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
infringed."

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.

Joe

http://www.academicwebpages.com/preview/mehra/pdf/epp_retrospect.pdf

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:
http://www.nber.org/chapters/c11454.pdf?new_window=1

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,
http://en.wikipedia.org/wiki/Humphrey–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...

Thursday, February 4, 2010

cars, drugs, foods, taxes, big government

I see similarities in several problems afflicting large industries:

Cars are getting so complicated that even the manufacturer cannot figure out their problems. A good study of the CARFAX auto history would find that that 50s and 60s cars are more durable and reliable than 80s, 90s, 00s, even though metals and technology were primitive and cars were cheap, dangerous throw away items. Mainly they were simple and mechanical and could figured out and fixed.

Food stores are filled with fancily wrapped expensive white flour, sugar, fats, salt, artificial color and flavors and preservatives that I bet are less healthy than meals that ordinary Americans ate around 1900 when much of the population was on farms. Even during the 1930s depression my parents families had gardens, cows, and jobs. It is true that transportation now lets people choose more fresh fruits and vegetables around the year, but people often eat junk food instead, and the fresh fruits are often from foreign countries, picked too green, burn lots of jet fuel to fly them up from Chile, and other problems. A very complicated and expensive food chain.

Drugs help some diseases but people now take far too many, often for self inflicted diseases from poor diet choices and lack of exercise in part due to cars. There is a huge legal drug industry with world headquarters in Berkeley and San Francisco areas generating lots of tax revenue for California. Also California has a huge illegal drug industries, high quality pot in Humboldt, Mendocino and in the mountains above Fresno, Porterville, and much indoor pot and meth all over the California and USA, some in foreclosed houses, stores, etc. Drugs are complicated and generate toxic waste, and add to the problem of poor health. Probably less healthy than coffee, tea, chocolate, alcohol and tobacco some of which is organic and low pollution.

Bank derivatives are also complicated rube goldberg devices that take a simple idea such as home mortgages and jazz it up with details and really crazy legal language, then slice and dice it, bundle it and sell it through several different banks so that neither the ultimate buyer of the mortgage, nor the borrower knows how much it will cost and who will get paid what, or more importantly why the buyer should not just walk away as the house price sinks below face value of the mortgage and the payments exceed rents. There were fewer mortgage defaults and bank bankruptcies back in the old days of a fixed interest rate 30 year mortgage with 20% down. Both borrowers and lenders were better off.

All of these poor choices generate income for all the people working in the industries, and taxes for government. And support an army of lobbyists and social engineers and liberal advertising artists and the whole liberal media. However for most working people and buyers of the products they are probably worse off than they were back in the old days. Although GNP GDP Industrial production numbers make it look like we are better off. Sure, we have choices and some can take advantage of the huge technological progress that has been made. Electronics have probably helped everybody whether they make good or gad choices. And maybe vacations, travel, and learning. But in many areas people are worse off.

Food, Drugs, and Cars have exacerbated the health care problem and raised the cost of insurance. Despite much progress I think in the USA that life spans are starting to shrink after decades of lengthening. Other countries are still lengthening but they may come down too as the obesity epidemic spreads, and more cars, aids, and stress from bank derivatives.

All of these problems are possibly caused by too much libertarianism giving consumers too many choices. The smaller choices previous were enough. People just want too much, and too much variety which is ultimately their undoing. Maybe big government is needed to force a smaller number of choices.

All of these impact multiculturalism, racial warfare, and genocides that we have recently witnessed in Rwanda and elsewhere. In Rwanda the darker Negroes killed off the richer lighter colored Negroes who were too cozy with white imperialists. In the USA minorities use more illegal drugs and have less health insurance for legal drugs. USA minorities get fewer home loans and have more foreclosures and loss of homes. Mexico has illegal drug wars, USA is in the Afghan poppy fields. Maybe we need more big government to fight / prevent more of these wars. USA minorities have less education and are less able to figure out contracts, drugs, etc. More big government education may be needed to educate minorities to think more "white". Not sure how all of this will play out, but I hope not with a bloody revolution.

Monday, February 1, 2010

Gold Bubble?

I just heard Obama on TV talk about cutting spending and trying to reduce the deficit, sort of amazing for a Democrat to sound like a Republican.

The prospects for gold depends on fiscal and monetary policy. Right now we have a very expansionary fiscal and monetary policy to get us out of the great recession but many want to cut back right now to prevent overheating and inflation. If the economy strongly rebounds then the money supply will probably get cut back thus reducing the possibility of hyperinflation. If fiscal policy continues to be highly stimulative then monetary policy can cut back thus reducing the possibility of hyperinflation. If the fed cuts back for any reason and prevents hyperinflation then people will quit worrying about it and sell their gold.

It is nearly impossible to figure out what will happen to gold unless you can read the minds of Obama, Bernanke, and the politicians and what they will do to prevent inflation, balance the budget, etc. Until the economic situation stabilizes then gold will probably stay high. If inflation starts to show up then gold will go higher. If the government could cut wasteful spending, cut taxes, and balance the budget then gold will go much lower but I don't think that is very likely. My 2 bits.