So it's starting to happen. A few weeks ago commodities got pounded, oil and silver especially. And now stocks are falling rather sharply. It looks like the market is starting to price in the end of QE2 as $6 billion of cash flooding the system every day courtesy of the Federal Reserve will be ending in just over a month. Without this economic life support, we can expect to see deflation rear its ugly head again over the summer as the market desperately tries to cure itself of government created disease. Of course, once people start to see the value of their 401k fall through the floor, housing double dips to new lows, interest rates rise to unacceptable levels and our pathetic job creation ability comes to an end everyone will beg Ben Bernanke to start QE3. And why not? The first two rounds worked so wonderfully, right? As Jim Rogers said, "The money printer will print money." We won't be twisting Bernanke's arm a whole lot before he obliges us.
Expect to see the S&P drop about 20% before Ben is justified in unleashing his Helicopter full of cash. September. Maybe October.
Monday, May 23, 2011
Helping The Unemployed While Growing The Economy (An Easy Solution To Our Predicament)
I still find it fascinating that politicians can't seem to grow the economy. Even though many of them realize how it works, political theater and partisan politics always seems to get in the way. For anyone who doesn't yet understand it, I'll take some time to explain it so you can see how easy it is.
Let's say Bob is unemployed. All we need to do is have the government give Bob some money, say $150. Now Bob can take that $150 and buy a TV from Mike. Mike, being a wealthy businessman, will then pay $100 in taxes and he can be allowed to add the other $50 to his vast fortune. Now, since Bob bought an energy efficient TV, the government can give him a $50 rebate for making a wise choice. Add that $50 to the $100 in taxes that Mike paid and the government can then give Bob another $150 for his unemployment check the next week.
Bob can then take that $150 and buy a bike from Jack. Again, Jack is a wealthy man so he will pay $100 in taxes and get to keep $50 to add to his wealth. Since Bob is making the correct decision in riding a bike instead of driving a gas powered vehicle, he will receive another $50 rebate so he can get another $150 for his unemployment check the following week.
Now Bob has a TV, a bike and $150 having started out with nothing. So what does he do? Well, he takes that $150 and he buys a radio from Sam and a week later he gets another $150 unemployment check from the government. So now he has a TV, a bike, a radio and $150 after starting out with nothing. And because of this process, Sam, Jack and Mike all saw an increase in demand for their products and the economy grew as a result. This is just a win-win-win situation all around and it's exactly how we need to grow ourselves out of this mess we're in.
And hopefully at some point Sam, Jack and Mike can all go broke on their investments so that they can be unemployed as well and start collecting unemployment checks so the economy can grow even faster with all the extra aggregate demand the government would be producing.
Hopefully everyone reading this recognized the satire and sarcasm, but it is almost exactly the way many of our politicians understand economics.
Let's say Bob is unemployed. All we need to do is have the government give Bob some money, say $150. Now Bob can take that $150 and buy a TV from Mike. Mike, being a wealthy businessman, will then pay $100 in taxes and he can be allowed to add the other $50 to his vast fortune. Now, since Bob bought an energy efficient TV, the government can give him a $50 rebate for making a wise choice. Add that $50 to the $100 in taxes that Mike paid and the government can then give Bob another $150 for his unemployment check the next week.
Bob can then take that $150 and buy a bike from Jack. Again, Jack is a wealthy man so he will pay $100 in taxes and get to keep $50 to add to his wealth. Since Bob is making the correct decision in riding a bike instead of driving a gas powered vehicle, he will receive another $50 rebate so he can get another $150 for his unemployment check the following week.
Now Bob has a TV, a bike and $150 having started out with nothing. So what does he do? Well, he takes that $150 and he buys a radio from Sam and a week later he gets another $150 unemployment check from the government. So now he has a TV, a bike, a radio and $150 after starting out with nothing. And because of this process, Sam, Jack and Mike all saw an increase in demand for their products and the economy grew as a result. This is just a win-win-win situation all around and it's exactly how we need to grow ourselves out of this mess we're in.
And hopefully at some point Sam, Jack and Mike can all go broke on their investments so that they can be unemployed as well and start collecting unemployment checks so the economy can grow even faster with all the extra aggregate demand the government would be producing.
Hopefully everyone reading this recognized the satire and sarcasm, but it is almost exactly the way many of our politicians understand economics.
