Category Archives: Poverty

The Fed, Sausage, and Angry Southerners

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Most people think of higher gas prices when they hear the word inflation. I like to look at how our food portions shrink while retaining their prices. The outcome is the same, higher cost per ounce, but it probably makes more business sense to put fewer chips in the bag than to raise prices. Apparently this phenomenon also angers sausage eating southerners as evidenced by the following recording.

This gets a tad not safe for work near the end…

Angry Jimmy Dean Sausage Customer

I keep wondering what the Fed is going to do about this situation. I imagine that by the middle of December things will be worse and they’ll be forced to cut, probably 50 basis points. Let the sausage lovers eat cake.

Optimistic? Don’t Read This Post

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Some people prefer to remain blissfully unaware of potential problems in the near future. Others prefer to know so they can plan for what’s ahead. If you’re the type who favors happiness over preparedness then I would advise you not to read this economic forecast from Nouriel Roubini. He’s often quoted by The Economist and WSJ and has a hell of a track record.

“I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. In this extreme scenario whose likelihood is increasing we could see a generalized run on some banks; and runs on a couple of weaker (non-bank) broker dealers that may go bankrupt with severe and systemic ripple effects on a mass of highly leveraged derivative instruments that will lead to a seizure of the derivatives markets (think of LTCM to the power of three); a collapse of the ABCP market and a disorderly collapse of the SIVs and conduits; massive losses on money market funds with a run on both those sponsored by banks and those not sponsored by banks (with the latter at even more severe risk as the recent effective bailout of the formers’ losses by theirs sponsoring banks is not available to those not being backed by banks); ever growing defaults and losses ($500 billion plus) in subprime, near prime and prime mortgages with severe known-on effect on the RMBS and CDOs market; massive losses in consumer credit (auto loans, credit cards); severe problems and losses in commercial real estate and related CMBS; the drying up of liquidity and credit in a variety of asset backed securities putting the entire model of securitization at risk; runs on hedge funds and other financial institutions that do not have access to the Fed’s lender of last resort support; a sharp increase in corporate defaults and credit spreads; and a massive process of re-intermediation into the banking system of activities that were until now altogether securitized. “

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Global Warming, Inflation, and Radiohead

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Radiohead’s new free album is killing the environment.

The Federal Reserve hasn’t hidden their absolute terror of a deflationary spiral. Bernanke is a student of the Great Depression and has vowed to never let it happen again. Greenspan and now Bernanke slash rates at the first sign of trouble because they can simply gloss over inflation with a questionable CPI. People are less forgiving when they suddenly lose their job when compared to paying more for eggs. And the foundation of this whole crazy debt laden financial system relies on constant inflation.

If the new Radiohead album does well the music industry as it currently exists is pretty much toast. Music is the first to go only because songs can more easily be squashed into small files. Movies will go the same route eventually. The deflationary forces of technology are no doubt freaking out the Federal Reserve. In fact, Ray Kurzweil’s new AI book has an entire chapter on deflation. At least in the ’30s entire industries weren’t forever vanishing, people just bought less for a while. If music goes free there will be no CD revival in five years.

So here’s my justification for the thesis. The Fed is watching the deflationary forces of technology bring down massive industries. They’re also watching the end of the housing bubble. The trillions of dollars recently created flowed to housing prices instead of food, energy, etc. Housing prices aren’t used when calculating inflation. The end of the housing bubble means a couple of things. One is the need for a new asset bubble which can hide inflation, the other is the risk of deflation due to the tsunami of foreclosures we’re witnessing.

The powers that be are currently worried or they wouldn’t have cut rates 50 basis points. Environmental regulations are only going to put downward pressure on the economy regardless of their potential long term benefits. If the Fed cared about the long term they wouldn’t have nearly completely devalued the dollar. As technology kills off gigantic industries you can bet the people at the Fed are telling the powers that be not to do anything that will destabilize this already battered ship.

