Saturday, April 30, 2011
Friday, January 7, 2011
Footnote: $325 Billion
This level of $325 billion happens to be the level of funding for the US military in 1992, when Bill Clinton succeeded George Bush (senior) as the first Gulf War came to a close, and we were engaged as an Middle East MP force over Saddam.
According to US government inflation statistics this would be equivalent in today's terms to about $500 billion.
Reducing our costs by $400 billion would enable us to almost pay the interest costs of our current debt for the year.
Some would say this money keeps troops employed. Great. What a job. If the reduction in debt by $400 billion was proportionally applied to troop levels from our current total force of 1.4 million actives, this would be equivalent to 800,000 personnel. $400 billion over 800,000 FTEs is $500,000 per head.
Ask your local soldier: would they prefer their current annual salary or $500,000 per year (roughly the same as average Goldman Sachs bonuses)?
The math is astounding. We could send every downsized troop to a 4-year university for 25% of the savings. We could use another 25% to hire hundreds of thousands of teachers. Fix infrastructure. Invest in renewable energy. Modernize our grid. Invest in public rail transit. Or pay down the debt.
The opportunity cost scenarios are many, political willpower though, much less evident. While I hope it could happen, I prefer to invest time and energy hedging for the alternate scenario.
According to US government inflation statistics this would be equivalent in today's terms to about $500 billion.
Reducing our costs by $400 billion would enable us to almost pay the interest costs of our current debt for the year.
Some would say this money keeps troops employed. Great. What a job. If the reduction in debt by $400 billion was proportionally applied to troop levels from our current total force of 1.4 million actives, this would be equivalent to 800,000 personnel. $400 billion over 800,000 FTEs is $500,000 per head.
Ask your local soldier: would they prefer their current annual salary or $500,000 per year (roughly the same as average Goldman Sachs bonuses)?
The math is astounding. We could send every downsized troop to a 4-year university for 25% of the savings. We could use another 25% to hire hundreds of thousands of teachers. Fix infrastructure. Invest in renewable energy. Modernize our grid. Invest in public rail transit. Or pay down the debt.
The opportunity cost scenarios are many, political willpower though, much less evident. While I hope it could happen, I prefer to invest time and energy hedging for the alternate scenario.
Sunday, January 2, 2011
How to reduce the Federal Deficit by $4 Trillion Dollars by 2020
Our current defense posture includes substantial offensive costs, under the dictum that the American way of life is partially dependent upon projecting our influence throughout the world. Manifest Destiny in every time zone. A big stick for every knucklehead that asserts sovereignty over their natural resources, resources that we might want to take in the name of the Red White and Blue.
A successful use of military power lies in its inherent latency. Slipshod use of that power weakens you. When you put your military in motion with poorly defined campaigns you are playing with loaded dice. The moral, human, and financial costs of poorly planned campaigns are many times that of smartly executed actions.
President Teddy Roosevelt understood how to project power and use it in metered doses to obtain objectives, the Big Stock policy. After all he fomented a Columbian revolution and Panamanian Independence, to dig a canal where the master French engineers of Suez failed... however neither Bush II nor Obama show the same mastery of Big Stick execution. Their approach reminds me of the village idiot who whacks the beehive simply because they *have* a stick in their hand. Inelegant. Yoda wept.
We are now in a de facto NeverEnding War, and badly planned, that. As of June 2010 we have been in Afghanistan longer than Vietnam, and as of Thanksgiving 2010 longer than the Soviets. End dates are tossed around like so much water cooler talk before the TV podiums in Washington, with no tangible action taken by either the President or the Congress to end the conflict.
The financial costs are calculable, but almost inconceivable. The website Cost of War allows you to go down to specific states, cities and counties to see what each owes in terms of our actions in Iraq and Afghanistan. As of the new year in 2011, my adopted home town of San Francisco is on the hook for $3.8 billion dollars. My rural home county's share is $131 million dolars.
What's yours?
The cumulative tab for our wars is well over a trillion dollars and mounting.
Our cumulative economic output each year is around $15 trillion dollars. Our national debt is approaching our total national output. A battle is now looming in Washington over raising our debt ceiling from $14.3 trillion to a higher level to allow increased spending on programs and war to continue without commensurate cuts or tax increases. Every time Congress votes to raise the ceiling, but not before much ululating occurs before media celebrities about the woes of higher debt. This pandering ignores the real danger.
If our national debt continues to accelerate we stand to lose control of our economic system, and thereafter our way of life as we know it. This is because increasing the debt to live beyond our means runs the risk of fanning inflation (or more accurately, currency debasement) and thereby displace the US dollar as the primary world reserve currency. When other central banks and other countries see that their reserve dollars are worth less and less, they will bail and switch to other fiat currencies or bullion. This is already happening now in a somewhat controlled fashion, but it is dangerous and fragile decoupling. If this process trips for any reason and unwinds in a disorderly or unexpected way, this would make our recent Great Recession seem Minor by comparison.
