The Ca$h Bull

Terminated

2010-05-19T15:05:00.000-07:00

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.

Countdown

2010-04-18T06:30:00.000-07:00

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.

Disproof of the Cash-Inventory Equivalency

2010-04-17T20:04:00.001-07:00

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.

T*Bux 2009

2010-04-15T08:34:00.000-07:00

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.

Spend Cycles

2010-04-14T11:54:00.001-07:00

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.

Inventory in Motion

2010-04-11T13:31:00.001-07:00

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.

Greek Debt BBB-

2010-04-09T10:22:00.000-07:00

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.

Predictions 2009: more Good, Bad, and Ugly

2010-03-29T11:22:00.001-07:00

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.

Health Bill Ramifications

2010-03-26T10:50:00.000-07:00

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.

Preliminary Health Bill Passes

2010-03-22T18:32:00.000-07:00

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.

Why 0% is Bad

2010-03-17T17:35:00.001-07:00

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.

Icelanders Reject Bailouts

2010-03-07T14:30:00.000-08:00

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.

Savers Go Away

2010-03-06T10:18:00.000-08:00

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

2010-03-06T09:50:00.000-08:00

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.

Fannie, Freddie Guarantees

2010-03-05T13:40:00.000-08:00

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.

$15B Jobs Bill

2010-03-04T18:45:00.000-08:00

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.

"Purchases Cannot Exceed Earnings"

2010-03-01T10:33:00.001-08:00

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.

Freddie to stop buying Option ARMs

2010-02-26T11:25:00.000-08:00

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.

Wall Street Bonuses

2010-02-23T10:36:00.000-08:00

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.

Fed Rates

2010-02-20T11:04:00.001-08:00

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.

Fed Increases Discount Rate

2010-02-19T10:09:00.000-08:00

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.

Mortgage Modifications

2010-02-16T11:26:00.000-08:00

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.

National Debt Ceiling Increases to $14.3T

2010-02-12T14:17:00.000-08:00

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.

In Defense of the Euro

2010-02-05T13:25:00.000-08:00

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.

Rules of Inventory

2010-01-28T10:55:00.000-08:00

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.

ZIRP'd Again

2010-01-27T12:22:00.000-08:00

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

2010-01-27T12:21:00.001-08:00

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.

Made to Order

2010-01-26T13:15:00.000-08:00

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.

High Maintenance

2010-01-25T15:26:00.000-08:00

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.

Bernanke has been Assimilated

2010-01-24T08:29:00.000-08:00

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.

Barney Frank Said What?

2010-01-23T22:54:00.000-08:00

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.

Poor Google

2010-01-22T16:41:00.000-08:00

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

2010-01-22T14:17:00.000-08:00

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

2010-01-22T12:43:00.000-08:00

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.

ObamaCare is DOA

2010-01-19T20:21:00.000-08:00

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).

Mortgages, Reverse Rents, and Ghost Slaves

2010-01-18T14:45:00.000-08:00

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.

Price Control

2010-01-16T19:11:00.000-08:00

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.

Limits of Spending

2010-01-15T13:17:00.000-08:00

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.

Instituting Fee-for-Service

2010-01-11T14:47:00.000-08:00

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.

Venezuela, the "Strong Bolivar," and TVs

2010-01-09T17:50:00.001-08:00

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

2010-01-09T15:18:00.000-08:00

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

The British-Iceland War

2010-01-08T10:34:00.000-08:00

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.

Argentina's President Moves to "Tap" Bank Reserves

2010-01-07T21:43:00.000-08:00

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.

Fed Wants to Drain Reserves

2009-12-28T13:59:00.001-08:00

Today, the Fed announced hopes of crafting a policy which would drain banks of their reserves[1]. Apparently, this is to keep reserves from being lent out[2], suggesting the possible initiation of a stronger dollar policy, or at least stop it from weakening further.

I've been commenting for awhile about the increase in base money supply by over $1T since September 2008. At the same time, it has not had an impact on the actual money supply because it all seems to be sitting in bank reservers not doing much of anything. So, does the Fed want that money back? I have doubts.

Anyway, this is all in the "announcement" phase and far from the "planning" or "action" stage. I prefer to wait until the action stage, or the planning stage at the earliest, before commenting on anything. However, the articles have an interesting statistic: The Fed's balance sheet is now $2.2T with the intent of absorbing $1.25T in mortgage-backed securities through March.

Since most of these securities are probably toxic with minimal chance of being paid back, this amounts to a pure infusion of around $1T into the economy.

This kind of money should be inflationary, however we continue to see deflation, particularly in the housing market, due to the much greater contraction of credit, both through defaults, and the general resistance and reduced ability of the the public to take on more credit.

Sources:
1. Fed Proposes Term-Deposit Program to Drain Reserves.
2. Fed Proposes Tool to Drain Extra Cash.

Debt Ceiling $12.4T

2009-12-26T13:40:00.000-08:00

Santa's elves have been busy. Also on Christmas eve, and with minimal fanfare, the Senate approved increasing the national debt ceiling by $290B (or $2105 T*Bux) to $12.4T overall.[1] While this isn't a huge percentage increase, it does suggest the prior limit of $12.1T will be reached shortly, if not already.

Another figure I recently saw was a expansion of public debt to $7.7T, nearly $2 trillion dollars higher than $5.9T owed at the end of 2008. "Public debt" is the portion of the national debt owed on treasury bonds. The rest, I understand, is debt owed to the American citizenry for Social Security and Medicare entitlements.

Federal tax revenues collected in 2008 was $2.3T

Sources:
1. Congress Increases Debt Limit.

Merry Christmas... Suckers!

2009-12-24T20:40:00.000-08:00

Sadly, Obama used this Christmas eve to announce there will be no limits to the amount of taxpayer subsidy to support Fannie Mae and Freddie Mac.[1,2] When the program was instituted in September 2008 under Bush, bailout limits were set to $200B. Obama then doubled limits to $400B, and today he announced no limits.

Effectively, banks can shift toxic loans on to the tax base by selling them to Fannie Mae and Freddie Mac. With the government buying, likely worthless mortgage securities will be bought at full price. This amounts to very generous support of Wall Street courtesy of taxpayers. Reportedly, so far $110B of mortgage securities have been picked up, so this pre-emptive expansion of government support seems a little enthusiastic.

Also, the CEOs of these two failed government-run programs are once again eligible for bonuses of up to $6M.[3]

Sources:
1. U.S. Promises Unlimited Financial Assistance to FNM, FMC.
2. U.S. Move to cover Fannie, Freddie Losses Stirs Controversy.
2. Regulators Approve Millions for Fannie, Freddie Execs.

FDIC Limit Extension

2009-12-22T00:04:00.000-08:00

Late news but I thought I'd pass it on.

In September 2008, to mitigate cash flight from banks, the FDIC limit was raised from $100k to $250 per bank, good through 2009. If memory serves, this was connected to the TARP legislation.

Last May, the increased rate was extended through 2013.

Man of the Year

2009-12-17T22:31:00.000-08:00

Ben Bernanke won Time Magazine's "Man of the Year."[1] The article opens with: "A bald man with a gray beard and tired eyes is sitting in his oversize Washington office, talking about the economy. He doesn't have a commanding presence. He isn't a mesmerizing speaker. He has none..." and it goes on further like this. You know, Time, when I'm up for nomination for forecasting the fate of the dollar, you can just go ahead and pick the other guy.

In what has to be regarded as an embarassing setback for Bernanke, a hold has been placed by Bernie Sanders (I-Vt.) on his confirmation for another term as Fed Chairman.[2] This means he will require 60 votes for confirmation. Almost surely he will get that, but this stretches out the process and gathers unwanted attention in an area of politics that I imagine tends to prefer quiet and usually enjoys support from both parties. In today's panel hearing he won by what must have been a concerning 16-7 margin. Though he will be confirmed, this cannot be regarded as a victory.

Sen. Jim Bunning (R-Ky.) noted that past recipients of Time's "Man of the Year" included Adolf Hitler, Josef Stalin (twice), Yasser Arafat, Vladimir Putin and Richard Nixon (twice).

Sources:
1. Person of the Year 2009 (Time).
2. Senate Panel Endorses Bernanke for Second Term (LA Times).

Citi's Stock Selloff

2009-12-17T18:29:00.000-08:00

Back in March I wrote a regrettable post angrily denouncing the media for crediting the emerging turnaround in the DJIA (then in the mid-6000's) to Citigroup's declaration of quarterly profits. As we now know, over the subsequent months the DJIA has advanced briskly and broadly to the mid-10,000 range. The last line of the post I would like more than anything to delete, in fact the whole post I would—it really was written in the heat of the moment—but integrity dictates it has to stay. This "dead cat bounce" wasn't the huge surprise to me that the line suggested, though later I did make a top call in the 8500 range.

Today, a substantial slide in the DJIA was again attributed to Citigroup—this time because they "sold stock at a discount."[1] Again, I'm tempted to poo-poo this as having any sort of relevance to the broader economy, but experience has shown me I have much to learn.

