Monday, December 27, 2010

Economics: Productive vs Destructive

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Too often our citizens call for the government to create jobs, but there's fallacy in this thinking, because the government does not create jobs, it destroys them.

If we can understand the purpose of government and of law then we can better find the balance of taxation, and how little taxes we truly need in order to create an atmosphere of innovation and productivity. *I* believe the purpose of government is to provide liberty & protection of private property, NOT to provide prosperity, the latter is on our own heads to produce. In trying to postpone political dialogue for another day (it'll be a long discussion of theory and history) I'll focus on the economic side of why government spending is destructive and economically unwise. (Side note: *some* things government spends on is necessary to provide for liberty, but it would still economically fall in the category of unproductivity.)

The open market is used for buying and selling of goods & services. If someone creates a business that doesn't provide a valuable good or service then the market chooses to not allocate any resources to that business, therefore it fails. This is essentially what's known as the "profit motive", to provide something of value so that you may attain more resources for yourself and in turn provide even more things of value to the market so that you can attain even more resources. Thus there's motivation to be productive.

What happens when government spends? In my open letter to my congressman I brought up the wasted resources of the IRS, but let's be more concrete and discuss building a bridge. If a governor decides that his citizens need work perhaps he'll decide to have a bridge built or rebuilt, so he sets in motion some taxes that allows him to buy the materials and hire the workers to build a bridge. Hooray, there's a boom in employment for a select few citizens, they're able to provide food for their families and earn an honest day's wages.

This is where Henry Hazlitt has originated the thought process of identifying the "seen" versus the "unseen". What we do see is that there's now a bridge where perhaps there wasn't one. However, what we do NOT see is the jobs that were lost because of this project. We don't see where the taxes were extracted from the private sector, where businesses had to forgo finances that would've been used to expand their operation, perhaps they had to lay off a worker, or perhaps they did NOT get to hire a worker. We don't see where the physical resources were taken from, the concrete and steel that may have been used for another building or warehouse. You see, when the government buys it takes away resources from the open market and drives prices up, the law of supply & demand at work, so now we also have supplies that are more expensive to the private sector. Yet, despite having this thing that can be "seen", all we have is a bridge that the market apparently did not need; we have people who are now unemployed again, actually we have even more people unemployed because resources were taken from the private sector.

The government saw a problem, and only made it worse. Government spending seems to always be destructive, when the military goes to war it kills citizens (workers/resources), it builds bombs and literally destroys resources in the bomb itself and if a miracle happens and it manages to hit a building it destroys even more resources. "Ah", you say, "but a building destroyed is now a new project that can provide employment!" Never mind that we just covered that, instead let me introduce you to Frederic Bastiat's "Broken Window Fallacy".

Bastiat is a Frenchman from the 1800s who wrote some seething satirical articles and highly enlightened books about economics and philosophy. One of his most renowned analogies is that of the "Broken Window Fallacy". Suppose a boy picked up a rock and smashed out a baker's window, well under the false thinking then the boy is now responsible for the glass maker's new-found job, he's a hero! This would seem obviously false, if it were true then we would break all windows, bomb all cities and pray for natural disasters. Instead, imagine had the boy not broken the window and the baker had used the money to buy a new suit, now we have a window AND a new suit. Two things instead of one.

Government has the unfortunate capacity that it never has to worry about a profit motive, because when it needs money it simply increases taxation (or in our modern times it simply prints the money, a different form of taxation, a hidden tax). This is one of the reasons why it's a good idea for the government to stick to its core reasons for being and not infiltrate on the private sector, or become friends with it. With competing in the private sector it can offer wages that private businesses cannot compete with, so it taxes us to pay even more to have XYZ (mail, Amtrak, whatever) done in an inefficient manner. Realistically, 1 Federal government job costs us 2 in the private sector. And those 2 jobs are a real cost to productivity, something that would've gone towards a real good or service instead of a job building a bomb that is only meant for destruction. Sometimes, the "bomb" is simply IRS agents, TSA screeners, or actual bombs destroying lives in countries afar which result in the government asking for more bombs to kill the lives that weren't happy with the destruction of the first set of lives, but that's a topic I've covered already.

So, what happens when the government makes friends in the private sector? This is "Crony Capitalism", it's what we have now, and it's up for discussion next.
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A View of Economics
Week 1: The Coming Disaster
Week 2: What is currency?
Week 3: Inflation
Week 4: Hyperinflation
Week 5: Deflation
Week 6: Money Represents Production
Week 7: Bubbles pt 1 - Housing Bubble
Week 8: Bubbles pt 2 - Pure Credit Expansion
Week 9: Bubbles pt 3 - The Bust is a Good Thing
Week 10: Productive vs Destructive

Monday, December 13, 2010

Economics: Bubbles pt 3 - The Bust is a Good Thing

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Too often the boom is praised and the bust is hated, when in reality the only healthy part of the cycle IS the bust. Think of the bust like a shower, you scrub off the dirt and dead tissue so that you're only left with the healthiest and cleanest parts. For me, showers are also a good time of contemplation, a time where reflection spawns creative thought.

I'm not saying that we should rejoice that people are losing jobs, but if we understand *why* a business needs to fail then we'll also understand that new jobs will soon be created, because the market has automatically become more efficient in this cleansing process making available resources that were being wasted with inefficient businesses.

If Wes-E-B is giving away goods due to my awesome idea of expanding credit to my customers then when I go out of business there will now be many things that can happen. The supplies that were going to my store can now go to other stores that are more efficient and they can expand their business to serve more people. Someone can also take over the building I was using, maybe starting a new store or perhaps an entirely different business (like a warehouse for shipping FedEx, or whatever), they'll likely get a great deal since I have to auction off the only usable parts of my business (buildings, inventory, equipment), while removing from the market those bad things (my empty line of credit), this is an automatic increase in efficiency over what I had originally started with. The employees are released, but there will likely be new businesses that will need employees as well, and since these other businesses are more efficient they'll likely have a more stable job. Not to say that any of those things are guaranteed, it's a highly random example so there's a lot of room for variables, but we *can* say that there's a rush of new resources available to the market.

So it is when a bubble bursts, there needs to be a liquidation of malinvestment (a term I believe that was created by the Austrian School that stands for failing businesses/bad assets). Through the liquidation the market now can see which businesses are efficient and can be trusted, the usable assets can now be reallocated by an efficient business.

Ah, but you say that the Financial Bubble has burst, so why hasn't there been a recovery? To which I remind you that it *hasn't* burst yet! Remember Bush & Obama's bailouts? Remember Bernanke's Federal Reserve bailouts? No, rather than let the bad assets fail they've merely been propped up, further exacerbating the issue. That isn't to say that no businesses were helped, but if you loan ME a billion bucks I'm sure I could make something out of it too, the point is that the market didn't determine that those businesses *earned* anything else, politicians did! The fact that they propped up these illiquid assets is why we have NOT had a full recovery yet, just further kicking the ball down the road.

I often hear that we're making things worse for the next generation, but I'm here to tell you that you should not be concerned with your grandchildren and probably not even your children, because WE are the ones that will likely face the fallout of a century of bad economic policy. However, if we allow it to take place and let the market make its determinations then we can get back on fertile ground, where only good businesses thrive and survive.

First, we have to undergo the treatment to the disease, not merely continue treating the symptoms. Believe me, the treatment will freaking hurt.
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A View of Economics
Week 1: The Coming Disaster
Week 2: What is currency?
Week 3: Inflation
Week 4: Hyperinflation
Week 5: Deflation
Week 6: Money Represents Production
Week 7: Bubbles pt 1 - Housing Bubble
Week 8: Bubbles pt 2 - Pure Credit Expansion
Week 9: Bubbles pt 3 - The Bust is a Good Thing
Week 10: Productive vs Destructive

Monday, December 6, 2010

Economics: Bubbles pt 2 - Pure Credit Expansion

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How extremely fortuitous that last night Federal Reserve President Ben Bernanke was on 60 Minutes, because today we're talking about how pure credit expansion creates booms and busts. In his interview he said a few interesting things, "One myth that's out there is that what we're doing is printing money, we're not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we're doing is lowering interest rates by buying Treasury securities, and by lowering interest rates we hope to stimulate the economy to grow faster. So the trick is to find the appropriate moment when to begin to unwind this policy. And that's what we're gonna do."

