Saturday, December 25, 2010

Federal Reserve Dual Mandate

The S&P500 stock price index and the CPI were both around $8 in December 1901. Since then the S&P500 has grown to $1242 today while the CPI has grown only to $219. If a patient investor invested $8 then he would be able to buy 6 such baskets today and accumulated dividends paid over those years would buy several more baskets! The Fed enabled a 1000% increase in purchasing power return even while coping with some horrific wars and depressions!

The Fed has allowed the economy to flourish and at the same time held back inflation so that by following the textbook advice of buying stocks for the long run any investor could over time see their money grow in purchasing power.

The Fed must keep unemployment low so that work can get done and people can buy products so that companies can make money. The Fed also keeps inflation low so the basket of goods will not cost too much. The Fed has a dual mandate by law to perform a balancing act between inflation and unemployment, an empirical relationship: the Phillips curve plots the tradeoff in his study of inflation and unemployment in the UK from 1861 to 1957. Sophisticated elaborations are used today.


Data from The Full Employment and Balanced Growth Act (Humphrey–Hawkins Full Employment Act), is an act of legislation by the United States government.

The trap of the Federal Reserve's dual mandate

By George F. Will

Thursday, November 18, 2010
In 1977, Congress gave the Federal Reserve a "dual mandate."

NEW YORK ( -- For more than 30 years, the Fed has been tasked with a so-called dual mandate, which outlines two important goals: keep prices stable and maximize U.S. employment.

Tuesday, December 21, 2010

End the Fed?

The problem in a banking panic is that you cannot get your money out of the bank to convert to gold or to spend or to do anything with it. Your bank has lent that money out for productive economic activities such as running businesses or buying houses. Financial systems will always need to have a central bank such as the Fed as lender of last resort to step in and provide liquidity when there is a sudden surge in the demand for cash -- a bank run, panic, or whatever. Cash (or gold) is a hot potato that banks need to spend or loan out as soon as possible to avoid losing money due to storage costs or inflation. The real economy needs that money to finance production and consumption. The Fed and the financial system by high-speed transactions rapidly spin the small amount of cash electronically to support an economy much larger than the money supply. The attached charts show that the money supply is less than 2 trillion and that supports an economy of over 14 trillion. If people pull their money out of banks and convert it to gold then the economy would fall from 14 to 2 trillion because banks would not be able to make loans to keep business and consumers spending! It would actually fall more than that because gold transactions are much harder to accomplish than checks/debit cards. You would have to mail it certified mail or drive... The economy would essentially collapse. Financial systems are very delicate coördination systems for economic activity that naïve tampering by politicians can easily foul up.

It is a con game for sure, but that’s how it’s played. You say “if their bank can’t provide the gold…” and therein lies the rub. Only the central bank offers or offered redemption. Not commercial banks. After all, the gold was property of the treasury, not the local banks. Did I misunderstand you there? Back in the old days you could take a silver certificate to the federal reserve bank in San Francisco and get roughly a teaspoon of granular silver (forget how many grains) but that was never the case at commercial banks.

It all goes back to honesty and honest weights and measures, the core of every civilization from Sumerians to present day. You do understand what I’m saying, that redemptions occur when people distrust the central bank (they print the money, so to speak). That’s all part of perception. The people could be right or wrong. After all only a certain percentage would go that far, most are sheeple. But currently our government has printed far beyond ANY plausible imagination of the dollar having any realistic value.

The Fed HAS already depreciated the dollar 97% in 97 years. That’s grounds enough, don’t you think? I mean they’ve proved they cannot monitor economic trends, they can’t detect or even avoid bubbles and busts, only exacerbate them. Both Greenspan and Bernanke have said the same things regarding their respective bubbles. Game over.

Currency is small, most of the money is in checking accounts, CDs, money market funds, and other liquid assets that are forms of liquid money. A gold standard implies convertibility of money into gold. If sometimes people can convert to money to gold and other times they cannot convert to gold then I don't see how that can be called a gold standard. What are the rules that determine when somebody can convert and when they cannot? The problem in a panic is that people need or want their money. If they are demanding gold and their bank cannot provide the gold, then isn't that bank bankrupt? If people can't get their gold then what is the use of saying it is a gold standard? It is just a bunch of bankrupt banks without a fed that can print money to get through the crisis.

I could be wrong but I think this misinterprets the “gold std.” I don’t recall any time in history when ANY country ON the gold std had enough gold in the treasury to exchange for ALL notes outstanding. Currently I think the Euro and Swiss Franc are partially (15 – 20%?) gold backed. Point being that as Greenspan said in his “gold and economic freedom” essay, gold keeps the central bank honest. A country will not over-print money if it thinks citizens will then begin redeeming them for gold. That was starting in the early 60s under Kennedy and he struggled to cut spending, even ordered the withdrawal of troops from Vietnam and printing of silver cert’s bypassing the Fed.

If citizens perceive their govt is inflating, they will begin withdrawing and redeeming. Ordinarily that act, sustained for months lets say, is sufficient to convince remaining citizens that the paper currency is still good. You don’t have to fool all the people all the time, but you must have enough to allow redemption and you have to restrain your spending. Is that too much to ask??

After disgruntled citizens walk around for a few months with heavy metal in their pockets and don’t see any price increases at the store, they return the metal to the treasury and switch back to paper. That’s what Greenspan and others advocating “gold std” have always asked and I don’t think it’s unreasonable. Right now the US claims the highest reserves of all at 8000 metric tons.

I agree. Going back to the Gold standard is not practical. Banks borrow short and lend long. Depositors want to be able to withdraw their money in a hurry, sometimes. Borrowers want long-term loans and mortgage. There will always be a duration gap. In a panic banks will never have the cash or gold to refund the depositors' money. They will have to turn to the fed for liquidity -- short-term loans to get through the crisis.

If there were a gold standard banks would not want to hold large amounts of gold -- which pays no interest -- while waiting for depositors to come withdraw it. Banks need to make loans so the gold would be out being spent. If the depositor wants his money it would not be there. I don't see how it can work -- would the Fed truck in bars of gold to the banks getting run on?

Further there is not enough gold to support the current level of economic activity. Total liquidity vastly exceeds the value of the world stock of gold. The economy would shrink drastically.

I have not read Ron Paul's book "The End of the Fed", but have been watching the reviews, like the ones below. I disagree that getting rid of the Fed and going back to the gold standard is a good idea. For one thing, nobody has answered the problem of liquidity demands for banks during times of stress. Gold is not an easy media of exchange and to pay people off at the bankers window with gold is ridiculous. It would set us back to the 1903 Panic where they tried this and caused a collapse of the monetary system. There has to be flexibility in the velocity of money in the system, and something like the Fed is the only solution that I could see to take care of this. Right now is a transition time where there is a lot of cash distributed that will have to be absorbed, which hopefully the Fed will do by the next few years, and to reduce its asset holdings. Raising the reserve requirements on banks and requiring banks to hold Treasuries is in the works when this economy recovers a bit more. Can you imaging the Congress doing this? There is no way a Congressman is going to regulate some bank's holdings and have a team of regulators inspecting. He would be run out of Washington. Worse yet, to get that bunch to agree on regulation.

My suggestion is to replace Bernanke with a person who is a good cop. There needs to be a watchdog on the corruption that is going on both in the banking industry and Wall Street.

Do you think this talk of ending the Fed is just noise from the lunatic fringe that will never accomplish anything? Has the Fed gotten so bad? Something may come out of all this but I fear the devil is in the details and much of it is not thought very well so as to be practical. The USA Fed is already the most privatized central bank in the world -- Bernanke does not have to obey Obama or Congress on monetary policy, just give his quarterly reports. If the Fed is doing a poor job then do they want a takeover by the politicians who will likely push for more inflation and stimulus to get people back to work and get re-elected? It seems that no matter what Ron Paul proposes he will antagonize some large constituency who will push back through the political process to end up with something like what we have today. The current setup is probably as close as we will get to private banking. USA does not have inflation according to the CPI as measured by the BLS. If the measurement is wrong, then fix the BLS, not the Fed. I do think the cost of houses, gold, oil, stocks, bonds, education, loans, and medicine needs to somehow get factored in better because they seem not to impact the CPI when the Fed promotes price bubbles. Housing alone is a huge expense and really zoomed in 2000-2008 while CPI was flat, erroneously. The CPI forces concern about bubbles in pickles, toys, and cheap goods from Asia more than the big-expense items for American consumers. Monetary policy is the big item for the Fed -- inflation and unemployment. Regulatory responsibilities are more scattered ... Comptroller of the currency, CFTC, the states, etc.
End the Fed
Ron Paul

Wednesday, December 8, 2010

Hippie Educational Decline

Yes. Hippies are a big part of the problem. I never agreed with their promotion of drugs, dropping out of school, going without baths, dirty unkempt appearance, promiscuity, homosexuality, railing against the establishment that was supporting them. They were mostly lazy irresponsible unappreciative bums and crooks, or worse high criminals such as Charles Manson. There were some hippies even in Conservative Southern California. Some of them went to degree mills or otherwise got jobs and into the power structure where they watered down standards to meet their low expectations and low desire to work. With such bums in control the USA economy is performing worse and worse. California has been a leader in that downward spiral. There were social problems before hippies. Hippies just exacerbate those problems. I remember driving through Haight Ashbury San Francisco in 1970 three years after the summer of love -- it looked like a bombed out war zone with trash blowing down the street. Then in summer of 1987 the depressed illegitimate offspring of the summer of love were still congregating in the little park doing serious drugs. Something of a tourist trap but I don't even care to walk through it.