The need to reduce our spending is imperative. Most of the DC apparatchik would have everyone brawling in the streets over social programs. There is another way to save $400 billion dollars every year (that's more than US corporations pay in income taxes) and that lies in cutting military expenditures.
The United States is projected to spend around $725 billion dollars in 2011 on our military. I would suggest that we look at what other countries spend on their military operations. The following is a list of the major countries where we don't always see eye-to-eye and/or who have resources we covet and/or are in areas of the world that we or at least the Christian right consider important.
If we reduce our spending by $400 billion dollars that would then leave the United States with $325 billion for defense and offense, or still more than all of the above, combined, plus an extra $36 billion to deal with upstarts... or the bottom 100 countries of the world, combined.
Applying that $400 billion a year to deficit reduction could reduce our total obligations by $4 trillion dollars in the next 10 years, with no impact on social programs. This savings would help bolster world confidence in the US dollar, and enable us to leverage the extraordinary and incalculable privilege of remaining the world reserve currency.
We could never approach that kind of savings by ripping out social programs.
Consider one often thrown out by pundits: Food Stamps.
According to the Cato Institute Food Stamps (or the Supplemental Nutrition Assistance Program) are going to cost a projected $75 billion in 2011. This is nearly double that spent prior to the Great Recession so is out of the ordinary. But let's take this as the new normal for the sake of argument.
This amount supports 40 million people. Many of these have very marginal existence and elimination of food support could cause severe food distress. But who cares if 40 million people in America starve, right? I mean, revolutions in human history have never been provoked by mass starvation, right? So what have we got to fear except the cake-eating masses itself?
By the way, 40 million people is more than the populations of the following states, combined:
Other social programs can be put to the same analysis. Consider Section 8 Housing assistance vouchers. I personally have a big problem with how Section 8 is defrauded, by both recipients and landlords who distort the purpose of the program. It is not all fraudulently used and without it many families would be on the streets... just a damn poorly administered program with little oversight. But from a deficit perspective it is just not that big of a number relative to defense spending: around $30 billion total.
And consider this, a lot of our soldiers serving overseas have families here in these United States who rely upon food stamps and Section 8 to make ends meet.
But I'm not holding my breath waiting for our folks in DC to figure out basic economics or find some common sense. They would be well served to hear the opinions of the Austrian School of thought, but the Keynesian/Monetarist Chicago eCons that currently advise them are not going anywhere anytime soon.
So our deficits will likely continue to rise and inflation, follow.
Add some commodities/bullion to your portfolio, plant a backyard garden, and stock up the wine cellar! It's going to be an interesting ride.
A successful use of military power lies in its inherent latency. Slipshod use of that power weakens you. When you put your military in motion with poorly defined campaigns you are playing with loaded dice. The moral, human, and financial costs of poorly planned campaigns are many times that of smartly executed actions.
President Teddy Roosevelt understood how to project power and use it in metered doses to obtain objectives, the Big Stock policy. After all he fomented a Columbian revolution and Panamanian Independence, to dig a canal where the master French engineers of Suez failed... however neither Bush II nor Obama show the same mastery of Big Stick execution. Their approach reminds me of the village idiot who whacks the beehive simply because they *have* a stick in their hand. Inelegant. Yoda wept.
We are now in a de facto NeverEnding War, and badly planned, that. As of June 2010 we have been in Afghanistan longer than Vietnam, and as of Thanksgiving 2010 longer than the Soviets. End dates are tossed around like so much water cooler talk before the TV podiums in Washington, with no tangible action taken by either the President or the Congress to end the conflict.
The financial costs are calculable, but almost inconceivable. The website Cost of War allows you to go down to specific states, cities and counties to see what each owes in terms of our actions in Iraq and Afghanistan. As of the new year in 2011, my adopted home town of San Francisco is on the hook for $3.8 billion dollars. My rural home county's share is $131 million dolars.
What's yours?
The cumulative tab for our wars is well over a trillion dollars and mounting.
Our cumulative economic output each year is around $15 trillion dollars. Our national debt is approaching our total national output. A battle is now looming in Washington over raising our debt ceiling from $14.3 trillion to a higher level to allow increased spending on programs and war to continue without commensurate cuts or tax increases. Every time Congress votes to raise the ceiling, but not before much ululating occurs before media celebrities about the woes of higher debt. This pandering ignores the real danger.