I'll unpack that statement in a moment, but let's jump ahead to another profound statement that pretty much sums up everything you need to know about Central Banking and Central Economic Planning:

In response to being asked if he had any regrets, he said: "Well, I wish I'd been omniscient and seen the crisis coming....I didn't."

And there you have it, if you really want to sum up why planned economies fail it's because the people running it are not God, they aren't omniscient, in fact they're only people, well not people like us, they're dumber people. Sure they've got degrees and have studied lots of economic theory, but that's as useful as me gaining a degree on why the moon is made of cheese, *if it's wrong then I'm well-studied in something that's WRONG*, and no matter how many degrees you get in bad economics the theories are still _fundamentally_ wrong. Let's address the fundamentals while dispelling why his first statement I quoted is either a lie or a semantic game (or both).

Imagine I own a grocery store, let's call it Wes-E-B. Here at Wes-E-B the sales have only been okay, but I'm ready for some serious growth, so I decide to let all my customers open an account for $1,000 so they can buy as much as they desire. It works! Everyone is buying everything off the shelves and business is amazing!! My numbers are looking massive! Well, the next day I go to re-supply and it turns out that my suppliers don't take Wes-E-B credit and I can't pay to re-stock my shelves, my business goes belly-up and what looked like great gain turned out to be a short lived "bubble". My credit meant nothing to the rest of the world, so I actually gained nothing, in fact the things that I had were gone as well, I actually gave them away!

That's a very non-systemic bubble. "Systemic" is when everything is intertwined with each other, kind of like the planks in a ship, if one of those planks pops a hole then it dooms the rest, they're linked. So let's expand the scenario a bit further to make it more systemic.

Wes-E-B's line of credit was a success, and to help their sales all my suppliers decide to let me have their goods on credit as well, because once I get paid by my customers (who now owe me $1,000 plus interest) then they'll reap a tidy extra profit too. That game has to work alllll the way down to the farmers and the manufacturers and even to their raw suppliers, miners and whatnot. If the farmers decide they don't want our credit since that won't pay their electricity then the fuse is lit for the entire chain to go up in smoke, because the manufacturer of cereal can't get any corn, Lays can't get potatoes, which means Wes-E-B can't get any inventory and now there's several businesses that are in trouble instead of only mine. My suppliers can't get supplies, I can't put anything in my store, we all fold because we created *new* money through expanding credit.

The turnaround isn't normally that fast, if it only took a few months for the resources to be called upon (and not found) then we'd likely already have abandoned this flawed thinking. Instead, it takes years to find out that the resources aren't there, because the process is far more convoluted and complex, but results are the same.

Here you should note: nearly the entire globe is systemically involved in Wes-E-B's line of credit, it's called the dollar and it's the reserve currency of the world. No one wants to see it go up in flames, because the fallout will be massive if it does.

You see, money is supposed to represent a product or a service rendered. When people see money they believe that they can buy something with it, if you looked at money and said "That won't buy anything because that particular dollar was never earned!" then you'd be insane, because you can't differentiate the two. Money is merely a placeholder for a transaction, $2 I earned by selling shoes is a placeholder for the milk I bought for $2. I traded shoes for milk, that's what currency is for, to allow complex forms of exchange.

However, when you initiate the creation of money by loaning it into existence (which sounds EXACTLY LIKE PRINTING MONEY OUT OF NOWHERE YOU SON OF A B---, ahem) then people suddenly have the ability to purchase items, OR invest it into projects. This is why the rate of interest is so important, a lower interest rate means you can take out a lot of money for longer term projects. If you had a 15% interest rate, would you want to have that rate for 10 years? Probably not, so you're projects would be shorter term so that you could pay back the loan faster and focus only on the most immediately profitable projects. However, if you had access to a loan at 3% interest then you can focus on Research & Development and work on projects that take years to develop and find that next new invention/product that the 'kids' are wild about. Interest rates are VITAL to a healthy economy, it sends all the signals to business about whether it should be producing for now or researching for later.

The market, if left alone, will set these rates automatically. When times are tight then the interest rates should be sky high, because there's so little money to loan out that it can only be allocated to the most profitable projects! Think of it this way, if you only had $100 in your account to last you for the next 45 days, would you loan $90 of it out to someone starting a business? Not if you want to live semi-comfortably! So, the only way you'd lend that $90 out is if you KNEW that 1.) you could get $150 in repayment (which means this person you're lending it to has A++ credibility) and that 2.) you'll get it back before you starve.

If, however, you had $10,000 in your account then you'd be much more willing to loan it out at lower rates of return and be riskier as well in the hopes that you hit a home-run rather than a base-hit.

Where "Helicopter Ben" comes in, is that though he has verbally acknowledged that he's not omniscient, he somehow still thinks he can manipulate the market by setting the interest rates, which leads to an *expansion of credit* that the market never, in reality, ever had. It signals the market to take out loans and create new projects, build houses (financial bubble), build businesses (Dot Com bubble), INVEST (1929 bubble that led to the Great Depression).

If you simply hand out money that nobody ever earned/produced, then it'll be spent on things leading to a boom, but when those things look to get "re-stocked" then it will crash, because those extra 'things' were never there to begin with. If Wes-E-B simply had extra inventory then I'd lower the prices in order to sell more, leading to more real world sales, aka a bigger share of the money that's already out there that I can now use to re-stock, using the excess to fund a new store down the street leading to actual economic growth.

When money grows while the number of products don't, then prices increase, this isn't growth! Growth is when there are products created. You can't replicate growth by increasing the amount of currency! It only leads to the depletion of goods through the boom and bust cycle.

In a post from March, I noted how it's "tricky" for the Fed to "unwind" their inflation. Ben admits it isn't easy, oddly he also simultaneously says that the money supply doesn't increase and that it DOES increase but not in any significant way. Eh? Can up also be down? It's semantics, he's saying the "currency in circulation" doesn't change even though he does increase the money supply. "Currency in circulation" = what we use when we shop; "money supply" = what the banks have access to, essentially. So, if the banks begin loaning out the money he wants to raise rates to keep all of the money from flowing out too quickly, Goldilocks' "just right". However, knowing where that "just right" spot requires some otherworldly knowledge (if it were in fact a good idea anyway, which it isn't).

Bernanke is either "Lord, liar or lunatic", and he admits he isn't Lord.
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A View of Economics
Week 1: The Coming Disaster
Week 2: What is currency?
Week 3: Inflation
Week 4: Hyperinflation
Week 5: Deflation
Week 6: Money Represents Production
Week 7: Bubbles pt 1 - Housing Bubble
Week 8: Bubbles pt 2 - Pure Credit Expansion
Week 9: Bubbles pt 3 - The Bust is a Good Thing
Week 10: Productive vs Destructive

Monday, November 15, 2010

Economics: Bubbles pt 1 - Housing Bubble

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We know that inflation is merely the creation of new money, which results in higher prices (duh, because now the money outnumbers the goods/services and is therefore worth less than before). We know that deflation is the decrease in the money supply, which leads to a stronger dollar/currency, and lower prices. We know that money is merely a representation of a product or service, a placeholder for a future trade. Let us tackle the "boom and bust" cycle, or financial "bubbles" as they are often called.

A bubble is when something like a house is trading for more than it's actual value. This bubble bursts when no one is willing to trade at the higher value, therefore causing the value to decrease to a number that suits would-be buyers. It's a bit like "hot potato" in this fashion, as whoever is holding it when the bubble bursts is the loser.

The real question is "Where does the bubble come from?", and I intend to make this plain.

(Entire books are written on such things, so I will try to get the juiciest and most relevant bits. However, Mises.org is a fantastic site with loads of audio, video and articles discussing a wide range of economic and philosophic matter.)

Let us focus on the most recent bubble, the housing market that burst a couple years ago that sent ripples throughout the globe. The opinions on who to blame spans far and wide, some blame speculators for driving up prices, some blame the home-owners for wanting nice housing they couldn't afford, some blame banks for making the loans so easy to get through Subprime mortgages (prime=deserves the credit, SUBprime=does not meet ordinary standards for a loan), some blame Wall Street for selling off these debts through Credit Default Swaps (basically an insurance policy to hedge their bets and free up capital).

