Pernicious Debt

People argue that we need to get the money flowing again, meaning we need to get the banks to lend. There are several problems with this.

First is, of course, a problem of income. Any purchase of any capital good made on credit is a final transaction where manufacturing is concerned. This is why so many car companies created financial arms: when a car is bought on credit, that's it; there's no more car bought until the note is retired somehow.

This means there's no purchasing with the money set aside to pay the note. So, if someone buys a car on credit, with payments of $300 per month plus full coverage insurance payments of $100 per month, that makes $400 a month they cannot spend on anything else.

When the debt load gets high enough, most people are spending most of their money servicing debt, and are unable to make new capital purchases. They still buy food and they still buy minor things, although the maximum price they can afford is lower, so either the quantity or the quality of the non-capital goods they buy suffers.

This puts capital goods producers out of work, ie, auto manufacturer workers. These workers now have an income of zero and are no longer able to service their debts let alone contribute to employment of others.

So, sooner or later, other sectors suffer. Makers of toys do badly. Makers of gadgets do badly. Netbook manufacturers do well at the expense of notebook and pc manufacturers. In other words, people spend less and less, causing there to be less and less to spend.

If, for instance, a person manages to get a job for less money, or is trying to live on one income when they used to live on two, they can reduce the price of the things they buy by, ie, buying generic or cooking their own meals. However, their debt payments remain fixed. As previously noted in the annals of the bureau, all activity is at the margin.

Now, if they pay, say, $1000 in debt and used to make, say, $2000 per month, they had $1000 to spend on their non-debt needs, such as food and toys. If their pay drops to $1500, a 25% decrease, their net income is now just $500. A 25% decrease in their income results in a 50% decrease in their negotiable income, leading to severe hardship. A 50% decrease in their income will lead to a 100% increase in their negotiable income, leading to bankruptcy, as their only chance of survival is to reduce their debt payments.

Now, to arc back onto the topic of this point, if we drive greater debt to the consumer, the end result will be a greater percentage of their income servicing debt and therefore less of their income being spent on non-debt items. Think about that for a second. People will buy fewer combs, fewer toys, less expensive food, fewer of anything that does not require debt to acquire. It is perhaps true that greater availability of credit will save the auto industry in the US, although it is just as likely that the available money will go to Japan or Korea or Germany. However, it is almost certain that it will reduce negotiable income.

Fortunately, most people sense this and are not interested in acquiring more debt. Now is a time of paying off debt, meaning increasing, over time, negotiable income. This is hard on the banks, as their revenue is related to the amount of debt people are willing to assume, and they have so much bad debt they are trying to acquire good debt so they can achieve positive cash flow.

So, creating new loans is good for banks. It also may help house builders and the auto industry, as alluded to above. It also allows venture capitalists to start business that may or may not be a waste of money.

However, sticking to the banks, banks that are making new loans at this point are making a high percentage of bad loans. This is because most of the people willing to assume more debt right now are not necessarily effective at managing their own money. Also, there is no reason to believe that the system has recovered enough to make that person's job secure enough to assume a high load of debt no matter how collateralized.

Since the problem with the economy is an overabundance of bad debt, with leverage ratios up around 30 to 1 before the collapse, making more loans is not really a good idea. However, banks have no other way to generate income, so must do so or fail.

A loan that defaults is an immediate loss to a bank. In other words, when someone borrows, say, $100,000 to buy a house, and makes payments of, say, $800 a month on his mortgage, the bank gets to apply a percentage of that, very low initially, to the principle and applies the rest to its bottom line, probably around $700 a month. However, if the loan defaults, the bank is now out the remainder of the principle, say, $70,000. I chose that number to simplify math, as it is clear that it is 100 times the income from the loan per month. So, on a cash flow basis, having a loan default is on the order of a hundred times greater than the income from the loss. This means that around 100 other loans that you have must pay on time in order for you to not lose money on a cash flow basis. Of course, on a net accounting basis, it isn't as bad, as that loan comes out of your reserve. However, if, as was common in banking, the reserve was not adequate to the defaults, the bank gets in trouble and the only way it has to increase its reserve is to write more loans to get more income.

In a proper deflationary depression, banks simply fail. This means they run out of reserve and then auction off their assets. The government covers depositors up to $100,000. Many companies get in trouble covering their profligate spending with bonds, as the bond market would simply crater with the auctions of bank assets. Lots of very rich people would be rendered destitute.

However, this would be fair. These rich people desperately need to get some sort of comeuppance. They haven't learned their lesson. Worse, they claim to be able to manage risk, yet failed significantly to do so. Since the only reason a bank is supposed to be able to charge interest is related to the risk of making the loan in the first place, if they will not shoulder the consequences of taking the risk, they should not receive the interest.

It is like the insurance companies lobbying the feds to pay for 9/11. Insurance companies accept premiums for assuming risk. They're supposed to manage the risk and require premiums to cover the risk. If they then throw the risk onto the government, they no longer have a valid claim to accept premiums.

So, the problem was caused by banks making mistakes on a grand scale, cheered on by government that did not understand economics (there's a surprise) and this lead to a debt crash, which, in broad strokes, is simply that people now have so much debt that the maintenance payments eat up all their disposable income, leading to a reduction in purchasing, leading to a reduction in manufacturing, leading to a reduction in payment, which causes a vicious cycle that eventually results in a 'blow off' of bad debt, clearing the way for people to start spending again.

However, not only has the government not learned from the mistakes, but it is actively helping the banks to not learn from their mistakes. The leverage ratio is not as bad, but, given that much of the reserve these days is debt, banks are not in a positive position yet. That aside, they are starting to do the same sorts of risky things that led to this problem in the first place, emboldened by the fact that the government stands ready to make good any of their losses. This is called a 'moral hazard' by economists, although one analyst insists that a better term is 'ethical hazard', as it really isn't about morality, but about the risk generated by a misallocation of resources.

Since the government has made good the losses of banks that are 'too big to fail', those banks have a golden ticket to do whatever fool thing they dream up while their stock valuations soar. Since any losses will be made good, they can go ahead and do the whole gamut of foolish loans to groups with low repayment outlooks. Doing this increases their supposed income, so their stock looks ever more attractive, leading to increased stock valuation, leading to executives making more money.

However, none of this is good for the greater economy, as it locks lots of people into untenable debt situations, creates more economic activity with little hope of producing useful returns and in general misprices much of what happens.

For instance, if a venture capital firm can get cheap money, they can go out and take a risk on some startup that may or may not ever make money. There will be a lot of economic activity in that particular company before its inevitable failure, putting lots of people on the streets.

However, the bigger problem is that something has been produced that nobody wants enough to pay its real cost. This means that things we actually want cost more because there is less of it and the people who made the thing we don't want are competing for what we want with us. Yes, inflation in price of most of the things we want is the result, leading to lower effective income for everyone.

I've said it before and I'll keep hollering it until I can wail no more. Any activity, whatsoever, that produces anything people do not want, will be inherently inflationary in prices. The only way to have such activity, as a matter of fact, is to have inflation in the money supply so that people are paying for the things nobody wants enough to pay for out of money that nobody really ever had. Of course, the bankers & co. take their cut and live high on the hog, as it were, while the rest of us in the trenches repeatedly see our purchase power decrease.

Now, were the banks allowed to fail, we'd see everyone's debt load reduced, leading to greater available income, leading to greater actual spending, leading to greater demand, leading to greater employment, leading to greater available income, leading to greater spending, and so on. Also, a reduction in impediments to employment would really help, such as the destruction of the IRS, Medicare, Medicaid and anything else that requires documentation and paperwork to employ someone. Also, the minimum wage has to go. Basically, if an employer can employ someone for a low amount to start, the employer can grow more easily, leading to greater employment, which leads to greater spending, which leads to greater employment and so on.

This is what we need to foster, not the negative spiral of debt for the benefit of big bankers and their big lifestyles, but the spiral of increased purchase power for the benefit of the average Joe and Jill and their three kids. In order to accomplish this, we have to reduce regulation and impediments to employment and we have to establish a stable monetary policy, such as my favorite, free money (not free as in anyone can have some, but free as in you can use anything you like to trade or pay for anything you like).

Democrats Do Not Understand Economics

Obama has just slapped a 35% tariff on incoming tires from China. This is a perfect example of why protectionist legislation does not work.

For starters, the tariff will simply drive tire production to other countries. The US is simply not competitive in this market segment. So, the obvious beneficiaries are countries such as Brazil and India. Since the US does not have the tooling to make the cheap sorts of tires sold by the Chinese, as that market hasn't really been contested by American tire makers in a long time, we don't expect any production to be driven to the US. So, unless Obama plans a blanket tariff at some point, there is no real hope of increasing production in the US.

Of course, the immediate problem is that China most likely will retaliate in some way. What this means is reduced exports for the US, most likely chickens. So, one of the problems with protectionism is immediately evident, and that is that other sectors will lose employment. So, to recap, tire manufacturers will not be helped, but, say, chicken farmers, will be hurt.

Here at the bureau, we try to dig deeper. As we have said before, various protectionist legislation over time has had unintended consequences. This is no different. If Obama has not slapped a similar tariff on Chinese car imports, it is likely that this tariff will provide the Chinese with an excuse to enter the US car market, because their tires may not have a tariff if put on a US-bound car.

