Falling Demand in the Great Recession forces Southwest to Raise their Ticket Prices

Posted by PITHOCRATES - July 28th, 2012

Week in Review

Typically prices rise during good economic times.  And fall during bad.  Because demand rises during good economic times and falls during bad times.  And prices typically follow demand.  As businesses can raise prices when the demand for their goods or services rises.  But rising prices don’t always indicate good economic times (see Southwest joins as airlines raise fares on most U.S. routes by Nancy Trejos posted 7/24/2012 on USA Today).

A three-month break from airfare increases has ended, with Southwest Airlines raising fares by $4 to $10 round trip on most routes inside the U.S…

Kevin Schorr of Campbell-Hill Aviation Group, a Virginia consulting firm, says airlines haven’t been able to raise fares in recent months because of the economic uncertainty surrounding the presidential election and Europe.

He says airlines are cutting the number of flights they’re making available. “By doing that, they’re able to raise fares if there’s less supply,” he says…

Paul Flaningan, a spokesman for Southwest, says the airline raised fares on non-sale tickets and excluded routes shorter than 500 miles.

Southwest, on the other hand, is raising prices because of falling demand.  Fewer people are flying because of the bad economy.  Leaving some planes to fly with empty seats.  Of course, a plane flying with empty seats makes it harder for that plane to cover its flying costs.  So they pulled some planes out of service.  Because a plane sitting on the tarmac is not burning jet fuel.  And planes sitting on the tarmac helps them fill the seats on the planes remaining in service.  Allowing those planes to fly profitably.

Then there are overhead costs.  With fewer ticket sales there’s less money coming in to pay their overhead costs.  This is an example of economies of scales in reverse.  With fewer unit sales (i.e., ticket sales) they have to recover their overhead costs on fewer tickets sold by increasing the price of each ticket.

So the airlines are not raising their ticket prices because they are greedy.  They are raising them because the economy is so bad that fewer people are flying.  Forcing them to raise ticket prices on the remaining few who are still flying.  Just another indicator of how long and deep the Great Recession has been.  And continues to be.

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The Cuban People are Moving their Country towards Free Market Capitalism

Posted by PITHOCRATES - July 28th, 2012

Week in Review

Cuba’s National Assembly is meeting to discuss Raul Castro’s economic reforms.  And people within and without Cuba are watching anxiously.  To see if Cuba will throw off their socialist/communist shackles.  So the Cuban people can breathe liberty and enjoy prosperity.  Where all Cubans can live the good life.  Not just the inner party members (see Cuban parliament meets on Raul Castro’s economic reforms, budget, tax system by Peter Orsi, Associated Press, posted 7/23/2012 on The Washington Post).

Islanders and Cuba-watchers will be seeing if the assembly takes any action on long-promised measures such as the easing of travel restrictions, increased private farming of state-controlled land or the approval of cooperative businesses…

And last week the island’s burgeoning small business class was dealt a blow with the low-key announcement of new, stiff tariffs on imported goods.

The entrepreneurs say that without access to wholesale markets, the only way they can supply their businesses is through “mules” who transit between Cuba and places such as Miami, Ecuador and Panama with their bags stuffed with food, spices, clothing, electronics, diapers and other items tough to come by on the island…

It made no mention of the small businesses, however, and insisted that the measures were necessary because excess baggage is slowing down service at the airport, making it resemble a cargo terminal.

By 2015, Cuban officials are gunning to have removed 1 million workers from bloated state employment rolls and have transferred more than 40 percent of the economy into private hands, compared with about 15 percent today.

Import tariffs don’t protect domestic business.  They hurt domestic business.  By raising their costs.  Which forces businesses to raise their prices.  Which hurts their sales because people buy less when prices are high.  So they find ways around paying those high tariffs.  So they can keep their prices low so people can afford to buy their wares.  And the Cuban small business owners turn to “mules” to bring in what the command economy of Cuba can’t.  Goods at free market prices.

The command economy of socialism/communism doesn’t work.  Free market capitalism works.  Free trade works.  As proven by the Cuban black market.  People were jamming their bags so much with the goods that are in demand that it was turning the airport into a “cargo terminal.”  The government may not know how to supply businesses in a free market.  But entrepreneurs do.  And the Cubans are ready, willing and able to advance Cuba into the 21st century.  All they need is for the government to let them.

The Obama administration could take a lesson from the Cubans.  In what works.  And what doesn’t work.  The Cubans are trying to move towards free market capitalism.  While President Obama is moving America in the other direction.  The Cubans want less government in their economy.  Because it clearly doesn’t work.  And they have the scars (economic and physical) to prove it.  While the Obama administration is trying to put more government into the economy despite this not working anywhere it has ever been tried.  Even our one-time Cold War nemesis is admitting this.  And when they do perhaps it’s time for our president to do likewise.

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Los Angeles Medical Marijuana Dispensaries attract Drug Addicts and Crime

Posted by PITHOCRATES - July 28th, 2012

Week in Review

As if the potheads and college students didn’t have enough troubles.  First it was the Israelis harshing their mellow.  By making a marijuana that does everything medicinally beneficial without getting you high.  And now this.  Soon the potheads and college students will have little reason to get out of bed in the afternoon (see Los Angeles council bans medical marijuana dispensaries by Rory Carroll posted 7/24/2012 on the Guardian).

Los Angeles may soon be off the map as a pot-smoking mecca following a city council vote to ban storefront medical marijuana dispensaries.

