2009: Predictions and things to look forward to

Since this eventful year of 2008 is nearly up and I have some free time after graduation, I have decided to update my blog to put some predictions up for the upcoming year. I plan to write voraciously in the new year and as one who has followed the blog can tell, the volume of posts each months continues to rise. Now for the predictions--

1)I predict that Bernard Madoff will not be the biggest crook to come out of the financial mess of the past year. I know that is hard to fathom, but if this comes true it will be the story of the new year.

2)The federal government is going to expand under Obama, but the deficit will shrink in succeeding quarters as the payouts for the wars decrease and the trade balance improves because US demand for imports falls with the weak economy.

3)The Federal Reserve will raise interest rates in the second part of the year to try to gain more buyers for US bonds. The current 0-.25% window is ridiculously low and killing off any propensity to save Americans may have. Just going to the bank and looking at the 3% returns on CDs is depressing.

4)Oil prices will stay low, resulting in social disorder in some petroleum-based economy. The early signs will show when the oil powers have to cancel projects because they budgeted for them at five times the current price. Telling the citizens you cannot build a hospital because you do not have the money does not make many a people happy.

Give your thoughts and have a happy new year

Christmas Break

I shall not be posting until after Christmas so until then have a great Christmas, Hannukah, or whatever you celebrate

A sad tale of these modern times

A town of around 13,000 in Ohio is having half of its population laid off due to the failure of DHL's parent company. Stories like this are becoming more common as "company towns" such as Janesville, WI and Dearborn, MI are on the verge of losing their manufacturing base. What are all of these people to do, go back to school? Stories like this are really scary reminders of the times in which we live.

On another note Gallup released a poll showing great gloominess with the American economy. It shows that 95% of people view the economy as a crisis or great concern, but individuals are not as worried about their personal finances. The second part is not that surprising, since unemployment been gradually increasing and the economic damage has only really hit in the past three months. In six months with the economy on its continued slide should see those negative personal numbers rise as the cash reserves run out and the individuals realize the magnitude of how bad the job market currently is. Hopefully things get better so my prediction does not occur.

Morality vs efficiency, a quick answer

A certain commenter asked about whether morality and economics are related and whether the theoretical economic system of distributism becomes either atheistic or Marxist. I shall address each one as best I can given my limited knowledge of the philosophy and the time of day.

The first question posed presents one of the fundamental issues of economic and political thought in the past century and then some. On the extreme left the Marxist would say that any economic system which is not having the means of production in the hands of the collective workers is an immoral system. The other extreme, the libertarian, argues that any economic system not based on individual self interest is an immoral system. Somewhere in between lies the optimum for the vast majority of society, in which people want efficiency but not the marginalization that would be necessary to achieve it. For example, in the field of health care most individuals would say that they want health care provision to be the best in the world, but would object to allowing those unable to pay to die. In a purely market efficient system the poor would be allowed to do die because their willingness to pay is below the market price, so they would be excluded. This difference between what is the most efficient and that which is best for society is the difference between two economic schools, the welfare economists and the classically liberal schools.

All economic systems try to maximize two ideas:efficiency and equity. As stated above the two are often at odds because the efficient level of production is not society's optimum level because of externalities. These are non price factors resulting from a policy or production of a good. Positive externalities include increased security to neighboring buildings from the hiring of a security guard for a different building(the externality affects the one not paying for the guard), and negative ones include pollution and noise.

Two interesting works to contrast these ideas are Ayn Rand's Anthem with Huxley's Brave New World. In the former a collectivist society is said to be removing the freedom and individuality from man, while the latter portrays a collectivist society which takes away the freedom from individuals in the name of efficiency. To the libertarian, the free market is the most important safeguard to individual rights and therefore individual morality. Conversely, a more unorthodox economist might see the free market as filled with many negative externalities which would carry a burden for society and would require oppression in the name of efficiency. The conditions of the laborers in China in my previous post shows that in a truly efficient systems individuals are made into little more than living cogs. In a truly free economic system there is always a good degree of inefficiency because certain pursuits have social value but little economic value. If this were not the case, then artists and teachers would be highly paid since their contributions to society have long term dividends in spreading culture and knowledge between generations, but in the calculus of modern economics they are low paid because their product does not have immediate financial gain, so they are valued less. They are, however, valued because their contributions have a societal benefit which outweighs their economic benefit.

Question 2: does a distributist economic system lead to either atheism or Marxism?

From what I have read about this system it seems the more likely result from such a system is not Marxism, but regionalism. Since distributism values the smallest unit possible to carry out economic activity, it logically follows that smaller parts will wield greater power in terms of everyday transactions. Ergo, the small collective units will end up creating a lot of small scale states such as Renaissance Italy or ancient Greece, with trade between them as necessary but problems in terms of certain larger scale needs such as defense.

Religion could be a problem also because the distributist ideology seems to favor subsidiarity(that smallest units possible be utilized to carry out society's goals) since a logical contradiction occurs if religion is a top down institution. E.g. the church may claim one goal for society, but the smaller subsidiaries believe in another path, resulting in a societal breakdown. Secondly, certain institutions withing churches such as tithing will pose friction in this system since their will be the issue of whether the money stays locally or is better used by a higher office of the church. These issues all arose in different periods of history, and caused splits within the churches. I would see religion being a very weak force in such a state, but becoming atheist is not as likely since religious values tend to be passed on a family level, so the impetus on smaller units would tend to keep religion around.

Hopefully that answered some questions, I wish I could write more but I must sleep at some point.

Why the US is not competitive with China in manufacturing

As you can see from the video, Chinese workers live like rats and make a whopping $300 a month working burnout hours. If we want to live in third world conditions, we can compete on a level cost structure too! If we are going to have a global labor market, then we must accept living like the rest of the world does: in crushing poverty. Free trade in labor does not help Americans because we cannot compete on costs with third world nations, so we either have to accept slave wages or give up manufacturing, or some combination of both. Either way our standard of living must fall as convergence of wages comes closer and closer.

Fed loans two trillion, won't tell us who got it

The greatest theft in the history of mankind

Let them eat cake: a 2008 tale

Back in the late 18th Century in a once great power with overseas wars, economic might, and the defeat of their main rival for world influence taken down by a small nation there were a class of people who took from the treasury to enrich themselves. In this time, the poor were told that they should be happy being told how to behave by those in power, since the rich and powerful enjoyed the blessings of the almighty, or else they would also be wretched and poor like the factory workers. Even the elite of this time made patronizing remarks about the need for the poor to change their habits and sacrifice since times were so bad, such as telling starving Parisians to eat cake(a more expensive good) since they could not afford cheaper sustaining bread.

Fast forward to 2008 in the United States and see that history once again repeats itself. The most militarily and economically powerful nation is engulfed in two overseas wars, their main rival for world influence(the Soviet Union) was defeated just about a decade ago by upstarts in a tiny piece of land, and leeches in suits are draining the treasury to line their own pockets. In this modern time the churches of materialism(also known as megachurches) tell the faithful that wealth is a sign of being blessed and that those who are poor are not blessed. Now the aristocrats changed their titles from Marquess to Senior Executive, but the same dynamic holds true. Let me past this quote from a spokesmouth for welfare queen AIG to bring home the point:

Nicholas Ashooh, AIG's senior vice president of communication, acknowledges that the perception of his company has taken a hit.