Photo by FB42 on Flickr

The Rise of the Benevolent Dictators, Davos, and the Federal Reserve

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Davos is the annual meeting of the most powerful people in the world. It’s sort of a post-polytheistic Mount Olympus. From Wikipedia:

“According to its supporters, the World Economic Forum is an ideal place for dialogue and debate regarding the major social and economic problems of the planet, since representatives of both the most powerful economic organisations and the most powerful political organisations are present, since intellectuals also participate, and since there is a generally informal atmosphere encouraging wide-ranging debate.”

Interestingly, but probably not surprisingly, the economic consensus seems fairly optimistic.

“Executive Director Stephen Lussier told Reuters in Davos that demand for diamond jewelry around the world was strong over the critical Christmas period and that growth in the United States, where the economy is supposed to be slowing, was around five percent.”

Because the best way to judge the strength of the middle and lower class is diamond sales.

And from the Detroit Free Press:

“Home foreclosure filings surged to record levels across metro Detroit in 2006. In Macomb County, the number of foreclosure filings nearly tripled, from 2,755 in 2005 to 8,192 last year, translating to one home for every 39 in the county.”

“In Oakland County, Michigan’s wealthiest county, the number jumped from 3,754 in 2005 to 7,282, meaning one of every 68 homes. In Wayne County, the number of filings more than doubled, from 18,176 to 40,220, translating to one of every 21 homes.”

“Oakland County’s number translates into an average of more than 100 homes per week going to auction, the largest number county officials ever have seen and more than twice the number in 2004.”

Who are you going to believe? Blood diamond sales representative or the foreclosure numbers?

The question is whether the powerful are also optimistic about the prospects for the poor. I assume yes because if you can’t keep the poor happy then Democracy doesn’t work. So you have two options.

A:> Dictatorship. This would piss off the poor to no end.
B:> Benevolent Dictatorship disguised as a Democracy.

Option A is a non-starter. B on the other hand would be set up to prevent the populace from car-jacking democracy in an attempt to reduce the liberties of others due to religious beliefs or greed. With a growing wealth divide resulting from the exponential growth of technology (job killing ATMs) the problem is going to get worse. Try explaining Austrian Economic theory to the average Joe who just wants a car as nice as his neighbor. It doesn’t work. But 30 year+ mortgages and increasing, job killing productivity growth are mutually exclusive.

So what does the Federal Reserve do then? Money printing sure. But if you know how the timing of inflation works then it appears to be a wealth transfer from the poor to the rich. Regressive taxation to offset our progressive tax bracketry. The rich give a lot more money to the poor than the middle class so if the middle class dies off quicker they don’t mind. The rich are going to do a better job taking care of the poor than the needy middle class or the incompetent government, and that should make everybody happy.

Rifkin’s The end of Work is probably correct, he’s just not taking into account the fact that technology is going to make boredom obsolete.

The Fight for Meritocracy

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A quote from The Economist, which happens to be exactly what I believe… Which also happens to be why I’m still willing to pay for content in a world full of brilliant and free bloggers.

And the talented would do well to intervene in this debate on the side of the disadvantaged. For one last thing is sure to flow from the hunt for talent: even greater inequality. Most societies will tolerate the idea of well-rewarded winners, as long as there is equality of opportunity and the losers also clearly gain something from the system. If those conditions are not met, populist politicians from Toledo to Tokyo will clamp down—and everyone will be poorer for it. A global meritocracy is in all our interests. Be prepared to fight for it.

If the poor understood that minimum wage actually hurts their prospects they’d certainly be less likely to vote for populists. It feels like the debate is shaped by the public’s lack of knowledge of economics and both sides are farily happy in their God vs. Friendly Taxes niches.

Are the uneducated incapapble of understanding free markets? I don’t think so. We simply need better ways of getting the message across.

The Noodly Helm

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The economic grilled cheese sandwich was left unattended too long, so they thought, and the acrid stench of fiscal mismanagement(and burnt cheese) was getting stronger. Everybody was looking for the chef when the malfunctioning stove was to blame.

The left is going to get a shot at piloting the unpilotable beast for a while. When they fail it should be interesting to see if America swings right again or if they make the assumption that there simply was not enough wealth redistribution, in which case Frank Castro takes the noodly helm.