"I agree. I don't know how to change what is already a rolling steam engine down the track. The time to worry about this kind of stuff was back during the late 60's, early 70's during the "age of Aquarius" hippie movement. Now, that they are grown up, the chicken is coming home to roost."

Test scores still report USA going to hell in a handbasket with our teens headed to the bottom of the barrel. USA economy is doomed without corrective action. Obama should have focused on education instead of health care -- sickness can be reduced by a return to traditional diets, just as education can be improved by a return to traditional hard work, carrots and sticks. Bill Gates is right: more pay for the better teachers,... reward for performance. Similarly give students better grades for better performance, get rid of "social promotion" and don't pass them if they flunk. Make all classes hard enough to assess differential performance and get rid of mickey mouse art and music classes.

Fifteen-year-old students in the U.S. ranked 25th of 34 countries on an international math test Teenagers from South Korea and Finland led in almost all academic categories. China’s Shanghai region topped even Finland and South Korea. Microsoft Chairman Bill Gates, saying instructors should be rewarded for results

Monday, November 22, 2010

New Crash Coming, Hyperinflation

It looks like QE2 is designed to lower long-term rates so people can borrow to buy depressed houses and other real estate, thus propping up prices. The fed is the bankers bank and those member banks are sitting on real estate backed assets which are worth far less than their face value. They have repossessed lots of houses and need to dump them on the market soon. The fed is just trying to boost the prices so that banks can continue to report strong earnings and not force them to recognize losses on their lousy real estate deals. Thus we are seeing the beginnings of a new bubble where house prices will bubble up to where they were before the 2008 crash, and maybe overshoot those, and drag other assets into the bubble such as gold and silver. Obama is going along with this, just as did Bush during the Greenspan Bernanke dot-com and house bubbles. So we see a third bubble taking shape much like bubbles of the last dozen years. Most likely another crash. This time China will be more important. They have already announced they want to cool their economy at the same time that Bernanke is letting the dollar slide which will also cut China exports to the USA. We are also seeing oil, food, and other prices suddenly starting to rise and other prices are going up with our economic recovery. The recent bubbles were not accompanied by inflation because China Wal-Mart etc. was flooding USA with low-cost goods. This bubble we will not be so lucky and will see some inflation that may become imbedded in core inflation and force interest rates higher. The problem with bubbles is that they burst. As interest rates go higher people will cut their buying of houses and their prices will crash. QE2 may start a bubble but excessively loose monetary policy can sow the seeds of its own destruction by the inflationary pressures that it may release. Bond holders and China may panic and just dump the bonds back into the market and cause interest rates to skyrocket faster than what Bernanke thinks. We saw in the 1970s stagflation cured by Volcker
Mr. Volcker raised interest rates sharply in his “October massacre” of 1979. Other than the Volcker years, the central bank has largely lurched from one mistake to another. After a loose-money decade in the 1920s, it let the nation’s money supply collapse in 1930-32, a proximate cause of the Depression. Later, it overexpanded the money supply in 1965-79, leading to soaring inflation. After 1995, the chairmen, Alan Greenspan and now Ben Bernanke, made the same mistake, expanding the money supply far faster than the rate of United States economic growth. This caused bubbles in stocks, real estate and commodities for which the world is now paying the price.

Saturday, November 13, 2010

Bankers, Elites, Conspiracies

Humans have a strong herd instinct so during booms they become wildly optimistic and greedy --they borrow too much, get over-extended, then get clobbered in the inevitable crash. Then they become fearful, depressed, and think the recession will never end. In the great depression unemployment was 95% in the San Francisco Mission District (Irish back then) which became the epicenter of the dot-com boom 6 decades later. I remember sitting at the New York City Hilton Christmas tree December 27 1982 AFA meetings looking for a job after the stock market had suffered for 10 years and it looked like USA was getting taken over by Japan and everybody was depressed. Within a few months the stock market took off and did not crash much for decades. I can remember the 1970s when the Dow was 600 something and now it is over 11,000. Houses have done well in many areas of the country. I got a free account at and printed out the annual Dow Jones:
31-Dec-1973 850.86
31-Dec-1974 616.24
31-Dec-1975 852.41
31-Dec-1976 1004.65
30-Dec-1977 831.17
29-Dec-1978 805.01
31-Dec-1979 838.74
31-Dec-1980 963.99
31-Dec-1981 875.00
31-Dec-1982 1046.54
30-Dec-1983 1258.64
31-Dec-1984 1211.57
31-Dec-1985 1546.67
31-Dec-1986 1895.95
31-Dec-1987 1938.83
30-Dec-1988 2168.57
29-Dec-1989 2753.20
31-Dec-1990 2633.66
31-Dec-1991 3168.83
31-Dec-1992 3301.11
31-Dec-1993 3754.09
30-Dec-1994 3834.44
29-Dec-1995 5117.12
31-Dec-1996 6448.26
31-Dec-1997 7908.24
31-Dec-1998 9181.43
31-Dec-1999 11497.12
29-Dec-2000 10786.85
31-Dec-2001 10021.50
31-Dec-2002 8341.63

While the market goes up and down, there needs to be a good reason to suggest that the long run upward trend will not continue. Dumb and crooked politicians and regulators are not a good reason because they have been around for a long time.

"Let us break this down."Pessimistic" is a characterization of the nature or direction of Chapman's predictions. Thus pessimistic is defined as against what the lamestream media is telling persons what is happening or going to happen. What the lamestream media saying is therefore perceived as the benchmark to be measured against. What is the predictive validity of the mainstream? Less than 50% which would be random in a binary system and much less given the many possible alternative scenarios."

I agree that most media cannot forecast, and they cannot even figure out the history. They are trying to entertain, sell newspapers and get people to buy things and vote in particular ways. The media were full of optimism during the boom and pessimism during the bust. The 1970s was even more depressed than today.

"Time and time again Bernanke and his predecessor Greenspan fail to make accurate assessments about anything. Much of their public statements can be characterized as making excuses about why their plans did not work and their assessments were wrong due to changed circumstances"

I heard them over and over again say they did not anticipate the recent crash and the severity of the following recession (although now everybody seems to think that everybody knows that recessions are long and severe after such a financial crisis). I do believe they do not know what was going on. This means we should be careful about any of their policy prescriptions. In fairness, Greenspan did coin the term 'irrational exuberance' in 1996 but failed to do anything to rein it in.

"In fact Greenspan admitted he made up terms and statements as he went along. Add to this the adamant refusal of Federal Reserve authorities to even be audited."

I don't think the politicians want to audit them. If people elect politicians who do not care, then the bankers can do what they want with help from the other elites.

"Meanwhile their lifetime banking and corporate associates continue to receive bigger and bigger payola at the expense of the average American."

Most Americans do not study economics and don't know how the financial system works, nor do their elected politicians. So bankers get to do what they want, with help from the other elites. When much of the population is uneducated, these 'elites' gain power with a small clique running everything. Most third world countries operate this way.

"A conspiracy is defined as two or more persons engaged in a plot that have taken active steps to advance the fulfillment of the goal of that plot. This is loose definition and one that reflects criminal law. Never the less the circumstantial evidence suggests that the Fed and the fully owned and controlled lamestream media are the ones actually engaged in a conspiracy to defraud the American public."

Much of what they do is legal, and the illegal parts are done by idiots that they payoff. The elites -- bankers, lawyers, lobbyists can rig the game to get rich and scot-free and let the idiots rot in jail (most of them do not get caught either). I don't know if the elites can be called a 'conspiracy' because they are probably not smart enough to see how it all fits together. They are just responding to incentives and manipulating the system to bend it in their direction in their own small part of the system. It's just the way the system has evolved and many elites not be happy with this system, even those who get a lot of money from it. It is dysfunctional and will weaken the USA in the long run.

I agree on the investment recommendation for agricultural land. World population is exploding and they will buy food and especially water which is scarcer than food. Some people like gold jewelry but they will buy that after they get food and water. Numerous companies in India, China, Brazil, Russia and elsewhere will be a better investment than gold -- they pay dividends and get larger price appreciation.

"Frankly as a seasoned licensed criminal investigator circumstantial evidence would cast doubt on much of what the powers that be characterized as a given or a fact including birth certificates, Al Qaeda causation or Weapons of mass destruction. This does not imply the end of times but a contrarian investment scenario. Would I want to invest in TIPS that pay well under the actual inflation rate and are subject to increasing federal and state tax rates or would I be better off investing in gold or silver or agricultural land when 40 million American live on food stamps and the currency is rapidly losing purchasing against food and other commodities?"

He is relentlessly pessimistic and conspiratorial which makes me suspicious. Unfortunately, he may be right. USA financial system may be in for more than a bumpy ride, maybe a complete hyperinflationary collapse. Even if we can't catch the crooks, maybe we should make them pay higher taxes?

“Dr. Bernanke unfortunately does not understand economics, he does not understand currencies, he does not understand finance,” Rogers, 68, said in a lecture at Oxford University’s Balliol College yesterday. “All he understands is printing money.” “His whole intellectual career has been based on the study of printing money,” he said. “Give the guy a printing press, he’s going to run it as fast as he can.”

The Fed Helps Stabilize the Economy

There are no good data series that go back much before WWII so economic performance of that era must be uncovered by careful historical analysis. Most researchers conclude that the economy was stabilized by the introduction of the Federal Reserve and reforms motivated by the great depression. There were frequent depressions before the great depression but none since. Canceling depression-era reforms such as Glass-Steagall helped cause the crash of 2008.

