Wednesday, May 19, 2010

Terminated

This is no longer an active blog.

It was my original plan to delete it, but there is enough useful information documenting bailout efforts since March 2008 that I've decided to keep it up, with the caveat that the "Core Theory" posts should be ignored because the Cash-Inventory Equivalency is in error.

Its replacement, where I will be posting similar content but greatly de-emphasizing if not eliminating monetary theory discussions, will be here:

Countdown: Zero Hour.

Thank you readers for your support.

Sunday, April 18, 2010

Countdown

Having slept on it, one week from now the Ca$h Bull will be deleted.

There are a few reasons but the main one is the disproof of the cash-inventory equivalency. While there are many other points raised over the last couple of years which I think are good, looking back over things, the assumption of the cash-inventory equivalency is so interlaced into everything that even if the idea directly affects only a small portion, it spoils the rest. In examining the relationship of cash and inventory, rather than fixing what is here, I think it is best just to start over.

Having become so focused on the consequences and demonstration of this theory, the blog has degenerated into a debate with myself on abstract financial formulas, to the point I haven't been encouraging nor even wanted others to read it, or done anything to promote the site for over a year now. While I was hoping things might change with a positive demonstration of the cash-inventory equivalency, that didn't happen.

With its name, it was a time-limited blog anyway. I chose it because I was bullish on cash, and March 2008 was a good time to be bullish on the U.S. dollar, at least until March 2009. The dollar has still done okay over the past two years, but over the past year there have been better investments.

I've much enjoyed economic blogging and plan to continue. It has greatly refined my knowledge of things like money creation, fractional reserve lending, government bonds, and the relationship of yields to principle. My definition of inventory, economic capacitance, errors of pricing and production, the desire coefficient, and considering how production relates to money supply are still good and will somehow be ported over to the new blog.

My blogging interests lately have been, aside from proving or disproving the cash-inventory equivalency, are pending government bankruptcies and good investment opportunities with a 0% federal lending rate.

Rather than just letting the blog sit and moving on, in the interest of minimizing the misinformation that already exists on the Internet, I will delete it completely, and that which was good I still have saved and can be ported over to its replacement.

Saturday, April 17, 2010

Disproof of the Cash-Inventory Equivalency

In attempting to prove mathematically the cash-inventory equivalency, which has been the focus of this blog for awhile now, I've isolated its fatal flaw.

The cash-inventory equivalency states that the prices of all things for sale will self adjust to be exactly equal to the money supply.

Here is the error: in a healthy economy, inventory gravitates toward zero, not the money supply. The better inventory moves, the less inventory in stock, and the faster production can happen, and the better the profits for the producers.

However, money supply still limits production, meaning it limits what can be charged for what is produced. How it does so, and how this new construct can define the value of a dollar, will be discussed in upcoming posts.

So I don't think all is lost, but before moving on this just needed to be said.

Thursday, April 15, 2010

T*Bux 2009

T*Bux is the cost per U.S. taxpayer on a $1 trillion expenditure.

From this, the "per capita" cost of any government program is an easy calculation. What might change slightly year-to-year is the number of taxpayers. Keep in mind data from the IRS lags by nearly a year. Still, we have a good approximation.

2009 data shows there were 131,543,000 federal filers in America. This is a 6% drop from a year before, which is unsurprising given rising unemployment. It pushes up the government burden on each particular taxpayer. Dividing $1T by that number and we get:

T*Bux (2009) = $7600 (up from $7250 last year).

To review its use, if a program costs $800B, that is $0.8T, so 7600 * 0.8 = $6080 per taxpayer. The new federal debt limit is $14.3T, so that is 7600 * 14.3, or $108,680 that each taxpayer owes if the government maxes out what it legally can, which it will, before raising the debt ceiling further.

Net federal revenues for 2008 was $2.3T. 2009 is pending. If it were the same, that would be $17,480 per taxpayer.

Now don't think corporations are going to be paying all of this because they pay hardly 10% of taxes. The vast majority of revenues comes from personal income tax. If you think corporations should be paying more, do you really want American jobs outsourced further? I suppose it depends on the corporation. If AIG wants to leave our country I'd throw out the red carpet. For the record, I support ending both personal and corporate income taxes and replacing it with a federal sales tax.

I know there are interest payments etc. but that adds extra confusion and numbers should be compelling enough as they stand.

Wednesday, April 14, 2010

Spend Cycles

Moving toward a proof of the cash-inventory equivalency, another factor that has to be considered—in addition to money velocity, production velocity, money supply, and inventory—is the maximum rate of spending.

Does money supply limit the velocity of money? Cannot one dollar spent a million times over clear the same amount of inventory as a million dollars spent once? Indeed it can.

If we are at a dollar bazaar with a number of venders all with goods at a dollar a piece, a money supply of one dollar can see all of those goods sold, eventually. If everyone there had a million dollars divided among themselves, then a million dollars worth of inventory could be cleared instantly. But with just one dollar, the rate inventory clears is dependent on the rate of spending.

Now, factor in production velocity. Say a new good enters the bazaar every five minutes during the hours it is open. If that one dollar can be spent once a minute, it can clear this new addition of inventory as well as the old inventory. If new inventory is added every minute, then that dollar can keep up, though the inventory will not change in size—it won't shrink, but at least it will not grow. If new inventory is added every 30 seconds, and if on average that dollar can be spent no faster than once a minute, then inventory will accumulate.

If a second dollar is added to the money supply at the bazaar, then the inventory can still remain in balance with new goods added every 30 seconds. A third dollar added to the money supply puts it in good shape: not only can the new inventory be accommodated, the old inventory can also clear. Once old inventory clears, production can step up to a new item every 20 seconds. If this is the maximum rate of spending, if buyers can move dollars around no faster than once per minute, then new production is limited by the $3 money supply, in a balanced economy.

In each "spend cycle" of one minute—the duration it takes for the money supply to be spent—no more than $3 of inventory can be added, or it will not clear. If $4 of inventory is added one cycle, then $1 of it would be left over, so only $2 could be added in a later cycle for things to balance out.

In the $3 economy, if two vendors are very close to one another, then the same dollar might be spent twice in a minute, whereas if sometime needs an item from a vendor far away, then a minute might go by and the dollar in transit is not spent at all. The maximum rate of money turnover should be regarded as an average.

Once money velocity hits its maximum stride, then and only then does money supply limit the amount that can be spent. If money is being spent as fast as it can, the cash-inventory equivalency can be mathematically demonstrated.

Sunday, April 11, 2010

Inventory in Motion

Previously, I said an actual proof of the "cash-inventory equivalency" was probably beyond my mathematical ability, but this post is the start of an attempt.

Money supply and inventory are hard to compare. Money supply is fixed—who is holding on to a given dollar will change, but the total supply of money, excepting hyperinflationary situations, remains generally stable from month-to-month. When it does change from printing, credit expansions, or credit contractions, the change occurs slowly.

By contrast, things for sale are in constant flux. They enter the market when produced or put up for resale, and then leave it once purchased, and so what is for sale is always shifting in a healthy economy, and ideally nothing remains on shelves for long. To remain in balance, that which is sold must equal that which is produced or put up for resale.

In a productive economy, inventory has to clear at the rate it is produced or added, otherwise it accumulates if produced faster, or disappears if sales are faster. If sales stop but production continues, then the producer is working for free, which is an unsustainable condition. But if production stops and inventory stagnates then prices could be anything. However inventory will clear faster and production can resume if prices are lower.

So: money velocity = production velocity, where money velocity is dollars spent on inventory over time, and production velocity is the price of goods produced over time.

They do not have to equate—producing a unit does not imply it will be bought, and excess inventory can be bought up faster than it is added—but over time sales has to balance with production, otherwise inventory accumulates if production velocity exceeds money velocity, and vanishes to nothing if the reverse.

Further posts will consider how money velocity and production velocity relate to money supply and total inventory.

Friday, April 9, 2010

Greek Debt BBB-

Today Fitch cut Greece's credit rating from BBB+ to BBB-, one step above junk [1]. This is in the context of ongoing deficit spending and approaching the terminal limits of borrowing. Official numbers for Greece in terms of national debt relative to GDP and tax revenues aren't greatly out of proportion to other nations with heavy debt burdens such as Japan and the United States, but with Goldman Sach involved [2], I'm sure there is more than meets the eye. While many are expecting bailouts of Greece from the Eurozone, and they are not out of the question, but have not been forthcoming either.

In the broader context, pretty much the only thing that stops reckless government spending is when it runs out of money, meaning there is no longer a market for Treasury Bonds. The higher the risk, the more the country has to pay in yields, and the more it costs to insure that debt.

