The Skip Bureau

Why No Real Recovery Will Happen

2011-12-10T13:57:00.000-08:00

Right now, major central banks are acting on your behalf. They are shoveling newly-created money into the coffers of their cronies at the major international banks. That money will largely go to finance governmental debt. Here is how it works.

First, a bank that has managed to get labeled 'too big to fail' approaches their former employees now running the local branch of the central bank, and says that he needs a 'loan' to survive. This loan is duly issued, as per policy. These loans come from the interbank or commercial loan operations. These operations have been established as 'lender of last resort' for some time now. When you hear the 'fed rate', this is the rate the banks will be charged. Not only is this rate well below the rate of inflation, both real and reported, it is well below the rate that the government pays for its debt.

That last bit is important, as most of this money, at last count $7.7 trillion in the US alone, is lent to governments because the bank will not hold cash. It doesn't make sense for the bank to use it to handle bad debts; they will simply swap those for US bonds from the fed anyway. This another program the fed has. It provides swaps of government bonds to banks in exchange for the toxic assets the bank has. So, the banks can unload their toxic assets for bonds anyway, but must retain a 'reserve'. This reserve can be in any 'monetarized' asset, such as, for instance, government bonds. So, the bank tends to put its new loans from the fed into the bond market, one of the real reasons that the fed prints this money.

The bonds thus bought have a payment rate above the rate the money was borrowed at. For instance, the fed loans at, say. 1/4 % (0.25%), while federal bonds pay, say, 3%. This means that the bank is making 2.75% on borrowed money, 100% leveraged. For instance, it borrows $1 bn, buys bonds with it, pays $2.5 mn in interest to the fed (who, by the way, 'invests' that 'income' in, you guessed it, federal bonds), and sees the value of the bond increase on its way to maturity by 3% per year. That works out to $30 mn. This is $27.5 mn in profit. Remember, this is profit for no real investment.

This dodge is used primarily to provide profit for the banks, increasing bonus payouts (the money was free anyway), and provide support for US bond auctions, which might otherwise go no bid. This is very bad, as it would cause an increase in the cost of the bonds, in order to get bids, reducing the faith in the US government. As faith is what holds this system together, loss of faith can lead to the whole system falling apart.

These 'leaders' are really playing an end-game, and this end-game is known as a 'delaying tactic'. The idea is that if the thing is delayed long enough, the economy will recover, and the debts can be covered. There is one major problem with this: the delaying tactic is seriously distorting the economy.

Each time some bank pays bonuses to a banker for managing to suckle the teat of government, each time the government creates some new bureaucrat or boondoggle, each time money flows into some sort of production that nobody wants, the overall production pool of things people want shrinks.

We can use our hypothetical economy. With ten people in the economy, under normal conditions, one of them would be involved in government, say, and one in banking and financial services. When the government guy colludes with the banking guy, the government sector grows to, say, two people, and the banking sector grows to, say, two people. That's now four people. This results in a 25% reduction in the productive sector, from 8 to 6. However, as we've said before, the demand for goods remains the same. This drives the price up, as money was printed to purchase substantially less goods. The efficiency used to be 80% and is now 60%. The only way, of course, to continue keeping things as they are, is to print even more money, which leads to even greater public sector consumption, as well as more bankers with fat bonuses. As time progresses, the percentage producing drops. At the moment, some estimates put it around 50% in this country.

Ever wonder why they call it a 'gilded age'? The roaring twenties had a lot in common with this age; things are not as well built and they cost more. The only way to make a capital purchase, such as a car, is on credit because cheap credit has driven the price up by distorting the market. The only way to buy land or a house is on credit. Nobody can expect to save enough to buy anything because our real wages are continuously decreasing and available investment vehicles mostly lose money compared to inflation.

See, when the bank buys bonds with money borrowed at 1/4%, it drives the yield of the bond down. That means that someone playing with his own money will now make less. In our example above, it ends up being 3%, which is less than real inflation. Now, our investor will have to pay 40% tax on whatever he makes, so his real return is less than 2%, which means he is losing money.

One of the results of this kind of monetary shenanigans is the increasing price of insurance. When bond prices go down, insurance prices go up. This is because insurance companies are required by law to keep their money in highly liquid investments, meaning investments that can be easily and quickly traded for cash with little loss of principle. Bonds are commonly used. When bond yields go down, particularly when the bond yield is lower than the rate of inflation, the insurance company has to buy more bonds to meet his reserve obligations, meaning he has to raise rates in order to afford the bonds. This is certainly not the only reason for the rise in the cost of healthcare, but it is a major reason.

So, to recap, the average person cannot save because they lose money, cannot save anyway because their real income is falling, and thus must finance everything with cheap money, which leads to an increase in the cost of goods which drives price inflation. As a result, bankers get rich off of play money and the federal government gets to spend and spend and spend. And the best part? All of this is perfectly legal...

Maybe I Was Born Paranoid

2011-05-26T19:53:00.000-07:00

Some people see the glass as half full; we call them optimists. Some see the glass as half empty; we call them pessimists. Some people worry that the state of the glass is not known; we call them skeptics. Some people worry we will never find water, that the glass is completely empty and that it is poison in the glass besides; we call them paranoid.

In engineering, there is a concept of 'insufficiently paranoid', a condition where someone has failed to consider all the possible ramifications. Insufficiently paranoid engineers often go on to design systems that fail spectacularly, bringing their pride down to a more appropriate level.

I guess what I am getting at is that paranoia is not a bad thing. Too much paranoia leads to inaction or to action that is not particularly helpful, such as stocking a bunker in the Nevada desert. Too little paranoia has you sitting on a beach as a hurricane bears down. The right amount of paranoia is, quixotically, referred to as 'prudence'.

So, what is a prudent man to make of the world? Russia sabre rattling at Georgia, with the US and NATO apparently unable to take steps to accept Georgia's inclusion into a group armed with nuclear missiles, pretty much the only thing that will guarantee Russia will leave Georgia alone.

Russia, however, may soon not be a problem, that is, if EU countries are willing to allow the drilling for gas in their shale gas reserves, but the truth is that the greenie is against anything that might smack of progress, as they relentlessly march us all into their cold grey future where thousands of us must die so Gaia can quit crying or whatever.

Watermelon is the term commonly used to refer to the alliance of the old red with the new green, green on the outside and red on the inside. Why must the red/green hate progress so? Is it happiness they hate? Why do normal ordinary people follow these tenets of green, such as pointless recycling and reduction of energy use?

The truth, as it stands, is that the world has never been so flush with energy. It is good news. It should be leading to cheaper energy, which normally leads to an economic boom for everyone. Instead, we have nations rationing energy, constructing bird slicers and other, even dafter ideas to harvest 'renewable' energy, such as tide power, which is an idea that literally leaves me speechless. Seriously.

Take windmills -- please, take them. Windmills cause changes in the wind pattern in the lower atmosphere leading to a reduction in the relative humidity, causing those areas downwind to dry out and see a reduction in vegetation. This is on top of their killing birds wholesale. They also require invasive modification of whatever land they are placed on, including cutting trees, leveling ground and mounting massive concrete and steel bases that will probably never be removed. All of this for very little power when the wind is blowing, which is not nearly often enough.

Take electric cars. The battery in an electric car uses toxic chemicals. The magnets in the motors use rare earths. The cars themselves are very lightly constructed, meaning they are not particularly safe. They have a low payload. They are also much more expensive to purchase. Under most conditions, they will not cost less over the lifespan of the vehicle because their purchase cost exceeds the difference in fuel cost. This includes hybrids.

There are some valid engineering reasons to build electric cars, and, when the day comes that they are cost-effective, I will gladly buy one. However, in the short term, trying to increase the uptake of hybrids and electrics through taxes is just wasting money to make people feel better, when we should be telling them the truth.

For instance, recycling is mostly a waste (haha, bad pun). The commonly recycled materials, glass, paper and aluminum, each have their problems. Of them, aluminum is easily the most useful recyclable, something that the junk man will actually pay you for because he can sell it on.

However, paper is a relatively pointless thing to recycle, if for no reason that, naively, putting the paper in the ground (landfills) sequesters CO2. Other than that, there is the question of hauling it to a recycling plant, recycling it and then selling it back into the market. All of this is generally more costly than simply using new wood, which is normally sprint-grown for this purpose. If you add up all the costs of recycling paper, you find there is a very slim reduction in energy used for certain post-consumer products, such as napkins, but that slim reduction in energy comes at a high cost.

Glass is just silly. Glass is made out of sand, and, if left alone, will become sand again. The cost of reconditioning glass is really about the same, overall, as the cost of making new, and glass in a recycling bin will be colored, which is a problem.

Saying we're running out of material so must recycle glass is admitting to not understanding anything about the production of glass. It is as laughable as those who wish to argue we're running out of water, when what they really mean to say is that we're running out of cheap water, that the budget has other concerns than fixing the leaking pipes and besides, we all need to sacrifice because it takes a village.

The water thing, in particular, annoys me. I have low flush toilets. I have a four inch main sewer pipe. I have to run water in my tub periodically to keep the pipes clean. The toilets do not produce enough flow to keep the pipes clean.

Besides, how good is a low-flush toilet if it has to be flushed multiple times?

Then there are the evil low-flow shower heads I hate so much. Why am I penalized for wanting to be clean?

Were this at all necessary, it'd be one thing, but the fact is that those toilets and that shower constitute a tiny percentage of the water used. The greenies will tell you that the percentage is large, but the percentage they use is of domestic water use, not total water use, and, almost certainly, industrial water use dwarfs domestic water use, so, even were the toilets and showers 50% of domestic use, that would run up to, say, 5% of the total use.

All those numbers are off the top of my head, and you can do your own research on the subject.

I'm just saying that we are flush with resources, and we need to push back against these greenies that seem to be grabbing power everywhere.

What is really going on...

2011-05-20T18:33:00.000-07:00

We're going back to pretending we know what is happening. Some of the opinions in these articles are very well researched while most are just hunches. The subject of this post is the latter.

At the moment, silver has been over sold. That means that the price is lower than it ought to be due to more people than normal having sold. Why this happens in May is not really a mystery; people have to pay taxes in April so easily negotiable investments go down in May. Thus it has always been.

About the market in general, though, there is much more to say. At the moment, a silver shortage is under way, according to all sorts of semi-reputable rumor. From sources with the same level of reliability, we're hearing that the amount of refined silver available to the market is perhaps one tenth that of gold. This means there is ten times as many gold as there is silver available to sell right now.

Gold, by and large, is used little in industry, most of it being used for jewelry and other decorative purposes, and the balance used for investment. This means most of the gold mined is converted to the sorts of things people hang on to. The things made out of gold are, also, easily convertible to pure (investment grade) gold.

Silver, on the other hand, is primarily an industrial metal. Most of the silver mined is used for industrial purposes, in electronics, in health care, and in a myriad other applications. Most of the silver so used is not easily recovered, and, while the recycling of electronics is on the rise, a significant amount of silver has already been disposed of in landfills.

The much smaller percentage of silver that ends up as investment grade also is used more as a conduit for other financial purposes, rather than as a store of value. This means that silver swings wildly, one of the reasons people tend to hold gold instead. Given that it takes far less money to drive the silver market by purchasing a large order, it is easier for a hedge fund investor, for instance, to park money in silver while moving it somewhere else, making a nice profit in the process. I won't discuss how this is done right now, because I barely understand it myself, but it does happen.

All this means that gold ends up being the preferred money store. To a certain extent, this is so because it is so. In other words, while silver certainly appears to be considerably more scarce relative to gold at the moment, people still believe gold to be valued because it is scarce, which is only partly true.

It is scarce, but it is largely scarce because investors buy and hold it. This is the same situation the dollar is in, that it is held in massive amounts by foreign interests, keeping its value up. Since many investors, both public and private, buy and hold gold as a hedge against inflation, it works as a hedge against inflation. The price is kept high because people are buying and not selling.

Silver, on the other hand, has both upside and downside potential. It is known as the cheaper money metal, meaning that young and less wealthy buy it because they get more for their money, so there has always been a market for it. Also, it has been no secret that it appears more scarce than gold, so speculators have also been buying it as a long-running speculation. This author, for instance, bought silver at $7 an ounce some five years ago, with the current price around $35 or so, last I checked.

The potential upside could be a flip in the relationship of gold and silver, which happened in medieval times, when new silver mines led to silver being far less scarce and therefore worth less. Were this to happen, the amount of fiat money that could be made would be very impressive, indeed.

However, if you believe, as the Bureau unanimously does, that inflation must happen in the future, silver may be a better hedge, as it may go up against gold and oil, as well as food and property, things that you will need. Were this to happen, it would present both a profit opportunity and a hedge.

As usual, this article is not intended as investment advice. You are urged to do your own research, as it is your money you are investing, and we won't help you if you lose it.

Why We Can't Soak The Rich

2011-04-20T21:49:00.000-07:00

There is a lot of talk amongst liberals right now about raising taxes on the rich. What makes me so very angry I can hardly see straight is the fact that they intend to soak those with high income, not those who are rich, because, of course, many of them are actually rich and do their level best to dodge taxes.

The saying is, of course, that these people are often multimillionaires who want to help the poor with someone else's money. Since they, by and large, avoid paying taxes on their actual assets, they shift the burden of payments onto the average person. In order to seem like they are paying their fair share, they raise taxes on the highest incomes, pretending that those taxes actually apply to them, when, in reality, they pay capital gains on their income without having to pay social security and the rest.

See, a person who is 'rich' has a lot of assets, and these assets, such as a paid-for mansion or paid-for cars, can be said to depreciate, hiding any income the 'rich' may have, which neen't be much. Other assets they have, generally investment vehicles, provide them with income in the form of capital gains and dividends. This income is not the same as payroll. Income from dividends, interest payments and the like end up being taxed as self-employed income, but capital gains do not. Capital gains is subject to a flat tax without any social security, medicare or medicaid tax. This is why CEOs happily take stock options in lieu of a salary. The difference between the strike price and the sales price is capital gains, not income.

A person who is rich also pays people to protect his money, and one of the entities he tries very hard to dodge is the tax man. If you look at the complexity of the tax code, you'll find an awful lot of it has to do with hiding income so that those who are rich can lose enough money to avoid taxes.