While there's a certain amount of culpability for all of those mentioned, the actual secret demon is none other than the Federal Reserve (the Central Bank for the United States). At first glance you may think this to be absurd, I mean they only make money right? They don't tell us how to spend it, right? Eh, not so fast.

Yes, the Fed creates money (through many mechanisms, but for simplicity's sake and not to jump into Fractional Reserve banking practices yet we'll just say "create money" for now), but what happens when they put this money into circulation? Can they indeed influence how it is spent? Yes, they can, obviously first they get to decide where the money goes.

Imagine you're in a house with low water pressure, like say a slow trickle at every faucet. What if you found out one faucet was suddenly flowing? Well, you'd form a line at that faucet, get while the getting is good. Same difference! The Fed decided it would create money at low interest rates and let Fannie Mae and Freddie Mac lend it out. Fannie & Freddie are GSEs, Government-Sponsored Enterprises, who basically compete on the open market, but kind of like the US Post Office they get to offer the market certain things that are beyond competition.

So, the Fed in coordination with the government (through policy and Fannie & Freddie) turned on the spigot for capital to be poured into real estate. The money is pumping, that of course attracts speculators, who attract homeowners, who go to banks that already know that the money is there to lend out, thanks to the Fed! The banks want to keep the capital flowing so they sell off these risky mortgages to someone else. Before you know it there's so much money flowing, that due to this inflation (of the currency) the value of the product (real estate) has risen to accommodate all the new capital flooding in, whereas without the inflation these would never have been reasonable prices that would've attracted any sane person. What happens when the faucet gets closed? Crash.

Now perhaps I grammatically messed something up in there, but that IS the gist. You can blame irresponsible buyers who walked away from their upside-down mortgages (owing more than their real estate is worth), you can scream at greedy banks or write the President (Bush, thanks again buddy) about ill-advised housing policy, but NONE of those things matter as much as the Fed, because without the ability to create all of that money (from NOWHERE) none of those people are able to make their dumb decisions.

I hate dead horses, so allow me to keep beating on them: this is only one example, one area of where the Fed has hurt the economy. This isn't to say that many people didn't come out ahead, I'm sure a lot of speculators are quite happy, a lot of traders on Wall Street probably did okay as well. The real, true, heartless irony is that the people this was supposed to help, the poorer families, are actually the people who are worse off. They're the ones who can no longer afford their house, they're the ones whose money is worth less thanks to all of the inflating done by the Federal Reserve. So, if you want a face to blame for bubbles, I'll give you two: Alan Greenspan and Ben Bernanke.

Next week I'll go into a little more detail about the philosophy of why pure credit expansion is the cause of all boom/busts.
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A View of Economics
Week 1: The Coming Disaster
Week 2: What is currency?
Week 3: Inflation
Week 4: Hyperinflation
Week 5: Deflation
Week 6: Money Represents Production
Week 7: Bubbles pt 1 - Housing Bubble
Week 8: Bubbles pt 2 - Pure Credit Expansion
Week 9: Bubbles pt 3 - The Bust is a Good Thing
Week 10: Productive vs Destructive

Monday, November 8, 2010

An Open Letter to My Congressman

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Mr. McCaul,

I've voted for you twice the past two elections and can see others joined me as well. This letter will address my expectations for you as my representative. While I know we completely differ on what qualifies as national security (you can find my analysis of foreign policy on my blog http://www.dawnoftheweak.com/2010/08/us-foreign-policy-part-11-conclusion.html), I would like to primarily address economics & liberty in this open letter.

I am quite in line with Austrian Economists views on monetary policy and I'm hoping you are an open minded individual, as this philosophic approach to monetary matters will seep into the philosophy of small government and equality for all individuals.

I think we'll both agree that it is quite hypocritical for the Federal government to demand individuals and states to balance their checkbooks while not demanding the same of their own household. This is simply unacceptable, and any deficit spending of the government only goes towards creating more oppression and the destruction of more American wealth. Allow me to elaborate.

First: Tyranny. Anytime government oversteps its core reason for being it is immediately en route to tyranny. So, what is the core reason for having law? It is simply to protect life, liberty and property. Frederic Bastiat said it succinctly, "Life, liberty and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place." To attempt anything further than protecting every person's property equally, means that the law has immediately become unjust, for what lies beyond equality but inequality?

The government has nothing, so it must first take from someone so that it may give to someone else. Perhaps you demand every child be given a free education. Who should teach them if no one volunteers? Who should pay the teachers, with whose money? Who should fund the facilities? I'm greatly in favor of an education, but what is an education if not someone's perspective on life? Accurate math should always provide the same answer, yet who gets to decide which formulas and equations are best and most relevant to learn? History has only happened once, yet who gets to decide which side of the single truth is told? Why is it that science and creationism cannot coexist on purely academic terms? If the government is to be involved in an area, then it must show no biased to or against any people group.

From a federal standpoint, I expect you to fight against the Department of Education and allow our communities who balance their own budgets to decide these matters. That excess money is no longer federally needed to be extracted from the public. Not only education, but the same can be said for same-sex marriage, drugs and prostitution. These are personal choices, and though I am heterosexual, do not do drugs or participate in prostitution I feel that the lowest form of expressing my morals is by using force through legislation.

If the government protects property rights then I say it protects everything it is there to protect: I'm vindicated in acts of violence against my person since that is a violation of my property; it prosecutes against theft and the breaking of contracts; and when it's limited to protecting my property then it does not encroach on my individuality by legislating how I choose to live my life. Anything further begins the process of picking a side. How much money can be saved by allowing cops to enforce meaningful laws? Imagine how the courts would be expedited without the logjam in the judiciary system, and what of the money saved in prisons and jails! If someone desires to harm their bodies with pot, heroin or alcohol it is their own business as long as they do not violate my property, because we are not legalizing violence and theft. The law should protect my property rather than plunder it, or else what good is law?

Secondly: the government's destruction of wealth. Government is not a business which produces anything of worth. It is not a productive entity. On the contrary, it only consumes from those who DO produce and uses it in a destructive manner.

For instance, some say that the IRS creates jobs. However, I say that it destroys jobs and potential jobs in the private market through the consumption of resources. These resources lay in many areas, the direct taxation that the IRS agents are expected to collect is an obvious resource that the private sector loses right off the top, but what of the human resource that is lost? Yes, the IRS agent himself is a lost resource! On the open market perhaps this man would be an entrepreneur, or a financial analyst or bookkeeper, helping a business that produces something of value on the open market. Perhaps the business' own accountant could be better utilized as a forecaster instead of wasting time and filing space figuring out the chaotic tax code! To think of the man-hours wasted on taxes that could be spent on productivity! What of the physical land that is consumed? Perhaps this land would be a factory or a warehouse for shipments! What of the resources that are used in the building itself? What of the men who spent their time building that building? The government thinks that these are jobs created, but I say that it is a resource wasted on something that is merely a destructive end. For what good is produced out of the use of these resources?

Consider for example a farmer who grows wheat, he consumes half his crop to live and sells the other half on the open market. He then uses the proceeds to start his next crop and double his land producing even more! Let us inject a soldier who eats only half of what the farmer requires, yet, what has the soldier produced of value? Nothing! He merely has destroyed 1/4 of the crop and created nothing of value himself. Perhaps if we turned that soldier into another farmer they could work twice as much land and be that much more productive. Thus we can see the possibility of how government destroys what the free market could more efficiently utilize.

Surely providing protection of life, liberty and property has not always been so expensive! The day of our founding fathers could not have been a day of such a fiscally oppressive budget. Therefore I expect you to fight against the income tax, and as many taxes as you can fight against. Trim the fat until we can see the six-pack abs of Lady Liberty!

