So much for scaling back. The world’s rich and elite — or those who just want to appear so — have been cracking open their wallets in a big way lately, and luxury automakers are the beneficiaries. Bentley Motors announced that sales in the first quarter of 2013 were up 26% globally compared to the same period last year. Sales in the Americas increased 35% for the same time frame. The automaker, which is known for high-price, high-end models like the new Flying Spur (MSRP from $200K), still has a very small portion of the auto market. Just 2,212 new Bentleys were delivered to customers worldwide during the first three months of 2013, compared to 1,759 the year before. Even so, Bentley isn’t a mass-market type of operation, and the automaker is on pace for what it would consider a huge year. In 2011, for example, global sales hit 7,003, a 37% increase over the previous year. This year, Bentley should easily top that 2011 sales total. More importantly, in terms of gauging the state of the global economy (and the willingness of the rich to drop big bucks on plush, pricey new toys), it’s noteworthy that Bentley is hardly the only luxury automaker doing brisk business lately. USA Today reported that Porsche just had its best January ever for sales, up 32% compared to January 2012. Once February and March sales totals were in, Porsche Cars North America announced it had experienced its best-ever first quarter, with 9,650 vehicles sold, a rise of 35% compared to the same period last year. Audi also said that it just had the “strongest first quarter in its history” with 369,500 units sold, up around 7% from the January-March period in 2012. Jaguar Land Rover sales were up 17% in the first quarter, according to the Guardian. (MORE: Luxury Wheels, Honda Price: New Breed of Upscale Cars Selling for About $30,000) Given the numbers, it’s unsurprising that expensive new luxury models have been flooding auto shows. A recent New York Times piece offered
The volatile rise and fall of Bitcoins has prompted lots of stories explaining why the online virtual currency is a classic bubble. Many compare it with Tulipmania in 17th Century Holland, where the prices of rare tulip bulbs soared to absurd heights and then crashed, ruining the speculative investors who had bought them. But the Bitcoin phenomenon is more than a bubble. It says something important about the current and future state of the global economy. The scale of the recent boom and bust has been staggering indeed. At the start of the year, a Bitcoin was worth $13.51. Earlier this week, it traded as high as $266. And on Thursday, it plummeted to less than $100, as one of the exchanges where Bitcoins are traded closed temporarily. This would be comparable to the exchange rate for the British pound soaring from $1.62 (where it was on Jan. 1) to $31.90 and then falling back to $12. Such monumental appreciation and volatility is clearly the result of speculation – people buying the online currency just because they think its value will rise, not because they want to use it to purchase goods and services. But Bitcoins’ gains are not the result of speculation alone. They partly reflect the fact that the Bitcoin system is much better designed than previous online currencies. And more significantly, the runup also reflects anxiety about the safety of the global banking system and the stability of major international currencies. (MORE: No Money, No Problems: Canada Considers Completely Digital Currency) The technicalities of the Bitcoin system are complex, but to make this online currency more successful than previous versions, the designers overcame two key challenges. First, to prevent counterfeiting, they attached a history of transactions to each currency unit – but allowed users to keep their transactions nearly anonymous. Counterfeiting is hard because fake Bitcoins would need an authenticated history to pass muster. Second, they strictly controlled the supply of Bitcoins outstanding — thereby saving it from the disastrous fate of, for example, the paper currency known as assignats
Four years after the U.S. recession ended, the global economy is still beset by problems. The present danger comes from Cyprus – where the sea foam once gave birth to the goddess Aphrodite but now only creates froth in panicky financial markets. The proposed bailout plan for troubled Cypriot banks would impose losses of up to 40% on the largest depositors. And that, in turn, could undermine confidence in the banks of other troubled euro zone countries. Cyprus is only the latest challenge for global financial stability, however. In the U.S., deteriorating urban finances – from Detroit to Stockton, Calif. – threaten municipal bond holders, public-sector workers, and taxpayers. In addition, a rise in long-term interest rates seems inevitable sooner or later, either because of inflation or because the Federal Reserve backs away from its easy-money policies. Higher interest rates would mean big losses for bond investors, and also for government-sponsored entities, such as Fannie Mae and Freddie Mac, that hold mortgage-backed assets. The greatest risk of all, however, may be one of the least visible – namely, the expanding, shadowy market for derivatives. These highly sophisticated investments have contributed to financial disasters from the 2008 bankruptcy of Lehman Brothers to J.P. Morgan’s 2012 trading losses in London, which totaled more than $6 billion. (MORE: The $600 Billion the IRS Can’t Collect) Basically, derivatives are financial contracts with values that are derived from the behavior of something else – interest rates, stock indexes, mortgages, commodities, or even the weather. Just as homebuyers make only a down payment when they buy a house with a mortgage, derivatives traders put down only a small amount of cash. Moreover, one derivative can be used to offset or serve as collateral for another. The result is that a massive edifice of derivatives can be supported by a relatively small amount of real money. Some derivatives, such as typical stock options, trade on exchanges. But many are simply private contracts between banks or other sophisticated investors. As a result, it’s hard to know the total