So, anyway, raising the highest tax rates will merely cause more 'creative compensation' schemes, like the above-mentioned stock options, to reduce the total tax burden on the income. It won't necessarily increase revenue from taxes.

Raising taxes is really not all that bright of any idea, anyway. The fact is that the government is seriously in debt. It needs to learn to live within its means, not continue to grow. Given the amount of money it needs to save this year to achieve solvency, some $1.6 trillion, raising taxes simply isn't going to cut it, without raising them to ruinous levels. At some point, someone is going to have to step up to the plate with a plan that cuts spending by at least $1 trillion this year and commits to significant cuts next year, at least another half trillion. With a modest raise in taxes, that would equate to a mild surplus in year three.

Or, we could just enact my particular vision, ditch the income tax, return to the excise and tariffs of yore, perhaps with a corporate income tax, and hack around $1.8 trillion or so off the budget. The immediate increase in available income would reduce the rate of foreclosures and increase discretionary spending by the American consumer, leading to economic recovery.

As for the loss of jobs from cutting government so much, the fact is that dollars spent by consumers have higher velocity than dollars spent by the government, so every dollar spent by a consumer will go through more hands, meaning more jobs. The money doesn't go away; it gets spent one way or another. If the consumer simply puts the money in the bank, he drives down the rate of interest at that bank, leading to increased borrowing, which will lead to increased spending by someone else.

This idea that liberals have that the government is somehow superior at spending is laughable, and leads to the government spending on things nobody wants or needs, like three simultaneous wars, or, indeed, the ability to prosecute three simultaneous wars. With a careful and prudent hand, it is possible to eliminate vast stretches of bureaucracy and help those trapped in government jobs to lead wonderful, productive lives enriching the human experience with real production.

So, Global Warming...

2011-04-14T17:49:00.000-07:00

Or Anthropogenic Climate Change or killing baby seals or whatever. Can there be a more disproven hypothesis? Does it even matter? What is it about people that causes them to give up a good thing?

Bad enough that the high priests of this religion jet around the world, playing with the world leaders, movers and shakers, in other words, those who never get round to the local pub. At the local pub, they're losing the argument. Even ardent greenies of my acquaintance are not as interested in CO2 anymore.

Bad enough they insist that the rest of us suffer deprivation and even death, and certainly, unhappiness, while they jet around the world eating caviar, going from airport to hotel suite (larger than my house) in a fleet of SUV limos, which is all ok to them because they're saving the world from us, while I work on my cars trying to keep them running just one more year, when, hopefully, they'll finally be paid off.

But, the absolute worst bit is that it is all so completely unnecessary. The world hasn't been warming for three years. The sea levels are not rising. The latest data shows ice caps are not melting at an alarming rate (the rate hasn't been established, but that it is not alarming has). Evidence strongly suggests that temperature on earth correlates with solar activity, and, if so, it's going to cool for quite some time.

So, seriously, eat, drink and be merry, and try to vote the puffins out of office.

What is really going on?

2011-01-04T20:31:00.000-08:00

The question mark indicates the sad truth, that there is now officially so much chaos in the system that nobody has any clue what is going on. At this point, the traditional indulgence in the conspiracy theory is not even a possibility because nobody could be steering this ship of state at this point.

However, the light of hope shines brightest at this point, as the forces of control fail in the face of chaos. I've heard the conspiracy theory that some dark and foreboding committee of one hundred jewish followers of the articles of zion received from the last templar under direction of the marovingian or whatever (not gonna look it up, if you want to, you can correct me in a comment that I will probably ignore), that such a group wants chaos because out of chaos it can form the kind of order it hopes to form. However, this just won't work.

In chaos, by definition, things are unpredictable. Were things at all predictable, the situation would be merely complex, not chaotic. If it were easily predictable, it would be referred to as ordered. Anyway, what we have here in the US and most of the world, is chaos.

We have chaos in the weather, with potentially serious shifts in weather patterns, leading to thousands of victims. We have chaos in world politics, with things like wikileaks, moslem extremists and tea partiers to contend with. We have idiots running countries that may or may not have nuclear weapons, some of which are verging on being officially failed states. We have the west, having run this globe for a seriously long time, verging on bankruptcy and ruin, with a ruling class that is utterly clueless.

Out of this chaos comes some encouraging news. For instance, when the Democrats compromised with the Republicans over the taxes and the continuing spending bills, the tea party threw a hissy fit and newly chastised Republicans rescinded the compromise. Obama, ever the skillful negotiator, turned turtle and let them.

The only thing the politician is really afraid of is public opinion. Such a sudden change in behavior is impressive because it arises from a sudden change in opinion. The tea party isn't that old. It has grown out of a growing dissatisfaction with governance in general, and has evolved into a much better educated electorate that is not willing to tolerate back room deals and tons of waste. This electorate is starting to make noises about things that were considered fringe only a few years ago, such as auditing the Federal Reserve Bank.

Even more interestingly, much of the rest of the world is now making noises about a gold standard, of all things. Ten years ago, gold was considered a barbaric relic of earlier times, now selling for six times the value it used to sell for at its lowest price. People are noticing.

The hedonic adjustments the bureau of statistics makes to their inflation statistics are being ignored. Everyone can see their energy, food and fuel prices rise. Even if the price of consumer goods continues to go down, most of the population of this country spends most of their money on energy, food and fuel. As has been noticed before on this blog, activity is at the margin and any increase of a major cost can lead to a reduction in other expenditures, which can add up to a major reduction in economic activity. This largely explains what is happening now.

There may be economic recovery, but it is jaded. It is not broad-based, and it is not strong. The problem with any sort of recovery that would re-establish the roaring nineties is that the average consumer has been shocked hard and will not likely engage in such ruinous economic activity again, meaning that we should see debt ratios continue to drop. This is positive for the country in the long term, but in the short term can lead to a decade or more of deflation, which, if the government works at it, can be turned into proper stagflation, a la Japan's lost decade.

So, to avoid that eventuality, we have to see the electorate make their elected officials do the wise thing and not fight deflation, as deflation is a natural remedy for all sorts of monetary evil, and, in the long run, will lead to a much leaner, much more efficient, and much stronger economy.

What Is Really Going On

2010-11-01T15:00:00.000-07:00

This is really about the most popular feature we put on here at the bureau, with readership increasing from the normal two or three up into the mid ten. As per usual, it is just an attempt by the analysts at the bureau to guess what is going on by reading between the lines.

We have some guiding principles, starting off with the fact that nearly everyone is telling some sort of untruth or half truth. This is based on the assumption that a few of the actors are mendacious, a few of them lazy, and an awful lot of them are credulous morons. One of the most important facets of a good lie is that the intended audience sincerely wishes to believe it to be true.

For instance, the ongoing smearing of Iran comes to mind. Certainly, Iran is playing at being a foil to the US, and certainly, Iran has made its lack of love for Israel clear, but certainly, it has done very little to act on either of those impulses.

We can start with the enrichment of fissile material, which many argue is indicative of its intent to wipe Israel off the map. The bureau does not concur with this analysis. Iran is engaging in the exact same thing Pakistan engaged in, that North Korea dabbles at, and that is acquiring a deterrent to a very viable threat.

The US provided Iran with notice when they attacked Iraq that the US will not brook those who stand up to the US for long. So, in order to remain independent, Iran must defend itself, meaning it must acquire powerful weapons.

The US, however, continues its hamfisted interventions and halloweenish saber rattling, alternatively trying to kill its way into hearts and minds and trying to threaten and bully its way into compliance. These policies have nearly ruined the state of Pakistan, leading to a schism in that government that threatens world security because they do have nuclear bombs.

As a short aside, one of the commonly used heuristics to determine the motivations of the various actors in this, the big game, is the basic assumption that we, as humans, are very much alike. We may approach acquiring our needs in different ways, but we have the same basic needs. As a result, the habit the US has acquired of killing and torturing innocent people in the name of suppressing terror seems to have been remarkably effective as a recruiting tool for those very people that we are trying to suppress.

How does it work? Well, it starts with a serious disdain for our fellow man, such as shown by military contractors killing locals for sport. It morphs into policies of spiriting people off for 'rendition', which turns out to be a horrifically bad idea. It ends when the whole world can see the utter lack of moral fortitude present in our policies, which clearly place the preservation of our precious skins above the wholesale slaughter of their young men.

It turns out that arguments in favor of torture are utterly silly and seem seated in a wish to believe torture effective. Too many Bond movies may be responsible, where the hero threatens some despicable half wit and thus gains the knowledge necessary to win the day. In reality, tortured people tend to tell you what you want to know.

That is an important fact that must be emphasized: tortured people tell you what you want to know, not necessarily what is true. When tortured, some young terrorist is just as likely to invent very intricate stories of conspiracies to do grievous harm as he is to tell the truth, that he hung out with some disreputable incompetents and had nothing at all going on.

In other words, we told him he was a big shot, we tortured him using fearsome methods into believing he was a big shot, and he may even pass a lie detector test with his confessions, but they are still likely to be false.

Ask a true interrogator what the most effective way to get intelligence is, and he will say to wine and dine the target, to become close friends, to spend time, and then to simply record and correlate. Once the target has been arrested and spirited away, the target is useless for further intelligence gathering. If the target is carefully groomed, the target can continue to provide useful intelligence for a very long time.

In closing, to warp back onto Iran and Pakistan, imagine being in their shoes. I know it is hard, since Americans seem completely serene in their moral superiority, but our government took young men from nearby countries and tortured them. Most of these young men had actually done nothing wrong.

Our government has killed over a hundred thousand people so far in the global war on terror. If you figure an average family size of five or so, that's four hundred thousand potentially very pissed off people. Given the population size of the average middle eastern country, that's a significant number, and it's not even considering the extended family.

To win a hearts and minds victory, the occupying force has to be utterly fair and has to be seen sacrificing itself to promote the local security. We have not been fair at all, and our troops ride around in armored trucks and shoot at anyone who gets too close. Now wonder they hate us...

Yikes!

2010-10-29T14:35:00.000-07:00

To those of you who still read this blog, the amount of mild sensationalism has become commonplace. However, now we must consider the probability of far greater sensationalism coming down the pike.

There is a growing feeling amongst the population that the fed controls the economy, and, believe it or not, investors are seriously worried the fed will not inflate adequately.

When it seemed that this was a possibility, when Bernanke seemed to be indicating he would not aggressively pursue quantitative easing and swaps, the stock market went down. When a new rumor came out that he would keep the amount of cash flowing into the economy at the same level, stocks recovered.

Odd as it may seem to anyone schooled in economic theory, this seems to be the accepted wisdom of the day. Inflation in money inevitably leads to inflation in price, and we are seeing that right now. Food prices seem to have jumped about 20% of late. Due to a lot of factors, it is not unreasonable to expect that food prices will probably jump more, but that is not part of this diatribe.

So, the accepted wisdom is that we're seeing inflation in food prices, mild inflation in raw materials but deflation in assets. To 'fix' this, Bernanke is expected to engage in greater monetary inflation, which will lead to more of exactly what we're seeing.

It's pretty simple, really: if the price of subsistence rises, the cost as a percentage of income rises, leading to a reduction in disposable income, leading to a reduction in the purchase of capital goods, leading to a reduction in the price of those capital goods, otherwise known as price deflation. It's like trying to get a bigger ham by blowing air up a pig's butt. All you get is pig all over the place.

It's simple, really. A given family makes, say, $5000 a month. They pay, say, $1000 in food. This is not unrealistic. An increase in food cost of just 20% is another $200. Now they pay $1200. As I have pointed out before, all activity is at the margin, and, in this case, their margin is $200 narrower. So, instead of spending $1200 on a new TV, which they would have paid for on their credit card, $200 a month every month for six months, they have to make do with the old TV. There is a reduction in the purchase of capital goods.

This relates to the housing market, as well. As the cost of subsistence rises, the amount of money available to pay for mortgages goes down. This is one of the pernicious effects of inflation, that people who were previously stable financially suddenly find their margins thin to nothing and thus must sell capital goods to free up cash flow.

If you can't sell your house because, for instance, it is upside down in one of the worst housing bear markets in history, you either cut other spending or you walk away from it. Neither is good.

So, in the exact case where people will see their disposable income go down and thus reduce capital spending, the stock market goes up. Oh, well.

Aliens Among Us

2010-10-10T14:14:00.000-07:00

This is actually a twofer installment, as there are two common uses of the word aliens, one meaning those not of this country, and the other meaning those not of this world.

Recently, a Vatican scientist and an Air Force (USAF, retired) officer both predicted the arrival of aliens (pointy eared green variety) some time this coming decade. The Bureau has decided they are potty and probably unreliable, and that the sudden increase of serious discussion of space aliens is a part of the grander cyclical nature of idiocy that has gripped man as surely as death and taxes.

The other type of alien is becoming an endangered species. As the economy here continues to sputter and plotz, many of the illegals are going back home and fewer are coming over. One thing is certain, though, and that is that Republicans will take credit, calling it a result of their increased enforcement...

Another Update

2010-09-25T17:06:00.000-07:00

We at the bureau periodically write about what is going on behind the scenes based on the idea that we have very vivid imaginations and enough hubris to think we can read between the lines from the news.

Well, first up is the religious right. We try to remain light-hearted in the face of these people, but it is difficult. It is often amusing to hear arguments propounded by those of this particular political bent, knowing with absolute certainty that the arguments have no basis in fact.

Probably the most depressing of this sort of thing in recent history is the so-called 'ground zero mosque', which is neither at ground zero nor a mosque; it is a proposed location some two blocks away from ground zero.

One of the few things we know for certain about the founding fathers of this country is that they had no intention of ever letting religion in any way enter into government policy. So strident was their concern that it was the first thing they put into the bill of rights.

So, from a strict constitutional perspective, or from a perspective that any reasoned student of history would assume the founding fathers espoused, the building of this mosque is a non-issue. Also, the Jesus of the New Testament certainly does not seem to care about other religions except to periodically point out that being a member of some religious club did not automatically result in salvation, as in the parable of the good Samaritan, with which most of us ought to be familiar.

