IF you spent $40,000 last year and earned only $35,000, you would have had a deficit of $5,000. Keep that up and you’d live on the street before long.
If a company spends $40 million and has only $35 million coming in, its auditors would be required to report a loss of $5 million. If this company keeps that up its investors, bankers, and customers would revolt.
Last week the federal government mailed its “Statement Of Operations And Changes In Net Position For the Year Ended September 30, 1998.” Not a very catchy or clear title, which is the way Washington probably likes it. That way nobody will understand.
In it there’s a line called “Excess of Net Cost Over Revenue,” which happens to add up to $133.8 million.
I love euphemisms as much as the next person. When I was a kid I always told my parents about my “excess of net costs” whenever I ran out of allowance early. And now my wife and I constantly discuss over dinner how our household revenues don’t quite meet our net costs.
But what we don’t do – nor would anyone else handling family or corporate finances – is pretend we have more money than we need – a surplus – even though our costs exceed our revenues.
According to the numbers made official last week by the government, America ran a $133.8 billion deficit in the fiscal year ended last September. There was no surplus, despite what you’ve been reading. It was a deficit – “in the red,” “out of bucks,” “broke,” “net costs over revenue.” Call it whatever you like.
So there was no legitimate reason to debate whether this non-existent surplus should be given back to people in the form of a tax cut (as the Republicans have suggested) or somehow turned over to the also-euphemistically called Social Security Trust Fund – which several people studying the matter have suggested should properly be called a “distrust,” or at least a “distressed,” fund.
Through convoluted accounting the government can pretend there is a budget surplus – as long as it keeps stealing regularly from Social Security. But that would be like the Crudeles breaking into the house next door so we can cover our “net costs over revenues.” Normal people go to jail for that.
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If you need any other proof the stock market is irrational, just look at shares of airlines.
With the price of oil surging over $18 a barrel the response of a sane market would be to worry that big users, like airlines, might suffer reduced earnings. And in rational times the whole market might be weak because, hey, who isn’t hurt when the price of oil rises?
Not only doesn’t Wall Street worry that oil prices have climbed, but it last Friday (before the whole market sold off) pushed the Dow Transportation index to a record high. Why? Because, obviously, higher jet fuel prices are exactly what airlines want.
Making the situation even less logical is the fact that the military confrontation in Yugoslavia – with the threat of ground troops being deployed – makes the entire world economy and oil prices unpredictable.
Bottom line: There is a stock market bubble, enjoy it while it lasts, get out before it ends.
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It is becoming ever clearer just how important the stock market bubble is to America and why the Federal Reserve is reluctant to do its job and curb investor speculation.
Washington reported last week that wages and benefits slowed in the first three months of 1999 to just 0.4 percent growth. That was the smallest increase in the so-called employment cost index – which combines wages and benefits – since 1982.
And wages are increasing that slowly, even though the government claims the unemployment rate is down to a 29-year low of 4.2 percent.
What’s this tell us?
First, the government’s numbers are probably wrong. If there really is a shortage of workers in this country wages would be rising.
And if the government’s statistics are accurate and wages are increasing that slowly, it means America’s economic growth and the rise in consumer spending are being fueled by borrowing and by the stock market .
People don’t care about pay increases. All they care about is the bubble.
So, if the market suddenly declines, this country’s economy is in big trouble. It won’t be like ’87, when everyone predicted disaster and was wrong because people weren’t counting on stock market profits.
This time the dangers are real.