If our national debt continues to accelerate we stand to lose control of our economic system, and thereafter our way of life as we know it. This is because increasing the debt to live beyond our means runs the risk of fanning inflation (or more accurately, currency debasement) and thereby displace the US dollar as the primary world reserve currency. When other central banks and other countries see that their reserve dollars are worth less and less, they will bail and switch to other fiat currencies or bullion. This is already happening now in a somewhat controlled fashion, but it is dangerous and fragile decoupling. If this process trips for any reason and unwinds in a disorderly or unexpected way, this would make our recent Great Recession seem Minor by comparison.
The need to reduce our spending is imperative. Most of the DC apparatchik would have everyone brawling in the streets over social programs. There is another way to save $400 billion dollars every year (that's more than US corporations pay in income taxes) and that lies in cutting military expenditures.
The United States is projected to spend around $725 billion dollars in 2011 on our military. I would suggest that we look at what other countries spend on their military operations. The following is a list of the major countries where we don't always see eye-to-eye and/or who have resources we covet and/or are in areas of the world that we or at least the Christian right consider important.
- The People's Republic of China (inc Taiwan): $110 billion
- Russia: $61 billion
- Saudi Arabia: $39 billion
- Brazil: $27 billion
- United Arab Emirates: $13 billion
- Iran: $9 billion
- Kuwait: $4.5 billion
- Oman: $4 billion
- Iraq: $3.8 billion
- Venezuela: $3.2 billion
- Angola: $2.9 billion
- Sudan, Syria, Nigeria, Kazakhstan, Lebanon, Jordan, Libya, Georgia (combined): $12.8 billion.
If we reduce our spending by $400 billion dollars that would then leave the United States with $325 billion for defense and offense, or still more than all of the above, combined, plus an extra $36 billion to deal with upstarts... or the bottom 100 countries of the world, combined.
Applying that $400 billion a year to deficit reduction could reduce our total obligations by $4 trillion dollars in the next 10 years, with no impact on social programs. This savings would help bolster world confidence in the US dollar, and enable us to leverage the extraordinary and incalculable privilege of remaining the world reserve currency.
We could never approach that kind of savings by ripping out social programs.
Consider one often thrown out by pundits: Food Stamps.
According to the Cato Institute Food Stamps (or the Supplemental Nutrition Assistance Program) are going to cost a projected $75 billion in 2011. This is nearly double that spent prior to the Great Recession so is out of the ordinary. But let's take this as the new normal for the sake of argument.
This amount supports 40 million people. Many of these have very marginal existence and elimination of food support could cause severe food distress. But who cares if 40 million people in America starve, right? I mean, revolutions in human history have never been provoked by mass starvation, right? So what have we got to fear except the cake-eating masses itself?
By the way, 40 million people is more than the populations of the following states, combined:
- Connecticut
- Iowa
- Mississippi
- Arkansas
- Kansas
- Utah
- Nevada
- New Mexico
- West Virginia
- Nebraska
- Idaho
- Hawaii
- Maine
- New Hampshire
- Rhode Island
- Montana
- Delaware
- South Dakota
- Alaska
- North Dakota
- Vermont
- Wyoming
- and for good measure, Washington DC
Other social programs can be put to the same analysis. Consider Section 8 Housing assistance vouchers. I personally have a big problem with how Section 8 is defrauded, by both recipients and landlords who distort the purpose of the program. It is not all fraudulently used and without it many families would be on the streets... just a damn poorly administered program with little oversight. But from a deficit perspective it is just not that big of a number relative to defense spending: around $30 billion total.
And consider this, a lot of our soldiers serving overseas have families here in these United States who rely upon food stamps and Section 8 to make ends meet.
But I'm not holding my breath waiting for our folks in DC to figure out basic economics or find some common sense. They would be well served to hear the opinions of the Austrian School of thought, but the Keynesian/Monetarist Chicago eCons that currently advise them are not going anywhere anytime soon.
So our deficits will likely continue to rise and inflation, follow.
Add some commodities/bullion to your portfolio, plant a backyard garden, and stock up the wine cellar! It's going to be an interesting ride.
Tuesday, December 14, 2010
The most capital intensive baggage transport complex in history
Last week Scott Kirby, CEO of US Airways, announced at the Hudson Securities conference that 100% of their profits will stem from ancillary airline fees, such as checked baggage fees, seat or flight change fees, and on-board service.
Most of the commentary I have read on this concerns the usual storylines about consumer gripes on miscellaneous fees generally, there is another side that is being missed in the commentary.
(By the way if fees in generally annoy you, check your itemized cell phone bill.. many of those surcharges ... not to mention the purchase... are end-run ways for filling state coffers by politicians who just don't want to admit to voters they are raising your taxes).
But with regards to the airline, what I find interesting is that what the CEO is saying, is that after adding up all of the revenue from airline tickets, and subtracting from this number the real costs of running the airline: leasing the planes, paying salaries of pilots, attendants, ground crew, and agents, buying the fuel, and any bond interest or loan payments, the profitability of the entire operation is precisely zero. Zip. $0.