This is not to even mention the destruction of our dollar through inflation, helmed by Ben Bernanke and the Federal Reserve, an evil devourer of wealth if ever there was one. What else can we call an entity that is designed to steal the value of the money I earn? Therefore, I expect you to fight to end the inflationary policies of the Federal Reserve and the Fed all together, instead let us Americans decide what we desire to trade with, we are smarter than your colleagues deem us to be. All that the constitution requires is that we pay our debts to the state in gold or silver, so let it be so and let us trade amongst ourselves however we please. Let us opt out of the destruction of our wealth (through the erosion of the dollar) and repeal legal tender laws!

I voted for you, and though I'm technically a registered Republican, I am no loyal slave to a party. I voted for Bush, and I voted for Obama, though I have great disappointment in their Presidencies. This mid-term I've voted for Democrats, Republicans and Libertarians. I am no partisan slave. No, I think it's a vile thing indeed and would repeal every law respecting party lines if given the chance. Martin Luther King Jr desired that men would be judged on their character, not on their color. Similarly, I believe that politicians should be judged on their philosophy and not on their party. How egregious the thought that you can know someone's ideals without first asking. This is a bipartisan dictatorship, and the core "values" that each party claims to have, they violate daily. Republicans claim a stance of small government, yet how long since a Republican President has decreased the budget or said what program they'd cut if given the chance? Republicans cry foul over the "socialist" Obama, who looks to redistribute wealth, where was this philosophy when Bush was taking oil from Iraqis to give to tycoons, when he taxed us directly and indirectly (through inflation) to give to Halliburton and other war profiteers? Republicans cry as though they're Pro-Lifers yet kill citizens with warmongering, both foreign and domestic, guilty and innocent alike. Not to mention the foul stench of our inhumane torture, and to people who have been given no trial! Liberty-minded party indeed! Democrats claim to be for individuality and personal choice, yet Clinton enacted "Don't Ask, Don't Tell", the government deems itself as the bestow-er of marriage and yet discriminates against homosexuals. Fighting for the oppressed, there's an unenviable amount of oppression. Therefore, I expect you to stand for a philosophy of individual liberty, and find like-minded individuals regardless of their affiliation. I expect you to fight for my right to be left alone. I expect you to be willing to learn from anyone, wisdom favors the humble. No grandstanding, no rhetoric, no excuses.

Some may ask what all this "injustice" and "tyranny" is that I speak of, because we do indeed still have a country to be marveled about. So, let me clarify that I find the income tax a modernized form of thievery and servitude. My money is something I spent my time earning, if I pay $200 in taxes while earning $5/hour then the government has made me work for them for 40 hours! If I don't pay then I face jail, and even if I am deemed as a "late" payer of the income tax then I face fines. I am to pay late fees on thievery! What do I get in return of this taxation? The Patriot Act? A subversive CIA that entangles us in foreign affairs? 700 bases in 130 countries? How does intruding on other countries make us any safer? This is like saying waving a gun around in public and shooting bystanders is the only way to ensure no one attacks me! How does intruding on my life increase my freedom? No, transparency should be limited to the government! Should we expect that the few in power will look out for the many? No, it's more reasonable to say that the many with equal power will keep each other in check. Give the power back, let us choose how we live without fear of big brother's disapproval and incrimination.

I'm no tea-partyer, though I admire their spirit. I'm no anarchist, I love our Republic. I'm only a 29 year old white male from a small conservative town (transplanted to Austin), but I know enough to see injustice and inconsistent ideologies, and I know when change is promised I'm expecting a change of direction, not a change of shoes. I make myself available to you for any exchange of ideas, in person, by phone or email. I have no qualms with listening to your views or hearing my philosophy corrected, an open-minded and honest conversation is the only way to change the hearts and minds of an individual, and this country is only made up of individuals. I expect you to see them that way, and protect their American right to live as such. I wish you well Congressman.

Sincerest Regards,
Wes

Monday, November 1, 2010

Economics: Money Represents Production

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I think this is where it starts to get very interesting. We've covered that currency is just a medium of exchange, so the rules of supply and demand work the same way. Inflating the currency results in higher prices (through the currency's loss of value), and similarly deflating it results in lower prices (through the currency's gain in value). Inflating it too much too quickly will result in hyperinflation and possibly result in its destruction altogether.

Now we'll begin to set the stage for understanding what a "bubble" is (aka "boom and bust"), where it comes from, and how some can spot it but others do not (or at least they refuse to acknowledge it).

Money represents real productivity. For example, if I work at Wal-Mart for 40 hours and get paid $5/hr then I'll get paid $200. That $200 represents a service rendered, real productivity. A more illustrative example would be a baker who bakes a loaf of bread and sells it for $2. That $2 represents one loaf of bread made, and when that baker goes and buys a carton of milk for $2, then we've essentially said that the $2 was merely a place-holder for the exchange of a carton of milk for a loaf of bread.

Very important to understand the concept that money is a physical representation of a good or service. Money in and of itself is a mere placeholder for some rendered good or service, for something of value that's been produced. This is why counterfeiting is illegal, because you suddenly have the power to purchase a good or service but you never created anything of value yourself, you simply created out of thin air the medium of exchange that represents rendered productivity.

Let's show this in a real example. I want a pair of shoes, I go to the shoemaker and he says that he'll make me a pair of shoes for one loaf of bread. I bake the bread, give it to the shoemaker, one week later he brings me a pair of shoes. Society evolves and we're now using a bill of credit to represent my loaf of bread. I go to the bank and hand them my bread, they hand me my bill of credit which is redeemable for 1 loaf of bread. I go to the shoemaker and hand him a credit note saying that he has access to one loaf of bread. He makes the shoes and goes to the bank to redeem his bill of credit for his bread. Society expands, there's now 2 bakers. I bake my regular loaf of bread, take it to the bank and put it on deposit for my bill of credit. The other baker does not make his bread, but instead gets a loan from the bank for a bill of credit and hands it to the shoemaker.

Business is booming for the shoemaker!

He makes 2 pairs of shoes, takes his bills of credit in for redemption but the bank only actually has 1 loaf of bread in reserve. He's been robbed. He's wasted his time and resources making a product that he cannot immediately sell, if he handed it over already then he has nothing in return for it. Yet, on the outset it seemed as though business was picking up! In reality, the bank sent a false signal to the market to ramp up production when in fact there had been no real increase in productivity. It was not immediately apparent, because it takes time for the real resources to be called upon, in our case it took a week for the shoemaker to find out that there weren't 2 loaves of bread. He had a very short boom and bust cycle. (This example tweaked from Thomas Woods' version in his book "Meltdown", I highly recommend it.)

This is why the Federal Reserve, the US central bank, is the root of all the market volatility for the past 100 years (including the Great Depression). As the controller and sole creator of US Dollars, they have the ability (and exercise it quite often) to create as much new money as they desire, however they merely create it out of thin air, that newly created money represents no new productivity from the market place. Thus, upon the new creation of money it sends the signal to the market to ramp up production which ultimately results in a large collapse once the resources are ultimately found to not exist.

After the 2001 Dot-Com bust, the Fed in conjunction with politicians started up the next bubble, the housing market (more on that later) in order to get the economy going again. Now that the housing bubble has popped, the Fed is trying to start its next Boom, but the market may be too taxed. Time will tell, but this Wednesday may be a landmark day, the Fed will officially announce its next batch of inflationary policies, how much, how often, and for how long. The keyword will be "Quantitative Easing", don't let the lingo fool you, it just means inflation, aka "creating money that nobody earned", or as I like to call it, "stealing".
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A View of Economics
Week 1: The Coming Disaster
Week 2: What is currency?
Week 3: Inflation
Week 4: Hyperinflation
Week 5: Deflation
Week 6: Money Represents Production
Week 7: Bubbles pt 1 - Housing Bubble
Week 8: Bubbles pt 2 - Pure Credit Expansion
Week 9: Bubbles pt 3 - The Bust is a Good Thing
Week 10: Productive vs Destructive

Monday, October 25, 2010

Economics: Deflation

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To recap, inflation is the increase of the supply of money which leads to the increase of prices in goods; or put another way, inflation is the decrease in the value of money which is reflected in the rise of prices.

Essentially the exact opposite: Deflation is the contraction in the supply of money leading to prices falling; or put another way, deflation is the increase in the value of money which is reflected in the fall of prices.