Certainly, other trading partners, such as Japan, will start using more Chinese tires, as China now has to sell their production elsewhere. So, US-bound Japanese cars may see Chinese tires. If the tariff actually applies to assembled product, expect the Japanese to use Chinese tires for domestic product and ship their tires to the US. Brazil et. al. will do the same. The market will shift some, new players will get a boost, but the American tire maker won't get any help.

However, domestic car production should take a nice hit. The tire price isn't that great, but margins are already razor-thin, and this is maybe a hundred or so off the bill of materials for a foreign car. So, the US manufacturer has to drop their prices a bit to stay in line, or the foreign car maker makes a few bucks more per car. Either way, the US car manufacturer is at a disadvantage. This is only unexpected to those who do not comprehend economics. It is, hopefully, unintended by the current administration.

And, let's not forget the poor consumer. One effect, in the short term, at least, will be driving up the prices of tires. This will hit families short on income the most, as they try to keep their cars operating. This will mean they will put off tire purchases, with the common result of increased accidents. So, an unintended (hopefully) side effect of this protectionist act will be to reduce the safety for everyone due to people putting off tire purchases.

So, to recap: protectionist tariffs will 1) not help anyone in the US, 2) cost US jobs in other sectors that export to china, 3) drive production to other countries, 4) hurt the US automobile industry and 5) reduce safety on the highway. You may pooh-pooh the bureau's conclusions, but the fact remains that activity is at the margins; a change of 35% in the price of the cheapest tires is actually enough to do all these things simply by pushing the cost of something past a tipping point. For instance, if a set of four tires cost $100, and a family can afford $100, they would replace all four tires. However, with a 35% tariff, the tires now cost, presumably, $135, and the family can only afford two, at $67.50. Imagine that writ large all over the economy, lots of situations where the decision maker suddenly finds himself on the other side of a decision from where he expected to be. Quixotically, this may actually lower tire sales in the US and thus hurt domestic tire manufacturing.

More Monetary Lunacy

So, I just saw the advertisement for Michael Moore's 'Capitalism'. Of course, one does not expect a lot of Moore, he being incapable of correctly diagnosing any sort of problem. However, he seems to manage to grasp the obvious fact that there is some sort of a problem.

I could go through his faults over and over, starting with his failed analysis of Columbine, through his misunderstanding of climatology, including his incapability to understand the politics of health care, up to now, his new missive missing the point on economics. To be perfectly fair, I have not seen any of his movies and won't start with this one; all my analysis is hearsay, but that really doesn't matter, because plenty of people hold the idea I wish to deal with now.

Moore stands in front of Wall Street and yells, "We want our money back!"

I think, more than anything, this piece of transparent grandstanding shows the central misunderstanding: that the money ever existed and that it ever was 'ours'. For the first part, the truth is that much of the 'money' used in this boom never existed, and the bailout money is all fake anyway.

Let me explain. First of all, lots of the collateralized debt, debt turned into an asset and loaned against, created money that didn't exist prior to the collateralization. In other words, the bank owns mortgages, for instance, which it terms assets, against which it must maintain a certain minimum reserve. However, if the bank packages these debts into a collateralized debt obligations, acronym CDO, then they can be sold as bonds, which the buyer can consider an asset. If the buyer is a bank, they can loan against that asset. If the buyer is someone else, a real estate developer, for instance, they can borrow against that asset. The great genius was the creation of a new way to do fractional reserve banking. They, of course, went on to create a massive derivatives market as well, but that's another story. Suffice to say, most of the money lost so far never really existed in the way we think of money normally, which is to say consideration for services rendered, or, in the vernacular, 'pay'.

The money was created out of thin air, in other words, and back to thin air it went. This, to put it simply, would be fraud in another age. In our age, the best and brightest went to Wall Street and created this mess, being called miracle workers and the drivers of the new prosperity. These same people are being asked to fix the problem now, and their prescription is exactly more of the same, as it is the only thing they know how to do.

This brings us to the second part. The money used for the bailout is also imaginary and never was ours. Basically, if you look at the US dollar, it says 'Federal Reserve Note'. The money is emitted by the Federal Reserve Bank of the United States of America, or FRBOTUSA using the classic American acronym tradition. This money does not come from the United States government. It comes from an independent organization that is theoretically controlled by the government only in that the president appoints the chairman. Treasury notes used to be common but are all but unknown now. The treasury does countersign all FRN, but it's not the same thing as emitting them.

Why does this matter? Well, when the government runs a 50% deficit, as it appears it will this year, all that money has to come from somewhere. The mechanism, near as I can tell, is that the treasury issues notes, which are bills or bonds, which go to the reserve bank, where they are partially auctioned to foreign investors and partially bought by the reserve bank itself. The reserve bank, using its plenary powers, simply prints, er, creates electronically, enough money to cover the purchase. This is important, because the fed now thinks it has 'assets', which are those bonds and bills.

Most of the 'open market operations' the fed engages in involve those bonds and bills. It swaps them with other banks 1:1 face value. In this way, banks get to unload questionable loans onto the fed, and get US Bonds and TBills in return. This does two things. Obviously, it removes toxic debt from the banks' sheets, which improves its bottom line as these debts will be repaid. Less obviously, it changes a large amount of debt from sub prime to triple-a. This means the bank's reserve ratio gets lower and they can loan more money, in theory.

The 'bailout' that was financed by congress, however, is slightly different. The money to make those payments, of course, did not come in from tax revenue; the money came from debt, which, as stated above, is at least partially produced by the fed. Here's the fun part: that money never needs to be repaid because it is 'owned' by the fed. At least, the part the fed owns does not need to be repaid. When it is swapped to a bank, the fed, first of all, will have to print up money to cover the bad debt it swapped for, and second, the banks will expect repayment, which I'm sure the fed will be happy to provide.

In other words, the US government will have to 'repay' the bonds and other debt instruments, but it will do so by borrowing more money. The genius of the scheme is that the banks get paid 'real money' in return for their bonds that they swapped bad debt for, and now they can swap more bad debt for bonds that were issued to repay the banks. It's all not really 'fraud' because it is legal.

The Federal Reserve Bank of the United States and the United States Treasury Department would like to remind you that they are pretty certain they are working in your best interest, or at least that's what all their banker friends are telling them.

Rules of Exploitation

Truth be told, people don't mind being exploited. Most people don't have a big plan in mind, so don't mind going along with someone else's big plan, and the group instinct tends to kick in and they work really hard together to accomplish something, feeling good about it. However, there are some rules to not never ever ever break when in a position to exploit the works of others. Here are a few.

1) Do not ever take too much money. This is probably the most important rule. No matter what you do, your cut can't be too high or you will begin to eat into your own sales, if nothing else. The cut taken by the RIAA, for instance, is so high that it has reduced sales of music significantly by setting the price on the upper end of what people will pay. The iTunes Music Store demonstrates this rather conclusively, as the prices there are much lower than the prices for physical CDs and the iTMS has seen its share of the market skyrocket.

2) Help people better themselves. This means giving them opportunities to advance, with more responsibility and the opportunity to make better pay. Believe it or not, bonuses are powerful incentives. A slightly lower base pay coupled with average bonuses that more than make up for it provide you with the opportunity to look a worker in the eye and say 'you are so important to us we are going to give you some extra money'. You can actually reduce payroll significantly through the judicious use of bonuses and you will certainly be able to retain your more effective employees more easily.

3) Parties, social events, so on. Show up. Shake hands. Don't expect to be fawned upon or even spoken to much, but, hey, these are your minions and you need to be seen around. Further, they need to relax in the company of their cohorts so that they develop better interpersonal relations.

4) Try to understand their needs and meet those needs. Once again, this can lead to lower payroll costs, as people get money to meet their needs. A happy worker is a cheaper worker.

5) Do your level best to match aptitude, attitude and job. Even if you have a worker who is very good at what they do, if they don't want to keep doing it, you may lose a good worker. Better to give them an opportunity to do what they want then to see them walk away entirely.

6) Provide a history of looking out for your workers. This means not firing them when things get rough. This means being ever so careful to clearly communicate to your workers that every effort was made before a given worker was let go. This means sometimes using company funds to help workers over personal hurdles such as unexpected costs. Once again, this will lead to lower payroll costs in the long run.

7) Don't ever, ever, ever mess with the pension. Doing so will cause people to simply not consider the pension part of the pay package, even if you put it back. Pensions are instruments of trust, and if you mess with them, your payroll costs for good employees will skyrocket.

8) If you're big enough, provide services such as lawyers, doctors and accountants to your employees. You'll find that you won't need to pay them as much when an accountant is helping them manage their finances, your lawyer is saving them pain and legal fees and your doctor is taking care of most of their complaints.

9) Keep them 'on the job' by providing someone to run errands, free food if they stay at work and social areas where they can 'get away' without getting away. Remember, a lunch with other workers can run to an hour and a half due to driving, waiting, so on, whereas a catered-in lunch can be as short as forty-five minutes, and the workers won't mind being shooed back to work so much if they are full of free lunch. Seriously, free lunch is one of the most effective motivators, right after free hooch.

