Steam Locomotive, Diesel Electric Locomotive, Interstate Highway System, Airplane, Air Travel, Refined Petroleum Products and Pipelines

Posted by PITHOCRATES - March 21st, 2012

Technology 101

The Diesel Electric Locomotive could pull a Train Cross Country and into the Heart of a City with Minimal Pollution

The 1920s were transformative years.  The Roaring Twenties.  It’s when we moved from animal power to mechanical power.  From the horse and plow to the tractor.  From steam power to electric power.  From the telegraph to the telephone.  From the gas lamp to the electric light.  From crowded mass transit to the freedom of the automobile.  From manual labor to the assembly line. 

You can see a glimpse of that world in 1920’s Steam Train Journey Across the United States – Westward Ho!  The beginning of the modern city.  With modern street lighting.  Electric power and telephone overhead wiring.  Streets crowded with automobiles.  Tractors and mechanical harvesters on the farm.  And, of course, the steam locomotive.  Connecting distant cities.  Transferring the freight to feed the modern industrial economy.  And shipping the finished goods.  As well as all that food from the farm to our grocer’s shelves.  Proving the 1920s were vibrant economic times.  With real economic growth.  And not a speculative bubble.  For there was nothing speculative about all of this technology becoming a part of our way of life.

Of course the technology wasn’t perfect.  The coal-burning locomotives belched black smoke and ash wherever they went.  Which wasn’t all that bad in the open country where a train or two passed.  But it was pretty dangerous in tunnels.  Which had to be short lest they suffocated their passengers.  (One of the reasons why all subways use electric trains).  Making for some long and winding railroads in mountainous terrain.  To go around mountains instead of under them.  Slowing trains and increasing travel time.  And they were pretty unpleasant in the cities.  Where the several rail lines converged.  Bringing a lot of coal-burning locomotives together.  Creating a smoky haze in these cities.  And leaving a layer of ash everywhere.  The cleaner diesel-burning locomotives changed that.  The diesel electric locomotive could pull a train cross country and into the heart of a city with a minimal amount of pollution.  As long as they kept their engines from burning rich.  Which they would if they operated them with dirty air filters.  Reducing fuel efficiency by having the air-fuel mixture contain too much fuel.  And causing these engines to belch black smoke.  Similar to diesel trucks running with dirty air filters.

Airplanes can travel between Two Points in a Direct Line at Faster Speeds than a Train or Bus with Minimal Infrastructure

Trains shrunk our country.  Brought distant cities together.  Allowing people to visit anywhere in the continental United States.  And the railroads profited well from all of this travel.  Until two later developments.  One was the interstate highway system.  That transferred a lot of freight from the trains to trucks.  As well as people from trains to buses and cars.  And then air travel.  That transferred even more people from trains to airplanes.  This competition really weakening railroads’ profits.  And pretty much put an end to passenger rail.  For people used the interstate highway system for short trips.  And flew on the long ones.  Which was quicker.  And less expensive.  Primarily because airplanes flew over terrain that was costly to avoid.

Highways and railroads have to negotiate terrain.  They have to wind around obstacles.  Go up and down mountainous regions.  Cross rivers and valleys on bridges.  Travel under hilly terrain through tunnels.  And everywhere they go they have to travel on something built by man.  All the way from point A to point B.  Now trucks, buses and cars have an advantage here.  We subsidize highway travel with fuel taxes.  Trucking companies, bus lines and car owners didn’t have to build the road and infrastructure connecting point A to point B.  Like the railroads do.  The railroads had to supply that very extensive and very expensive infrastructure themselves.  Paid for by their freight rates and their passenger ticket sales.  And when there were less expensive alternatives it was difficult to sell your rates and fares at prices high enough to support that infrastructure.  Especially when that lower-priced alternative got you where you were going faster.  Like the airplane did.