Further, Jesus told his followers to 'turn the other cheek' over things of far greater import than the possibility that some Muslims might have less distance to travel to get to their religious meetings. All this is easily summed up in a slightly misapplied quote from Jesus, 'truly, they have their reward'.

See, Christians are supposed to be concerned with things in heaven, 'so heavenly minded they're no earthly good' as was wittily put by some pastor in the long lost memory of the editor. Instead, they're combating illegal immigrants, arguing for torture of people who may or may not at one point have been sympathetic to terrorists, and so on, clearly not things the 'Prince of Peace' would occupy himself with.

This post has already descended into a rant, but the point is that there is little in the way of truth or fact entering the discussion on the religious right. This being said, the left is also quite lost. Much has been said in the left about how moneyed interests have manufactured the tea party movement, for instance.

See, the left is pretty certain it knows what should be done, and any reasonable person would agree with them. So, their first effort was to paint the tea partiers as unreasonable. The problem with this argument, of course, is that there are just too many tea partiers and many people personally know at least one, knowing that the one they know is not actually crazy.

When the attempt to paint the tea partiers as crazy fringe kooks beached itself heavily on a pile of facts obvious to everybody, they decided that the tea party movement was primarily driven by corporate funds, which, of course, is just silly. The demented nature of some of the commentators on the left appears to force them to not even be able to admit that there is a large body of people simply fed up with the overbearing, overweening, overlarge federal system, and are tired of the continuous bloating.

The internet has helped a lot, and the fact is that many of these movements are not classic centralized managed political movements but rather self-organizing and self-perpetuating because the average voter no longer trusts their leaders. Put simply, the tea party movement itself shows that a significant minority, possibly a majority of people in the US do not listen to their putative leaders anymore, whether conservative or liberal.

Yes, the tea party is not listening to the conservatives, either. The tea party has no interest in making itself about religion, sensing that to be a mistake. The hijacking of the conservative movement by the religious right gave us eight years of GW Bush.

Instead, there are a lot of moderate religious people, who believe in rights rather than in forcing the government to adopt a particular religion. Also, there are quite a few people in this group who are apostolic christians, a group that believes that religion has no bearing in governance but that governance must be moral and ethical, as well as respective of personal rights.

So, the tea party contains a wide spectrum of religious people, and irreligious people, conservatives to moderates, even some liberals, and is populated with lots of average Joes with decentralized, almost anarchic organization.

The point of this post, to wrench this screed back on topic, is that the primary argument put forward on a regular basis on this site, that what is happening does not correlate well to what is being seen in the news, is, hopefully, now clearly so. With little effort, the reader can scour the internet and find hundreds of different stories and theories, all of them contradictory, which is healthy. Yet the government is harassing anti-war authors, calling them terrorists. Or, maybe they are terrorists...

The Inherent Value of Money Fallacy

2010-05-17T12:34:00.000-07:00

This pernicious fallacy is once again raising its confusing head. The most recent instance I have seen is the argument advanced by conservatives that illegal immigrants send money home and this somehow affects the economy.

Oh, boy, where to start? First of all, money does not now represent actual value. Value is a metric we each assign money. For instance, my son believes, firmly, that the value of a dollar is around one fifth of a toy car. I disagree. I find that the value of a dollar is about two fifths of an energy drink. I also find the value of a dollar to be a certain percentage of my time, as I have a day job.

While the dollar value is different to different people, the number is not, and here is where the fallacy arises. We conclude that if we transfer the dollar from one person to another, its useful value will stay roughly the same. This is the fundamental fallacy of socialism, or any redistributionist system.

In the case of the illegal immigrant, however, the argument is particularly stupid, as it shows an epic misunderstanding of fundamental economics. Specifically, that dollar is the property of the US government and has no value outside of the United States. In other words, it is only legal tender in the United States. People outside the United States trade dollars because they know they can use them to buy useful things from the United States, not because there is any inherent value in a dollar.

If the illegal immigrant were sending, say, gold or some other precious good to his relatives, the argument might hold, but it would be more difficult to make because the immigrant would have had to purchase or acquire the gold or precious goods to send in the first place, which would have been economic activity in the US, weakening the original argument. However, some sort of valuable thing being sent to relatives in another country would definitely represent a reduction in the national wealth of the US. Why this doesn't matter I will explain a bit later. However, the dollar is not an inherently valuable thing.

The reason I'm stressing this point is that illegal immigrants work in the US, send their dollars home to, say Sweden (or wherever; not picking on anyone...), and their parents then convert the dollars to whatever the local currency is. The resultant dollars go into a bank where people who wish to buy things denominated in dollars may purchase them to do so. Once they buy something in dollars, the dollars are back home, in the US, circulating in the economy once again. In other words, the only difference between having an illegal spend money in the country and having one send the money home is how long it takes for the money to once again circulate.

Since the dollar was made in the US, it must always come back to the US sooner or later. On a macro scale, were the exports of the United States to continue to decline, at some point, the value of the dollar not in the US compared to those exports would go down. In other words, if the number of dollars floating around in the world economy stays the same but the amount of goods exported goes down, the goods would become more expensive, driving more exports and vice-versa. This is the price curve in action. In this case, the amount of dollars floating in the world economy has gone up, but the exports have not reacted yet, so dollar exports have become relatively more expensive. This means, over time, that demand for dollar-denominated exports will rise, causing an increase in manufacturing in the US to meet the demand.

So, not only does the illegal help his family back home, not only does he provide his country with much-needed hard currency, but he also stimulates the US export business. This is 'win-win'.

And, now for the case of the valuables being sent to the home country. First of all, the game is not zero sum; valuables are being injected into the economy at a fairly steady rate. Second, the increase in economic stature in the country the illegal came from is worth the valuables, as we generally pour plenty of economic aid into the types of countries illegals come from.

The other point is that an increase in wealth in a country generally leads to an increase in economic activity, which leads to an increase in consumption, which leads to an increase in importation, which will lead to an increase in demand for goods, which is pretty much what we have above. Of course, since the valuable goods are not dollars, they can be 'spent' anywhere in the globe, but any time they are spent, they will bid against activity in dollars. The increased economic activity will always drive increased exports.

One of the fun little facts is that the more people there are working productively, the higher the 'velocity' of money, meaning the more often it changes hands between its bouts in the government, and thus the greater the economic output. This will be true, at least, until we get a VAT. Anyway, the more people there are working, the greater the demand for goods and services, and the less those goods and services cost, leading us to my final point:

Any person working, for any amount, is producing in exchange for value. This means that an illegal working is producing value for his/her employer at the same time as gaining value for his/herself. This is an important point because even when illegals are 'taking jobs' they are producing value. That value will be 'spent' sooner or later on other value, leading to job creation, as it is value that would not otherwise have been there. What I'm trying to say is that the illegal earns and must spend, while his employer produces and must sell. Since the total cost of production is lower because of the illegal taking less money, the production is more efficient, and there is more to go around. This means generally better lives for everyone. The ability to gain a better life is directly linked to the rate at which people in an economy are gainfully employed in for profit enterprise.

Of course, the above clearly implies that, given true free trade, it wouldn't matter if the illegals worked in their country or ours, but that is a discussion for another time.

Pernicious Debt

2009-12-11T07:48:00.000-08:00

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 &c. 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

2009-09-14T23:23:00.000-07:00

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

2009-09-07T13:33:00.000-07:00

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

2009-09-01T23:25:00.000-07:00

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

2009-09-01T21:34:00.000-07:00

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

2009-09-01T04:27:00.000-07:00

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

2009-08-30T03:23:00.000-07:00

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?

2009-08-28T01:55:00.000-07:00

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

2009-06-24T03:24:00.001-07:00

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

2009-06-03T01:25:00.000-07:00

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

2009-03-19T02:28:00.000-07:00

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

2009-03-13T03:36:00.000-07:00

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

2009-03-11T07:25:00.000-07:00

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

2009-03-06T01:04:00.000-08:00

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.

You Saw It Here First

2009-02-25T00:51:00.001-08:00

Or maybe you didn't. The sovereignty movement, the subject of this post, has been around for some time, pretty much since the ink finished drying on the constitution. It flares up every time there's financial trouble or the federal government gets too uppity for the majority of its citizens.

The last time there was a significant, organized movement anywhere near this large, it led to the civil war. Tho the liberal wail that 'it cannot happen here', it has happened here, and the results were ruinous.

In the annals of the Bureau, you have seen the argument that the unrest that will almost certainly follow economic dissolution will lead to political dissolution. In the absence of a strong federal government, many of the issues currently separating the several states may lead to their wish to seek secession.

In particular, the State of Hawaii wishes to secede due to the mishandling of its local indigenous population. In this case, the urge is more than merely angst at an overweening federal government. However, it is the overweening federal government that is providing added impetus, allowing non-indigents to align with the indigents and thus increase the strength of the movement.

Of course, a strong federal government would never relinquish Hawaii, because without Hawaii, the US has no Pacific base worth talking about and the loss of the forward naval presence would do palpable damage to the US' self-image as world police. However, a strong federal government is what we won't have soon.

As the Bureau has stated over and over again, the strength of a government is largely tied up in its currency, as the only power it can get is the power it can buy. Once it loses the ability to write notes of credit and runs out of shiny things to trade, it loses relevancy, not to mention power. Then the magic 30% kicks in.

It only takes 30% approval to control a country. Even tho Obama's approval rating is very high, only around 30% actually support him, pretty much the same number as Bush had in his first term. Everyone else is just feeling good about not having to worry about Bush. However, Obama will soon see the same partisan trenchwork in the path of his reforms and will soon see that much of America does not support his agenda.

This brings us to our central discussion, which is that 25 states, a full 50% of the US, are in the process of passing or considering 10th amendment 'Sovereignty Resolutions', two of which border on articles of secession. We've discussed Hawaii, where the secessionists are gaining power, but New Hampshire is another story entirely. Pressure has been building in New Hampshire for some time, as the federal government continues to try to force the small state to do things the federal way. Now, New Hampshire feels backed into a corner and a bill has been introduced that is the first 10th amendment resolution with real teeth, as New Hampshire has provided grievances and determined that failure to address such grievances will be grounds for secession.

The other states are less aggressive, but many states, most vocally Louisiana, are considering rejecting Obama's stimulus package because it increases federal 'cash for enforcement' schemes whereby the federal government uses payments to encourage the passage of laws that it has no right trying to get passed, being as how they are powers delegated to the states. New Hampshire already declines a lot of this kind of funding.

The Bureau once again wishes to point out that the federal government is effectively broke and is pursuing policies that will inevitably lead to the ruin of the dollar. The 'dollar overhang' is already large enough to guarantee hyperinflation when the right spark sets it off. A nation without the means to pay its agents is a nation that cannot accomplish anything. When the federal reserve note reverts to its inherent value of worthless, the United States of America will no longer be able to pay federal military and police forces, not to mention tax collectors, and the logistics of continuing to manage the 'empire' using FRN bills will be a significant draw in itself.

The Bureau can point to many historical parallels, such as Zaiire, where the army refused to do its job until it got paid in US dollars rather than Zaiires, as the exchange rate was around two million Zaiires to the dollar and rising at the rate of something like 100% per annum. The government tried to pay in beans and the military dumped the beans on a road, blocking off food to the capitol city, at which point the government had to airlift food, because the army was blocking any attempts to remove the beans from the road.

Of course, you will hear 'it can't happen here', but it has. Over and over again, it has happened here. In many states now, and more to come, there is a sense that the federal government is not responsive to the needs of the states and is unnecessarily interfering in the lives of the citizens of said states. Many of these interferences are actual unfunded mandates that the states must finance, which contributes to the already high deficits in many states. Were the federal mandates not there, the states may balance their budgets even now in most cases. Certainly, they would have a freer hand to try to accomplish that goal.

For instance, Texas is a few cuts away from a balanced budget. The SCHIP requirements will make this situation worse, as did No Child Left Untested. Were the state to simply abandon the No Child Left Behind provisions and ignore SCHIP, they would likely have a balanced budget, and this is even before eliminating unfunded medicare and medicaid mandates.

Texas itself has always been one day of indigestion away from secession anyway. Mostly said in jest, the idea of leaving the US is mentioned regularly by residents. However, there is now a far more serious tone for a lot of reasons that nobody outside Texas will understand.

Texas by itself is completely self-sufficient. This means Texas has no need of the union. However, as the rest of the country basically slides into insolvency, Texas will be paying a higher and higher premium to support its federal habit, something the residents do not like. Simply eliminating the federal dead weight on the average Texan's back would result in around 25% more spending money, and reducing many of the onerous regulations would lead to lower state taxes as well.

Texas has a healthy school system, by and large, the second largest agricultural output in the union, industry, including automobiles, defense, arms, ammunition, transport and energy, as well as control over much of the energy production for the entire US. Texans have an independent spirit. Texans are inordinately armed and Texas is a vast territory to try to occupy. Much of Texas has only a slight concern with the sanctity of governance, so an appeal to that civic duty will go unheeded.

Also, Texas has normalized relations with Mexico, unlike California. Texas has the ability to absorb labor at a far higher rate than any other state and has the labor capacity south of the border to support it.

This is not to say Texas is ready to secede or that any state is ready to secede, but it is to say that if the federal government collapses, many states will almost certainly secede and the resultant geography will be interesting. It is the opinion of the Bureau that California will become its own country. Washington State, Oregon and Idaho will form another country, possibly called Pacific States of America. Montana, Wyoming, Colorado, Utah, Nevada, Arizona, New Mexico and Oklahoma can join Texas in the Western States. From the Dakotas down to Kansas and over to Ohio form the Central States. From Kentucky south to Arkansas, over to Florida and up to North Carolina, possibly including West Virginia, are the Southern States. It is expected that Virginia, Maryland, Pennsylvania, New York, Rhode Island, Delaware, Massachusetts and New Jersey would remain the United States of America. That leaves New Hampshire, Vermont and Maine as the Eastern States.