The council has voted unanimously in favour of the crackdown after the mayor, the police chief, the city’s attorney office and residents’ groups called for restrictions…

The council decision followed mounting complaints from police and neighbourhood groups that legalisation of medicinal marijuana – which remains legal – spawned seedy stores that peddled weed to recreational users on medical pretexts.

Most were profit-making businesses catering to “healthy young adults” rather than sick people with chronic pain, the LAPD chief, Charlie Beck, said in a letter to the council.

Several council members including Jose Huizar had previously supported the dispensaries but changed their minds after residents complained they attracted drug addicts and crime.

Imagine that.  Healthy young people were buying medical marijuana just to have a good time.  And the proponents of medical marijuana said that wouldn’t happen.

Marijuana enthusiasts in LA are unhappy with these restrictions.  Even those without medical conditions.  Who appear to be using medical marijuana as a backdoor to legalizing marijuana.  The proponents of medical marijuana said that wouldn’t happen, either.

Worse, these marijuana dispensaries were attracting drug users.  And crime.  Because drug users want to buy drugs.  Which takes money.  So drug users steal money to pay for their drugs.  Which apparently hasn’t changed since making marijuana legal to buy in California.  Probably because drug addicts have difficulty in finding a job.  What with their addiction and all.  So they turn to crime to fund their drug needs.  Stealing.  Or prostitution.

So it is easy to understand why people living in the communities with these medical marijuana dispensaries want to close them down.  Because they are in their communities.  People don’t want to live near a bar where people are coming out drunk.  So drunk that they are falling down.  Vomiting.  And urinating in the parking lot.  Or on the streets.  Sure, going to the bar is fun.  But not when that bar is in your neighborhood.  And you have to see the seedier side of fun night after night.  It’s the same with these marijuana dispensaries.  Only it’s worse than public vomiting and urination.  There’re drug addicts.  And crime.  And no one wants that in their neighborhood.

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Budget Deficits in the NHS force Mental Health Patients to Wait up to 3 Months to see a Specialist

Posted by PITHOCRATES - July 28th, 2012

Week in Review

Great Britain kicked off the 2012 Olympic Games.  And the opening ceremonies took us through their venerated history.  And their music.  For Britain gave us more than agriculture advances, representative government, capitalism and the Industrial Revolution.  They gave us Led Zeppelin, The Rolling Stones, Queen, David Bowie and the Beatles.  To name a few.  And what a few they are.

The institutions of Britain helped shape the world.  And brought peace to the world.  Pax Britannica (1815–1914).  Where the Royal Navy suppressed piracy on the high seas.  Ended the slave trade.  And brought peace to the world by facilitating free trade.  The British Empire grew into the greatest Empire since the Roman Empire.  The empire that founded Britain’s capital city on the Thames River in AD 43.  Londinium.  Host of the 2012 Olympic Games.  Yes, that’s right.  Britain dates back to the Roman Empire.  And was once part of the Roman Empire.  Right up to Hadrian’s Wall.  Built across northern England.  Marking the northern border of the Roman Empire in Britain.

So the Brits have much to be proud about.  And it showed in the opening ceremonies.  Included a salute to their National Health Service (NHS).  Which the British are especially proud of.  And rightly so.  For it may be the finest national health system in the world.  But it’s a different Britain today.  An aging Britain.  And as the population ages it is stretching the NHS thin (see NHS ‘Is Failing’ Mental Health Patients by Thomas Moore posted 7/24/2012 on Sky News).

The NHS is still failing people with mental health problems, despite a Government strategy launched more than a year ago, charities have warned.

They say patients in some areas are waiting at least three months for specialist counselling. Some end up going private because they need more urgent care…

But mental health services have long been seen as an easy cut to make when money is tight. Implementation of the Government strategy stalled while the NHS and social care was reorganised.

Waiting three months?  Why the long wait-time?  Because the NHS is running chronic deficits.  Because of that aging population.  Which makes any social program that transfers the cost of one generation to a future generation impossible to sustain.  Because the group of retirees is growing at a greater rate than the rate new workers are entering the work force to pay for that retired generation.  Which means higher tax rates on the younger generations.  Rationing of health services.  And, of course, longer wait-times.

Obamacare is starting out on the upside of the retiree curve.  So they are entering the world of national health care as an aging population is already pushing up health care costs.  And will only see those costs rise exponentially as the baby boom generation begins to retire en masse.  At which point people in Britain waiting three months for treatment will say, “It could be worse.  We could be in America.”  Why?  Because with five times the population of Great Britain the US will rewrite the book on service rationing and wait-times.  As Americans see the quality of their health care plummet.  Along with the quality of their life.  For the Americans already have trillion dollar deficits without the cost of Obamacare factored in.  The Americans will add so much debt that their credit rating will fall again.  Which will raise their borrowing costs.  Forcing them to borrow money just to pay the interest on the debt.  Until eventually the Americans will go through what Greece is going through.  Only on a grander scale.

The proponents of Obamacare like to point out that America is the only ‘rich’ country that doesn’t have a national health care system.  Well, we may soon have one as Obamacare goes into full effect.  So we may finally have a national health care system.  But we won’t be rich anymore.  Which will be rather ironic.