"Oh, it's terrible, it's terrible," he told CBS News.

Ashooh said the retention program does not include anyone in the firm's financial products business, the tiny arm of the company that torpedoed AIG with its high-risk, bad loans.

"We know that this is not a popular thing. A lot of people just won't accept it, but if you think about it, it's a calculated decision to keep businesses intact so that we can sell them and pay back taxpayers what we owe them," he said.

The translation: we screwed up the world's financial system and are rewarding top executives but you should trust us with money that you worked hard for since we know what is best. If you let us take $115 billion and dole it to top management, who will probably leave anyhow, it's in your best interest. Oh, while you are at it, pay some interest for our largesse (bonds are not free money after all) and enjoy it. There's a Santayana saying that keeps getting stuck in my head right now.

Scandal:Government Oppression Keeps Down Entrepreneurial Governor

Today the forces of oppression and inefficiency have decided to interfere with the free transaction of goods and services by the enterprising salesman Rod Blagojevich. In his quest to attain the American dream, this young Serbian took advantage of the opportunities to finally take a piece of his pie by simply helping his fellow Americans advance in these most interesting times, who can fault that?

Instead of being greeted for his creative attempt at job creation, the government does that which it always does to free enterprise:stifling innovation. Instead of being allowed to trade his ground breaking method of transferring a seat between two consenting parties, the Forces of Business Inhibition arrested the great enterprising young man. They even claim that such enterprise is "a new low!" A new low! If only Milton Friedman himself in his diminutive glory could see the breathless efficiency with which the Serbian savant reduced barriers to entry in the US Senate market and created additional consumer surplus with each new commission seat appointed to his neighbors. The shame that Uncle Milty had to depart us before he could view in all of the glory as another immigrant's son displayed the heights achievable with the American Dream!

However, free marketers everywhere have stated hopefully that Mr. Blagojavich will not be touched by too many "invisible hands" in the state prison. Blagojevich states his innocence, claiming to be following in the footsteps of economic visionaries such as "Creative bond marketer Michael Milken, energy guru Kenneth Lay, and veteran stock valuator Scott Waksal."

Given the depth of knowledge that the governor has in the complicated world of political office efficiency, shouldn't he be admired for his prowess rather than pilloried?

Another free marketeer tucks tail and hides

Today it is with great joy that I announce the latest intellectual surrender by a free marketeer to the seductive power of government money. Ben Stein, apparently on a break from equating evolution with Nazism, has written a column about the need for a bailout. Try not to laugh as you read statements such a:s"

Amazingly, we can have whole fleets of C-130's fly to remote areas of Iraq and Afghanistan with pallets of hundred dollar bills piled from floor to ceiling. Then we can pass them out to warlords who make tea for our soldiers one hour and blow their guts out the next. We can send CIA operatives into Somalia and give millions, maybe hundreds of millions, to warlords to fight other killers.".

Hmm Mr. Stein, maybe you should have thought about that before groveling to Bush during his reelection? Of course this is the same guy who said that "Everything will be fine, just get back to work" in September. He also said that the economy is basically in fine shape in late October when the market melted down. It is always nice to see an ideologue forced to accept reality, though I am sure the second stocks have an uptick he will be back on the free markets, no regulation bandwagon.

PS. This is the same guy at an interview who stated that "science leads to killing."

Chicago:A Lesson in Why The Free Market is Not so Free

Over this weekend some union employees in a Chicago decided to stage a sit in at their factory after they were laid off and not given their severance or unused vacation. These workers were abruptly laid off and since the former company went into bankruptcy, the assets were handled by Bank of America. Bank of America decided that it had no obligation to pay the workers the debts their former company owed and gave a giant F@#$ you to the workers. Isn't it so great that labor and management can negotiate in the free exchange of labor for employment?

Oh wait, what I am seeing more and more frequently is a system of labor laws which lack any enforcement. As a result, workers are being denied their final earnings, being made to do thing outside of their contracts because they will be fired, and made to work above and beyond what they signed up for because they can be tossed on the swages, which are negative. In other words, as the worker produces more units, they are paid treets at any time. It is a sign of how naive and/or stupid the randoids/Milton Friedman followers are when they claim that labor can really equally enter negotiations with management on equal terms. If that were the case, then real wages would rise, especially given the continual rise in productivity. From that linked report from the Bureau of Labor Statistics shows that the change in output in all sectors of the economy is greater than the change in real hourlyless in this glorious economy. Here's a hint to why people are not buying anything, they are getting a pay cut every year they are getting no increase in wage to match inflation, and a decade plus of this will catch up in a comsumption driven economy.

Today's Economics Lesson: Why Oil Prices Are Dropping

Today comes news that oil prices are approaching $40/Bl and the US lost a half million jobs last month. This kind of negative news pushes the demand for energy down as people without work cut back on spending since they have no money coming in, which means supply is greater than demand. The price individuals are willing to pay for a good is below the market equilibrium at the previous price, so the result is underconsumption. If people are homeless long enough, the income change will cause the whole demand curve to shift down, which lowers the price for the good supplied.

In other words, people without the money for gas to drive will not drive. The only good news from this economic downturn is that many a petrodictator is going to be dropping a brick if prices get much lower. Their lavish spending while the population starves will catch up quickly.

Laid Off

Well, I just got laid off along with about 500 other people. I guess I can pursue my next career as a stand up economist.

Morality in Economics?

A read asked why I do not address any morality in discussing economic issues and the answer is simple, from a purely competitive standpoint there is no efficiency other than what clears the market. In other words, matching a buyer with a seller is the only right thing in the world and preventing equilibrium is the only wrong thing.

This is the view of the Austrian school and the Milton Friedman cult of personality. It believes that markets never fail and government stops free enterprise. They believe that everything is a matter of allowing the market to work and if you are not successful it is because you are lazy since everyone has the ability to trade their goods and services freely with anyone else in a free market. With their belief that the absence of government promotes freedom and prosperity, shouldn't they point to Somalia as the perfection of their ideology? It has had no government for nearly two decades and no barriers to entering the market. It should be a paradise!

This view is intellectually and morally shallow because it does not deal with the impact of externalities since the market will "take care of it." As anyone who has not had their head in the sand the past two years can attest, businesses do not self regulate. Companies in bankruptcy are flying executives to resorts while laying off workers and the balance sheet crumbles. Also, pollution is another area that market does not fix because the cost of pollution is borne by third parties more than by the producer. Without the right to not be sickened by pollution, individuals have no power to stop it. This is the purpose of government, to deal with the externalities that the market cannot address because the efficient level is not the societally efficient level.

Today's Economics Lesson-Why Agriculture is Only Done By Big Corporations With Any Success

Today's lesson is a two-fold lesson encompassing the concepts of economies of scale and the perfectly competitive firm structure. The first concept, economies of scale refers to the ability for larger firms to squeeze out additional units at lower and lower costs as they expand to the greatest marginal return. In other words, since fixed costs are highest at the first unit of output, the additional units spread out these costs over more and more units. This results in lower average cost per unit until diminishing returns set in. Diminishing returns means that for each unit past the minimum average cost level, the increase in marginal cost is greater than the benefit or revenue of the next unit.