This is, of course, rank speculation, although the Bureau is occasionally right on these wild-ass guesses. These guesses are based on our 'world view model' which simply assumes people try to do what they think is best for themselves. For certain, a new nation led by Texas and including the western states listed above, with good relations with Mexico and Canada, would be a powerful industrial country. It would also be good for the citizens of such states, as they saw their negotiable income increase as their freedoms also increase.

The other pressing issue is the almost clandestine efforts at convening a constitutional convention. This is very nearly real, as two states are all that are needed to complete the process and convene the convention, which would have plenary power over the entire governance of the United States. Frankly, the Bureau would rather see dissolution than handing world-improvers a clean slate to rewrite the constitution, as there's nothing really wrong with the constitution, it is just that nobody follows it anymore. The Bureau is convinced that a new constitution will be just as ignored as the current one.

Inflation(Money) Is Not Inflation(Prices) Redux

2009-02-19T17:50:00.000-08:00

So, the fed is madly inflating. They are engaging in every monetary inflation trick they know. Why aren't prices going up? Why haven't loans started flowing?

There are always two sides in any economic analysis, the supply and demand. Oddly enough, any transaction can be analyzed from any side. For instance, the sale of pork bellies is traditionally analyzed as a supply of pork bellies and a demand for pork bellies. However, an argument can be made that there is a supply of purchasers of pork bellies and a demand for purchasers of pork bellies.

So, basically, there is both a supply of credit and a demand for takers of credit. In this case, both are drying up. There are few people in the position to borrow money, and most of them are not interested in it. There are also few banks in an actual position to loan money and few of them are interested in it.

So, the fed wishes to alleviate this problem by pumping money into the economy at a rate never before seen in recorded history. The increase in money in the economy has so far had little effect on the continued deflation in prices. The only way to stop deflation is to let it happen.

Basically, people are in debt up to their eyebrows. For those unemployed, they don't have any room to maneuver and are going to lose everything anyway. For those employed with increasing costs or employed at reduced pay, they will lose part of what they have. For those who are on fixed pay with fixed cost, they have no ability to increase their holdings.

The axiom 'all economic activity is at the margin' applies here. If someone has committed 90% of their income, they only have a 10% cushion. An 11% increase in prices will wipe that out, leading to the need to reduce other spending, which is, of course, someone else's income. This is the crux of economic trouble, that spending is in discrete lumps which often must be entirely eliminated because they cannot be reduced. A good example is cable tv, something most people can actually do without. In most cases, the price cannot be reduced, so the cost must simply be eliminated.

Another large payment most people make is the mortgage. As people need money, they will begin, more and more, to consider eliminating what is quite often the largest single payment they have. This is particularly true if they can move into an apartment for substantially less or if another house, either cheaper or more attractive, is available. They may be able to finance the other house for substantially less and may get it financed because it is something the banks want off their books as it is a foreclosure.

What can happen next is the family simply defaults on their previous loan. This puts another house up on the 'market'. These cascade defaults pose a problem. The Bureau cannot assess the risk for this, but it most certainly is happening. However, the risk of these families moving into apartments is also there, as is the risk of them moving into houses investors bought with cash for the purpose of renting, which is effectively the same as the first case in that the old house is now in default and they are living in a house that was foreclosed on.

After this happens enough and enough banks take enough of a drubbing, some investors will step in and buy the loans that are worth something. Out of the ashes will arise a new, healthier banking system with loans generally only made to people with the means to repay them. House prices will plummet as well.

However, those in power right now are mostly bankers and are not interested in losing their shirts. So, they are attempting everything they can to not allow home prices to decrease. They are also trying to lock people into the homes they are currently paying on, which is why Obama wants to provide 'mortgage assistance'.

Most people also believe that home prices should be protected because they will lose value in dollar terms if the prices go down. Of course, what they're forgetting is that all prices will go down. Their house may go down faster, but not so fast that they are completely ruined. This is the thing I keep trying to emphasize, that everything is related. When prices go down in one sector, prices in another sector will eventually follow because the price of their production goes down.

How does this happen if the goods in one sector are not active factors in another? Well, during a recession, there's 'downward wage mobility'. This means that people often are laid off and forced to take lower-paying jobs. However, since another sector has gone down in price, they can sometimes afford to. Also, entry-level pay is lower and the pressure to raise wages is lower because the costs are lower. As costs go down, wage earners essentially get free wage increases.

Now, price collapses in the housing sector could be a major boon to the rest of the economy as people essentially cut their largest cost in half. It is precisely this thing the feds are trying to prevent so banks don't lose money. They are clearly not acting in the best interest of the rest of the economy, protecting moneyed interests at the expense of those upon whose back this economy is borne. Letting the banks fail would mean everyone pays less for everything and thus finally has more negotiable funds for growth in the rest of the industry. Propping up the banks and locking people in expensive mortgages means stopping any hope of real recovery in the long term because nobody has any margin and 'everything happens at the margin'.

Fiscal Responsibility

2009-02-18T15:57:00.000-08:00

Keynesians insist that we can spend our way out of a recession. They are half right. We can spend our way out of a recession, but only if we've saved our way out of a boom.

Arguably, were government properly managed, this is an obvious idea: when the economy appears to be overheating, raise taxes and buy assets such as gold, silver, so on. This will slow the economy and reduce the risk of over production. However, it is very important to not spend the money, as that will only recirculate it and not significantly slow the economy.

When the economy slows, the government can reduce taxes and live off its assets, either securing loans against them or selling them outright. Then, the spending the government is committed to does not have to go down. Further, this is just good fiscal responsibility, as things the government does that are big-ticket one-time costs, such as building a new road, can be done during a down time with the money that has been saved, thus reducing unemployment making things the country actually needs. This behavior is not at all inflationary, as the funding comes from previous saving.

Of course, to do this, the country would have to learn to live well within its means and would have to learn to raise taxes during flush times and lower them during lean, the exact opposite of what currently happens. The easiest way to accomplish this is to enforce that all taxes be of sales/use taxes, which will naturally track economic trends up and down. The mere act of saving during times of high economic activity will slow down the economy.

However, during a recession, prices decrease, so the government must save significantly more than the current value during the boom in order to cover the bust. Fortunately, booms generally last longer than busts.

What's Really Going On

2009-02-17T01:09:00.000-08:00

Welcome to the zany new world. The analysts at the Bureau have been pouring over the web, trying to read between the lines as we usually do. Several interesting things are afoot.

First, of course, is the giant worldwide slow motion collapse that is ongoing, but has become uninteresting. The end game is fairly apparent, but those who can affect a change seem certain to ignore reality as long as possible, quite possibly because they have a vested interest. Since you can now hit up any regular news source for plenty of (dis)information on this subject, and the Bureau has released post after post on that subject, which should provide plenty of (dis)information from the Bureau's perspective, we'll just ignore that 800 pound elephant in the room and look at what awaits in the wings.

Of course, the Bureau continues to monitor China, as the global economy is pretty much riding on China's back. China is in a strange situation where their country's wealth on a global stage is tied up in US paper. This gives them amazing leverage of the kind that a madman has in an elevator with a grenade.

If China starts to liquidate its Dollar-denominated paper, it will trigger a collapse of those assets, which will reduce the sovereign wealth of the country. The question, of course, is whether they care. The United States certainly cares, as it is that wealth that currently staves off the devaluation of the Dollar on a global stage.

If China stops buying US paper, it will no longer be able to export anything to the United States. The objective of a Communist state differs from that of a Mercantilist state such as ours has become. A Communist state putatively exists to provide the workers with a better life, something the Chinese Communist state has done more than lip service to. Therefore, the longer the Chinese can keep US Dollars flowing in as an excuse for continued employment, the better it is from a Chinese viewpoint. This is why they are buying our paper.

Further, China now finds itself more and more in a position of global influence. They have a lever with which to move the world as we know it. The United States no longer commands the control of this planet. It still boasts the largest and most effective military, but it cannot take on China in any war near the Chinese homeland. It also cannot see to the one thing the US Navy has a right to be doing, which is deterring piracy on the high seas.

What this means is that most of the world, including Russia, are now required to pay begrudging respect to Chinese diplomats and China now obtains the kind of respect they have come to expect in their culture for their ancient society. It also means China is now more civic-minded, having deployed warships to deal with piracy in a way the US hasn't.

So, to summarize: China has control of the US by having control of the majority of US paper. China is now using its navy with some effect in a global stage fighting piracy, something the first-rate navies seem unwilling or unable to effectively address.

Now, for the bad. China lacks enough jobs to be fully-employed and has too many people to remain agrarian. This poses a serious problem. However, the meteoric rise of China has not come to an end; they now are in possession of a large manufacturing base, paid for by the United States and Europe, and are capable of turning that to their gain. Thanks to industrious effort, they have taken the leg up the rest of the world offered them and proceeded to climb further in their own direction. Everything the world has asked them to make they have reverse-engineered and created clones more useful to them.

The Bureau still believes China wants nothing more than to be considered a 'peer of the world' rather than a third-world nation, and has no militaristic intentions. However, many continue to misinterpret China's anti-piracy efforts as China attempting to establish blue-water naval capacity. It is possible China may achieve true blue-water naval power, but in the day of the nuclear arsenal, it means little to any first-world military, a class China finds itself in more and more often these days. What the Bureau must stress is that China has taken every precaution to ensure that these cruises are co-operative with the rest of the world, particularly India, England and the US.

That's it for the China desk. Now, off to another part of the world, Russia. The Bureau feels that the Bear is waning. Russia's short time in the limelight was due entirely to a booming energy market. The serious bust in the energy market has hurt Russia's bottom line, and, since their governance process and society at large is simply riddled with corruption, it can stand little reduction in the inflow of cash. It is expected that Russia will turn inward for the near future and there will be less and less problems with satellite states.

The next area of concern is the EU. The Bureau is primarily concerned with major players and those players that speak English because the Bureau is quite lazy. However, noises coming out of EU are very interesting, indeed. The Euro is in trouble, as the ad hoc alliance it really represents is coming apart. Germany does not feel it should pay to bail out Italy, for instance, and Italy wishes to inflate to fix its financial problems, something that would hurt Germany. As the tension grows, the EU will be under heavier and heavier fire.

England, the only country that has really implemented most of the EU directives, is watching its economy plaster under the weight of those directives, and is beginning to awake to the suffocation. The libertarian movement in England may gain steam as a result, and it is becoming more clear that England may secede from the EU, something it certainly can do as the EU has no standing military, and the only power strong enough to do anything about it, France, is allied with England in NATO.

We're not looking at Armageddon or WWIII, we're looking at a slow, grinding dissolution of a more and more ineffectual system, as Europe deteriorates faster than the United States from the contagion released on these shores.

Well, I lied; we will discuss the current economic disaster, but only to point out that the worst of the economic problems are clearly happening elsewhere. The United States managed to sell tons of toxic paper to the rest of the world and they are now suffering the losses for having bought the paper. Literally, the damage to the rest of the world has been greater than the damage to the United States. Such is the benefit of having the reserve currency.

This brings us to the last topic on tonight's agenda, the sociological ramifications of recent events. One thing the Bureau has considered at length over time as part of the futurological model we subscribe to, is the fact that the United States got more than its fair share of charlatans. They came here in droves to find a new place to work. They have so far managed to stay ahead of most of the rest of the world in dirty tricks. They managed to sink Japan with the cost of the great real estate collapse in the 80s and now they are shafting the rest of the world right now.

However, it is becoming apparent that the backbone of the country, those professionals that produce the high income and therefore high taxes, as well as provide the services and management expertise that has made the US one of the best run countries in the world, those same professionals are talking of leaving. They were talking of leaving when Bush was elected, and some did move to Canada. However, now it is no longer ideological; it is an active concern for the future. There are a lot of potential issues to consider, but the biggest winner in this change is likely to be, of all places, New Zealand. Hopefully the target countries will savor the opportunity to receive the new refugees from the dissolution of the Great Republic, and for certain, were the Bureau to relocate, the updates would continue about as often as they have so far.

Once again, there is a heaviness in the air. One is tempted to end with the old adage 'last one out, turn out the lights', but it is likely that the power will be off anyway.

Ain't Gonna Work No How

2009-02-15T03:47:00.001-08:00

Everyone is wading in on the economy these days. Over and over we're told that the current stimulus package is too small to be of any use, which is pretty much true. However, there isn't any way it's going to work no matter how large it is. I'll address the arguments as follows:

1) "It worked for FDR, it can work now!"

In a word, no. It didn't work for FDR. Sure, GDP went up, but real production stayed about the same. In other words, in our hypothetical 100 man economy, we went from 80 men employed to 90 men employed, but we didn't see any increase in actual production, because the things built were commonly not things people wanted. In other words, the government didn't put people to work growing food; they put people to work doing make-work infrastructure projects of doubtful utility. In a world where nobody can afford to operate a car, the availability of nice, clean and majestic roads is of little utility. This means that the new 90 man workforce was trying to buy the same stuff from the other 80 men, leading to price inflation.

But, didn't the extra people working buy things in the economy and thus employ more people? Sure, they did. This prevented deflation in prices, which would have led to reduced costs and thus available funds to increase consumption and production. Let me repeat that: primarily, the stimulus stops the adjustment in prices that would 'mark to market' or price more correctly those things used in production as well as final goods, meaning that many inefficiencies still exist and the actual recovery takes much longer because there is less free cash for investment.

2) "We need the infrastructure, anyway!"

Sure we do. One of the few things that statists argue the government needs to be doing is infrastructure, roads, electricity, so on. All arguments as to whether that is better done privately aside, this is actually a mildly good argument. The problem is, of course, that 'infrastructure' is less than 30% of the 'stimulus' because, frankly, it is bad stimulus because it takes so long to get going. We can't just 'build a bridge'. First we have to employ an architect and some civil engineers to design the thing, which can take 18 months. Before that happens, we have to make all kinds of surveys and plans to know where to put the thing. We have to hire geologists and other kinds of professionals to make sure it won't sink. And then we hire a few men to build it. A modern bridge simply does not employ a lot of people in a hurry.

Some things we could do immediately. These include painting, inspection, pothole filling, trash pickup, road widening, so on. The problem is that almost all these projects require competent manpower, which we're short on. The work would have to either be completed at overtime by workers currently on payroll, which doesn't help much, or be done by new people, which is a recipe for disaster. As exhibit A, I give you the TSA workers who paw your person and property in airports.