Sunday, May 15, 2011
Today's Record LOW Gas Price
Over the past several weeks there has been a ton of reports about the high price of gas. Right now I would have to fork over nearly four dollars just to buy one gallon of gas. And it's true, if you're paying for gas in dollars, the price is almost at a record high. But I bet you haven't heard anything about how today's price of gas is at a record low. In reality, gas has never been cheaper in America. The problem is that in order to enjoy these record low prices you'll have to pay for that gas with real money, which the government quit issuing a few decades ago.
Before 1965 the government issued quarters and dimes that were made out of 90% pure silver. Before 1968 a dollar bill was really a silver certificate. That is, you could bring that bill to a Federal Reserve branch and get an ounce of silver in return. A quarter was made out of 1/4 ounce of silver and a dime was made out of 1/10 ounce of silver.* Today the coins are made out of whatever metal happens to be the cheapest and is then coated with another cheap metal to give it a silver color, making them have almost no intrinsic value. If someone asked for a quarter and you gave them a couple grams of copper and nickel that was worth 5.7 cents, I doubt that they would accept it, which is odd because that's all a quarter is. As for dollar bills, we don't even have those any more. What we have are Federal Reserve Notes, which are basically green pieces of paper that are backed by government debt. If you don't believe me then just take any bill out of your wallet and read the top of it. If you bring a FRN to a Federal Reserve branch and ask for anything in return they'll laugh in your face. Modern money in all its glory!
But back to the record low gas price. In 1931 the price of gas hit the all-time low price of about 17 cents per gallon. But remember, our money at that time was, quite literally, gold and silver. Now suppose you have a dime that was minted before 1965. You could take that coin to your local precious metal store and exchange it for about $3.50, since silver is currently at about $35/ounce. You could then drive to a gas station and get nearly a gallon of gas with those FRN's that a single dime bought you. In fact, if you paid for gas with those silver coins, gas would only cost you about 11 cents a gallon.**
What has happened here is obvious to anyone who cares to think about it. It's not the price of gas that is soaring. It's the value of the Federal Reserve Notes that are plummeting, causing you to fork over more of them just to buy the same amount of gas.*** We don't need presidential investigations or a special task force to understand why prices are rising, we just need to understand what money really is. Sadly, those of us that do understand this and, consequently, would like to return to a gold standard, are viewed in the same light as people who claim to have seen Elvis in a Tennessee truck stop, have a story about being abducted by aliens or harbor a rabid desire to blow up government buildings after spending a couple decades of isolation in a two-room shanty in Montana.
I think it's time to stop complaining about high gas prices and start complaining about the Federal Reserve purposely devaluing the money we use to buy gas. And Justin Bieber. Seriously.
*Actually, since they're only 90% silver they don't actually contain 1/10 an ounce of silver. I'm oversimplifying a little bit to avoid explaining a whole bunch of pointless math, but doing so doesn't alter my point. Feel free to do the math yourself.
**Interesting fact here. Today's price of gas is $3.90, and measured in depression-era currency it's $0.11. Do the math and you'll see that is a 97% difference. That's exactly how much the value of a dollar has declined since the Federal Reserve was instituted in 1913. This is no coincidence.
***One reason those on the political left who are more passionate about combating the widening wealth gap and, at least on a surface level, want to directly aide the poor, should support the gold standard is that the inflation of the monetary supply disproportionately benefits the most wealthy in society. When new money is created, the wealthiest people get it first. That means they get the benefits of spending or investing this new money before the monetary inflation causes prices to rise. Once the inflation eventually benefits poorer people in the form of higher wages, the prices have already risen, meaning that their income doesn't necessarily go up in real terms.
Monday, May 9, 2011
Interest Rates: How Interesting
Back in the olden days, in the long long ago, before about 1913, we didn't have a monopolistic cartel of private banks headed by a few unelected officials who were in charge of the nation's (and, more recently, the world's) money supply. But, other than money supply, another great power of the Federal Reserve is to dictate interest rates, either directly or indirectly. It's this power that gives us nearly every economic boom (Read: Bubble) because the central bank loves to keep interest rates too low for too long, thereby creating excess credit that eventually funnels into a single area and creates a bubble. But what would the world be like if Bernanke couldn't control interest rates? Well, this thing called the "free market" could take care of that. And it's actually pretty simple.