I have done considerable digging around for old data (some is on this computer) and most show much worse gyrations in business activity the farther you go back into history. The 2008 crash was unusual, as was the 1970s oil supply disruption. The Federal Reserve helped the USA to live easy for a long time. Also helping the USA economy recently has been loans and low-priced goods from foreigners. If people want to borrow and spend it is hard for the Fed to stop them. Similarly a gold standard cannot stop people from borrowing and spending. But I will fault the Fed for the severity of the two recent bubbles -- tighter money could have raised interest rates and stopped some of the recent housing bubble, for example. High interest rates would also have boosted the dollar thus motivating people to quit using credit cards to buy foreign goods, taking out auto loans, etc. So laxity by the Fed lately has helped lead to the current malaise. I think many consumers have learned their lesson but in a few years we will have a new naïve generation to educate.

The fed needs to worry about house and asset price inflation as well as consumer good inflation.

The average duration of the 11 recessions between 1945 and 2001 is 10 months, compared to 18 months for recessions between 1919 and 1945, and 22 months for recessions from 1854 to 1919. Because of the great changes in the economy over the centuries, it is difficult to compare the severity of modern recessions to early recessions. Recessions after World War II appear to have been less severe than earlier recessions

Tuesday, October 26, 2010

Federal Reserve Asset Purchases

Many are worried about the Federal Reserve's asset purchase schemes. I don't see how they can buy trillions of assets without risking inflation and other dire effects. Maybe the economy is so weak that this is a last resort to stave off a depression. But it may result in hyperinflation, a dollar collapse, or even worse a stagflation with a dollar collapse. Probably the bankers are trying to discourage Obama stimulus II or real tax and spending reform.

I think the main purpose of this is for the banks to unload a lot of junk paper to the Fed for the government to hide and ultimately dilute the value of the currency. This will allow the costs of the banking fiascos to be spread surreptitiously to the general public. Most are clueless as to economic reality. When the dire effects become too big to hide, the government can claim they had no idea this was coming and that it was not their responsibility and outside of their control. Talking heads and pundits will continue to commentate to no avail. Electorate will continue to elect idiots and crooks.

Bernanke Asset Purchases Risk Unleashing 1970s Inflation Genie. For the second time since he became chairman in 2006, Ben S. Bernanke is leading the Federal Reserve into uncharted monetary territory.

Sunday, October 10, 2010

California Budget Deficit

California should be rich with several booming industries: 1) Computers 2) Drugs 3) Hollywood 4) War Machines 4) Fruits and Nuts. Still these are not generating enough tax revenues so CA is running a deficit. The new budget failed:

They did not cut enough
They assume some revenues which will not arrive
They are borrowing more 

So they not collect enough taxes and will face another round of cuts next year.  By failing to properly address the issue they just postpone the day of reckoning and make the cuts more severe.  If they raise taxes too much then businesses and rich people will retire or leave causing even less tax revenue in the future.  Spending and borrowing must be cut way back to get out of this mess

From the news:

Democrats agreed to cut schools by $3.1 billion, but they made $1.9 billion of that a deferral that they promised to give education next year.

The budget does little to solve the state's structural imbalance, and fiscal experts believe that the state is heading toward another massive deficit next year.  California is counting on $5.3 billion in federal funds to balance this year's budget, yet the state only is commited for $1.3 billion. Chiang still has not ruled out IOUs, though legislators passed a bill Thursday that would allow the state to defer $5.5 billion in payments to schools and social services.

The $87.5 billion spending plan relies on rosy assumptions about revenues from taxpayers and the federal government, as well as reductions to state worker pay, prisons, and social services.

the pending $87.5 billion spending plan does little to solve the state's permanent fiscal problems and makes several questionable assumptions that could make next year's deficit worse should they fall short. "We said they were facing a multibillion-dollar shortfall in 2011-12, and nothing has changed the underlying economics and budgeting of that"

Wednesday, October 6, 2010

Obama stock market rally

Does the stock market rally mean that Obama is doing a good job getting this economy recovered from the Bush crash? Or does it mean investors are hoping the fall elections may get rid of some democrats who helped him socialize medicine? Obamacare expands coverage without expanding the number of doctors meaning that some getting medical care will have to get less in the future. The Federal Reserve has pushed interest rates down to liquidity trap levels and are now attempting further stimulus. I worry this will only cause more trouble in the future. In the short run the low-interest rates are punishing retirees who need those interest payments to live. In the long run it builds up inflationary pressures, lowers the dollar, scares foreigners away from US assets, and postpones needed steps to fix the economy.

Why doesn't Obama do more to win the war on drugs and illegals being fought along our southern border? USA is being invaded but he is sending troops around the world to kill heterosexual Muslims who hate our gay-friendly culture. Drugs and homosexual diseases kill more Americans than do Muslim terrorists. I believe USA could stop the flow of drugs and illegals by moving our troops along the border and careful inspection of anything crossing the border or complete shutting down of the border.

Sunday, September 26, 2010

Higher Taxes Coming

Eventually the USA will have to deal with the huge debt that is still growing. I see 4 ways the USA can handle it. In order of probability:
1) Raise Taxes
2) Cut Spending
3) Hyperinflation
4) Repudiation

The top tax rate was over 90% for quite some time but now it is below 40%. Democrats are inclined to hike taxes. Republicans refuse to agree on a plan to cut Government spending. So the Democrats will eventually get their tax hike. But I suspect there may be some budget cuts too due to so much waste and incompetence by overpaid bureaucrats. Even Democrats cannot deny it. Republicans are just not effective advocates after they threw away the contract with America and boomed spending 2001-2008.

Poor people like inflation because they are borrowers and could repay their (many) loans with cheaper dollars in the future. Rich do not like inflation because they are lenders and would get stuck with those cheaper dollars. The rich also own the banks that own the Federal Reserve. Why would they allow the Fed to act against their interests? For example, right now the fed could be buying up more bad mortgages and rewriting the terms to let bankrupt homeowners stay in their house for pennies on the dollar. This would put a floor under house prices. However they are not doing much to help the poor but are trying to firm up their own balance sheets by getting rid of the crummy paper they already bought.

Default is possible but is very serious. They would probably print money instead. Probably will not even get to hyperinflation. But there may be some inflation from oil and commodities. Gold is probably in a bubble.

Saturday, September 25, 2010

Recession Over

The Saint Louis Fed provides a free Fred Database with nice graphics abilities. Using this one can see that charts of the three most important indicators reveal the following: 1) Industrial production is recovering sharply and is double what it was in the early 1980s. 2) Employment is recovering and is double what it was in the early 1970s (production grows faster than employment because productivity is increasing). 3) Most importantly real GDP (that includes services) is nearly back to where it was before the crash. The economy has been expanding for over a year. An expansion is the opposite of a recession. A depression is a long and deep recession. USA is not in a recession and therefore not even close to a depression. Some parts of the USA did not even go into recession. This recession was concentrated in areas that built too many, too large, too expensive of homes and cars by using too much debt. This spilled over into areas that loaned money or did the paperwork for the loans, or collected taxes on the loans. Much of the construction and loan activity has halted and the people fired, so a new recession will not happen from new cutbacks in this area.

I lived though the 1960s Vietnam bubble and 1970s oil crash; the 1980s S&L Wall Street bubble and crash; the 1990s tech dot com bubble and crash; and the 2000s Iraq house bubble and crash. Smart money has already reinvested and are starting the next bubble and crash cycle. That's why they call it the bulls and the bears -- an alternating cycle of irrational exuberance and fear. Smart money manipulate the human herd instinct to herd morons toward slaughter. TV, radio, drugs, junk food, junk education, isolation by cars and remote houses are all instruments of mass destruction. The rich will get richer and the poor will get poorer.

Friday, September 24, 2010

Long Recession

The recent recession was the longest since the great depression. I wonder if the current recovery might be weak and the economy slip into more recessions such as the recent Japanese 'lost decade' of working off bad debts? Houses are still overpriced in many areas such as the California Great Central Barrio. These house prices must fall to be competitive with Mexico which has less pollution and crime in many areas and more English speakers. Further there is still new construction at the same time that much of the USA population is moving back to Mexico, moving home to parents, or going homeless, leaving many houses empty. Banks are sitting on large inventories of foreclosed houses and afraid to dump them onto the market or house prices will fall further. Further, commercial real estate is still falling, banks are sitting on mortgages and other assets that are worth far less than face value, as is FNMA GNMA and the Fed. Many businesses still need to contract. Businesses that are looking to hire often cannot find the skilled workers they need. Goods still must be imported from overseas. I suspect the economy is in for some rough times ahead until some of the fundamental disequilibria come back into line. As long as government props up failed agenda it will take longer for the economy to function properly.

Saturday, September 11, 2010

Privatize Infrastructure

Many liberals clamor for a new stimulus, especially for more federal spending on infrastructure. The problem is that this will increase the deficit. So why not privatize infrastructure? This would allow private enterprise to raise private financing and get the job done better without any cost to taxpayers. Particularly, many highway systems are paid for by taxpayers, whereas trains are mostly private enterprise and currently make profits and move as many ton miles as taxpayer subsidized trucking companies. By selling off the interstate highway system the US taxpayer could get out of debt and not be responsible for future maintenance of those highways. Customers can pay tolls by RFID. If they don't like one highway they can take another thus putting pressure on highway managers to do a good job and keep tolls low.