Man had always wanted to fly.  Like a bird.  But no amount of flapping of man-made wings got anyone off the ground.  We’re too heavy and lacked the necessary breast muscles to flap anything fast enough.  Not to mention that if we could we didn’t have any means to stabilize ourselves in flight.  We don’t have a streamline body or tail feathers.  But then we learned we could create lift.  Not by flapping but my pushing a curved wing through the air.  As the air passes over this curved surface it creates lift.  Generate enough speed and you could lift quite a load with those wings.  Including people.  Cargo.  Engines.  And fuel.  Add in some control elements and we could stabilize this in flight.  A tail fin to prevent yawing (twisting left and right) from the direction of flight.  Like a weathercock turns to point in the direction of the wind.  And an elevator (small ‘wing’ at the tail of the plane) to control pitch (nose up and nose down).  Ailerons correct for rolling.  Or turn the plane by rolling.  By tipping the wings up or down to bank the airplane (to turn left the left aileron goes up and the right aileron goes down).  And using the elevator on the take-off roll to pitch the nose up to allow the plane to gain altitude.  And in flight it allows the plane to ascend or descend to different altitudes.  Put all of this together and it allows an airplane to travel between points A and B while avoiding all terrain.  In a direct line between these two points.  At a much faster speed than a train, bus or car can travel.  And the only infrastructure required for this are the airports at points A and B.  And the few en route air traffic controllers between points A and B. Which consisted of radar installations and dark rooms with people staring at monitors.  Communicating to the aircraft.  Helping them to negotiate the air highways without colliding into other aircraft.  And air travel took off, of course, in the 1920s.  The Roaring Twenties.  Those glorious transformative years.

Refined Petroleum Products have Large Concentrations of Energy and are the Only Fuel that allows Air Travel

The most expensive cost of flying is the fuel cost.  The costlier it is the costlier it is to fly.  Not so for the railroads.  Because their fuel costs aren’t the most expensive cost they have.  Maintaining their infrastructure is.  They can carry incredible loads cross country for a small price per unit weight.  Without swings in fuel prices eating into their profits.  Making them ideal to transfer very large and/or heavy loads over great distances.  Despite dealing with all the headaches of terrain.  For neither a plane nor a truck can carry the same volume a train can.  And heavier loads on a plane take far greater amounts of fuel.  This additional fuel itself adding a great amount of weight to the aircraft.  Thus limiting its flight distance.  Requiring refueling stops along the way.  Making it a very expensive way to transport heavy loads.  Which is why we ship coal on trains.  Not on planes.

Trains are profitable again.  But they’re not making their money moving people around.  Their money is in heavy freight.  Iron ore.  Coke.  And, of course, coal.  To feed the modern industrial economy.  Stuff too heavy for our paved roads.  And needed in such bulk that it would take caravans of trucks to carry what one train can carry.  But even trains can’t transport something in enough bulk to make it cost efficient.  Refined petroleum.  Gasoline.  Diesel.  And jet fuel.  For these we use pipelines.  From pipelines we load gas and diesel onto trucks and deliver it to your local gas station.  We run pipelines directly to the fuel racks in rail yards.   And run pipelines to our airports.  Where we pump jet fuel into onsite storage tanks in large fuel farms.  Which we then pump out in another set of pipelines to fueling hydrants located right at aircraft gates.

These refined petroleum products carry large concentrations of energy.  Are easy to transport in pipelines.  Are portable.  And are very convenient.  Planes and trains (as well as ships, busses and cars) can carry them.  Allowing them to travel great distances.  Something currently no renewable energy can do.  And doing without them would put an end to air travel.  Greatly increase the cost of rail transport (by electrifying ALL our tracks).  Or simply abandoning track we don’t electrify.  Making those far distant cities ever more distant.  And our traveling options far more limited than they were in the 1920s.  Turning the hands of time back about a hundred years.  Only we’ll have less.  And life will be less enjoyable.

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Music, Radio Transmitters, Radio Receivers, CD Players, Compression, MP3 Players, Internet, YouTube, Live Streaming and Music on Demand

Posted by PITHOCRATES - February 29th, 2012

Technology 101

The Roaring Twenties brought Electrical Power and Broadcast Radio into our Homes

We take music for granted today.  We can listen to pretty much anything we want to.  At any time.  In any place.  In the home.  In the car.  At the gym.  It’s nice.  You can listen to some of the most beautiful music at your convenience and leisure.  It wasn’t always like this, though.  During the time Edvard Grieg composed his masterpieces few could listen to them.  Unless you attended a live performance.  Which weren’t that readily available.  Unless you lived in a big city.  Where a symphony orchestra could include some of his music in a performance.  But you had to listen to what they played.  And what they played was the only music you were familiar with.  Unless you had a friend with a piano.  Who could read sheet music.  And was a concert-level pianist.  Again, something not that common.