10) Be careful to not overload them. This is particularly important with knowledge workers such as programmers, authors and so on. When they get burned out, their productivity plummets. Far better to let them have time off to recharge than to have them sitting in a cubicle hopelessly staring at the same block of text for hours. This may mean forcing them to go home, and certainly means that, whenever possible, they use a desktop that cannot leave work so they cannot take work home. Their spouses will thank you and that means less stress at home and thus less burnout.

I guess the point of this essay is there is a disturbing trend that has been going on for some time to treat humans as disposable, interchangeable entities, to lay them off at a whim and to shuffle them around like cattle. I have been through this experience as an employee a few times. Only one time have I ever worked for a company who got most of this right and I deeply regret quitting.

So Let's Talk About Health Care

A few things keep popping up everywhere, such as the current US argument about whether to create a more socialized medical system or not, which is largely a debate along partisan lines, and of little interest to this bureau because either it will pass and thus doom healthcare in the US or it won't and thus keep us locked in the slow, painful death of our current system.

The bureau is simply against a single-payer healthcare system because, like all socialist systems, it will pretty much end any innovation in health care. Of course, our current system has channeled 'innovation' into ways not particularly helpful to the rest of us, leading to ever more expensive tailored prescription drugs with ever odder side effects that may or may not be effective at treating the actual problem. Seriously, let's not get started on how broken medicine is.

Above, I did, indeed, mean to say 'more socialized'. The system we have now is already pretty much socialized. Hospitals are subsidized out of public funds. Much of our current research is funded by public funds. Bureaucrats control what remedies can and cannot be used.

One problem, so they say, is that poor people cannot afford expensive procedures, and a single-payer system would ensure this was fixed. Poor people can afford catastrophic insurance. What most of the poor can't afford is the current PPO/HMO plans. Catastrophic insurance is pretty much what it says on the tin; if you break your arm, they will cover it. If you get laid up with cancer, they will cover it. If you want to go to the doctor for the sniffles, they won't cover it.

Believe it or not, catastrophic insurance is actually lots cheaper than a PPO because these things don't happen that often. Regular doctor's visits and simple procedures are to be covered out of pocket, but since catastrophic insurance is so cheap, it is easy to save quite a bit of money to cover the high deductible the plans tend to have.

Now, were the health care system deregulated, further savings could be seen. For instance, most instances of a doctor's visit are for some form of a communicable disease that can be dealt with on an outpatient basis. Believe it or not, your local pharmacist is a very good resource for these sorts of problems because he knows the drugs and what they do better than the average doctor.

As an anecdote, I used to go to doctors to get medicine to deal with my allergies. Invariably, they'd prescribe something like Zyrtec, at that time prescription only, and not properly covered by my insurance. The cost of a month's supply of Zyrtec was $66. My copay was $60. Hardly worth the paperwork, methinks. I got 'downsized' and ended up working for far less money, and no longer had the cash to cover $100 for a doctor's visit followed by $66 for Zyrtec, so I went into a local drug store. The pharmacist asked if he could help and I said I needed a cheap, powerful antihistamine. He directed me to chlorpheniramine, which is so cheap it can be had online for $5 for 1000 pills.

I took chlorpheniramine four times a day until Zyrtec went over the counter. It saved me great wads of cash. However, I probably would have bought the Zyrtec if I could have avoided the 'doctor tax' of $100 per visit.

One other problem with health care is that the average doctor simply cannot be acquainted with every possible syndrome. It is very easy to miss the markers for an underlying condition, leading to vastly more expensive treatment at a later date. This problem has been solved in the engineering field with something called an expert system.

An expert system is a large collection of rules in a computer, although it can be done by hand as well. When a problem crops up, the technician opens the expert system, enters the initial parameters, then conducts the tests the system directs. As each parameter is entered, the system processes the rules to eliminate the ones that do not apply. It then displays the necessary diagnostics to proceed based on the rules that still apply. If the system is well-designed, it can narrow the problem down in a hurry and will provide the same diagnostic solution for every instance of the same disease. Believe it or not, this repeatability does not happen now.

Also, a proper expert system will spot cross-discipline blind spots. It is an old adage that if you tell your doctor what you think you have, you will be diagnosed with that, but there is a corollary that says that if you go to a specialist, you will be diagnosed within his speciality. An expert system would easily spot this sort of problem, as any specialist can run the whole system and the system will, through diagnostic rules, lead the specialist to conclude the disease is in another speciality.

The resulting medical system would be in tiers, with technicians doing most of the actual day-to-day work, with researchers and doctorates responsible for tracking down diseases the system failed to identify and fashioning rules for them. I expect early on there will be a lot of rules that say 'see a specialist in '. The specialist would be expected to craft acceptable rules based on his diagnosis, and would be expected to take a significant amount of time making sure he got it right.

The resistance to this idea the bureau has found falls into a few different categories. I will deal with them each, one at a time:

What if it is wrong?

This is an interesting question. As the system is being developed, it will be wrong rather often, so will require the oversight of an experienced doctor. However, after a period of time, even though the system will still make mistakes, it will begin to be more accurate than the average doctor, whose accuracy is lots lower than any of them like to admit. Further, as time progresses and the system is elaborated upon, it will begin to spot rare and exotic disease earlier than humanly possible. In other words, this sort of thing will eventually be right far more often than a human could ever be.

I don't like being treated by a machine.

The machine won't treat you; medical technicians will do that. They will just do it with far less wasted time in school and with far greater accuracy than any human ever could. Actually, for some people, this sort of thing could be a boon because the average person can self-diagnose most common problems and self-treat using an expert system, which would save even more money and give these people a degree of freedom unheard of before.

I trust my doctor; he's a very intelligent and confident man who seems to know everything.

Doctors do, indeed, have a god complex, which is why they absolutely must not be allowed any real political power. So certain are they of their beliefs, they are prone to having massive blind spots and to being completely unaffected by rhetoric, facts or glaring fallacies. As far as many of them are concerned, if it is in a book or a drug pamphlet, it is correct. They are confidence men, as nobody would let a mere human anywhere near their bodies if they did not act with supreme confidence. However, the dirty little secret none of them want out is that more people are killed by mistakes made by doctors than are killed by handguns in this country. Look it up. Seriously.

Your system would allow people access to valium/painkillers/narcotics/etc.

Sure it would. There's no reason for them to not have access to those things at this time. As a simple aside, almost anyone can get any of those drugs with relative ease despite well over forty years of drug prohibition. Just like alcohol prohibition, drug prohibition has created a criminal element with a strong control of much of the country. This is really fodder for another essay, but banning something is a sure way to make it extremely profitable to criminals.

That being said, once knowledge is out there, it would be easy for the average person to understand what they're doing, and if they have a concern about it, they can check themselves into a clinic.

However, by far the most pernicious facet of the control the doctors exert on medicine is the cost. Drugs are expensive enough, but the average person has no way of determining if the drug they were given was appropriate, or whether or not it was the cheapest option. With the availability of an expert system, such information could be obtained, meaning that, with free availability of medicine, the average person can make an informed decision, either to follow the advice of their medical professional or to go with some other solution.

I won't go deeply into it, but cannabis is clearly in this category. Very expensive drugs exist to deal with the lack of appetite for those under chemotherapy or suffering from AIDS, but few are as cheap and effective as cannabis. Despite that these people are essentially going to die, they are not granted what little comfort cannabis can provide and instead are given drugs whose side effects can often be horrific and whose price is rather stratospheric.

What about all the doctors?

Lots of medical doctors would find themselves being nothing more than medical technicians, as that is what they are now. Initially, lots of trained doctors would be needed to refine the system, but, in the end, most of the doctors are going to have to find something else to do or accept that they will merely be technicians. On a positive note, they ought to be able to handle patients at a higher capacity due to the ease and speed with which an expert system can diagnose problems.

Also, the good diagnosticians will be 'kicked upstairs' to work on the rules. There will be lots of work streamlining the system. If the thing is left to market forces, there will be as many as three competing systems, providing an impetus to develop improvements and refinements to both increase efficiency and accuracy.

So, the monopoly exerted by the doctors' cabal is seriously inflating the price of medicine as a legal monopoly almost always does. Couple that with the economic issues facing insurance and the general decline in real income in this country, and you have the problem in a nutshell, well, a large basket, anyway.

Two Trillion Dollars

That's Two Trillion Dollars, with a 'T'. USD 2,000,000,000,000. Were that much handed to every man, woman and child in this country, it'd be roughly $6500. Handed to every one of the 14.5 million people currently listed as unemployed, it's roughly $138,000. Each. That's how much money the Federal Reserve Bank of the United States has 'lent' to bankers so far since this whole disaster started. Seriously. Well, that's how much, approximately, they think, might have been lent, as one of their functionaries has told us that her office does not even know how much has been lent and to whom.

So, who cares, right? They're fixing the economy. At least they're doing something, right? Wrong. Aw, heck, if you've been reading this blog, you knew that was coming.

If they'd given each jobless person, say, $100,000 to do whatever he liked with, they'd go a lot farther towards 'fixing the economy'. Giving it to bankers has done essentially nothing. The banks haven't been lending that money; it merely kept them from ruin. That's the truth of it.