As more countries become unable to sell bonds, I will be looking for patterns in terms of amount of debt relative to GDP and taxes in order to anticipate the debt limit for the United States. At the rate things are going, only then can we expect bailouts to stop. If Japan is any guide, we have a ways to go.

Sources:
1. Fitch Downgrades Greece.
2. Bernanke says Fed Reviewing Goldman Sachs/Greece Contracts.

Monday, March 29, 2010

Predictions 2009: more Good, Bad, and Ugly

Today is the second anniversary of the Ca$h Bull. Having made good headway this year with demonstrating the plausibility of the cash-inventory equivalency, I think this blog will be able to enjoy a tighter focus going into the future. I plan to have fewer, but longer posts, that will go into more depth onto the state of the economy once theory posts wrap up.

Out of curiosity—and not that I'm expecting a dime from this, but just to see what it is like—for this year I plan to start hosting ads. I'll report on my experiences with it next year.

I've been more leery about making predictions lately since we currently operate in a bailout economy. Bailouts drive the economy today. Wherever you find optimism and success nowadays that is usually because of government intervention. The rest of the economy is struggling if not crashing. Take away all bailout efforts including a zero-interest rate policy and I anticipate a major crash. So predictions now are nothing more than second-guessing what policy decisions will be made by Washington, rather than successfully understanding a complex system.

So, this time, I'll review predictions made over calendar year 2009 (instead of the last 12 months), repeating some before March of last year, and skipping some from the beginning of this year. This is because it is hard to comment on predictions made two months ago. Even forecasting the demise of the health bill (which I took back in a comment a week later) which would be a disastrous prediction since it recently passed—not all is said and done yet and the perspective of a year will offer a clearer view.

I'd like to revisit one prediction, from 2008:

9/11/08: "The federal government will buy troubled mortgages from banks, I imagine at near face value, floating Treasury Bonds as needed to pay for them—such that the Treasury Department holds the mortgage stinkers, bought for with bonds that will be paid off by the taxpayer over time. Banks now have the opportunity to become re-capitalized from recent losses and dump toxic mortgage securities all at once." This was on my list of predictions from last year (3/29/09) that I filed under "ugly," since last year they were doing everything BUT that. The more time passes, the more accurately it describes the situation.

Okay, without any further adieu, here on the predictions from 2009—the good, the bad, and the ugly:

The Good:

1/26/09: “future indicators show no end to budget cuts and profit downgrades.” Comment: budget cuts big time. Profit downgrades—well since banks factor bailout money and mark-to-model accounting into profits, what can you do?

1/28/09: “Expect quantitative easing soon.” And we got it.

2/10/09: About Geithner and acquiring toxic assets from banks: “The fact he is calling for the use of private capital in all of this, for this ‘bad bank,’ which obviously isn't going to happen unless it is fully guaranteed, strikes me as almost a delay tactic.” Comment: That seems like ages ago. Anyway, the whole public-private investment program has fallen by the wayside. This "bad bank" now is just the Fed and the GSEs. I can't see any private capital of significance involved in the toxic asset bailouts.

3/21/09: Regarding the establishment of some new global currency at the G20 meeting: "Anyways, from what I've been reading it does not sound like these talks have progressed very far, and unlikely will by meetings end." Cha-ching!

6/15/09: Regarding coercive tactics to get banks to modify mortgages: "Where the mortgage markets are already starting to freeze, despite the Fed's efforts at quantitative easing to keep money flowing, a move like this can't make banks more likely to originate loans." Comment: I don't have any precise data, but news and hearsay suggests they haven't been. I'll add that any benefits of quantitative easing on the general economy seem unimpressive.

6/26/09: "It's been a tepid rebound we've had since March. If it were in line with past dead cat bounces, eyeballing the DJIA over the decades, such a faux-recovery spike could have easily reached 10,000 and maybe even 12,000 before the true decline to fundamentals began." Comment: of the various general mis-statements made by me this year on the stock rebound, it is this statement I prefer to remember.

8/12/09: "In the current environment of tightening credit, we have 90% of the money supply that could potentially contract quite a bit, and if credit falls more than 15%, such would wash out any total monetary expansion from quantitative easing." Again, no exact numbers, but this seems about right. The $1.8T quantitative easing plan may have been successful at holding off economic disaster, but I would not describe our present economy as "stimulated."

12/11/09: While my post "Even Steven" does not give any predictions what direction the dollar would take, it falls almost perfectly on the date the USDX turned around and started heading north again. Even though the USDX wasn't quite at the all time lows of March '08, I wrote the post "Even Steven" on that day figuring I might not have much more chance to comment on the lows of the dollar. I guess you'll just have to take my word on that.

The Bad:

3/21/09: "With talk of a new world order, gold has been doing okay. The dollar I anticipate will recover after the meeting closes." I'm tempted to leave this one out because it offers no time frame. The USDX did take a significant hit in early March, then recovered some in April before beginning a prolonged decline that lasted until November.

4/12/09: "But I'm guessing we are closer to economic stabilization by a return to fundamentals than we are to the speculative peak of the bubble." This was about a month into a Bear Run that lasted until November. While neither correct nor incorrect, I'll use this line to represent a handful of statements that failed to sufficiently incorporate the impact of bailout efforts.

5/7/09: Regarding the "Stress Test" of banks back in May: "I'm going to hazard a guess now that the economic contraction will exceed their worst case scenario, and another stress test will be needed before all is said and done." The Stress Test was nothing but accounting silliness that has already fallen into obscurity. My only regret is reporting on it at all. The Stress Test will not be performed again. The banks will simply be bailed out. The Stress Test is irrelevant anyway because even in this bailed out economy the numbers have exceeded the Feds worst case scenario, and no one wants to draw attention to that.

6/21/09: "My money remains in dollars, but at this point diversifying into gold and some competitively priced stocks would be a more sensible strategy than when this blog first began. Were I a more savy investor I would have jumped from dollars into stocks in March, but had I done that now I would be going back to cash." The DJIA was around 8500 at this point. It would still be months before the DJIA would plateau. It just goes to show: pay no heed to me when it comes to investment advice.

8/17/09: To summarize my post "Squeezing the Shorts": as long as there remains a strong market for short sales, there remains a strong market for stocks, and prices can stay high. I now believe the current stock market is driven by fundamentals, not by aggressively shorting the market—since competing investments are so poor nowadays, stock dividends don't have to be particularly high to sell well.

12/16/09: "Personally, I see no economic fundamental driving the recovery other than an easy money policy directed at Wall Street and Corporate America." I guess age has made me less cynical, even though that statement was made a scant 3 months ago. As stated above, I now feel stock P/E ratios of stocks are in line with other investments. Absolute numbers might have risen, but stock yields have been deflationary.

12/28/09: "Today, the Fed announced hopes of crafting a policy which would drain banks of their reserves." Now, this isn't a prediction, not mine anyway, but reserves sharply increased right after this statement was made. I don't know why I blog on anything the Fed says, other than as a contrarian indicator.

The Ugly:

3/10/09: “Get dollars now and sell your stock while you still can.” Definitely the wrong sentiment at the beginning of a long bear run. I called it as ugly last year in the same month the prediction was made, so you have only three weeks worth of malinvestments you can blame on me. Still, since the inception of this blog, if you accepted one and only one investment strategy, you would be better off holding onto cash than stocks, and I think gold is the only major investment category that would have beaten cash.

Friday, March 26, 2010

Health Bill Ramifications

Although it is still way too early to forecast how the Health Care Bill will play out, Mish recently posted some interesting comments.

Basically, it is much cheaper for businesses to pay the fine for not insuring employees. The fine is $2000 per year, whereas insurance runs closer to $6000. Similarly, it is cheaper as well for individuals to pay the fine, which runs from $700 to $2300 per year, than to buy their own policy, which for me would run around $6000. If worse comes to worse and one is diagnosed with an expensive medical condition, one can buy a policy at that point because they cannot be excluded for pre-existing conditions. Just paying the fine ends up being a very cost-effective strategy. The only place where one could still get hit is emergency treatment.

So who knows, this bill might actually move us toward the free-market solutions I desire, where one just has to pay $2000 for the government to stay out of our business; a bargain indeed. One can game the system by buying insurance only when they develop a costly medical condition.

Monday, March 22, 2010

Preliminary Health Bill Passes

Late yesterday the Senate version of ObamaCare was brought to the House where, under extreme pressure from Obama and ranking Democrats it eeked a marginal victory. As best I can tell, it enacts universal health coverage by making it unlawful not to buy it, and gives nearly $1T over the next 10 years to someone--time will tell exactly who will be the beneficiaires. To my mind, it spends $1T perpetuating all of the current problems, in exchange for one minor benefit: that one cannot be denied insurance based on pre-existing conditions. Presumably one can still be denied for other reasons. Time will tell what will be done to limit costs.