But today you can click on a computer link and listen to almost any obscure piece of music there is.  From Grieg’s beautiful Bådnlåt (At the Cradle), lyric piece for piano, Op. 68/5.  To something really esoteric like Sparks’ As I Sit Down To Play The Organ At The Notre Dame Cathedral.  You can listen to them.  You can buy them.  Download them to a portable MP3 player.  And take them anywhere.  Just imagine trying to do this in 1899.  Going to the lake.  And wanting to listen to Grieg’s new lyric piece for piano.  Opus 68.  Number 5.  At the Cradle.  Unless you took a piano and a concert-level pianist with you that just wasn’t going to happen.  But this all changed.  Beginning around the dawn of the 20th century.

Nikola Tesla had recently won his war with Thomas Edison.  His AC power replaced Edison’s DC power as the standard.  And in the 1920s we were electrifying the country.  We began to generate and transmit AC power across the land.  To businesses.  And to homes.  Where we could plug in the new electrical appliances coming to market.  We were working on another new technology during this time.  Something that could plug in at home to the new electrical power.  The radio.  This technology had something to do with electromagnetic fields and waves.  Transmitted between antennas.  One on a transmitter.  And one on a receiver.  As long as the transmitter and the receiver were tuned to the same frequency.  The first use of this new technology was in the form of a wireless telegraph.  Which few people had in their homes.  These were more useful to communicate with others who were not connected by telegraph lines.  Like ships at sea.  Where we sent Morse code (those dots and dashes that spelled words).  Which worked well.  As long as all the ships didn’t tried to communicate at the same time on the same frequency.  But transmitting speech or music was a different manner.  Because everyone talks more or less in the same band of frequencies.  And notes played on one violin tend to play at the same frequency on another violin.  So if some radio transmitters broadcasted different concerts at the same time you wouldn’t hear a nice concert on your radio.  You’d hear a cacophony of noise.  To get an idea what that would sound like open up three or four browser windows on your computer.  And play a different song on YouTube in each.  What you hear will not be music.  But noise.

In the Eighties we traded our Phonograph Needles for Laser Beams in our CD Players

Of course, this didn’t stop the development of commercial broadcast radio.  For we tune radio transmitters and radio receivers to the same resonant frequency.  The transmitter transmitting at one frequency all of the time. While the radio receiver could tune in to different frequencies to listen to different radio broadcasts.  When you turned the radio tuning dial you changed what resonant frequency your receiver ‘listened’ to.  Which was basically a filter to block all frequencies but the tuned frequency from entering your radio.  We call that frequency the carrier signal.  Typically just a plain old sinusoidal wave form at a one frequency that we imprint the information of the speech or music on.  The transmitter takes the music waveform and modulates it on the carrier signal.  Then broadcasts the signal on the broadcast antenna.  The receiver then captures this signal on its antenna.  And demodulates it.  Pulling the musical imprint from the carrier signal.  And restoring it to its original condition.  Which the radio than amplifies and sends to a speaker.  I left some steps out of the process.  But you get the gist.  The key to successful broadcast radio was the ability to transform the source signal (speech or music) into another signal.  One that we could transmit and receive.  And transform back into the source signal.

The Roaring Twenties was a Neil Armstrong moment on earth.  It was one giant leap for mankind.  For it was in this decade that the modern world began.  Thanks to Nikola Tesla and his AC power.  Which allowed us the ability to plug in radios in our homes.  And power the great radio transmitters to get the signal to our houses.  Tesla, incidentally, created radio technology, too.  Well, Tesla, and Guglielmo Marconi.  (Patent disputes flared between these two greats about who was first.)  Great technological advancement.  Created during a time of limited government and low taxes.  That unleashed an explosive amount of creativity and invention.  The Eighties was another such decade.

The Eighties launched the digital age.  The world of bits and bytes.  1s and 0s.  Digital watches.  Clocks.  Calculators.  PCs.  And, of course, our music.  For the Eighties gave us the compact disc.  The CD.  Music that didn’t wear out like our vinyl records.  And didn’t pop or hiss with age.  Because a CD player didn’t have a phonograph needle.  That rode the groves on our vinyl records.  It had something far more futuristic.  A laser beam.  That reads information encoded into the CD.  Information encoded onto a reflective layer through a series of pits.  During playback the laser either reflects or doesn’t reflect.  This information is than processed into a series of 1s and 0s.  Then converted into the analog waveform of the source material.  And becomes music again.