Similarly a wide range of dams, levees, bridges, pipes, and other engineering projects can probably be done better by private enterprise than government bureaucrats. Do liberals want the government to do these jobs to promote some social agenda? Why do they think the government can do these projects right? Don't they have a TV? Did they see New Orléans Katrina? Illegal immigration? Drugs? 9/11? Homeland security failures since 9/11?

Friday, September 10, 2010

Feynman QED

I am looking thru Feynman's book. I like the diagrams. I have been thinking about writing something like this for finance and economics where most writing is obscure, overly technical or political propaganda. They clutter their articles with math and statistics when often a nice picture and well written text would suffice.

Even though the world is headed toward iPhones and online writing, there is much benefit for pdf files on ultra high-resolution paper in black and white. Much easier to read, finding things in indexes, understanding the organization, etc.

Many problems need conceptual understanding more than access to the recent information. Many problems can take a year to write a few pages. Most of the puffed up economic writing is really worth only 1 page with the rest just repeats of past research, bibliographies, summaries, introductions, and a rehash of formulae and tables.

QED: The Strange Theory of Light and Matter
Richard P. Feynman

Sun, Oracle, Hurd, Cloud, Apple, iPhone, iPod

Sun may arise again with the help of Hurd and Oracle. Sun invented Java and popularized Unix, client-server, and the network is the computer
and was talking about "network appliances" circa 1995 so has decades of cloud-like experience. Plus the Oracle database which is a big part of the cloud. Will be more competition in this space.

The Apple iPhone 4 iPod touch is great, especially the screen which needs to be good on such a small device. Small helps for portability. For a lot of people a smart phone is the only electronics they need: phone, camera, game, tv, movies, music, phone book, calendar, diary, email, text, chat, etc. Will cannibalize sales from other product lines but will also get more sales from upgrades, software, services. I am wondering if FaceTime Skype on iPod touch might be the only phone I need? Then how does this compare with all the other smart phones. Then how easy is it to develop apps for those platforms, individually and collectively.

Wednesday, September 8, 2010

War in Iraq

I agree with Joseph Stiglitz. We will be paying for decades. $3 trillion is an underestimate -- we are not out yet. I wonder why he thinks the war only raised oil prices by $10 when it jumped from $25 to $140? The vast amount of fuel to move our military and contractors around, and the procurement, and spending in oil rich countries will all add to fuel demand even long after we are gone. Our military will be complaining about illness for decades. Worst is what should have been done in the USA such as a great wall on our southern border and better financial regulations to prevent the war bubble and crash of 2008.

Friday, September 3, 2010

Economic Data and Models

The best way to approach economics is to avoid all the 'isms' and the schools of thought and the names of economists. All of this is mainly of interest to historians and is covered online at for those with time to waste. Many economists get tenure for explaining how today's popular but deficient theories developed over history. But few care, not even economists, and it is hard reading. Laypersons would get totally confused without 2 or more years of economics classes.

Instead there are 2 important ways for laypersons to approach the economics literature:

A) Just look at the data that is covered in the news. There is unfortunately not very much data. But for what there is, the definitions are available from the originating agencies, cheap paperbacks, and Wikipedia. You can graph it free at the st louis fed FRED project. Good enough for most purposes.

B) Harder is the scientific models that try to explain the data. These fall into 3 types:

1) Time series pattern recognition fit to that data that mindlessly extrapolate history which unfortunately never repeats itself exactly. The problem here is that statisticians will bury you in a maze of non-understandable coefficients and buzzwords for their models while not explaining that their models do not fit very well and that the data look nearly like a random walk.

2) General equilibrium theorists, game theorists and others often use little or no data. They make as few assumptions as possible (to be elegant) and generate a huge amount of math, prove theorems, draw graphics, tell little stories and get a lot of attention, NSF grants, and prizes. Unfortunately if you change the assumptions a little to make the model more realistic then it all falls apart.

3) The macroeconometric models and other applied models try to merge 1) and 2) with mixed success. is one such model. They are essentially the only game in town but have a lot of problems. They do serve as a basis for most government and corporate policy. But the actual models used would be barely recognizable to any of the theorists who write in 1) and 2). 1) is much more popular than 2). Even within 1) and 2) there are warring camps and even friendly camps cannot figure out what similar friendly camps are talking about.

So often trading and economic policies are often done by intuition and politics with a jumble of inconsistent economic theories and approaches offered as the rationale. USA junk economic policies resemble USA junk food, both of which are lowering the quality of life in the USA. Colleges do not require economics or nutrition classes, and most colleges are aimed at recreation, not education. Until the education system is fixed it is not going to get better. Everybody needs to demand better competence and performance of economists, government bureaucrats, colleges, corporate leaders, etc. Most of these are not required to take annual drug tests, credit checks, SAT/GRE tests, continuing education classes, criminal background checks, or any basic competence tests despite the vast amounts of money poured into these institutions.

Friday, August 27, 2010

Liquidity Risk Waiting for the Other Shoe to Drop

Bernanke gave the stock market a pep talk to push the Dow above 10,000 again. But the future is still cloudy. In a liquidity trap people are paralyzed by fear and stop buying so the economy continues to sink. Lowered interest rates do not trigger spending so some other stimulus is needed so that people feel more confident. With pensions and social security getting cancelled due to lack of money people are saving a lot more instead of spending. Even worse the lower interest rates make it even harder to accumulate money.

The first attached chart shows that new house construction and furniture has stabilized at much lower level. But housing may crash again as interest rates rise back to normal. The fed has pushed interest rates very low but that cannot last so eventually housing will get clobbered again as interest rates rise back to normal. Also governments are sitting on a lot of debt so their budgets will get clobbered as they start to pay higher interest rates.

The second attached chart indicates that stock prices do poorly in September. I don't know why they just looked at the post WWII data. I have data on this computer going back to 1870 that may show September is not so bad. But this year portfolio managers may want to sell in September to show they did not perform so badly if the market continues to tumble.

Obama needs to reverse his socialistic tendencies with a big tax cut and firing of a lot of worthless bureaucrats. Otherwise people will continue to freeze spending due to fear of continued economic malaise or worse -- a depression. They are waiting for the other shoe to drop:

Thursday, August 26, 2010

Liquidity Trap

Yes, USA is in a liquidity trap -- interest rates are near zero so cutting them will not help. Bernanke is following ZIRP in accordance to the dictates of Muslim Economics. A Zero Interest Rate Policy obeys the commandment to not rip people off by charging interest on loans. According to Islāmic law, the charging of interest is unjust and exploitative. Also the USA government Fannie and Freddie violate Proverbs 11:15: He who guarantees a loan for a stranger will suffer, but refusing to underwrite is safe.

Monetary policy is at the end of its rope and has not revived the economy. The Obama fiscal policy stimulus was too much spending, not enough tax cuts. People need a big tax cut to pay off loans so they can keep their houses and cars and quit wasting money on interest payments. If they felt more secure they would spend more to boost the economy. But they are wisely cutting back because the Obama approach is pushing USA back into recession.

Keynes wrote in a different era when there was less debt and taxes. So the huge spending of the 30s and especially WWII stimulated the economy. Now we suffer from too much debt, taxes, and government spending. A big tax cut would be the fastest and easiest way to get some stimulus, especially if accompanied by elimination of some government programs. The net result would still be Keynesian deficit finance adjusted to meet the new reality.

Dow 9966 today. Obama/Bernanke should resign so we can get somebody in there who can cut taxes. They are the #1/#2 most powerful. The buck stops there. I worry confidence will never return until we breed a better crop of politicians. USA becoming a third world banana republic faster than demographic changes would predict. It is a leadership foulup by 60s liberals who think big government is a panacea.

Response to: I have been looking at where we stand in this economic downturn, and I have an admission to make. I have never supported Keynes in his arguments about depression economics, especially the issue of deficit spending to break deadlocks of the downward spending spiral. But I am re-evaluating my position. In looking at Keynes, I now believe he was right,, especially the "liquidity trap". He said, "No matter what the Fed would do to bring down interest rates to stimulate economic activity, it would be like pushing a rope through a knothole". He was right. I am now convinced that we are in a "liquidity trap". Keynes would be gratified to see what is happening today, and the Fed using useless tools to spur recovery. Ironically, he predicted the "liquidity trap" during depression days in the '30s at around 3.5 percent, which is where we are now, and such an environment to last around seven years, which is exactly what is happening now. Looking back to those depression days the government did not recover the economy with Roosevelt's New Deal as much as the economy recovered itself, just as he predicted in his "General Theory". I am re-reading his General Theory in a more concentrated light. I now believe that this economy today is in exactly that same position, with a lack of confidence in the system which will continue until confidence recovers in the marketplace....maybe another seven years down the road.

Response to: Dow fell to 9966 early this morning. Republicans are right to call for Obama to fire his economics team who are leading the country in the wrong direction. The universities are also to blame. They are importing illegal aliens to build increasingly fancy buildings for themselves while letting education fall by the wayside. Seems they should keep prices low to help students afford the education. Use their excess money to improve the curriculum. USA economy was better decades ago when business schools did not have such fancy buildings.

Tuesday, August 17, 2010

College Education Decline

USA education is increasingly Micky Mouse. Harder colleges should be upgraded in the rankings. Instead they get downgraded. A race to the bottom on how easy colleges can become. The increasingly low quality of population is the root cause of the underlying economic malaise. Professors get great teaching evaluations by making their classes easier and easier to where in the end much time money is wasted on classes that do not teach anything and the students cannot do anything. Made worse by sexual diseases, drug addictions, death, rock and roll damaged ears. Jungle culture becoming mainstream.