There is still plenty of maneuvering in to be expected, by both parties. The Democrats might still focus on a Public Option agenda. The package may cost them votes in November, but if it hadn't passed, I would guess it would have been worse. If there is one thing worse than bad legislation, it is failing to pass it.

Wednesday, March 17, 2010

Why 0% is Bad

In what is less and less of a news item, the Fed kept interest rates at 0% today. No change since December '08. No sign of tightening on the horizon.

So long as the economy remains deflationary in most sectors, particularly jobs and housing, in keeping with the Fed's mandate for price stability (yeah it is hard to keep a straight face while writing that), there is little alternative other than to keep rates at 0%.

So what is wrong then, in a deflationary environment, with just handing out money with the sole condition that the borrower has to pay it back, absent any interest? The problem is, it hurts all investments in the long run.

It directly hurts cash and treasury bonds, in terms of reducing interest payments there. But it indirectly hurts stocks as well. With interest rates on cash and bonds generally low in the 0-2% range, stock dividends no longer have to be as much to still be attractive investments. Price-earnings ratios for stocks can go way down and still be competitive in the 2-3% range, which drives the prices of stocks higher. Say a stock pays 50 cents in dividends per share per year. If you are looking for a return of 6%, each share would have to be priced at around $9 to be of interest. But in a climate where 3% is considered a competitive return, then the stock should sell okay at $17.50. The DJIA going up absent higher dividends simply means investors are willing to accept lower P/E ratios.

Now, if an investment bank can borrow money from the Fed at close to 0%, and invest it with a 3% return, well that is a good deal for doing no work and producing nothing of value. The Fed maintaining interest rates at 0% thus insures low yields for all investements.

Sunday, March 7, 2010

Icelanders Reject Bailouts

In early January, Iceland's president vetoed legislation that would cost everybody in Iceland $16,000 on average—probably twice that if you just count taxpayers—to make British and Dutch governments whole (after they bailed out depositors in collapsed Icelandic banks). It would force the people of Iceland to pay for banking collapses. Yesterday the same resolution was put to public vote where it lost by a near unanimous 98% margin[1].

If $16,000 seems like a shocking number, Americans owe more than $90,000 per taxpayer on our national debt. In America, such legislation never would have gotten to the voters because Congress would have gladly passed it and the president would have gladly signed it. Imagine if the TARP were put to public vote, or the Obama Stimulus? Each of these would have easily been defeated, as would the current bill for health care "reform." Personally, I think any legislation big enough to cost taxpayers that kind of money should be put to public vote.

This probably is not totally over but I don't know how much recourse Britain and the Netherlands have. The Iceland government will have serious credit rating problems over the coming years, and probably Great Britain has enough influence that there will be any number of diplomatic consequences for Iceland. But Icelanders will reap the benefit of a government now forced to live within its means, which creates a healthier society for all[2].

Sources:
1. Iceland's Message: Don't Bail Them Out.
2. Iceland's GDP rises 3.3% ahead of referendum.

Saturday, March 6, 2010

Savers Go Away

Our economy was once driven by reckless credit. Now it is driven by government bailouts. Through all this, savers have been social pariahs for the better part of a decade.

Banking is simple: borrow money at low interest rates and lend it out at higher rates. The difference is your profit. Now, back when the Fed was offering 5% interest rates, if banks could get the money from a saver instead at 3%, that was a good deal for everybody, or at least for the banks. Now today, where federal programs freely make money available at close to 0%, there isn't much point in drawing capital from savers. Aside from interest to the customer, which at this point is 0% wherever you go, banks have to pay 0.25% in FDIC (or NCUA) guarantees, soon to be raised to 0.4%. It appears there aren't enough loans to be made these days to make that 0.4% cost worthwhile.

At least that is what one bank in Nevada is reporting, who is now paying savers to withdraw their deposits. The figures it supplies are interesting. We will see if this becomes a broader trend.

Source: Credit Union: Puh-lease take your money.

Loses to Depositors

Depositors in failed banks are guaranteed protections of their deposit from the FDIC of up to $250,000. In failed banks where people had deposits higher than that, they have generally been made whole as well, usually when the purchaser of the failed bank assumes the deposit. However, if there is nobody who buys the bank then the money one has over the guarantee limit can be lost.

So, this article from the The Street [1] is saying such a thing did happen in the latest round of bank seizures on Friday. For two of the four seized banks, the FDIC couldn't find a buyer. This is a little surprising because the FDIC practically gives the assets of a seized bank away to healthy banks. Even at the rock bottom prices charged by the FDIC for the sale, this week, for two banks, there were no takers.

The day is still young and buyers could still be found. I'm just saying, for you quarter-of-a-millionaire's out there, just be mindful.

Source: Four Banks Fail, Depositors Suffer.

Friday, March 5, 2010

Fannie, Freddie Guarantees

For Fannie Mae and Freddie Mac, there has always been the belief that the federal government would bail out bond holders if they went south, even though it was explicit there were no guarantees that would happen. In 2008, they went south, and indeed all bond holders were made whole as the GSEs went into federal receivership. Now that they are run by the federal government, I imagine a lot of people figure they are about as safe as a higher-interest treasury bond, and I wouldn't be surprised if these people are right. But today, Rep. Barney Frank (D-Mass.) is saying otherwise.[1]

I recall politicians warning us there were no guarantees right before they went into receivership, yet the bond-holders remained as safe as can be. So if it were any other person saying that, other than Obama, it would hardly be post-worthy, but Frank has always been a cheerleader of the GSEs and has about as much oversight over their operation as any congressman.

So today's news may be a small thing, but at least it is a step in the right direction—at least from Obama's pledge of unlimited bailouts. Time will tell if Frank's statements are a red herring to distract and assuage public resentment over a never-ending stream of bailout efforts that protect nothing but greed and fraud. An interesting figure from the article is the amount of debt the GSEs hold, on the order of half the federal debt.

In other news, some banks scrambled today as Fannie Mae withdrew much of its cash holdings to cover delinquent debt.[2] No doubt, they will be needing the rest of it pretty soon.

Sources:
1. Fannie, Freddie Holders shouldn't assume guarantees.
2. Banks scramble to raise cash after FNM cuts.

Thursday, March 4, 2010

$15B Jobs Bill

The house passed a $15B "jobs bill" intended to help job creation.[1] That is $109 T*Bux. I remember last month, when it was still $80B, being impressed with Washington's new restraint.

But it also announces clearly where the priorities of Washington lay. In 2008 a $700B ($5075 T*Bux) TARP, or "bank bill," was ramrodded through Congress over the course of a couple weeks. Shortly after Obama took office, a $787B ($5706 T*Bux) "public employees union bill" similarly found easy passage.

Maybe they think 10% unemployment and another 7% underemployment, and higher in places like California, is nothing to be very concerned about and $15B will solve everything. But I doubt that is why the figure is so low.

Words of trillion-dollar health care reform are still batted around as democrats strategize to get a couple republican votes needed for passage. So the easy money days of Washington are not totally over yet.

Source: House OKs $15B jobs bill.

Monday, March 1, 2010

"Purchases Cannot Exceed Earnings"

The economy may be going to hell in a hand basket as bailout efforts have soured on main street and are met with ambivalence in Washington, but I'm determined to prove the cash-inventory equivalency. This relationship allows one to value the dollar (or any fiat currency) independent of comparisons with foreign currencies, and offers a precise model to explain pricing, and how it relates to monetary policy.

I see three strategies to substantiate the relationship that the total of all prices of all things for sale will self correct to be exactly equal to the money supply: 1. a mathematical proof, 2. a logical defense of the symmetry, or 3. an empirical summation of all things for sale and comparing that with the money supply. My math skills are probably insufficient for the first approach, and besides, we are dealing with diffuse and inexact values. Now, even if I were to have all the data to calculate inventory, and even if it were the same as the money supply, that might just be coincidence—although enough similarities, over a long enough time, and in enough different circumstances, might be regarded as a de facto proof.

But today I would like to consider the second approach: the logical argument, and to do so, let's start small. Let us examine the truism that purchases, at the level of an individual, cannot exceed his income. Purchases cannot exceed earnings.

Laugh, you do? Naive I am, you say? "Living in a cave, are you?" you ask, "born yesterday, perhaps?" Yes, I understand we have solvency problems from reckless credit, which only proves my point. Credit extended now consumes earnings in the future, be it your own, or the bank's in the case of default, or the taxpayer's in the case of bailouts. Repayment has to come from somewhere, it should come from the beneficiary of a loan, but if they do not pay, it will be diffused elsewhere on society. While credit allows one to leverage income over time, in a sustainable economy, purchases cannot exceed earnings.

