The problem of overstated business profits has important implications for capital investment, because business pays taxes on the exaggerated reported profits, not on more realistic inflation-adjusted figures. Because taxes on profits are calculated on these overstated profit figures, the taxes are also inflated – they are higher than the real profit situation warrants. As a result, the combined effect of inflation plus taxation has been to significantly reduced.
Afraid of making a mistake on your taxes? If you haven't completed your taxes for this year you have less just over three weeks to file. This year has been pretty busy and every time I start to do ours, something else seems to pop up. My goal...
Staying fit and healthy with cycling Profits of biking are great and if taken up as a form of regular physical exercise it can be a remarkable means to total physical fitness. Biking tones up muscular tissues and enhances staying power. It improves respiratory wellness and...
Exxon Is The Government's New Whipping Boy! I've been trying to find out whether we're going to see an increase in interest rates over the next few years. It'll depend on whether we have inflation and go into a recession or not. While reading on this topic,...
Inflation distorts the reported profits of business by making them appear to be much higher than they really are. Partly, this is because the purchasing power of each dollar of profits has been severely eroded by rapidly rising costs of capital goods. Another problem has been the accounting practices used by business (and required by the government) which have overstated profits by including in reported profits substantial amounts of funds that are not truly profits – rather, they are required to replace inventories and depreciated assets at prices made much higher by inflation.
Thus, much of the apparently high profits of highly inflationary periods such as the 1970′s is not really “profits”
the sense of being available for dividends to shareholders or, more important, for new capital investment. As a result, the reported profits of business during the 1970′s were largely an illusion created by inflation, and capital investment lagged despite an apparently strong profit picture.
Leveraged Finance Defined Leveraged finance relates to funding a business, a company or another investment using more debt than would be considered normal. More than normal debt is going to imply by nature that the funding is a riskier prospect, and therefore more...
A "That's So Maven" Roundup They say puns are the lowest form of humor, yet puns go way back, well before Shakespeare. So today's post title is my way of saying this is a roundup of my fellow Money Mavens, some of the best and...
What Do Venture Capital Firms Know That The General Public Does Not? The answer is probably, a lot. That being said, the Wall Street Journal released the top 50 Venture-Backed Companies while you can read more about the methodology the list basically, seeks to pinpoint the 50 U.S. venture-backed companies with the...
Easy-money policies are used to stimulate bank lending and spending by consumers and businesses at times when the economy is in a recession and unemployment is unusually high. If the easy-money policies cause aggregate demand to increase, real output will rise more rapidly and unemployment will decline.
These beneficial effects of easy money are, however, not automatic. If the economy is in quite severe recession and expectations regarding the future are gloomy, consumers and businesses may be reluctant to borrow and spend money. Also, the banks may choose to hold some excess reserves rather than make loans that might prove risky due to poor economic conditions. Thus, easy money merely increases the banks’ reserves and makes more loans possible; it does not automatically create money and boost aggregate demand. This problem has been likened to “pushing on a rope,” which suggests that easy money by itself may not always be sufficient to lift the economy out of a recession. For this reason, many people believe that easy money should be combined with federal budget deficit, which can provide a more direct boost to aggregate demand and can thereby start the economy on its way toward recovery.
When easy money does generate higher aggregate demand, the results are not totally beneficial: a side effect of the increased total spending may be more rapid inflation. While the reduced unemployment from the easy money policies may make some additional inflation acceptable, this side effect does place a limit on the use of easy money.
China Pulls Out The Heavy Ammunition! According to the Telegraph,The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.Two officials...
Ideas To Make Money With A Grownup Business On Craigslist.org Here are ideas for making money with a grownup business on cragslist. org. Among the reasons that cl. org should become monitored carefully in case your child exists, is because you will discover ads that incorporate adult content. Most of...
5 Disheartening New Economic Developments Now that the debt ceiling has been raised and the media have already turned to the question of how Obama will be celebrating his 50th birthday, it behooves us to consider the new market slump that has sunk in following...
Debt and the Credit Crisis The last recession that our country experienced was, in truth, a mild one. The stock market and many corporate profits began to tank, but consumer spending seemed to dance merrily on through the recession without as much as a scratch....
Myth #1: Any increase in wages causes cost-push inflation
Wage increases will only force up labor costs per unit of product if wages rise faster than output per worker-hour (productivity). Figure 12-4 shows the example of a fradistat factory in which output per worker-hour is 100 fradistats in 1982, and 103 fradistats in 1983. Over the year, wages rise from $7.00 to $7.21 per hour, but labor costs per unit do not rise, because productivity has risen at the same rate as wages (3 percent per year). However, if wages rise faster than productivity, the situation is quite different, as Figure 12-5 shows. Here, wages have risen by 10 percent, while productivity has risen by only 3 percent. The result is that labor cost per fradistat rises considerably – by 7 percent. The productivity increase “absorbs” or offsets 3 percent of the 10 percent wage increase, leaving 7 percent to “spill over” into cost increases. The result will be pressure on prices.