Electric Car Race

Racing is a good way to force improvements to vehicles, many of which are too heavy, sluggish, top-heavy and bogged down with junk. One advantage to batteries is that the weight can be slung low and distributed right to improve handling and aerodynamics. We just drove 400 miles in a new larger Honda gas V6 that got nearly 40MPG at mostly 70MPH. Mileage could be improved by shrinking the vehicle and shedding frills. USA needs more taxes and regulations to force auto makers to make better vehicles. GM should not get a bailout until they discontinue all vehicles that do not get 20MPG (like a large 1955 Ford V8 sedan.)

Friday, August 13, 2010

FHA Bailouts for the Rich?

Should taxpayers take the risk on million dollar New York City condos that most taxpayers cannot afford? Or is government a way for the rich to ripoff the middle class. Bailout developers and those who do not repay their debts.

Wednesday, August 11, 2010

USA Bankrupt, dismal science

I am glad economics is returning to its traditional role as the `dismal science' to help USA shake irrational exuberance. USA actually has a $4 trillion deficit that in present value terms is $202 trillion. The below was obvious decades ago but more are seeing it now. Demographics takes a while to become apparent. It is also correct that USA will face some degree:

1) End of Social Security, Medicare, Public Pensions
2) Huge Tax Increases
3) Hyperinflation
4) Sky high interest rates as the market comes to realize we are bankrupt thus exacerbating the above problems.

Tuesday, August 10, 2010

Fuels and Culture

Fuels and Culture

July 19th, 2010

I remember as late as 1967 buying gasoline at the most expensive Shell station on Main Street in a California Barrio for 36.9 cents per gallon. The energy crisis hit 6 years later when I was in Boston and had trouble finding gas for my Opel when gas went over $1 per gallon.

Then I remember in 1989 or so in Sacramento paying 89 cents per gallon at cheap Regal gas/methanol mixture in the nice shopping center on Fair Oaks Blvd near Howe. I remember standing there and thinking “how can they make money.” Sure enough Saddam Hussein invaded Kuwait and Bush I went to war and gas prices shot up again.

Then the price weakened during Clinton. I remember in 1999 getting cheap Arco on Reseda Blvd. in Los Angeles for 89 cents per gallon again! Then Bush II came in and gas prices jumped during the wars to around $3 in many areas.

It would be easy to construct a math example where the average MPG of the US fleet will increase while at the same time more fuel is consumed for the same miles driven. This is what happened during the 1990s when many drivers went from the smaller simpler 1980s vehicles to the SUV’s (the new land yachts to replace what got scrapped during the 1970s crisis.) The math is you move X 25MPG vehicles to 15MPG SUVs and move the same number X from 25MPG to 36MPG vehicles then the average mileage will increase but more fuel will be consumed assuming the same miles driven.

In both cases, the wars and the mileage requirements is the fault of the federal government trying to increase oil use and discriminate against diesels, methanol, electric.

Further the 1986 tax laws were changed to favor home ownership, including giving tax benefits to second homes. These were built in far flung places and people started driving farther to get to them, and illegals were imported to build them and prop up the value of older homes and older vehicles.

Any new technology will not have the lobbying power of established companies who will buy politicians, rap artists, talk radio hosts, etc. to keep the status quo. Laws will force people to use gasoline instead of diesel, alcohols, hydrogen, solar, electric, etc. Other countries can be even more corrupt than the USA.

If prices were allowed to freely vary and reflect the fundamentals then we would probably see more alternative fuels and less obesity, diabetes, stupidity, etc. The problem is corruption in politics. The dysfunctional educational system deprives people from learning about technology and forces them to take liberal worthless classes to get a degree and puts morons in the seat next to you who take up class time with stupid questions so no learning can take place. Fat rap artists having sex in SUVs get students wanting to emulate their success. The media are constantly blasting people with ads for junk food, Viagra and other drugs. With so much of the population drugged and sick then how can we address fuels that require some knowledge of chemistry and engines?

Tuesday, June 29, 2010

Krugman 3rd depression

Dow falls below 9900 back to where it was back in March 22, 1999 -- over a decade of no progress.

Krugman may be right about a third depression but does not know why. Princeton does not have a business school or finance department. What is different today is the quadrillion dollars of financial derivatives, which are a form of debt, a promise to pay.
Derivatives were rare until they took off in the 1980s and 1990s and led to the crash. Financial derivatives are on top of much indebtedness of governments, corporations, and private people. His recommendation for more deficit spending is only going to add to the problem. Like Keynes said, when conditions changed, he had to change his opinion. Keynes went from arguing for a balanced budget to arguing for running a deficit to get out of the great depression. Now we have had deficits for decades and it is time to return to balance and to reduce the overhang of derivatives related debt. The debt and deficits are now the disease, not the cure.

Wednesday, May 5, 2010

Bernanke Bubble

I agree with you on the Bernanke Bubble. The politicians are putting pressure on the fed to cause another inflationary boom so that the Democrats and Obama can get re-elected. The problem is they hurt the economy so bad that it is taking too long to recover so they may get booted out of office.

> I agree with you about the bond market. I believe the Fed is behind the
> curve again and stocks are surging into dangerous waters. The P/E ratios are
> ridiculously out of whack, and you are right, institutions are diving into
> stocks big time because the bond market is destined to fall out of bed. I am
> at a loss as to why the Fed does not let the free market determine bond
> rates and to readjust their portfolio holdings.

I think the answer is politics and the inherent inflationary bias of third world banana republics and mobocracy in general. Theoretically the Federal Reserve is supposed to be above politics, like the Supreme Court, and act in the best interests of the economy. But in practice the Fed will succumb to politics, especially now that financial institutions are being called in to testify before congress and heavily critisized.

On a positive note, industrial production is recovering sharply, and business profits are improving after they have fired many employees and the worst businesses went bankrupt. Now these unemployed can find work in leaner and meaner firms in parts of the economy that need to grow.

> I see where they have
> decided not to relinquish mortgage packages, low rated bonds, and other
> holdings as Bernanke testified before Congress. I believe that he is under
> political pressure to hold rates where they are for Treasury to float more
> debt.

Yes, I expect this pressure to continue and eventually cause inflation. Most of the economy is still too weak to raise prices -- people don't have enough money to buy very much. But as the recovery continues this will change and people will spend more freely and the result of massive liquidity will materialize into price increases.

> The institutions see this and are getting out of the bond market
> recognizing hidden bond retractions and going into stocks.

Yes, it looks like the smart money has already left and the dumb money is suffering losses on their bond portfolios. I expect to see this in the stock market later this year. Many think the stock market has gotten ahead of itself and are moving money elsewhere. The problem is where? Maybe overseas. I just had the idea to move to Mumbai India which is the English-speaking business capital on the west coast with weather similar to Hawaii (which lacks business.) China is more booming but the language is too difficult.

> Somewhere this
> has got to give way, and interest rates will have to go up. Looks like the
> Fed is screwing up again.

Yes, this is the third Fed induced bubble we have had in the last 15 years! When will it end? How much can the economy take?

Glass-Steagall was good

As I expected, with politicians ripping up the bankers, those bankers now wish they had not engaged in risky activities and are calling for re-regulation to curb risky activities.

I was appalled when they got rid of Glass-Steagall. Financial institutions need firewalls between them to help contain crises. This would also help prevent banks from getting too big to fail. More smaller banks would also provide more competition at the margin as banks fight over businesses on the periphery where their businesses overlap.

Many now agree with me:

Wednesday, April 21, 2010

More on Apple vs Dell vs Linux

I agree. You want an Apple -- a computer that works out of the box with little fuss, and that keeps running fast without crashes, and that has better security. Apple hardware and software comes from the same company. Apple does not sell so many different kinds of machines. They get lots of revenue per machine. So they can get what they do sell to work better, like a Porsche.

Linux is great if you have a lot of people in your company or school that will help you along with your particular hardware and software setup. Classes, tutorials, etc. Most people do not have that in the USA unless they happen to work for a company or school that has professional staff dedicated to your particulars. Like a custom built hotrod.

Windows has millions of users and is fairly well understood. But it has security weaknesses and is built on a crumbling infrastructure. Windows Vista was a flop, too complicated. Windows 7 is simpler and better, like an updated XP. But is still not stable and rock solid. What is amazing though is that some Microsoft software I bought in 1985 runs just fine on the new Windows machines. Backward compatibility makes things complicated. In contrast the Matlab software I bought in Fall 2005 will not run on the Mac I bought in Fall 2008. They changed chips to Intel.

You just want something that will work, reliable stable fast.

"I think Linux it too out there for me. I need something a little more conventional. I am very used to Windows, but there are always problems when a new version comes out and upgrading is difficult. It also takes a long time to boot and even wake up from hibernate."

Monday, April 19, 2010

Apple vs Dell vs Linux

If you already know Microsoft Windows it is probably not worth the effort to learn either the Apple Mac or Linux. They do take time to learn. There are lots of nice laptops from Dell, HP or eeePC that are much cheaper than Apple for the same specs. Linux is cheaper than Dell or Apple because the operating system is free, although Dell has such huge sales that they can squeeze down the price to nearly as cheap as Linux.