Now let's expand "purchases cannot exceed earnings" to all of society. At the social level, I propose earnings equate with money supply. Money supply is the exact measurement of earnings across society since, excluding barter arrangements, money is the only unit of income. All paychecks taken from the money supply will go toward purchases or to savings. Purchases reflect earnings for the sellers. Earnings will pass quickly through some but settle with others; savings are still earnings, just money that is earned previously. Savings do not rest but will be lent out by banks. This consumes future earnings from the borrower as repayment, so credit balances with earnings over time. Whether money moves or stays it has been earned at some point. All earnings have to come out of the money supply. All money that enters the money supply is earned, even if it came as a lien on future earnings, or more cynically, came by virtue of having friends with a printing press. Printing money counts as "earning" it.

In a Venn diagram, with a money supply circle and earnings circle, the only part of the earnings circle that reaches outside money supply would be barter arrangements. If earned money, spent money, saved money, borrowed money, and printed money is all earned, then I see no money that does not fall within the earnings circle, other than unpaid debt to a bank that goes bankrupt and is not bailed out. The two circles are very close to being perfectly superimposed.

Let's turn to inventory. Inventory, here, is defined as the set of all goods available for purchase. The identity of inventory and actual purchases isn't quite as close. While purchases have to come from inventory, inventory can remain unsold. But the relationship of purchases to inventory is one of considerable overlap. In a sustainable economy all inventory eventually has to be sold.

So, extending the statement: "purchases cannot exceed earnings" to all society, we can almost say "inventory cannot exceed money supply." It can—if sellers overprice their items. But then sales velocity slows, and unsold inventory accumulates. Production must be slowed or prices lowered such that the item sells, otherwise producers and sellers will not be compensated and will stop producing it.

So, the cash-inventory equivalency is defended on the grounds that purchases can never exceed earnings in a sustainable economy (where purchases equate with inventory and earnings with money supply at the social level). Purchases can equal earnings though, so to maximize profits sellers will price their wares to that effect.

Friday, February 26, 2010

Freddie to stop buying Option ARMs

Freddie Mac announced that it would stop buying interest-only mortgages because of their poor performance overall[1]. That's one GSE down, one more to go. Given the fiscal insanity our government has been engaged in, even the slightest steps toward rationality—compelled by obvious and overwhelming evidence—I suppose we can welcome as progress.

In broader news, there has been widespread reporting lately on the generally poor performance of housing and its tepid recovery[2,3]. What hasn't been reported on is the upcoming wave of Option ARM resets scheduled from the end of 2009 through 2012. This will be the second of a one-two punch to the housing market that began with the subprime resets back in 2006-2008. Option ARM resets will be at least as big, in terms of dollar value, but are spread out over a broader period so they might not have quite the obvious impact of subprime. This will particularly hit the mid-range market in the bubble states. Bottom line, we've had minimal housing recovery since 2008 and house prices are likely to fall further now.

So, Freddie is getting out right before the real disaster hits. They should have gotten out a lot sooner and in fact never existed at all subsequent to their conservatorship by the federal government or enactment by Congress. Still, I find myself pleased by the news.

Sources:
1. Freddie ends buying of all interest-only mortgages.
2. Sales of previously-owned houses unexpectedly fall.
3. Midwest home sales figures reveal mixed picture.

UPDATE [2/28/10]: Fannie Mae's loses were nearly $75B in 2009, following $60B in 2008. That's about $1000 T*Bux shifted to every tax payer in America... for just one GSE. Similiarly, AIG is reporting loses of $11B in 2009, down from $100B in 2010. AIG was the conduit through which TARP bailout money was directly handed to banks, foreign and domestic, free and clear, no strings attached and no need to pay it back. The GSEs allow the shifting of toxic securities from banks balance sheets on to the tax base.

Tuesday, February 23, 2010

Wall Street Bonuses

It is being widely reported today that Wall Street bonuses increased by 17% in 2009. I mention this only to underscore that this is the fundamental problem of bailout activity of any sort: it supports the wealthy at a cost to everyday Americans. Sure, is it posed as benefitting the poor or the greater good or some nonsense like that, but it never works that way, never has, never will. Hopefully one day more people will look upon such claims with suspicion.

Personally, I think deep down they know the party is over and are cashing in on what is left.

Saturday, February 20, 2010

Fed Rates

I'd just like to quickly comment on the distinction between the Discount Rate, which was increased Thursday, with the Federal Funds Rate, which is the more prominent interest rate policy and remains unchanged at zero percent.

The "Federal Funds Rate" or "Overnight Rate" is a necessary fudge factor in a system of fractional reserve lending, where banks have only a small percentage of cash on hand to cover their deposits. If there are substantial withdrawals or loans, and reserves dwindle, they have quick access to cash through the Federal Funds Rate. Getting money from the Fed in this way is ordinary, everyday business.

The "Discount Rate" is a longer term loan when banks find themselves generally undercapitalized and need emergency money to weather adverse circumstances—like say more loans going bad than tolerance limits allow. In these circumstances banks are mostly encouraged to seek loans from other banks to stay afloat. If they have to go to the Fed for this sort of loan, it casts a shadow of doubt. At least it used to. Bailout circumstances being the way they are, who knows, maybe no longer.

So, raising the Discount Rate will adversely affect the ability of struggling banks to survive. The likelihood of an FDIC seizure increases, and with that, opportunities for healthier banks to acquire the assets of seized banks at fire sale prices. Of course, at 0.75% the Discount Rate is still extremely low, but if the Fed wratchets it up in a step-wise fashion, this may be what we see.

UPDATE [2/23/10]: Today the FDIC reported a 27% increase in "problem" banks for the year 2009. If the discount rate keeps going up, as hopefully it will, it could be feeding time soon for the healthier banks.

Friday, February 19, 2010

Fed Increases Discount Rate

In a surprise move that is hopefully indicative of a broader change in policy, the Fed increased the discount rate to 0.75% yesterday (from 0.5%). This came rather out of the blue; usually the Fed gives a better "heads up" before this sort of thing. The Federal funds rate remains the same at effectively 0%, so for all practical intents and purposes zero-interest rate policy remains in effect.

Tuesday, February 16, 2010

Mortgage Modifications

Reuters is reporting Bank of America has made around 12,700 mortgage modifications with the assistance of the Obama stimulus passed last February [1]. This is better than two prior mortgage renegotiation programs under Bush, which to my knowledge affected exactly zero modifications, even though billions were alotted. Extending the figure across the board to other banks, one can guess the number of modifications overall is somewhere in the tens of thousands. Not a particularly high number given the scope of the problem, but not zero either.

Mortgage modification is a good solution, one that would automatically happen if free market principles were allowed to flourish and Congress and the Federal Reserve Bank weren't happily offering generous bailouts to the banks. In a free market, the banks would be motivated to modify mortgages because getting paid less is better than foreclosure.

As it stands, banks can avoid modifications and simply hang on to foreclosed properties if they expect ongoing government subsidies. Mortgage modification now happens only under government enticements and coercion.

Sources:
1. BofA modifies 12,700 under govt program.

Friday, February 12, 2010

National Debt Ceiling Increases to $14.3T

It was just in December that the national debt limit was raised from $12.1T to $12.4T. Today, it was increased more substantially to $14.3T [1], or $103,675 T*Bux. On average each tax paying American would owe more than $100,000 on the federal debt.

Obviously, everytime we reach the debt limit, Congress is just going to pass a higher limit, so this debt limit is effectively meaningless. The real debt limit is when people stop buying Treasury Bonds. The U.S. has some wiggle room there still, but countries like Greece and Argentina are discovering what that limit is. The way things are going, so too will the rest of the world eventually.

Source:
1. Obama signs bill raising debt limit to $14.3 trillion.

Friday, February 5, 2010

In Defense of the Euro

News sources have been reporting the euro is faring poorly because of problems in Greece [1-3], specifically the impending inability to pay off its debt. Problems with debt repayment and borrowing costs are growing worse. I don't know if it has reached terminal limits, but it sounds close.

Looking at the one year graph of the dollar vs. the euro, the trend line is headed in a southerly direction, but it remains squarely between the highs and lows for the year. This might not even be a diminution of the euro, but a strengthening of the dollar.

Say Greece does default on its debt, how would that affect the euro? National governments are an economic entity just like any individual or business—where income comes from taxes and is spent on government services. Governments contribute neither to the inventory (since all they provide are services) nor the money supply (central banks do that), so the stability of the Greek government has little to do with the amount of euro's in circulation, or what is for sale in euros.

Perhaps people are concerned the European Central Bank will monetize Greek debt to help them out, as a kind of charity. I anticipate that is highly unlikely, but I won't rule out the possiblity. Some commentators have even questioned the euro's viability if Greece defaults [2,4]. How this resolves will be informative since Greece will be one of the first of many dominoes to fall.