Now the literal capitalist would say the item that contributes marginal profit is the most important focal point of business management. As bag fees comprise the biggest component of all fee revenue, a literal capitalist reading is that all of the infrastructure and personnel exist to ensure bags get transported from one location to the next, since they provide all the profit. You are incidental to the bottom line since your fare just helps cover costs. Perhaps even more succinctly, your main job is to make sure those bags get to the counter so they can be checked in. When you pay for their transit you are throwing that money directly to the bottom line.
Now musing on the substantial costs invested in air transport infrastructure, from the oil drilled and refined into high-grade jet fuel, airport complexes, raw materials used to build and service planes, personnel hired etc. etc., this must represent the most capital intensive bag transport logistic operation, ever.
Richard Branson, the UK billionaire investor and entrepreneur had an interesting take. When he was asked how to become a millionaire, he quickly replied:
"There's really nothing to it. Start as a billionaire and then buy and airline."
He of course later invested in US Airways, before starting Virgin Atlantic Airways and most recently, Galactic.
Me, I'll stick with the carry-ons.
Most of the commentary I have read on this concerns the usual storylines about consumer gripes on miscellaneous fees generally, there is another side that is being missed in the commentary.
(By the way if fees in generally annoy you, check your itemized cell phone bill.. many of those surcharges ... not to mention the purchase... are end-run ways for filling state coffers by politicians who just don't want to admit to voters they are raising your taxes).
But with regards to the airline, what I find interesting is that what the CEO is saying, is that after adding up all of the revenue from airline tickets, and subtracting from this number the real costs of running the airline: leasing the planes, paying salaries of pilots, attendants, ground crew, and agents, buying the fuel, and any bond interest or loan payments, the profitability of the entire operation is precisely zero. Zip. $0.
Now the literal capitalist would say the item that contributes marginal profit is the most important focal point of business management. As bag fees comprise the biggest component of all fee revenue, a literal capitalist reading is that all of the infrastructure and personnel exist to ensure bags get transported from one location to the next, since they provide all the profit. You are incidental to the bottom line since your fare just helps cover costs. Perhaps even more succinctly, your main job is to make sure those bags get to the counter so they can be checked in. When you pay for their transit you are throwing that money directly to the bottom line.
Now musing on the substantial costs invested in air transport infrastructure, from the oil drilled and refined into high-grade jet fuel, airport complexes, raw materials used to build and service planes, personnel hired etc. etc., this must represent the most capital intensive bag transport logistic operation, ever.
Richard Branson, the UK billionaire investor and entrepreneur had an interesting take. When he was asked how to become a millionaire, he quickly replied:
"There's really nothing to it. Start as a billionaire and then buy and airline."
He of course later invested in US Airways, before starting Virgin Atlantic Airways and most recently, Galactic.
Me, I'll stick with the carry-ons.
Tuesday, September 28, 2010
A Faith-Based Currency.... the Dollar is younger than Woodstock... the Red Queen always loses (a winning counter-move)... and the inflationary monkey on our back.
Through the Looking Glass.
The Red Queen is a mad character Alice encounters on the other side of the Looking Glass. She explains to Alice that she must run faster and faster just to stay in the same place:
Bubbles are rational reflections of efficient market hypothesis at work [sic]
Ask yourself: 'how many economists predicted the catastrophic effects of a housing collapse on our way of life?', or, even more succinctly, 'how many of them predicted that housing was even in a bubble, arguably the largest bubble in human history?'.
Certainly the heralded "maestro" Sir Alan Greenspan performed admirably as our very own Wizard of Oz:
Fuck in corporate America I'd get fired if my models failed for even a fraction of that time. You wouldn't last two hours at a Vegas craps table with that streak.
Alan though got knighted by the (English) Queen and Bob Woodward wrote a book on him. Does anyone see something wrong with this picture? Were we not groveling at the wrong graven image (Greenspan)... instead of relying upon our innate abilities to detect bullshit?
The US Dollar is not 200 years, nor even 100, years old. Try 39 years old.
After World War II the first world pegged their respective currencies to the US Dollar at fixed rates. The US Dollar in turn was fixed to gold, in a daisy-chain agreement known as the Bretton Woods Accord, so named after the New Hampshire town where it was signed. We were a gold dollar and the rest of the world linked to the dollar, so the world was effectively back on a gold standard.
Flash forward just 25 years. With US costs escalating from the Vietnam War, a desperate President Nixon eager for an inflationary economic boost to gain re-election, and a sceptical French government which started demanding repayment of US debt obligations in gold instead of paper dollars... all had a momentous consequence. In 1971 Nixon signed an executive order suspending the convertibility of the Dollar for gold. This in turn set loose all manner of free-floating currency foreign exchange chaos, catalyzed the foundations of the Euro, made Arab petrol prices fall below production costs (and resulting in the embargo to raise them above new costs), and launched the high inflation era of the 70's.