The Eighties gave us the Digital Age which led to the Internet and Music on Demand

This process is similar to the process of broadcast radio.  Not in any technological way.  But by changing a source signal into something else.  And then converting it back again.  In the case of the CD we sample an analog signal (i.e., an audio recording).  By taking ‘snapshots’ of it at regular intervals.  Then convert these snapshots into a digital format.  And then transfer this digital information to the reflective layer on a CD.  Those 1s and 0s.  When we play it back the laser reads these 1s and 0s.  Then converts these digital snapshots back into the original audio signal.  Sort of like modulating and demodulating a signal.  Only instead of modulating we’re converting from analog to digital.  Then vice versa.

The quality of the digital format depends on how much information each snapshot contains.  And the interval we sample them at.  Larger chunks of information taken in short intervals contain a lot more information.  And improve the quality of the sound.  But it will also take up a lot of space on those CDs.  Limiting the number of songs we can encode on them.  Which lead to compression.  And MP3s.  Which worked on the premise that there’s a lot of music in music.  But we don’t necessarily hear all of that music.  Some sounds mask out other sounds.  Certain frequencies we barely hear.  So while the CDs tried to reproduce the music as faithfully as possible, we learned that we could discard some of the information in the music without reducing the quality of the music much.  This saved a lot of space on CDs and portable MP3 players.  Allowed faster downloads on the Internet.  And live streaming.

The Roaring Twenties changed our world.  Modernized it.  And gave us many things.  Including broadcast radio.  And music in our homes we never had before.  And the Eighties also changed our world.  Further modernizing it.  Giving us the digital age.  That led to the Internet.  And music on demand like we never had before.  Where we can listen to anything.  No matter how obscure.  It’s now all available at our fingertips.  To listen online.  Or to buy and download to a portable device.  From Grieg to Sparks.  And everything in between.

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LESSONS LEARNED #28: “Politicians love failure because no one ever asked government to fix something that was working.” -Old Pithy

Posted by PITHOCRATES - August 26th, 2010

THE TELEVISION SHOW Gomer Pyle, U.S.M.C. aired from 1964-1969.  It was a spinoff from the Andy Griffith Show.  Gomer, a naive country bumpkin who worked at Wally’s filling station, joined the Marines Corps.  And there was much mirth and merriment.  To the chagrin of Sergeant Carter, Pyle’s drill instructor (DI).  Think of Gunny Sergeant R. Lee Ermey’s Sergeant Hartman in the movie Full Metal Jacket only with no profanity or mature subject matter.  Sergeant Carter was a tough DI like Sergeant Hartman.  But more suitable for the family hour on prime time television.

Gunny sergeants are tough as nails.  And good leaders.  They take pride in this.  But sometimes a gunny starts to feel that he’s not himself anymore.  This was the subject of an episode.  And Gomer, seeing that Sergeant Carter was feeling down, wanted to help.  So he stuffed Sergeant Carter’s backpack with hay before a long march.  While the platoon was worn and tired, Sergeant Carter was not.  He was feeling good.  Like his old self.  Until he found out he was not carrying the same load his men were.  He asked Pyle, “why hay?”  He could understand rocks, but hay?  Because if he outlasted his men while carrying a heavier load, he would feel strong.  But knowing he had carried a lighter load only made him feel weak.

This is human nature.  People take pride in their achievements.  They don’t take pride in any achievement attained by an unfair advantage.  Self-esteem matters.  And you can’t feel good about yourself if you need help to do what others can do without help. 

AN OLD CHINESE proverb goes, “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.”  Let’s say I am a fisherman in a small village.  I catch fish to feed my family and sell/trade for other family needs.  There’s a man in my village who asks me for a fish each day so he can eat.  I’m a caring person.  So I give him a fish each day.  So a pattern develops.  Each day he shows up when I come in from my fishing.  He takes the fish and goes away.  It works out well for him.  He doesn’t have to work.  He can live off of my kind charity.  Then I move.  Without me being there to give him a fish each day, he no longer can eat.  And dies.  If I only had taught that man to fish. 

Kindness can lead to dependency.  And once dependent, you become lazy.  Why develop marketable skills to provide for yourself when someone else will provide for you?  The problem is, of course, what happens when that charity ends?  If you’re unable to provide for yourself and there is no longer someone providing for you, what do you do?  Steal?

Dependency and a lack of self-esteem are a dangerous combination.  And they feed off of each other.  This combination can lead to depression.  Behavioral problems.  Resentment.  Bitterness.  Envy.  Or a defeatist attitude.