For agriculture the fixed costs are quite high because land is thousands of dollars and acre, and the inputs for production such as tractors, feed, corrals, etc. are very expensive. As a result, the smaller farmer has to pay for the capital cost of their operation over a smaller number of units, so their average cost is higher than a corporate farm where the equipment and land costs are spread out of a factor of the smaller guy's operation. In other words, if farmer Joe and farmer Jim both raise cows in the same area, but farmer Joe has only ten acres and farmer Jim as a thousand, then farmer Jim has the ability(if his money allows) to purchase more cows than Joe possibly could, so the cost of the truck, trailer, feed will be spread out over however many units each one's land can produce efficiently.

A second consideration is the type of market structure an agricultural business exisists within. Since product differentiation between most agricultural products is pretty much nonexistent(ie one cannot tell apart milk from Joe's cows compared to milk from Jim's cows) and anyone who can buy land and cows can enter the market, and also that millions of little producers are creating milk at any given time result in a nearly perfectly competitive market. This has two important meanings economically: 1) that the homogenous nature of the product and number of sellers means nobody has the ability to control price or collude, and 2) that in the long run the economic profit is zero because firms can easily enter or exit the market depending on supply and demand conditions. As a result, the spot price for an agricultural good is the price anyone pays for it, so anything above that price will not sell at all. This creates a problem because the producers are reliant on say milk pricing being X, but then they fall and suddenly the smaller firm has the same costs but shrinking revenue. If the price rises, the smaller firm may be able to have a short term profit, but the price will go lower due to new firms producing the formerly profitable good.

Given how economically despairing the idea of being a small farmer is, so many people in this country still attempt it. The downfall of the family farm is an unfortunate side effect of the economic realization of the preceding lesson, in that the wages earned being a small farmer are more work and lower than what could be earned at a service job. If this were not the case, why would whole swathes of the nation see their children flee and towns become vacant as the last generations of farmer pass on?

This too shall pass

The image above is the left wing irony equivalent of the famous picture of Americans standing in a breadline in front of a billboard proclaiming the world's highest standard of living . Here a Venezuelan man picks through garbage to get food and items to salvage under a graffiti dedicated to a Marxist revolutionary. Both images portray the flaw in latching on to ideology, as ideologies are simply means to have power over people.

The previous statement is simply a reflection on the self interested nature of humanity. If that were not the case, then humans would be able to come together to rationally distribute resources for the sake of harmony. Instead, in any system of government there arise a class of rulers and a class of the ruled. The ruling class hordes the wealth of a nation that is produced by the ruled class' labor. This occurs in every system because there is a cartel problem in that the benefit to cheating is too great for such an order to continue. In other words, in a system where all the resources are evenly distributed among every member, there is a gigantic incentive to cheat because the small margin of excess over the next guy gives you political and economic power greater than the next guy since you can use the excess wealth to curry influence. It's the same reason why Goldman Sachs can steal $700 Billion from the treasury and Chavistas live in mansions. It's the same human failing with twin masks.

Writer's Block Edition

Since I am unable to write much due to my final classes and a big final project for school, I will put a picture to show what I am thinking.

The Best Deficits Fiat Money Can Buy

Today's story comes from CNBC about the cost of the financial socialism, I meant bailouts, exceeding the cost of WWII with inflation adjustment. So we are spending more money than it took to bring down both the Third Reich and the Empire of the Sun and all we have to show for it are executive compensations that only Croesus could imagine?

This is the largest transfer of wealth in human history, one which is mortgaging the future of the nation in the hands of the same idiots who got us into this place. Why nobody calls this the theft that it is comes as the biggest indictment of the modern media. In eight years Bush has increased the national debt from $5.272 trillion to $10.578 trillion. Check here if you want to see for yourself. The date range is from January 20, 2001 to today. Where is the outrage?

Thought from a trip to the grocery store

I have been employed in a precarious industry, so going to the grocery store meant looking for non perishable staples such as rice, pastas, sardines, etc. Well I went and noticed that every one of these things had high traffic in their areas. Sardines were almost all gone when I had taken my share, the pasta aisle was thinned, and basic goods seemed to be the majority of everyone's carts.

What does it mean? It means that, like me, most people are having to adjust to having less purchasing power and uncertainty about employment. Why would people spend extra money on groceries that will go bad in a few days if they are worried about their next paycheck? If you want to read it from CNBC instead of me, check here. I am a big believer in the most obvious things being the best economic indicators. When you see that parking lots are empty and people are buying only staple goods, things are bad no matter what the government statistics tell you.

Peter Schiff Says The Truth in 2006

Watch someone state the obvious and get ridiculed by trickle down cultist Art Laffer. It is so sad to see a washed up economist like Art Laffer talk about how great the US economy is while debt is shooting up faster than a junkie lottery winner.

This artificially low interest is the best point of the whole video. Since the mortgages were largely adjustable, the rise in interest rates that occurs when money get tightly squeezed makes homeowners unable to repay mortgages as they maxed out thinking the ARM was set in stone. Instead, the money has dried up and retail is falling as a result.

Wealth is illusory in the modern context because the asset valuation is not based on any kind of reasonable trade standard, IE a house is worth this much because that is the stable price for a house in the area, but instead it is being set by third parties such as appraisers and rating agencies. The worst part comes from the conflict of interest that the same ratings agents get money from the firms they rate. It is like believing a fake watch it really a Rolex because the dealer says it is such. Why would a shady person at a bus stop be any less reputable doing this con game than a white collar thief on Wal Street?

Poverty in America

Here are some pictures from the city showing poverty in the US.

Circuit City Falls, Who's Next?

Today's announcement that Circuit City is filing the Chapter 11 comes just days after retail sales have had their worst month in years. What does it mean to you? It means that people are not buying the gadgets they used to between losing their jobs or having bills take up larger and larger shares of their income. This Christmas will be a very bad one for retailers, with people paring back because they do not know if they will be employed in January. We should be seeing more Circuir Cities when the retail numbers from Christmas come in.

My political orientation

Does this seem right?

By the way, the axes are economics on the X and social on the Y.

The Ghost of Christmas Shopping Past

One of the more interesting developments to see whether the economy has bottomed out will be the retail numbers after Christmas. Since the November and December months are the two most profitable months in retail, the performance by retailers will signal whether money is being hoarded or spent. According to the latest retail data, same store sales are falling throughout the industry. Only Wal Mart currently seems to be above the fray.

The question remains, will Americans go through credit cards and pay 30% interest on the newest toys and gimmicks? At some point the shopping spree has to end, as wages are not rising as fast as inflation yet Americans are trying to stay at the same level of consumption. These two things cannot be kept going in the long run, as the end result is greater and greater debt.

More posts upcoming

I have been swamped lately, but I promise new posts soon.

Pre Election Predictions

As you can see, I don't give McCain much a chance. I see a lot of razor thin races in Virginia, Florida, and North Carolina which will go to Obama due to anger over the state of the economy. Texas will go to McCain by less than ten points. California will pass Prop 8(gay marriage ban) by a narrow margin of 52-48. Finally, I predict that Al Franken will lose in Minnesota once people realize who they are voting for.