Sources:
1. U.S. dollar, yen gain on Europe debt woes.
2. Greek financial crisis proves test for euro zone.
3. Europe debt fears sink euro.
4. Greece's financial crisis puts future of the euro into question.

UPDATE [2/11/10]: The European Union has pledged "moral support" to Greece, whatever that is, but no money. I'm sure the euro responded negatively, but this is good news for it.

UPDATE [2/14/10]: No love from Germany to Greece today. A poll of Germans showed a majority would rather see Greece expelled from the euro zone than to bail them out. Of course, the two events are unrelated—there is no requirement for Greece to be bailed out for it to keep using the euro. Greece though, may want to leave to create its own currency that it can inflate from within to support its spending. That wouldn't, however, forgive its debt in euros.

UPDATE [2/24/10]: Thousands of Greeks take to the streets today in protest of responsible government spending. Things get personal as Greece demands more money from Germany for the Nazi occupation of WW2. There have been suggestions over the past few days in the news media that Greece covered up the true state of its economic situation with the help of Goldman Sachs.

Thursday, January 28, 2010

Rules of Inventory

When I started this blog, I sought a way to evaluate the investment value of a dollar independent of foreign currencies. I sought a way to gauge its purchasing power within the U.S. economy. I proposed the value of a dollar is the inventory of all things for sale divided by money supply, where the money supply is the sum of printed cash and credit. So V = I/(P+C). Back then, it was intended that the inventory was more or less a constant—things for sale would remain stable on average—so, by the formula, if printed currency stays the same and credit collapses, the value of a dollar increases.

Shifting variables around, I saw that I had just equated money supply with inventory. I called this the "cash-inventory equivalency," which is an assumption upon which this blog is based, but a relationship I find nowhere else in economics. The closest thing is the quantity theory of money which relates money supply to prices, but doesn't equate them.

Anyway, while the U.S. money supply is easy to estimate, how to approach the calculation of inventory—the total price of all things for sale—has been on my mind. So over the past couple weeks I wrote a series of posts [a-e] that discusses different ways marketable goods are exchanged, which collectively add up to the longest post on this blog. Here is the system:

Inventory can be:
1. Purchased outright: the price of each item for sale is added to the inventory, or...
2. Used over time, as in:
a. rentals: the cost to buy the rented item is added.
b. labor: labor is excluded from inventory, or...
3. Made to order, as in:
a. services: services are weighted by the sales of stock shares of the company that provides them (or whole establishments if privately owned, when and if it is for sale).
b. goods: treated as the sum of raw materials plus the service that assembles them, or...
4. Null inventory: giving away money or trading money for money is excluded.

Explanations:
1. Regular Inventory. These are items sitting on store shelves or in stockpiles awaiting purchase. Cars, houses, loaves of bread, barrels of oil, copper bars, etc. these items, that are for sale, are added together to determine their weight on the inventory.

2a. Rentals: for houses, cars, and anything else, their contribution to inventory each time they change hands is the price it would take to buy them. One can use "reverse rents" [a,c] to approximate the price to buy. The logic being, the owner bought them, and renting resembles buying from the owner, with the owner acting as the financing organization [b].

2b. Labor: is not included in the inventory. First, labor itself does not have any value, only what it produces. So might the laborer have inventory value? I looked at this from the perspective of an employer buying a slave [a], or an independent contractor selling himself [d]. If a worker generates savings, possibly there is value as an investment [c], but since ownership of a person is not a legal option, there is no way to factor it in to the inventory.

3a. Services on demand: for services provided by an individual, for the same reason labor is excluded, so are services from independent contractors. At the business level, companies can be bought and sold, so have an inventory value as a function of their profit when they are for sale. The inventory value of all the services they provide is reflected in that sales price. If a service company is owned by stock holders, the value of its services is reflected in the price of shares for sale. Shares of stock, those on the market, are added to the inventory at their asking price.

3b. Goods produced on demand: follows the same logic as services on demand, where the service is assembling raw materials into a finished product. The raw materials are tallied in the inventory as regular commodities. The service that assembles them has an inventory value as a function of its profitability, when the company is up for sale, or as its shares are bought and sold. If an individual contractor assembles the goods, the service is not added to the inventory, in line with the labor not being a commodity.

4. Null Inventory: There are many things that have value and are bought and sold but not part of the inventory, and labor is one of them. Any gift of money, or trading money—anything that involves an exchange of money for money—is not included [e]. This includes bond sales and securities, loans of any sort, gambling, taxes, charitable contributions, derivatives, and insurance premiums.

In summary: sales are divided into goods and services. Goods are added to the inventory at their price to buy, whether they are offered for sale or rent. Services are not part of inventory, but a company that provides services, can be sold as a good. Individuals that provide services cannot be sold. Money is not a good.

Illegal goods have to be factored in line with these rules. Prostitution, for example, behaves as a service provided by an independent contractor, so is not tallied in the inventory. Prices of illicit substances, however, must be counted.

As data is tallied, these are the rules by which inventory will be calculated. The following posts discuss my train of thought in more detail.

References:
a. Mortgages, Reverse Rents, and Ghost Slaves.
b. Implied Prices.
c. High Maintenance.
d. Made to Order.
e. Null Inventory.

Wednesday, January 27, 2010

ZIRP'd Again

Not that there was much doubt, but the FOMC held interest rates today at 0%, with one dissention from Kansas. Quantitative easing and lending facility programs will be winding down, hopefully. There is little news on the Fed front. No doubt, Bernanke is occupied with his Senate confirmation hearing.

Null Inventory

Finally, in this series about calculating inventory, this post will review intangibles and money itself as a marketable item.

Where money is traded for human behavior, such as labor and services, that has already been excluded. I ruled out laborers as having any sales value given that people cannot be legally owned, and even if it were legal, due to the high maintenance, they would not be a particularly good investment. Better to pay them wages and be done with it.

Regarding labor, consider a contractor who sells promissory contracts for their labor, as in: "pay me now and I will paint your house in two weeks." If the house is sold in one week, that promise has marketable value; one can increase the price of the home by the amount of that contract, since it is a promise the house will soon be painted or the money will be refunded. But it is the painted house that has inventory value, not the work that paints it.

Say a masseuse does the same thing, selling promises of a massage redeemable on demand. Are those promises marketable items that can be added to inventory? They could be bought and sold, sure. But the massage itself is an action rather than a thing, so there is no way to factor it in to the inventory.

Gifts of money are not counted as inventory either. In this light, neither charitable contributions nor taxes are an inventory item. Similarly where money is exchanged for money, that has no inventory value. In the cash-inventory equivalency, money is the yardstick by which inventory is measured, so it cannot be included in the inventory ever.

With bonds, money up front is exchanged for money paid back over time with interest. Securities or loans are not factored into inventory. Gambling is paying money in exchange for a greater payout if a specific event occurs, like a royal flush or the right number in lotto. Insurance policies behave in the same way, including health insurance, where money is charged in exchange for a promise that money will be paid to the doctor in the event of a doctor's visit. Similarly, all the derivatives on securitized mortgage tranches is just a gamble with no effect on inventory.

The take home point is that inventory has to be a durable thing, and it cannot be money itself. While intangibles and money itself have value and are bought and sold all the time, they will not factor into the inventory.

The next post on this topic will summarize the calculation of inventory, and distill it to a few essential rules.

Tuesday, January 26, 2010

Made to Order

This post will consider goods and services produced only on demand, like food at a restaurant, and how they factor into the inventory of all goods for sale.

First, let us consider a doctor's visit. Say he provides check-ups in a fee-for-service private practice. How does the value of a check-up weigh on inventory? Let's say the check-up takes an hour which includes all documentation and reviewing labs, etc. If he saw 40 patients per week, that would equate with being employed full time. If there were a lot of cancellations and he only saw 20, that would equate with half-time employment. Either way, we can do a reverse rent on his monthly salary to calculate the price of his ghost slave. While most income people earn is spent on the maintenance costs of being human, in this case, he is a single doctor and his tastes are modest, so he generates plenty of savings. So, is his inventory value a reverse rent of savings per month? Hold that thought for a moment as we switch gears to cheeseburgers.

With cheeseburgers, raw materials of the final consumable is already in the inventory. One buys those when they place an order. What one also must pay for is the service that transforms buns, ground beef, cheese, lettuce, tomatoes, et. al., into a cheeseburger. The customer is buying the raw materials plus hiring the service that prepares it, as opposed to the doctor where one just pays for the service.