The average person does not have unlimited ability to draw on a line of credit like the US government does. It can't simply print money to cover losses like the fed does. The average person is now looking at cinching up their belt and hoping one of the two wage earners does not lose their job, and, if they do, then they simply have to cut services. There is no other way.

But not the fed. Not the US government. The US government is running something like a 50% real deficit. This isn't the imaginary 'budget' deficit, which is a pretty number based on the approximations if nothing happens and all is rosy. The real deficit includes stopgap spending for the war effort, the various bailout packages and so on. It does not include the above two trillion dollars. Add that in and the actual deficit goes north of the budget. Yes, folks, we stand to spend over twice what we make this year, if true accounting were taken.

But, it's all saving the economy, right? I mean, if it helps, even a little, it's worth it, right? Wrong. Even if this whole spending money on credit were ever, and I mean ever effective at creating real growth, we'd still be stuck paying for it. The loans being taken out this year ought to push us over ten trillion in debt easily. Were the fed properly accounted for, we'd have passed that level years ago, as operations of the fed depend on faith in the dollar, which is, in turn, underwritten by faith in the US government. This means that either by greater production to sop up all that extra money or by increased payments directly to service debt, we will have to pay for this.

In other words, if they fix the economy, we will have to pay for the fix, and our children, and our children's children, unto the third and fourth generation.

Of course, if the dollar goes bust, then we won't have to pay, will we? We'll pay with a ruined economy in the short term, but won't have to worry about all those IOUs afloat on the world market. Now, I think we can see why bankers fear deflation so much. They want the middle road, the slow and steady inflation that makes their loans worth less but their assets worth more. Any deflation reverses that trend and they start to lose money.

So, when bankers run the country, inflation will be the rule of the day, even if it means pumping two trillion dollars into the economy in less than a year. I do believe Thomas Jefferson warned us about bankers, banking and letting the government be run by same. It is to our ruin we have not heeded his warning.

An Interesting Theory

If you ever study evolution beyond that which you were required to do as a student (I was a student at a Christian school so had to study it myself), you will find some interesting facts. First, evolution does not optimize for a given thing; it merely finds the best option currently available. The old joke is that a gazelle doesn't actually have to be faster than a lion to get away; it just has to be faster than the slowest gazelle. An organism doesn't have to be the best at what it does, it just has to be better than the others.

Another interesting point is that evolution really does not like success. If it did, we'd still be cowering in our caves wondering if the tyrannosauri were hungry tonight. They all died off because they had become so specialized for a world that had been very static for a very long time. When an organism become extremely adapted to its locale, it can lose the ability to survive outside of the locale. The little furry mammals, however, had the ability to survive outside the comfort zone of the dinosaurs, so, despite that they were not strictly competitive with the dinosaurs, they won out simply because the dinosaurs did not survive.

One thing that has to be said at this point, no matter how one feels about it, is that society is essentially an evolutionary system. I know that this statement generally causes annoyance from those who hear it, as they launch into tirades about the evils of social darwinism, but the simple fact is that anyone can see the impact in history of this darwinism, and it explains the dominance of the English speakers to a large extent in that the English speakers were the ones willing to do the sorts of things that would achieve dominance. However, it was not always so, and it will not always be so.

These same English speakers have become extremely effective at their niche. They have become so good at it they appear to have violated some of the rules of proper exploitation, one of which is to not be too much of a burden, or the masses will throw your yoke off and likely separate your head from your body for good measure.

So we now have most of the world embroiled in a banking disaster created largely by the English speakers, bought into by almost everyone with a pair of dimes to rub together. The response of the banking community, which largely controls the levers of power in the west, and, indeed, much of the east, is to funnel funds from the public store to preserve their lives.

One is tempted to think of the dinosaurs, perhaps facing a desperately cold winter, huddling together trying to save their lives, in the face of their certain destruction. This is exactly what these bankers are doing. Having been so remarkably effective at their niche, they have pretty much gotten to a position where they cannot survive without the niche, so will defend that niche at all costs.

The problem, as any reader of this blog knows, is that they don't produce anything. Were they lending their money, a concept found ridiculous a long time ago by bankers, they would produce value by providing capital, and their actions would not be in any way inflationary. Were banks lending out funds on deposit for that very purpose, such as certificates of deposit or bonds, then we'd not have any problem, either. However, for a very long time, they've been lending out money created for that purpose by the fed. That's not even quite right, as they only have to have a certain percentage on hand in liquid reserves, that percentage actually below 1% right now due to 'quantitative easing'. Seriously, the whole thing stinks to high heaven like fraud, but, as one analyst keeps pointing out, it's not really fraud if it's legal.

In the old days, banks had money. They lent that money to good ideas and made a profit. Or they lent it to bad ideas and took a beating. Either way, it was their own future they messed with. There were no sub insurers, underwriters and so on, so when a bank failed, it normally only took out its own depositors. There were limited failures of banks where a region would lose a large percentage of its banks, mostly due to speculating of one kind or another, where bankers lost their heads, but nothing like this scale.

After the invention of the fed, banks began to more and more act as conduits for fed money rather than to make their own investment decisions. This led to the current situation where the banker is nearly purely parasitic, existing as a puppet of the fed and the treasury, spending his entire life complying with endless regulations to get his snout into the trough of newly-created paper. For being a good little pig, he gets his cut of every dollar he conduits.

The end result is that banks have completely forgotten that creating value was how they made money; they invested in new production and that new production brought improved lives and happiness to many, which meant that nobody resented the banks because they actually helped people. Now, banks are machines that tick the appropriate boxes and do their best outside those restrictions to maximize their profit stream at the expense of everyone. Hence, most major banks make most of their money in their consumer banking operations from fees, as, despite that it costs them essentially nothing to bounce a check, they now charge north of $30 for that 'service'.

The problem is that the niche they now inhabit is that of cheap government money, and, like the warm rain forests the dinosaurs lived in, that may not last long. And, like the dinosaurs, bankers have become so specialized that the modern banking system cannot even exist without the niche. It is doubtful if individual bankers and economists will be able to adapt.

However, there is still lots of inertia in the system. The peasants are angry, and the bankers are being forced to make concessions, such as the recent court order to the fed to divulge to whom loans were made and why and the increasing calls for a full fed audit, but people don't really know why things suck. Our entire lives, things have been getting steadily worse; we all know it. Sure, technology has made lots of things better, but the quality of construction of most things has been steadily deteriorating. The actual cost of living has been climbing. In the fifties, it was expected that a man could provide a nice life for an entire family, and families were large then. Now, both spouses have to work, often just to keep body and soul together.

As I've gone over before, when a significant percentage of the population is not producing anything anyone wants, they drive the price up for everyone else. Because of how we've allowed our banking system to grow, the banking system and all its workers essentially get our work for free. They are now nearly completely parasitical. They play their derivative games, engineer all investment vehicles so nobody else can make any money, and generally screw with all of us for their personal gain, and we let them. The problem is that when the public at large has finally had enough, nobody knows which direction the anger will spew.

I could remark about Frenchmen storming the Bastille. I could remark about Dutchmen throwing their wooden shoes (sabots) into the machinery. I could remark about the US Civil War, which was really about economic oppression more than anything else (which is why it started in a port, and not on land, where the slaves actually were). I could remark about the fall of the second reich (the Weimar Republic) leading to the rise of Adolf Hitler. All these things are a result of the same witches brew we have simmering in our caldron over here.

If the president does not take strong and active steps to break the power of the banks, eventually the public will tire of losing ground every day of their lives. Some charismatic leader may be all it takes.

And, for you conspiracy nuts, it is almost never the person currently in power that decides to take over and create the new utopia; it is some unknown blowhard right now building a power base somewhere nobody knows. Seriously; go look at the rise of Hitler. He was a persistent and utter failure as a politician until events lined up just so and he suddenly became everyone's darling. Once again, seriously, Germans thought him a savior and handed him the keys to the kingdom.

So, the bureau still stands by its recommendations: let the banks fail, lower taxes, cut services, recall military from the rest of the globe, and concentrate on reducing impediments to new businesses. Everything else is just perpetuating a system that failed so long ago it is nothing but a rotting hulk at this time, at its core people who are morally adrift, willing to ride on the backs of the rest of us.

It's Been a While; Whatever Did You Do?

Well, the world has pretty much been unravelling according to plan. Seriously folks, look back into the old posts. The bureau has been concerned about systemic, worldwide deflation, and, lookit, no matter how hard central bank blowhards blow, the economy stubbornly refuses to reflate. Of course, we at the bureau would love to point out that all that money they are stuffing into the garbage bag that is the economy must come out somehow, and the most likely way is through serious staggering inflation.

So, how would it happen? Well, deflation being the current cause celebre, central bankers are busy stuffing money anywhere they can except directly into the hands of the public at large, because, well, that would be too obvious to the dollar hawks. So, they are handing it off to banks with next to no oversight, and, if a recent equivocation by a functionary of the central bank is to believed, they aren't even writing down who they gave it to, which will provide for some interesting dinner conversations when it all comes out.

However, the money, believe it or not, isn't being lent. This is quite sensibly because the rest of us are scared spitless about the idea of taking on more debt. It is an interesting factor of a free economy, that when nobody wants a thing, you can't sell it at any price. So, despite that the 'price' of money, the effective interest rate, has been below zero for a very long time, due to the fed interbank rate being below the nominal rate of inflation, the market is not moving; few new loans are being made.