Financial turmoil in Cyprus, where the parliament rejected a plan an eurozone bailout deal that would have taxed bank deposits, is prompting investors to shift cash from the euro zone to the U.S. That’s boosting the value of the dollar — and it’s just the latest installment in a story that has helped the dollar strengthen for more than a year. Despite gridlock in Washington and a string of economic mishaps, the dollar has risen by 7% since late 2011. That’s a striking turnaround for a currency that was in relentless decline for decades. If the upward trend continues – and there are good reasons to think it will – then the U.S. dollar could become almighty once again. The dollar’s decline over the past 30 years has been far greater than most Americans realize. It has lost almost half its value against other major currencies since 1985 and is down 33% in the past 11 years alone. Indeed, the value of the U.S. dollar is lower today than it was in 2009 when the recession ended. In part, this fall occurred because of government policies in Europe and Japan that kept the euro and the yen overvalued. A weak currency can bolster a country’s economy in the short run, by making goods cheaper for foreign buyers and thereby encouraging exports. But over the longer term, a robust economy is typically accompanied by a strong currency. A currency rises in value when more foreign money is flowing in than is flowing out. These inflows occur not only because of export sales but also because foreigners see investment opportunities or are seeking safe places to park their cash. As a result, a stronger dollar is a bellwether of an improving economy and a brighter outlook for U.S. stocks. And there are three reasons economists think the dollar’s rise could continue: (MORE: Cyprus: The E.U. ‘Rescue That Risks Backfiring) Other major countries are worse off economically. The U.S. economy may be sluggish, but it has grown for 14 straight quarters since the recession ended
Yesterday’s deal to avoid the fiscal cliff offers quick fixes for the country’s most urgent financial problems but will also add almost $4 trillion to the deficit over the next 10 years. Cuts in discretionary spending and entitlements have therefore become even more essential, but the fiscal cliff deal has postponed negotiations over spending for at least another couple of months. Moreover, one major government program is likely to be omitted from those discussions: Social Security. Although much attention has been paid to ending the temporary reduction in Social Security payroll taxes, little has been said about modifying the program’s benefits. Indeed, these are likely to be kept off the table entirely during future negotiations over spending cuts. This omission is usually justified on the grounds that Social Security does not contribute to the deficit. However, the program does add to the growth of the national debt. How can Social Security have no deficit and yet add to the national debt? Chalk that up to the Social Security Trust Fund. Money that workers pay into the system goes largely to fund benefits for people who have already retired. Any surplus goes into the Trust Fund – now more than $2.7 trillion – which invests in government bonds. In 2010, however, the amount that Social Security took in fell short of the amount needed to pay benefits. That gap is growing and is projected to surpass $100 billion a year before the end of the decade. (MORE: Four Misconceptions About Taxes and the Deficit) This shortfall can be covered by taking money out of the Trust Fund. But every time that’s done, the government has to redeem some of the bonds in the Fund for cash. It gets that money by selling other bonds to the public. And while bonds in the Fund represent money that the government owes to itself, and therefore don’t count toward the national debt, bonds sold to the public do add to the debt. Since Social Security will likely continue to pay out more in benefits than it takes in,
Optimism has been growing that Democrats and Republicans will be able to reach a budget deal that brings the deficit down to a sustainable level while avoiding a recession. A lot of investors appear to be skeptical, though, judging by the fact that the Dow has declined 473 points since President Obama won re-election. I’m skeptical too. A compromise may be achieved that avoids the drastic spending cuts and sizable tax increases scheduled for next year. But it’s hard to see how the economy will be able to achieve better than sluggish growth, accompanied by the risk of rising inflation. The problem is the math. If a country runs a deficit (as a percentage of GDP) that is equal to its growth rate, the debt level will remain constant. This year U.S. GDP will be a little less than $16 trillion, and its historical growth rate is 3.25%. That works out to what we might call a “safe” deficit of $520 billion, or even $600 billion if you allow for a little inflation. Last year, however, the U.S. deficit was $1.1 trillion — or roughly $500 billion too much. That gap could be closed by ending all tax cuts, tax breaks and stimulus payments for everyone, according to the Tax Policy Center. But two-thirds of the burden would fall on the middle class — something both political parties want to avoid. All the proposed tax increases on the wealthy, however, even combined with the end of the payroll-tax cut, would raise only $295 billion. So unless there were spending cuts twice as big as the ones currently scheduled, the deficit would still be too large. (MORE: Will Obama Make Wall Street Pay for Its Support of Romney?) Some people have proposed forgetting about the deficit until the economy is growing robustly. But there is a limit to how much more debt the U.S. can safely take on. The National Bureau of Economic Research calculates that debt greater than 90% of GDP slows economic growth. And at the current rate, within four years the U.S. will
We all feel unappreciated sometimes. It was the particular genius of überlibertarian author Ayn Rand to turn those hurt feelings into a political movement of sorts, at least in the fictional world of her massive novel Atlas Shrugged, in which a group of industrialists inspired by the mysterious John Galt decide to go on strike [...]
Evidently feeling that our political discourse is not silly enough yet, the kind folks at National Review have given us a cover story arguing that Mitt Romney needs to fully embrace his inner Thurston Howell.