Sources:
1. Stocks Fall on Citi Sale, FedEx Forecast (BusinessWeek).

FOMC December

2009-12-16T13:47:00.000-08:00

Today the Fed kept rates the same[1], at close to 0%. Nor where there any additions to quantitative easing or lending instruments. They anticipated the U.S. economy is in the early stages of recovery, and as recovery moves foward there will be changes to tighten money supply, but nothing new for today.

Personally, I see no economic fundamental driving the recovery other than an easy money policy directed at Wall Street and Corporate America.

Sources:
1. Fed Press Release (12/16/09).

"Public Debt"

2009-12-15T00:36:00.001-08:00

In the last post I came upon an interesting number from the CIA World Factbook, that the U.S. public debt is around $5.4T, which seemed odd, considering the debt clock has us over $11T nearing the spending cap of $12.1T.

So I looked it up. There is public debt, which is $5.4T for the USA as of 2008 (but likely a trillion dollars higher now), which is the amount owed to holders of Treasury bonds. Then there is gross debt, which is that number plus what it owed by intra-governmental trust funds like Social Security. It is gross debt which is nearly $12T in the U.S.

This blog will continue to try to make sense of scattered concepts and figures one finds when attempting to nail down the level of government indebtedness.

Mexico Downgraded

2009-12-14T22:20:00.000-08:00

Downgrading of national debt I expect to become more commonplace in coming months, and one day will reach Europe and the United States. But today Mexico is in the spotlight, dropping from a BBB+ rating to BBB rating. Business week[1] cites a high reliance on oil taxes and a reluctance to implement a national sales tax as pivotal to the debt downgrade.

The CIA world factbook for Mexico (2008) cites a GDP of $1.56T, with a public debt at 36% of that, or around $560B, and revenues at $257B, with state expenditures at $258B. It varies depending on where you look, though; vague and inconsistent figures are a common pattern when it comes to the unsustainability of government spending.

In other news, political tensions seem to be heating up in Italy, where the prime minister spent some time in the hospital after taking a hit to the face from a gothic cathedral replica[2]. No reason was given to what motivated the 42-year-old assailant, who seems to be getting more fame than notoriety from it—but Italy has one of the higher debt-to-GDP ratios in Europe.

For Italy (2008): GDP is $1.83T, public debt is 106% of GDP (or nearly $2T), revenues are $1.07T, and expenses are $1.13T. A debt-to-revenues ratio of 2 is a pattern in Mexico, Italy, and Greece.

Using the same method for the USA (2008) we have: GDP $14.44T, Public Debt at $37.5% of GDP (or $5.4T, which I wonder how they calculate when we have debt ceiling of $12.1T), revenues at a scant $2.52T (or around $16,000 T*Bux), and expenses at $3T.

Sources:
1. For Want of Higher Taxes, Mexico's Debt is Downgraded.
2. Italy Ponders Wounds as Berlusconi Mends from Attack.

Even Steven

2009-12-11T11:04:00.000-08:00

The U.S. Dollar Index has nearly fully retraced gains made from the start of this blog in April 2008, through March 2009. Had I said in March to divest from the dollar and jump into the stock market, I would be the smartest blogger on the Internet, and had I done so myself I would be around 40% richer. Part of the rebound was the expected "dead cat bounce" seen commonly in deflationary corrections. Part is from recent bailout activity. How much is which I cannot say due to the seeming reduction in transparency of bailouts over the past few months.

Anyway, the dollar has not quite fully retraced its path but it is close and it easily could. Given this, I'd like to reflect on the purchasing power of the dollar over this time.

From March 2009 through today, clearly it has not been as good an investment as the stock market, or against foreign currencies. But has it been bad? Comparing today to April 2008, I would rather buy a house today. I think now is a better rental environment as well. I would rather fill my car with gas today then back then. I would rather hire an employee today. Prices of food and everyday goods remain similar—however deflation would first present as increased rates of items on sale. Has there been that? I think so, but overall my grocery tab feels about the same. At least it hasn't increased further as it had been doing though most of this decade. I'd even rather buy stocks now than a year-and-a-half ago, though if I had wanted to I missed my opportunity last March. Generally, since the start of this blog, deflationary forces have been prevailing, and the purchasing power of the dollar is stronger.

Of course, one thing that I wouldn't rather buy now is gold, that recently peaked at $1214/oz. From the start of this blog until today, gold has had some ups and downs but is up around 25%.

The U.S. Dollar Index is limited in that it compares the dollar against other currencies. If all currencies were to devalue simultaneously, which isn't far fetched as central banks frequently act together, the index in that case would stay even, while the purchasing power of the dollar is lost. Mostly the purchasing power of the dollar has held steady or strengthened, with the main exception being gold.

Greece Downgraded

2009-12-09T09:52:00.001-08:00

Greece is in the news today. Their government bonds are facing a hefty downgrade, and interest rates demanded are rising briskly[1]. In short, the Greek government is running out of options to finance itself, to the point where a possible bailout from the European Union has been raised.

The article gives a puzzling statistic, which I think is a mistake. It reports Greek national debt is 125% of GDP, which would be a very manageable level of debt—better than major European economies as well as the U.S., all running in the ballpark of 150% of GDP, or Japan which is close to 200%. I wonder if they mean 125% in excess of GDP, or 225%.

This is an interesting number to me because it defines the point where governments are forced to stop deficit spending. In a recent post, I offered a debt-to-GDP ratio of somewhere between 2 to 6 based on examples we have from different countries. If the Greek balance sheet is going into a tailspin at 2.25, then we may be reaching government spending limits even sooner than I was guessing.

ADDENDUM: So I've been researching national debts, and I find numbers all over the place. 125% is a common number I see for Greece, with the U.S. and much of Europe hovering around 60-70%, and Japan at 170%. So clearly there are different ways to calculate the figure. Will post further when I see better consensus data. Here is some 2008 data, though, as we know, when it comes to public spending, 2009 was a busy year. What really matters is that national debt to tax collection ratio, of which GDP may be seen as a ballpark indicator of taxes the government can collect.

From the CIA World Factbook for Greece (2008): GDP is $344B, National Debt is 97.4% of GDP, Revenues are $127B, and expenditures are $144B.

Sources:
1. Greece Government Bond Tumble Fails to Entice Pictet

Base Money Surpasses $2T

2009-12-04T15:37:00.000-08:00

A little over a year ago, before September of 2008, base money had plateau'd at around $800B. Within three months there was a sudden spike to $1.8T, where it had stabilized for the better part of 2009. Around September of this year it has begun to drift upward again, now just over $2T.

Bank reserves follow exactly the upward trend in base money supply, meaning any new money created is just sitting in banks. Obviously the Fed and the Treasury Department gave it to them to lend out to "jump start" the economy and support inflated asset prices. But banks seem to be hesitant to lend it out.

So because the added money is sitting in banks, this is the equivalent of printing a trillion dollars and then burying it in coffee cans in the desert. There is no meaningful effect it is having on the overall supply of money in circulation. Not that a trillion dollar expansion is not of concern, but that is how it is playing out.

Nobody Wants a Weak Dollar

2009-11-15T07:55:00.001-08:00

The truth comes out. As easy money policy drives the USD index back toward the lows when the blog was first started, this is coming under criticism of Chinese regulatory authorities, whose balance of trade is harmed by a weakened dollar[1]. They cite a weak dollar adversely effects developing economies, and the carry trade that has resulted has re-created a spectulative environment[2].

I'm glad the Chinese have government officials capable of talking sense when it comes to fiscal policy, though, to be fair, it seems every nation can talk about other nations finances more sensibly than their own—and China's supression of the yuan comes at a cost to the standard of living of Chinese workers. But it is pretty rare for anybody to speak on the dollar sensibly in any official capacity, so thumbs up to China for crossing that barrier.

Also noteworthy is China's attitude that the value of the dollar is a function of fiscal policy, which I fully agree with. Inflation and dollar weakness is not some inevitable natural event.

Sources:
1. China: Loose US policy, weak USD creating speculation (WSJ)
2. China: Low US interest rates threaten recovery (AP)

Economic Capacitance in the U.S.A.

2009-11-13T11:13:00.000-08:00

Earlier in this blog I used a term "economic capacitance" to describe the length of time an economic unit (i.e. individual, family, business, or government) can persist in the face of negative cash flow.

With no income, economic capacitance (EC) in months would be savings divided by monthly expenditures. If there were income, but expenditures are greater, EC in months would be savings divided by losses per month, where losses are income minus expenditures. If one has a good credit rating, one could add borrowing capacity to savings, which would lengthen the amount of time before excess expenditures render one bankrupt. In short, economic capacitance is the length of time one can maintain excess spending before the shit hits the fan.

