Saturday Night Show: Janet Yellen Rate Hike While Pension Plans Going Broke

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A weekly Saturday financial show that attempts to predict market direction for the week ahead by looking at a variety of fundamental and technical charts. This week’s show features commentary on Janet Yellen and the Federal Reserve’s strange timing of a rate hike, how Obama Administration diverted FNMA money and investors dividends into Affordable Care Act to keep it solvent, and the collapsing pension funds across America.

Illegal Immigration and Job Wage Stagnation In the US

Illegal immigration negatively impacts the hourly wage of US citizens. Illegal immigrants are pouring across the Mexico border, and we have no way of counting them but what we can do is track legal immigration from Mexico then double the number for a fuzzy-math estimate.

With legal immigration and an impenetrable border, economists working for the US government can control and set the upper limit on the number of immigrants competing with existing US citizens for jobs. With illegal immigration, the flow of people into this country that are competing with US citizens for jobs and resources can not be controlled.

With the flow of millions of illegal immigrants into our country, the labor supply of workers with less than a high school education significantly increases. That puts even more downward pressure on the wages of the poorest Americans. That, in turn, limits their ability to climb the economic ladder. Limiting the number of jobs available for American citizens is not a smart economic policy for the long-term economic development of our nation.

The following graph illustrates the effects of importing illegal workers on the American labor market.

The “Y” axis shows wages paid per hour for a job, and the “X” axis shows the quantity of labor available for that job. Equilibrium (thin black line) is where the supply and demand curves cross. In this hypothetical example, at $16 per hour, there are 33 applications for a particular job.

An increase in the supply-of-labor from illegal immigration shifts the supply curve down from S1 to S2 as available labor rises. A new market equilibrium is established (thin red line). The business listing the job can lower the hourly wage to $13 per hour as there are now 45 applications for the job.

Without illegal immigration, the business would have to offer $19 per hour (w1) to get 45 applications for the job because the higher the hourly wage offered, the more people would apply for the job. The loss (shaded area) from illegal immigration, therefore, is w1 – S2 = -$6 per hour lost.

Macroeconomics and the supply and demand graph above proves that the effect of illegal immigration is to shift the supply-of-labor curve downward, causing it to intersect the demand-for-labor curve at an equilibrium point with a much lower wage level and a higher quantity-of-labor level. This shift signifies the willingness of illegal immigrants to perform more labor for lower wages than American citizens. This effect on the labor market affects all laborers, both illegal and legal.

Lower and lower wages caused by more and more illegal immigrants means consumers have less purchasing power because they make less per hour. Businesses will have to lower prices to sell their goods and services which creates a negative feedback loop and deflation. Remember, deflation is a decrease in general price levels throughout an economy. Massive illegal immigration during the Obama Administration explains in part why the Federal Reserve is having trouble getting inflation going (CPI) even after spending trillions of dollars of tax payers money to boost the economy.

But I Heard That Americans Are Unwilling To Take The Jobs Mexicans Take

It is not true that Americans are “unwilling to take the jobs” in question. The issue is not whether Americans are or are not willing, but at what hourly wage level. In a free market, American citizens have the right not to take a low paying job. In a free market, having some jobs go unfilled because businesses are not willing to pay higher wages is a legitimate outcome.

Illegal immigrants should not be able to compete with American citizens for jobs because their presence in our country is a violation of the law. The number of people granted citizenship in the US has to be at a controlled rate else our economy will crash under the weight of a deflationary spiral. This dire outcome of a deflationary crash is not an opinion but instead fact based on macroeconomics.

We have to get our immigration and borders under control else America’s shining beacon of light will burn out.

Government Spending and the Crowding Out Effect

The velocity of money has hit the lowest level ever recorded as I wrote about here. I believe the crowding out effect is at least partially to blame for the slowdown in the velocity of money.

President Obama has run the national debt up to nearly $20 trillion, more than all President’s before him combined. This expansionary fiscal policy has crowded out private sector investment.

Crowding out is the offsetting effect on private expenditures caused by the government’s sale of bonds to finance expansionary fiscal policy. When the Federal government borrows money to finance a budget deficit, the U.S. Treasury sells IOU’s in the form of bonds or treasury bills directly to the private capital markets and uses the proceeds from the sales to finance the deficit. The Federal Reserve is out of the loop as the U.S. Treasury is competing directly in the capital markets with private corporations, which may also be seeking to sell bonds and stocks to raise money to invest in new plant and equipment.

To compete for these scarce investment dollars, the Treasury typically must raise the interest rate it is offering in order to attract enough funds. This means that running a deficit is largely a zero sum game. The money used to finance the deficit is money that would otherwise have been borrowed and spent by corporations and businesses on private investment. This is how deficit spending by the government is said to crowd out private investment. This crowding out effect is illustrated by these two figures.

On the left-hand figure, an increase in investment demand by the government shifts the investment demand curve from Id1 to Id2. This raises the interest rate and reduces private investment as is made clear by the right-hand figure. Note that in this figure, if the economy starts at point a and moves to point b, crowding out will be equal to h1 minus h2; however, if the economy starts at point C in a recession and moves to point B, crowding out need not occur.

I believe that substantial crowding out has occurred during the Obama Administration and their expansionary fiscal policy which has reduced the velocity of money.

Banks don’t need savers money because they have large surpluses of cash and can borrow money cheaply from the Federal Reserve; thus savers are penalized as they are paid very low-interest rates on their savings.

The next President of the United States needs to reverse course in my opinion and reduce the crowding out effect to get the velocity of money going up again. The way to do that is to stop using fiscal policy and government spending to drive economic growth. In the GDP formula: GDP = C + I + G + (Exports – Imports), the reliance on fiscal policy should be reduced because increases in G (government spending) are largely being offset by declines in I (investment by businesses).

Unfortunately, most modern Keynesian economists recognize the possibility of crowding out, but they do not think it is a major problem when business borrowing is depressed because that’s what usually happens in a recession; therefore, an activist expansionary fiscal policy is appropriate.

UPDATE Orlando Night Club Mass Shooting and S&P Futures Market

A gay nightclub in Orlando was the scene of the worst terror attack in U.S. history since 9/11. A shocking 50 people were killed inside the Pulse club. Was it Muslim based terrorism or gay hate as a result of the redefining of marriage by the Obama Administration and Democrats?

It was probably both.

The gunman was Omar Mateen of Ft. Pierce, Florida. Omar Mateen was armed with an AR-15 assault rifle and a hand gun. Omar Mateen was a Muslim and did have radical Islamic ties. He held a Florida security officer license and a state firearms license.

In the past, Obama would never blame the problem on radical Islamic terrorism. In this case, Obama might try and blame it on gay hate or automatic firearms.

Clearly this was ISIS. ISIS claimed they were going to attack Florida just three days ago. They did. Democrats might try and claim this was something other than Islamic terrorism, like gay-hate or something, but most Americans know the truth.

Donald Trump received lots of congrats over Twitter about being right about Radical Islam, he responded:

Watch the S&P Futures Market

The overnight S&P futures market will begin trading in a few hours. This will give us a suggestion as how markets will open on Monday. I will be posting updates on the S&P futures market below.

June 12, 2016 8:08 PM Pacific Time in the U.S. – S&P futures have moved slight lower since last update. As of 8:08 PM, S&P futures are down -0.40%. The futures market seems to holding fairly steady. We can say now with greater confidence that we are not seeing a crash in the futures market so this will likely be the last update for the night.

June 12, 2016 6:45 PM Pacific Time in the U.S. – S&P futures are moving lower. As of 6:44 PM, S&P futures are down -0.37%.