As I have said over and over again (not necessarily on this blog) the best possible stimulus is a direct payment to every citizen in the US. Limit it to those who filed tax returns last year or simply blast it at the census roll, but whatever way you do it, do it immediately. A large cash payment would go towards spending in most cases, paying debt in most of what's left, and savings in a small percentage. A large enough check will even lead to home improvement.

3) "So, let's do that, it seems like a good idea..."

Ah, less excitement, but we're now thinking a bit. However, let's get on with the analysis of the problem. In the 30s, when the US crashed, it did so largely due to the collapse of the export business. These days we don't have an export business. Were everyone given a pile of money, most of what they bought would not originate in the US. That means that our stimulus will mostly help China et. al., not the beleaguered worker in America. The reason for this is pretty simple: they have the capacity and we have the money. That has been true for so long that changing it would require a sea-change of the exact same sort we're trying to prevent with this stimulus. So, as before, the cheapest place to get things would be elsewhere because they're hurting as bad or worse than we are and thus will underbid us.

4) "Um, ok, so we make a law that stimulus can't be spent on things made overseas..."

Now you're thinking again, but not far enough. This is protectionism in all its ugliness. Whenever a nation goes down this road, it invariably hurts its prospects. Let me explain.

There are two common types of protectionism: the embargo/tariff and the subsidy. People don't think of subsidies as protectionist, but they are. I'll deal with them separately, but first there is one consideration that is common to both. Simply put, the protectionism becomes an expected benefit. Every time you break down and help a given sector, that sector comes to expect the help, so you will be helping it again and again. Another common problem with protectionism is the specter of a trade war.

First, the embargo/tariff. Essentially, they are the same thing, as the embargo simply sets the price at whatever a smuggler wishes you to pay while a tariff increases the price by a certain fixed amount. This kind of tariff primarily hurts your own consumers and producers. If the thing being protected against is a factor of production, all the things produced from it cost more, meaning everyone in the economy now has to pay more so that a few can afford inefficient production and unwarranted wages. As I have discussed before, falling prices help everyone, but prices being held up inevitably only help a small part of the economy.

Second, the subsidy. Essentially, you take money from the economy at large and pay it to politically important industries. In some cases, such as Airbus, the number is as high as 30%. The French government prints a 30% rebate on every plane sold. This means that whatever that amount is is being added to everything else they sell. Let me explain.

In our hypothetical economy, we produce widgets and wangos. We subsidize widgets by 10% and sell wangos on the open market for whatever the market will bear. If we sell ten widgets at $10 each, we make $100, and pay $110 to the producers of widgets. Then we tax for $10 off of the sales of wangos. Suppose we sell 100 wangos at $1 each, for $100. Then, we tax the wango sales at 10% for $10, meaning wango producers get $90 or 90 cents a wango which is transferred to widgets. In order to remain wage competitive, you guessed it, the producers of wangos raise prices to $1.11 per wango because the 10% tax makes it 11 cents per wango if the price is only $1.10. That 11 cents initially appears to increase government income because the same number of wangos move initially. However, it does not last.

Now, a foreign concern is faced with the opportunity to purchase a widget from us at $10 when it costs us $11 to produce and to purchase a wango from us for $1.11 when it costs us $1.00 to produce a wango. Here the central problem arises. The foreigners will simply find another place to buy wangos, preferably somewhere they aren't taxing them. At the same time, they will buy widgets. This means the cost of the subsidy goes up at the same time that the taxes go down. However, since the expectation of the 10% subsidy still exists on widgets, the producers argue, successfully, that they can't continue to sell as many and thus employ as many people if they don't get the subsidy. Since this is now a large political lobby group, it is difficult to reduce the subsidy. At the same time, the internal production of wangos is literally drying up because, in this modern world, it has become cheaper to buy wangos abroad than purchase them locally.

So, for instance, we sell 15 widgets at $10 each and pay $165 to the widget producers, then go looking for the $15 in tax money from only 50 wango sales, which is now a 23% tax, meaning each wango now costs $1.30 on the open market, or wango producers are making less money. As you can see, this is actually a feedback loop, as the more and more the system distorts, the worse things get. This commonly happens in any redistributive attempt, as it will create a new price curve and preference function that always, always, always favors the cheaper product, all other things being equal. So, subsidized health care ends up with a high percentage of people getting their kids checked for the sniffles and thus the government having to cut funding for other, more important things, because there simply is no cost comparison and thus the majority wins.

As an aside, this is one of the more insidious problems with the VAT. Chinese companies pay no tax on their factors of production but, say, British companies do. That means that each interim production has a tax on it and is thus more expensive than its Chinese counterpart. In the end, the VAT will drive the local industry to adopt a model that does the most possible production overseas, thus driving jobs out.

So, to summarize: any useful stimulus will take too long and won't necessarily increase jobs or won't necessarily produce useful output. Any attempt to increase jobs is essentially an attempt to drive production and will end up driving production at the lowest cost competitor available, which is not the USA. Any attempt to stop that will provide ruination for other parts of industry that may be on the track to recovery.

So, what is a country to do? First, let the banks fail. I cannot stress this enough. If the banks do not fail, they will continue to be a valueless parasite with highly-paid dolts at their helms. If they are allowed to fail, we will end up with leaner, meaner banks with great hunger in their bellies who know the feeling of impending doom, which means they will manage our money a lot better.

Second, let the industries that need to fail, fail. Goodbye Chrysler. Maybe, goodbye GM. Possibly even Ford. These industries are locked in titanic struggles with their very own production systems, and the failure of just one will free up resources to keep the other two alive. It will also provide a lesson to the labor unions that fighting for wages over twice what the Japanese make is a good way to go out of business. Out of the ashes of these dead industries will come new industries that are streamlined and ready to produce economically.

Third, reduce restrictions on business, certainly those considered 'small', those employing, say, 100 people or less. These are the engines of your economic revival. The recovery does not start with GE. It starts with Joe the Plumber who decides to hire a young man who is down on his luck for a few dollars an hour to do scut work like heavy lifting. Then the young man has money to spend and Joe gets more work done. More importantly, the young man now has a career path.

Fourth, eliminate the minimum wage. I know that the morons running the monkey house insist that we need to do the opposite. However, an absolutely certain way to grapple families into public assistance is to remove their ability to produce any sort of income. A family would rather have some sort of income than no income, and the minimum wage often prevents that. Certainly, younger, less experienced workers are priced right out of the market.

Fifth, eliminate the income tax. Just do it. Both corporate and personal. Cut government spending drastically. Don't worry, the failure of the banks will get blamed for the catastrophic depression such an action would trigger. However, within a few short years, recovery will begin to happen, as the average person who is still employed will see a 20% pay raise immediately. Further, the average person would be able to take around a 17% pay cut and still stay even on income. This means that the person can make his payments and feed his kids on less money. Further, the people thrown out of government jobs (don't throw them out all at once, of course) would find jobs somewhere, as there is a demand for jobs as well as a supply. When they find a job, they add to the real economy by producing something someone actually wants. You'll see a serious increase in the actual economic base which will lead to real GDP growth.

And finally, and most importantly, support all civil liberties, the right to keep and bear arms (reduces the cost of security, meaning more money for other things, not to mention employs manufacturers of arms and ammunition), protect the right to property by enacting legislation prohibiting the doctrine that allows drug warriors to accuse property of a crime, which is in direct violation of the 4th amendment (increases people's confidence in their property), stop the drug war because it violates the right of a person to his own person, as well as the right to pursue happiness (also, will reduce crime and thus police costs) and, finally, protect financial freedom by removing restrictions on cash flow, prepaid cards, or any new payment method. This is 'free money' as opposed to 'hard money' or 'fiat money', the idea that money is something the market can generate without any regulation, and the de facto nature of money for a very long time prior to the invention of government regulated money, which has, mostly, been used to finance war. Go back to only accepting gold and silver in payment of debts due the federal government and only pay out gold and silver in payment for services rendered. This will force the government to become fiscally responsible or go broke in a few years and will protect the value of money in the hands of the average guy. It will also allow new, more efficient forms of money to arise which will reduce 'transaction costs' and thus increase the velocity of money and therefore the GDP.

I'm fond of saying that everything political or financial eventually boils back to economics and that any 'accounting irregularity', be it any redistributionist policy such as the progressive tax or welfare, or direct violations such as fraud and theft, lead to loss in the economy as a whole. Systematic accounting irregularities lead to systemic loss and we all get poorer as a cherished few get richer. I guess we have to ask ourselves if we really want to create a society where there are a few very rich and the rest of us barely making it, because that is the eventual result of every single experiment into socialism of any sort, even social democracy. The siren call is loud to the bourgeois guilt and certainly appeals to the downtrodden poor, but in the end, remember this maxim as if burned on your souls as you are out of work, starving and have lots of time on your hands: 'Communism can work until the food runs out.'

Do Not Be Concerned About Deflation

2009-02-01T02:20:00.001-08:00

I say not to be concerned about deflation for two reasons. One, deflation isn't the bear in the closet it is perceived to be. Two, deflation will not be the order of the day for long.

First, let's address deflation and what happens during deflation. First, deflation eventually drives all prices down. This is because there is less money chasing goods, meaning that the price of goods must decrease as the value of money relative to goods goes up. Easily, one can see a few positive things about deflation. One, the decrease in prices has led to an increase in spending, quixotically. What has happened is that margins, and therefore profits, have decreased, as they must, which harms the rich. The average person remains unaffected by the travails of the stock market.

There's a misconception about the demand for jobs. It is assumed that jobs are created through industrial activity and that is the whole of it, when in reality, there is a demand for jobs as much as a supply. As a recession wears on, workers must accept lower pay due to a reduced supply of jobs, but the demand is still there for jobs, allowing, at a reduced cost, many activities that were formerly marginal. As the write-offs continue and money starts flowing again, the mal-deployed funds get deployed to accomplish more useful things for less money, reducing the cost to the entire system, which reduces prices, which leads to, quixotically, prosperity, because prices can and often do fall faster than wages in a recession.

Now, on to our second point, which is that this deflation cannot long endure. Part of the argument is that the government's attempts to inflate their way out of the deflation will not entirely fail. At some point, the Obama administration's infrastructure spending will start to provide a trickle of growth, and that will be all the inflation needs. If the fed does not act decisively to stop inflation at the very first sign, and the fed has never acted decisively to stop anything at the very first sign, then the current cash overhang will explode.

This deflation was caused by a massive overhang in imaginary money in the form of derivitives, most of which have simply gone away thanks to the collapse of the mortgage industry, where most of the toxic instruments lay. The mechanics have been hashed and rehashed, but suffice it to say that massive amounts of monetized assets have been removed from the system, which has reduced the cash pool significantly, leading to mild deflation. Why mild? Because the fed did everything in its power to stop the failure of these institutions, even to the point of assuming some of these toxic instruments. At the same time, the fed and the treasury department have been stuffing cash into the economy with both hands. So far, this cash has resulted in little change in the economy because the consumer lacks the ability to assume any more debt and bankers lack the will to risk greater amounts of money at this point on weak credit.

However, in about two years, most consumers will be in better shape, assuming the whole system does not implode, and most bankers will be looking at making better profits rather than merely surviving, so the credit situation will change. At the moment, there is plenty of cash in the system to enable lending. By that time, with continued efforts at essentially zero interbank rate, coupled with ongoing infusions of cash into the banking system, the banking system will be flush with reserves, leading to an ability to lend using fractional reserve banking. As the infrastructure Obama wishes to build will really start employing people right about then, given that engineers must design and contractors must bid and beaurocrats must approve, we can expect a spark of apparent recovery right about then.

Since the government-employed people will not necessarily be adding value to the system but will be given tokens just the same, they will bid up the prices against the rest of us producing the factors that they need. Since by that time a significant amount of the economy will be under control of the government, doing politically effective things rather than economically effective things, we can expect a continued decline in real production against an increase in demand through fiat money. Add in a generous dollop of lending and the dollar will simply collapse.

The seeds of this destruction are being sowed now. The continued inflation of the currency in an effort to save the banks is the foundation for the next bubble. The bankers currently running the system could not see the inevitable collapse that was obvious to any student of economics five years ago, so they will not now see the potential for runaway inflation. The end will be short and horrific.

Why Saving Doesn't Work

2008-12-26T19:44:00.000-08:00

Everyone you have ever known has told you to save money. This begs two questions: what do they mean by 'save' and what is 'money'. Of course, everyone knows, right? Wrong.

First of all, the act of saving money is an attempt to defer the redemption of production. To explain that more clearly requires an answer to the second question.

Money in the modern sense, as in paper, fiat money, has no value. It represents a token or marker for production. In essence, a dollar represents, say, one burrito's worth of production. The benefit of a common exchange currency is a reduction in the amount of exchange tables necessary to facilitate exchange. This means that things are priced in a common value measure rather than in terms of other goods.

Now, when an employee gets paid, he/she receives compensation for production. He/she can then redeem that compensation for other peoples' production. That covers two of the aspects of money, that of common valuation and currency. The remaining aspect is the one we need to discuss, which is preservation of wealth.

Fiat money, by its very nature, has no value. Its use is by fiat, an order of the government. It is not a factor in production nor is it something that anyone wants for any use other than money. In some ways, as a currency, this is a good thing, as it is, theoretically, not subject to variations in value due to demand for whatever commodity was chosen as money. For instance, when gold is used as a currency, the variation of the value of gold leads to variations in pricing and valuation that lead to instability in the market.

Now, to discuss savings. Savings are funds of some sort set aside to be consumed at a later date. These funds are typically deployed in some sort of investment vessel. When they are not, they are deployed as fiat funds by default. The problem is, of course, that those funds are not value themselves.

If you just save money by stuffing cash in a pillow, that cash represents current production, not future production. In the future, there is no guarantee that production will remain the same. As an example, a quantity of funds equal to 1/10th the production today may be equal to 1/12th in the future. This is one reason savings don't work very well.

In our current economic environment, production in first world countries is fixing to fall. No matter what the savings, there will only be so much production to go after. The result of this is that savings will be less useful.