The U.S. government is an economic entity. Income comes from taxes. Expenditures reflects the military, social, and infrastructure services it provides, and also subsidies and bailouts. To my knowledge, the Federal Government has no savings, nor any resources that could be construed as savings, but I won't rule out there could be something I don't know about. The federal government can pay for services directly with tax money, or through bonds it can float, which are then paid off with taxes.

The U.S. government has been deficit spending for years, with ever increasing debt reaching upwards of $12 trillion now, or close to $80,000 for every tax paying citizen. Some of the debt it accrues will be essentially forgiven by a targeted 2% inflation rate every year. But the government is still deficit spending well beyond that, exacerbated under the Bush administration, with no end in sight under Obama.

Through direct bailouts of banks and an easy money policy flowing in the direction of corporate America, this financial house of cards that is the credit bubble remains standing: but at a cost of hundreds of billions of dollars in bailout packages, and more in loans to poor credit risks, and more still on guarantees for toxic securities.

So, with that introduction, I'd like to reflect on: just how long can the government keep doing this?

As long as there is a market for Treasury Bonds, the U.S. government is in business. They can shovel as much money into Wall Street as they like. With all the chatter about where the dollar is headed, the market for treasury bonds shows no sign of letting up. So, in the end, the free market for Treasury Bonds decides the economic capacitance of the federal government. When people stop buying treasury bonds, and only then, would the government be forced to curtail its spending.

So when is that? Currently the U.S. debt is around 1.5 times its GDP. Most major European economies are around that. Japan's national debt is closer to 2 times its GDP, and they are far from financial armageddon. Now Iceland's debt is/was 6x its GDP and financial armageddon HAS hit there including a bloodless coup against the political party responsible. So the tipping point is a debt-to-income ratio somewhere between 2 to 6. The U.S. is too big to do what Iceland did; I'm going to guess that a debt to GDP ratio would be 3, after which borrowing costs would become prohibitively expensive. So that is around double where we are now, or another $12T the government has to play around with, in my opinion.

So then, is there any sense to curbing our spending to not reach that point, and go back to living within our means? Going into debt now reduces our capacity to accrue debt later, so future America will not have the same opportunities for deficit spending that we have today. Worse, if greater amounts of tax money in the future go to pay off the debt burdens accrued from the past, that narrows the government services future America will enjoy—either that or increases its tax burden, with all the impediments that puts on a market system.

Jobless Rate Crosses 10%

2009-11-06T20:40:00.000-08:00

After hovering in the 9% range for the last few months, the unemployment rate in the U.S. was measured at 10.2% for the month of October.

70 years ago, unemployment counts were highly inclusive measurements trying to capture every one capable of holding a job that wasn't fully employed. It was counts like these that brought us rates of 20+% during the Great Depression. Times change, and now this statistic counts only those without any employment who are actively looking for work. Those who are working part time, or who are working outside their field of expertise (computer programmers who are now baristas at Starbucks), or who have given up and are no longer looking for work will not be included in today's measurements. Factoring in these underemployment rates would double this number.

Any recent "recovery" in asset prices was not driven by increased spending or a robust economy. It is driven by taxpayer-funded government bailouts.

ADDENDUM [12/6/09]: Or you can just watch this video.

November FOMC Meeting

2009-11-04T20:38:00.000-08:00

The FOMC meeting today kept rates at near 0%, though decreased the infamously vague "agency debt" from $200B to $175B.

Changes in monetary policy remain few and far between of late, but those which have been instituted, and are underway as we speak, continue to keep the economy afloat, in terms of maintaining overpriced assets through easy credit from the government. One wonders how successful the "recovery" would have been without this in place.

The U.S. dollar suffers when the government floats treasuries to bail out the financial sector. This blog maintains it cannot last forever, and when it ends, the government will have to choose between dollar devaluation or a deflationary recession (where the buying power of the dollar goes up), and they will choose the recession.

Fox Guarding the Chicken Coop

2009-10-16T12:11:00.000-07:00

In more disheartening than noteworthy news, a high ranking Goldman-Sachs executive has been hired as director of the enforcement division of the Security and Exchanges Commission. Goldman Sachs execs have been holding the Treasury Department Secretary position for this administration and the last, and widely occupy high ranking government positions.

It is not like we really lost anything, because the SEC has done nothing of substance during the entirety of the mortgage debacle, and has never been in danger of protecting the public or making a real difference, but it feels like rubbing salt in an open wound.

UPDATE [4/16/10]: Now that Goldman-Sachs has been charged with securities fraud, some more detail and an updated live link is warranted. The person in question was 29 year-old Adam Storch, who was appointed as chief operations officer of the enforcement division of SEC, who reports to director Robert Khuzami.

10.000

2009-10-14T19:31:00.000-07:00

Giving credit where credit is due, no pun intended, well maybe sort of—I mean there is a lot of government subsidy going into the system now—the DJIA peeked over 10,000 on a long trudge up from it's mid-6000 nadir. Anybody who bought in the 6000s and is still holding onto things knows a lot more than I do, is very lucky, or knows the right people.

I watched this show in the real estate market of 2006, patiently, and so I'm sitting back and watching the same show again now. As stocks rise the dollar will be unsteady, but gold is robust, comfortably above $1000/oz.

The fundamental premise of this blog is unchanged. In good times the dollar can be strong AND the market can be strong. But in a recessionary environment, one of them has got to give. Those holding onto bonds—treasury, corporate, or securities—will not sit idly by while their wealth is deflated away.

Lewis Voted off the Island

2009-10-01T07:41:00.000-07:00

Bank of America CEO Kenneth Lewis announced his resignation yesterday. Mostly, heat has come upon him for the acquisition of Merril Lynch, possibly under the coercion of the Fed and Treasury Department, at a heavy cost to BAC shareholders. I would say his prior acquisition of Countrywide was a similar error of judgment, but he hasn't seen a fraction of the criticism for that. With those two acquisitions and all the toxic debt they held, BAC's viability relies on government subsidies and bailouts, in their multiple current forms.

Health Insurance, the Public Option, and Free Markets

2009-09-22T09:36:00.000-07:00

Since I've had this discussion on several occasions, and since it seems to be what everyone is now talking about, I thought I would comment on it here.

As I've expressed before, I support the insertion of free market principles into our health care system as much as possible, in opposition to socialized medicine, which I feel will be inefficient and lead to inferior quality. At the same time, I support the "Public Option" as a lesser solution—in other words the ability to buy the equivalent of a Medicare policy. It has largely been dismissed now from serious congressional consideration under pressure of the health insurance lobby. The reason cited is that insurance companies couldn't fairly compete against it, and so it opposes market principles.

There are (at least) two reasons why the free market does not apply to our current private health insurance system:

1. Under current statutes, Americans are coerced to buy private health insurance. This is not free market. In my case, I'm 40, my previous employer paid $500/mo., for which I had a Kaiser plan and used almost none of it except for three doctors visits for a specific condition which was mostly successfully treated. Now I did have the option to refuse any plan, but I could not have said to my employer: "I want to insure myself: please give me the $500/mo. instead." Without that option, free market principles do not apply.

2. Private insurance gets huge indirect government subsidies in the form of Medicare. Medicare is given to all Americans over 65, and all Americans with permanent disabilities. This amounts to cost-shifting health insurance onto government once people become unprofitable: either they cannot afford premiums, or they get to an age where they become statistically more likely to develop expensive conditions to treat. There was a time when healthy people were charged high premiums to offset costs for the unhealthy. Those days ended with Medicare. Now healthy people are merely gouged for high premiums, and the tax base handles the vast majority of the truly sick in this nation.

Since Medicare is capable of treating the truly sick, and for the most part they get good care under Medicare, with minor adjustments it should be able to oversee the healthy majority of Americans as well, particularly if they collect premiums in line with what health insurance companies are charging.

This talk about free markets is simply the fact that Health Insurance companies have found and unbeatable racket to extort the American public and don't want to lose it.

Oh What is a Bear to Do?

2009-09-19T11:42:00.000-07:00

I'm posting today simply to say I still consider this a fully active blog and it is still my intention to post approximately twice per week regarding economic events that could influence the value of the dollar, and any other thoughts on the subject that cross my mind.

It is just that news regarding bailout activity has been distinctly inactive—real factual news as opposed to commentary or speculation which is abundant—and replaced by hot air around health care reform. With nearly a trillion dollars of taxpayer money being put on the table and up for grabs, naturally, those who stand to profit from the pending health care legislation have cranked up lobbying and media efforts such that events unfold in their favor.

New economic bailout activity may have slowed down, but bailout activity already in the works is in full swing. Since the last two major bailout events--the TARP and Obama stimulus—were followed by precipitous market declines, it may be policy makers now are bending over backward not to upset this house of cards.

What happens from here? Is this the beginning of the recovery, or is this an overstretched rebound? If it is a recovery, it is a tepid an incomplete one. There is still significant unemployment and the mortgage situation is still in the toilet and will get worse as the under-reported Alt-A market continues with their adjustments until 2012.

