I seek answers from those more economically sophisticated than I am


I have a few questions to ask, all of which involve economic trends.

Why, if the economy is contracting and the labor market is flat-lined, has the stock market gone up?

Will the stock market stay up (long-term and short-term predictions, please)?

The IRS says that families will be paying $20,000 for health insurance.  It also says that the top penalty for failing to buy insurance is less than $3,000.  Medical insurance companies can no longer turn away people with pre-existing conditions.  This means that people can avoid the $20,000 fee, pay the small penalty, and buy “insurance” only at the time they need it.  (Or, more accurately, buy “cost shifting” when they need it.)  Can the insurance companies stay solvent under these circumstances?

If insurance companies cannot stay in business with this non-insurance fee structure imposed upon them from above, how will they change?  Most are diversified.  Will they simply abandon health insurance?  They cannot refuse to pay onerous fees, because payments are forced upon them by law.

Will the death of insurance companies create a medical black market, where people pay cash for services?  In a way, this wouldn’t be so bad, because it would do away with the moral hazard that comes from both huge insurance companies and government interference.  With those huge systems, people have no incentive to shop around for better or more affordable treatment.

Obama’s Consumer Financial Protection Bureau is forcing banks to give unsecured, low-interest home loans again.  These loans, and the machinations into which the financial industry entered in order to protect itself from the downside risk of such loans, triggered the 2008 recession.  What will happen this time around?  Will banks go out of business?  Will they come up with some grand new scheme?  I assume that, if they do the latter, it will implode.  The last time, it took around two decades before the Ponzi scheme collapsed.  How long will it take this time?

I will appreciate any and all answers to these questions.  I truly don’t understand what’s going on in today’s economic world.  Incentives are flipsy-wopsy and trends make no sense.


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  • http://photoncourier.blogspot.com David Foster

    A very useful source for intelligent thinking on stock-market dynamics is fund manager John Hussman…see for example his post Puppet Show.

  • Mike Devx

    You know, Book, I want to thank you for this post and several other recent posts, because in those posts you’ve been honest and courageous enough to admit that you don’t have all the answers, and you want more information, and you’re looking to “expand your frontiers”.  One recently about the nature of the Constituion and individual rights I found particularly worthwhile.
    We don’t have all the answers.  Yet, in this frenzied mass-communication era, even in the blogosphere, there is a risk of seeming to become irrelevant to the (FRENZIED) effort of resolving the “Questions Of The Day”.  We must address the current issue immediately!  And we must address it authoritatively without fail!  Now! Now! Now!
    I’ve always enjoyed your blog for its essence as an “oasis of peace among the frenzy”.  I just wanted to reiterate that.  I think of your blog as a place of civilization among the uncivilized.

  • http://OgBlog.net Earl

    The stock market WILL go up and down.  If all your money is invested in it, your net worth will go up and down with it.  Harry Browne wrote The Economic Time Bomb a number of years ago, and in it (as well as in a number of his other books) he teaches how to invest so that you capture the gains on the upside, and soften the blow of the losses on the downside.  One of the best recommendations I got for his methods was when my Dad said “You’ll never strike it rich that way!”  :-)
    A significant part of my retirement fund is invested in the market (as is my 90-year old mother’s) because it is the only place (over the last 100 years or so) that you can expect the value of your capital to grow faster than inflation.  Get Harry Browne’s book – I recommend it highly, and if it makes sense to you, try investing according to his strategy.  
    As for the health insurance companies, their demise is part of the plan….because we’re headed for a government-run single-payer system.  I hope it can be avoided, but that’s what the “smart people” want for us (though not for themselves, of course).
    Finally, if the Administration continues to force banks to make loans that can’t be repaid, then bad things are going to happen…but it requires a braver prognosticator than your servant to speculate on what (precisely) those bad things will be!