Consumer Spending Drop A Brick

To the surprise of absolutely nobody, consumer spending dropped this month. This is not rocket science, since the grocery stores have not dropped prices while our wages and wealth have fallen, if we have work at all. I still see milk for 4 dollars a gallon even with the price of gas halved here. It's a very curious thing that when gas prices rise they are directly fueling price increases, but when they plummet they are not a factor to cause price drops. If only consumers here would stop buying overpriced goods, then market forces might work. Unfortunately that is only a pipe dream, as one in five American house buyers has a house worth less than the remaining mortgage.

Fed Meeting Today

Everyone's favorite group of quasi independent bankers meets today to discuss the probable rate reduction, which would be just another notch in the belt of the Bernanke Fed and its love for the low interest rate.

The Fed believes that inflation is not a worry because the world's economies are so bad, which I also aree in the very short term to be true. If stock markets are losing 70% of their value from last year such as the Shanghai Index, then the loss in wealth tempers inflation concerns because a lot of money is not needed to be printed to cover the new wealth in an economy.

In the long term, however, the story is quite different since there has been an inertia from the last two Fed groups to raise interest rates regardless of inflation. When the markets stabilize and prices run up on commodities again, your dollar will buy much less with a 1% interest rate than a 3% interest rate, etc. Beware the short term fixes for they may hold long term curses.

9 more days until the end of the three year election

One of the problems with early voting is that you get weeks of hearing about the campaign when you no longer care since it does not apply to your vote. Well in my trip to the polling place at my school I noticed a couple of things: 1) turnout is way,way up, 2)black voters are coming out in huge numbers, and 3) young people are showing up in bigger numbers. If this is the case in a state where McCain will not lose unless he cooks Bevo(the UT Mascot) while wearing an OU Jersey, I can only imagine the trends in places where the presidential race is actually close.

That being said, this was also the first election I really cared about none of the candidates. My only view was to vote them all out, as nobody currently in power should be reelected since they have presided over such incompetent rule.

Today's update on the Fed's Printing Press Operations

Just when you thought the Fed could not blow more money on attempted market manipulation comes word that we are now on the hook for up to 450 billion more. With this latest round of fiscal malfeasance, the Fed and Treasury have add over a trillion and a half dollars in debt just this year. In other words, the debt level added this year is more than a quarter of what the total national debt was in 1993. Hurray for the party of small government.

Here's a video where Bush claims his 2003 budget will cut the deficit in half in five years. This pretty much sums up the legacy of Bush on economic matters, speak a big game and fail to follow through.

Getting Drunk on The Taxpayer's Money AIG Style

Apparently billions of dollars in the past two weeks has not been enough to satiate the pirate at AIG, as they are now tapping on a paper purchasing agreement from the Fed worth up to ten billion dollars. The same company that took 87 billion, or $87,000,000,000 of my money and your money, then received an additional 37.8 billion, and now they want a little extra time at he government trough.

Why is a company too big to fail? In a country where for years the economic mantra has been that "free market capitalism is the best way to achieve wealth" there should be riots in the streets over such government intervention. Instead, the corporate fascism is accepted as though government actually has power to do good for the economy. The problem is that government cannot effectively decide what 300 million people want on a daily basis, and no corporation can do so either. If the people do not want to invest in companies because they are illiquid, then government can only delay the problem because they cannot make every illiquid company liquid so that investors will flock to financials. If only someone actually advocated personal responsibility in DC...

final debate, final analysis

To borrow a tired cliche, McCain accomplished too little, too late. He finally came out swinging and bringing up the dubious connections Obama has with people like the terrorist Bill Ayers and Obama's propensity for government largesse. When McCain referred to Obama as "Senator Government" I actually saw a spark of life in their campaign. Unfortunately, a quick joke won't roll back the huge market losses, the bailouts, the high oil prices.

McCain also brought up the issue of school vouchers which are long overdue. Competition between schools for students is necessary because the current educational system is stuck in neutral since the current funding allocation gives high funding to both high and low performing schools. This means that the incentive for a poor performing school to improve is not that great since a lot of funding will dry up if there is too much improvement. If students could choose where the tax money for education went, then school districts would have to treat the students and parents as customers rather than serfs. As it is now the taxpayer is only seen as a dollar amount by the school districts since they are tied to the land via geographical school tax assessment. Vouchers will free the taxpayer from the school district fiefdom, which is long overdue.

Market volatility and political reality

Last week saw people losing over half their portfolio value in one week, and Monday saw the largest absolute increase in the Dow in history, so are happy days here again? The answer is that we will not know until the injection of capital into the financial system is completed. If(and that is a big if) the bailout plan succeeds the velocity of money should increase, which would avoid a depression since a low velocity means money is not being loaned out or used to purchase goods and services.

Even if the bailout succeeds, the political landscape will be changed by the economic realities of the last eight years. The first lesson is that the Republican party cannot claim to be the party of financial responsibility as they have presided over the complete removal of any spending restraint. Secondly, the McCain/Caribou Barbie campaign is in very dire straights with three weeks left in the election. Since early votes are already beginning in some states and will all be starting by next Monday, this last debate is really the final gasp in the campaign. If McCain comes across as badly as he has the last two debates, with stumbling and playing for a tie, prepare for the polls showing Obama up double digits to increase. Is the debate performance going to be too little too late?

Thoughts on the economic meltdown

From hearing the word on the street, I get the impression that everyone is going to bail out of stocks soon who is still in. That is only a wise idea if you need the money to live offi n the very near term. Otherwise, withdrawing the stocks locks in losses, since the stock price is only set when you sell and buy, so right now it has no value until you cash it in. Also, moving to cash right now is also a losing proposition since the interest rates at banks are in the mid fours, meaning you get a negative rate of return on cash accounts. Government CDs are also negative return gainers, so rather than fret over immediate investment I would rather see people save some money and use some of it that they can spare to buy things before the post bailout0bearstearns-aig-stimulus payment borrowing starts to really kick up the inflationary dust storm. I feel confidernt having invested in the growing wheelbarrow market. It is the next big thing in banking.

Another day, another bit of corporate welfare.

Apparently the executives at American International Gang got a new nearly $40 billion dollar loan from the Weimar Republic, I meant the US Federal Reserve. This comes after they were reported to have blown $400k on a spa day which you and I paid for.

Here are some quotes from de Tocqueville as he toured the nascent America for you to contemplate against the backdrop of the rape of the American experiment by the suits on Wall Street:


"In towns it is impossible to prevent men from assembling, getting excited together and forming sudden passionate resolves. Towns are like great meeting houses with all the inhabitants as members. In them the people wield immense influence over their magistrates and often carry their desires into execution without intermediaries." Compare that to the closed door meethings between energy companies and the government which end up with more powerful companies and more gouged consumers.

""The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."" No more needs to be said.

Think about those two ideas when you hear about how dangerous certain ideas are from different candidates or about how we taxpayers must give our hard earned money to billionaires. If this is a free, capitalist society, I would not want to know what a socialist one is like.

This is the face of America's downfall.
(Former AIG CEO Martin Sullivan)

Congress just gave you a pay cut

Today's bailout means that everyone in this nation just took a pay cut thanks to the inflation which will follow the bailout. When more money is printed to cover debts, inflation occurs because the scarcity of money decreases. I was physically ill listening to Nancy Pelosi cackling at the press conference, like a school girl who just got dad's credit card. I need to sleep and dream of a fiscally conservative country, since I won't be waking up in one.