I would prefer an eeePC laptop based on Linux that can be faster and lighter and cheaper than either the Apple or Microsoft. Some versions of Linux like Ubuntu are big and sloppy and easy to use. I prefer the simpler, leaner and meaner versions of Linux. All are faster than Microsoft and more stable. Probably faster and more stable than Apple and a lot cheaper. But the hardest to learn, especially if you are doing anything out of the ordinary.

Linux tends to be used by experts and hackers so can be a little rough and hard to use but you can get it to do more. Free open source means it is easy to modify, they are not trying to rip you off and hit you with fees for everything you do. Linux is very popular in Germany, India, China and most of Europe. Linux got started by a Finland student "Linus" Torvalds.

Apples are very expensive because users tend to be naive ipod listeners and artists -- not engineers -- so naive users need it very easy to use. As a result things are fairly solid and idiot proofed.

I only got an apple because it is required to write programs for the iphone.

Yes, My PC is very cluttered after 2 years. There are programs such
as "registry Mechanic" that can fix some of the problems, and I have
to do a lot of cleaning up on my own. I may be getting some clutter
and confusion on my mac but it has been nearly 2 years now. I hear
they do get problems and there are software fixes, but it seems much

The other point in stability is that I often have to reboot several
times per day when the machine hangs or starts acting strangely. My
macbook stays on for days weeks before I feel it is time to reboot.
It does automatically download security and other fixes and sometimes
require a reboot for those to take effect, and that is enough. I have
only to reboot my mac once or twice per year due to the machine

I do not know much about linux but I used similar machines 1973-1983
and sometimes since then and they are usually rock solid. Although
there are so many different kinds that some probably do have some
problems. Stick to the most popular "distributions" each linux is a
different distribution with different purposes and histories.

China II

I saw a scary vision of what might happen to Los Angeles and the great Central Valley barrios. It was a TV program about Detroit that once was USA's most prosperous city in the 1950s and 1960s where a negro could get a job without a college education and still live a middle class
life. Now the city is bankrupt, has lost half the population, high
murder rate, crime, decaying schools, low test scores, and finally the
city is razing whole neighborhoods and converting them to farms.

Farms might be a good idea in California too -- the Central Valley and Los Angeles used to have a lot of farms before being paved over by roads, housing, and shopping centers. People need to eat more fruits and nuts to help solve the health care crisis that to a large extent is caused by too much junk food. The Central Valley and other parts of California still produces a lot of fruits and nuts and could produce more.

I saw on TV that Nazis are marching in downtown Los Angeles to promote
white supremacy. I doubt if that movement will take off, but they are
getting exercise. latimes

China is showering USA with products and loans, and causing an
imbalance that must be corrected eventually. In the meantime USA is
getting addicted, lazy and dependent.

" China will surely have to pull back its exports and start laying workers off in the factories."

Yes. USA cannot import at this rate indefinitely. Already many
Americans groan at all the debt and some cannot even make their house
payments. They thought they were rich while house prices were rising
due to loans from China so they bought too many goods from China. Now
they have to buy from China because China has low prices that
Americans need to survive.

" Most have been relocated to the cities from rural parts of China and it will be interesting to see how Chinese labor unions accept this."

The China government is very worried about possible unemployment if
the USA quits buying, and that drives this imbalance. It seems they
should be able to increase domestic demand -- Chinese should be able
to buy their own goods instead of exporting so much to the USA. That
might ameliorate social unrest due to higher unemployment. More
domestic goods would lead to lower prices in China so if one family
member is unemployed they could live better on the remaining

" Most unionized labor in China is structured and controlled from the political arm in Beijing."

I am not able to understand the nature of unions in China. The whole country was converted to a big labor union under Communism, so what can they be a force to negotiate with managers when they are the managers? Now under liberalism they have rich capitalists to fight against, but how does that work? Their system is so different and still to some extent run by Communist bosses possibly disguised as something else and corrupt. Probably payoffs everywhere. How does it work?

" As I understand the makeup, the Chinese don't not have an income tax, but deduct revenues from salaries before being paid by the corporation."

I am under the impression that their "tax burden" is lower than USA, far lower. That might be one reason why they are so competitive, they do not have massive taxes imbedded in every product. USA also pays more for health insurance. Combine the high taxes with high health benefits costs and our companies are burdened in competing with China. Also we pay a lot for education but do not get very educated

American companies in China pay subsidies directly to the Chinese government and submit to government inspections. The big arm of Communist Party has all of a sudden become the tax collector, and operating like a Capitalist nation. China's wealth comes from subsidies that it charges others to operate in their country and causing rich Chinese to replace the British in mansion homes along Repulse Bay, Hong Kong and super condos overlooking the harbor.

This may be a big source of revenue to China Communist bureaucrats. But much money is earned by manufacturers -- they hire cheap skilled labor and make big profits by selling the goods overseas.

These rich Chinese are appointees from the Communist party and hold great wealth, which is mostly deposited in American bonds (Treasury Bonds). Very little is plowed back into the country, which leads one to believe that they are affraid of their own history repeating itself, like bank runs and Maoism, so they try to get it out of the country legitimately through the government they control.

I think they are wise to be worried and to move some wealth overseas. The politics is unstable and can deteriorate quickly -- that is why they reacted to the Tiananmen Square riots so violently, and the Falun Gong religion. Communists must maintain tight control or the big country can go haywire. Chinese in Taiwan have also been moving to the USA, Canada, etc or at least having 1 child born here for citizenship. It will take some decades to achieve political stability. The Taiwan question is still not settled.

"In my opinion, this is very dangerous because a collapse of the working class in China could cause revolt against the Party with the Chinese leadership leaving the country and coming here. I look at San Francisco, and think that it has already happened. With large cash holdings, these Chinese live very well here.."

I have known quite a lot of these rich people, they are all over SF.
They will buy a million dollar house for their kid to live in while
going to some flunky music school. Another destination is Vancouver,
BC, Canada which is a third Chinese most living in the expensive
neighborhoods. wiki

Wednesday, April 14, 2010

China vs USA

I can only quote Winston Churchill's radio broadcast in October 1939: "I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest."

I cannot figure out what China is up to, but it is probably rational and in their self-interest. By making their currency cheap, Chinese goods become cheap and exports huge so Chinese employment stays high and Chinese accumulate vast wealth in the form of US bonds, etc. However, this cannot continue indefinitely because the interest payments on those bonds will require USA tax increases. Eventually USA taxes will get so large the USA population will starve to death. There will probably be a USA revolution or default on the debt before that happens -- the tea party movement is an early warning. USA is still far away from catastrophe, but USA domestic manufacturers are hurt by the competition, and jobs are fewer, and Americans are just upset about getting deeper into debt because they know that will lead to problems eventually (as they just saw in the real estate crash).

Bernanke must know that Reagan / Volker caused a "super dollar" in the early 1980s by tight money, high interest rates drawing capital in from around the globe. This hurt houses and cars but set off a boom with all that capital and big federal deficits. We are in a similar situation now with big deficits and a mini-super-dollar caused in part by China holding down their currency. I don't know if that rest of the big boom can be replicated now with so much debt being held by China. and so much manufacturing and employment in China. Interest rates remain low and will remain low because the economy is depressed. So the situation is not completely comparable to the 1980s.

Our situation is unique and unstable. We know some trends will have to reverse at some point and the longer the wait the more disruptive the reversal will be. California and Los Angeles bankruptcy may be a leading indicator of how the USA debt may get resolved. We will see more on that this summer!

Seems Bernanke is looking much older in the past 2 years. I would not be surprised to see him resign. He said nothing about the Chinese holding our debt other than it would be in their favor if they would adjust their own exchange rate. To me, this indicates his naive understanding of the Chinese. He never expounded on how it would enhance their position, and not a word on how it would discount the value of their Treasury holdings. He's evidently playing some kind of game with Congress.

China is an enigma. It is always full of surprises, and much of that comes from Chinese culture and a way of life. Crisis in China is always spontaneous, like droughts, bank failures, revolutions, and anything else that grows large in China then falls flat. Where we live by routine, the Chinese live by exageration, even their dams. The failiure of real estate in China would not be surprising, and there are also other more inflated problems in China. The uncontrolled industrial expansion and extravagant overbuilding in rural sections of China has to have some kind of political disruption to an old time Communist regime that is still in power and Maoist. Too, mother nature is not kind to China. They limited childbirth with family size laws to fight overpopulation, but have done nothing to stop famines, which could happen anytime. I believe the last one was in 1953-55 or thereabouts.

Friday, April 2, 2010

Triple Bubble Inflation Coming

I agree with you on the Bernanke Bubble. The politicians are putting pressure on the fed to cause another inflationary boom so that the Democrats and Obama can get re-elected. The problem is they hurt the economy so bad that it is taking too long to recover so they may get booted out of office.

"I agree with you about the bond market. I believe the Fed is behind the curve again and stocks are surging into dangerous waters. The P/E ratios are ridiculously out of whack, and you are right, institutions are diving into stocks big time because the bond market is destined to fall out of bed. I am at a loss as to why the Fed does not let the free market determine bond rates and to readjust their portfolio holdings."

I think the answer is politics and the inherent inflationary bias of third world banana republics and mobocracy in general. Theoretically the Federal Reserve is supposed to be above politics, like the Supreme Court, and act in the best interests of the economy. But in practice the Fed will succumb to politics, especially now that financial institutions are being called in to testify before congress and heavily criticized.

On a positive note, industrial production is recovering sharply, and business profits are improving after they have fired many employees and the worst businesses went bankrupt. Now these unemployed can find work in leaner and meaner firms in parts of the economy that need to grow.