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  • Mike Devx

    If inflation is running 2% per year, then over five years, it has run 10%.  (It is actually a little over ten percent.)
    So, in five years, I should demand that the money I’ve invested be worth AT LEAST over five years as ten percent more than what I put in five years ago.  Just to keep pace with inflation.
    We are being told, today, that it is a wonderful thing that the dollar amount for investors matchest what was invested five years ago.  That means, I believe a 0% increase due to inflation.  Which means, *almost* exactly, that in five years, the money you’ve invested is worth 10% LESS than what you put in five years ago.
    And this is supposed to be a GOOD thing?  The truth is, if the stock market were linear, with no ups an downs, and with inflation at 2% per year, EVERY SINGLE DAY should record a new high.  Every single day!  And on average, every year, should reflect a new high in monetary dollar value.  Because that is how inflation works.
    Yet we are being told that it is a wonderful thing that we have FINALLY reached the same dollar value that we had five years ago.  Bull Shit.  If you’ve reached the same dollar value that you had five years ago, that means you’ve lost 10% of your value.  (And since inflation has been actually more than 2% per year, you’ve lost MORE than ten percent over these five years.)   Do you think it is an acceptable investment decision, to lose ten percent of value over five years??? 
    If you invested $100 five years ago, to simply break even, and have absolutely zero return on investment, I mean ZERO PERCENT, you should have a little over $110 in worth right now, assuming 2% inflation over those five years.  Anything less is a LOSS.  These people claiming greatness because we have finally re-reached the levels we were at five years ago are idiots.  In my humble opinion.  Today’s terrible may be better than the worse terrible we were at two years ago, but it’s still TERRIBLE.  I don’t know what they’re thinking.  Please enlighten me if I’m wrong.

  • Ron19

    Bookworm, try reading some of Thomas Sowell’s books on economics:
    Basic Economics: A Common Sense Guide to the Economy,  (2010)
    Economic Facts and Fallacies, 2nd edition, (2011)
    These are a bit more beginner-friendly than Friedman, Bastiat, or Hayek.  Stay away from Keynes, until you are a lot further along.  Rush is a source of economics stories, but not an all-around teacher for a complete course.
    Also, the intellectual divides among economists is comparable to the intellectual divides in politics.  A good book on economics will take you along step-by-step like Algebra for Dummies.  If you have to accept explanations on faith, your trying to learn bad economics. 

  • Danny Lemieux

    I would disagree with you regarding Hayek, Ron19. “Road to Serfdom” should be a must-read for every high schooler in the country.

  • Texan99

    (1) The stock market responds to manipulation from the Fed, sometimes to a high enough degree to overshadow (temporarily) the real trends for growth in the economy.  If I’m right, the Fed is blowing up a bubble.  The Fed keeps bond interest rates low, largely by buying up the majority of the treasury bonds issued by the U.S.  The Fed prints money to buy the bonds, which dumps new fiat money into the hands of the investors who originally bought the bonds.  Investors can’t get any return from bonds, so they’re pushing their money into stocks, and that pushes stock prices up by simple supply-and-demand pressure.
    (2) Clearly the insurance companies will be driven out of business (perhaps after a short period of making out like bandits) if they are forced to sell insurance to riskier groups without raising the price enough to reflect the risk.  Isn’t that the plan?  Drive them out of business, announce that the market has failed, and implement a single-payer nationalized system.  I only hope that a black market will survive alongside the single-payer system, because even when everyone has “insurance,” we still have to solve the problem of getting medical care — not at all the same thing.  Caps on prices don’t make the thing cheaper, they just make it less available.
    (3) The new regulation-forced housing bubble is working pretty much like the old one.  I’d be surprised if the Ponzi scheme could go on as long this time.  The first time around, there’s a human tendency to say “this can’t be happening.”  It will be easier to acknowledge the risks the second time.  The question really is, to what degree will the taxpayer be put on the hook for the losses (either bailing out the banks or bailing out the homeowners), and how quickly?

  • http://OgBlog.net Earl

    Mike: good analysis if one puts all one’s money in the market and leaves it there.
    Summary of Harry Browne’s book (which all readers of this blog should get, and follow only if it makes sense to you):
    Split your “permanent portfolio” (the money you can’t afford to gamble with) four ways:  1/4 metallic gold, 1/4 long-term U.S. Treasuries, 1/4 money market, and 1/4 growth stocks.  Keep the fund “balanced”, meaning that at the end of each term (you choose – Harry says annually is good enough, I do it ever three months) you sell whatever makes up more than 1/4 of your stash, and use that money to buy whatever is less than 1/4 of your stash.  Otherwise, forget about it.
    When the market tanked in 2008, a lot of my colleagues pulled their money out, locking in their losses.  I tried to convince them that this was an opportunity to buy the U.S. economy at fire sale prices, and I did so.  As the market has recovered, I’ve taken profits every three months – my total fund is up close to 20% in the last five years – I haven’t figured it exactly.  I use the Vanguard family of mutual funds (no individual stocks or bonds under this plan), so balancing the account is simple and costs me nothing.
    My only regret is that I’ve never included the metallic gold – when I started, you couldn’t do that in an IRA, so I split 3 ways.  It has worked well, but I’d be farther ahead if I’d had the gold in there.
    Read the book, folks — check the library and do it for free, or spend $4.00, including shipping, at Amazon used books.  Worth MUCH more.

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