Deflation is a good thing for the average citizen, particularly helping those who have been responsible and saved their money, because now the money that they've saved is worth more. However, for people holding debts, deflation is a very powerful reminder of those debts, because now it's even harder to repay them. For instance, if you own a house that hasn't been paid off, you may owe $100,000 on the mortgage, but due to deflation perhaps the price of your house falls to $80,000 before it can be sold which leaves you holding $20k in debt. I'm not saying holding $20k in debt is a good thing, but it's an accurate reflection of reality, that house was never worth $100k to begin with, it was a symptom of an over-inflated economy.

Right now our economy is beginning to see symptoms of deflation. People are paying down debt, which is leading to the money-supply evaporating, which leads to the value of our dollar increasing. At the same time, fewer people are taking out loans, so no new money is being created even though the Fed is trying to re-inflate the economy to give it another "boost". Since the first round of inflation hasn't done it's job (banks aren't loaning out new funds, opting instead to keep reserves high to hedge against future defaults; more on our fractional reserve system later), Federal Reserve Chairman Ben Bernanke is looking to do another round of inflation, which he labels "Quantitative Easing", taken from Japan (whom it didn't help either).

This is a rather dangerous game the Fed plays. On the one hand, pushing banks to loan out money in order to devalue our dollar (thereby raising prices) is an insidious way to "help" our economy (and in the process wipe out the middle class and keep the impoverished down), on the other hand if it works then the debt holders become the winner, because now that person who owns the $100,000 house can sell it for $120k and make their profit, however the responsible people who saved and showed diligence with their finances see their money shrink in purchasing power, essentially wiping out their savings a little at a time.

Those aren't even the worst-case scenarios. If banks aren't loaning out their money right now, which is potentially a couple trillion, and the Fed, wait, scratch that, let's put a name to it, and *Ben Bernanke* decides to push in a couple trillion more and banks let that money hit the market, if Ben Bernanke (in some circles known as "Helicopter Ben" from his essay about combating deflation) isn't able to reign in a lot of that cash then the problem will be hyperinflation, and likely the destruction of our dollar.

The cold reality is that the Federal Reserve is highly political, despite the attempts from Chairmen to say otherwise, because the Fed uses inflation to fund our government. Whenever the US Treasury sells foreigners US Treasury Bonds, those bonds are backed by US Dollars which can only be printed up by the Federal Reserve. Imagine a Fed chairman who decided to not print the money, they would get fired, after all it's the President of the United States who nominates the Chairman and the Senate who confirms him. Seeing as how the US is the largest debtor country in the world (probably in the history of the world) then it's easy to understand why we don't want our figurative "house" to drop in value, it means that the money we used/borrowed is of less value than the money we have to repay, the consequences of which are to cut programs and be fiscally responsible. I bet you can't find a lot of Republicans or Democrats who get excited about that idea. However, destroying the dollar through inflation means you get more programs, less responsibility and someone else holds the bag. Pretty evil stuff.
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A View of Economics
Week 1: The Coming Disaster
Week 2: What is currency?
Week 3: Inflation
Week 4: Hyperinflation
Week 5: Deflation
Week 6: Money Represents Production
Week 7: Bubbles pt 1 - Housing Bubble
Week 8: Bubbles pt 2 - Pure Credit Expansion
Week 9: Bubbles pt 3 - The Bust is a Good Thing
Week 10: Productive vs Destructive

Monday, October 11, 2010

Economics: Hyperinflation

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If inflation is the creation of new money (which results in higher prices due to the new money devaluing all the other money already in circulation), then what is hyperinflation? Kind of the same thing, but in warp speed and with a couple twists.

Hyperinflation is certainly the rapid rise in the price of consumer goods brought about by overprinting of a fiat currency. However, it not only happens because of the debasing of the currency, but it also happens due to the loss of faith in a currency, so everyone rushes out to spend their money before it's totally worthless, rather than holding dollars people opt for something tangible.

We don't need to look back too far in history to see where hyperinflation has set in and ultimately caused a currency to crash and become utterly void of value. There's so many examples that it's hard to choose, in fact you could probably name the country and they've seen it. Including the United States debasing our own currency during the Revolutionary War. The most recent was Zimbabwe, after a few years of hyperinflation the government abandoned their dollar all together in April of 2009. Inflation ran so rampant that they were printing up denominations in Trillions, can you imagine paying for a Snickers with a trillion dollars?

The hyperinflation in Zimbabwe was the result of massive printing of new money used to pay debts and "buy prosperity". It didn't take long before the market caught on and opted instead to trade in something more valuable like gold and silver. After finally closing shop on the Zimbabwean Dollar their government officially opened itself to foreign currencies to be used. Ultimately these other government run currencies will also eventually disappear, as all government mandated fiat/paper monies do, because the temptation to abuse the printing press is too much for politicians to handle.

I sincerely doubt if our dollar crashes that it will get so bad that we will be digging in the mountains for enough gold to buy bread, but that doesn't mean it will be a cake walk. Hyperinflation is a very real possibility, some are predicting it absolutely will happen, but it's difficult to tell since there are an infinite amount of variables. For instance, China holds the most US debt (coming in 2nd place BTW, is the Federal Reserve), so it's kind of in their interest to not let the US$ fall, or they'll lose money as well, Japan is the 3rd largest holder of our US Treasury Bonds (our debt), as well as many other nations, so if they all decided to sell their debt/Treasury Bonds then it would quickly become worthless and our dollar would entirely crash, so they won't do that, at least not at first.

What if China became convinced that our dollar was going to soon become worthless? They would sell it as quick as they could find a buyer, United States be-damned, because the first to get rid of it ends up hurting the least. As I mentioned last week, the Federal Reserve is getting ready for another round of inflation, who knows if this will trigger the sudden auctioning of our bonds. Another round of inflation will certainly excite our debtors, in a bad way. After all of these bailouts and inflationary practices what we're actually looking at is an enormous US Treasury Bond bubble. EVERYONE is way way way over-invested in US debt. My financial adviser recently showed me a portfolio where 1/3 of the investments were directly in US Treasury Bonds. What happens when the only group of people who will buy those bonds is the Federal Reserve? The bubble pops and we witness the single largest economic collapse in the history of the world.

I know that seems rather hyperbolic, but if you consider the facts then you'll see it's quite easy to justify. 1) The world has never been as connected as it is now, so intertwined that I can invest in China's market place within a matter of minutes. I don't even have to leave my house. 2) Most of the world is tied into our economic system via holding of our debts. Those two things alone set the stage for a systemic collapse, much in the same way that all of wall street saw a systemic collapse of their financial institutions.

The bottom line is that the market is bigger than any government policy or dictatorship. Just ask 1923 Germany, fine, you can't *actually* ask an inanimate object that "lives" in the past, buuut, if you could... Germany's currency was originally backed by gold, which meant you could redeem their goldmark for actual gold, but in 1914 this gold standard was abandoned in order to allow paper inflation to fund the first World War. The war ran longer than anticipated (as it usually does) and since the treaty that cemented their loss of that war demanded reparations they decided to simply print the money, which ultimately caused their hyperinflation and crash of their currency. (It's a bit more complex and interesting, but I'm cutting to the point.)

In fact, war is a common reason why a currency falls, even in our own country we debased the Continental Dollar in order to fund our own revolution. Our founding fathers having seen the destructive nature of paper currency decided to write into the constitution that states could only accept gold and silver for legal tender of debts (Art. 1 Sec. 10) and that only Congress could "coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures" (Art. 1 Sec. 8).

There are no absolutes with regards to ensuring my money today retains at least the same amount of value tomorrow, but there are some pretty good ways to make it difficult to lose its value, and allowing a private entity to print as much as it wants and hand it to whoever it chooses without any oversight whatsoever is probably the worst idea ever, anyone who disagrees is either clinically insane or profiting from it. It's asking the fox to guard the hen house!