But for those who think good times are here again, I guess all I can really do is use such a time to take a little break.

As the stock market grows, the dollar falters. Neither is back to the 2007 highs for the DJIA or 2008 lows for the dollar.

The Recession is Over

2009-08-21T10:38:00.000-07:00

...according to a statement made by Ben Bernanke today.

That's great. I'm so glad to hear it. They were sounding somewhat more pessimistic at the FOMC last week but hey, I'll take it. Hopefully now, the bailouts will come to a close, the auction lending facilities will be wrapped up as soon as possible, quantitative easing will at least not be extended beyond where it is at now (if not stopped early), and further FOMC meetings will bring rises in the interest rate.

Or perhaps, maybe, current circumstances are supported by unsustainable easy credit from the government that will reverse once the bailout measures reach their natural endpoint of an exhausted tax base?

Squeezing the Shorts

2009-08-17T09:40:00.001-07:00

This blog has presented a macroeconomic theory over the past year and a half, which examines money supply, bailouts, and equates inventory with money supply and considers the consequences assuming that relationship to hold true.

But in terms of day-to-day fluctuations of the stock market, and even sustained runs, my guess work has not been good, and were I playing a shorting game, even though I am as much a bear as anyone, my guesses as to when fluctuations were to take place have been so bad I’m sure I would have lost my pants.

Part of it is the activity of bailouts of the falling economy, which is at best kept discrete and at worst hidden from the public eye. Bailouts allow upswings to go on longer than they should. But shorting is another factor which allows a bear run to enjoy one last moment of triumph when all looks hopeless. Which I’d like to comment on today. So I propose three phases to a bear run to help predict or at least better understand the natural course of upswings during a generally down market (or “bear runs”):

1. The Run: all bear markets have reversals of course. In the panic of a down market the indices will overshoot, which will be followed by a reactive upswing. This results from the inevitable imprecision of market pricing, which worsens during strong or unexpected periods of change—in other words, sinusoidal amplitudes that surround mean pricing only worsen. To predict the course of the bear run, one guesses what the mean pricing of stocks should be at a given moment, and the degree that the fall went below that average. The rebound should overshoot the "true" value by a similar amount.

2. Doubt and Shorting: when that moment comes to pass, and indices start to level off, and we all think the run is over, then since many people are expecting reversals of the market, shorting will be prevalent.

3. Squeezing the Shorts: however, if many people short the market at the same time, a third dynamic comes into play. Prices of stocks are determined by what buyers are willing to pay, and what sellers are willing to accept. With many shorts in play, those who possess the stock know that shorters HAVE to buy stock at whatever price it is at when the short sale comes due. At that time, there will be intense demand for the stocks, and since shorters have no choice, an extortion game can be played where shockholders wait it out for excessively high returns. And so we see sudden spikes of stock prices at the end of “bear runs,” right after it has started to level off.

4. Recycling: now, seeing this uptick can potentially arouse confidence and produce another run, albeit smaller, until shorters are exhausted and the run loses all confidence.

Then and only then will there be a down swing in the market.

"Agency Debt," Part 2

2009-08-13T13:26:00.000-07:00

In the continuing mystery of "agency debt," for which the Fed intends to spend $200B (around $1500 T*Bux) as a part of its quantitative easing program—"agency" we think means the GSE's—but "debt" remains ill-defined other than it probably does not mean mortgage-backed securities since there is a separate $1.25T program for that.

On his blog, Mish showed a robust market for corporate debt over the past month which he attributed to fueling the S&P index.

If this is where the $200B is earmarked—toward buying, insuring, or somehow facilitating corporate debt—we have an explanation for the sustained comeback of U.S. stock indices in the setting of an otherwise deteriorating economy.

But I don't know of any GSE that invests in major corporations so, again, the term "agency" continues to remain non-specific.

Quantitative Easing through October

2009-08-12T11:49:00.000-07:00

The Fed had an uneventful FOMC meeting today. The notes are pessimistic about the economy despite recent events in the DJIA and other economic indices. There is no suggestion of rate hikes from 0% as it stands now. They did extend the window of quantitative easing by a month from September to October, but the amount remains $300B for treasuries, and then around $1.5T in "agency" mortgage-back securites and "debt."

For the record, $300B equals $2175 T*Bux, and $1.45T is $10,512 T*Bux. In other words this round of bank bailouts runs close to $13,000 per taxpayer. But money isn't coming from taxpayers... it's coming from the printing presses of the Fed, and so the tax is more of a devaluation of existing currency than something taken from our income. Such devaluation will be reversed as the bonds are paid back. Treasuries will be repaid, but I'm highly skeptical about agency mortgage-backed securites and debt, and so much of that $1.5T would be pure monetary expansion handed to the bankers.

My guess is, money supply will be diluted by around $1T from this. This would be bad for anyone holding onto cash.

Cash supply now runs around $1T (discounting what is sitting idle in bank reserves), and fractional reserve debt runs around 9x that (with approximately $4T in mortgages and $1T in consumer debt)—and so I'm guessing a ball park money supply of around $10T from cash and credit.

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.

Trophy Houses

2009-08-10T18:05:00.001-07:00

In the midst of this current economic resurgence since last March, where it is hard to discern any economic growth driving it but it keeps progressing and beating expectations, I’d like to comment on a clear pattern seen in the real estate market since declines began in 2006 (or 2007 in San Francisco). It is this: low-end properties are correcting toward fundamentals faster than the higher-end ones, with middle-range properties somewhere in between.

To me the explanation is straightforward: there is greater economic capacitance at the wealthier end of the spectrum, so more ability there to sustain a drain of wealth while waiting for a turnaround. (Those getting the bailouts enjoy a whole lot of economic capacitance.) Low economic capacitance has a snowball effect: inability to keep up with underwater mortgages leads to that many more properties on the market, which leads to further erosion of prices, which means more underwater mortgages and more homeowners with a motive to walk away, and less ability to buy in worsening economic times.

However, if low-end properties become a decent investment once you factor in the rent-to-mortgage ratio, whereas higher tier properties demand mortgages well in excess of rents, then the low-end market will draw interest from middle-range buyers, exerting a downward pressure on that market, which will eventually work its way to the top.

So goes economic theory. In actuality, upper-end properties in areas of high demand are declining in price very slowly, at best. I’m thinking of San Francisco. Which begs the question—might there be areas immune to economic factors, “trophy” properties in other words, which will maintain a strong market so long as there is an upper 5% of the population that controls 80% of the wealth, or so?

Now I’m all for redistribution of wealth, so long as it is voluntary, and trophy purchases of any kind—cars, boats, houses—have exactly that effect: a drain on wealth from those who have it. By “trophy” I mean a purchase which commands prices above and beyond fundamental value because of general desirability and status benefit which comes of it. So, is this trophy market sustainable? Could somebody get an upper tier house in San Francisco with the anticipation that wealth would at least be preserved and capital gains could even improve on the investment?

I suppose the only answer is: “time will tell.” It depends on how deep the pockets of the wealthy run. But one does not become rich or stay rich by losing money. In anything but a climate of compelling capitals gains, trophy properties are costly.

What If...

2009-08-02T16:38:00.000-07:00

For all of those now contemplating that the recent upswing of economic indices reflects a true turn around, I wish they would all pause for a brief moment to reflect on the following: imagine if all taxpayer underwritten government programs—the TARP, TAFs, the upcoming PPIP, and any other money the Fed, Treasury Department, and GSEs are now tossing around—what if it all suddenly came to a halt? Then what? Would you still anticipate the economy to continue growing and the numbers to keep rising?

All bear markets have bull swings. This one, in addition, has a lot of government backing. The Obama administration will do everything possible to keep the bubble economy in this disequilibrium state. As long as there are people willing to buy Treasuries, such money can be used indefinitely to keep easy credit flowing and the money supply high. The end point is where Treasuries become prohibitively expensive because nobody wants them or, hopefully sooner, the tax base increasingly comes to realize the fraud being perpetrated and takes a stronger stand against it.

Government bailouts can only stall the economic contraction. Eventually they will run out of money, and the return to fundamentals will continue. What is worse, the government money misapproprated in Wall Street bailouts now will be gone when it is truly needed for jobs, extended unemployment, food programs, and basic social supports.

Banking Bonuses

2009-07-29T06:02:00.000-07:00

This faux-recovery we are now in, being hailed as the beginning of a true turn-aroud, continues to defy top-calling from bloggers and pundits alike—not so much in amplitude, which is still modest, but in duration. I figure, you get to make a top or bottom call once. Mish threw his away months ago, I blew mine earlier this month. Both of us were close in terms of value, the market has not gone up much since we made these calls, not far beyond the normal range of noise, but it still hovers in mid air, and is certainly not going down.

The March rebound began with Citibank's announcement of better-than-expected profits, defying expectations, and other banks have done likewise, and many are taking aggressive steps to pay back TARP money. This latest spike once again stemmed from Citibank's announcement of profits.