Debate Post Mortem

After watching the vice Presidential debate, one must analyze the debate in sections and conclude that there was no runaway winner. The following analysis discussed the debate and what was most noticeable about each part.

I. The opening questions/the economy:

The first two questions showed a very nervous Sarah Palin repeating talking points no matter how far they deviated from the question. For example she was asked about the bailout and talked about her time as mayor and cutting taxes, but never mentioned the bailout. Edge:Biden

II. Foreign policy:

Foreign policy questions were very friendly to Joe Biden, with him utilizing his years of foreign policy experience to talk about the governance in Iran, the prevention of nuclear proliferation, and the need to prevent more atrocities in Darfur. They both agreed on interventionism in Darfur, which seemed like a lot of hot air to me since we already have two wars going on and cannot afford a third. Edge: Biden

III. Personal questions/closing statements:

This area was where Sarah Palin had a chance to narrow the gap with her (whether it is real or not) folksy charm and references to being outside the mainstream of politics. Biden did his usual act of talking about his blue collar roots (whether real or not) and both did an admirable job. Palin came across as very likable with her references to her and her opponents sons both being in Iraq and the graciousness in ending the debate. Edge: Palin

Overall winner: Biden
Biden did what he needed to do, coming across as a seasoned veteran against a neophyte governor. Palin did her best to not hurt her cause, making no mistake and only showing nervousness as the onset and improving performance as the night wore on. Unfortunately when you campaign is sinking like a lead balloon, you need better than a tie if you plan on winning.

Caribou Barbie and The Big Debate

Tonight is the big night when Caribou Barbie debates with Joe Biden, it will be the beauty queen versus the foot eater, hockey mom versus blue collar mansion dweller. Hopefully this debate performance by Caribou Barbie is so bad that it dooms the McCain campaign so this endless election will finally go away.

I went down, down, down and the flames went higher

Today there is finally some positive economic news. Defeating the $700,000,000,000 bailout means that the greedy investment firm which still exist will be bought out by more liquid firms at fire sale prices and the world goes on. The alternative was borrowing nearly a trillion dollars from the Chinese to pay the bills, which would mean that we would be even less sovereign than our current state suggests. Hopefully the market realizes that the gravy train is not pulling into the station and money begins to flow to solid companies again. Either way Henry Paulsen should be fired.

Socialism for the Rich, Capitalism for the Poor

If you have no been living in a cave for the past two weeks you have probably heard about how the fundamentals of the economy are not so strong, no matter how many times John McCain told us otherwise last week. The situation, minus double talk, is that greedy companies were given the authority by the Clinton and Bush administrations to lend to anyone with a pulse to encourage a society of homeowners. Naturally this drove demand for housing far above the market level, so prices rose at astronomic rates, which made investment in mortgages seem like a sure bet(which does not exist in this world).

Homeowners, meanwhile, borrowed against their homes on the belief that the value of the homes would continue rising like Michael Jackson at a pre school, so at the end of the day you could have a person with a mortgage for a home with a line of credit on the home based on a higher value than the house is worth, resulting on owing much more than the house is going to be worth for a long time.

Finally, the government has been largely responsible for the problem by keeping interest rates low, which allowed easy lending and less scrutiny for the creditworthiness of borrowers. One question nobody asks is, why is the former CEO of Goldman Sachs asking for nearly a trillion dollars to bail out his company?

Needing a rest from economics to get a good post

I am taking this week off as much as possible to detoxify after classes such as "Theory of Price" and Managerial economics where I mathematically compute economic theorems. I cannot find joy in economics at times due to the amount of studying required.

The Robber Baron is Riding High

Today is the day when any pretense of fiscal conservatism can officially be kissed goodbye. Today the US Taxpayer is made to pay for the incompetence of the Fannie Mae and Freddie Mac management to the tune of hundreds of billion of dollars. This paragraph sums the situation up best:

"But even after the government seized the mortgage finance companies on Sunday and dismissed their chief executives, the companies’ outgoing leaders could see big paydays — a prospect that angers many investors, particularly because ordinary stockholders could be virtually wiped out."

We are paying for golden parachutes with our tax money. Welcome to slavery

Mourning the death of capitalism

Just research the bailout of the mortgage giants to see why this nation is now a socialist nation for the wealthy

Today in Politics

Greetings,

After a week of economics classes I decided to write on the politics of the day for a change. The first story is that John McCain gambled and decided putting an attractive woman with a shallow resume on the ticket is the key to win this election. His choice of Alaska governor Sarah Palin makes very little sense because it makes him unable to attack Obama on experience(which has so far been his only effective campaign weapon) and she does not have a competitive state to help McCain.

On the plus side for Palin, she is very attractive and will be good contrast to the older Biden when the debate occurs. She also seems to be ideologically consistent, so she will excite what remains of the Republican base. Compare the two candidates and think of which one will come across better on TV. One looks like Dr. Melphi from the Sopranos, the other looks like a game show host. On serious matters, this election has two inverted campaigns, with one party having a neophyte presidential nominee and a very experienced VP candidate (Obama/Biden) while Palin's addition makes McCain's campaign an inverse. Let the real campaign begin.

Thoughts on the state of the economy

The economic brilliance of the Bush administration is finally shining upon the land. We have a half a trillion dollar deficit, inflation at twenty year highs, and money flowing out of the country. This comes as wages have been stagnant for decades and people can hardly afford basic goods. Just in the last month the charge for electricity rose 20%. How can any country absorb such inflation with wages being so paltry?

I have come out of my box and seen my shadow, six more weeks of economics blogging

Dear Mr. Economics,

I'm going to bank on your sincere invitation to leave a comment even if your guests happened to dislike some of your posts.

For one thing, I really find the professor's (what's his name?) attitude disgusting! But the way it was handled is not honorable either. What is the intention for exposing him?

I mean he's personal opinion should have been shared ('coz clearly he has this strong need to share it with a "friend") in a private e-mail... or just a personal conversation between a "trusted' friend or a therapist.

I believe he was not as prudent to use the university's property to convey some really personal/delicate/sensitive matters...

My question is why do we need to air it- broadcast his folly...
Now, we appoint ourselves to "police' and micromanage the thoughts of people... personal thoughts of people...

Is the intention for airing to protect young women (young co-eds) from people like him? What was his crime exactly? Was it watching these ladies dress and act provocatively (perhaps that's not the intention of those women -- but really?!? what were they thinking dressing immodestly?) Was it because he like to watch porn?

I repeat I find the professor's attitude repulsive and disgusting but at the same time I find the women equally repulsive and disgusting for the way they conduct themselves.

Today you can NOT even tell these girls to dress appropriately without being called a prude or be charged with being a sexist.

The prof. has some personal issues and should either see a priest, and minister or a therapist.

Someone (but who?) should be educating the women once again how to behave like a lady but the men should treat a lady like a lady even if she does NOT act like a lady!

In other words, there is no excuse for any gentlemen to treat a women with disrespect based SOLELY on her exterior demeanor! But on the same token the women should be responsible and take accountability on the way they handle themselves in order to be respected or treated with respect!

This goes back to the disastrous effects of FEMINISM...