People like to blame the banks for clamming up, requiring your whole life history, with witnesses, in triplicate, before issuing a loan, but that is only part of it. There's a lot more to it. For starters, there's the loans that the government has 'adjusted', meaning the home owners have essentially declared chapter eleven, but only on their home, and received a court-ordered payment schedule. This makes the loan into a no-recourse loan, meaning the homeowner can't easily get out of it. Of course, the amount they have to pay is set right at the level that makes them squeal like a pig, so they have no more income to get new loans. As a matter of fact, they're so scared, they're re-using toilet paper and so on at this point.

And that's why the loans should have been left to go into default. I know it is harsh, but had that been allowed, the homeowner would have sought and acquired cheaper digs, due to the fact that investors are snapping up homes at serious discounts and renting them out, likely to someone just evicted from their house. This means the former homeowner would have negotiable income once again, instead of being chained to the grist mill, as it were. He would be able to take on more credit. He would be able to eat out. He would be able to buy a new flash-bang computer instead of the netbook he's struggling with, cursing the day Obama came to help him.

Anyway, what this means is that, largely, the system has been locked into a kind of stasis, with much of the mal-investments and general cruft locked in place, with Wall Street exactly as parasitic as ever, except now we're pitching gobs of cash at the 'last bullwark of capitalism' and that cash isn't being lent. It's going to bank coffers, to executive payouts, to jets, so on.

The money in the bank coffers is what concerns us. At the first spark of real recovery, banks will start lending that at silly multiples again. When that happens, the fact that the fire was never put out will be obviously to all, as the conflagration strikes up again.

And, an increasing market will not allow for the derivatives market to finally implode like it should meaning the sponge that has been sopping inflation as fast as it can be pumped will go away. The fed always takes a while to react, but the sudden stoppage of hemorrhaging losses in the financial markets coupled with any real recovery in the consumer sector will drive the biggest bout of inflation you have ever seen.

As usual, these posts are just opinion; the bureau and all its writers, friends, family and pets do not make any recommendations as to how to spend your own money and if you lose all your money, don't complain to us; you should have done your own research. This information is given for free, and you should consider the price in your decision making process.

Stupid People Wanting Price Fixing

Well, as expected, and, indeed, predicted in these annals, structural inflation is starting to show again. Prices of 'must have' goods such as food and gasoline are inching up again. Of course, as also predicted, prices of all investment vehicles are going down. This is an odd situation, that of inflation in many core consumer prices, deflation in others, and deflation in investment vehicles, including commodities. We shall endeavor to make sense of the situation.

First off, the commodities. The price of gold has fallen along with the stock market. What is emerging is a picture of technical traders and hedge funds that use gold as a swing value for storing money between plays. Many of them find themselves short on money when the market goes down so sell gold to cover their plays, which drives the price of gold down. If, for instance, a hot shot trader were playing the carry trade against a paper security such as a stock or bond, and suddenly had to cover because what he had borrowed against lost value, he'd have to sell what he hedged with, ie, gold.

Silver is a different story. Silver has a lot of transactions that are financed by paper silver, but they're short term. Parking a large sum of money is not an easy process; leaving it in a bank leaves you exposed to all sorts of risks, and means you aren't making any money. Raising finances is not so easy in the general market, so financiers can be seen to short sell silver as a quick loan, expecting to buy it back at a future date. For this reason, silver has, for some time now, not exactly followed any rational pricing system.

Of course, any time a pricing system is applied, someone will figure that out and develop a system to take advantage of the system. For instance, at one time, the analysts at the Bureau were fascinated by the ratio of gold and silver. For about a year and a half, a very solid picture emerged, with silver clearly leading gold. The analysts, confident of their system, were preparing to exploit it when it all fell apart. Fortunately, the analysts did not lose much money, but the point is that no system long endures in the face of the world economy, where some kid with a computer can be trading against you, exploiting your system for his gain.

What this means, partly, is that the system employed by thousands up until recently, that of buying and holding, is losing money. Other people, mostly short specialists, are making money at the expense of the buy and hold types. The way this works is that the talking heads talk up the economy, the politicians, desperate for good news, pile on, and the public slowly buys back in. Then the inevitable bad news comes, and the plugged-in professional trader dumps his long holdings and shorts the stock, which is essentially double-selling. The long holder is screwed.

Sun Tzu said, "In death's ground, stand." To apply it to today, when the stock market loses 30% in a short while, don't sell and lock in the losses. Ride the thing into the ground. Or were you dumb enough to sink your whole investment portfolio into the stock market?

Anyway, that's pretty much what is up with the market. With the next set of loan failures fixing to start and the situation in business real estate getting worse, we're looking at another spate of massive losses for banking institutions, leading, of course, to further losses in the economy. This means more losses in the stock market.

I suppose a little stock market theory is in order here. When you bought stock, you did not put money in the market; you put it in someone else's pocket. This is how stocks differ from bonds and bank accounts, where money has been sequestered in some way that is still considered at least semi-liquid. Stocks are securities that have worth rather than a face value and that worth changes. Many people view the stock market as containing cash, which it simply does not. So, a loss of billions of dollars in the stock market has not changed the cash situation one little bit. Major stock losses are not deflationary is what I'm trying to say.

When you sell stock now, someone else puts money into your pocket. The worth of the whole market is the amount that people are willing to pay for it. This means that a contraction in the stock market is actually an effect, not a cause. The cause is the tightening of belts everywhere. The problem is that people attempt to sell out of the market when there is little money for buying, establishing lower prices, making them 'marked to market', to use a banking term. The securities now so marked cause people to have to report their assets reflecting the lower price, which generally changes debt ratios and retirement plans, leading to greater savings, which reduces the amount of money in the general market. And thus the vicious cycle of deflation sets in, deflating everything from house prices to car prices to gold and silver prices.

But, not food and fuel prices. Why? Well, we're finally getting to the point of this post. Both fuel and food have been the subject of price fixing of one type or another and have not been truly free markets. Food, in particular, is heavily regulated, but is done so to drive prices up, not down, quixotically. However, this has still led to a reduction in the quantity of food available, as the mechanism of driving food prices up was to cause artificial scarcity by paying farmers not to grow crops.

We are now sitting on something like four weeks' grain reserves worldwide. That ought to be pretty scary, as three years' supply is not unheard-of. If we were to have one bad crop in one major area, we'd be looking at starvation for the poorer nations. This is all a result of price fixing. Were farmers allowed to grow and sell what they could, agribusiness would become ever more streamlined and productive, production quality and reliability would increase, and the general foodstock would be more abundant. I cite the tech industry as an example.

However, it is very difficult to get any sort of innovation into farming, as the governments of the world fall all over themselves to protect the small farmer, who inefficiently uses land. This has led to West Texas, of all places, being one of the fastest growing farming areas in the United States, due to very little regulation and no restriction of agribusiness. Oddly enough, the hardscrabble land and low rainfall have been overcome by technology to the point where West Texas is outproducing more fertile areas.

Of course, a contributing situation to the worldwide food shortage is the increasing usage of prime land as city and subdivision land rather than farmland. Most of the breadbasket of Southern California is so used already, and much of the Eastern farmlands are so used. This is another reason we're growing vegetables in the rock and limestone of West Texas. Ok, it's really not that bad, but, compared to Southern California or the Shenandoah Valley, it sucks.

That leaves fuel. Fuel is one of the most heavily regulated markets in the world. It is very politically sensitive. Most of this regulation is to effect some form of price fixing.

Most recently, the price fixing was in the form of an attempt to tax away 'windfall profits'. The funny thing is that there are no apologies right now from those who tried to do that, now that gas companies are seeing large losses, but that's the business cycle. Sometimes you win, sometimes you lose, and you need to keep the money from when you win to cover when you lose.

However, price fixing has been ongoing in this market for a long time. For certain tax breaks, the price essentially gets set at the producer, which is the refinery. Everyone after that merely takes a preset percentage. This seems perfectly fair until you discover that it means that a given gas station cannot take advantage of a local situation to make more money or to provide a price break to its consumers.

Of course, the whole point is to stop a local gas station making more money, but the truth is that if they make more money, they will drive more supply to the area. When the price is held artificially low, scarcity sets in and fewer gas stations exist. Further, when the price is held artificially high, it can be hard for a new gas station to get customers, as its prices are exactly the same as the other one down the street. Between these two effects, the failure rate of gas stations is startlingly high.

One other interesting fact is that OPEC learned its lesson in the seventies and will now trigger a massive price cut rather than risk training Americans not to use fuel again. Since the capacity to reduce consumption still exists in this country, any serious rise in prices results in a fairly rapid reduction in consumption, leading to a falloff in orders for crude, as inventories rise all over the place. By the time it works its way back to Saudi Arabia, the reduction will be magnified. Essentially, if we use domestic oil for, say, 30% of our fuel, and non-OPEC foreign for 30%, leaving OPEC for 40%, if we cut 20% of our fuel usage, that comes mostly out of the OPEC sources, it being the most expensive, so orders for OPEC fuel drop by 50% ( 20% is half of 40% ). Thus do the Saudis lose a pile of income.