The service is the inventory item we need to consider, not the final product, and its price of the establishment is a function of its profitability. Made to order items, above and beyond raw materials, are factored into the inventory when their systems of production are bought and sold. The cheeseburger would not be added as an inventory item—only the store that makes it—unless, say, some were frozen and delivered to mini-marts for resale, at which point their prices enter the inventory independent of the value of the burger shop.

For a place like McDonald's, the system of production is continuously bought and sold through the sales of stock. Stock sales reflects the inventory contribution of its output. For a privately owned Mom and Pop outfit, the inventory price of its products are weighed at those times when the store itself is on the market.

Bottom line: cheeseburgers don't count toward inventory, only the establishment that makes them.

Restaurants, like people, have high maintenance costs, but unlike people, can legally be bought and sold and so factor into the inventory when they are up for sale, where price is a function of the profits they deliver.

Revisiting labor in this light, back to the doctor, to the degree he generates savings, treating an employee or service provider as a private contractor, he will have investment value to himself as the owner of his firm. So the worker has an "implied price" based on savings, just as the rental unit has an implied price for the landlord whenever occupants change. The difference is, for the worker, the occupant isn't going to change. He is off the market so does not factor into inventory.

Monday, January 25, 2010

High Maintenance

This is another installment in a series of posts which discusses the calculation of inventory for the cash-inventory equivalency. Today, I will revisit labor as inventory.

For items not bought but rented by the month, I concluded that the rental unit, whenever it changes occupants, should factor into the inventory at the full price it takes to buy it. Since labor can be viewed as renting an employee on a monthly basis, I figured it should similarly be factored in to inventory at the price it would take to buy the employee. Rents would be to house prices what wages are to the "ghost slave." From principle and interest rates you can calculate the monthly payment. With "reverse rents," you calculate the principle from the monthly payment, and that is the price that would be included in the inventory for those items available for rent.

Back when I first defined reverse rents and ghost slaves, out of convenience, I disregarded the maintenance cost of the unit. This post will now factor that in, and will show that by doing so, rents and labor behave quite a bit differently.

For a house to be a profitable investment, the rent it generates has to exceed the mortgage and the maintenance costs. This includes repairs, taxes, insurance, and any landscaping, etc. Maintenance costs on a house are generally small relative to the rental income. But still, the reverse rent on a monthly payment would overstate the price of the unit as an investment. More correctly, one should do the reverse rent on the monthly payment minus average maintenance costs.

Now let us consider the maintenance costs for humans. Left to our own devices, people pretty much spend all the money they get, as confirmed by very low savings rates over the last decade. If you include income taxes in the maintenance costs, the net profit generated by most humans is close to zero.

So as an investment, people being the money sieves we are would be mostly worthless unless they generate savings (or equity or capital gains). If they do, then their theoretical investment value would be function of the savings they generate. Since owning a person has not been an option since the Civil War, for all practical intents and purposes, labor can be excluded from the inventory.

So, fortunately, I do not have to go into the nuts and bolts of owning a ghost slave. Later, when discussing the role that bonds, gambling, and insurance premiums have on inventory, I'll give another reason why labor can be disregarded from inventory.

Coming up with the idea of ghosts slaves and then negating their value in light of high maintenance costs is a roundabout way of saying that work is not a tangible good so should not be included in the inventory.

Sunday, January 24, 2010

Bernanke has been Assimilated

Bernanke has been assimilated by the banking Borg.

Hey, Nobel Prize winning Paul Krugman wrote that, not I. Tossing out a Star Trek referrence, next generation no less, scores him a couple points, despite his Keynesian monetarist view. The Nobel Prize, well, at least in the case of Obama, another assimilant, we see how easily those things get tossed around.

These sorts of prizes are all over the place. The Ca$h Bull wishes Mr. Borg-of-the-Year luck in his upcoming senate confirmation.

Saturday, January 23, 2010

Barney Frank Said What?

Barney Frank (D-Mass.) has been an unending supporter of mortgage bailouts and Fannie Mae and Freddie Mac. Whenever somebody has to jump to the defense of government involvement with the real estate market, it was Barney Frank.

Now, he is calling for the abolishment of Fannie Mae and Freddie Mac, which, though still in the "announcement" phase and could go in any direction, is such a positive turn of events I thought I would mention it. He wants to replace the GSEs with something else, but in the current political climate, anything will be better than Fannie Mae and Freddie Mac. Famous last words, I know.

The election of Scott Brown seems to be having wonderful ripple effects through the Democratic leadership.

Sources:
1. FNM, FMC Should be Eliminated, Frank Says.

Friday, January 22, 2010

Poor Google

Google has a problem that I'm sure will make you cry yourself to sleep: they don't know where to put some $24B in cash holdings they have. With that kind of money, careful research is done and expensive opinions sought. So where would you put it?

This New York Times article [1] suggests they pay it out as dividends to their shareholders, which makes sense to me. If I had that kind of money I would probably go into venture capitalism. Despite the collapse of the credit economy, America has plenty of good investment opportunities. But you'll find none along well-trodden pathways.

Well, there is no end to investment advice on the Internet, but for the record, since Google supports my blog, I'll just say, maybe there is no hurry for them to invest it anywhere, and there is no shame in keeping cash where it is.

Sources:
1. A Good Place for Google's Cash.

Just Say No to Big Government Spending

I've seen 500 point slides in the DJIA rebound 1000 points two weeks later, so the following is spoken with due caution.

But it seems whatever happens to a major government package, it isn't good for the stock market. The gradual decline of the DJIA had been slow and orderly until the TARP passed, where it fell off a cliff, and then the next time we saw a major and abrupt increase, that was after passing the Obama Stimulus.

Now, following the election of Scott Brown in Massachussets and hopefully a failure of ObamaCare and a return of some control to government spending, we still see these agressive declines. I was expecting passage of ObamaCare and then a major correction in the DJIA to follow. But it seems that even its imminent failure was sufficient to trigger the slide.

Implied Prices

This is a follow-up to my post on "reverse rents" from a few days ago.

I don't know if any attempt has ever been made to calculate the sum of all things for sale in an economy, if as a practical or theoretical matter anyone has ever needed to do it. But to substantiate the cash-inventory equivalency, that is what I find myself doing. For now, before touching actual figures, I am developing a model for how to approach it.

There are different ways items in an inventory are sold. One is that they are produced and awaiting purchase on a store shelf or in a stockpile somewhere. This is the classic reference to inventory. If all items were for sale that way, we could just add them up and compare it to the money supply. But goods can also be rented on a monthly basis, like apartments, or similarly labor. Then, there are goods and services produced on demand.

I addressed the rental problem a few days ago, by pointing out the similarities and overlap between renting and paying a mortgage, and concluded that when a rental property is on the market, it should be accounted into the inventory at its purchase price—in other words its "reverse rent," or the inverse of its financing cost.

Now, this is pretty unintuitive. If a house is bought, then an actual sum is transferred, either from the buyer to the seller, or from the bank to the seller and then the buyer settles things with the lender over time. For rentals, all that is transferred is the rent and deposit, so why should the full cost be factored into the inventory? Isn't the point of renting, one of them, to allow procurement of a dwelling without a large lump sum?

Consider, if you will, three scenarios: A. a landlord sells a rental property to another landlord, and at the same time the old renter moves out and another moves in, which one can label L1·R1 -> L2·R2; B. the landlord sells the unit, but the renter, being a good tenant, stays there, or L1·R1 -> L2·R1; and C. the renter moves out and a new one moves in, or L1·R1 -> L1·R2.

Scenarios B and C are variants of scenario A. All scenarios can be portrayed as L1·R1 -> L2·R2, where in scenario B: R1 = R2, and in C: L1 = L2. During a rental transaction, the landlord can be viewed as selling the property to himself. During the tenant change, the cost of selling the unit is added to the inventory because it is tied up with the landlord.

Still, it remains counterintuitive at least to me why this "implied price" would be factored into the inventory as a landlord buying a property from himself. Can't we all just sell air to ourselves and blow up the inventory to infinity that way? The rental is the transfer of a tangible item, one the landlord could have sold, but held on to the unit instead to rent to the next occupant.

Another way of looking at it is: whether the item is paid for instantaneously or over time, its burden on the money supply will be counted as the same. Intuitive or not, that is how calculations will proceed for the time being, and any further insights or clarifactions can be added in upcoming posts.

Tuesday, January 19, 2010

ObamaCare is DOA

Tonight, Republican Scott Brown defeated Democrat Martha Coakley for the Massachusetts Senate seat vacated by the late Ted Kennedy. Two weeks ago Brown was trailing badly but since then steadily caught up in the polls to surpass his Democratic rival.

Once Scott Brown takes office, the balance shifts to 41 Republicans and 59 Democrats. Without 60 Votes, the Democrats cannot break a Republican filibuster—of, in particular, the ObamaCare health proposal.