Feminism fosters barbarity and whimpiness/laziness in men it never did inspire chivalry in them and that is the bottom line... sorry if I digressed...

Your last sentence on this particular entry was -- and I quote "enjoy it here..." - well, some folks may enjoy it... and find it amusing; I find it sad - nonetheless, it did provoke me to write my reflection and share them with you and your guests...

Thanks,

That comment over my rebroadcast of the earlier professor story stirred up some strong opinions. In my rebuttal I must point out three things which make the story newsworthy: 1)the professor was having loud noises come out of his computer while a student was nearby, 2) regardless of how women dress, the guy is paid to teach Ricardian Equivalence and Pareto Efficiency, not fantasize about shopping at Goodwill, and 3) this story has generated a ton of press for this school.

On the first point, it shows clearly a lack of judgement and no desire to keep his job. If you were in the private sector and pulled the same thing you would be on your way out the door faster than you can say "sexual harassment."

On the second point, his paycheck is based on his ability to teach a class while on the school's(taxpayers') dime. Whatever he wants to do in his personal life is his own business, but when public email is used to broadcast the risque details of one's fantasy's, that becomes everyone's business because of the negative publicity that such things becoming public bring. As far as the whole question of whether society causes such behavior through the sexualization of women's clothing, I would argue that the premise presented is that women are to blame for the prof's lecherous thoughts. If so, then how does one rectify the situation. Realistically nothign can be done to change the popular culture which fosters such clothing, so the only recourse is through the legal process.

Finally, this story has gone global, so to speak. I saw it on such sites as Fark.com, which means that millions of people have seen it. That alone is reason to post it, since nothing too much ever seems to get in the news about my school.

Today's economics lesson: GDP numbers do not tell the whole story

To clarify a bit, the traditional definition of an economy comes from convenience, but the way it is explained in aggregate terms is when the output (GDP) rises slower than the capacity to produce(growth in the labor force and its productivity). The second one is the more realistic because it takes into account the underperformance of an economy, which leads to unemployment.

For example, if GDP rises 1% but the workforce grows 2% (assuming no change in productivity) the real result is that the additional 1% of those entering the workforce do not have jobs because there is not enough output(which translates to income for households) to employ them.

Generally, the US economy has had long run growth of around 3.5-4% so that is the marker for staying constant with the growth in capacity. We are far below that, while our productivity is not falling and our population rises. Thus, unemployment has been rising for every month of the year.

It's just logical, you have to examine GDP numbers in the context their capacity to see how accurate they are. For instance, I noticed East Timor is the second fastest growing economy in the world in terms of GDP, but then it also has huge population growth and is moving up from rock bottom so its productivity has to rise. The end result is that the standard of living is pretty much the same

finally my school gets in the new

Finally UTSA gets some national news as The Smoking Gun releases some emails from our favorite randy(and not in the Objectivist sense) professor. It contains such gems as "I should just tell everyone about the 10 pieces of lingerie I bought at Goodwill last weekend. Very intriguing, especially the worn, unwashed thong with the delightful aroma."

Enjoy it here

Here I am at the coast

There I am in front of the replica of the Santa Maria. It smelled like fish and saltwater, which made it uncomfortable to stand there for the picture.

finally back in the saddle

Well, after school, stress, and lots of macroeconomics I am pleased to announce the resumption of the Invisible Boot. I promise new posts, new content, and all the economic goodness your head can handle.

The Train is Pulling into Inflation Station

Inflation rose .6 percent last month, which anyone who has not been living in a cave knows. This is big news in a country whose recent history has been inflation in the twos per year. One good effect of this inflation rise comes in the likelihood of a Fed rate rise rising. Import prices last month rose 17%, which means that Wal Mart, Target, Costco are all gonna be raising the prices to keep their Chinese goods coming in. Hurray globalism.

Today's Lesson-Corporate Taxes are Paid by Consumers

While there is little good to be said of Congress lately, they made one intelligent move by having the windfall profits on oil tax filibustered. While I am as pissed as the next guy about paying four dollars a gallon in gas, basic knowledge of how economic systems work will dictate that taxing profits fails to do anythign about the price of oil, in fact it will raise it.

To understand why a tax on the profits beyond the normal corporate tax will be passedo nto consumers, one must understand that in any economy there are two sides. One side, the demand side, is made up of the businesses and households and governments which spending money or taxes to get goods and services. The other side, the supply side, is the producers(businesses) who create the goods and services the consumers want based on this old law called supply and demand. When there are more buyers than sellers, price rises, and when there are more sellers than buyers price falls. When income shrinks, demand falls, yada,yada,yada. To cut the story short, in the total (aggregate) supply of goods in this country there are two factors which have exogenous variables-output and price. When a tax occurs on a corporation, the price of producing a good goes up because the tax is added into the price in order to maintain profit margins. If the tax were not added into the price, the company would be unable to make money as the would soon have costs exceeding revenue from all of the costs of labor, taxes, overhead, etc. By increasing the taxation on oil companies, the cost of each barrel will rise to maintain profit margins, increasing the price of each barrell. At the same time, fewer people will be able to drive because of the increased prices, which lowers demand. This causes the amount of tax revenue from gas taxes to decrease, which leads to infrastructure problems, and so on and so forth.

In conclusion, businesses seek to make profits, otherwise they would be charities. By increasing the cost to produce on a company, the price of each product rises and demand falls. With oil the price of every product rises due to the use in transportation and being a factor in so many different goods. Even if one did not own a car, the cost of the bike tires would go up, as would the helmet, the backpacks, and the water bottle all rise since all are made from petroleum-based plastics and use petroleum biproducts. Enjoy

Taking a break from studying

I am taking a break from studying upper level macroeconomics to report on the news of the day. First it appears that John McCain, aka the old guy running against Barack Obama, is not doing so hot . If the election were held today, he would lose 304-234 to Barack Obama, conceding formerly R states in Ohio, Colorado, Missouri, New Mexico, Iowa, and barely hanging on in Florida and Virginia.

Will this abysmal showing hold true, or is it a reflection of McCain's invisibility for months with a contested Democrat primary? We shall see

Economically the price of gas is destroying the budgets of Americans and putting our entire economic system at risk if these prices continue without real wage growth. Today I filled up and paid $91, and noticed that diesel prices are close to five dollars a gallon. Diesel prices are the more worrisome of the two since the equipment used ot harvest our food and transport it is all diesel. If farmers cannot make a profit due to diesel prices, we will be exposed to shortages for the first time in thirty years. Of course the government excludes fuel and food prices from inflation, so they claim inflation is under control. Cut out discretionary spending as much as possible is all I can say.

Fed says rate cuts to stop

Today I noticed a billboard which summed up the state of the economy. It gave a rate on a $100,000 7 year CD, and it was a whopping 3.45%. That means you are having a net loss of purchasing power keeping money in the CD. The only good things to come from such a low interest rate is that you can borrow against it for a low rate to pay off higher interest bills or invest in something. At least the Fed says they are done cutting . Now raising the interest rate slightly is what we need to stop the free fall of the USD.