Instead of this current monopoly on the dollar that the Federal Reserve has (via mandated US law), perhaps the single best way to ensure that my money retains value is to allow the market to choose. Competition is good, because everyone votes with their money, and if I think someone is ruining a currency then I can choose to use another and be exempt from its downfall. That very concept, that I can choose someone else's currency will drive honesty into business, or that business will be driven out of town. But as of right now, if hyperinflation sets in and we see prices double over the course of a couple weeks, there is no reprieve for US Citizens who don't have the capital to buy valuable assets and commodities like gold and silver, instead we'll see the savings of responsible people fall into nothingness overnight and only be left with political grandstanding by the ones who allowed this to happen in the first place.

While hyperinflation and the destruction of the dollar remains a very real possibility, I would say the biggest and first indicator is likely going to be when oil stops trading exclusively in the dollar. Until then just plan your finances wisely and tie your savings to something that retains its value, I think that there is NO reason to have more than a couple thousand sitting in cash in a bank account.

So, if inflation & hyperinflation is when a currency loses its value, what happens if a currency *gains* in value? Deflation, and it's a good thing.
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A View of Economics
Week 1: The Coming Disaster
Week 2: What is currency?
Week 3: Inflation
Week 4: Hyperinflation
Week 5: Deflation
Week 6: Money Represents Production
Week 7: Bubbles pt 1 - Housing Bubble
Week 8: Bubbles pt 2 - Pure Credit Expansion
Week 9: Bubbles pt 3 - The Bust is a Good Thing
Week 10: Productive vs Destructive

Monday, October 4, 2010

Economics: Inflation

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Magic tricks! Have you ever seen a magician perform? You pick a card, shuffle the deck, he closes his eyes and spins around three times yet somehow still is able to pick your card out of the deck. We all know there was no magic, but there was sleight of hand going on, we missed something...

Inflation is commonly thought of as the rise in price of consumer goods as judged by the Consumer Price Index (CPI), this is the sleight of hand at work, because we're led to believe there's no way to prevent this natural phenomenon. Wrong. In fact, inflation is actually the increase in the money supply, so the rise in prices are only the effects of inflation. If my friend had the only 10 dollars in existence, they'd own 100% of the money, but if I suddenly created 990 dollars then theirs would suddenly be worth 1% of what it used to be worth. I just drank their milkshake.

Inflation is the insidious thing that allows governments to fund their ridiculous promises and expand their operations & wars (there's many kinds of "war", Iraq is one kind, "War on drugs", "War on poverty", etc). Rather than directly tax people for all of these programs, the government turns to the central bank (for the United States it's called The Federal Reserve) to print up money which it uses to buy bonds from the US Treasury. Inflation has just occurred.

Another word for inflation, one the government hates to use or see, is debase. Debasing the currency is a far more accurate description. Since money is merely a facilitator of trade, you cannot create wealth by simply creating more money, instead what happens is everyone's worth goes down and only the creators of the new money win.

One of the tricky parts of inflation is that it doesn't show up immediately, and it doesn't show up everywhere. If you want to spot it all you have to do is look to where the government spends it. For example, health care. The government pours in billions of dollars into this single sector, and rather than make it more affordable all it does is make our dollar less valuable in that sector.

So, it's not that prices are rising, it's that your money is just worth less. If only that was where it ended. Now imagine there's a trillion dollars floating around society right now, all the prices are adjusted based on that (it's more complicated as far as proving this out, but that's what it boils down to), now imagine I create another trillion for myself. While it's sitting in my possession all the prices stay the same, because that money is not in the market yet, which means I get to buy everything at the old price.

Discount! Great deal for me!

It gets far, far worse. I don't, of course, spend all that money in the same place, rather spend it in 5 places. Well, they'll essentially get a discount too, when they use that money. Now, those business don't immediately give their employees a raise, right? Instead, there's a slow trickle down to the lower income people, but by the time it's traded the hands of all these banks, businesses and government purchases, inflation has already set in and the lower income people have been paying the higher pricing before ever seeing an increase in their wages. They've just been robbed without a gun, and without notification.

The Fed creates a ton of money, they and the government pick who it is spent on, those are the real "winners", and everyone else loses, all of the time. Until the money isn't worth anything at all...

You have to understand that the Federal Reserve wants to keep prices inflated, so in order to do so they must create new money. Inflation favors the debtor. If I owe you $200 Million, and can create it out of thin air then I can pay my debts back cheaply, rather than work and be productive to earn that money. It hurts the debt holder of course, but that's beside the point I'm sure. So, who can we think of that holds a lot of debt? Right, the US Government has over $13 Trillion, so inflation helps them keep up the gamble, until everyone catches on that their debts are being repaid with devalued currency and they stop buying our US bonds. Uh oh.

With the Bush and Obama bailouts we already see the creation of a couple trillion in new money/inflation, but that doesn't even include the $2 Trillion the Federal Reserve created (without approval from anyone), and they're planning on another round of "quantitative easing" aka QE2, aka INFLATION, so what happens if/when that money eventually hits the market place? Hyperinflation. That's next.
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A View of Economics
Week 1: The Coming Disaster
Week 2: What is currency?
Week 3: Inflation
Week 4: Hyperinflation
Week 5: Deflation
Week 6: Money Represents Production
Week 7: Bubbles pt 1 - Housing Bubble
Week 8: Bubbles pt 2 - Pure Credit Expansion
Week 9: Bubbles pt 3 - The Bust is a Good Thing
Week 10: Productive vs Destructive

Monday, September 27, 2010

Economics: What is currency?

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This may seem just a little *too* simple to start with, but roll with me for a moment. Understanding currency is absolutely VITAL to understanding economics, because generally speaking, currency is half of every single transaction. You buy stuff with money, you sell stuff for money. Shouldn't we understand what money is and where it gets its value?
Shouldn't we understand what money is and where it gets its value?
Entire books are written on that simple question and I've listened to more than a couple lectures about it, so I'll make this as brief as my loquaciousness allows. Currency started as a means to barter between people. In a community, some people grew produce, others were craftsmen, some of your neighbors wanted your service and some didn't, so how did you trade with the ones who didn't?

This is essentially how currencies developed. A community needed to be able to trade with one another with confidence that what they received in return for their offered goods would hold value once they try to use it with another community member. Therefore, early currencies had intrinsic values to their cultures. For instance, some Aztecs used beans as a bartering tool, and even as recently as the 17th and 18th century beaver pelts were used as currency in Canada and parts of North America.

There's many important features to a good currency, but at the top of the list is that it must retain its value. I'm sure at some point beaver pelts were no longer the cool thing to barter with and someone was the last one to know, maybe they ended up with a gang of pelts stinking up the patio. More likely they were able to sell their pelts for dollars once dollars were being widely circulated as a common trading currency. One thing we know for certain: beaver pelts are no longer an acceptable bartering medium. This tells us a very important lesson, there is no guarantee that what we use to trade with today will be the same thing we use tomorrow.

So, what are the characteristics of a "good" currency? This unequivocally depends on who you're asking. If you ask a government official, they'll always want (and historically have always found a way to get) a currency that is easy to make, so that they can make more of it (governments like spending and need money to do so). That's the reality of fiat currency, aka "paper money", you can print as much as you want as long as you have paper to print it on. And now in our digital age, you don't even need paper, it's just numbers on a computer screen. Of course, printing everything you want is a bad thing for currency, which brings us to our first characteristic:

A good currency has a limited supply. It's a very common law in any market that the more there is of something, the less value it has. The law of supply & demand. I realized that early in childhood through collecting baseball cards, "rare" equated to "high value". Why should money be any different? Of course if it's too rare, like a diamond for instance, then there is not enough supply to be usable, and besides, a diamond would be bad for our second characteristic.

It must be divisible. Being able to break up the currency helps in bartering. Think about it, when dealing with someone and all you have is a $20, but you only want to pay $15, how do you get around that? You have to hope they have change. However, a good currency would allow you to simply chip off a piece to keep, give the rest. Likewise, if it's easily separable then it should be easy to put together. Maybe something like copper? Copper works in this rule as well as with the next characteristic.

It must have intrinsic value. As noted above, this is a subjective evaluation. At one time beaver pelts held value for people in the north, but the dollar holds no intrinsic value, because if people ceased trading in dollars then it's worth would be ZERO, there is no inherent value to it. Whereas even a beaver pelt has some durable value: it can keep you warm, decorate your pad, or (God forbid) clothe you. Paper does none of that, and is not considered to be of any value without the US *using threat of legal prosecution to force its use*. Copper on the other hand has an intrinsic value, it's useful in and of itself, but it's value is so low that it would violate our next rule.