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FT128: “Democrats use class warfare to attack and tax the rich while taking money from the working poor by selling them lottery tickets.” -Old Pithy

Posted by PITHOCRATES - July 27th, 2012

Fundamental Truth

The Inherent Contradiction of Class Warfare is that you can’t Hate the Rich while wanting to be Rich

You hear it in the news.  You can hear it in the streets.  You can feel it in the air.  It’s another election season.  And the Democrats are ramping up their class warfare to assail anyone who did what everyone in the country wants to do.  Make money and live well.  President Obama even told successful small business owners the reason for their success.  Not the 80+ hours a week they put into their business.  But because their previous taxes built roads and bridges.  Which is a puzzler.  Because there are a lot of roads and bridges across America.  So you’d think there would be no business failures.  But there are.  A lot of them.  Despite all those roads and bridges.  Like I said, it’s a puzzler.

I guess the sad truth is that it’s not only rich people who hate the poor.  But it would appear our roads and bridges hate the poor, too.  Otherwise everyone would be making money and living well.  Not just those lucky few the roads and bridges favor.  Damn roads and bridges and their hateful ways.  Then again, roads and bridges are inanimate objects.  And can’t pick winners and losers.  So perhaps it’s the government that taxes us to pay for those roads and bridges that have hateful ways.  Perhaps they’re not building them special enough to spread their magic of success to those they come into contact with.  Perhaps our government officials don’t like poor people either.  That is to say, poor people who don’t remain poor.

But that’s neither here nor there.  It’s more around the corner and down the stairs.  No, what’s at issue here is the inherent contradiction of the Democrats’ class warfare.  Namely, if having more money than others is so evil why is it that everyone wants to have more money than others?  Isn’t that the whole point of unions?  To give their members more money and better benefits than those outside their membership?  It’s why the teachers go on strike.  For more money.  And more benefits.  Including health care and pension benefits that few teachers have ever contributed to.  Which is a lot better than most poor and middle class workers.  So here is a large group of people who have more money than others and yet the president never tells the teachers that they didn’t earn their pay and benefits.  So it’s okay to elevate some people above others even though we all use the same roads and bridges.  Odd.  For that seems like the definition of class warfare.  Granting special privilege to some so they can have more money than others.

Thanks to Roads and Bridges Movie Stars and Musicians make Obscene amounts of Money

To further see the inherent contradiction in class warfare consider Hollywood.  And the young and aspiring actors who go to Hollywood.  Why do they go there?  To become rich and famous.  To have more money than other people.  So they can live in their Hollywood mansions.  And in other mansions around the world where the rich and famous like to call home.  For a few weeks out of the year at least.  Those who make it became obscenely wealthy.  And make far more in a day than regular working people earn in a lifetime.  Not only do they want more money than others.  They have more money than others.  Yet the president doesn’t tell them that they didn’t make that happen.  Or that their success was due not to talent but those roads and bridges.

Consider, too, those who enter the music industry.  Rock, pop, hip hop and rap stars.  Why do these people enter the music industry?  To become rich and famous.  To have more money than other people.  Like the Hollywood stars they, too, want mansions.  Private jets.  Boats.  And all the other toys that money can buy.  They want to eat in the finest restaurants.  And party with famous celebrities from around the world.  These musicians don’t make music for the greater good.  For the poor.  For sick children.  No.  They make music to make as much money as they possibly can.  Some even begin legal action to protect what’s theirs in the digital age.  Fighting piracy abroad and illegal downloads at home.  Because they may have a lot of money.  But more money is better.  So they sue.  Yet the president doesn’t single these people out, telling them that they didn’t make their success.  It was those roads and bridges.  And that their illegally downloaded music is due to the people downloading it.  Who paid for those roads and bridges that made their talent possible.

How about lawyers?  They’re some of the richest people in the world.  And how do they make their money?  By taking it away from others who earn it.  By suing these wealth creators.  Or insurance companies.  Especially medical malpractice attorneys.  Who earned the unflattering moniker ‘ambulance chaser’.  Because they are willing to sue anyone to make a buck.  To have more money than others.  Lawyers are in part responsible for the high cost of health care because of their fraudulent lawsuits raising the cost of medical malpractice insurance.  And the class action lawsuit raises the cost of businesses (and the price of everything we buy) while bringing in obscene amounts of money for them.  While the people they represent make a fraction of what they collect.  But the president doesn’t tell these people that they owe their success to roads and bridges.  No.  He never says a word about lawyers.  Probably because he is a lawyer.  So rich lawyers get a pass.

Being Rich can’t be Bad when the Poor Spend so Much on Lottery Tickets trying to become Rich

The Democrats use class warfare to take more money away from those who they think don’t deserve it.  Those who have more money than others.  Other than teachers, movie stars, music stars, lawyers and anyone else with more money than others who typically vote Democrat.  Which seems to make it okay to have more money than other people.  If you vote Democrat you can have as much money as the roads and bridges can make for you.  But if you’re a small business owner trying to navigate the labyrinth of regulations just so you can pay a high tax rate, well, then it’s a different story.  Because these small business owners may vote Republican.  So whatever they make they were just lucky to make.  Even undeserving.  Because they didn’t build their business.  They weren’t smarter than anyone else.  They just used our roads and bridges to an unfair advantage.  So these leeches now owe us.  The people.  And should pay a higher tax rate.  And when they try to use legal tax shelters we should change the law so they can’t.  While turning a blind eye whenever those who vote Democrat hide their income to avoid paying those high tax rates.