These are often unintended consequences of government programs.  A failed program, then, has far reaching consequences beyond the initial economic costs of a program.

LIQUIDITY CRISES CAUSE a lot of economic damage.  If capital is not available for businesses to borrow, businesses can’t grow.  Or create jobs.  And we need jobs.  People have to work.  To support themselves.  And to pay taxes to fund the government.  So everyone is in favor of businesses growing to create jobs.  We all would like to see money being easy and cheap to borrow if it creates jobs.

But there is a downside to easy money.  Inflation.  Too much borrowing can create inflation.  By increasing the money supply (via fractional reserve banking).  More money means higher prices.  Because each additional dollar is worth a little less. This can lead to overvalued assets as prices are ‘bid’ up with less valuable dollars.  And higher prices can inflate business profits.  Looks good on paper.  But too much of this creates a bubble.  Because those high asset values and business profits are not real.  They’re inflated.  Like a bubble.  And just as fragile.  When bubbles burst, asset values and business profits drop.  To real values.  People are no longer ‘bidding’ up prices.  They stop buying until they think prices have sunk to their lowest.  We call this deflation.  A little bit of inflation or deflation is normal.  Too much can be painful economically.  Like in the Panic of 1907.

Without going into details, there was a speculative bubble that burst in 1907.  This led to a liquidity crisis as banks failed.  Defaults on loans left banks owing more money than they had (i.e., they became illiquid).  They tried to borrow money and recall loans to restore their liquidity.  Borrowers grew concerned that their bank may fail.  So they withdrew their money.  This compounded the banks problems.  This caused deflation.  Money was unavailable.  Causing bank runs.  And bank failures.  Business failures.  And unemployment grew. So government passed the Federal Reserve Act of 1913 to prevent a crisis like this from ever happening again.  The government gave the Federal Reserve System (the Fed) great powers to tweak the monetary system.  The smartest people at the time had figured out what had gone wrong in 1907.  And they created a system that made it impossible for it to happen again.

The worst liquidity crisis of all time happened from 1929-1933.  It’s part of what we call the Great Depression.  The 1920s had a booming economy.  Real income was rising.  Until the Fed took action.  Concerned that people were borrowing money for speculative purposes (in paper investments instead of labor, plant and material), they put on the brakes.  Made it harder and more expensive to borrow money.  Then a whole series of things happened along the way that turned a recession into a depression.  When people needed money, they made it harder to get it, causing a deflationary spiral.  The Great Depression was the result of bad decisions made by too few men with too much power.  It made a crisis far worse than the one in 1907.  And the Roosevelt administration made good use of this new crisis.  FDR exploded the size of government to respond to the unprecedented crisis they found themselves in.  The New Deal changed America from a nation of limited government to a country where Big Government reigns supreme.

ONE PROGRAM OF the New Deal was Social Security.  Unemployment in the 1930s ran at or above 14%.  This is for one whole decade.  Never before nor since has this happened.  Older workers generally earn more than younger ones.  Their experience commands a higher pay rate.  Which allows them to buy more things.  Resulting in more bills.  Therefore, the Great Depression hit older workers especially hard.  A decade of unemployment would have eaten through any life savings of even the most prudent savers.  And what does this get you?  A great crisis.

The government took a very atypical moment of history and changed the life of every American.  The government forced people to save for retirement.  In a very poor savings plan.  That paid poorly by comparison to private pensions or annuities.  And gave the government control over vast amounts of money.  It was a pervasive program.  They say FDR quipped, “Let them try to undo this.” 

With government taking care of you in retirement, more people stopped providing for themselves.  When they retired, they scrimped by on their ‘fixed’ incomes.  And because Social Security became law before widespread use of birth control and abortion, the actuaries of the day were very optimistic.  They used the birth rate then throughout their projections.  But with birth control and abortion came a huge baby bust.  The bottom fell out of the birth rate.  A baby bust generation followed a baby boom generation.  Actually, all succeeding generations were of the bust kind.  The trend is growing where fewer and fewer people pay for more and more people collecting benefits.  And these people were living longer.  To stay solvent, the system has to raise taxes on those working and reduce benefits on those who are not.  Or raise the retirement age.  All these factors have made it more difficult on our aged population.  Making them working longer than they planned.  Or by making that fixed income grow smaller.