Before Nixon we were a gold dollar, as mandated by the US Constitution. After Nixon we were a fiat currency and subject to the government printing press (or ability to add zeros to the debt in server-land).
Put another way, all the Baby Boomers today are older than our modern free-floating fiat currency, and the Gen-X-Y-Millenials (etc) have known nothing but inflationary fiat dollars. This is how currencies revalue when artifice is used to elevate their values and then the props are kicked out from under them for political gain.
Why the government apparatus now depends upon fiat inflation.
Simple. Debt we issue today is worth less tomorrow with inflation. It reduces the obligations of money that must be repaid to those who buy our Treasury bonds. Today's debt becomes cheaper tomorrow. Great!
Tally the trillions of dollar inked for Medicare & Medicaid, plus the new health care bill, and we've got a big check that our tax base won't cover without cheapening the currency to make it all happen. I believe all of these programs are necessary, even moral, but that we also have to be honest with people about their costs and safeguarding them from fraud.
The only trick for issuing evermore debt, of course, is that you have to ensure that you'll always have a ready supply of buyers for your debt who don't realize they are being had. They have to continue to think they're getting a good deal relative to other choices. It must also be done at a controlled rate or its game over, man, game over.
The Red Queen is the Monkey on our Back.
Inflation will destroy your paper savings, it is a mathematical guaranty.
Imagine you have a new child when you hear inflation has been 'contained forever' at 3%. After one year a saved $100 is now worth $97 in comparable purchasing power. When li'l junior or miss is ready to go to college, that same $100 initially put into a checking account is now only worth ~$58, for a total real loss of 42%. And all that assumes you never had to pay any taxes or account fees on the deal (meanwhile college expenses have risen by large amounts year-over-year in the interim).
Say you get interest on that money? Great! Subtract your annual tax bracket from that rate of return and recompute. Just to stay even at a 28% bracket means you need to find a savings rate of around 4.2% just to stay even on an after-tax, after-inflationary basis in this scenario (assuming no account fees, of course).
We have a faith-based currency.
Does not the government print "In God We Trust" on the currency itself?
Remember Dollars today are just paper and e-bits on financial servers, backed only by the full faith and credit of our government. Is there anyone out there who would propose our government acts as responsible stewards of the Republic over their own re-election?
Avoid Red Queen myopia.
The way to advance personal wealth interests is to advantageously switch among asset classes at the height of their valuation cycle before the mathematical underpinnings fail.
The presumption that growth in any one class may double infinitely per unit of time underscores the blind madness of the Red Queen:
Diversification among sensible asset classes is a relatively good way for you to topple the Red Queen, because even in an inflationary environment staying par with respect to real purchasing power means you win.
The Red Queen is a mad character Alice encounters on the other side of the Looking Glass. She explains to Alice that she must run faster and faster just to stay in the same place:
.. said the Queen. `Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!'During bull markets many adopt Red Queen thinking. Rare is the pundit who highlights the risks of throwing more and more dollars at the same thing in the hope of achieving outsized returns. Indeed most window-dressing debate is meant to keep the party going, not temper its excess.
Bubbles are rational reflections of efficient market hypothesis at work [sic]
Ask yourself: 'how many economists predicted the catastrophic effects of a housing collapse on our way of life?', or, even more succinctly, 'how many of them predicted that housing was even in a bubble, arguably the largest bubble in human history?'.
Certainly the heralded "maestro" Sir Alan Greenspan performed admirably as our very own Wizard of Oz:
'American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.' Alan Greenspan, Credit Union National Association 2004 Governmental Affairs Conference, Washington, D.C. February 23, 2004Then Alan lobs a real ball-buster, but coming from him the media fawns over each word as if from Moses himself:
“The fact that our economical models at The Fed, the best in the world, have been wrong for fourteen straight quarters, does not mean they will not be right in the fifteenth quarter."Ex-squeeze me? A baking powder? Putting aside for just a moment as to what qualifies as the "best in the world"... remember 14 quarters is like 3 and 1/2 YEARS of being wrong. That's a hella long trips around the sun and almost as long as it took for me to graduate college.
Fuck in corporate America I'd get fired if my models failed for even a fraction of that time. You wouldn't last two hours at a Vegas craps table with that streak.
Alan though got knighted by the (English) Queen and Bob Woodward wrote a book on him. Does anyone see something wrong with this picture? Were we not groveling at the wrong graven image (Greenspan)... instead of relying upon our innate abilities to detect bullshit?
The US Dollar is not 200 years, nor even 100, years old. Try 39 years old.
After World War II the first world pegged their respective currencies to the US Dollar at fixed rates. The US Dollar in turn was fixed to gold, in a daisy-chain agreement known as the Bretton Woods Accord, so named after the New Hampshire town where it was signed. We were a gold dollar and the rest of the world linked to the dollar, so the world was effectively back on a gold standard.