This is welcome and exciting news for anyone who supports market principles and sustainable government spending. The fact that Massachusetts just elected a Republican sends a strong message to the Democratic leadership. He campaigned on being the 41st vote against the health care proposal [1]. So hats off to the citizens of Massachusetts for taking a step toward sensibility in American politics.

This is not to say that the status quo is good, just that the democratic health proposal went in the wrong direction. The right direction is to remove all employer mandates to buy health insurance for employees, and then, where health care is deemed necessary and unaffordable on a case-by-case determination it can be assisted by government subsidy.

Senate majority leader Harry Reid agreed to seat Brown immediately (rather than delay is inauguration until after health care legislation passes) [2]. This effectively brings an end to ObamaCare.

Source:
1. Obama Calls Brown to Congratulate him (FoxNews).
2. Dems Reeling, Soul Searching after Mass. Loss (AP).

Monday, January 18, 2010

Mortgages, Reverse Rents, and Ghost Slaves

This is not about haunted mansions in Atlanta, but me thinking aloud about a dilemma that occurs when factoring rentals and labor into the cash-inventory equivalency.

Equating money supply with stockpiles of commodities is straightforward, but not for expenses you pay over time. So when hiring labor, say, what time frame ought to be considered when factoring its costs into the sum of all goods for sale? To answer this, I will consider mortgages, then rents, then compare and contrast monthly wages with slavery from an employers perspective.

Despite what fantasies Realtors® perpetuate, a mortgage on a home gives you almost the same legal rights as a renter. If you don't pay the mortgage, you get evicted. If you gut the place of copper plumbing before you leave, expect consequences. The fact that the landlord can evict a renter for other reasons is balanced by the fact that a renter can leave easily without consequence. With leases, the legal rights are even closer. When you "buy" a home, you and the bank must agree upon a price with the seller, and then you pay financing fees to the bank over the course of the mortgage, after which, in 30 years or so, you hold legal title.

It will vary by interest rate, but say on an $800,000 house you would owe somewhere around $4000/month to the bank. It would be more than that; $4000 would be after a down payment and at a low interest rate, but this keeps the math simple. You would also have maintenance costs including fire insurance and taxes, but they are separate from the financing costs; you would have these whether you buy the house outright or get a mortgage.

Factoring rental or lease costs into the inventory is the reverse of the process. Since the renter has full access to the use of the property, if the rental is $1000/month, that is like buying a $200,000 property. The landlord or bank at some point bought the property for around that, and renting it has ball park similarities to buying it where the landlord is the financing organization. With each $1000/month rental on the market, that is $200,000 that factors into inventory prices that ultimately must equate with the total money supply, else sales velocity starts to bog down. $200,000 sounds like a lot, but keep in mind it is only for those rentals actively on the market at a given moment, and the U.S. money supply is somewhere around $10 trillion.

We can take these same principles and apply them to labor. Let's beam over to an alternate Star Trek universe where we all have goatees, and an employer needing a laborer can choose between hiring an employee or buying a slave. If the market rate for the position is $48,000/year, that is $4000/month. In this evil dimension, if one buys a slave to do the same work, they would break even if the slave costs around $800,000. If the slave were on sale for only $600,000, that would be a bargain, or if the going rate is a million dollars per head, that would be expensive and you are better off hiring an employee. If $600,000 seems like a lot for a person, keep in mind the financing costs at $3000/month are less than wages at $4000/month. If you need to downsize, you could sell the slave to a company that is hiring to pay off the principle and close the deal.

Back on planet Earth, in figuring rentals and labor into the inventory of all goods for sale, it would therefore be the cost to own the item you are acquiring by the month, either the house or the "ghost slave," that factors into the inventory.

For housing inventory prices [I(h)], we can do a Fermi estimate: for a population of 300,000,000 in America, say there are 100,000,000 dwellings, occupied either by homeowners or renters, and let's give a 5% vacancy rate now on the market, or 5 million dwellings now available for sale or rent. Let's set the actual and "ghost" prices of all these units at $300,000 on average. 5 million x $300,000 = $1.5 trillion, or 15% of the money supply.

This approximation was not fudged and these were the first numbers I pulled out of my head. This is at least in the right magnitude, if it doesn't hit the bull's-eye. Pricing available rentals into the inventory at the full cost of the unit gets it surprisingly right at first glance, or may even understate things.

Is this my final answer? No. With rentals, the approximation may be okay, but with labor, the cost of the ghost slave is probably over-stated due to the high maintenance costs of humans that was not factored in.

But I'll leave things as they stand for now since the concept of "reverse rents" and "ghost slaves" offers a new perspective which I hope will move forward the formulas for inventory pricing.

Saturday, January 16, 2010

Price Control

I've argued before that government spending, even excessive spending, does not increase money supply, but rather shifts money from taxpayer interests to politician's interests. The government acrues revenues by collecting taxes or selling bonds; either way, the money it spends is money that is taken elsewhere from the system. Treasury bonds behave as a voluntary tax that is paid back over time with interest.

Government spending has no effect one way or the other on money supply, but it can and does affect prices. This I would like to discuss today in light of the cash-inventory equivalency.

Previously, I equated money supply with the sum of the prices of all things for sale. In a fractional reserve system overseen by a central bank, the economy could be represented as:

P + C = sum[I(x)]

Where P is printed currency, or cash; C is credit that originates through franctional reserve lending and thus augments the money supply; I is the inventory of items for sale, and x is each general category of saleable goods.

Everything for sale added up is "sum[I(x)]." Say we were to subdivide salable good into: labor (l), energy (e), food (f), commodities (c), houses (h), medical supplies (m), retail goods (r), and investments like stocks and bonds (i). We could subdivide the economy further, but let's keep these broad categories for simplicities sake. The equation becomes:

P + C = sum[I(l) + I(e) + I(f) + I(c) + I(h) + I(m) + I(r) + I(i)]

The cash-inventory equivalency states that prices will self-regulate to equal the money supply. Now it is not the inventory of all houses that would be counted here, but just the ones for sale. If prices of all saleable goods were set greatly higher than the money supply, then velocity would slow and inventory would build to a point where sellers would be profit motivated to cut their prices. Conversely, if money supply greatly exceeded inventories, then money is in abundance and sales velocity would be brisk and prices would tend to rise. These opposing market forces converge on the "cash-inventory equivalency." So goes the theory.

Now, like you, me, hot dog stands, non-profits, and major corporations, the federal government is one economic entity amid the broader U.S. economy with a balance sheet of income (mentioned above) and expenditures. But it is a big player and it can use tax money to affect prices in the different sub-categories in one direction or the other.

To be clear, here I am excluding the Fed. Though the Federal Government and the Federal Reserve Bank are related, their economies are separate. The government's money comes from taxes and bonds, the Fed's money comes from printing it. Fed spending would be inflationary if that money were just given away, but generally it is disbursed in the form of a loan, which is only a temporary increase in money supply for the duration of the loan.

So, if it wants to, Congress can keep prices low. It can buy food at market rates and give it to the poor for free or at reduced prices. Or it can subsidize food producers with the agreement they will sell their product at reduced rates.

It can elevate prices in certain categories too. It could buy houses and keep them unoccupied to shrink the inventory, creating a scarcity of those houses still for sale. Or, it could subsidize banks so they can delay forclosures on delinquent loans, which also restricts inventory. In this way prices can be increased beyond market rates. Also, the government could make malinvestments in overpriced stock, or buy bonds in companies such that its stock will rise. I'm not saying it is doing that, but it could if it wanted to.

While these actions can affect prices in focal market segments, this does not alter money supply, so it does not cause inflation or deflation in the Austrian sense of the term.

Friday, January 15, 2010

Limits of Spending

Since politicians tend to see it as their duty to protect financial benefactors regardless of the expense to ordinary taxpayers, we can anticipate no end to corporate bailouts—using the justification that they perform an essential public service (such as investment banking) that could not easily be replaced by a new company if the firm were allowed to follow its natural course to bankruptcy.

Since our government is showing no self-restraint and will likely continue the bailouts for as long as it can, the question that has been on my mind lately is: how long can it? It cannot raise taxes to 100%, in fact it is already politically problematic, in California at least, to raise taxes higher than where they currently are.

So the federal government can keep selling treasury bonds. For now, the market in U.S. treasury bonds is good, but eventually distrust in the government's ability to repay debt will drive borrowing costs higher and investors elsewhere. Other countries, like Greece, Mexico, and Argentina, are starting to reach their terminal limits of borrowing, so I've been watching for patterns that define the limits of investor interest.