And as a result of widespread "profits" and repayment of TARP bailouts, financial executives will resume collecting outrageously high salaries and bonuses. Keep in mind the amount of government (taxpayer) support for the credit industy, even outside the TARP, and the ongoing suspension of mark-to-market accounting, where one can place whatever value they like on toxic assets. Financial stocks are still in the toilet and their shareholders are still screwed.

The day of reckoning is merely postponed. Saying: "we need to rescue banks because our economy depends on credit" is like saying: "we need to bailout Enron because we need energy."

California IOUs

2009-07-10T12:20:00.000-07:00

An interesting situation is brewing around the IOUs California started issuing last week due to budget gridlock in Sacramento—in the face of tax income for 2008 being greatly below expected. A number of banks agreed to honor these IOUs until today. After today though, many banks, at local and national levels, are voicing resistance about honoring them any further.

California will almost certainly pay them back. They carry an annual rate of 3.75%, which is a better deal then I've gotten on any of my CDs even at promotional rates for a long time, and better than I recall on Treasuries for awhile now. If a holder of an IOU were to sell it for 90 cents on the dollar, that would be the hottest deal in town. Even at 95 cents they would probably fly off the shelves. At 3.75%, even at face value I bet they would sell well.

Which makes it strange that banks are starting to refuse them, particularly with the bad PR and the risk of losing accounts with depositors going elsewhere. It would appear their ongoing liquidity problem, at this point, may be extreme.

***

In a humorous turn of events, banks are claiming their refusal to take state IOUs is a public service. Wells Fargo says: "The State of California–just like any household or business–must be responsible for living within its means." Bank of America adds: "We do not want our acceptance of registered warrants to deter the state from reaching a budget agreement as soon as possible." Does Wells Fargo suggest that major banks, being a business, ought to live within their means as well?

Plenty of credit unions see the opportunity here and will be accepting state IOUs.

UPDATE [7/12/09]: It looks like the market rate for California IOUs is emerging between 80-95 cents on the dollar. The cited problem is they are cumbersome to deal with. In a climate of scarce liquidity, I can see it as an issue. Otherwise why couldn't a bank take out a loan from the Fed at under 1% to service these at nearly a 3% markup?

Agency Debt

2009-07-10T09:23:00.000-07:00

Today the Fed will buy nearly $4B of "agency debt"—the first of an earmarked $200B. $7B was offered for sale to the Fed, of which only about half of that was taken. It appears they are starting slow.

By "agency," they mean the GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. As for "debt," it would be packages other than mortgage backed securities since that has been distinguished separately. Bonds perhaps? It still seems rather vague but may clarify in further press releases.

It's small potatoes now, but if the Fed starts buying, with printed cash, debt that has no chance of being repaid, from agencies where no recourse will be demanded, that would constitute a pure infusion of cash into the money supply, which would reflect a permanent devaluation of the dollar by the relative percentage the money supply was expanded.

This is in contrast to credit-driven bailout measures (i.e. funded by Treasury Bonds), or any easy credit, which is only a temporary devaluation of the dollar. It also contrasts to taxpayer-funded bailout measures which does not devalue the dollar at all but simply shifts cash from taxpayers and the usual tax money recipients to those who receive the bailouts. A poor investment at best.

Funenjoyment

2009-07-03T08:54:00.000-07:00

Amid the California state government resorting to IOUs, and the Bureau of Labor and Statistics cooking the unemployment numbers to keep things safely under 10%, economic strife has hit home and yesterday was my last day at a job of 8 years.

No, I'm not moving in with my parents. It was a half-time job and I work part time elsewhere. They wanted me to do more work for less pay, so I decided it was time to move on. My pay was funded at city, state, and federal levels so it was not surprising, and I might have brought this upon myself by voting down props 1A-1E and encouraging others to do the same—although even if they passed I figure it would have only delayed the inevitable. I'm glad I voted the way I did.

Leaving a job is pretty stressful. I feel it is the right course and will open up new opportunities, but I wouldn't call this past month a good one.

But, there's plenty on the bright side. Having been a renter, I've saved up money and get by on very little. With my other part time job I'm pretty sure I'll be cash flow positive. I haven't taken a vacation in years—now, I don't have much of an excuse anymore. So I'm going to be living it up. I've also had my fill of being an employee so will at least be an independent contractor and hopefully start of my own practice when the time comes. At least, I will have the chance to rethink my direction in life.

If Borrowers Ruled

2009-06-28T12:12:00.001-07:00

I've made the point before that hyperinflation favors those in debt, and deflation benefits the lenders. Furthermore, I've stated that at the end of the day America is a democracy, but at the beginning of the day it is a plutocracy where political favors are lobbied by wealthy interests. Finally, I argue that hyperinflation versus deflation following a credit bubble is a function of monetary policy; deflation will happen with a hands-off approach, hyperinflation happens when money is printed and distributed without recourse.

Which all adds up to a safe feeling in my mind that the correction of the housing bubble, and all other bubbles blown of late, will be deflationary, and cash will increase in purchasing power and value as time passes. So long as the government can use tax money and treasury bonds to support inflated asset prices, it will continue to do so, but when that reaches its endpoint, the correction will be deflationary.

For every dollar of debt somebody owes, there is a quiet entity expecting to be paid back with interest, not to mention strong currency. Anyone who has treasury bonds or sizable holdings of bonds of any kind will have lobbying efforts intent on keeping the dollar strong. (Keep in mind, with a 10% fractional reserve policy, 90% of the money out there is debt.)

Now if politicians obliged themselves only to the voting public, it would be a different story. With most Americans having more debt than savings, they would benefit from strong inflation assuming incomes rose to match it. Employment was strong during the hyperinflation of the Wiemar Republic, although workers were paid with Monopoly money so their wages were really much less than in times of stable currency.

So hyperinflation had two benefits: it forgave debt, and unemployment was very low. Both of these are very democratic and enticing to anyone who can't find a job. Retirees who lived on fixed government pensions were left to starve, and anyone with cash holdings either moved it to assets or lost everything.

In Germany and Austria in the early 20's, the labor unions had particularly strong political status, and they favored free and easy money for reasons mentioned above. More so, we saw these countries strangled by war reparations. In this climate, we have a situation where hyperinflationary policies became politically possible. But given the general suffering and economic chaos that resulted, in hindsight it would still be inadvisable.

We are far from those conditions here. Hyperinflation is as easy as turning on the printing press. But politically, it is impossible.

Flight to Cash?

2009-06-26T13:54:00.000-07:00

The U.S. savings rate hit a 15-year high, just under 7%, today. Despite all the financial shenanigans, we see a slight trend of people going back to cash. As always, this sort of thing is concerning to the contrarian investor. But the last time people moved into cash, back in September, the dollar had a nice run that lasted until March and the onset of quantitative easing.

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. So it's hard to draw conclusions about the last three months. Either we are waiting for the real rebound, or this was it and its weakness underscores the strong deflationary pressures at work.

FOMC Outlines Quantitative Easing

2009-06-25T08:07:00.000-07:00

Concluding their meeting yesterday, the Fed held interest rates at near 0%. This was expected and no surprise to anybody.

They reiterated their plan to continue what quantitative easing is currently underway, but did not add to it, citing some signs of a turnaround in the recession.

Here are the numbers: for this year they plan to buy $300B of Treasury Bonds, $1.25T of agency mortgage-backed securities, and $200B of "agency debt." I don't know what agency debt is, but I'm guessing both that and the mortgage-backed securities have very little market value so this amounts to a $1.5T infusion of cash into the economy, which can't be good if you have a savings account. The government is probably good for the treasury bonds, so the purchase of them with printed currency amounts to a $300B increase in money supply that will remit over the course of the bond.

More information about the mortgage-backed securities and agency debt is needed before any firm conclusions can be reached. Does the money for their purchase originate with printed currency or Treasury Bonds? And what recourse is there for the defaults? These will need to be known to determine how inflationary this policy will be.

And, although $1.5T is a lot of money ($10,875 T*Bux), the total money supply of dollars is somewhere around $10T, around 90% of it is debt, and that is all under heavy deflationary pressure at the current time.

Hyperinflation Survival Guide

2009-06-23T08:21:00.000-07:00

Here's a few more thoughts from reading When Money Dies (UPDATE 5/20/10: sorry, online text has been removed by publisher's request, and it is quite pricey on Amazon).

There were some who prospered during the collapses of currency in Austria, Hungary, and Germany following WWI. There are also areas of need that were particularly hard hit, which caused much suffering in these countries. If you truly believe hyperinflation is about to happen in America, here are some preparations you can make, and some hot career moves.

When currency collapses in value, it is mainly consumable goods that will be scarce. Everybody will be hoarding them. Durable goods will be in plentiful supply, since people will be trading those for consumables—by which I mean food and fuel. The bomb shelter types will be in good shape for hyperinflation. I'd recommend keeping bags of flour, grains, and canned food, enough to last for a year, until the new currency is well established.