Flash forward just 25 years. With US costs escalating from the Vietnam War, a desperate President Nixon eager for an inflationary economic boost to gain re-election, and a sceptical French government which started demanding repayment of US debt obligations in gold instead of paper dollars... all had a momentous consequence. In 1971 Nixon signed an executive order suspending the convertibility of the Dollar for gold. This in turn set loose all manner of free-floating currency foreign exchange chaos, catalyzed the foundations of the Euro, made Arab petrol prices fall below production costs (and resulting in the embargo to raise them above new costs), and launched the high inflation era of the 70's.
Before Nixon we were a gold dollar, as mandated by the US Constitution. After Nixon we were a fiat currency and subject to the government printing press (or ability to add zeros to the debt in server-land).
Put another way, all the Baby Boomers today are older than our modern free-floating fiat currency, and the Gen-X-Y-Millenials (etc) have known nothing but inflationary fiat dollars. This is how currencies revalue when artifice is used to elevate their values and then the props are kicked out from under them for political gain.
Why the government apparatus now depends upon fiat inflation.
Simple. Debt we issue today is worth less tomorrow with inflation. It reduces the obligations of money that must be repaid to those who buy our Treasury bonds. Today's debt becomes cheaper tomorrow. Great!
Tally the trillions of dollar inked for Medicare & Medicaid, plus the new health care bill, and we've got a big check that our tax base won't cover without cheapening the currency to make it all happen. I believe all of these programs are necessary, even moral, but that we also have to be honest with people about their costs and safeguarding them from fraud.
The only trick for issuing evermore debt, of course, is that you have to ensure that you'll always have a ready supply of buyers for your debt who don't realize they are being had. They have to continue to think they're getting a good deal relative to other choices. It must also be done at a controlled rate or its game over, man, game over.
The Red Queen is the Monkey on our Back.
Inflation will destroy your paper savings, it is a mathematical guaranty.
Imagine you have a new child when you hear inflation has been 'contained forever' at 3%. After one year a saved $100 is now worth $97 in comparable purchasing power. When li'l junior or miss is ready to go to college, that same $100 initially put into a checking account is now only worth ~$58, for a total real loss of 42%. And all that assumes you never had to pay any taxes or account fees on the deal (meanwhile college expenses have risen by large amounts year-over-year in the interim).
Say you get interest on that money? Great! Subtract your annual tax bracket from that rate of return and recompute. Just to stay even at a 28% bracket means you need to find a savings rate of around 4.2% just to stay even on an after-tax, after-inflationary basis in this scenario (assuming no account fees, of course).
We have a faith-based currency.
Does not the government print "In God We Trust" on the currency itself?
Remember Dollars today are just paper and e-bits on financial servers, backed only by the full faith and credit of our government. Is there anyone out there who would propose our government acts as responsible stewards of the Republic over their own re-election?
Avoid Red Queen myopia.
The way to advance personal wealth interests is to advantageously switch among asset classes at the height of their valuation cycle before the mathematical underpinnings fail.
The presumption that growth in any one class may double infinitely per unit of time underscores the blind madness of the Red Queen:
- No investment may compound infinitely without natural corrective forces.
- Attempts to subvert the first precept invites catastrophic default, as these attempts invariably take on characteristics of bubble psychology.
Diversification among sensible asset classes is a relatively good way for you to topple the Red Queen, because even in an inflationary environment staying par with respect to real purchasing power means you win.
Monday, September 20, 2010
Model forecast confirmed!
Well today the National Bureau of Economic Research (NBER) declared the ending date of the Great Recession. They put the end of the current downturn as June of 2009. In my charter blog post from March 6th 2010 I placed the end of the downturn as July of 2009, confirming that my approach was sound.
I think this helps prove my point with respect to how economic data mining can be effectively used: (1) intuitive but simple approaches that work, or (2) excessively complex models or methods that take months or years to "prove" correct.
My point with the initial post was to illustrate the practical benefits of the former over the latter. When one can adequately predict the key points with as few inputs as possible, then it should be deployed as a first-response diagnostic. The benefits are that policy makers, business leaders, and voters(!) can therefore more quickly react to a new economic reality and mitigate the tendency of a cycle to swing in excessive directions.
Of course in-depth research should be done to better understand how we collectively create messes that are costly and time-consuming to clean up, but these lags in time should not be used (as they are today) as an excuse to befuddle the masses with time-wasting debates.
As it stands today we have quite enough economic illiterates and short-term thinkers sitting in positions of power across government, the media and business sectors, who make decisions that affect a great many people, so the less time we data mining analysts give them to speculate on whether the earth is round the better off we will all be, on average, over the long term.