More immediately, there is not enough currency in the banking system, according to those who control these things, and so they will make more. This will increase the amount of currency in relationship to production, which will continue to fall for the foreseeable future. In the end, this will lead to massive inflation. Savings denoted in dollars will be reduced in value.

Quixotically, even though in the future there will be more dollars chasing less production, leading to price increases, real values will fall because total production will fall faster than prices will rise. What this means is that stocks will also be worth less.

Commodity prices will fall in real production terms as well for some time. In the future, expect to see them rise. Since commodities are part of the production process, they represent real savings. In the case of precious metals, they also represent things people want. In the future, as the dollar goes to zero value as it must, expect gold, silver and platinum to gain in value in both real terms, as compared to production, and in nominal terms, as compared to the dollar.

However, if you really want to save money for your future, invest in people. Create a business that does something that needs to be done. Get people you can trust in it. When things go bust, your company will survive. When you go to retire, you will have built real wealth that you can live off of.

No, Really, Inflation Hurts You but Helps Them

2008-07-17T00:25:00.000-07:00

I know I keep harping on inflation. Many people do. Some may think I'm just trying to sell gold. In reality, I think that most people who are 'gold bugs' are just trying to convince others of the importance of hedging their savings. Much of the arguments presented here are counter-intuitive but make sense. This is a sort of compendium of the reasons I don't like inflationary practices.

First, we'll consider the effects of inflation on banking. Initially, inflationary policies can seem great, or people would not tolerate them. True inflationary policies start with something called 'fractional reserve banking'. This is a system where banks build capital out of deposits and then loan out a part of the capital on the theory that not everyone will want their money back at once. Initially, nobody thinks this is inflationary because, technically, there's the same amount of money out there; it's just all being used instead of some being saved and some being used.

The problem is that the money that is deposited in the bank in a liquid account, an account that is expected to have funds available at any time, are funds that someone counts as liquid money. That means they compare value based on what they have in liquid funds for their daily transactions. At the same time, someone else borrows that money and spends it, meaning the money is at once available to be spent and spent. This does not inherently increase price, as the money is only spent once so the price is not directly bid up. However, the person who has the money may have bought the item at a lower price were the loan not available and the higher price not sustainable. In other words, it does increase the amount of money available to spend, which has an upward pressure on prices, particularly capital goods prices.

So, the first evil of inflation in money is obviously inflation in prices. This causes 'capital misallocation', causing sound companies to have trouble competing with those who do not have any problem carrying a high debt load. Since the work must be done by a laborer, that laborer is not doing other work. Misallocation has workers chasing rainbows, making things people may or may not want based on future income projections and what monetarists think are appropriate loans. Thus do we have an average of, what, eighteen months in business for a new gas station. It also means established mom and pop gas stations can't compete with slick new stations built on credit that have bought their stock on credit.

So, we come to another evil of inflation, that of driving the small business man to the margins. Anyone with a dream and a prospectus can get a small business loan to open a new business. What this means is that a family business, which may or may not be able to acquire funding, must compete with a business that is just starting with a good prospectus. The business that is starting may even use the mom and pop business' numbers to justify their existence.

Now, some say that the lower prices and better service are the reason the new store wins, but we're reaching another evil of inflation. Inflation drives capital investment. A loan, once executed, in an inflationary enviroment will reduce in liability for the life of the loan, meaning that as time goes on, the cost to the business from having taken out the loan is reduced. So, the business now has to consider buying a machine that, say, makes ten tortillas an hour or paying a man that makes ten tortillas an hour. The machine's cost is now fixed, meaning its cost will not go up over time, and, in a relative sense, will actually go down as it is amortized and the loan is reduced through the magic of money being worth less. However, in the same environment, the employee will require constant increases in pay, both for senority and for inflation.

Really, there was a time when a given job was paid a given amount for the duration of a man's life. Wage increases came from climbing the ladder, not senority. However, these days, any raise less than the rate of inflation is a de facto pay cut, so employees have come to expect a 3% raise per annum, which has been below the actual rate for some time, but that's another argument.

Now, the employer will seek every way he can to reduce his headcount so he can reduce the constant increasing costs. He also can purchase the device on credit, saving his capital for other uses.

So, the increase in inflation causes a reduction in employment particularly among unskilled and semi-skilled labor.

Which brings us to another evil: the rich get richer. We already discussed how the poor get poorer, but now we'll deal with how the rich get richer. If I were an investment banker, I would be able to make interesting bets using 'leverage'. For instance, during the heyday of the 'Yen carry trade', investment bankers borrowed Yen at around 1% from the Japanese interbank system. They then bought US T bills at around 4%. Say they put down a million dollars to borrow nine million, which is conservative. Their ten million dollars will add on three hundred thousand more than the interest cost on the original loan. This means their original million dollar stake is turning 30% per year. Get this: they can double down on the gains after a little over three years and start making six hundred thousand a year off of two million. Essentially, at 30% per year, you double your money every three years or so, meaning you are rapidly unable to secure loans to match your available funds, which means you have to park them somewhere, which severely distorts other investments by driving down yields.

So, the rich get richer by getting inflationary funds first. This is the point to remember, that the banks and bankers always get the money first, before the rest of us see it lose purchase price, so they get to buy with new dollars amounts of stuff that we would not be able to buy with the same money because by the time we get it, the value has been reduced.

So we come to the middle class. The lower class depends on social security for their retirement, among other things. They do not necessarily make investments. The middle class makes investments. Well, with the bankers having money to drive investment, and, indeed, so much money that they can afford to drive markets if they want to, and also they can afford to lose. This means they will chase slimmer margins and wildcat on riskier investments. The middle class cannot afford this, so their money has to chase more stable investments, which often end up losing money in the long run because there is simply too much money to invest.

So, over the long run, the middle class loses purchasing power in its savings, although its debt load is reduced. The lower class loses income and has a hard time obtaining assets. Those with access to the money gain more money.

So, what is to be done? Well, we could just wait. The kind of people who are ok with making money without producing more value tend to also get greedy. Sooner or later, they push the whole thing too far and the value of money begins to plummet in an inflationary spiral. Alternatively, their entire house of cards evaporates and the whole thing spirals into deflation, causing the rich to lose their lunch either way. The middle class, those with skills, often do well in either case because someone must do the things that keep the cogs moving in this world. However, the lower class with no mobility and few options begin to riot. Thus begins a period of civil unrest that seems to source from intractable social issues but is really driven by the most fundamental need of man, which is to be secure about his house and possessions, and to have some of the things he thinks he needs for the good life.

We are seeing this progress in France right now. The United States is a long way behind, but the trajectory is the same. Both countries have been pursuing ever more regulated and redistributionist economies, to the point where France has essentially a one month guaranteed vacation and no way of firing a new hire. This means, of course, that jobs are very scarce. So, there are a lot of young men with nothing better to do with their lives than pursue Islamic superiority. Were those young men employed, they'd have less energy to devote to burning half the city.

A similar situation obtains in the United States, where drugs are a result of urban decay due to majestic mismanagement of urban funds, the availability of wellfare, and the prohibition of drugs. Each leg is a part of what allows the situation to continue. Cities raise taxes to help pay for the corruption, graft, and mismanagement common to cities these days, which drives both businessmen and wealthy out of cities. Thus do the lower class move in, property values plummet, and cities are forced to raise taxes even higher to meet the new demand on law enforcement and so on caused by the collapse of the culture. At the same time, people cannot find work, so go on wellfare, which provides an incentive in many cases to raise a larger family and avoid marriage, as both result in effectively lower payouts. This destroys the family unit, causing an increase in crime, as the lack of an effective father figure is the number one determining factor in the potential for criminal activity in young males. Now, with nothing to do and no effective discipline, the young man turns to the fabulous world of drugs where he can make it big, since he has no other real opportunities. Since the city has mismanaged itself so badly, and is not paying its employees, particularly police, enough, the criminal element can pay off the police force in many cases, and soon it becomes very nearly impossible to stop the decline of the city.

Remember, though, that it is built on three things, mismanagement, wellfare and drug prohibition. Remove any of those three things and the problem will largely be reduced. Remove two of them and the problem pretty much goes away. If you remove the prohibition on drugs and the wellfare, the families will be forced to move to find income, as drug money dries up due to large pharmaceuticals easily out competing drug cartels and the families no longer having wellfare. This means much more vacant city area, which is potentially a good thing, as that will allow businesses to move back in at a much lower stated value, so lower tax. Also, as their tax base dries up, the city will be forced to scale back on everything, including corruption, which will cause some of the more corrupt officials to seek graft elsewhere.

Should the city become better managed, as New York did, it can more effectively deter crime. This did reduce drug trafficking. However, were drugs legal, and deterrence more effective, crime would largely go away. Ditto better management and no wellfare, as workers would once again have to move out to pursue income.

All of this has a point. Redistributionist and deficit spending policies are essentially inflationary. If someone takes a dollar from me and gives it to someone else under the guise of social wellfare, they have taken production from me and given it to someone who did not produce. Now I am forced to compete with that person for goods that have been produced. However, the actual amount of goods produced has not changed; the percentage that those who have produced goods get of the amount produced has gone down, which is an increase in price from their perspective. This is not monetary inflation; this is actually reduction in production leading to price inflation. Were that dollar not redistributed, it is likely that the other person would be force to produce something for his money, leading to greater production, however marginal, and a reduction in prices as a result. The funny thing is that it is actually additive. Every extra thing he produces lowers effective prices for everyone else as well as himself, so he gets more of the pie by producing more. Every thing he gets for free reduces the pie for everyone so his portion of the reduced pie is worth less.

That is redistribution in a nutshell. Deficit spending is another evil that is related to inflation. It is inexorably causative. What that means is that every dollar the government borrows to spend it does so on its name, not on any assets, for it has no negotiable assets. Thus are those dollars essentially created out of thin air. As a matter of fact, they are created out of thin air in literal fact more often than not, as the federal reserve bank commonly creates batches of treasury bills with which to swap banks for their (failing) loans, which the federal reserve bank now calls 'assets'. However, the treasury bills authorize the congress to spend money that was swapped to banks. So, they loan money to the government and then trade that loan to a bank for other assets which are really debt. I can't make this stuff up.

Without deficit spending, the war on drugs would not be worthwhile. The Department of Homeland Security would not be possible. The war in Iraq would be laughable. All of those 'mandates' cause deficit spending because 'we have to' and 'think of the children' or whatever. The problem is that they are enormously costly with little obvious benefit. The only concern, that it may need to be paid back, is put to rest on the idea that the money is decreasing in value so it doesn't matter. However, as above, this causes a misallocation of resources. Money is spent on boondoggles that help a minority of the voters because it can be. Were no debt spending readily available, as the founding fathers envisioned when they said money shall be of gold or silver, there would be great difficulty in deficit spending as it would require the acquisition through loans of physical gold and silver rather than the mere construction of virtual money by the minting of electrons as is common today. This would go a long ways towards curbing government spending, as it would be constrained to the tax base at the very least.

The funny thing to me is that we have way, way more 'dollars' floating about than paper currency. As a matter of fact, there is very little paper currency actually in circulation, because each paper transaction represents money that could not have had a fractional reserve transaction on it so isn't making a bank money. Further, paper money is expensive to count and handle, whereas electronic money is simplicity itself to count and handle.

Also, a government that has sufficiently tied up the ways and means of its citizens can track their movements, which is invaluable to law enforcement tasked with rooting out drug users, drug dealers, and those who may have seen a naked person under the age of 18, which are apparently the most important problems facing the country today.

Were there free money, there'd be no way to gain such control. This would mean that crime would pretty much have to involve a wronged party to be discovered, which, in my humble opinion, is a far nicer society than the one we live in. This is, to me, the greatest evil of the fiat money system, that it can be so easily tracked.

What is really going on, again

2008-07-11T16:58:00.000-07:00

The bureau has been under the radar for a bit, due to a need to complete several projects that have been overdue for a bit. Such is the nature of the computer business.

So, what is happening now? Much as predicted in these releases, the trend of inflation coupled by deflation continues. Property values continue to decline in much of the country while income remains largely stagnant and jobs go away. This is pretty much textbook stagflation, and now, even the mainstream news media has somehow cottoned onto the happenings and goings on. So, the bureau will not dwell too much on it, and will hold itself to a single 'I told you so'.

The middle eastern conflagaration continues pretty much as planned. Iraq continues to appear calmer as ethnic groups relocate in order to form enclaves and the US forces manage to convince locals to fight a common enemy, 'Al Qaeda' in Iraq, a group only loosely related to 'Al Qaeda' worldwide. Of course, prior to the misadventure in Iraq, there were no 'Al Qaeda' in Iraq, so add that to the failures of this administration.

As promised, Obama will be no better, talking up attacking Pakistan for their own good. Well, one of your analysts at the bureau spent formative years in Pakistan, as well as India. The bureau can think of nothing dumber than trying to 'fix' Pakistan. In other words, after decrying the war in Iraq, this fool wants to attack Pakistan, which has even less to lose and has nuclear weapons. No kidding.

And, as usual, lefties twitter on about civil liberties and women's rights, failing entirely to notice that one of the worst offenders against both is actually Saudi Arabia, our 'friend'. Ron Paul stood up with his teeth in his mouth in a presidential debate and pointed out that Saudi Arabia is the largest single funder of state sponsored terrorism in the world, yet remains our 'friend'. Iraq has traditionally not been engaged in state sponsored terrorism, posed no threat to the US, yet we attacked it.

The bureau has, of course, held for some time that a golden opportunity to achieve detente with Iran was squandered by the administration. The opportunity still exists. There is tons of disiniformation about Iran floating around, but I wish to counter it all with one point: President Ahmanijad or however you spell it came here. Bush did not travel to Iran. The president of Iran was so concerned with efforts to avoid war with the United States that he travelled to the United States to speak with the American people because our administration is so hopelessly pigheaded that not only does it rattle sabres, it ignores overtures to peace.

I'm not saying the guy is a saint; he's said things that any self-respecting Jew would take offense to, such as denying the holocaust, but in the grand scheme of things, he made the effort and the Jews did not. Which one is really the bigger culture? Which one really wishes peace?