"I see where they have decided not to relinquish mortgage packages, low rated bonds, and other holdings as Bernanke testified before Congress. I believe that he is under political pressure to hold rates where they are for Treasury to float more debt."

Yes, I expect this pressure to continue and eventually cause inflation. Most of the economy is still too weak to raise prices -- people don't have enough money to buy very much. But as the recovery continues this will change and people will spend more freely and the result of massive liquidity will materialize into price increases.

"The institutions see this and are getting out of the bond market recognizing hidden bond retractions and going into stocks."

Yes, it looks like the smart money has already left and the dumb money is suffering losses on their bond portfolios. I expect to see this in the stock market later this year. Many think the stock market has gotten ahead of itself and are moving money elsewhere. The problem is where? Maybe overseas. I just had the idea to move to Mumbai India which is the English-speaking business capital on the west coast with weather similar to Hawaii (which lacks business.) China is more booming but the language is too difficult.

" Somewhere this has got to give way, and interest rates will have to go up. Looks like the Fed is screwing up again."

Yes, this is the third Fed induced bubble we have had in the last 15 years! When will it end? How much can the economy take?

Tuesday, March 30, 2010

Slow but classic recovery

The economy seems to be recovering, only very slowly. Amazing that the indicators are following classic business cycle patterns.

The stock market is going up (it usually leads the economy), probably because investors are jumping into stocks and out of bonds because bonds are going down. As governments try to sell more bonds, the bond buyers are demanding a lower price and higher interest rates due to worries about the coming inflation and ability of the governments to repay. This will push up the mortgage rate too, and put more pressure on house prices. High interest rates also push down stock prices, eventually. Right now the downward pressure on stock prices has not yet materialized but many seem to think the year-long rally may fizzle soon.

All of this everybody knows. The government cannot continue to borrow and spend. Eventually the bills will come due. The longer they wait to cut, the worse the cuts will have to be. What USA needs is a big tax cut and an even bigger spending cut along the lines advocated by Ron Paul. Government wastes too much.

Now the feds are taking over student loans and will forgive the loans after 20 years if they cannot repay them by then with repayments limited to 10% of income above a base allowance. (Forgiven after 10 years if they teach or nurse). So students can take mickey mouse classes, not learn anything, not be able to function on the job, and not be able to repay and just get the loans forgiven after 10 or 20 years. A waste of money and an insult to education.

Wednesday, March 24, 2010

PIGS and Low USA Interest Rates

" We will just have to see how this plays out. Somewhere along the line the deficit spending is going show up with huge accumulations to the debt. "

Yes, debts will pile up and can pile up for quite a while before it gets corrected. Either the debt has to decrease, stay the same, or eventually bankruptcy, hyper-inflation or some other catastrophe happens.

" The subsequent rise in interest rates has not happened yet because there are takers out there for government bonds."

Yes, the Chinese have to buy bonds because they are running a huge trade surplus and are awash with dollars. Also many other countries have trade surpluses with the USA. Either the currencies have to adjust or Americans stop buying or Chinese start buying US goods -- as long as there is a trade imbalance there will be buyers for USA bonds.

" Somewhere these interest rates are going to have to go up. So far nothing on the horizon to show this but the cracks will begin to show up in the long term bond market when price falls. Right now there is a surge of funds from European banks bailing out of the Euro and buying dollars. When this subsides we should note some change."

I think this is a major factor recently. Europe has big problems with the PIGS -- Portugal, Ireland, Greece, Spain who have too much debt for their weak economies. California is better than Greece. USA states are in trouble but not as bad as the PIGS. Europe is investing more in USA bonds as a flight to safety until they can straighten out their own problems.

This inflow of foreign investment will give Obama money to dig a deeper hole. It may get so deep that the USA cannot climb back out of and we join the PIGS which are facing draconian austerity measures such as termination of Social Security, Medicare, Medicaid, Schools....

(Some are talking about retiring in Ecuador, Costa Rica or Panama which are supposedly cheap and safe like USA in the 1950s. With USA crashing, why not live on the beach?)

Tuesday, March 23, 2010

Health Care Bill

My problem with the health care bill is that it is so complicated that nobody knows what is going to happen, including those who wrote the bill. It may backfire. Our recent crash was triggered by failures in policies to promote home ownership via the community redevelopment act Barney Frank. It handed rich people billions of dollars in bonuses and threw poor people out of their houses onto the street.

" Yes, it is all over but the shouting! I agree with you and looking for a good Tea Party candidate is first priority. I hesitate with Ron Paul because of his stand to get rid of the Fed, yet his other policies make sense, especially debt reduction."

Yes, he recommends termination of many liberal spending projects -- this will obviously save money and reduce the debt without raising taxes.

"It may take a move to default on some part of the debt to recover what is going to happen with this new Health Care Bill. My feelings are that the Congressional Budget Committee lied about cost reduction on the bill and were bought off. Watch out for new taxes, and an increase in unemployment.

Yes, there will be new spending that will be financed one way or another. The bill is probably too complicated for the CBO to figure out and they can manipulate the figures easily. Increased uncertainty will scare business from hiring to tax receipts will be under pressure. They will have to tax, inflate, or default.

Obama continues to spending on 2 wars plus adding more spending on health care and other socialist experiments will eventually bankrupt USA. Another problem with this new bill is that like many other such bills, the spending is happening sooner and the purported savings, revenues, and tax inflows will happen later so politicians can will continue to run up debt and hide the problems, poor performance and low revenues for decades. The recent crash was an accident -- they should have been able to put off the day of reckoning until 2020 or later.

The new health care bill or or an Iran war may be the straw that breaks the camel's back. Eventually debt financing money will hit the limit as to what creditors will put up with (as in California). The the feds can hyper-inflate and cause a Facist takeover or they cut so much spending so much as to cause a Communist revolution. Either way democracy is dead!

Wednesday, February 24, 2010

Inflation risk

I just heard Bernanke grilled by Barney Frank, Ron Paul, and other
politicians. Bernanke seemed to be in a better mood because the economy is showing
some signs of life. He flatly declared that the Fed will not monetize
the debt.  He said the Fed is planning to tighten money
as the economy improves. So if the money supply is tightened as the
economy recovers then interest rates will increase, making the huge
federal deficit even bigger! Will the US government default?

I do not see how a catastrophe can be avoided. Either we will get a
US default (collapse of pension funds, insurance companies, the
dollar, sale of Hawaii to Japan, etc.) or the Fed will will monetize
the debt leading to hyperinflation. Either way we are screwed. Am I
missing something somewhere? Are the feds being honest? What do you
think is a reasonable scenario without catastrophe? Do you seriously
think they can reduce or eliminate social security, medicare, welfare,
FNMA, GNMA, highway spending, war in the middle east, ... ? I think
the politicians will take over or pressure the Fed to hyper inflate.

On the California education system fiasco: Maybe terminate the CSU
and other taxpayer subsidized degree mills and start a new branch of
the UC university system with those facilities. Specifically limited
to train more doctors, nurses, pharmacists, dentists, engineers, and
scientists. If we increase the supply of medical professionals that
will help to bring down the cost. My roommate had to go to medical school in Mexico because of bad grades, fooling round with his girl friend, and working at PBS. We should be able to train USA students in the USA.

Tuesday, February 23, 2010

Freedom of the Roads

You make an important point "freedom of the roads." Conspiracy may be too strong of a word, but it looks like government and industry have cooperated in forcing people to spend 20% of their waking hours commuting and paying for transportation including taxes to support government bureaucracies. It is expensive to buy a modern complicated auto, insure it, license it, and deal with dealers, mechanics, and the DMV, AAA,... I sometimes wonder if a horse or train might be cheaper and more effective for many.

These costs do not include the damage to health from sitting and driving and working too much, and paying for funerals, health insurance. This is a major factor in our "health care crisis." Maybe USA should get rid of cars altogether, build cities more compactly, and avoid health care costs caused by too much sitting and driving and inhaling exhaust fumes. Some say the whole transportation system is rigged to make some wealthy and it does support huge bureaucracies such as the DMV, CHP, CalTrans,... One advantage of the wealthy coastal suburbs such as Marin County is that the DMV is easier to deal with there and cops are not on edge with so much criminals behind every bush. But the suburbs have a hidden tax of long commutes, and more auto expenses.

There are phd programs in transportation economics and it would probably take 10 years of study just to get data and literature on the current transportation system and how it interacts with other sectors of the economy.

I would not be surprised to find that our current setup is just another example of dysfunctional big government and meddling by politicians. I hope the budget crisis will lead to more privatization of transportation or at least studying the costs and benefits of alternative transportation systems. Why did they push high speed rail before we have adequate low speed rail? Is this political pork for inland Los Angeles which is hard hit in the recession? I suspect if we privatized transportation we would have more trains and fewer freeway traffic jams. Train tracks are easier to build and do not require importation of so many illegal Mexicans to do the construction, thus lowering the need for so many highways, houses, schools, and all the public investment that goes along with large populations.

Re transportation, I think most Libertarians I've met feel that even
driver's licenses are extreme. A one time examination (without a lot of
politically inspired rhetorical questions on the written portion) would be
acceptable, but exacting yearly fees for license and registration is really
big brother. I think if the founders could have envisioned what DMV has
become, there would have been an additional amendment, something like "A
well mobilized citizenry being vital to the security of a free state, the
right of the people to travel freely on pubic roads, shall not be

libertarian gridlock transportation policy

While many libertarian ideas sound too liberal, I saw a discussion on
CSPAN where the speakers brought up many ideas I have thought up, even
the link between gasoline and obesity. The speakers disagreed with
each other but seemed to agree that more privatization of
transportation would be in order. What do you think? The book
writer below was the main speaker and told of a solution to gridlock:
cars whizzing down the freeway at 70MPH only 20 feet apart by computer
controls. He said the technology already works but I am skepticial.
What do you think? Cato is a large libertarian think tank that I have
been reading for decades.