I think this helps prove my point with respect to how economic data mining can be effectively used: (1) intuitive but simple approaches that work, or (2) excessively complex models or methods that take months or years to "prove" correct.
My point with the initial post was to illustrate the practical benefits of the former over the latter. When one can adequately predict the key points with as few inputs as possible, then it should be deployed as a first-response diagnostic. The benefits are that policy makers, business leaders, and voters(!) can therefore more quickly react to a new economic reality and mitigate the tendency of a cycle to swing in excessive directions.
Of course in-depth research should be done to better understand how we collectively create messes that are costly and time-consuming to clean up, but these lags in time should not be used (as they are today) as an excuse to befuddle the masses with time-wasting debates.
As it stands today we have quite enough economic illiterates and short-term thinkers sitting in positions of power across government, the media and business sectors, who make decisions that affect a great many people, so the less time we data mining analysts give them to speculate on whether the earth is round the better off we will all be, on average, over the long term.
Saturday, March 13, 2010
Where would you hide a trillion dollars?
A trillion dollars is a lot of money. It is in fact more than actually exists in circulation. And it is presently hiding from everyone in plain sight at the Federal Reserve.
Regular Reserves of Depository Institutions have historically been the pots of money that banks have to show the Fed, to assure them they are still capable of staying open. Think of a casino where you can't get in, until the guy sees that you have a few 20 spots in your pocket. Little noticed, the Reserves numbers just sort of stayed there year in and year out and are very boring.
Excess Reserves are the money that banks put into the Fed when things get a little jumpy out there, above and beyond Regular. Big moves in Excess Reserves are basically when the Fed turns into a panic room, and banks stuff it with their money. When the all-clear is sounded they take it back again and go about their business. Excess Reserves are Run-to-Daddy time.
For decades Excess Reserves have been rather steady, with the bumps generally coinciding with notable geo-political events or financial crises (click to enlarge):
Then of course in 2007 the real estate bubble began its overdue correction and all hell broke loose as it imploded. Let's look at 2001-July 2009, to put the 9/11 'spike' into relative context with the advent of the financial crisis:
So what happened? Well part of the bailout, er, stabilization, was the Federal Reserve announcing in October 2008 that they would start paying interest to banks on their excess reserves. The concordant amount of money-equivalents that fled the system to the Fed safehouse jumped $200BN in that month, and by New Years stood at $767 billion.
That's a huge shift. The amount of money that went into this category in just three months, exceeded the total amount of money we've spent on the war in Iraq since its beginning ($711 billion as of the time of this writing).
Banks are now being paid by the Federal Reserve to park cash or junk assets counted the same-as-cash, whereas before they were not paid and would therefore lose money (since banks make money by lending it out).
Now perhaps the official story is true, and the fact that lending dropped off a cliff to credit-worthy businesses and others at the same time banks were getting paid was a sheer coincidence. What does not appear to be in dispute is that the reduction in lending exacerbated the recession, likely further hurting employment and sending real estate another leg down. Since reserves are needed by banks to actively make loans, I find the official story a little hard to believe.
But let's expand the view through present, to get a sense for how big this program has gotten since the stabilization rationale was presented.
As of February 2010 there was $1.162 trillion dollars in Excess Reserves at the Federal Reserve, and its not slowing.
Interestingly the interest being paid to banks on these balances comes to just about $3 billion dollars annualized. If the Fed was buying 5-year Treasuries at around 2.25% then the Fed is making the difference of about 2%, or $23 billion in profit.
What I think is most concerning though is that I believe the Fed is setting the stage for market distortion in the years to come in a way that could impact everyone from wage workers to retirees. The Fed is taking these Excess Reserves and using them to buy other assets like US Treasuries. This can create the appearance of strong market support for the US dollar, since the mass purchases by the Fed of US Treasuries is helping keep those prices higher (and interest rates lower) than would be the case if free markets were to set the price.
Not unlike some of the recent Ticketmaster scandals... by those hackers who cracked the code and bought all the tickets for hot concerts before they went on sale to the public, who were then in turn forced to pay higher prices from re-sellers... if all this use of Excess Reserves is adding artifice to the US Dollar without fixing the underlying problems in US banking institutions (such as unregulated derivatives), then it could be the underpinnings of an even larger house of cards that market forces will eventually correct. If the markets correct the imbalance in a sharp, uncontrollable way interest rates could skyrocket.
We also call this monetizing the debt, and it often leads to hyperinflation with rapidly rising prices (without necessarily any increase in pay for the people).
So, monetization of sovereign debt is one of those really, really big no-no's. It can lead to rather Weimer-esque replays that we should be re-studying now, because the use or abuse of Excess Reserves as a monetary tool could be affecting the Treasury prices in a way that looks pretty now, but is in fact masking structural defects in the trading schemes of Wall Street.
