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over the taxes and the continuing spending bills, the tea party threw a hissy fit and newly chastised Republicans rescinded the compromise.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.
Tuesday, January 4, 2011
Monday, November 1, 2010
What Is Really Going On
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...
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...
Friday, October 29, 2010
Yikes!
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.
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.
Sunday, October 10, 2010
Aliens Among Us
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...
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...
Saturday, September 25, 2010
Another Update
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...
Monday, May 17, 2010
The Inherent Value of Money Fallacy
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.
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.
Friday, December 11, 2009
Pernicious Debt
People argue that we need to get the money flowing again, meaning we need to get the banks to lend. There are several problems with this.
First is, of course, a problem of income. Any purchase of any capital good made on credit is a final transaction where manufacturing is concerned. This is why so many car companies created financial arms: when a car is bought on credit, that's it; there's no more car bought until the note is retired somehow.
This means there's no purchasing with the money set aside to pay the note. So, if someone buys a car on credit, with payments of $300 per month plus full coverage insurance payments of $100 per month, that makes $400 a month they cannot spend on anything else.
When the debt load gets high enough, most people are spending most of their money servicing debt, and are unable to make new capital purchases. They still buy food and they still buy minor things, although the maximum price they can afford is lower, so either the quantity or the quality of the non-capital goods they buy suffers.
This puts capital goods producers out of work, ie, auto manufacturer workers. These workers now have an income of zero and are no longer able to service their debts let alone contribute to employment of others.
So, sooner or later, other sectors suffer. Makers of toys do badly. Makers of gadgets do badly. Netbook manufacturers do well at the expense of notebook and pc manufacturers. In other words, people spend less and less, causing there to be less and less to spend.
If, for instance, a person manages to get a job for less money, or is trying to live on one income when they used to live on two, they can reduce the price of the things they buy by, ie, buying generic or cooking their own meals. However, their debt payments remain fixed. As previously noted in the annals of the bureau, all activity is at the margin.
Now, if they pay, say, $1000 in debt and used to make, say, $2000 per month, they had $1000 to spend on their non-debt needs, such as food and toys. If their pay drops to $1500, a 25% decrease, their net income is now just $500. A 25% decrease in their income results in a 50% decrease in their negotiable income, leading to severe hardship. A 50% decrease in their income will lead to a 100% increase in their negotiable income, leading to bankruptcy, as their only chance of survival is to reduce their debt payments.
Now, to arc back onto the topic of this point, if we drive greater debt to the consumer, the end result will be a greater percentage of their income servicing debt and therefore less of their income being spent on non-debt items. Think about that for a second. People will buy fewer combs, fewer toys, less expensive food, fewer of anything that does not require debt to acquire. It is perhaps true that greater availability of credit will save the auto industry in the US, although it is just as likely that the available money will go to Japan or Korea or Germany. However, it is almost certain that it will reduce negotiable income.
Fortunately, most people sense this and are not interested in acquiring more debt. Now is a time of paying off debt, meaning increasing, over time, negotiable income. This is hard on the banks, as their revenue is related to the amount of debt people are willing to assume, and they have so much bad debt they are trying to acquire good debt so they can achieve positive cash flow.
So, creating new loans is good for banks. It also may help house builders and the auto industry, as alluded to above. It also allows venture capitalists to start business that may or may not be a waste of money.
However, sticking to the banks, banks that are making new loans at this point are making a high percentage of bad loans. This is because most of the people willing to assume more debt right now are not necessarily effective at managing their own money. Also, there is no reason to believe that the system has recovered enough to make that person's job secure enough to assume a high load of debt no matter how collateralized.
Since the problem with the economy is an overabundance of bad debt, with leverage ratios up around 30 to 1 before the collapse, making more loans is not really a good idea. However, banks have no other way to generate income, so must do so or fail.
A loan that defaults is an immediate loss to a bank. In other words, when someone borrows, say, $100,000 to buy a house, and makes payments of, say, $800 a month on his mortgage, the bank gets to apply a percentage of that, very low initially, to the principle and applies the rest to its bottom line, probably around $700 a month. However, if the loan defaults, the bank is now out the remainder of the principle, say, $70,000. I chose that number to simplify math, as it is clear that it is 100 times the income from the loan per month. So, on a cash flow basis, having a loan default is on the order of a hundred times greater than the income from the loss. This means that around 100 other loans that you have must pay on time in order for you to not lose money on a cash flow basis. Of course, on a net accounting basis, it isn't as bad, as that loan comes out of your reserve. However, if, as was common in banking, the reserve was not adequate to the defaults, the bank gets in trouble and the only way it has to increase its reserve is to write more loans to get more income.