In a truly free market the interest rate would be determined by the amount of savings. When someone deposits money into a savings account, what they're essentially saying is that they are going to under-consume today so that they can consume more in the future. If enough people do this, and the amount of deposits on the bank's book increases, banks will lower interest rates. This lowering of interest rates does two things. First, it makes it cheaper for businesses to borrow money, thereby encouraging it. After all, interest is simply the cost of money. Lower interest rates can make a huge difference to a business that plans on investing a lot of money that won't start to turn profits for many years. Think of R&D departments that attempt to invent new technologies that won't be sold in a store for 10 or 20 years. The difference between 5% and 4% could be millions and millions of dollars. So as savings are build up, interest rates go down and long term investments become feasible. This works out wonderfully because the money that is being used to finance these long term investments that don't pay off until some future date is the very savings that people put away in order to be able to consume something in the future. This consistency in the time factor cannot be stressed enough. Not until people decide to consume in the future (save) can business start to invest in their future (borrow).
The second thing lower interest rates do is discourage savings. If you're only gaining 2% on a savings account you're going to save a lot less than when you were getting, say, 5%. This allows the banks to lend out their deposits, which is how they make most of their money. Once most of the deposits are lent out, the banks will need to start raising interest rates. This will encourage more savings and allow banks to rebuild their deposits at the same time that it discourages borrowing. Again, the time factor works out perfectly here. As people are consuming more today, it becomes harder for a business to invest in the future. This cycle continues with the competition between banks, saving habits of the individual and borrowing needs of business all working together to determine the interest rate.
But like I said, that system died a long time ago. How wonderful that we progressed enough to cast away those quaint relics of yesteryear. That awful era where unintelligent rubes didn't have the know-how to properly manage a nation's economy, money and credit. At least now we realize that we simply need the right people in charge. And as long as we just allow those brilliant economic planners to turn the dials the perfect amount and press the right buttons in the proper sequence we'll be alright. They'll give us the perfect amount of credit and just the right level of money supply. The waste and inefficiency of saving can be eliminated without effecting the ability of business to borrow and invest. I don't see how this could possibly go wrong...
In a truly free market the interest rate would be determined by the amount of savings. When someone deposits money into a savings account, what they're essentially saying is that they are going to under-consume today so that they can consume more in the future. If enough people do this, and the amount of deposits on the bank's book increases, banks will lower interest rates. This lowering of interest rates does two things. First, it makes it cheaper for businesses to borrow money, thereby encouraging it. After all, interest is simply the cost of money. Lower interest rates can make a huge difference to a business that plans on investing a lot of money that won't start to turn profits for many years. Think of R&D departments that attempt to invent new technologies that won't be sold in a store for 10 or 20 years. The difference between 5% and 4% could be millions and millions of dollars. So as savings are build up, interest rates go down and long term investments become feasible. This works out wonderfully because the money that is being used to finance these long term investments that don't pay off until some future date is the very savings that people put away in order to be able to consume something in the future. This consistency in the time factor cannot be stressed enough. Not until people decide to consume in the future (save) can business start to invest in their future (borrow).
The second thing lower interest rates do is discourage savings. If you're only gaining 2% on a savings account you're going to save a lot less than when you were getting, say, 5%. This allows the banks to lend out their deposits, which is how they make most of their money. Once most of the deposits are lent out, the banks will need to start raising interest rates. This will encourage more savings and allow banks to rebuild their deposits at the same time that it discourages borrowing. Again, the time factor works out perfectly here. As people are consuming more today, it becomes harder for a business to invest in the future. This cycle continues with the competition between banks, saving habits of the individual and borrowing needs of business all working together to determine the interest rate.
But like I said, that system died a long time ago. How wonderful that we progressed enough to cast away those quaint relics of yesteryear. That awful era where unintelligent rubes didn't have the know-how to properly manage a nation's economy, money and credit. At least now we realize that we simply need the right people in charge. And as long as we just allow those brilliant economic planners to turn the dials the perfect amount and press the right buttons in the proper sequence we'll be alright. They'll give us the perfect amount of credit and just the right level of money supply. The waste and inefficiency of saving can be eliminated without effecting the ability of business to borrow and invest. I don't see how this could possibly go wrong...
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