The Debt-to-GDP ratio is a commonly cited figure that indicates the creditworthiness of a nation. Public debt-to-tax revenues is an alternate measure I've been eyeballing. It seems that should be the bottom line: how much you owe vs. what your income is. But even there, no compelling patterns have emerged. Japan is about as much in debt as anywhere and its government can still finance itself, and the U.S. debt-to-taxes ratio is as high if not higher than countries now being downgraded.

I plan to keep watching the international financial news, and as more countries join the list of credit downgrades, hopefully stronger signal patterns will begin to emerge.

Monday, January 11, 2010

Instituting Fee-for-Service

As the monstrosity nicknamed "ObamaCare" nears reconciliation of the House and Senate versions, I'd like to revisit my support for a market system in health care. In short, my ideal system is fee-for-service, except where it is unaffordable, then the government could offer loans for necessary health services and procedures.

We could ditch the "loan" idea in favor of a full subsidy, but wherever free healthcare is given there will be abuse, fraud, and waste. There will be growing pains as our current system—already broken by what socialism has so far instituted—adjusts to market realities, but the efficiencies of a competitive system will quickly pay for themselves. The cost of insurance premiums is borne by both businesses and employees, and we would be free of that. What cannot be paid, such as a catastrophic event, will be assisted by government subsidy if needed.

Its institution will take two simultaneous steps: (1) Remove all mandates for employers to buy health insurance for their employees. If insurance companies want a free market system, this is what it will take. Of course there will still be medical insurance available for people who want it, but it will be optional, rather than coerced. Then (2) formation of a program that reviews whether a procedure in question is necessary, and whether the bill is affordable for the individual or not. If it is necessary and unaffordable, then the government pays it by loan or subsidy. It would be funded by what already exists in MediCare and MediCaid; their focus would switch from general health coverage of certain populations to "necessary and unaffordable" coverage for everyone.

What I am suggesting is a comparable system to food assistance: if you want to go to the fanciest restaurant you can. Otherwise you buy what you need at the store, and if you can't afford that, there would be food banks and food stamps.

Saturday, January 9, 2010

Venezuela, the "Strong Bolivar," and TVs

Yesterday, President Hugo Chavez of Venezuela announced devaluation of Venezuela's currency (now at 2.15 per dollar), and a dual-tier exchange rate of the Venezuelan "Strong Bolivar" against the dollar, depending on what industry you are in. (The Bolivar became the new "Strong Bolivar" when Chavez cut three zeros from it two years ago.) Government exchange rates will become 2.6 per dollar for essential items like food and medicine, and 4.3 generally. The black market exchange rate is 6.25 per dollar. [1] So technically this isn't really a devaluation but the partial removal of a currency peg.

The cheaper government exchange rate behaves as a subsidy to those parties that have access to it. Most Venezuelans don't. Subsidized exchange rates allows much cheaper access to goods from America (or any good that can be bought with dollars). Industries with access to the preferred exchange rate can furthermore make a tidy profit though buying dollars from the government at a low exchange rate and selling them on the black market at nearly a 300% markup. Venezuelans who want to protect their wealth against inflation (which is a historical probability there) by holding dollars would greatly benefit if they have access to the subsidized exchange rate over those who don't.

Meanwhile, ordinary Venezuelans are running to buy TV sets before the cost of foreign products in Strong Bolivars essentially doubles [2]. The appliance import industry has been subsidized by the government up to now, and with this policy, they still are, but not as much. Dollar subsidies, in the best light, almost behave as a wealth redistribution scheme from the excesses of the highly focal oil market to the broader economy. Still, it is unfair, benefitting some Venezuelans (those with access to it) more than others.

From the CIA World Factbook: Their GDP is $356B, revenues is $94B, and public debt is 14% of GDP, or $50B. High inflation rates in Venezuela (30% in the factbook) essentially forgive a lot of public debt. So the reason for today's move appears to be a decline in revenue in dollars from reduced oil exports.

Sources:
1. Chavez Devalues Venezuela's Currency.
2. Nervous Venezuelans buy TVs after devaluation.

December Jobs Report

It has been understood for awhile how the U.S. Bureau of Labor Statistics has been cooking numbers to keep unemployment figures artificially low, hovering at around 10%, but BusinessWeek [1] recently published an article that bears repeating.

In December, the economy lost 85,000 jobs. There were 85,000 fewer job openings. Which means there are 85,000 Americans who are not working, but since there aren't jobs for them, they are not counted as unemployed. Since the labor force shrank, the percentage of unemployment did not rise.

So why would it benefit the government to be manipulating the figures in this way? Why does the government want us to believe the economy is stronger than it is? Perhaps they want us to believe that the trillions of dollars being poured into Wall Street and corporate bailouts is having a general benefit, so they can continue forth with broken policies.

Source:
1. Shrinking U.S. Labor Force Keeps Unemployment from Rising

Friday, January 8, 2010

The British-Iceland War

Not really, but things are heating up between the two countries.

To review, last February I blogged how Iceland got in over its head by running up the national debt—to approximately 6x of its GDP. Iceland was the pizza boy that bought the McMansion. Doing so did not meet with much opposition because the government freely shared it with the public in terms of generous subsidies. No doubt, Icelanders must have felt they were prospering. The English and the Dutch were happy to lend Iceland money because they offered such rich interest rates—around 15% at a time when in the United States you were lucky to get 3%—and this was all insured by the governments of England and the Netherlands.

But unsustainable government spending eventually reaches its limit. This Ponzi scheme met with sudden collapse where there was a run on Icelands banks as people quickly tried to withdraw their money. The British depositors will be made whole thanks to their government and the British tax base. But there are major powers in play who want their money back from Iceland.

So lately the Iceland legislature has been working on a repayment scheme that would cost the people of Iceland about $16000/head, and more than that if you just count the taxpayers. A hefty sum to be sure, but keep in mind each American taxpayer owes about $90,000 on our national debt. My opinion is: the legislature's plan does not sound wholly unreasonable.

But it still met with widespread public opposition in Iceland, and recently, the president of Iceland veto'd the legislation [1]. Though he denied this intention: effectively this amounts to declaring bankruptcy [2].

So, Britain effectively seized Icelands assets using an anti-terrorism law from 2001 [3]. So is Iceland a terrorist state?

Since viking days I would say the people of Iceland have been a pretty peaceful lot. My experience with them has been EVE online and communicating with the central bank about a question I had—where I got a prompt, courteous, and informative reply, something I wouldn't necessarily expect from the Fed. I think I could hang with those guys.

But like I predicted back in February, Iceland will not be let off the hook easy.

Sources:
1. Iceland President Vetoes Collapsed Icesave Bank's Bill to UK.
2. Iceland's Government Says it Won't Default; is talking with IMF.
3. U.K. Used Anti-Terrorism Law to Seize Icelandic Bank Assets.

Thursday, January 7, 2010

Argentina's President Moves to "Tap" Bank Reserves

I really need to do a post on Argentina one of these days. This whole blog could be devoted to Argentina's recent economic history over the past two decades, which is almost a perfect case study in Austrian economics. Argentina has a problem of uncontrolled borrowing and is now saddled with debt it cannot repay. It has been this way for awhile, and they have attempted to both default and inflate their way out of debt, and still they are in trouble.

What brings this up is Argentina's President, Christina Fernandez de Kirschner, is seeking the equivalent of $6.6B from its bank reserves [1]. Basically, tax revenues are insufficient to repay the public debt, and issuing new treasury bonds is becoming expensive [2]. So she is seeking money from bank reserves, and I would bet against the likelihood it will be repaid. It would amount to an inflationary injection of currency, debasing the money supply for the whole nation.

Essentially she is trying to force their Central Bank to invest in interest-free Treasury bonds with newly printed money. This is a bottomless black hole. Central Bank President Martin Redrado wisely told her to take a hike, and now his job is in danger.

This is a power struggle that I forsee the bank will win and the president will lose. People who bought Argentine bonds had no intention of seeing their investment lost to inflation. UPDATE [1/8/10]: I didn't expect things to happen this fast, but this play by the president has already been blocked by the courts [3]. No doubt there will probably be more back-and-forth, but ultimately I think where things are today is where they will stand. Redrado already has his job back [4]. My guess is, President Fernandez will be losing hers soon.

From the CIA World Factbook: Argentina's GDP is $575B, tax revenues are $87B with a public debt of around 49% of GDP, or $288B. This is why the common "Debt-to-GDP" ratio is unreliable and needs to be disregarded; Argentinas debt-to-GDP isn't too bad, but its debt-to-revenues is worrisome.

Sources:
1. Argentine Central Bank Ouster Frees Fernandez to tap Reserves.
2. Argentine Battle Over Central Bank Reserves Deepens.
3. Argentine Bonds Fall After Judge Blocks Use of Reserves for Debt.
4. Ousted Argentine Central Bank Chief Redrado Returns.