However, despite all that, structural inflation is also at play. Thanks to the Obama stimulus package, tons of money have been injected into the economy. That money has to all go somewhere. For some time, it has been going into banks to keep them afloat, as their losses mount. However, lots of it got thrown into the economy as a whole, and that money is now starting to show up in bidding wars for resources, hence the increase in price of things that matter.

The Bureau remains unconvinced the bottom has been reached. The Bureau had been not buying precious metals on the opinion that they would go down even further, but the Bureau will now hedge bets and purchase some on this down cycle because inflation is a growing concern.

What is really going on

It is time for another missive in the massive canon of the Bureau.  You have been warned.

The United States has been waning as an influence for some time.  I submit as evidence the completely anecdotal fact that the most impressive piece of music I've heard in a very long time comes from Colombia, 'Tu No Eres Para Mi', by Fanny Lu, and the most impressive movie I've seen in a while is 'Chandni Chowk to China'.  To be perfectly fair and open, I grew up in India, and the experience was very nostalgic.

However, as always, your analysts continue to read between the lines (yes, there's more than one, and at least one other analyst has also seen 'Chandni Chowk to China').  Two things about that movie really grab the attention of the bureau.  First, the movie is produced by an American movie studio, Warner Brothers.  This fact is actually held as part of the reason the movie itself is considered a failure by those following Bollywood, that the Americans dumbed it down for international release, that Warner Brothers is having trouble making its own movies so is seeking to get a percentage of the foreign market but in the process is ruining the genre.

The bureau does not think so.  Warner Brothers, and Hollywood, in general, are really not in need of saving.  The American music industry is in trouble, a mess laregly of its own making, as its margins are too high to be sustainable in this day of easy copies, but the movie industry is still seen as providing a good value for the money, and is moving to make its margins far more palatable.

No, what is going on is that Warner Brothers is, indeed, trying to make Bollywood more mainstream.  What that means is that they  picked a snore of a movie specifically because it was a good vehicle to explore the market, as it would not cost a lot and it would produce guaranteed box office money.  This is just good business on the part of Warner Brothers.

However, the second, possibly more interesting thing shows up in that this movie is about interaction between India and China, where Indians are shown as 'cool, artistic and full of leadership' while China is shown as 'technically savvy'.  It's that last little bit that ought to scare Americans, because we made them that way.

Essentially, we have handed China the keys to the kingdom by teaching them how to make all our gizmos.  For the US market, they do not do the KIRF (Keeping It Real Fake) knockoffs, but for the rest of the world they do.  This means much of what we have them make for us, they knock off, reducing the cost of the unit and some of its western polish, and sell to the eastern rim.

The bureau is of the opinion that the end of the US hegemony will be a good thing for the world and may bring forth a new renaissance where the world politic and world culture is not dominated by the mass market western mold but rather is a bizarre bazaar model common to the east, a situation where ideas flourish largely unfettered by control.

In a situation like that, in the new global world that is emerging, your author can hear a song on the radio and locate the actual song within minutes, buying the song so that royalties get paid back to the original singer in Colombia (theoretically; we all know that most of the 'overhead' in the music industry is the RIAA and its ilk).  In an unfettered global economy, this sort of thing would be commonplace and such an artist could have the opportunity to become an international superstar.

For years the US market for culture has simply dwarfed all other markets simply because the US economy dwarfed all other economies.  As the US economy contracts and other economies grow into its place, this will be less so.  Hollywood still has a massive lead on most other centers of culture, and most of the money ends up in Hollywood somehow, but other centers are emerging, and, indeed, it is now possible to produce a movie completely without involving a studio, and distribute it online, as the wildly popular 'Dr. Evil' series has shown.

So, to wrap up, the US used to have all the money, no longer has it, and this is a good thing for the rest of the world.

What Money Really Is

Money is not, cannot be a separate entity.  Money has worth as a relationship to the things it can be exchanged for.  This is the monetary aspect of a money metal, and, indeed, the only aspect of fiat money.  This point is very important because the relationship between money and the things it can be exchanged for is very important.

There are a few pillars of economic analysis.  One is consumption.  Another is production.  Relating them is, of course, money.  Now, when consumption goes up and production remains the same, prices rise.  When production goes up and consumption remains the same, prices go down.  This is the price curve.

So, it is said that an economic stimulus package must simply spend to get people working and give them money to spend and thus stimulate the economy.  From a naive view, this works.  However, using the simple price model, we can show that it does not; it does, indeed, prolong a recession.

As these bulletins have repeatedly stated, production is the source of affluence.  Without production, we do not have things and cannot save for the future.  There is no wealth creation with no production, so no wealth to preserve.  That is the value of production.

Now, if a person is paid to do something nobody wants, production happens, but it is not consumed.  Thus, the worker fails to produce usable output.  This means that the worker is now merely a consumer, vying for the real production of the rest of the economy.

As said above, this causes an increase in consumption without a corresponding increase in production, which increases prices for everyone.  Since, as has been argued before, all activity is at the margin, increased prices tend to reduce spending, particularly if the workers feel their reserves are getting pinched.  So, a mere 5% increase in prices may eliminate an entire sector of the economy, such as expensive sit-down restaurants.

Now, all those people are unemployed and must be 'stimulated'.  Unfortunately, that is even more of the economy that is consuming but not producing.  This leads to higher prices all around, which leads to more economic malaise, which leads to more stimulus until the entire economy either hyperinflates or implodes.

Of course, many liberals will now argue that we can pay these people to do things some people want, but this raises the problem of artificially low pricing, which leads to overconsumption of a given item.  For instance, very few people would pay for the average output of the National Endowment for the Arts, yet here we are, with plenty dollars for that output.  Liberals make fairly stupid arguments that without arts we are nothing, yet, prior to the NEA, art flourished, indeed, the very arts they are endeavoring to save developed without any official government policy to support them.

However, consumption of these things clearly exceeds what consumption would be without the subsidy, which tends to require greater subsidy or rationing.  But, that is another argument.

Now, compare this with the proper way to end a recession by simply letting the system fail: house prices fall, reducing costs to the largest portion of the population.  Writeoffs, writedowns and chargeoffs reduce the payment load on these same people.  High unemployment leads to lower labor costs throughout the system.  Through the wonderful mechanism of deflation, prices fall in all sectors, as contributory factors of production drop in price.  This means everyone gets more free income, allowing them to spend into new sectors, such as sit-down restaurants, leading to greater employment.

So, lock the current system in and end up in misery for perhaps fifty years or take a year or two of sharp pain and then get back on track to greater growth.  It's our choice...

Outbreak of Sensibility

So, here I sit watching Kramer on The Daily Show with Jon Stewart.  Despite that I cannot politically agree with Kramer and that he is pretty late to the sudden discovery that the vast majority of our economy has been fraudulent for so long now,  I am impressed with him, as he has actually shown up on The Daily Show and taken his lumps.

I have been a fan of Jon Stewart for some time.  I watch the Colbert Report much more religiously, but The Daily Show sometimes has streaks of brilliance.  What amazes me is that this show digs for material to show people as the hypocrites they always are.  Were the world to care, this editor held opinions in the past that he would like forgotten, but well-meaning men change their minds when presented with  new truth.

So, here is Kramer taking a beating at the hands of Stewart, taking it like a man, offering as his mea culpa that he wishes to make it right within the bounds he is allowed to.  That his masters, CNBC, allowed him to show up on The Daily Show and take his lumps reflects well on CNBC.  In the past few months, I've seen quite a bit of actually truthful information leak out of CNBC, suggesting maybe someone is thinking again in network news.  It's almost the breath of fresh air Fox was before the Bush administration.

I do not understand why six different feeds haven't already picked up on this interview, as I think it is a stunning piece of work, nearly equal to Dr. Colbert's speech at the Whitehouse Correspondents' Dinner.  

One of the things that impresses me with these men is that they merely stand.  Occasionally Stewart will let his flaming liberal panties show, and Colbert plays at being a conservative, but in both cases they rarely let that stand in the way of poking fun at anyone who does something stupid in the news.  And, they constantly research, rather than merely reciting a canned news story, leading to even more hilarity.

This has been one of the things that bothers me about politicians, that of the complete lack of real access.  They are not allowed to face hard questions and are insulated from what people really feel.  I would dearly like for Obama to go on the Colbert Report or The Daily Show and explain why this stimulus package is going through despite that most of America hates the idea.

I will wander mildly off topic and mention that the President of Iran came to the United States in order to present his case to the American People.  To be sure, I remain utterly skeptic of any attempts to paint Iran as being actively hostile to American interests, let alone American people, and, indeed, reports on the ground seem to indicate that the United States and Iran have much in common and have the potential to join hands in a true, useful and effective 'war on terror'.  However, to end the digression, the President of the United States has never gone to Iran to talk to the people.

So, to wrench back on topic and tie in the above, we now here the Prime Minister of New Zealand quite sensibly pointing out that there is no way his country can effectively stop the global slide and doing so would needlessly place the country in debt, thus saddling future generations with the cost of fixing this problem.  Instead, he says he is going to focus on reduced taxes and infrastructure improvements in order to ready New Zealand for the recovery that is sure to come.  He is not talking about reducing taxes for the poorest in New Zealand, he is talking about compressing the tax structure, which means reducing all the brackets, but reducing the higher brackets more.