In case you forgot anything, have plenty of cigars and cigarettes on hand. In war, prisons, and hyperinflation, tobacco has always served as makeshift money when there is no other. Being durable, portable, divisible, and having intrinsic value—it fulfills pretty well the criteria for natural currency. Bummer about the huge tobacco tax—come to think of it, does the government know something we don't?

Farmers did okay during the Weimar collapse, mainly though the trade of durable goods for food. Either make friends with a farmer, or learn to become one. At least that way you won't starve. At the very least take up gardening if you anticipate hyperinflation. In Austria, in the early 20's, a farmer could trade a few bags of apples for a piano.

Which brings up hot careers: aside from farming, look into finances or the black market. Crazy profits are to be made there. While many starved and died of disease and exposure, others partied—and you want to be one of those. Wall Street types did well during the collapse of the Krone and the Mark, for the exact same reason they've done well in the past decade. When cash is devaluing, the stock market is hot. Foreign currency and stocks were the primary ways people preserved what wealth they had. Since financiers get a cut of these transactions, they will profit handsomely during the collapse of the dollar. They may be losing their jobs now, but they shouldn't get too cozy at their parent's house. They will be plenty busy when hyperinflation hits.

Now, when people are freezing and starving, they will gladly trade their most prized and valuable belongings for food and fuel. While the government tries and fails to ration everything, the international black market will be sizzling. Don't miss out!

If you follow these simple rules and quickly get your money into stocks and gold, there is plenty of fun to be had with hyperinflation. Any schadenfreude renters may now be feeling will pale in comparison to those prepared for the dollar's collapse. At the very least, it will be your chance to loose those 20 pounds you've been meaning to shed.

The Distinction Between Deflationary and Hyperinflationary Policy

2009-06-21T07:19:00.000-07:00

I've been reading When Money Dies: the Nightmare of the Weimar Collapse by Adam Fergusson. The book is so rare it costs several hundred dollars on Amazon, but fortunately it is free online. I'm still near the beginning but it is a thought provoking read.

What interests me in it is the distinction between deflationary and hyperinflationary outcomes of economic contractions. The more I read, the more I conclude the differences are disturbingly narrow, and if monetary policity shifts from one direction to the other it could easily go without notice to the public for awhile.

I hope both inflationists and deflationists can agree that either outcome will be a determination made by the regulators of fiscal policy—in the U.S. it would be the Fed and the Treasury Department. There is nothing inherent in economics that will naturally go in one direction or the other. Hyperinflation or deflation is a choice consciously made and acted upon by financial authorities.

In the event of recessions, governments try to stimulate the economy with loose monetary policy. In our case now, this has been going on without stop since the end of the internet bubble. It is still going on, first with a real estate bubble, then a second stock market and commodities bubble, and now with quantitative easing. Efforts at money creation have been taking place non-stop for a decade.

But all the money created by the government, so far, is in the form of credit, which is expected to be paid back. The act of paying back credit at the end of a bubble is deflationary. First, there will be less credit available in the coming years, and second what disposable income people now have will be mainly used to pay off debt. The overall result is money contraction and price deflation.

What happens in hyperinflation is that money is created and distributed without any need to pay it back. It is handed out as payment for government services or entitlements without any expectation it will be returned.

This difference turns out to be subtle. So far, all reported stimulus money is a government loan underwitten by the tax base. This fundamentally does not expand money supply. Any expansion is only temporary, so the ultimate outcome is deflation. Were such loans NOT to be underwritten by the tax base and could be defaulted on freely, hyperinflationary risks come into play.

When it comes to tight wages, unemployment, reduction of government services, widespread defaulting on credit, and tight lending standards—deflation is what we are seeing. Prices of everyday goods remain about the same but most investment classes remain down from 2008. All deflationary unwinds have exhibited rebounds like the one we are seeing now and if deflationary patterns hold then corrections to fundamentals will resume any day now.

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.

10%

2009-06-20T08:27:00.000-07:00

News of economic woes has fallen on California a lot lately, and given the budget crisis and a particularly bubbly real estate market and tech industry—it seems California will be leading the way down this economic sink hole.

For May, the jobless rate here cracked the 10% barrier, 11.5% actually. It leads the rest of the nation now at 9.4% and rising. Maybe there is some cause for optimism from the rebound of the stock market, but to my mind there are no real signs of improved employment opportunities and a lot of government jobs in jeopardy come July.

With the Alt-A resets only starting, and the middle- to upper-end housing market cracking at the seams, there is plenty of room still to fall, and years before a turnaround can be expected.

California Foreclosure Prevention Act

2009-06-15T21:06:00.000-07:00

In one of those efforts that means well but in the coming months we will probably see a far worse backlash, today California added 90 days to the period between the first defaulted payment and repossession through foreclosure, unless the servicing bank has a program in place for loan modification.

As history is playing out, banks are much more resilient toward any sort of loan modification than I would have guessed, based on general business sense that lowered loan payments are better than no loans payments and trying to sell the house in a saturated market. But as it happened, all government efforts to assist the process have failed. The original Hope For Homeowners Act was a bust, which followed a similar Bush plan that was also a bust. In that we need this sort of legislation, the more recent Obama plan must be struggling.

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.

Sign of the Times

2009-06-11T21:57:00.000-07:00

That resort, St. Regis in Dana Point, where AIG famously held a $440 thousand spa retreat for its executive to celebrate their newfound bailout money—that resort is in a foreclosure sale.

Ah, AIG. It hasn't made the news for awhile. I wonder how much of it there is left. Monetary policy has become so quiet lately.

ECB Pause

2009-06-05T16:05:00.000-07:00

With the Fed and Bank of England ZIRP'd, the ECB holds at near-ZIRP of 1%, catching the social vibe that maybe the worst is behind us and things are about to turn around.

At home, the DJIA has been hovering at the upper 8000s. Unemployment is on a constant march upward, and at 9.4% for May it could well surpass 10% in a month or two. But it's no longer "unemployed"... it's "funemployed!" Recent successes of the DJIA and rising oil prices have reassured the more optimistic among us of good investment opportunities soon.

The debt unwind, and the consequent contraction of money supply, has plenty of room still to go. Quantitative easing can stall the process but does not affect fundamentals.

May Recap

2009-05-31T11:29:00.000-07:00

Bailout news is fewer and farther between lately. I don't think that it has lightened up, only that the DJIA has crashed twice now after the initiation of major bailout packages—the TARP and the Obama Stimulus—so they've learned to be more discrete.

The dollar continues to be under persistent and heavy fire with bouts of quantitative easing, which in essence blows a new treasury bubble after the internet, housing, and commodities bubbles crashed. Quantitative easing is the lender of last resort—the printing press—however just like any debt-driven "prosperity" it will eventually reach its limits and make the crash that follows all the more worse rather than letting equilibrium forces restore our economy to its natural state in the fastest and most painless way.

The dollar hasn't lost all of its gains since it March 2008 lows, but its heading in that direction. How far it will go before the treasuries bubble collapses I don't think anyone can know for sure but I don't think it will retrace all the way before quantitative easing reaches its natural endpoint.

Keep in mind, there has been quantitative easing in Japan for years, and the yen is one of the stronger currencies.

I've heard no word as of yet about the beginning of the Public-Private Investment Program, the last piece of bailout malfeasance, which in essence will unload toxic securities held by banks on to the tax base. I wouldn't be surprised if that has begun, I just haven't seen anything specific about it. It is terrible for the tax base and takes money away from more needed and socially beneficial bailouts, but this would have no effect on money supply or inventory and so no direct effect on the dollar, unlike quantitative easing which amounts to a temporary increase in cash supply.

1F-passes; 1A-1E fails

2009-05-19T23:47:00.000-07:00

In one of those rare moments where I agree fully with the California electorate, propositions 1A-1E—which offer diffuse tax increase to cover California's budget shortfall—have been defeated; and 1F—which blocks pay raises of elected officials during deficit years—has passed.

The voters, what few of them showed up, have spoken. Hopefully this generalizes to the rest of the country regarding voter attitudes toward uncontrolled government spending.

On the Origin of Currency

2009-05-17T16:54:00.000-07:00

Today, we will have a speculative history lesion.

Our prehistoric ancestors lived in small communities. Specialized communities prevailed over generalized ones, since specialization exists in all human groups today, but we don’t see it in other primates, so specialization ruled. Such groups require trade among members—potters need to be able to pay the bakers, and everyone needs to contribute for the soldiers—and to do this human society requires a tool of exchange.

In small communities a “moral economy” forms—people share, but individuals who give more things of greater value to others are regarded by the group more highly than those who gave less. People gave what they had, and took what they needed—and people who gave more were remembered more fondly, and prospered.

As small villages grew into cities, moral economies became impractical. Trading had to be done through barter if the group was too big for everyone to know everybody else. Trust could not be relied upon. An economic exchange had to be sealed at the moment, which meant if one wanted or needed the possessions of another, they had to offer something immediately in exchange.