In a proper deflationary depression, banks simply fail. This means they run out of reserve and then auction off their assets. The government covers depositors up to $100,000. Many companies get in trouble covering their profligate spending with bonds, as the bond market would simply crater with the auctions of bank assets. Lots of very rich people would be rendered destitute.
However, this would be fair. These rich people desperately need to get some sort of comeuppance. They haven't learned their lesson. Worse, they claim to be able to manage risk, yet failed significantly to do so. Since the only reason a bank is supposed to be able to charge interest is related to the risk of making the loan in the first place, if they will not shoulder the consequences of taking the risk, they should not receive the interest.
It is like the insurance companies lobbying the feds to pay for 9/11. Insurance companies accept premiums for assuming risk. They're supposed to manage the risk and require premiums to cover the risk. If they then throw the risk onto the government, they no longer have a valid claim to accept premiums.
So, the problem was caused by banks making mistakes on a grand scale, cheered on by government that did not understand economics (there's a surprise) and this lead to a debt crash, which, in broad strokes, is simply that people now have so much debt that the maintenance payments eat up all their disposable income, leading to a reduction in purchasing, leading to a reduction in manufacturing, leading to a reduction in payment, which causes a vicious cycle that eventually results in a 'blow off' of bad debt, clearing the way for people to start spending again.
However, not only has the government not learned from the mistakes, but it is actively helping the banks to not learn from their mistakes. The leverage ratio is not as bad, but, given that much of the reserve these days is debt, banks are not in a positive position yet. That aside, they are starting to do the same sorts of risky things that led to this problem in the first place, emboldened by the fact that the government stands ready to make good any of their losses. This is called a 'moral hazard' by economists, although one analyst insists that a better term is 'ethical hazard', as it really isn't about morality, but about the risk generated by a misallocation of resources.
Since the government has made good the losses of banks that are 'too big to fail', those banks have a golden ticket to do whatever fool thing they dream up while their stock valuations soar. Since any losses will be made good, they can go ahead and do the whole gamut of foolish loans to groups with low repayment outlooks. Doing this increases their supposed income, so their stock looks ever more attractive, leading to increased stock valuation, leading to executives making more money.
However, none of this is good for the greater economy, as it locks lots of people into untenable debt situations, creates more economic activity with little hope of producing useful returns and in general misprices much of what happens.
For instance, if a venture capital firm can get cheap money, they can go out and take a risk on some startup that may or may not ever make money. There will be a lot of economic activity in that particular company before its inevitable failure, putting lots of people on the streets.
However, the bigger problem is that something has been produced that nobody wants enough to pay its real cost. This means that things we actually want cost more because there is less of it and the people who made the thing we don't want are competing for what we want with us. Yes, inflation in price of most of the things we want is the result, leading to lower effective income for everyone.
I've said it before and I'll keep hollering it until I can wail no more. Any activity, whatsoever, that produces anything people do not want, will be inherently inflationary in prices. The only way to have such activity, as a matter of fact, is to have inflation in the money supply so that people are paying for the things nobody wants enough to pay for out of money that nobody really ever had. Of course, the bankers & co. take their cut and live high on the hog, as it were, while the rest of us in the trenches repeatedly see our purchase power decrease.
Now, were the banks allowed to fail, we'd see everyone's debt load reduced, leading to greater available income, leading to greater actual spending, leading to greater demand, leading to greater employment, leading to greater available income, leading to greater spending, and so on. Also, a reduction in impediments to employment would really help, such as the destruction of the IRS, Medicare, Medicaid and anything else that requires documentation and paperwork to employ someone. Also, the minimum wage has to go. Basically, if an employer can employ someone for a low amount to start, the employer can grow more easily, leading to greater employment, which leads to greater spending, which leads to greater employment and so on.