Thursday, February 18, 2010

Obama Austerity, Greece, China Debt

The note below is important, on how US debt is held by a wide swath of the Chinese population due to the capitalistic nature of their economy. I wonder if the Chinese government actually controls less of the economy than USA at this point? It is hard to get good data on China -- I cannot read the language even if I get the data. It is also hard to find out what is going on in the USA economy.

Obama is on TV right now declaring a budget freeze, but he exempted social security, medicare, medicaid, military, veterans benefits and such items which are the biggest part of the pie! I wonder what good he expects to accomplish by this? The problem in a democracy is that the people will kick out conservatives and replace them with liberals who will cut taxes, take out loans to dish out short term benefits and leave the debt to future generations to deal with, possibly by hyperinflation.

Greece got into trouble because they joined the Euro zone and the other countries will not print money to payoff Greece's huge debts.  So the other countries are forcing austerity measures onto Greece.  (It looks like Goldman Sachs may have to help out Greece because they may have made mistakes in the financing.)

Obama is making some minor moves toward austerity in the USA but probably the steps are too little, too late. I think the USA will eventually print money to payoff the debt, social security, medicare, medicaid, etc. They are printing money currently to postpone the banking crisis and to boost house prices back up to where not so many
houses are underwater. This money printing will continue and get worse as baby boomers retire and start collecting social security. Like Milton Friedman said: "the lags of money are long and variable", so inflation may not be real obvious until 2020 or 2030. But eventually USA will see inflation.


As far as the China debt. I think that it is important to realize that it is not the Chinese government holding US debt. It is the population. China has been expansionary because its private business is a capialistic system rather than with a communist controll of production. Small businesses all over SouthEast Asia have grown into very large businesses and the Bank of China is all over the orient. This means that the flow of cash into the economy has been more private, allowing the citizenry to invest into US Treasuries. Therefore, the holdings are mostly individual banks, businesses, and customers than the Chinese hiarchy. So there is really no leverage by the communist government to control flow of funds, like most news
broadcasters claim. The Chinese have had severe bank runs before, and the people look for safety of investment, and believe the dollar is the most reliable.

The danger comes from China's cycle of drought and production failure, that historically happens every hundred years or so. This could bring down their economy overnight. I recall seeing this in Canton in 1950. Recall of Treasury bonds by the population could be a sleeper.

Tuesday, February 16, 2010

Death of Social Security

"The coming social security storm has implications for the infrastructure of the country. With the disappearance of the middle class I doubt very seriously that a minimum wage non-English speaking Mexican worker in Los Angeles is going to support an old white broad in Massachusetts. "

I have been saying this for a long time. As far back as 1986 it seemed clear to me that Social Security and other retirement plans will not have the wherewithal to honor their obligations. Now we have the collapse of California and an increase in people who do not have or value education. Many long-term implicit contracts that (spoiled brat?) civilized society has grown accustomed to will not be honored. Race is a factor as is the younger generation who would prefer drugs over supporting the elderly.

In general the finance industry can be viewed as a means to separate fools from their money by selling them pie in the sky. Like preachers and snake oil vendors they collect their bonus up front and are long gone before the buyer finds out that he has been duped. Ponzi schemes pay off some early buyers to attract in even more suckers later. This can be viewed as part of the evolutionary process of survival of the fittest. The schemers who legally steal get to live in NYC and Beverly Hills while the losers are ostracized to the pot farming and fruit growing poor rural areas.

Social security benefited from a strong US economy after WWII when most competitors destroyed themselves leaving the US with the largest industrial base and a trained work force. So it was easy to pay promised social security benefits. Now the government is saddled with an increasingly large Federal debt with interest payments gobbling up an increasing share of the budget. It will be increasingly difficult to pay social security, medicare and other benefits. Something will have to give. Similarly states are deep in debt and already making major cuts in spending programs.

Public and private pensions such as CalPERS and 401Ks are also in trouble. Stock brokers like to point to academic studies showing the 13% earned by stocks as measured by the Dow and S&P500. Unfortunately these are the very best stocks, the top 30 or 500 out of millions of companies that have been started. Most stocks earn less. And the Dow is still around 10,000 as it was way back in the 1990s when Bill Clinton was president. Then you have to subtract out the substantial management fees. CalPERS has also lost a third of their money in private equity, real estate, derivatives and other risky assets. Eventually pension plans will not be able to pay promised benefits unless they are lucky to pick what will be the top stocks in 30 years when beneficiaries will be retired.


Monday, February 8, 2010

Banks prefer Inflation or Deflation?

The following paper found that gold is not the best commodity for price stability. Instead a currency based on plywood, copper, aluminum, and ammonium nitrate would give the best price stability:

I will add that politicians trying to force doctors to give more health care is similar to politicians trying to force bankers to give more loans. In both cases the "have nots" will get more by taking from the "haves" unless magically we get more doctors to provide that health care, or more workers make more money to pay back those loans. It might be wishful thinking on the part of politicians who probably should be focusing on educating more doctors so they can treat more patients and educating more workers so that they can make more money and pay back the loans the banks already made.

I can agree with some of this. There is a casino mentality in finance and the more money in the casino, the more money bankers can extract and justify -- modern rent-seeking feather-bedding. So bankers do not want deflation either. Especially because the politicians like Barney Frank may come in and try to take over or otherwise screw up the financial system. We see that happening today with interest rates fairly low, in some cases zero, to help the economy get out of this recession but politicians are not happy and want the fed to do more even though their existing loans are not performing and banks are near bankrupt and further injections of liquidity raise the risk of hyperinflation. Price stability plus full employment would help keep politicians satisfied. There is also "risk aversion" -- bankers could plan better if inflation was constant than if prices were jumping between various rates of inflation and deflation. Also deflation and depression would kill their loans as borrowers go bankrupt.

"This is a simplistic view, I'm sure, but it seems the Fed, and all central banks, would prefer, or at least tolerate some inflation rather than ANY deflation. Think of them as realtors, if you like. Or casino owners. They ALWAYS get a cut of the action, win or lose, so it's in their best interest to have inflation (prices up), not deflation. They don't want SO much inflation that the economy melts down, because that too, impacts their profits."

Yes but there is an asymmetry. In a deflation they will get repaid more valuable dollars but in an inflation they will get repaid more worthless dollars. So given a choice, bankers would prefer a little more deflation than a little more inflation, holding everything constant. I think the fed and the bankers do not want anything to upset their racket but they would be more worried in general about inflation than deflation.

The main problem is the politicians who are always meddling in the economy and get even more troublesome if the private sector does not manage its affairs well. After the depression and WWII, USA economic policy was regulated by the Employment Act of 1946, which encouraged the federal government to pursue "maximum employment, production, and purchasing power" through cooperation with private enterprise. Later,–Hawkins_Full_Employment_Act
signed into law by President Jimmy Carter on October 27, 1978, explicitly instructed the nation to strive toward four ultimate goals: full employment, growth in production, price stability, and balance of trade and budget. Obviously difficult to achieve.

You can get the text below for a dollar. It has a good history of financial systems and theory. It was used at Berkeley and Harvard but proved to difficult to be used at most colleges so went out of print. Professor Pierce was Chief Economist at the Fed, called the "big okie from Modesto" by students came from a wealthy agricultural family. He did not like bankers or get along with them but he was the smartest man in the building so they had to appoint him to maintain the empire. He used to go down to the Oakland docks to drink with "real people" and was a chain smoker. Recently deceased.

Inflation Tendencies in our Democracy

The fed is the "bankers bank" all owned by rich people and serve mostly rich people who by definition own huge piles of paper assets that would get demolished by inflation. Poor and lower middle classes are often those most in debt and want more inflation so those debts will shrink in real terms and they can repay those debts with cheaper dollars, thus hurting the rich.

There are more poor voters than rich voters. Democracies elect politicians who want easy money, low interest rates, a booming economy, and they try to force monetary authorities to stimulate. As in ancient Rome "give them bread and circuses." Dictators also must stave off revolution by appeasement of the masses. Hard money regimes often have to resort to debasement of gold and silver coins. There is usually a tendency toward inflation everywhere. If politicians implement a gold standard (ha) it would not last long. I don't think any country has devised a trading system without a central bank.

Theoretically inflation is not so important if people are uniformly impacted. If a cup of coffee is 1$ or 100$ does not matter if your income is 100 times larger in the latter case. While prices have gone up a lot since 1913, incomes have gone up much faster. Poor illegal immigrants on welfare in Fresno have better food, medicine, houses, computers, ipods, than rich New Yorkers did back in 1913.

The current political battles are just a continuation of the old conflict. Sometimes rich mortgage brokers win, other times poor debtors win. I agree that we may see more circuses such as war on Iran or a new terror attack to keep the masses and politicians away from trying to force the fed into printing more money. The purpose of the liberal news media and conservative talk radio to distract, deflect and postpone the inevitable.

Eventually the fed will be forced to print more money and buy more of the huge government debt that Obama is increasing and thus cause inflation. This is an opportunity for smart money to get richer by buying gold, silver, land, houses, farms, art, stamps, rugs...