Currency is an extension of barter. The coin of the kingdom would be a tradable good, desired by many, that ideally would have been convenient in the sense of being (1) easily portable and (2) divisible. For example, if you want a haircut and you have a goat, then exchange is problematic, because the goat is worth more than the haircut, and you cannot cut off a piece of the goat for the haircut. Ideally, currency would be (3) long lasting and not degrade over time, and also it had to be (4) precious to some degree—it could not be too easy to procure. The bartered good that best displayed these properties would be widely accepted as the natural currency.

In World War II, for example, when cash was scarce, cigarettes were used as currency among GIs, and are probably still used that way in prison today. In ancient times, salt was used to pay roman soldiers, which likewise has many of the properties of a natural currency. But it was mostly gold that would prove to be ideal, and coin was preferable to crown or ring, being standardized and more divisible. Over the centuries, gold came to be replaced by bank notes, which were more convenient still, being even more portable than gold. However, trading bank notes was still essentially trading gold, since bank notes could be redeemed for gold.

With the development of fractional reserves, things began to change. Usually you could redeem banknotes for gold, but if the bank ran in to trouble, and there was a run on it, there were more banknotes than actual gold. Notes required faith in a stable economic system. They were riskier, and required there be no economic surprises.

The final stage of the evolution of currency has been a disconnection of bank notes from gold. Bank notes are not longer redeemable for gold, or anything. Cash is not a “natural currency,” and it is not based on faith either; its use is legally enforced. It is legal tender. Whether anybody has any faith in the dollar or not, bond holders must accept it as a means of payment. The law cannot say what its value is though—that is determined by their supply (which is regulated), and individual judgments about the desirability of the goods dollars can buy.

Modern cash has the advantage and disadvantage of manipulability by federal regulators. During times of wealth expansion, the fiat currency system can be easily increased to accommodate growth while preventing constriction of prices due to scarce cash. But regulators can also get it wrong, and expand the currency when the economy isn’t really expanding, except in the form of a speculative bubble. When people think they are in a new economic paradigm, they are really just greater fools getting in a lot of debt to pay excessive prices on speculative assets or commodities.

So that’s the good and the bad of where we find ourselves in regard to cash. It is the central lynchpin of a demand-driven economy.

A False Assumption

2009-05-09T08:59:00.001-07:00

I’d like to comment on a statement one routinely sees in nearly every critique of the dollar or fiat currency—the fallacy that it is "backed by nothing." This sentiment is all over the blogs, even otherwise good ones supporting free market principles.

Granted, the only use of paper money I can think of other than spending is to patch side wall tears in bicycle tires: due to its durability you can stick paper money between the torn tire and the inner tube and get home that way. Otherwise it is already printed on so you can't use it as notepaper, and due to paper money’s poor absorbent qualities it wouldn’t even be good for the usual uses of throwaway paper.

Okay, there isn’t much intrinsic value in the bill itself, unlike gold coins which could be melted down to make jewelry, arthritis medication, or a handful of other industrial uses.

But fiat currency is backed by the law. It’s legal tender. So legally, it is backed by all things for sale in the American economy; in a 10% fractional reserve system, credit accounts for around 90% of the money supply, so it is not something a merchant could easily turn away. In practice dollars can be conveniently and easily exchanged for goods and services. For anyone who holds the dollar, it is backed by any and all things for sale in America.

In this light, let us compare paper money to a stock certificate. Those who would disparage the dollar would tend not to say that a stock certificate is backed by nothing. But practically speaking, it is not like you can exchange some certificates for machinery from a factory, even if you are supposedly a part owner of it. The stock certificates gives one power over the management, supposedly, and the potential for dividends. But beyond that, company stocks can only be exchanged for dollars. So really a stock certificate is backed only by that which many consider to be backed by nothing, or fiat currency.

So paper money has all kinds of backing. Any criticism built on the premise that fiat currency is backed by nothing is illogical, dead wrong, and can be safely dismissed.

Mini-2006

2009-05-08T18:42:00.000-07:00

It feels like we are in a "mini-2006" right now, which was a bubblicious jubilee in a credit-intoxicated delirium as prices hovered in orbit well beyond any stones throw of fundamentals. Generally, in jobs and the stock market there seems to be an optimism out of proportion and disconnected from the gravity of the facts.

Since mid-March the stock market has made a robust comeback from its 6000-range lows, back into the mid-8000 range. Among job-seekers I know there doesn't seem to be the weight of economic pessimism beating down as it has been at least since the holiday season.

Still though, this mini-correction of the economy is a far cry from its speculative highs and is following the pattern of a dead cat bounce found in the midst of any crash. To the degree that quantitative easing is contributing, and it may be, even though one would still anticipate this faux-recovery without it, quantitative easing will still be an economic burden in the long run weighing on us later either through a restriction of economic activity through tight credit and reduced government spending; or a devaluation of cash and debt—in other words inflation.

As always, since those whose wealth is stored as debt are the same ones who pull the cranks and turn the levers on the money machine, I think we'll see trends toward deflation in the long run.

It's still cheaper to rent than to buy, and P/E ratios still stink. The job market continues to contract, and for each job lost, that is a further decline in economic velocity which builds as it cycles.

But for those who remember fondly 2003-2006, current events should arouse a pleasant sense of deja vu, while it lasts.

ECB Rate Cut and more Easing out of England

2009-05-07T17:53:00.001-07:00

Today, the European Central Bank continues toward ZIRP with dropping overnight lending rates to 1%. The Bank of England has announced another 50B GBPs of quantitative easing (in addition to 75B GBPs before), and maintained thier overnight rate at 0.5%.

Both of these would be favorable developments for the value of the U.S. dollar on world markets, but tempered by the fact of our own quantitative easing underway. There was a mild spike in the value of the euro vs. the dollar today, probably from those investors who regard this sort of intervention as a favorable development, and no changes of significance with the pound.

Stressed

2009-05-07T17:21:00.000-07:00

The results of the Fed's stress test of major banks are finally in, projecting how much loan losses banks might face under adverse financial circumstances.

Between credit extended for businesses, mortgages, and consumer loans, under the worst case scenario they considered (basically a mild economic contraction over the next two years—not the worst case scenario possible), banks stand to lose upward of $600B; $186B from mortgages alone. Ten of the 19 banks looked at are undercapitalized, needing raise close to $75B total by this November. Bank of America is the worst offender, needing to raise $34B, Followed by Well Fargo at $14B, GMAC at $12B, Citigroup at $5.5B, and the rest under $3B or not needing to raise any capital. Bank of America and Wells Fargo are no doubt dragged down by their accumulation of Countrywide/Merril Lynch and Wachovia (who before that had acquired Golden West), respectively.

So, the test results today confirm the presence of severe undercapitalization in the system, and major losses as the credit contraction moves forward. The tests seem to have been conducted responsibly; perhaps skewed a little too optimistically, but not sugarcoating the problem either. 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.

Chrysler Bankrupt

2009-05-05T11:37:00.000-07:00

We are in the midst now of an arranged bankruptcy of Chrysler, where it would be purchased by Fiat, all coordinated by the federal government at a suppressed price. We've seen this before, where banks were seized by the FDIC and then sold to other banks, whereupon shareholders lost everything, and unless special deals were made then bondholders lost everything too.

With Chrysler, the federal government does not have seizure power, but the Treasury Department can twist the arms of TARP lenders with exposure to Chrysler to comply with the plan. Non-TARP lenders to Crysler, and stock and bondholders of any sort, are compromised by the deal and their only recourse is to file legal action, which surely will happen.

Unlike bank seizures, this is going to be messy, I suspect worse even that Wells Fargo's purchase of Wachovia, which was bad enough.

Having owned a Dodge pickup—and not that I didn't like the truck but I was distinctly unimpressed the way the company operates and treats its customers—I'm left thinking the government shouldn't lift a finger for Chrysler.

SF Mechanist's Health Care Proposal

2009-04-29T08:45:00.000-07:00

Off topic, but I thought I'd throw it out there, since it's making the rounds on the blogs.

I believe that in clinics and hospitals funded by government (county, medicaid/cal, medicare), private insurance (including HMOs and PPOs), and private pay, Americans get good health care. Exceptions abound, here as anywhere, but overall the quality is good. The problem on all levels it is ridiculously expensive and burdened with heavy administrative costs.

"Single-payer" health care does not leave me with any confidence the situation will improve.

So, my system attempts the following: maintain current levels of care and availability for all, dispense with the notion of "free" health care because it isn't and in fact it is valuable, but still maintains high levels of care for people if they can't afford it, and reduces costs overall. It is a return to a fee-for-service system with government subsidies, loans, and backing.

Starting with fee-for-service, free market principles bring its advantages to the efficiency of the system. Health care delivery becomes a negotiation between doctors and patients of what is available and what patients wish to pay for. If it is too expensive, rather than shoving it to government, patients can talk about options, such as generic medications.