The stove is productivity. A thing once associated with rising wages. The problem is that accelerating productivity ultimately leads to job losses as software, etc. improves to the point where we simply get in the way. The stove isn’t really malfunctioning, it’s only causing problems because of two things. A:> It’s accelerating and we don’t like change and B:> Standard of living takes a back seat to pride.

The Fed – Will probably be looked back on as an impotent institution that simply delayed the inevitable.

Pride – Why Unions worked for a while. If the country swings far left this will be the reason. People prefer their welfare in the form of a paycheck. If this doesn’t change things could get ugly.

Is the world fair? Nope.
Do we try to remedy that? Yes.
Does it work? No.

Interesting question to ponder: Is human nature compatible with technology that makes the 9-5 unnecessary?

Stuff on tap: Estonia, China, Peak Oil?

Cell Phones, Food Stamps, Mexican Beer

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My friend and I were drinking imported mexican beer, discussing globalization and the race to the bottom. What follows is the beerless conclusion to my argument…
My view of what’s about to go down doesn’t really fall into any easily defined categories of left, right, bear, man-cow, etc. I believe that we’re transitioning into an era where millions of jobs will be lost due to productivity gains. Economists are already saying that there are plenty of job openings but not enough qualified people to fill them. I think that trend is about to get much, much stronger.

So to sum up my idea: A lack of productivity (relative to some theoretical limit) acts as a form of wealth redistribution which is now going away due to the accelerating productivity trend. A lack of technology has the same stifling effect on an economy as powerful labor unions.
Some consequences:
Median wages drop
Housing bubble pops hard
Deflation, which makes lower wages easier to swallow
Higher living standards due to high productivity
Angry people that prefer welfare from an employer instead of the government (it’s a pride thing)
Issue 2: The only way to keep living standards relatively high is by limiting government while increasing wealth redistribution. That sounds like a bizzare contradiction but only if you assume wealth redistribution requires bureaucracy. Take food stamps. An alternative would be to have government run soup kitchens spread throughout the country “creating jobs”. Of course the labor unions would demand $50/hour and fat pensions which would require higher taxes and would result in less money for food. So we have food stamps.

Food stamps of the future will probably be codes programmed into cell phones that allow people to carry a balance with them. They could draw from the food or medical balance depending on what they need but the services would be provided by private businesses. So you could have a government website that adds food, medical and education credits to these mobile devices which people use like food stamps but you could prevent the transfer of credits between devices so people wouldn’t be able to buy a gun with food stamps. They could buy butter and trade it for guns but the credit wouldn’t become a currency.

That sounds crazy coming from someone with libertarian leanings but then I never had a problem with the goals of Socialism: equality, justice, etc. just the fact that it leads to poverty and inequality. Wouldn’t it be strange if anarcho-capitalism generated enough wealth to realize the socialist dream of fat, happy middle class? Of course the middle class will be unemployed but some might look at that as early retirement, especially if everyone else is retired as well.

Privacy and Property are the Same

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“Those who would sacrifice liberty for security deserve neither liberty nor security.”
Ben Franklin

A famous quote used against Alberto Gonzales during a recent speech about the importance of warrant free wiretapping. While sitting in traffic today thinking about those words another phrase, often used by the left to justify non-free markets, popped into my head. Financial security. So I moved some variables around in my head and came up with:

“Those who would sacrifice economic freedom for financial security deserve neither economic freedom nor financial security.”

It is the logic of freedom as most people see it applied to economics. It is contradictory to believe that government should be able to regulate, tax, and inflate at will but not wire tap because they are two sides of the same coin. We lose freedom when governments interfere with free markets or tax and we lose freedom when governments listen to our phone calls without a warrant. The left aren’t alone in their inconsistent beliefs. Many conservatives dispute Darwinian evolution and believe democracy can be imposed from above (through war) when the Austrian School of Economics (the foundation of the Reagan/Thatcher revolution) praises the logic of evolution as applied to markets and argues that social order can only emerge without excessive government interference.