Thus, only if wages rise faster than output per worker-hour will wage increases cause increases in labor costs per unit and thus put upward pressure on prices.
The Income Divide - Two Sides... Parade Magazine has a very interesting recap on the last year's economy and how it applies to the public. How Did You Do? gives a view into the state of the nation. There are quite a few statistics that I...
Still No U.S. Recession. Of course it's the AP, so we need to hack our way through the misdirections, doom-and-gloom adjectives and distractions to get the real point: "Last year the economy grew by 2 percent, the weakest showing since 2002." They can't resist...
Challenges that Corporate Bloggers Face Corporate blogging is not the kind of thing that comes easily and generates immediate success. When it come to social media efforts like blogging, there are upsides and downsides and both must be addressed in order to adequately prepare for...
Counter Argument to China's Threat To Dumping US Dollars/Treasuries/ A few days ago,China threatened to offload its Billions of US Treasuries in retaliation to any US imposed trade tariffs.One of the newsletters I read regularly is from John Mauldin who doesn't think its likely that China will follow through...
Myth #2: Wages rising faster than productivity means cost-pushing inflation is occuring
Does Figure 12-6 prove that cost-push pressures are causing inflation? Most people would say “yes,’ but in fact it does not. It shows that wages are rising quickly enough to generate inflation, but it does not tell us why wages are rising that rapidly. Perhaps a strong labor union is pushing up wage rates, making this indeed a case of cost-push inflation. Or, perhaps the graph shows non-union wages (such as computer programmers) being pulled up by heavy demand for their skills in the face of a shortage of computer programmers.
Myth #3: All wage and price increases have negative economic effects because they generate inflation
This is a commonly held belief, but is not always true. In a market economy, wages and prices are constantly changing in response to changes in supply and demand. For example, in myth #2 above, if businesses need more computer programmers than are currently available, the resultant wage increase will serve a positive purpose: it will increase the supply of programmers by encouraging more people to become programmers. Similarly, if consumers want to buy more steak than is presently on the market, the price of steak will rise, encouraging producers to increase the supply of steak. Thus, changes in prices (including price increases) also play an important role in making the economic system operate effectively, by adjusting supply to demand. If prices could not change, the economic system would be unable to adjust to changes in demand.
Have Gold Prices Peaked? In case you were asleep, last week saw gold break all records and almost closed at $900/Oz. I still think its a good time to buy for long term investors. Lets see what other investment advisers think. According to Merill...
How Coins are Valued A coin collection can be a fascinating hobby or an investment the can increase in value over time. If you have a sizable collection or want to become a serious collector, it may be wise to get a professional assessment...
Rising Gas Prices Can Help Your Weight Loss Photo Courtesy of kpgingaz With the ever increasing gas prices (doesn't seem like it's going down any time soon) I figured I had better take advantage of it some how. One way that I thought of was to not use...
Which Dividend Stocks Are Worth Looking At? The market has been defying gravity this summer, with the S&P500 up 49% since March. But most of the appreciation has been in what I consider lower quality stocks. Many homebuilders with doubtful prospects have doubled from their recent lows,...
However, cubs on demand and the money supply may not always in themselves be sufficient. We have seen that, in addition to demand pull inflationary pressures, there are also cost-push forces, and that these can be particularly powerful and troublesome if “inflation psychology” is strong among the public. Thus, if output per worker-hour is rising only 1 percent per year, and workers seek – and get – wage increases of 10 percent per year in their attempts to protect themselves from inflation, production costs (and prices) are bound to rise quite rapidly. Thus, while stressing the vital role of monetary policy, Beigie states that “monetary policy alone is unlikely to cure inflationary pressures originating in excessive income expectation…”, and adds that “it is imperative that expectations be kept in line with potentials.”
Another way to develop a budget surplus would be to increase taxes. In theory, an increase in taxes (for example, personal income taxes) helps to combat inflation by reducing consumer spending and thus aggregate demand. On the other hand, such a tax increase could also prove largely self-defeating. If many wage-earners succeeded in offsetting it by increasing their incomes more rapidly, causing additional cost-push pressures on prices.
Boomer and Retirement Weekly Reader - Late on Easter Edition I'm tardy with my favorite reads of the week. It's been a busy weekend in a pleasant way, with the family around and lots going on at church. Here are few things I read this week that might interest you...
The Continued Slow Deflation of the Housing Bubble The stock market perked up last week. Does that signal the beginning of a return to the good old days? After all, the Obama economic team is feverishly pulling out all of the stops in its attempt to restart the...
Save Time, Money and Space in Over 80 Ways If you're looking for handy gadgets, tools and various items that can save you time, money or space (or all three!) this list of more than 80 top products is just what you need. Everyone's got saving money on their...
Deleveraging Is Not Deflation! I read a very interesting article on called De-leveraging is Not Deflation. Here's a partial extract: "Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation...
Related Websites 