What's Really Going On

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

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

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

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

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

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

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.