It must be portable. When it comes to metals, there's far more valuable options that follow all of these rules but keep enough inherent value that you can carry it on your person without needing a pack-mule. Gold and Silver are good options, currently a single ounce of gold is worth $1,300, that's pretty easy to carry on your person. So, precious metals are fantastic options because it follows all these previous characteristics, as well as the last.

It must be durable. Not just a physical durability, but something you can look back at through history and have certainty that it's use isn't a fair-weather option, but that it's been used for ages and stands the test of time. Of course, physical durability is important too, something that doesn't tear or disintegrate through usage is vital to future trade, so as not to devalue your wallet.

Obviously, paper money scores on like 1 of these 5. It isn't durable, has no intrinsic value, it's not divisible, and it has an unlimited supply. However, it is portable, but in the instance of our dollar it's portability works against us since you can make as much as you wish (to the detriment of its value) without worry of difficulty transporting it. If you look throughout history fiat currencies have a staggering rate of failure, and I suspect that its failure rate will end up at 100%, because it violates the very heart of "good" currency. The thought of using gold and silver will bring up some questions like, "What about banks?" or "I don't want to carry around a brick of gold!", do not fear, these questions will be addressed in a future post, but before I do I want to reveal in as many ways as possible why fiat currency is bad. Next: inflation.
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A View of Economics
Week 1: The Coming Disaster
Week 2: What is currency?
Week 3: Inflation
Week 4: Hyperinflation
Week 5: Deflation
Week 6: Money Represents Production
Week 7: Bubbles pt 1 - Housing Bubble
Week 8: Bubbles pt 2 - Pure Credit Expansion
Week 9: Bubbles pt 3 - The Bust is a Good Thing
Week 10: Productive vs Destructive

Monday, September 20, 2010

Economics: The Coming Disaster

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Hindsight is always easy. Everyone can tell you that we had an economic crisis that resulted in a recession unlike any other since the Great Depression. The real question is who predicted it? How could they know yet remain unheard? What did they know? More importantly, what was being said by those whom we were listening to, and what are they saying now? Wouldn't it seem like conventional wisdom to pay more attention to the people who accurately predicted the crash? It would also seem counter-intuitive to give more power to the same people that got us into this situation. At the heart of the philosophies practiced today are two diametrically opposed economic theories, Keynesian Economics versus Austrian Economics. My desire is to not only reveal what each of these philosophies hold as their pivotal differences, but to show how one of them reveals that the crisis is not over, and another much larger crisis looms ahead, and it may be far worse than you think.

To deliver a full understanding (and in the course of writing to help shore up my own understanding) I will lay the groundwork of economic basics regarding the nature of currency, recount historical events showing how governments historically have used currencies and the effects of their usage, whether good or bad. I'll cover topics such as inflation, deflation, hyperinflation, how a currency falls, how a currency gains value, what is a recession, who creates our money, who funds our government, and much more.

I have several goals. I hope that discussing this in chunks will not only help illuminate our current situation, but I dearly want discussion and to spark interest so that maybe someone does their own investigations and is inspired to discover the world that runs our world, because it's FAR easier to understand than I once thought, if you understand the philosophy then you can pick apart any discussion. This is why I have a growing resentment for our 2-headed 1-party system, because at the end of the day they are both taking part in the same underlying philosophies, yet they are so adept at keeping us focused on the bickering that either no one cares to get involved because "it seems too complicated" or it's reduced to Right vs Left.

At the end of this discussion I will reach the conclusion that you can't lay blame to one party or the other, you have to hold them both accountable for why our economy is in shambles. The Housing Bubble was/is bad, but there's also a Higher Education Bubble that's getting ready to pop, a dollar crisis is on the horizon and a global economic collapse. Obviously, this should worry you, it isn't entirely too late, but it's unlikely that we will avoid it since no one is coming to their senses. I personally think it will hit by the summer of 2012, but predicting the "when" is next to impossible since the variables are so many, much like seeing a gas station on fire you know that it's going to explode, you just don't know when.

Let's figure out economics.
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A View of Economics
Week 1: The Coming Disaster
Week 2: What is currency?
Week 3: Inflation
Week 4: Hyperinflation
Week 5: Deflation
Week 6: Money Represents Production
Week 7: Bubbles pt 1 - Housing Bubble
Week 8: Bubbles pt 2 - Pure Credit Expansion
Week 9: Bubbles pt 3 - The Bust is a Good Thing
Week 10: Productive vs Destructive

Monday, September 13, 2010

My Time Travel Beef

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I know you're thinking I'm going to bring up the parallel time-line issue, if I went back in time that in order for time to compensate for my tampering ways that there would need to be a new time-line created at the point of my entry, leaving us with 2 time-lines, one in which I never traveled back and one in which I did. You're wrong! You may be jumping to the next logical issue, if I traveled forward in time is there another parallel time-line issue? Wrong again! You may even be saying that quantum physics accounts for all these issues or that the recent discovery shows that we can change the past, to which I say no and no, but if you'd shut up and let me speak we may get on with today's order of business.

My real issue with time travel is that when generally thought about we consider moving forward and backwards in time, instantaneously via such methods as "Back to the Future", but perhaps I missed it, but I don't recall anyone addressing that you're not only challenged by traveling through space-time, but also space-space, because the Earth moves, so if you stood somewhere and traveled back a day you'd likely end up in the middle of space or inside the Earth. So time travel is a beyotch not only because (well, because it's impossible) you're moving back into the past but also because you need to be able to teleport to the exact location, syncing that up is on some kind of "Rain Man" multiplied by Will Hunting type insane. We'll definitely have our flying jet-packs first.

I will say that I haven't read H.G. Wells' "Time Machine", but I did see the (awful) movie and he may have circumvented this issue because his machine was not a vanishing thing, but rather a stable thing that stayed still while advancing (or retreating) through time, observing all things happening around it, thereby allowing it to stay in the sphere of the Earth and its gravity, acting as more of a "fast forward"/"rewind" rather than "skip to next chapter". I guess you could say he was ahead of his-- (bad pun truncated by smarter future-me).

Monday, September 6, 2010

Keys to Good Confrontation

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I don't know if anyone actually enjoys confrontation, I hope not. However, I think it's healthy to not necessarily shy away from it. From my experience, a healthy confrontation often leads to: closer-knit relationships, it's an unusual bonding experience and something that brings people closer after an emotional journey; greater understanding, I think it's always helpful to walk away from a situation feeling clarity where previously it was cloudy; humility, nothing attracts me to a person more than knowing they're humble, and nothing brings humility out quite like a healthy dose of resolution. That's scratching the surface I'm sure, but I want to get into what I think of as the keys to having a good confrontation that you can walk away from with a lighter heart.

1. Breathe. This whole post is coming out of my recent drama at my gym. I was working on the speed bag for a few rounds and then a trainer approached me (humbly I might add) to say that in the future if there was a rehab client on one of the tables that I shouldn't get on the bags. Now, this lit a giant fire inside me, but I knew that maybe the worst time to speak is when I'm emotional, so I nodded my acknowledgment and finished my workout. I immediately felt that someone else's workout was taking precedence over my own and felt slighted, it wasn't as if I were taking away the other client's equipment, right?? So, with all these emotions flooding I knew I was in no place to hear very well, and hearing is of the utmost importance for healthy conflict.

2. Humility. There has to be an absolute desire to understand from another point of view, if the only concern is making your own point heard then there cannot be a healthy resolution, because "getting your way" isn't healthy for anyone, listening is healthy, and you can't expect for someone else to listen if you don't do it first. Example may be the best teacher.

3. Express emotions, unemotionally. The trickiest of them all is to say exactly how you're feeling but to do it in an non-accusational, one way to do this is using language that's "removed" from the other person. i.e. instead of "You pissed me off by saying I'm ugly", perhaps something like "when I heard myself being called ugly, I was really hurt", I think this helps retain accuracy while helping paint your own picture without directly villifying the other person, helping to keep emotions abated.