FDR used a crisis to create Social Security.  Now our elderly people are dependent on that system.  It may suck when they compare it to private pensions or annuities, but it may be all they have.  If so, they’ll quake in their shoes anytime anyone mentions reforming Social Security.  Because of this it has become the 3rd rail of politics.  A politician does not touch it lest he or she wishes to die politically.  But it’s not all bad.  For the politician.  Because government forced the elderly to rely on them for their retirement, it has made the Social Security recipient dependent on government.  In particular, the party of government who favors Big Government.  The Democrats.  And with a declining birth rate and growing aged population, this has turned into a large and loyal voting bloc indeed.  Out of fear.

A PROGRAM THAT straddled the New Deal and LBJ’s Great Society was Aid to Families with Dependent Children (AFDC).  Its original New Deal purpose was to help widows take care of their children.  When program outlays peaked in the 1970s, the majority of recipients were unmarried women and divorced women.  Because this was a program based on need, the more need you had the more you got.  Hence more children meant more money.  It also reduced the importance of marriage as the government could replace the support typically provided by a husband/father.  Noted economist Dr. Thomas Sowell blames AFDC as greatly contributing to the breakdown of the black family (which has the highest incidence of single-parent households).

With the women’s liberation movement, women have come to depend less on men.  Some affluent women conceive and raise children without a husband.  Or they adopt.  And the affluent no doubt can provide all the material needs their children will ever need.  Without a husband.  Or a father for their children.  But is that enough?

The existence of ‘big brother’ programs would appear to prove otherwise.  Troubled children are often the products of broken families.  Mothers search for big brothers to mentor these fatherless sons.  To be role models.  To show an interest in these children’s lives.  To care.  When no such role models are available, some of these troubled children turn to other sources of acceptance and guidance.  Like gangs.

AFDC has compounded this problem by providing the environment that fosters fatherless children.  And another government program compounds that problem.  Public housing.

POOR HOUSING CONDITIONS hurt families.  They especially hurt broken families.  Without a working husband, these families are destined to live in the cheapest housing available.  These are often in the worst of neighborhoods.  This is an unfair advantage to the children raised in those families.  For it wasn’t their fault they were born into those conditions.  So, to solve that problem, government would build good public housing for these poorest of the poor to move into.  Problem solved.

Well, not exactly.  Public housing concentrates these broken families together.  Usually in large apartment buildings.  This, then, concentrates large numbers of troubled children together.  So, instead of having these children dispersed in a community, public housing gathers them together.  Where bad behavior reinforces bad behavior.  It becomes the rule, not the exception.  Making a mother’s job that much more difficult.  And because these children live together, they also go to school together.  And this extends the bad behavior problem to the school.  Is it any wonder that public housing (i.e., the projects) have the worst living conditions?  And some of the highest gang activity? 

Government didn’t plan it this way.  It’s just the unintended consequences of their actions.  And those consequences are devastating.  To the poor in general.  To the black family in particular.  AFDC and public housing enabled irresponsible/bad behavior.  That behavior destroyed families.  As well as a generation or two.  But it wasn’t all bad.  For the politicians.  It made a very large constituency dependent on government.

THERE ARE SO many more examples.  But the story is almost always the same.  Dependency and a lack of self-esteem will beat down a person’s will.  Like an addict, it will make the dependent accept poorer and poorer living standards in exchange for their fix of dependency.  Eventually, the dependency will reach the point where they will not know how to provide for themselves.  The dependency will become permanent.  As will the lack of self-esteem.  Conscious or not of their actions, Big Government benefits from the wretched state they give these constituencies.  With no choice but continued dependence, they vote for the party that promises to give the most.  Which is typically the Democrat Party.

But how can you fault these politicians?  They acted with the best of intentions.  And they can fix these new problems.  They’ll gather the brightest minds.  They’ll study these problems.  And they will produce the best programs to solve these problems.  All it will take is more government spending.  And how can you refuse?  When people are hungry.  Or homeless.  Or have children that they can’t care for.  How can anyone not want to help the children?  How can anyone not have compassion?

Well, compassion is one thing.  When the innocent suffer.  But when government manufactures that suffering, it’s a different story.  Planned or not the result is the same whenever government tries to fix things.  The cost is high.  The solution is typically worse than the original problem.  And the poorest of the poor are pawns.  To be used by Big Government in the name of compassion. 

Of course, if Big Government were successful in fixing these problems, they would fix themselves right out of existence.  So as long as they want to run Big Government programs, they’ll need a stock of wretched, suffering masses that need their help.  And, of course, lots of crises.