We ought not be afraid of creative destruction, capitalism needs a clear view to separate the winners from the losers. We've spent a lot of time trying to prop up the losers in this business cycle. I would have rather we conserved those resources for more important initiatives, such as renewable energy, investments in mass transportation, or public education. It will telling to watch the ER figure to see what the Financial system and the Fed are doing with US capital flows, and to see how any distortions in the treasury market affects our ability to grow sustainably.
Peace out.
Regular Reserves of Depository Institutions have historically been the pots of money that banks have to show the Fed, to assure them they are still capable of staying open. Think of a casino where you can't get in, until the guy sees that you have a few 20 spots in your pocket. Little noticed, the Reserves numbers just sort of stayed there year in and year out and are very boring.
Excess Reserves are the money that banks put into the Fed when things get a little jumpy out there, above and beyond Regular. Big moves in Excess Reserves are basically when the Fed turns into a panic room, and banks stuff it with their money. When the all-clear is sounded they take it back again and go about their business. Excess Reserves are Run-to-Daddy time.
For decades Excess Reserves have been rather steady, with the bumps generally coinciding with notable geo-political events or financial crises (click to enlarge):
Then of course in 2007 the real estate bubble began its overdue correction and all hell broke loose as it imploded. Let's look at 2001-July 2009, to put the 9/11 'spike' into relative context with the advent of the financial crisis:
So what happened? Well part of the bailout, er, stabilization, was the Federal Reserve announcing in October 2008 that they would start paying interest to banks on their excess reserves. The concordant amount of money-equivalents that fled the system to the Fed safehouse jumped $200BN in that month, and by New Years stood at $767 billion.
That's a huge shift. The amount of money that went into this category in just three months, exceeded the total amount of money we've spent on the war in Iraq since its beginning ($711 billion as of the time of this writing).
Banks are now being paid by the Federal Reserve to park cash or junk assets counted the same-as-cash, whereas before they were not paid and would therefore lose money (since banks make money by lending it out).
- "The payment of interest on excess reserves will permit the Federal Reserve to expand its balance sheet as necessary to provide the liquidity necessary to support financial stability while implementing the monetary policy that is appropriate in light of the System's macroeconomic objectives of maximum employment and price stability." - FRB Press Release, October 6, 2008.
Now perhaps the official story is true, and the fact that lending dropped off a cliff to credit-worthy businesses and others at the same time banks were getting paid was a sheer coincidence. What does not appear to be in dispute is that the reduction in lending exacerbated the recession, likely further hurting employment and sending real estate another leg down. Since reserves are needed by banks to actively make loans, I find the official story a little hard to believe.
But let's expand the view through present, to get a sense for how big this program has gotten since the stabilization rationale was presented.
As of February 2010 there was $1.162 trillion dollars in Excess Reserves at the Federal Reserve, and its not slowing.
Interestingly the interest being paid to banks on these balances comes to just about $3 billion dollars annualized. If the Fed was buying 5-year Treasuries at around 2.25% then the Fed is making the difference of about 2%, or $23 billion in profit.
What I think is most concerning though is that I believe the Fed is setting the stage for market distortion in the years to come in a way that could impact everyone from wage workers to retirees. The Fed is taking these Excess Reserves and using them to buy other assets like US Treasuries. This can create the appearance of strong market support for the US dollar, since the mass purchases by the Fed of US Treasuries is helping keep those prices higher (and interest rates lower) than would be the case if free markets were to set the price.
Not unlike some of the recent Ticketmaster scandals... by those hackers who cracked the code and bought all the tickets for hot concerts before they went on sale to the public, who were then in turn forced to pay higher prices from re-sellers... if all this use of Excess Reserves is adding artifice to the US Dollar without fixing the underlying problems in US banking institutions (such as unregulated derivatives), then it could be the underpinnings of an even larger house of cards that market forces will eventually correct. If the markets correct the imbalance in a sharp, uncontrollable way interest rates could skyrocket.
We also call this monetizing the debt, and it often leads to hyperinflation with rapidly rising prices (without necessarily any increase in pay for the people).
So, monetization of sovereign debt is one of those really, really big no-no's. It can lead to rather Weimer-esque replays that we should be re-studying now, because the use or abuse of Excess Reserves as a monetary tool could be affecting the Treasury prices in a way that looks pretty now, but is in fact masking structural defects in the trading schemes of Wall Street.
We ought not be afraid of creative destruction, capitalism needs a clear view to separate the winners from the losers. We've spent a lot of time trying to prop up the losers in this business cycle. I would have rather we conserved those resources for more important initiatives, such as renewable energy, investments in mass transportation, or public education. It will telling to watch the ER figure to see what the Financial system and the Fed are doing with US capital flows, and to see how any distortions in the treasury market affects our ability to grow sustainably.
Peace out.
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