Of course, ask any Austrian or Anarcho-Capitalist what to do to get out of this mess, and they will all say what the Bureau has recommended over and over, which is to reduce taxes across the board, flatten the tax curve, eliminate capital gains (New Zealand essentially has no capital gains tax), spend money to improve infrastructure if you must spend money, and reduce needless regulation across the board.

So, the Bureau remains cautiously optimistic that what is happening is the people of this earth are beginning to lose patience with the fools who think they lead.  The one thing politicians must learn to fear again is the pitchforks.  The Bureau remains pretty certain that the attempted globalization will go forward, but, like all previous attempts to bring the whole world under one regulatory sphere, it will fail because nobody wants to pay for it.

This editor is also seriously considering starting the paperwork to move to New Zealand next week.  Such a decision is not taken lightly, but this country has not resembled the ideal that was laid down by the founding fathers in over a hundred years.  It is not the land of the free and clearly not the land of the brave.  It is a land where people talk about 'defending freedom' and 'invading Iraq' in the same sentence as if those two concepts were in any way related.

As time has progressed, the patriotic fervor that once burned in the breast has turned to cynical anger at the continued hijacking of the Republic by people who have power lust and liberal agendas.  Despite being an actual Democratic Socialist state, countries such as New Zealand and Switzerland more closely resemble the ideals that our great country was supposedly founded on, those ideas of personal dignity, financial freedom and the right to pursue happiness, long lost in this country.  After a while, one is tempted to simply reject the soul-sucking stupidity and find greener pastures.

And, once again, the Bureau's futurological model predicts brain drain in the United States.  It predicts a period of dominance in many technical sectors by the tiny country of New Zealand and predicts Zurich will be the major financial center once again, as New York and London collapse in ignominy.  Hopefully, any country that is the benefit of the leftover brains in the United States will not follow the same course that this country has, but all great countries must try their hand at empire, it seems, despite the likelihood of success being zero in the long term.

The Worm Turns

Great was Rome.  During her heyday, Rome controlled what was worth controlling of the world and then some.  Her armies marched unimpeded wherever they wanted, slashing and burning and enforcing the will of the emperor on everyone.  So great was Rome that it was felt by many that it could never fall, which, of course, is precisely when it started to fall.

Great was England.  During her heyday, there was not a part of the globe that a British ship or soldier did not have access to.  The sun continuously smiled on Her Majesty's subjects.  So great was England and so vast her power, that it was thought she could never fall.  Of course, she fell.

Great was the United States.  So great was Rome and so great was England, but they merely owned part of the globe.  The United States of America dominated every nook and cranny of the globe.  Her armies and her navies could strike anywhere in the world on literally a minute's notice.  No nation dared attack her and few dared defy her.  Yet she fell.

Here is the situation.  About, what, seven years back, debate was roaring about the Iraq war that was looming.  The analysts at the Bureau, not formally formed at that time, but still acquainted, felt that the Iraq war was going to be at best a misadventure and at worst a complete disaster.  The truth, as usual, ended up somewhere in between.  However, one thing the editor of this blog insisted upon time after time whilst debating the merits of the war online is the fact that a war inevitably drains resources at home.

When Rome was at her zenith, no nation or people dared mess with a legion because Rome retained sufficient resources to lay waste entire civilizations as necessary.  So great was the fear of Rome that her armies did not have to fight very much.  Only the barbarians lacked the fear.

When England was at her zenith, a single British man-of-war was enough to cause the 'natives' to get back in line.  On land, her armies had the reputation of never having broken and run in battle.  Nobody would tangle with the British because everyone was afraid of them.  Except the Germans, of course, related to the 'barbarians' that took down Rome.

These empires had periods of time early on where they were engaged in constant warfare, proving themselves to other nations.  The United States received its laurels in World Wars I and II.  We proved our mettle as a country and showed the Yankee ingenuity that is part of our particular charm.  We also showed we are not against charging into the thick of one of the most powerful defenses against a landing ever mounted.  Ever since that day, a country has to but think of Normandy to understand the risk of tangling with the US military.  Certainly, there is much to ponder in what happened at Hiroshima and Nagasaki, but, truly, the scary thing about the US army is the thought of thousands of men slogging ashore at Normandy beach, dying at an unbelievable rate, yet coming on to win the day.

So, all three empires, and, indeed, all empires that have ever existed have risen from the ashes of another, shown themselves to be in some way superior militarily and then collapsed.  It is the collapse that interests us now.

The feeling coming from south of the border (slang for Northern Mexico) is that they do not fear the United States, and, more specifically, Obama.  Texans, maybe, and Texans are fixin' to make a good show of it if they have to, as this war may be fought along the Texas and New Mexico borders.

These Mexicans are just like the Germans and Barbarians from the previous empires.  They are mere opportunists.  When this editor warned of losing the capacity to handle defense all those years ago, this editor had no way of knowing against what threat we would need those armed men.  However, one thing history has always shown us is that when, through hubris, a country weakens its defense, someone will take advantage of it.

So, here we are in Texas (the residence of most of the analysts of the Bureau), staring down gun and drug runners in Mexico, with the might of our state in Iraq and Afghanistan.  We will do it, because that is what a Texan does, and the Lone Star Republic will not fall.  Already her citizens are arming themselves and laying in supplies in preparation, because while the American Republic appears to have lost touch with reality, citizens of the Lone Star Republic have not and can see the very plain threat rising south of the Rio Grande.

However, how many men will we have to sacrifice to the altar of stupidity and pride?  How many women and children will be abducted for ransom, brutally treated and killed?  How many young people have to die as a result of taking low quality illicit drugs?

On the one hand, we don't have the military to police our border against an increasingly hostile and restless population.  On the other hand, that population is funded in a large part by our very own war on drugs.

So, the Bureau has been insisting for a long time now that the United States needs to do the following:

1) Bring all troops home from everywhere.

There is no favoritism this way.  The US has simply concluded it cannot afford to save the world any more.

2) Immediately end the war on drugs.

Prohibition has never been effective.  The amount of drugs coming into this country has not been meaningfully reduced.  Thousands of young people are needlessly incarcerated.  Many a third-world country is a wreck because of the drug lords they cannot rid themselves of.  Were drugs legal, industrial drug production would render those drug lords paupers in an afternoon and reduce crime worldwide, not to mention lower the cost of food as farmers switch back to regular crops.

3) Switch to a free money system but require hard money for government transactions.

This would protect capital and reduce the risk of constant, systemic failures such as fiat money has always provided.  Since the only people who seem to have any ability to predict what will happen are the hard money folks, maybe we ought to listen to them.  The fiat money leaders all profess to have been blindsided by this debacle despite that the hard money folks have been predicting it for nearly a hundred years, in precise detail.  In science, we consider the one who can predict what will happen to be the correct one.  Let's do that for governance as well.

4) Increase spending on the individual soldier but radically reduce the number of soldiers, thus making the American fighting man once again the best the world has to offer.

We need the best and the brightest in uniform, equipped with the best of whatever we can get and prepared to defend this nation, but not enough men to conduct significant foreign wars, to remove that temptation.  This is the military of a republic, composed mostly of citizen soldiers with a core of very competent, highly trained and well-equipped professional fighting men.  The authors of the US constitution knew that a standing army of any sort is an invitation to war, mostly by those who possess the army, so made it clear that no standing army was to be funded for more than two years.  This is one of the reasons we have been in a continuous state of emergency since Vietnam and, indeed, are still at war with North Korea.  Were we to quit at any point, we would have to disband our army within two years and then where would the world improvers be?

The result of these three things will eventually be smaller government, greater freedom, and a world that does not hate us nearly as much.  For, truly, they do not hate us because we have been rich or that we have freedom.  They have always hated us because we bother them.

All the Action Is at the Margins

That's a common statement heard by people getting started in economics.  I'm paraphrasing and I don't know who gets the quote, but it is a common enough thought to no longer be owned by anyone.

What it means is pretty simple.  To explain, let's dust off our test economy again.  A young entrepreneur takes out a loan to build an apartment complex.  He's done 'due diligence' and knows the market can bear a new complex.  He's shown all this to the bank and the bank has issued the loan.  He builds his complex.

At first, things go well; he has nearly full occupancy as everyone likes a new apartment.  Since he's fully occupied, his rent is relatively low.  Since his building is new, maintenance is very low.  He's making money and meeting his payments.

Well, after a little time, along comes his first problem.  A tenant defaulted on his rent, and has to be evicted.  The tenant trashed the apartment in the process.  Now the owner has to fix the apartment and find a new tenant.  He has reserves for just such a thing, and fixes the apartment as fast as he can.  It is a little harder to get a tenant and the time he spends trying to find one he's facing lowered income so it is hard to rebuild his reserves.

If he has ten units, he's lost ten percent of his income waiting for a new tenant.  When he finally gets one, he sets about rebuilding his reserve in earnest, but that's when the first problem with the building shows up.  Major repairs will ruin him.  He takes out another loan.

That loan increases the demand on his income.  Whereas before he had around 10% extra income to create a reserve, now he's down around 3% reserve.  He really has no choice in order to remain fiscally responsible, so he raises rents back to where he can get his ten percent, which amounts to a 9.7% increase in rent.