So they attack the successful. To help those who have less than them.  But do they really care for those who make less?  The good, decent, poor people?  Or do they try to take their money, too?  Well, it turns out they don’t.  Care for the good, decent, poor people.  And they try to take back whatever they give them.  By encouraging them to spend as much of their disposable income on lottery tickets as possible.  So the poor can be, wait for it, rich.  That’s why governments sell lottery tickets.  To give people the chance to be rich.  So they, too, can have more money than others.  So they can live well.  Even though they have a better chance of getting struck by lightning than winning a big jackpot.  Because when it comes to the lottery it’s little different than it is in Las Vegas.  The house ultimately wins.  As does the government.

Who’s buying the majority of lottery tickets?  The working poor.  So they can become what the Democrats hate.  People who have more than others.  So they can live well.  Again showing the inherent defect in class warfare.  Having more money than others can’t be bad.  Being rich can’t be bad.  Because if being rich and having more money than others was bad everyone wouldn’t be trying to be rich.  For teachers, movie stars, music stars, lawyers and anyone else with more money than others know that having money is good.  But having more money is better.  Especially when you have more than others.  And you can live a comfortable life away from those who have less than you.  While enjoying a disproportionally large share of that wealth created by all those roads and bridges.

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John Locke, Charles de Montesquieu, Republican Government, Separation of Powers, Enumerated Powers, Federalists and anti-Federalists

Posted by PITHOCRATES - July 26th, 2012

Politics 101

Funny thing about the Americans is that they just didn’t Like Paying Taxes

United we stood.  For awhile.  Until we defeated the British at Yorktown.  And negotiated the Treaty of Paris where Great Britain recognized our independence from the British Crown.  But people grew weary of the war.  On both sides of the Atlantic.  And those in the once united states (small ‘u’ and small ‘s’) were eager to retreat to their states.  And forget about the Continental Congress.  The Continental Army.  And everything to do with the confederation.  Threatening to undo everything they fought for.  Because of their sectional interests.

Shays Rebellion nearly pushed the country into anarchy.  It was the tipping point.  They had to do something.  Because if they weren’t united they would surely fall.  They owed Europe a fortune that they had no hope of repaying.  Funny thing about the Americans.  They just didn’t like paying taxes.  Making it difficult to repay their debts.  The Europeans gave them little respect.  France tried to sell them out during the peace talks to rebalance the balance of power in their favor.  Spain wanted to keep them east of the Mississippi River.  And off of the Mississippi.  Even refused them passage through the Port of New Orleans.  Britain didn’t evacuate their western forts.  The Barbary pirates were capturing American shipping in the Mediterranean and selling their crews into slavery.  And Catherine the Great of Russia wouldn’t even meet the American ambassador.  So the Americans were the Rodney Dangerfield of nations.  They got no respect.

In 1787 delegates gathered in Philadelphia.  To revise the Articles of Confederation to address these problems.  Some enthusiastically.  Some begrudgingly.  While one state refused to attend.  Rhode Island.  For they were quite happy with the way things were.  As the smallest sate in the union they had the power to kill almost any legislation that didn’t benefit Rhode Island.  For some legislation the vote had to be unanimous.  And they enjoyed charging other states tariffs for their goods unloaded in Rhode Island ports.  Things were so nice in Rhode Island that they didn’t need much taxation.  Because they had other states funding their needs.  Thanks to those tariffs.  Of course, this did little to benefit the union.  While imposing taxes on their neighbors in the union.  Sort of like taxation without representation.  Funny thing about Americans, though.  They didn’t like paying taxes.

Montesquieu said a Republican Government must Separate Power into Three Branches

Thomas Jefferson was in Europe in 1787.  John Adams, too.  But just about every other “demi-god” (as Jefferson called those at that gathering) was in Philadelphia in 1787.  America’s patriarch Benjamin Franklin.  The indispensable George Washington.  The financially savvy Alexander Hamilton.  The studious James Madison.  The Framers of the Constitution.  Highly principled men.  Well read men.  Prosperous men.  Who were familiar with world history.  And read the great enlightenment philosophers.  Like John Locke.  Who especially influenced the writing of the Declaration of Independence.  With his inalienable rights.  Consent of the governed.  And property rights.

As they gathered in Philadelphia to revise the Articles it became clear that they needed something more.  A new constitution.  A stronger federal government.  With the power to tax so they could raise money.  For without money the union could not solve any of its problems.  So they set upon writing a new constitution for a new government.  A republican government of republican states.  As they began to frame this constitution they drew on the work of a French philosopher.  Charles de Montesquieu.  Who championed republican government.  The ideal government.  A government of the people who ruled at the consent of the governed.  With built-in safeguards to protect the people’s inalienable rights.  The key requirement being the separation of powers.

Montesquieu said a republican government must separate power into three branches.  The legislature, the executive and the judiciary.  A nation of laws requires a legislature to write the laws.  Because the laws must respect the inalienable rights of the people the people must elect the legislature from the general population.  So the legislature’s interests are the people’s interest.  However, if the legislature was also the executive they could easily write laws that represented their interests instead of the people.  Elevating the legislature into a dictatorship.  If the legislature was also the judiciary they could interpret law to favor their interests instead of the people.  Elevating the legislature into a dictatorship.  Likewise if the executive could write and interpret law the executive could elevate into a dictatorship.  Ditto for the judiciary if they could write the law they were interpreting.  So the separation of powers is the greatest protection the people have against a government’s oppression.

