Stupid People Wanting Price Fixing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is really going on

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

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

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

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

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

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

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

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

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

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

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

What Money Really Is

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

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

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

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

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

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

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

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

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

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

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

Outbreak of Sensibility

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

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

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

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

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

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

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

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

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

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

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

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

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

The Worm Turns

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1) Bring all troops home from everywhere.

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

2) Immediately end the war on drugs.

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

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

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

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

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

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

All the Action Is at the Margins

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You Saw It Here First

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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