But say there is a catastrophic emergency, or one is diagnosed with HIV or cancer, and is unemployed or the working poor. Necessary health care is still rendered regardless of the ability to pay, and then the patient is billed for reasonable costs of services; there needs to be an office that helps patients negotiate such costs like insurance companies now have to assure they are not being gouged. But assuming the bill is reasonable and reflects the market value of services provided, the patient owes it.

If the patient cannot pay, then the government pays it, probably starting with Medicare, but the patient still owes the government for the cost. It is not the kind of bill that is sent to the collection agency, and if the patient remains working poor for life, they might never pay it. But if they win the lottery or come upon a sizable inheritance, then they would have to pay it.

If with job promotions or better education they reach a point where they could start to pay their health care bills off, then deals could be made such that it wouldn't be a serious burden, but over the years some headway could be made toward paying back what they owe.

Medical treatment that serves public health and safety—i.e. immunizations, tuberculosis treatment, and some mental health and substance abuse services—can still be made available by government subsidy.

Insurance savings would be considerable. I believe this system would maintain or even improve current health care standards, greatly reduce costs, and insure that necessary treatment is made available for all.

Swine Flu

2009-04-28T18:44:00.000-07:00

It seems kind of overkill, but Obama is requesting $1.5B to go combat the swine flu; on the other hand, nowadays it seems like pocket change when it comes to government spending. I know people are dying but there is no particular treatment of the flu other than managing its complications.

For those curious, $1.5B amounts to $10.88 T*Bux. Well worth it if it stops you from getting the flu, swine or otherwise, though I imagine, if approved, it will simply disappear into the public health care bureaucracy without tangible benefit.

The Stress Test

2009-04-24T17:37:00.000-07:00

So, results of the "stress test" for banks—to see how viable they would remain under favorable and not-so-favorable economic forecasts—were supposed to be in today, and most of what was revealed is we are going to have to wait until later to hear anything of substance about the stress test.

In the better scenario, and economic turnaround is coming soon, and unemployment and the credit contraction won't get worse than it currently is. In the worse condition, present economic factors particularly real estate, decline moderately through this year and then level off in 2010. There is some acknowledgment that things could go still worse than that.

If the banks were able to pull some accounting rabbit out of the hat, I'm sure we would have heard the results today.

Banking Profits

2009-04-20T11:14:00.001-07:00

Starting with Citibank's announcement that marked the beginning of this bear run, further increases in the DJIA has been punctuated by reports of profits from the different banks, including Bank of America, Wells Fargo, JPMorgan, and now the latest: Merril Lynch, of all things.

Stepping back and looking at the broader picture, one has to seriously question this new profitability of banks in Q1 2009. First, most of the banks would be effectively bankrupt if not for the committment from the Fed, Treasury Department, and Congress to keep them afloat no matter how many toxic loans they underwrote. Second, we have an easing of mark-to-market accounting such that banks can freely overvalue their assets. We have bailout money pouring in hand over fist. Now TARP money banks are supposed to pay back. But bailout money that came in indirectly via AIG they have no obligation to repay (and AIG will collapse before it pays anything back), and now they have non-recourse government guarantees of toxic asset purchases throught the public-private investment program, which will amount to either a direct transfer of tax money to the banks obligation-free, or an expansion of the money supply by the $500B alotted through the program.

Banks are not profiting. Banks are bankrupt without the system bending over backward to keep them from sinking like a rock.

T*Bux

2009-04-15T11:07:00.001-07:00

We all know that the U.S. National debt could pave a road to the moon and back in so many dollar bills. Statistics like that abound. but it is unrelated to everyday experience, and still leaves the true impact of this issue blissfully abstract.

Since recent bailout measures are approaching a trillion dollars a pop, to bring it home, I’d like to introduce "T*Bux," or how much money an average U.S. taxpayer owes on a government expenditure.

The U.S. Census is 307,212,123, per July 2009 estimate. As of 2007, there were just under half, or 138 million taxpayers in the U.S.

Ordinary calculators can’t handle 1 tillion divided by 138 million, so, knocking 6 zeros from each, we have 1,000,000 divided by 138. Or the T*Bux on $1T is $7250 per taxpayer, rounding off. This is the figure that will be used to make calculations.

The TARP is running $0.7 trillion, so that's $5075 T*Bux per average taxpayer. Quite the extortion when you look at it that way, what we are personally handing to the banks for screwing up our economy. Oh, sure, they'll pay it back. Well probably not AIG which alone, by my last count, has a $.18T tab, or $1305 T*Bux, for just one insurance company. What is lost for good is the $0.5T going to Public-Private Investment Program (PPIP) to guarantee toxic assets bought at inflated prices, or $3625 per taxpayer. Obama’s stimulus is $0.78T, or $5655 T*Bux in addition. The U.S. National debt ceiling, which we are very close to, is $12.1T, or $87,000 T*Bux.

After what we owe on our houses, the second biggest taxpayer indebtedness will usually be to fund government, with cars and credit cards and such weighing in at a distant third place.

As population estimates change, T*Bux will be revised.

Are We Halfway There Yet?

2009-04-12T10:55:00.000-07:00

Thought I would just check in this Easter. Bailout news seems to have abated as the DJIA creeps back into the low 8000's, and with quantitative easing, mortgage rates are dropping to the 4%-range (mainly directed at refinancing), and the program to buy around $500B of toxic assets from banks at inflated prices is moving forward if not currently underway.

News keeps cropping up around how the rates of acceleration of worsening economic factors, such has house price declines and joblessness, is getting less bad as months go on, and eyeballing the economic situation, I'm guessing the credit unwind is reaching the halfway mark. There would still be around 2 years Alt-A resets ahead of us, and banks are still hanging onto a lot of foreclosed property to limit supply. Even after the credit bubble is fully unwound this all would still be followed by a period of economic contraction though tight credit, made worse by a declining tax base and increasing deficits leaving fewer bailout options as time goes forth.

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. But I'm not believing calls that the correction is over and we can now look forward to good economic times.

In other words, I expect to see good news coming as prices move toward affordability.

Easing of Mark-to-Market

2009-04-02T09:22:00.000-07:00

So I saw the DJIA this morning and saw a sharp upward spike just peeking over 8000. Since it reached the mid-6000's, its has been rising steadily over the last month. But this shift seemed abrupt so, curious, I went to Google news and the only financial news that pertained was an easing of mark-to-market accounting regarding the toxic assets held by banks.

No doubt this relates to the so-called "public-private" program to bid for the toxic assets of banks, which will be almost fully government-subsidized non-recourse (for the taxpayer) purchases in a highly manipulated bidding system where only a few insiders would be allowed to participate. As it is shaping up it will amount to handing $500B of taxpayer money to banks in a sneaky way. More commentary to follow when it springs in to action.

The Market is a strange beast, but pretending there is money in the system where there isn't doesn't make it so. Though, maybe the market is salivating over the taxpayer money it sees headed its way.

Visit to Wells Fargo

2009-04-01T19:27:00.000-07:00

When I first started this site, just over a year ago, I had planned to focus more on things like CD rates and bank promotional specials. As it turned out, there was more bailout news than I was expecting, and more correction of the economy, and so attention turned to that.

But I'd like to refocus on cash as an investment, starting now. I've discussed before my little adventures with a Washington Mutual money market account, which is still going fine.

So I went to Wells Fargo today because a CD was maturing, and they called me several times encouraging me to open a checking account. I looked over their rates: 3-month CD's were at a miserable 0.80%, 9-month was 1.4%, and the "premiere" savings account they were pushing was at 1.15%. You can get over 3% only with a 36-month term. Maybe I just go in at the wrong time, but Wells Fargo has never impressed me with their rates. I was inclined to stay with the 3-mo CD's, but got talked into the savings account.

Most of the bigger banks I use are pushing checking accounts, even when I insist I'm never going to use it. Not sure why. The banker was kind enough to shred the free checks that came with it.

So in casual chatter I asked when Wachovia would be absorbed into Wells Fargo, and he didn't anticipate it would be for a year or two. By contrast, Washington Mutual is already Chase. Since I have an account with Wachovia I asked if FDIC covers the accounts separately, as two different accounts, which it does for now. However he didn't seem too sure that the FDIC limit of $250,000 through the end of this year would be made permanent. It felt like he was inclined to believe it would revert back to $100,000.

G20 Fizzle

2009-03-31T12:25:00.000-07:00

There has been some talk about a "new world order" in the G20 meeting going on now, specifically around the replacement of the dollar as the worlds reserve currency with a new global currency. One wonders what there is for sale this world currency could buy; what there would be that backs its value other than fiat currencies themselves. Anyways, from what I've been reading it does not sound like these talks have progressed very far, and unlikely will by meetings end. Otherwise there is empty chatter around the current global downturn, and some welcome discussions of anti-protectionism, that unlikely will make much difference.

With talk of a new world order, gold has been doing okay. The dollar I anticipate will recover after the meeting closes.