And here we find the first margin: say one tenant has a wish to buy a trailer home to get out of the apartment, but he keeps thinking that the apartment is a few dollars cheaper and the utilities are lower.  Well, on a $500 apartment, that's a $48.50 raise in cost.  He, somewhat annoyed, finds a trailer he can swing for less than that and breaks his lease at the earliest convenience.

We say this happened at the margin because the cost of the apartment changed, so compared to the trailer, the margin that favored the apartment evaporated, indeed, reversed.  The difference of 9.7% itself was not much, but the difference was enough to cross a threshold.  That is the important point.

Our landlord is in trouble again, although less so because there is far fewer repairs he has to do, but he is once again running right at his margin.  Either he gets a tenant or he raises rents again.  Well, suppose he finds a tenant, but only by guaranteeing that rent won't go up during the six month lease.

Down the block, an apartment chain puts in 36 brand new units.  Since this is a corporation that issued a bond, its interest rates are a lot lower and its overall cost is lower.  Now our apartment owner finds out he is not able to compete based on price.  The other apartment complex is able to run many more empty units and still compete on price because corporate is funding its startup cost.  Our landlord loses another tenant.

As time goes on, he ends up with more and more leases that don't let him raise rent.  He begins to fall behind.  As each lease renegotiates, he raises rent, but, since he's been losing ground, he has to raise rent way more than he otherwise would.

For instance, had he been losing 1% per month, he will have to raise rent 2% just to get some positive cash flow over the cost of servicing his loans.  In reality, he'll raise rents nearer 5%.

Fortunately, the large complex down the block is quite full and people don't often move until seriously annoyed.  So, he doesn't lose tenants for a while, although he stumbles into a catastrophe or two with his building, but he manages to get largely back on track and consoles himself that his debt load is not higher than the value of his property.

Now, the market crashes.  The large complex down the street is part of a corporation that is stable, has lots of reserves and low debt, so the sudden loss in the valuation of the building does not hurt it.  However, our guy is suddenly faced with the realization that he has more debt than value in property.  At the same time, two of his tenants become unemployed and move back with their parents.

He is now unable to do anything.  If he raises rent, he'll lose tenants as he already commands a high premium over the big complex down the block.  If he doesn't raise rent, he will be bankrupt within the year, as his reserves were set up to cover only one tenant gone, which was a reasonable idea when he started.

As time grinds on, he casts about for money.  He tries to get loans, but nobody will loan more than the development is worth.  With no other real recourse, he files for Chapter 11.

This is the second instance of margin.  This man is running a revenue-based business, one that requires a certain minimum revenue to remain solvent simply because of the debt load and the other fixed costs.  When his income falls below the minimum costs, he is insolvent.  His business valuation goes away.

Another margin starts to crop up.  He's been paying taxes on his profits, but this year he will have simply massive losses, so will pay no taxes.  Enough of this and the state, which is also revenue-based, will have to cut back.

The other major margin is his bank.  His loan was packaged and sold as a CDO tranche.  Well, he's not paying anymore in C11 bankruptcy, and won't pay for as many as three months, at which point his bankruptcy either becomes chapter 7 or he gets a renegotiated mortgage.  Either way, the bank is getting less revenue.

Now, the bank has sold an investor part of this CDO, but cannot pay the monthly payment for everyone because the income is less then the outlay once again.  It makes reduced payments to its investors.

The investors also have a margin.  No matter what, reduced income will drive reduced spending, as they investors get nervous and try to build up their margins.

And, here we have the truth of the statement and the reality of why no amount of stimulus short of enough to trigger hyperinflation will stop the current depression.  People everywhere are trying to increase their reserve because they're worried about their margins.  However, their margin is someone else's income, so that person sees income go down and must increase reserve against further downturn.

Simply give people money and they will save it.  This will not drive spending.  Give banks money and they throw it at 'fires', ie, their own investors, in order to avoid collapse, as the margin problem causes another problem, the one of concerned investors demanding their money.

In China, governments are handing out vouchers for spending, trying to force an increase in spending this way, but if those vouchers are not greater than the income of the people who receive them, the people will simply use the vouchers for needs and bank the money they earn as reserve.  In other words, consumption will not increase.

Now, let's examine two courses of action in our man's case.  In one course, the government steps in and injects an amount of money into his business to prevent his failing.  In the other course, his creditors force dissolution on him.

In the first course, he is locked into his debt structure because he has not failed.  So, he is locked into his rent structure and cannot lower it to be competitive and he will once again be insolvent.  In other words, nothing has been 'fixed'; we've only temporarily seen an improvement.  This is why bankruptcy courts almost always lower the amount of debt by order to avoid leaving the poor man in the position of guaranteed failure.  This is the end of the government bailouts of GM, the banks, so on, that they are failed already and propping them up merely prolongs their death, as it cannot lead to life, because they have costs that exceed what the market will pay for their services.

In the second course, it becomes clear after looking at his books that he cannot continue to operate because he can never achieve profitability.  So, the court orders his estate sold.  The corporation down the street buys it at sixty cents on the dollar and proceeds to make money with it.  The bank that lent him the money gets sixty percent back, which it can use to alleviate its cash problem and allows it to pay its investors, who keep on spending and so on.

Oddly, our guy emerges as a much smarter business man.  He works hard and presents a far better prospectus for a more moderate project and succeeds in getting a loan, and, having learned his lesson, he avoids the pitfall his previous project fell into.

Anyway, one of the points I'm trying to make, however poorly, is that all these entities have margin issues.  Once the margin goes negative, people react with panic and drive positive margins much larger than the previous negative ones, in order to pay down debt and build reserves.  This is what is happening world wide.

The previous 'position' (economic speech for all the deals involved) of the derivative market was worth some $60 trillion.  This was producing money for lots of people.  This is unwinding.

Now, here's the big problem: the current 'stimulus' package is worth some two billion dollars total, which, using simple math, is a factor of 30 down from the height.  Sure, we don't expect to make the whole $60 tn reappear overnight, but we have to somewhat meet the magnitude of the loss.

But, far, far worse is the loss in income to lots of revenue-based situations, including investor income to families, retirement income, insurance and government.  It is bad enough that banks are failing left and right as their revenue dries up and they cannot meet their payments.

The big problem is that a family that is accustomed to, say, 10% of its income from investment may suddenly see none of that money, indeed, may find itself in a significant loss due to the depreciation of its house and the loss in value of its stocks and bonds.  This means that not only has the family lost 10% of its income, it has lost, say, 40% of its total value, which means that it must increase its savings very significantly to rebuild its retirement portfolio.  This means that they must severely curtail spending, which is someone else's income.

Of course, retirees and the government face obvious problems, as their income comes out of profits, which aren't there anymore.  However, most people never see the connection between investment loss and insurance.  Why, for instance, is AIG, an insurance company, facing bankruptcy?

Well, it's all at the margin.  AIG and other insurers take in premiums and invest them in very liquid assets such as bonds and money market-type instruments, the very ones hit hardest right now.  Well, the insurance companies have actuarial tables that tell them how much reserve they need to meet their obligations.  When their investment portfolio falls, they must severely increase premiums or face insolvency.  If they do not do so, they may be accused of fraud and locked up in jail.

To explain, we'll simplify things.  A given class of insurance says the odds of falling into a puddle are around 20% per year, and the cost of each incident is $100.  That means that, per client, the insurance company needs to keep on hand at least $20.  That means, that, for 1000 clients, it needs a $20,000 reserve.  This is all very simplistic and probably not very correct, but it illustrates my point.

The insurance company pays out, on average, $20 per person per year, so it must cycle $20,000 per year, meaning that, in a perfect world, each client pays $20.  Now, suppose that the investment instrument the insurer uses loses 50% of its value, and now the insurance company's reserve is just $10,000, which is unacceptable by regulation, so it must increase reserves or declare bankruptcy.  It has a certain period of time to raise reserves, say, a year, given the magnitude of the loss.  It must raise its premiums by 50% to achieve this.

Now, imagine what that sort of thing does to the average purchaser of this insurance.  Some will simply deal with the puddles themselves, which is lost revenue to the company.  Some will reduce their other costs, which is a loss to the economy.  Some will go with another insurance company to avoid the increased cost.  This is a loss to the company.

If around 20% of the clients leave, the insurance company must now raise $6,000 (it had $10,000, its new base demands only $16,000 reserves) on the back of 20% fewer people.  Here's the really interesting thing: it's prices fall because its requirement falls faster than its revenue as it loses people.  This means that instead of $30 per person premium, it is charging $26.  As a matter of fact, if it loses 50% of its clients, it does not have to raise premiums at all.  Of course, it will have to cut costs significantly as its profits dry up, but it is somewhat better off.

This is one reason why propping up an insurance company is pretty dumb.  Essentially, AIG has been locked into its current cost structure.  However, AIG is pretty different because it has a massive position in derivatives itself, so it can literally lose more money than it is worth.  Let the idiots reap their rewards for writing insurance there is no possibility of covering.

So, everything happens at the margin, and, in a revenue-based system, it is not possible for a cash infusion to fix the business model if it's cash flow has gone negative unless the infusion is large enough to make good a significant amount of debt.