If a Power wasn’t Delegated to the New Federal Government it Remained with the States

During the Constitutional Convention they debated long and they debated hard.  The Federalists were in favor of a stronger central government.  The anti-Federalists were not.  The Federalists included those who served in the Army and the Congress.  The anti-Federalists were those who didn’t serve ‘nationally’ and favored states’ rights.  In general.  So one side wanted to increase the power of the central government while the other side wanted no central government.  For their fear was that a new federal government would consolidate power and subordinate the states to its rule.  As if the last war never happened.  And the states would still bow to a distant central power.  Only this time to one on this side of the Atlantic.

So the balance they struck was a two-house (i.e., bicameral) legislature.  A House of Representatives.  And a Senate.  The people in each state elected a number of representatives proportional to their state’s population.  So a large state had a large representation in the House.  So that house represented the will of the people.  To prevent the tyranny of the minority.  So a small privileged class couldn’t rule as they pleased.  Whereas the Senate prevented the tyranny of the majority.  By giving each state two senators.  So small states had the same say as big states.  Together they represented both the majority and the minority.  Further, states’ legislatures chose their senators (changed later by Constitutional amendment).  Providing the states a check on federal legislation.

To round things out there was an executive they called the president.  And a judiciary.  Providing the separation of powers per Montesquieu.  They further limited the central government’s powers by enumerating their powers.  The new federal government could only do what the Constitution said it could do.  Treat with foreign powers.  Coin a national currency.  Declare war.  Etc.  If a power wasn’t delegated to the new federal government it remained with the states.  To give the new federal government some power.  Including the power to tax.  While leaving most powers with the states.  Striking a compromise between the Federalists and the anti-Federalists.

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Conservation of Energy, Potential Energy, Kinetic Energy, Waterwheels, Water Turbine, Niagara Falls, Dams, and Hydroelectric Power

Posted by PITHOCRATES - July 25th, 2012

Technology 101

Roller Coasters use Gravity to Convert Energy back and forth between Potential Energy and Kinetic Energy

We cannot destroy energy.  All we can do is convert it.  It’s a law of physics.  The law of conservation of energy.  A roller coaster shows this.  Where roller coasters move by converting potential energy into kinetic energy.  And then by converting kinetic energy back into potential energy.

The best roller coasters race down tall inclines gaining incredible speed.  The taller the coaster the faster the speed.  That’s because of potential energy (stated in units of joules).  Which is equal to the mass times the force of gravity times the height.  The last component is what makes tall roller coasters fast.  Height.  As the cars inch over the summit gravity begins pulling them down.  And the longer gravity can pull them down the more speed they can gain.  At the bottom of the hill the height is zero so the potential energy is zero.  All energy having been converted into kinetic energy (also stated in units of joules).

Roller coasters travel the fastest at the lowest points in the track.  Where potential energy equals zero.  While kinetic energy is at its highest.  Which is equal to one half times the mass times the velocity squared.  So the higher the track the more time gravity has to accelerate these cars.  At their fastest speed they start up the next incline.  Where the force of gravity begins to pull on them.  Slowing them down as they climb up the next hill.  Converting that kinetic energy back into potential energy.  When they crest the hill for a moment their speed is zero so their kinetic energy is zero.  All energy having been converted back into potential energy.  Where gravity tugs those cars down the next incline.  And so on up and down each successive hill.  Where at all times the sum of potential energy and kinetic energy equals the same amount of joules.  Maximum potential energy is at the top.  Maximum kinetic energy is at the bottom.  And somewhere in the middle they each equal half of their maximum amounts.

(This is a simplified explanation.  Additional forces are ignored for simplicity to illustrate the relation between potential energy and kinetic energy.)

We build Dams on Rivers  to do what Niagara Falls does Naturally

So once over the first hill roller coasters run only on gravity.  And the conversion of energy from potential to kinetic energy and back again.  Except for that first incline.  Where man-made power pulls the cars up.  Electric power.  Produced by generators.  Spun by kinetic energy.  Produced from the expanding gases of combustion in a natural gas-powered plant.  Or from high-pressure steam produced in a coal-fired power plant or nuclear power plant.  Or in another type of power plant that converts potential energy into kinetic energy.  In a hydroelectric dam.

Using water power dates back to our first civilizations.  Then we just used the kinetic energy of a moving stream to turn a waterwheel.  These waterwheels turned shafts and pulleys to transfer this power to work stations.  So they couldn’t spin too fast.  Which wasn’t a problem because people only used rivers and streams with moderate currents.  So these wheels didn’t spin fast.  But they could turn a mill stone.  Or run a sawmill.  With far more efficiency than people working with hand tools.  But there isn’t enough energy in a slow moving river or stream to produce electricity.  Which is why we built some of our first hydroelectric power plants at Niagara Falls.  Where there was a lot of water at a high elevation that fell to a lower elevation.  And if you stick a water turbine in the path of that water you can generate electricity.

Of course, there aren’t Niagara Falls all around the country.  Where nature made water fall from a high elevation to a low elevation.  So we had to step in to shape nature to do what Niagara Falls does naturally.  By building dams on rivers.  As we blocked the flow of water the water backed up behind the dam.  And the water level climbed up the river banks to from a large reservoir.  Or lake.  Raising the water level on one side of the dam much higher than the other side.  Creating a huge pool of potential energy (mass times gravity times height).  Just waiting to be converted into kinetic energy.  To drive a water turbine.  The higher the height of the water behind the dam (or the higher the head) the greater the potential energy.  And the greater the kinetic energy of the water flow.  When it flows.

