enough, you can change the future before it happens.”
You can listen to Herbert E. Meyer’s presentation here.
The Decline: The Geography of a Recession by LaToya Egwuekwe has been updated. This is a revealing graphic.
The other evening in Econ and Stocks class I introduced my lecture about company profit margin by asking the following question: “What is the profit margin of grocery stores—Safeway, Kroger (Fred Meyer). In other words, how many cents of profit do you think grocery stores make on every dollar you spend there?” The guesstimates ranged from 8 to 20 percent. What is your best guess? The answer: ʇuǝɔɹǝd ǝǝɹɥʇ oʇ ǝuo. That’s my first point; profit margins are usually smaller than we think they are.
My second point is that profit margins are industry specific (data can be found here). For example, the average profit margin for grocery stores it is 1 to 3 percent (one to three cents per dollar of sales ends up as profit), for the Application Software industry it is 21 percent, for the Soft Drink industry it is 10.4 percent, and for the Aerospace/Defense Products and Services industry it is 6.8 percent.
My third point: check the accuracy of the information you hear. If the media is maligning a company or an industry—too much profit, executive salaries too high, etc.—check the accuracy of the impression. It may or may not be as they say it is. I then asked participants what kind of profit margins they thought healthcare insurance companies had—Cigna, WellPoint, Aetna. Participants felt the profit margins probably ranged between 30 and 40 percent. What is your estimate? The answer: ʇuǝɔɹǝd ㄥ˙ㄣ.
Then one class participant suggested, “Healthcare insurance companies make lots of money because of the high volume of sales (revenues).” A cautionary note, if a company has a high volume of sales, they may have high expenses to turn that volume into profit. Okay, last year Kroger had revenues of $76,733M and WelllPoint had revenues of $56,382M. So that doesn’t seem to support that health insurance companies make “too” much money through their high volume of revenues.
Then someone else said, “Yes, but look at the huge salaries the health insurance CEOs make.” What about that? Kroger’s CEO makes a base salary of $1.2M with a total compensation of $10.3M. WellPoint’s CEO receives a base salary and total compensation of $1.1M and $13M, respectively. So health insurance company CEO compensation does not seem to be out of line with at least grocery store CEO compensation.
This discussion prompted me to come home and create the chart below. I included Pfizer because one of the participants is analyzing it; I included Johnson and Johnson because we agreed it is a “nice family company.” If you are thinking about high profit margins and CEO compensation, check out the “family friendly” Johnson and Johnson company.
For this example I used the industry’s profit margin data from here, the company’s profit margin from here, and the executive’s base salary and total compensation from here .