Thoughts of the week

This week Israel turned 60, which means that for sixty years the Jews have turned desert into a prosperous land with many ethnic groups living in harmony. It's sad to think that the little country which has brought such inventions as the virtual keyboard, advances in nanotechnology, and devices for the deaf to be able to use phones will probably become another failed nation in 60 years when the islamists(I refuse to capitalize the name of a throwback ideology) have overtaken the multicultural state of Israel and replaced it with an Arab caliphate like the Gaza Strip is now. When that happens we can only look back on the scenes of joy and normal behavior(as opposed to burning tires and shooting guns to celebrate the death of some non Muslim) with sadness and ask why the West permitted such a tragedy to occur.

Here is the beautiful Israeli anthem, which is an interesting comparison between the lyrics of the Israeli anthem and the anthem of the throwbacks who call themselves "Palestinians."


Now compare the lyrics from the Israeli anthem to the Arab's song.

Israeli:

As long as in the heart, within,
A soul of a Jew is yearning,
And to the edges of the East, forward,
An eye gazes towards Zion,


Our hope is not yet lost,
The hope of two thousand years,
To be a free nation in our land,
The land of Zion and Jerusalem

Throwback:
My country, my land, land of my ancestors
My country, my country, my country
My people, people of perpetuity
With my determination, my fire and the volcano of my revenge
With the longing in my blood for my land and my home
I have climbed the mountains and fought the wars
I have conquered the impossible, and crossed the frontiers
My country, my country, my country
My people, people of perpetuity
With the resolve of the winds and the fire of the guns
And the determination of my nation in the land of struggle
Palestine is my home, Palestine is my fire, Palestine is my revenge and the land of endurance
My country, my country, my country
My people, people of perpetuity
By the oath under the shade of the flag
By my land and nation, and the fire of painI will live as a fida'i*, I will remain a fida'i, I will end as a fida'i - until my country returns
My country, people of perpetuity.

fida'i = one who risks his life voluntarily; one who sacrifices himself; hence the word fedayeen.

a future children's book from the Obama Ministry of Education

First post in ages

While I have been bogged down in economics finals, I decided to post something to break the silence. Today's lesson is the relationship between money supply and output, a concept which was not understood before the 60's and Milton Friedman.

In short, the relationship is governed by a balanced equation where the change in money supply time the velocity(how fast money circulates in an economy) is equal to the change in output time the change in prices. In other words MS*V=Q*P. Thus if the money supply rises, either price or output, or both must rise to match the increase. The effect of this relationship is that inflation and deflation are better understood as products of MS, rather than being arbitrary. Also, if money loses enough value that it ceases to be circulated much, then serious deflation occurs, as happened during the early days of American Banking. The goal of an economy should be to balance these forces out to keep output rising without increasing inflation outside of comfortable levers(circa 3%). For much of the 90's we were in such a pattern, but the collapse of the housing market and the lowering of interest rates to 2% increased prices and a slight amount of output, but since P was greater than Q, real inflation occurred.

I need to see more sources if thisis occurring, but if so the thought of food rationing is a sign of serious economic problems. If there is a shortage of food in a nation which has historically been a net exporter of food, then we really are in a serious downturn. I will wait and see if this really is happening.

Quick Update

Been busy with school and work, so Iahve been slow to update, so here are some important stories you might be interested in until I get a good chunk of time to give some more economics insight.

Bob Barr supposedly polls 7%

Zimbabwe is becoming closer to chaos from the fraudulent election

Huge oil find in Brazil

Berlusconi back in Italy

Today's Economic Lesson, Public Vs. Private Goods

From the Road to Serfdom by FA Hayek:

There are, finally, undoubted fields where no legal arrangements can create the main condition on which the usefulness of the system of competition and private property depends: namely, that the owner benefits from all the useful services rendered by his property and suffers for all the damages caused to others by its use. Where, for example, it is impracticable to make the enjoyment of certain services dependent on the payment of a price, competition will not produce the services; and the price system becomes similarly ineffective when the damage caused to others by certain uses of property cannot be effectively charged to the owner of that property. In all these instances there is a divergence between the items which enter into private calculation and those which affect social welfare; and, whenever this divergence becomes important, some method other than competition may have to be found to supply the services in question. Thus neither the provision of signposts on the roads nor, in most circumstances, that of the roads themselves can be paid for by every individual user. Nor can certain harmful effects of deforestation, of some methods of farming, or of the smoke and noise of factories be confined to the owner of the property in question or to those who are willing to submit to the damage for an agreed compensation. In such instances we must find some substitute for the regulation by the price mechanism. But the fact that we have to resort to the substitution of direct regulation by authority where the conditions for the proper working of competition cannot be created does not prove that we should suppress competition where it can be made to function.

Hayek says in this passage that certain goods are not functions of the normal supply and demand functions, so the cost to produce them or the benefits of production do not make economic sense to be produced, yet are necessary to the society. Examples of such things are military defense, as one cannot price the level of defense an individual needs since the state's defense encompasses all who live in it, regardless of their contribution. In other words, marginal benefit(MB) of the first user is the same as the second, is the same as the third, etc. The example in the passage about pollution from logging is an example of an externality(which shall be covered later) but clean air and water are public goods. Some public goods arise out of necessity to life, such as waterm and cannot be very effectively priced. If water were effectively priced based on market conditions, the resulting cost(people dying of dehydration and disrorder) would be far greater than the private benefit (profits for the water provider). In other words in a public good the social benefit(the benefit to society) outweighs the private benefit (benefit to the individual) and the marginal benefits to society are greater than the marginal benefits to the private individual.

Further, a true public good has two key characteristics--non rivalrous and non exclusionary. That means that a public good does not have competition and cannot have the benefit to one individual reduced by enjoyment of another(why MB is the same regardless of the number of consumers). At the opposite end of the spectrum are exclusive and rivalrous good-- private goods-- which result in private benefit being much greater than social benefit. A home is a private good because the enjoyment of the home for the owner is of greater benefit than the marginal benefit of having strangers also inhabit the home, which reduces the benefit for the individual. Most goods are closer to the pure private good end of the spectrum.

Are schools public goods is an often argued question in public policy classes. Here at the Invisible Boot we exam the question based on the characteristics of a public good. Let us go through a list of characteristics to examine.

1)Are public schools nonrivalrous(no substitute)?- No, they have competition from charter schools and private schools

2)Are they non exclusionary- No, the geographic boundaries of schools means that lower income students are excluded from wealthier schools with larger budgets, so the benefit to each user is not equal.

3) Is marginal benefit the same regardless of the number of users- No, the more users a school has, the lower the benefits due to reduced attention to each student a teach gives, and the scale of the school causes inefficiency in allocating resources as the volume of students creates more problems with management relative to the increase in money from each new student.

Giving Credit Where It's Due

Apparently not content to follow the laws of supply and demand, American consumers have taken on higher levels of credit card debt in February. This 5.9 percent rise in credit card debt levels means that the amount of goods being mortgaged for the future increased, meaning that the inflated prices are not functions of real supply and demand. In other words, businesses can afford to raise prices despite a downturn because Joe Q. Shopper uses his plastic wand to bridge the difference in his level of spending and growth in income.





Of course, this tradeoff is a Faustian bargain, as credit card debt is not all kind and fuzzy like the commercials tell you. Even if you pay your bills on time every month you can still be hit with fees and service charges, and if you are ever late you can feel the kind fist of 29.9% APR and more. Including fees and trailing interest, credit cards can be hitting you with 50% and higher real interest rates. Don't follow the guidance of the invisible boot though, you need those $500 pairs of sunglasses and $6 lattes more.