Hydroelectric Power is the Cleanest and Most Reliable Source of Renewable Energy-Generated Power

Near the water level behind the dam are water inlets into channels through the dam or external penstocks (large pipes) that channels the water from the high elevation to the low elevation and into the vanes of the water turbine.  The water flows into these curved vanes which redirects this water flow down through the turbine.  Creating rotational motion that drives a generator.  After exiting the turbine the water discharges back into the river below the dam.

Our electricity is an alternating current at 60 hertz (or cycles per second).  These turbines, though, don’t spin at 60 revolutions per second.  So to create 60 hertz they have to use different generators than they use with steam turbines.  Steam turbines spin a generator with only one rotating magnetic field to induce a current in the stator (i.e., stationary) windings of the generator.  They can produce an alternating current at 60 hertz because the high pressure steam can spin these generators at 60 revolutions per second.  The water flowing through a turbine can’t.  So they add additional rotational magnetic fields in the generator.  Twelve rotational magnetic fields can produce 60 hertz of alternating current while the generator only spins at 5 revolutions per second.  Adjustable gates open and close to let more or less water to flow through the turbine to maintain a constant rotation.

The hydroelectric power plant is one of the simplest of power generating plants.  There is no fuel needed to generate heat to make steam.  No steam pressure to monitor closely to prevent explosions.  No fires to worry about in the mountains of coal stored at a plant.  No nuclear meltdown to worry about.  And no emissions.  All you need is water.  From snow in the winter that melts in the spring.  And rain.  Not to mention a good river to dam.  If the water comes the necessary head behind the dam will be there to spin those turbines.  But sometimes the water isn’t there.  And the dams have to shut down generators because there isn’t enough water.  But hydroelectric power is still the cleanest and most reliable source of electric power generated from renewable energy we have.  But it does have one serious drawback.  You need a river to dam.  And the best spots already have a dam on them.  Leaving little room for expansion of hydroelectric power.  Which is why we generate about half of our electric power from coal.  Because we can build a coal-fired power plant pretty much anywhere we want to.  And they will run whether or not we have snow or rain.  Because they are that reliable.

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Housing Boom, Subprime Lending, ARMs, Housing Bubble, CDOs, Subprime Mortgage Crisis, Housing Inventories & Sales and Great Recession

Posted by PITHOCRATES - July 24th, 2012

History 101

Artificially Low Interest Rates and Federal Pressure to Qualify the Unqualified created a Housing Bubble

The federal government loves home sales.  Because they generate a lot of economic activity.  From the washing machines and refrigerators new homeowners buy to furnish them.  To the raw materials extracted from nature to make the concrete, bricks, wood, pipes, wires, shingles, glass, plastic, paints, carpeting, insulation, etc., to build them.  Enormous amounts of economic activity at every level throughout the stages of production.  It reduces down to a simple formula.  Make it easy for people to buy houses.  Enjoy a booming economy.  And how best to do that?  Make mortgages cheap.  By keeping interest rates cheap.  Artificially low.  To stimulate a housing boom.

This is Keynesian economics.  Government intervention into the private market.  By having the Federal Reserve keep interest rates lower than the market would have them.  To encourage more people to buy houses.  Then the Clinton administration took it up a notch with their Policy Statement on Discrimination in Lending.  Investor’s Business Daily reported (see Smoking-Gun Document Ties Policy To Housing Crisis by PAUL SPERRY posted 10/31/2011 on Investors.com) that this policy statement forced lenders basically to qualify the unqualified.

At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties…

“The agencies will not tolerate lending discrimination in any form,” the document warned financial institutions.

The unusual full-court press was predicated on a Boston Fed study showing mortgage lenders rejecting blacks and Hispanics in greater proportion than whites. The author of the 1992 study, hired by the Clinton White House, claimed it was racial “discrimination.” But it was simply good underwriting.

There was no racial discrimination.  Just people who couldn’t qualify for a mortgage.  But that didn’t stop the Clinton administration.  So there were artificially low interest rates.  And federal pressure to qualify the unqualified.  To let those who can’t afford to buy a house buy a house.  Enter subprime lending.  A way lenders could approve the unqualified for a mortgage.  With adjustable rate mortgages (ARMs).  Interest only mortgages.  Zero down mortgages.  No documentation loans (say you earn whatever you want and we’ll enter it into the application without documenting it).  Anyone who wanted to have a house could have a house.  And a lot of people bought houses.  Even those with insufficient incomes to pay their mortgage payment if interest rates ever rose.

When the Housing Bubble Burst it Destroyed a lot of Economic Activity and a lot of Jobs

The economy was heating up.  There was a housing boom.  The boom turned into a housing bubble.  Housing prices soared demand was so high.  Builders couldn’t build them fast enough.  And people couldn’t buy a house big enough.  McMansions entered the lexicon.  Houses in excess of 3,000 square feet.  For a family of four.  Or smaller.  But then these artificially low interest rates began to heat up inflation.  And it was the Federal Reserve’s responsibility to keep that from happening.  So they raised interest rates.  Causing the interest rates on those ARMs to reset at a higher rate.  Making a lot of those monthly payments beyond the homeowners’ ability to pay.  Homeowners defaulted in droves.  Causing the subprime mortgage crisis.  And the Great Recession.