This is what we need to foster, not the negative spiral of debt for the benefit of big bankers and their big lifestyles, but the spiral of increased purchase power for the benefit of the average Joe and Jill and their three kids. In order to accomplish this, we have to reduce regulation and impediments to employment and we have to establish a stable monetary policy, such as my favorite, free money (not free as in anyone can have some, but free as in you can use anything you like to trade or pay for anything you like).
First is, of course, a problem of income. Any purchase of any capital good made on credit is a final transaction where manufacturing is concerned. This is why so many car companies created financial arms: when a car is bought on credit, that's it; there's no more car bought until the note is retired somehow.
This means there's no purchasing with the money set aside to pay the note. So, if someone buys a car on credit, with payments of $300 per month plus full coverage insurance payments of $100 per month, that makes $400 a month they cannot spend on anything else.
When the debt load gets high enough, most people are spending most of their money servicing debt, and are unable to make new capital purchases. They still buy food and they still buy minor things, although the maximum price they can afford is lower, so either the quantity or the quality of the non-capital goods they buy suffers.
This puts capital goods producers out of work, ie, auto manufacturer workers. These workers now have an income of zero and are no longer able to service their debts let alone contribute to employment of others.
So, sooner or later, other sectors suffer. Makers of toys do badly. Makers of gadgets do badly. Netbook manufacturers do well at the expense of notebook and pc manufacturers. In other words, people spend less and less, causing there to be less and less to spend.
If, for instance, a person manages to get a job for less money, or is trying to live on one income when they used to live on two, they can reduce the price of the things they buy by, ie, buying generic or cooking their own meals. However, their debt payments remain fixed. As previously noted in the annals of the bureau, all activity is at the margin.
Now, if they pay, say, $1000 in debt and used to make, say, $2000 per month, they had $1000 to spend on their non-debt needs, such as food and toys. If their pay drops to $1500, a 25% decrease, their net income is now just $500. A 25% decrease in their income results in a 50% decrease in their negotiable income, leading to severe hardship. A 50% decrease in their income will lead to a 100% increase in their negotiable income, leading to bankruptcy, as their only chance of survival is to reduce their debt payments.
Now, to arc back onto the topic of this point, if we drive greater debt to the consumer, the end result will be a greater percentage of their income servicing debt and therefore less of their income being spent on non-debt items. Think about that for a second. People will buy fewer combs, fewer toys, less expensive food, fewer of anything that does not require debt to acquire. It is perhaps true that greater availability of credit will save the auto industry in the US, although it is just as likely that the available money will go to Japan or Korea or Germany. However, it is almost certain that it will reduce negotiable income.
Fortunately, most people sense this and are not interested in acquiring more debt. Now is a time of paying off debt, meaning increasing, over time, negotiable income. This is hard on the banks, as their revenue is related to the amount of debt people are willing to assume, and they have so much bad debt they are trying to acquire good debt so they can achieve positive cash flow.
So, creating new loans is good for banks. It also may help house builders and the auto industry, as alluded to above. It also allows venture capitalists to start business that may or may not be a waste of money.
However, sticking to the banks, banks that are making new loans at this point are making a high percentage of bad loans. This is because most of the people willing to assume more debt right now are not necessarily effective at managing their own money. Also, there is no reason to believe that the system has recovered enough to make that person's job secure enough to assume a high load of debt no matter how collateralized.
Since the problem with the economy is an overabundance of bad debt, with leverage ratios up around 30 to 1 before the collapse, making more loans is not really a good idea. However, banks have no other way to generate income, so must do so or fail.
A loan that defaults is an immediate loss to a bank. In other words, when someone borrows, say, $100,000 to buy a house, and makes payments of, say, $800 a month on his mortgage, the bank gets to apply a percentage of that, very low initially, to the principle and applies the rest to its bottom line, probably around $700 a month. However, if the loan defaults, the bank is now out the remainder of the principle, say, $70,000. I chose that number to simplify math, as it is clear that it is 100 times the income from the loan per month. So, on a cash flow basis, having a loan default is on the order of a hundred times greater than the income from the loss. This means that around 100 other loans that you have must pay on time in order for you to not lose money on a cash flow basis. Of course, on a net accounting basis, it isn't as bad, as that loan comes out of your reserve. However, if, as was common in banking, the reserve was not adequate to the defaults, the bank gets in trouble and the only way it has to increase its reserve is to write more loans to get more income.