RIP Charlton Heston

Thanks for telling us the truth about Soylent Green

Helicopter Ben Says Recession Possible, "Sun Could Rise in East"

Today the Fed Chairman says that a recession is possible. This is news because Uncle Ben has been the main cheerleader for the printing press industry, and even he is going negative. Here's a checklist of economic indicators and their effect on the likelihood of a recession.

GDP growth-Barely, not statistically significant, not really bad until negative
Inflation-Increasing, very bad
Dollar Value-Decreasing, feeds inflation in an import-based economy, bad
Unemployment-Rising a bit, bad, but we are still at full employment levels
Consumer spending-Down, not necessarily bad because it means personal debt is probably being paid off instead of shopping as much


Things are not going well on the economic side, but it could be worse. When unemployment shoots up, that is the time to be worried. When that happens either the interest rates fly upwards to reduce inflation or government subsidizes hiring of new workers to increase emplyoment. Either situation does not bode well for the economy and leads to social problemms in addition to the economic impact.

All Quiet on the Zimbabwe Front

In bad news for smugglers of toilet paper and toothpaste, it appears that Robert Mugabe will be losing the first round of voting no matter what. Conflicting reports have the opposition winning outright or drawing Mugabe into a runoff with the opposition winning 49%. How this race could be close is not fathomable to one who remember reading years ago how a sheet of toilet paper cost $417 while inflation in Zimbabwe was only around 1000%.

zimbabwe's election

Well people have voted in Zimbabwe and the results are suddenly delayed. This election is between a guy who has led Africa's most productive nation into a basketcase of 100,000% inflation and black markets for basic goods and one of his main opponents and a rising party insider. Either way the fact that mass protests broke out across the country is a positive sign that the ruling party is hopefully on the way out, or at the least Mugabe will be gone. Stay tuned for more updates.

Today's economics news

Today some big economic news came out which most americans will not hear since it does not involve a prostitute, a governor, or Paris Hilton's hair. First, consumer spending is down yet again this last month. The 0.1% increase is negligible due to the effect of inflation, so consumer spending is lower on magnitude. This means that more money is going to pay bills and buy food instead of buying that Ipod or designer clothes. Anyone who has gone shopping for groceries can see that inflation is definitely on the risse. Eventually the huge retail sector is going to crash since wages have been stagnant for years, while energy and food prices have flown.

Also, the economic conservatives at the Fed have decided to infuse more money into banks hoping to stave off a recession. This is a bailout by any measure, forcing you and I(and every other taxpayer) to subsidize the poor lending practices of banks. The same people who praise this move now can be seen talking about the need for failing businesses to be taken out when times are good. It's a horrible waste of money and creates more debt which brings down our economy over time by having foreigners purchase the bonds to finance said debt.

Today's Lesson-Scarcity and Price

In the over consuming society we live, numerous examples of this problem exist. The most basic idea for this comes from the "diamond and water" paradox. It asks why water, the basis for all life on Earth is nearly free, while diamonds for jewelry--which serve no practical function, cost thousands of dollars. Simply, the reason is scarcity, as diamonds exist in smaller quantities and as such the demand is relatively inelastic(closer to a vertical line) while water is more elastic(closer to a horizontal line).



In simple terms, that means that the more diamonds are on the market, the demand is roughly the same so price does not move. Water on the other hand has such a nearly fixed price that creating new methods of obtaining it does not change the price by much. Water cannot ever be free, however, as price acts as a regulator of behavior. At a price of zero, waste is rampant, as occurred during free water projects in Africa in the 1990s.



On the other side, luxury goods have inflated values attached to them which lead to waste in the same manner as freeing a basic good. One result is that the perceived status carries an economic value, resulting in irrational economic decisions. This distortion of real value causes people who purchase luxury goods beyond their means to engage in economically disadvantageous behavior, such as paying high interest credit or fractional ownership, leading to much greater financial pain than simply purchasing the good outright.

This week

Things coming out this week in the economic world:
Data on housing and consumer spending
More insight into whether the commodity run up is sustainable
A possible increase in the Bear Stearns buyout

Bored creation

Off for a few days

Check in next week

Another day, another rate cut

Today the Fed lowered interest rates yet again. Your money just got a little more worthless. What else is there to say?

Bush and Paulson Laughing At The Value of the Dollar and the Price of Oil

Economics Lesson, Supply and Demand for Money

What does this mean?

It means that the higher interest rates are, the lower the amound of money needed in the market at that time, which results in either the money supply shrinking(deflation) or interest rates(IR falling) to allow borrowing of money at the level the market demands. Conversely, in a situation where the IR is dropped below the efficient level(E), the quantity demanded is greater than the supply of money, so either the money supply increases(inflation) or IR rises to get closer to equilibrium. Guess which one is the current situation and which one was the situation in the 1970s...

Fed to lower rates again

This morning I have been seeing on all the news outlets that the Fed is going to cut the Discount Rate 1%. This rate mainly affects the interest on money lent from the Federal Reserve to financial institutions, but it has the effect of lowering the value of the dollar because it increases the quanitity demanded for money but lowers the demand below equilibrium. In other words, more money is used by the people in the American economy, but the interest rates do not rise to prevent inflation, resulting in more dollars chasing fewer goods.

Bear Stearns, Asian Markets, and the Week Ahead

Late tonight the news sources are reporting that Bear Stearns is having a firesale, with its shares being bought out for $2 a share. Besides the impact on the broader market that one of its key players has fallen in short order, it could bode poorly for many other big financial firms who also leveraged heavily during the housing crisis and then invested their money into mortgage-backed securities.

"This is about credit being overextended, and how bad it is for major
financial
institutions and for individuals. This is why we're probably
heading into a
recession." -- Peter Dunay, chief investment strategist
for New York-based
Meridian Equity Partners.(from the linked article)

Further, the Federal Reserve lowered the Federal funds rate one quarter of a percent to 3.25 percent. This is an emergency cut, with another cut probable at the Tuesday meeting. The results of the cut and firesale of Bearn Stearns so far have been a drop in the Asian markets and rising gold prices. Gold has been over a thousand dollars an ounce for the first time, though still below the inflation adjusted levels seen during the Eighties.

With the declining dollar value, commodities pricing has risen dramatically, which has been seen in gas price rises and a rise in the cost of food. Since the CPI-core rate does not take into account these "volatile factors" exceluded, the media reported CPI rate of inflation is often lower than the real inflation rate felt by consumers. That will be discussed more at a later time, as this is enough to digest for one night.

Preview of the upcoming week

Since sunday is a slow day in both the political and economic worlds, Here is a preview of next week's stories:

Market Open on Monday
Federal Reserve Meeting Tuesday
Possible further bailouts of the financial sector

First Zimbabwe Post

On Friday the Zimbabwe teachers ended a strike after a 745% raise. They are now paid 3.4 BILLION Zimbabwean dollars a year, which amounts to over a hundred dollars US annually on the black market exchange rate. Periodically more stories about the hyperinflation brought about by printing money to cover debts will appear, to illustrate the final product of unsound fiscal and monetary policy.