4. Validate emotions. No matter how illogical the misunderstanding, it's vital to acknowledge and validate someone's emotions. It's okay to understand and even apologize for someone's hurt feelings even if you did nothing wrong, because even in a ridiculous situation saying "I'm sorry you're hurt over that" does not mean "I'm a giant jerk and I'm sorry for what you think I did". To clear up a misunderstanding it's important the other person feels valid, even if their emotions arrived invalidly. Facts are important in any conflict, and you can't change the fact of how someone feels/felt.

I'm sure there's more to it, but I think those are the ones I need to get through a confrontation, whether it's one I initiate or not. I need to be level-headed first, so that I can then be humble and expressive and genuinely understanding. If at the end of the day there's no resolution, never lie, just acknowledge you have differing views and don't try to kick the dead horse back to life.

So, how did mine at the gym go? Well, the next day I worked out and caught up with the guy afterward, asked if he had a second to talk, told him that I thought he was great and did nothing wrong in spirit, but that I was offended that it seemed like another member's workout was getting priority over mine, he apologized immediately (and I restated that I wasn't offended at *him*, but that I didn't understand the philosophy of what was said) and he explained that when a client is on the table that they by terms have rented out that entire section of the gym. I understood immediately and we had a good few minutes of clearing the air, future strategy for similar situations, and mutual understanding/respect, a quick hand-pound and man-hug and we were through. A good confrontation.

Monday, August 30, 2010

Smart Villains, Smarter Heroes.

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I've been talking a lot of politics the last few months, I hope someone actually read one or two of those write-ups. The next series I plan on doing will be on economics, ranging from "where currency gets its value" to "how financial bubbles occur", but that's many many weeks away and in the interim I'll blab on whatever comes to mind.

I dabble in screenwriting, and back in 2004 this led me to a website called wordplayer.com, which is a fantastic resource for screenwriters, because it's run by two very successful writers Ted Elliott and Terry Rossio (Pirates of the Caribbean, Aladdin, Shrek, to name a few). One of their articles spoke of having smart villains, but smarter heroes. It's an art that's often lost on good stories, because there's nothing interesting about a story where a bad guy keeps getting lucky, or when a good guy is just cursed with bad luck.

The great example they used was in Indiana Jones: Raiders of the Lost Ark. In the opening scene you had Indy escaping dangers galore for an archaeological treasure, only to find upon his exit that the villain was waiting for him. In fact, the entire movie is filled with what Ted & Terry refer to as "epic failure", Indy for all his intelligence never really succeeds in the entire film, and it's only through the success of the villains do they find their own downfall, but Indy was smarter than them so he survived their fate. (I'm trying to not spoil it for those who may have ignorantly not seen it :)

Nothing makes for great writing quite like having your hero fail in epic fashion, yet still keep his wits to tunnel his way out of dire straits. I'm not saying that dumb villains aren't interesting as well, as can be seen in "Gladiator", where you have a bitter & ruthless villain who manages to do nothing right, but the writing is true to that character in that he never is bailed out with a dash of written luck, his brash decision making is his ultimate downfall.

At the heart of a well written film should be the feel that characters discover and make their own paths, and these paths are carved according to their character. The other side of this coin would be where someone has thought up "cool" scenes and simply filled in the characters to meet the criteria without adjusting for the characters themselves. A recent example would be the atrocious film "Knight and Day", where serendipity floods the entire movie, and at few points does anything happen that feels organic. The bad guy dies not because he was truly outwitted by the hero, but because the director needed to end the film with a bang. We were plagued for two hours with a dumb antagonist, and a dumb protagonist.

A good story leaves you with the feeling that you've learned something you didn't know, and a well written hero/villain combo leaves you feeling like they were the ones who created their circumstances, and it was a battle for the last laugh. Luck should be used sparingly, and then only against the hero. Nothing cheapens victory more than good old "Deus Ex Machina".

Monday, August 23, 2010

Who cares about a mosque in New York?

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I don't care that a mosque is being built close to ground zero. There's a number of reasons for this, allow me to enumerate:

1. It's a property rights issue
I'm fairly sure mosques aren't illegal. It's not as if they said "We're building a terrorist training center and drug factory." But I guess even those things would be fine as long as they received the proper labels like "CIA" or "Pharmaceuticals". If a group buys land, and they follow local law, I don't see any reason they can't build whatever they wish.

2. Religious Tolerance
I'm not Muslim, but that doesn't mean I need to take a stance of defiance against the entire Muslim community. Seeking to shut down the construction of a religious place of worship flies in the face of our deepest roots, the freedom to worship free of persecution.

3. Freedom of speech
Dr. Laura recently resigned from her radio talk-show. She took a call from a black woman who was looking for advice about her white boyfriend using the "n" word, so this loving "Christian" woman goes on a tirade of dropping the "n" bomb 11 times. Naturally this resulted in advertisers pulling out and a fallout from listeners, in response to all of that she stated that she was on a mission to regain her "1st Amendment Rights". Dr Laura is an idiot, the constitution is our contract with the government, not with citizens, so when someone no longer wishes to subscribe to your show because you're an unabashed idiot then that's our freedoms being properly exercised. However, if the state shuts down the Mosque that would be the opposite, and a very troubling precedent. But if the Muslim community decided to listen to New Yorkers and shut it down on their own volition, then that too is a proper exercise of freedom.

4. Islam is not the enemy
I'd like to be amazed at how utterly stupid media personalities can be, but that ship sailed a while ago. The fact is that we are not at war with Islam, despite what is preached from the airwaves. There's an enormous difference between being at war with an entire religion, and being at war with a group of people who *mostly* share a particular religion. If we're at war with Islam then shouldn't we be rounding up Muslims and assassinating them? That would be completely sick and irrational, because we aren't at war with Islam, and perpetuating these illogical prejudices is only going to result in the persecution of more innocent people.

This upheaval reveals a number of things, that we're all still reeling over what our country suffered through, and that the media is being used by politicians to play on these emotions. Look long and hard at anyone so blatantly declaring Islam the issue, these people are manipulators or stupid. Neither of which need to be humored. If you allow one religion to be persecuted, be prepared to have the same done to your own sacred beliefs.

Monday, August 16, 2010

US Foreign Policy part 11: Conclusion

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When you consider that people are killing themselves to get us off of their land. That a war with a tactic can never end. That our CIA undermines foreign governments, raises & supports hostile factions such as Saddam's, Bin Laden's and the Taliban. That we torture people who have been given no due process or trial, the same things we abhor other countries doing to our citizens (Vietnam anyone?). That we allow our President to go to war with anyone without a proper declaration from Congress. That we preemptively attack nations who have not attacked us while claiming moral high ground. That we destroy nations and the lives of non-combatants and hundreds of thousands of children through sanctions. Is it really so hard to understand the blowback?

When you consider how tyrannical our foreign policy is, how destructive, manipulative and vast it is, can you not see how our finances cannot sustain it?

Our military is a *national defense*. Not the policemen of the world who need to enforce our ways onto others. I believe our American soldiers should be used to protect American lives, to do otherwise is flat out wrong, no matter how good the cause.

I agree with Saint Augustine, who among with others created the philosophy of a true Just War, a war in which you are justified in waging, in which there are 4 criteria:
1) The damage inflicted by the aggressor on the nation or community of nations must be lasting, grave, and certain;
2) All other means of putting an end to it must have been shown to be impractical or ineffective;
3) There must be serious prospects of success;
4) The use of arms must not produce evils and disorders graver than the evil to be eliminated.

Iraq and Afghanistan fail in all of those categories. War should no longer be waged, we should bring our troops home, not only from those countries but from all places abroad. End the imperialism. Stop fabricating dangers abroad and giving people reasons to attack us.

For reference, here are all 10 parts of my US Foreign Policy write-up:
part 1: Blowback
part 2: Sanctions
part 3: Just-War
part 4: Preventive War
part 5: Declaration of War
part 6: Torture
part 7: Finances
part 8: CIA
part 9: War on Terror
part 10: War on Terror part 2, Suicide Terrorists
part 11: Conclusion