And, as previously noted in the annals of the bureau, he doesn't really run the country. The ayatollahs or however you spell it do. So, there are at least three major opinion blocks, those of the president and his constiutents, those of the ayatollahs and their constituents and those of the common guy trying to stay alive and make a buck. None of them have said anything to lead the bureau to think they'd be so stupid as to attack the United States now or in the future.

Talk continues of Iranian supplies to Iraqi 'insurgents'. First, the Iraqis are not 'insurgents'. After much nuanced discussion amongst the illustrious analysts at the bureau, it has been determined they are 'partisans', people who belong to a given party in the three way civil war the US is trying to stop. The US does not constitute a legitimate authority to anyone in that country except the few patsies we have turned our backs on at the earliest convenience. Therefore, we are usurpers and the term 'insurgent' refers to a rebel against an established, legitimate government, which we are not. Neither, of course, is the Maliki government.

As for Iranian supplies, it has been shown time and again that the supplies are either not from Iran or are things that can be bought in Iran. This is not the Iranian government selling supplies to people killing Americans, it is the Iranian government selling supplies, something that happens in every country bordering Iraq. One doesn't really have to wonder why Iran is being singled out; the US appears to want war with Iran and damn the reasons, exactly as it did with Iraq. After all, even the staunchest Iraq war apologists now cling to the 'we broke it so we must fix it' argument for continuing the war, as every single argument they have advanced has been shown to be the flimsy tissue it was.

Now, for the quotidienne dire prediction: approval ratings for congress and the president continue to fall. As unemployment climbs, this will become a volatile situation. It is from this mix that social unrest comes. Expect more and more widespread rioting. Expect increased crime. Expect our idiotic and morally bankrupt government to respond by tightening the garrotte already firmly emplanted in our larynxes which will, no doubt, increase the violence of the predictable response. So far, they have done little but make it unpalatable to fly and presume to watch everything we say and do. They have also shielded their lackeys in business for shamelessly handing over our information. At some point they will do something that annoys more than the middle class. At that point, the fuse will be ignited. It is from such fuses that new countries arise; it has happened in Russia, France and Germany. The bureau is not predicting that sort of thing yet, but the possibility exists. Were it to happen, it would be interesting to see how the United States were to break up.

The Problem With Loan-based Stimulus

2008-03-07T16:17:00.000-08:00

So, we've been giving loans to everyone who will take them on the theory that it will drive capital consumption by the masses. What that means in simpler terms is that people will buy houses and cars and other expensive things. This is considered a good thing because this will allow those who make those things to keep their jobs. It is, however, a slow poison in the long run.

In the near term, things seem grand. More things get bought, inventory drops, businesses sense a trend and hire more workers. This is always the first thing in an inflationary boom. The changes, however, are due to mispricing of the cost of money, something that cannot be sustained. The eventual end of such a 'crack-up boom' is inflationary ruin. But, that is not the point of this essay. The point of this essay is the near term results of such a policy.

On the first month after having bought a car or house, the owner's disposable income is reduced by the amount of the monthly payment. That is the rub. See, prior to having bought the thing, the owner had presumably more disposable income. This is, of course, assuming the owner traded up. Now, once having bought the thing, the owner has lost income and will thus reduce his purchasing of less expensive things.

The owner bought the thing on credit from a financier. The money backing that loan came from nowhere essentially, so any interest rate above zero will provide profit to the lending institution. In other words, if the Fed requires a 1/10th of a percent reserve on the loan, assuming simple interest, in a year the institution has gotten, say, 5% of $100,000, the principle, or $5,000. Reserve on such a loan is $100. The amount they have made is 5,000% on the loan, essentially.

Now, as appalling as it is that a financier can make that kind of profit for essentially zero risk, what is far more interesting is the fact that the house is bought. No more work will come out of it, despite money being paid. In other words, the work has been sunk, so in the near term at least, there's no more work to be done and no more money to be made by anyone else. That income from the purchaser is now officially in stasis.

You'd think that most of that money, being interest, would get spent by the financier, but this is seldom the case. Financiers are in the business of making money and building financial empires, so very little of their income is normally consumed. Thus, the replacement consumption from their spending does not even begin to match the loss of spending from the original transaction.

Now, once everyone has the widget on credit, spending simply stops. Nobody has any more negotiable income so nobody can assume any more credit. Until they're done paying something off, they're eating ramen and beans. Thus does the middle of the industrial pantheon commence to evaporate.

So, what is an economy to do? Well, according to 'helicopter Ben' Bernanke of the Federal Reserve Bank, one can simply drop cash from a helicopter. Far easier to limit the cost of extent loans, hence bankruptcy laws. However, the only way to reduce the cost to society of such a monstrous blunder is to reduce the comparative size of debt, which pretty much requires massive inflation such that the loan burden shrinks at an adequate rate compared to wages to help the average person increase negotiable funds.

Of course, the result of an inflationary boom has been thoroughly discussed. Almost to death. Still, a few salient points need mentioning: the wage earner gets replaced by cheaply-financed machines, the fixed-income people, such as the aged, eat cat food, the young become discouraged from saving. Pretty much what we see now.

Here we go again

2008-01-16T20:55:00.000-08:00

I watch political and economic news with the hope of finding trends and preparing for them. I am also active on political issues and place bets (investments) on economic beliefs. I have been trying to make a buck and protect myself, in other words.

What I have noticed is a startling ignorance everywhere. This is unsurprising, given that the average person does not have the information nor the time to discover the information. I am, right now, avoiding work I ought to be doing to write this, for instance.

This ignorance is abetted by the constant barrage of information and disinformation in the various media. Some of this has been improved on the internet, if people are willing to correlate sources. However, the internet has also enabled anyone to post without doing adequate fact checking, as in this blog, where we strive to high-quality guesses. Of course, real news hacks seldom fact check anymore.

As a matter of fact, 'news' is often nothing more than whatever the AP, UPI, etc., are running. Other 'news' often is loaded with the reporter's bias, his editor's bias, and the blinders of the expected target audience. The reasons for this are myriad. Quite often, the reporter thinks he/she has a burden to improve the lot of mankind. Quite often, news media have financial pressures to respond to. Quite often the group the media is targeted to and responds to is insular. It is not necessarily clear that a given piece is a 'hit piece'.

I have made no secret about being a Ron Paul supporter. I have his yard signs. I am not quite aligned with him, I being anarcho-capitalist and he Republican paleo-conservative, but we're going the same direction right now. Nobody else except Dennis Kucinich appears to be even remotely close to where I stand, at least from the two major parties. If Ron Paul does not make it, I shall vote Libertarian as I have the last few elections, unless he runs third party or independent.

That being said, I obviously do not believe the years old newsletters are any big deal. Some of it is offensive, no doubt, but several people I've read have indicate that much of the stuff is out of context, much of the stuff is not that offensive, and all of it was not written by Ron Paul. Oh, well. I don't really care. At this point, a racist, offensive person who is capable of reigning in the federal excess is superior to a nuanced, careful politician who will only make things worse. With politicians, we have to pick and choose, looking for politicians that have what we need. That is why I support Ron Paul.

To me, however, it is interesting the amount of effort and ink being expended attacking Ron Paul's character, not on any real issues, but on some old newsletters. Then there is the insular nature of most Republican and Democrat communities, where someone says a half-truth and the megaphone of the discussion groups turns it into a lie. The most amazing untruths are being parroted as if so, such that Ron Paul is a socialist/leftist/statist that I just read at one of the emptier sites, an assertion that was left unchallenged due to the site restricting posting to members only.

I will close by simply saying that people need to determine what they wish to see in a government, then pursue that through their only means, voting. To do this, the voter must understand how a candidate actually stands on the issues. Otherwise, we, as a nation, risk being led by painted faces right down the garden path to servitude.

Economic Silliness

2008-01-14T09:57:00.000-08:00

I have for some time now been a proponent of commodity-based money. Specifically, I am for 'free money', which means unregulated money, spontaneously issued, where the market decides which is acceptable and which is not. Under such a system, commodity-based money becomes the likely solution so that notes issued from any source are exchangeable so long as the source is trusted.

Now, the end of this is that we have, say, a gold-based currency circulating. Oddly enough, the primary argument I receive about this idea is that there is 'not enough gold in the world to cover the US economy'. This argument has been made by people otherwise quite intelligent, so seems to me to be based on a massive misunderstanding of money.

It is based on the idea that gold is currently priced correctly, but the relationship of money to gold is such that there is only enough gold in the world for a tiny percentage of the dollars out there at the current rate. This is the inherent value fallacy on first blush.

The inherent value fallacy holds that money has an inherent value. This is the primary fallacy on which economic redistribution plans are based. The idea is that a dollar is worth some irreducible amount and thus transferring a dollar from one person to another forcibly transfers that worth from one person to another. In a reasonably healthy economy, as any bank robber will tell you, this works. The reason is that the damage done by the transfer is small enough to not damage the system as a whole.

However, on a larger scale, we find that money is worth nothing more or nothing less than what people will give for it, just like every other commodity. Fiat money is confidence-based; it is worth what the receiver is confident he can get for it. Its primary value is that it is uniform, meaning each dollar is exactly the same as the next, so denominating in dollars makes it easy to make comparisons between choices.

But, if we forcibly transfer funds from one group of people to another, as our current economic system does all over the place, we devalue money itself. Those who consume do not produce as much as they consume while those who produce are not able to consume as much as they produce, leading to a disincentive to produce, as well as competition from non-productive factors for production. It is precisely this competition that leads to price inflation, which must be remedied with monetary inflation.

Now, gold is something that does have inherent value. It is a valued commodity, not a piece of paper, or worse, neatly arrange electrons. This means that gold does not lend itself to rampant monetary inflation. What this means is that fiat money stock has increased at a far raster rate than gold stock and hence the disparity between what money exists and how much gold exists.

Of course, there is really no problem; in order for gold to provide adequate backing for the dollar, gold merely has to increase in price relative to the dollar. Bad for the dollar, but good for holders of gold...

The next argument, smugly delivered, is that this means that the average citizen cannot afford an ounce of gold, if that ounce is now worth $1.2 million or whatever. This much is pretty obviously true, but the answer requires examining the common uses of money, which include currency, settlement and wealth preservation.

Currency is the most common use of money. This is trade. I receive dollars for my work and spend them for things I need. For currency, just about any script will do; it needn't be all that reliable of a money, as it only has to be redeemable as long as it takes for the retailer to redeem it. So, any bank should be able to emit notes based on gold that are redeemable when you pile enough of them together for some amount of gold. Otherwise, you simply use them to spend and acquire assets as you would dollars. In other words, for the common man, there really isn't any difference between a gold-based economy and a fiat-based economy when money is viewed as currency.

Settlement has been a common use of gold. At the end of the day, when international banks need to settle accounts, it is often easier for them to use a common value to settle with, and gold provides that. Essentially, each bank tallies how much it has been paid from another bank and how much it has paid the other bank, finds the difference and either bills the other bank that much in gold or pays it in gold. In a fractional reserve system, the actual use of gold for this is tiny, hence the low price of gold relative to the dollar. In a fully-backed world, the gold required would be much higher. This also does not affect the average man.

Wealth preservation, however, does, and here is where fiat money is truly pernicious. For starters, fiat money always declines in value over the long term because monied interests prefer it that way and the lumpen is in debt up to its eyebrows anyway, something inflation helps with, as each reduction in the value of the money causes a reduction in the amount they actually owe.

However, keeping money in those same dollars is not a good idea for precisely that reason, so people are driven to acquire assets and leverage themselves (borrow money) to buy more on the theory that money is cheap and easy to repay later. This means there is little money left for emergencies. There is also little money for opportunities. All of which means that insurance gets a larger share of the economy.

Another problem is that banks tend to make money no matter what the value of money in a fiat system because they can borrow at one rate and lend at another. This allows them to pocket the difference, which is making money. So, if they borrow money at 3% and lend it at 5%, even though money may lose half its value during the period of the loan, they still make the 2% in money that is now worth half what it was. However, they made that money not by working, producing value, or investing money; they made it by borrowing money that sourced from the fed, so was not backed by value, and loaning that, something nobody but bankers can do.

What this tends to do is make it hard for anyone but bankers to make money in investing. Bankers can borrow money at an artificially low rate, allowing them to invest for artificially low returns, often lower than real inflation, because they make money on the difference. The rest of us have to invest our real money, which means we lose money over the long haul, rather than make it. This is true of the stock and bond markets.

It is not, however, true of commodities, and this is where we see their scheme coming apart. The only bet the average investor can take short of being a sole proprietor or major partner in a business that does not allow outside investment, is in gold or silver, which are not investments in the normal sense in that they do not make money.

However, as fiat money decreases in price, its utility as a store of value will also decrease, driving more and more people to transfer fiat store into gold, silver, palladium and platinum, the traditional 'money metals'. This drives the value of the money metals up as it drives the value of the dollar down. However, the value of the dollar tends to decrease more slowly than the value of the money metals increases, causing those holding money metals to see the value they hold increase in purchasing power, meaning that during an inflationary crisis, money metals do qualify as an investment.

Now, were gold to become the currency, the increase in value of an ounce of gold purchased cheaply now would be truly staggering...

Inflation A' Comin'

2008-01-10T12:52:00.000-08:00

Right now, we are witnessing asset deflation coupled with price inflation. In other words, the things we own are worth ever less while the things we must buy keep getting more expensive. If left alone, it would reach a new equilibrium eventually. However, it will not be left alone.

First, banks are heavily leveraged right now. This means they have borrowed money to make money. As asset prices depreciate, their portfolios depreciate as well. Values become 'marked to market', meaning sold and a price established, rather then held with an estimated value. When this happens, the average sale price becomes the value of the asset.

Now, with the subprime collapse and the collateral reduction in high-end properties due to uncertainty and unemployment, banks are seeing massive chunks of their portfolios drop in price, which puts them in a net loss position. Further, they are required to maintain minimal reserves against just this sort of situation, and those reserve requirements are a percentage of their total outstanding debt, modified by assets. As the asset value decreases, the asset to debt ratio grows and the reserve requirements increase, meaning banks cannot loan any more money, and, indeed, must borrow to cover what they've loaned already.