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LESSONS LEARNED #3 “Inflation is just another name for irresponsible government.” -Old Pithy

Posted by PITHOCRATES - March 4th, 2010

PEOPLE LIKE TO hate banks.  And bankers.  Because they get rich with other people’s money.  And they don’t do anything.  People give them money.  They then loan it and charge interest.  What a scam.

Banking is a little more complex than that.  And it’s not a scam.  Countries without good banking systems are often impoverished, Third World nations.  If you have a brilliant entrepreneurial idea, a lot of good that will do if you can’t get any money to bring it to market.  That’s what banks do.  They collect small deposits from a lot of depositors and make big loans to people like brilliant entrepreneurs.

Fractional reserve banking multiplies this lending ability.  Because only a fraction of a bank’s total depositors will ask for their deposits back at any one time, only a fraction of all deposits are kept at the bank.  Banks loan the rest.  Money comes in.  They keep a running total of how much you deposited.  They then loan out your money and charge interest to the borrower.  And pay you interest on what they borrowed from you so they could make those loans to others.  Banks, then, can loan out more money than they actually have in their vaults.  This ‘creates’ money.  The more they lend the more money they create.  This increases the money supply.  The less they lend the less money they create.  If they don’t lend any money they don’t add to the money supply.  When banks fail they contract the money supply.

Bankers are capital middlemen.  They funnel money from those who have it to those who need it.  And they do it efficiently.  We take car loans and mortgages for granted.  For we have such confidence in our banking system.  But banking is a delicate job.  The economy depends on it.  If they don’t lend enough money, businesses and entrepreneurs may not be able to borrow money when they need it.  If they lend too much, they may not be able to meet the demands of their depositors.  And if they do something wrong or act in any way that makes their depositors nervous, the depositors may run to the bank and withdraw their money.  We call this a ‘run on the bank’ when it happens.  It’s not pretty.  It’s usually associated with panic.  And when depositors withdraw more money than is in the bank, the bank fails.

DURING GOOD ECONOMIC times, businesses expand.  Often they have to borrow money to pay for the costs of meeting growing demand.  They borrow and expand.  They hire more people.  People make more money.  They deposit some of this additional money in the bank.  This creates more money to lend.  Businesses borrow more.  And so it goes.  This saving and lending increases the money supply.  We call it inflation.  A little inflation is good.  It means the economy is growing.  When it grows too fast and creates too much money, though, prices go up. 

Sustained inflation can also create a ‘bubble’ in the economy.  This is due to higher profits than normal because of artificially high prices due to inflation.  Higher selling prices are not the result of the normal laws of supply and demand.  Inflation increases prices.  Higher prices increase a company’s profit.  They grow.  Add more jobs.  Hire more people.  Who make more money.  Who buy more stuff and save more money.  Banks loan more, further increasing the money supply.  Everyone is making more money and buying more stuff.  They are ‘bidding up’ the prices (house prices or dot-com stock prices, for example) with an inflated currency.  This can lead to overvalued markets (i.e., a bubble).  Alan Greenspan called it ‘irrational exuberance’ when testifying to Congress in the 1990s.  Now, a bubble can be pretty, but it takes very little to pop and destroy it.

Hyperinflation is inflation at its worse.  Bankers don’t create it by lending too much.  People don’t create it by bidding up prices.  Governments create it by printing money.  Literally.  Sometimes following a devastating, catastrophic event like war (like Weimar Germany after World War II).  But sometimes it doesn’t need a devastating, catastrophic event.  Just unrestrained government spending.  Like in Argentina throughout much of the 20th century.

During bad economic times, businesses often have more goods and services than people are purchasing.  Their sales will fall.  They may cut their prices to try and boost their sales.  They’ll stop expanding.  Because they don’t need as much supply for the current demand, they will cut back on their output.  Lay people off.  Some may have financial problems.  Their current revenue may not cover their costs.  Some may default on their loans.  This makes bankers nervous.  They become more hesitant in lending money.  A business in trouble, then, may find they cannot borrow money.  This may force some into bankruptcy.  They may default on more loans.  As these defaults add up, it threatens a bank’s ability to repay their depositors.  They further reduce their lending.  And so it goes.  These loan defaults and lack of lending decreases the money supply.  We call it deflation.  We call deflationary periods recessions.  It means the economy isn’t growing.  The money supply decreases.  Prices go down.