I remember in high school we had a financial counsellor explain to us the power of compounding applied to wealth. He went on and on about how we were all going to be millionaires when we got older. After the speech he asked if anybody had any questions. I was the only one to raise my hand and said something like “Cars used to cost $1000 right?” He agreed. Then I asked “So isn’t it possible that cars in fifty years will cost a million dollars and our life savings will buy a Hyundai?” To which he replied “It’s possible”. Needless to say I wasn’t a big saver until recently.

IRAs and home equity are not included in the calculation of the US savings rate. So as the government prints more money it decreases the value of our savings. The fact that Bush has cut taxes while increasing spending is a testament to the utility of inflation from the government’s perspective.

On an entirely different note, Rothbard has some interesting thoughts about the inability of older minds to accept new ideas because their ideas tend to rely on some fundamental assumptions that they then use as the foundation for their life’s work. I was thinking about this same topic recently, that people build these frameworks early on which are flawed yet build complex and often logically sound arguments on top of the flawed base. Here’s a condensed example using math.

-2 x -3 = +6 is true

2 x 3 = +6 is true

Flawed conclusion: Any numbers, when multiplied, give a positive result.

New theory: (6+6)/2 = 6

The theory is logically sound and lauded by the academic world as brilliant and it is mathematically correct. But one day the scientist, a social scientist in our case, proposes a new theory.

2nd theory: Government Surplus = (-2 x 6) -6 = 6

3rd theory: The government should spend 6.

These theories are also praised by critics as even more impressive than the first so newspaper Op-Ed sections begin to cover them, the so called second hand dealers in ideas jump on board and argue the merits of the logic behind subtraction and order of operations.But the math is wrong, the answer to the second equation is Government Surplus = -18. This is exactly what happens in the first few pages of Das Kapital with Marx’s flawed concepts of Equality of Value and Equal Quantity of Labor. Flawed ideas in the first three pages followed by four volumes of flawed conclusions.

Austrian Economics vs. Exponential Progress

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Grabbed some new books including Rothbard’s A History of Money and Banking and The Case Against the Fed.

The question I’ve been mulling over after macheteing my way through the first chapters is about the effect of change on the limits of freedom. Anarcho-capitalists see progressive taxation as inherently unfair. If you look at trends emerging due to the rise of automation it seems that the correlation between GDP and employment is starting to break down. With good enough robots having human help may actually hinder growth.

New jobs have always been created after brief turmoil following technological revolutions (industrial – farmers) but this time things are different. Automation is starting to kill jobs in the media business which was enabled by the printing press. This revolution is different because it doesn’t just allow new products. It makes their production nearly free. We basically had a form of socialism restricting free markets but it was caused by a lack and the expense of technology.

If you believe in free markets then this change would bring huge amounts of new wealth and progress, and I think it will. But I wonder how the distribution of that wealth will play out. Our low tech socialism created incredibly wealthy people (Hearst) but it also created thousands of jobs. One fat cat and thousands of people writing movie reviews. Everybody was happy. Now we’re looking at 50 fat cats with nobody else necessary. The 50 people will make more than the fatcat+1000s but is society better off? I think so. The opportunity cost of having smart people tied up in redundant jobs is usually overlooked in this analysis. I call it the Latent Potential of Middlemen (draft blog post in progress).

Hayek writes about that the mindset of an entire nation can be affected by socialism “The most important change which extensive government control produces is a psychological change, an alteration in the character of the people.” . It changes the way people think. There is an old quote that says we should work so that someday our children won’t have to. But are we just the kids that don’t want to stop working because our neighbors have a nicer car? Maybe our motives are flawed but the technological progress that results from our consumerism does benefit all people (MIT’s $100 laptop for instance). If the riots in Paris were occuring even in the face of France’s giant welfare state then should we be worried about the coming automation induced waves of unemployed? If you separate the concepts of employment and income which do people value more?

The title is a little misleading. Exponential growth is allowed by Austrian economics but the libertarian philosophy is incompatible with wealth redistribution that might become increasingly necessary as automation spreads.