When the banks won't lend to each other and there's no other source of income, such as foreign investors, money becomes hard to get. This drives down the cost of capital investments and assets, as purchasers dry up due to lack of funds. Of course, this becomes an overall drag on the economy as companies begin to run out of orders for capital goods as their assets depreciate as well.

In order to prevent a death spiral, the federal reserve in concert with the treasury and a compliant congress will inflate the economy by any means necessary. Expect federal mortgage aid. Expect bailouts, both public and private. Expect a tax rebate coupled with more credits aimed at low-income households. Expect bold new government programs. Expect none of this to really work.

However, the other side, where things are getting more expensive to buy, things we need every day and are not optional, expect that trend to continue unabated. The very measures the administration will use to fight deflation will by their very nature drive inflation. Since the asset depreciation is a form of deflation, it will be fought with more money in the system in order to enable higher prices.

This will happen not because it is necessarily beneficial, but because the ones who control whether it will happen are the ones who will feel the most pain if it happens. In other words, the ones in charge of the money supply are bankers, and they are the ones who are being hurt the worst.

Don't get me wrong; inflation will make my life much easier. I have a fixed apr mortgage. If the dollar falls, my house gets relatively cheaper. Many people are in this same position, many of them with houses they can no longer afford. This will be the populist justification, as wages go up due to inflation. For a time, this will be considered a good thing.

The problem is, of course, that any inflation may end in runaway inflation, which results in the destruction of the economy, and, often, violence. The collapse of the Weimar Republic and the subsequent rise of Hitler was partly a result of the Weimar hyperinflation. The reign of terror in France was due partly to a destroyed economy due to mismanagement and inflation. Mismanagement and inflation brought down the Roman empire.

This is, in the opinion of the Bureau, the strongest argument for free money. Not hard money, free money. Money needs to be created outside the government and not be in the control of the government. The government should pick either gold, silver or platinum and use it for all their accounts. This means all receipts and all payments are to be in the metal of the land. Actually, I prefer a specific alloy of the three to reduce the effects of volatility. The government should not coin money; the money should be value in weight and the government taxes and so on should be in weight of metal, not some abstract amount.

Wells Fargo Sux

2008-01-09T10:25:00.000-08:00

They have one job as far as I am concerned: turn my paycheck into cash. However, despite that it is a company check drawn on a corporate account, they insist on calling a company officer before cashing, something my company has told them not to do because it inconveniences everybody. This is part of the bank's ongoing anti-fraud stuff wherein they do their level best to not honor any of their agreements. It's not bad enough that they charge $5 for the privilege of getting my money, they also now take an hour to cash a check. When I informed them this was basically 'normal bank bullshit', we agreed I need not darken their door because the 'will not service me', which was odd, because as far as I could tell, they had not serviced me until my boss called and read them the riot act, reminding them that it was a corporate account with a large balance that could be moved elsewhere.

I hate banks in general. They get a significant amount of income from fees these days, hence a fee for every little thing. The rest of their income comes from making sure they never have to give out cash. Chase has reduced the amount you can take out of an ATM, for instance. I have a prepaid debit card now. Not only can I take out as much as I like when I like, although ATMs are limited to a generous $500, I pay no fees above the fee for having the card and loading the card, which are both cheaper than my Wells Fargo bank account had been, but my card works everywhere with no fraud restrictions. I cannot count the times Wells Fargo shut off my card for some fraud suspect or another, such as trying to buy fuel out of state...

Feh. If banking regulation means anything, which it doesn't, banks ought to be required to pay the full amount, in cash, on any presented check drawn on their bank. Instead, they increasingly demand that you have an account for everything, which kind of defeats the purpose of having an account, because if I cannot write a check that is immediately cashable for an amount in my account, then why have an account? Why not simply carry the cash? Morons.

But to me, it is interesting that the 'mighty' Wells Fargo is #2 in the subprime lending market and is now getting awfully tight with the cash...

What Is Really Going On

2008-01-08T09:36:00.000-08:00

Every so often, the Skip Bureau publishes its best guess as to the actual happenings in the world, not that reported by media, your brother-in-law, or other reliable sources.

So, Bhutto was assassinated in Pakistan. Curiously, legitimate opponents of Musharraf have been dropping like flies, to legal problems, or, er, like flies. However, Musharraf's hold on Pakistan remains tenuous. It has been apparent to the Bureau since the beginning of the misadventure in Afghanistan and the global war on ragheads that Musharraf would not long endure. He has always been nothing more than the puppet of the Bush administration, and is unpopular amongst some very hard men. It appears on first blush and with nothing even remotely approaching evidence that some intelligence agency or agencies have seen fit to help him remain in power.

Now, given the previous paragraph, one would normally point at the CIA or Pakistani Intelligence, but there are a lot of potential candidates. India, for instance, is situated to make inroads into Pakistan, having much more money available and an improving governing process. China has an interest and China's intelligence capability in wet work is pretty much unknown at this point, but they have steadily been improving their assessment capability, and one should not be surprised at effective field work from them. Of course, the CIA is a suspect, as they treat Pakistan like a back yard, having operated there for decades now, due to Afghanistan having been a front line in the cold war.

On the economic front, the dollar continues to fall, but all other currencies fall as well. China is forcing its currency down as a 'race to the bottom' with the dollar. The Euro is falling more slowly than the dollar. Ditto the Pound, Loony, so on. However, the global resource boom continues, driven, mostly, by falling currencies. The risk is that the falling currencies will misprice commodities and cause an eventual over-production in commodities, pretty much as inflation has caused an over-production in everything else so far. However, for those of you out there trying to avoid losing your shirts, the key thing to remember is that all paper money is inflating and thus losing value. None of them are safe.

On the US political front, it is appearing more and more that Obama may win the presidency. Ron Paul has made major inroads and still remains viable for the nomination, and the Bureau makes not secret about supporting him. However, many of the voters that Ron Paul needs are also possible Obama supporters, and Iowa has shown Obama can win them.

On the plus side, it appears Giuliani may be done for. This is a positive outcome of the Paul campaign, in that Paul and Giuliani compete for substantially the same Republican vote, that of the socially liberal fiscal conservative Republican. These have almost entirely gone to Ron Paul due to his superior record in civil liberties. Giuliani has to count on 'blue state Republicans', which are getting pretty thin on the ground anyway.

As for Iraq, it has become clear that genocide has reduced violence. After all, there's nobody left to kill in much of the country...

There are some improvements attributable to better management, but they all end up being in the vein of working with the locals, which often means surrendering key goals the administration had prior to the repurposing of the war. What this means is that many of the left's ideals, such as feminism, are going to be ignored in the final settlement in Iraq, pretty much as the Iraqis want it.

Iran continues to puzzle the stunted analysts in DC. What every person who analyzes anything in the Middle East must understand is very few arab countries have anything remotely approaching a unified government. In most cases, there is a secular government, which in Iran is Ahmanijad or however you spell it, and then there is a much more powerful group, which in Iran comprises the Ayatollahs or however you spell it. Many countries are essentially in multi-way civil wars.

So, Ahmanijad is the president of Iran, which is a bully pulpit, but does not reflect the feelings of the people or even the position of the religious leaders. The truth is that Iran as a country holds no real ill will against the United States. However, they are, understandably, nervous, given what has happened in Iraq.

No matter how much one may argue the US had ever reason to attack Iraq, nobody outside of the US concurs. Basically, the US has been seen as an aggressor, attacking a country for little more than failure to abide by a technicality in an agreement with the UN. It was pretty apparent to anyone interested in intelligence that Iraq never posed any real threat to the US, being one of the better run countries in the middle east.

In the same vein, Iran poses no serious threat to the US or its interests. However, it is refusing to 'play nice', which offends sensibilities in the neocon camp. Iran does, however, pose a threat to the US if mishandled. Iran has a virtual lock on the Strait of Hormuz, making potential losses high without an overland trek to get to Iran. The US military is, of course, not in any shape to fight Iran anyway.

The US military is in bad shape. Aircraft are running high hours. Ships are old. Morale is low due to extended deployments. As long as we continue to pretend our soldiers are not permanently deployed professional soldiers, we will have morale problems. As long as we put off spending to fund necessary repairs, we will have equipment failure, which, by the way, will exacerbate morale problems.

Fortunately, a corner seems to have been turned, with the National Intelligence Estimate showing some signs of a revolt against the once solid Bush regime. The drubbing the Republicans are receiving by the Democrats in terms of primary turnout shows that this neocon adventure may be nearly over. The Bureau does not, however, expect any improvement with a Democratic administration, harkening back to the days of Clinton and his progression of stupid interventions, one of which, Somalia, is a textbook example of how to ruin a country.

The Ron Paul Geek Factor

2007-12-01T19:02:00.000-08:00

Ron Paul. To most people, he's quite the enigma. Many in traditional media circles are having trouble understanding both his appeal and his platform. A good name for this is Fifth Avenue disease.

Our culture is built on taking reality, dusting it off, slapping a coat of paint on it and pretending it's something else. Geek culture is built on long arguments about what reality actually is. If you don't believe me, go spend some time on Kuro5hin or Slashdot. As a result, most geeks are very suspicious of most of what they read and hear.

The traditional media has been uninterested in geekery for some time, preferring to continue as if the jocks ruled the world. However, the geeks have built a parallel community for themselves, largely assuming, somewhat correctly, that the rest of society was uninterested in the things geeks were interested in. The internet has grown, in a large part, due to geek socializing.

Well, it turns out there are a lot of geeks, and many of those have been relieved to discover others like them. As a matter of fact, there seem to be more geeks than non-geeks.

So, a social movement has been growing under the radar and out of the loop. The social movement has not so much been ignored as the previous order simply cannot fathom its existence at all. The idea that those who are to be led by the 'elite' might take offense to being treated so is unfathomable. The idea that people would prefer being left alone to dealing with tons of social programs is, to them, inexplicable.

What I'm trying to say is that the average person of the old social order simply cannot comprehend the geek culture. The average geek, of course, cannot comprehend the old society, and views it as 'evil', a word whose meaning has changed in geek culture to mean anything that causes annoyance, trouble or more work than it is worth. There is a certain mean-spiritedness, of course, because none of these geeks were popular in school.

Ron Paul is quite a geek. He is not a computer geek. He's a medical geek. He's an economics geek. In the classical sense, a geek is anyone who obsesses to the point of social ostracisation. Ron Paul pretty much has demonstrated he really doesn't care what anyone thinks of him. He's also demonstrated the other mark of geekery: a single-minded dedication to the right thing. Sure, geeks may not agree what the right thing is, but most geeks are definitely dedicated to what they think the right thing is.

Ron Paul's 'right thing' is a well-managed government, a government that considers the cost before it does a thing, and a government that takes its citizens seriously. Being taken seriously is a new thing to geeks, despite their traditional position of being considered more intelligent than most. Being taken seriously is a new thing for Ron Paul.

Actually, there is plenty of surprise on both sides. I don't think there's been a serious effort to reduce Paul's performance, although there's been plenty of dirty tricks from other candidates and much of the establishment, but nothing more than they'd give, say, a strong Clinton bid.

Sure, those with a vested interest in Washington as usual are fighting, but most of society simply does not understand what Dr. Paul stands for, nor can they. As Mayer said, 'we're just waiting for the world to change'. The insurgence of Dr. Paul's campaign is due, simply, to the number of people who had all but checked out, been rebuffed, annoyed, angry, ostracised, whatever, who have been waiting for the world to change. Well, the chance is here and they are changing the world.

Fundamental Factors

2007-10-26T11:48:00.000-07:00

Economists refer to value used in production as a factor of production. In any modern economy, factors are generally too complex, both in terms of numbers and in terms of interrelationship, for conventional analysis. There are, however, root factors, that will, in my humble opinion, yield to analysis.

By root factors, I mean things that are fundamental to the survival of labor. Essentially, without labor nothing gets done because the labor itself demands things and must work to acquire them. Hence, the things the labor wants are the things it trades its labor for. Most of the things labor trades for in a modern economy are not fundamental to survival. Generally recognized survival requirements include food, water and shelter.

Water is largely a government thing these days, although drinking water is increasingly produced by private entities because (no surprise) they produce a so much higher quality product that people are willing to pay a premium over the essentially free the government charges for water.

Shelter refers, of course, to housing. A significant sign of decay in an economy is a reduction in the availability of high quality afordable housing. We don't have that problem right now, thanks to the housing market implosion.

Food, however, is a problem. The old saying goes 'Communism can work until the food runs out.' Food is one of the most basic of basic factors. It is also one of the most commonly ignored ones. Margins are razor thin and prices have been historically low as a percentage of the general economy for so long people simply don't worry about it.

Now, food prices are rising. Some of this is due to monstrously stupid responses the government put in place after the food production bubble that coincided with the general production bubble the US suffered that ultimately led to the great depression. These subsidies, taxes and price controls have ensured a fairly inefficient food market ever since.

At the heart of most of this meddling is price fixing. Price fixing is, of course, any attempt to make a given thing worth something other than what labor wants to pay for it. In this case, it was an attempt to make food worth more than what anyone would give for it on the theory that over production was not the farmer's fault. This had the effect of increasing the margin the farmers received, thus increasing their share of production. As long as production continued to rise, this situation didn't annoy the rest of the economy.

With the advent of far more scientific production, ie, agribusiness, the farmer as a tradition began to lose out. Agribusiness began using marginal land effectively, thus bypassing local laws that would have constricted it. As more and more farmers became insolvent, produciton declined. Now, as demand is increasing, production has met it on the way down.

Fortunately for us, agribusiness still has the ability to respond and increase production. In a more directed society, this is often not so.

For instance, in a communist society, where the farm producers receive exactly the same compensation as any other producer, the continuous reduction in quality and quantity of goods reduces the marginal benefit to farmers from floating their excess goods into the market, causing them to both reduce production and reduce the quality of the goods they release into the market. In the case of a free market, however, since food is a factor that has a minimum floor, production must increase to meet need, and price will increase in the short term to cover the increased need, which will lead to producers increasing production, leading to a new equilibrium.