Facilitating this economic carnage was the secondary mortgage market.  Fannie Mae and Freddie Mac.  Who bought those very risky mortgages from the lenders.  Repackaged them into collateralized debt obligations (CDOs).  And sold them to unsuspecting investors.  Who thought they were buying high-yield safe investments.  Because they were backed by historically the safest investment.  A mortgage.  But that was before subprime lending.  For these subprime mortgages weren’t your father’s mortgage.  These mortgages were toxic.

So when the housing bubble burst it not only destroyed a lot of economic activity, and a lot of jobs, it wreaked financial destruction in people’s investment portfolios.  All because of a formula.  Make it easy for people to buy houses.  But when you play with the economy too much you don’t create economic growth.  You created bubbles.  And the bigger the bubble the longer and the more painful the recession will be when that bubble bursts.  As those artificially high house prices fall out of the stratosphere back to real market levels.

The Current Gulf between Housing Inventories and Sales is what made this Recession the Great Recession

If you look at the housing inventories and housing sales for the decade from 2001 to 2011 you can see how bad the recession was.  And will continue to be.  We took housing data from the United States Census Bureau.   Housing inventories from Table 7A.  And housing sales from Houses Sold.  The data shows housing units in inventory and sold.  We used 2001 as a base year, dividing each number by the 2001 base numbers.  Graphing the results shows how inventories and sales trended for this decade.

From 2001 to 2005 housing sales were rising at a greater rate than inventories.  Indicating demand for houses was greater than the supply of houses.  Causing house prices to rise.  Encouraging builders to build more houses.  Heating up the housing market.  Sending prices higher.  Creating the great housing bubble.  Then around 2005 the Federal Reserve began to raise interest rates to tamp out inflation.  And those ARMs began to reset at higher rates.  Causing housing sales to fall.  From about 2005 to 2008 inventories continued to rise while sales collapsed.  Leaving the available housing supply far outstripping demand.  Causing house prices to collapse.  Leaving people underwater in their mortgage (owing more than their house is worth).  Or living in paid-off houses that lost up to half their value.  Or more.

The gulf between inventories and sales is what made this recession the Great Recession.  And is why the Great Recession lingers on.  There are just so many more houses than people want to buy.  Killing new housing starts.  And all that economic activity that building a house generates.

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Inventories

Posted by PITHOCRATES - July 23rd, 2012

Economics 101

Before a Business Earns any Sales Revenue they have to Spend Cash to Build an Inventory

To sell something a business needs to have it on hand first.  Because when it comes to manufactured goods we rarely custom manufacture things.  No.  When businesses sell something it’s something they already have in their inventories.  So how do they get things into inventory?  With cash.  Businesses buy goods and place them in their inventories.  They exchange some of their cash for the goods they hope to sell at a later date.  And the bigger the inventory they maintain the more cash it will take.  Cash they have to spend before they sell these goods.  Which requires financing.  Each large business, in fact, has a finance department.  That works to raise cash.  So the businesses can buy inventory (and pay their operating and overhead expenses) before they start selling anything.

This is how the retail stores work.  For manufacturers it’s a little different.  They make things.  Out of other things.  Things that go through various stages of production before becoming a finished good.  So to make these things requires different types of inventories.  Raw goods.  Work in process.  And finished goods.  When they pull raw goods out of inventory and begin working with them they become work in process inventory.  When finished goods come off the final production line they enter finished goods inventory.  The finance department secures the cash to buy the raw materials.  And for the equipment and labor used through the stages of production to produce a finished good.  Which enters finished goods inventory until they sell and ship these goods.

Before a business earns any sales revenue they have to spend huge amounts of cash first to move material through these inventories.  Cash they can’t use for anything else.  Like paying their overhead expenses.  Or servicing their debt.  So it’s a delicate balancing act.  You need inventory to produce revenue.  But if you run out of cash you can’t produce any inventory.  Or pay your bills.  A large inventory creates a large variety of things for customers to buy.  But if customers aren’t buying that large inventory will consume cash leaving a business struggling to pay its bills.  If they become so cash-strapped they will cut their prices to unload slow moving inventory.  Cut back on production rates.  Even cut back on expenses.  As in cost-cutting.  And lay-offs.

Good Inventory Management is Crucial for the Financial Health of a Business

A business doesn’t start generating cash until they start selling their finished goods.  Sales numbers may sound high but most sales revenue goes to pay for the costs of producing inventory.  A firm’s accounting department records these revenues.  And matches them to the cost of goods sold.  Which in a retailer is what they paid to bring those goods into inventory.  A manufacturer may use a term like cost of sales.  Which would include all the costs they incurred throughout the stages of production from bringing raw material into the plant.  To the labor to process that material.  To the energy consumed.  Etc.  Everything that was an input in the production process to place a finished good into inventory.  So from their sales revenue they subtract their costs of goods sold (or cost of sales).  The number they arrive at is gross profit.  Which has to pay for everything else.  Rent, utilities, marketing and advertising, non-production salaries and benefits, insurances, taxes, etc.  And, of course, interest on the cash their finance department borrowed to start everything off.

There is a unique relationship between inventories and sales.  There are countless things that happen in a business but what happens between inventories and sales receives particular attention.  A business’ greatest cost is the cost of goods sold.  Or cost of sales.  Everything that falls above gross profit on their income statement (the financial statement that shows a firm’s profitability).  This cost is a function of inventory.  The bigger the inventory the bigger the cost.  The smaller the inventory the smaller the cost.  This is a direct relationship.  You move one the other follows.  Whereas the relationship between sales and inventory is a little different.  The higher the sales revenue the bigger the inventory cost.  Because you have to have inventory to sell inventory.  However, there is no such corresponding relationship for falling sales.  As sales can fall for a variety of reasons.  And they can fall with a falling inventory level.  They can fall with a steady inventory level.  And they can fall with a rising inventory level.

