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.

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.

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.

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.

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.

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.

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.

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.

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.

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.