In a proper deflationary depression, banks simply fail. This means they run out of reserve and then auction off their assets. The government covers depositors up to $100,000. Many companies get in trouble covering their profligate spending with bonds, as the bond market would simply crater with the auctions of bank assets. Lots of very rich people would be rendered destitute.
However, this would be fair. These rich people desperately need to get some sort of comeuppance. They haven't learned their lesson. Worse, they claim to be able to manage risk, yet failed significantly to do so. Since the only reason a bank is supposed to be able to charge interest is related to the risk of making the loan in the first place, if they will not shoulder the consequences of taking the risk, they should not receive the interest.
It is like the insurance companies lobbying the feds to pay for 9/11. Insurance companies accept premiums for assuming risk. They're supposed to manage the risk and require premiums to cover the risk. If they then throw the risk onto the government, they no longer have a valid claim to accept premiums.
So, the problem was caused by banks making mistakes on a grand scale, cheered on by government that did not understand economics (there's a surprise) and this lead to a debt crash, which, in broad strokes, is simply that people now have so much debt that the maintenance payments eat up all their disposable income, leading to a reduction in purchasing, leading to a reduction in manufacturing, leading to a reduction in payment, which causes a vicious cycle that eventually results in a 'blow off' of bad debt, clearing the way for people to start spending again.
However, not only has the government not learned from the mistakes, but it is actively helping the banks to not learn from their mistakes. The leverage ratio is not as bad, but, given that much of the reserve these days is debt, banks are not in a positive position yet. That aside, they are starting to do the same sorts of risky things that led to this problem in the first place, emboldened by the fact that the government stands ready to make good any of their losses. This is called a 'moral hazard' by economists, although one analyst insists that a better term is 'ethical hazard', as it really isn't about morality, but about the risk generated by a misallocation of resources.
Since the government has made good the losses of banks that are 'too big to fail', those banks have a golden ticket to do whatever fool thing they dream up while their stock valuations soar. Since any losses will be made good, they can go ahead and do the whole gamut of foolish loans to groups with low repayment outlooks. Doing this increases their supposed income, so their stock looks ever more attractive, leading to increased stock valuation, leading to executives making more money.
However, none of this is good for the greater economy, as it locks lots of people into untenable debt situations, creates more economic activity with little hope of producing useful returns and in general misprices much of what happens.
For instance, if a venture capital firm can get cheap money, they can go out and take a risk on some startup that may or may not ever make money. There will be a lot of economic activity in that particular company before its inevitable failure, putting lots of people on the streets.
However, the bigger problem is that something has been produced that nobody wants enough to pay its real cost. This means that things we actually want cost more because there is less of it and the people who made the thing we don't want are competing for what we want with us. Yes, inflation in price of most of the things we want is the result, leading to lower effective income for everyone.
I've said it before and I'll keep hollering it until I can wail no more. Any activity, whatsoever, that produces anything people do not want, will be inherently inflationary in prices. The only way to have such activity, as a matter of fact, is to have inflation in the money supply so that people are paying for the things nobody wants enough to pay for out of money that nobody really ever had. Of course, the bankers & co. take their cut and live high on the hog, as it were, while the rest of us in the trenches repeatedly see our purchase power decrease.
Now, were the banks allowed to fail, we'd see everyone's debt load reduced, leading to greater available income, leading to greater actual spending, leading to greater demand, leading to greater employment, leading to greater available income, leading to greater spending, and so on. Also, a reduction in impediments to employment would really help, such as the destruction of the IRS, Medicare, Medicaid and anything else that requires documentation and paperwork to employ someone. Also, the minimum wage has to go. Basically, if an employer can employ someone for a low amount to start, the employer can grow more easily, leading to greater employment, which leads to greater spending, which leads to greater employment and so on.
This is what we need to foster, not the negative spiral of debt for the benefit of big bankers and their big lifestyles, but the spiral of increased purchase power for the benefit of the average Joe and Jill and their three kids. In order to accomplish this, we have to reduce regulation and impediments to employment and we have to establish a stable monetary policy, such as my favorite, free money (not free as in anyone can have some, but free as in you can use anything you like to trade or pay for anything you like).
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