In business sales are everything.  There are few problems healthy sales can’t solve.  It can even overcome some of the worst cost management.  So rising sales revenue is good.  While falling sales revenue is not.  There are many reasons why sales fall.  But the reason that most affects inventories is typically a bad economy.  When people scale back their purchases in response to a bad economy a firm’s sales fall.  And when their sales fall their inventories, of course, rise.  Until management scales back production to reflect the weaker demand.  Because there is no point building things when people aren’t buying.  Those who don’t scale back production will see their sales fall and their inventories rise.  Creating cash problems.  Because sales aren’t creating cash.  And a growing inventory consumes cash.  Making it difficult to meet their daily expenses.  Such as payroll and benefits.  As well as paying interest on their debt.  Which can lead to insolvency.  And bankruptcy.  So good inventory management is crucial for the financial health of a business.

If Retail Sales are Falling and Inventories are Rising Bad Times are Coming

Businesses target specific inventory levels.  During good economic times they increase inventory levels because people are buying more.  During bad economic times they decrease inventory levels because people are buying less.  And they monitor changes in the actual sales and inventory levels continuously.  Adjusting inventory levels to match changes in sales.  To balance the need to have an inventory flush with goods to sell.  While keeping the cost of that inventory to the lowest level possible.  All businesses do this.  And if you track the aggregate of the inventory levels of all businesses you can get a good idea about what’s happening in the economy.

John Maynard Keynes used inventory levels in his macroeconomics formulas.  The ‘big picture’ of the economy.  Looking at inventories tied right into jobs.  If sales are outpacing inventory levels then businesses hire new workers to increase inventory levels.  So sales growing at a greater rate than inventory levels suggest that businesses will be creating new jobs and hiring new workers.  A good thing.  If inventory levels are growing greater than sales it’s a sign of an economic slowdown.  Suggesting businesses will be reducing production and laying off workers.  Not a good thing.

Because of the stages of production changes in finished goods inventories can create or destroy a lot of jobs.  For if the major retailers are cutting back on inventory levels due to weak demand that will ripple all the way through the stages of production back to the extraction of raw materials out of the ground.  Which makes inventory levels a key economic indicator.  And when we combine it with sales you can pretty much learn everything you need to know about the economy.  For if retail sales are falling and inventories are rising bad times are coming.  And a lot of people will probably soon be losing their jobs.  As the economy falls into a recession.  Which won’t end until these economic indicators turn around.  And sales grow faster than inventories.  Which indicates a recovery.  And jobs.  As they ramp up production to increase inventory levels to meet the new growing demand.

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Argentina’s Keynesian Policies have given them the Weakest Economy in the Hemisphere

Posted by PITHOCRATES - July 22nd, 2012

Week in Review

The Argentines are strong advocates of Keynesian economics.  And they’ll embrace it till the bitter end.  Even as their economy goes into the crapper (see WRAPUP 3-Argentina economy shrinks in May for first time since 2009 by Hilary Burke posted 7/21/2012 on Reuters).

Latin America’s No. 3 economy is decelerating sharply after posting China-like growth rates for much of the past nine years. High inflation, a sluggish global economy, waning demand from neighboring Brazil, falling grains production as well as new trade and currency controls have prompted the slowdown.

“Stagflation arrived with a vengeance. Argentina now has the weakest economy and the highest inflation in the hemisphere,” wrote Alberto Ramos, a senior economist at Goldman Sachs, adding that private estimates put inflation at closer to 24 percent a year…

Argentina’s unorthodox economic approach centers on heavy state participation in the economy to foment high growth, job creation and domestic demand. The government does not publicly acknowledge the cost of this, which is double-digit inflation.

“We are taking active policies, using our own resources, to generate the virtuous cycle of spending, consumption, investment. You have more demand, more production and that feeds back into more spending, more production, more consumption.”

This is pure Keynesian economics.  Like in the Carter years.  But even Jimmy Carter didn’t have an inflation rate as high as 24%.  So the Argentine stagflation may outdo the Carter stagflation.  No doubt beating Carter on the misery index, too (the sum of the unemployment rate and the inflation rate).  Proving once again that Keynesian economics doesn’t work.

Still this is exactly what President Obama wants to do with the U.S. economy.  And it’s what the leading Keynesian economists are advising him to do.  Invest.  Spend.  To stimulate the economy the only way the federal government can.  By deficit spending.  Financed with more borrowing.  Taking the federal debt to new heights.  Or simply by printing money.  As in another round of quantitative easing.  Even though none of this has worked in the last three and half years under President Obama.  Or in the Seventies during the Carter years.  Or even in Argentina today.

So when will they learn?  When will they abandon Keynesian economics?  Never.  Because governments love to spend money.  And Keynesian economics is all about spending money.  Why, some even call this spending virtuous.  But there is a price in being virtuous.  Asset bubbles (as in Japan resulting in their Lost Decade or in America during their subprime mortgage crisis resulting in their Great Recession).  A sluggish economy.  And double digit-inflation.  Things that never end well.  Just ask the Japanese.  The Americans.  Or the Argentines.

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