We call this the business cycle.  People like the inflation part.  They have jobs.  They’re not too keen on the deflation part.  Many don’t have jobs.  But too much inflation is not good.  Prices go up making everything more expensive.  We then lose purchasing power.  So a recession can be a good thing.  It stops high inflation.  It corrects it.  That’s why we often call a small recession a correction.  Inflation and deflation are normal parts of the business cycle.  But some thought they could fix the business cycle.  Get rid of the deflation part.  So they created the Federal Reserve System (the Fed) in 1913.

The Fed is a central bank.  It loans money to Federal Reserve regional banks who in turn lend it to banks you and I go to.  They control the money supply.  They raise and lower the rate they charge banks to borrow from them.  During inflationary times, they raise their rate to decrease lending which decreases the money supply.  This is to keep good inflation from becoming bad inflation.  During deflationary times, they lower their rate to increase lending which increases the money supply.  This keeps a correction from turning into a recession.  Or so goes the theory.

The first big test of the Fed came during the 1920s.  And it failed. 

THE TWO WORLD wars were good for the American economy.  With Europe consumed by war, their agricultural and industrial output decline.  But they still needed stuff.  And with the wars fought overseas, we fulfilled that need.  For our workers and farmers weren’t in uniform. 

The Industrial Revolution mechanized the farm.  Our farmers grew more than they ever did before.  They did well.  After the war, though, the Europeans returned to the farm.  The American farmer was still growing more than ever (due to the mechanization of the farm).  There were just a whole lot less people to sell their crops to.  Crop prices fell. 

The 1920s was a time America changed.  The Wilson administration had raised taxes due to the ‘demands of war’.  This resulted in a recession following the war.  The Harding administration cut taxes based on the recommendation of Andrew Mellon, his Secretary of the Treasury.  The economy recovered.  There was a housing boom.  Electric utilities were bringing electrical power to these houses.  Which had electrical appliances (refrigerators, washing machines, vacuum cleaners, irons, toasters, etc.) and the new radio.  People began talking on the new telephone.  Millions were driving the new automobile.  People were traveling in the new airplane.  Hollywood launched the motion picture industry and Walt Disney created Mickey Mouse.  The economy had some of the most solid growth it had ever had.  People had good jobs and were buying things.  There was ‘good’ inflation. 

This ‘good’ inflation increased prices everywhere.  Including in agriculture.  The farmers’ costs went up, then, as their incomes fell.  This stressed the farming regions.  Farmers struggled.  Some failed.  Some banks failed with them.  The money supply in these areas decreased.

Near the end of the 1920s, business tried to expand to meet rising demand.  They had trouble borrowing money, though.  The economy was booming but the money supply wasn’t growing with it.  This is where the Fed failed.  They were supposed to expand the money supply to keep pace with economic growth.  But they didn’t.  In fact, the Fed contracted the money supply during this period.  They thought investors were borrowing money to invest in the stock market.  (They were wrong).  So they raised the cost of borrowing money.  To ‘stop’ the speculators.  So the Fed took the nation from a period of ‘good’ inflation into recession.  Then came the Smoot-Hawley Tariff.

Congress passed the Smoot-Hawley Tariff in 1930.  But they were discussing it in committee in 1929.  Businesses knew about it in 1929.  And like any good business, they were looking at how it would impact them.  The bill took high tariffs higher.  That meant expensive imported things would become more expensive.  The idea is to protect your domestic industry by raising the prices of less expensive imports.  Normally, business likes surgical tariffs that raise the cost of their competitor’s imports.  But this was more of an across the board price increase that would raise the cost of every import, which was certain to increase the cost of doing business.  This made business nervous.  Add uncertainty to a tight credit market and business no doubt forecasted higher costs and lower revenues (i.e., a recession).  And to weather a recession, you need a lot of cash on hand to help pay the bills until the economy recovered.  So these businesses increased their liquidity.  They cut costs, laid off people and sold their investments (i.e., stocks) to build a huge cash cushion to weather these bad times to come.  This may have been a significant factor in the selloff in October of 1929 resulting in the stock market crash. 

HERBERT HOOVER WANTED to help the farmers.  By raising crop prices (which only made food more expensive for the unemployed).  But the Smoot-Hawley Tariff met retaliatory tariffs overseas.  Overseas agricultural and industrial markets started to close.  Sales fell.  The recession had come.  Business cut back.  Unemployment soared.  Farmers couldn’t sell their bumper crops at a profit and defaulted on their loans.  When some non-farming banks failed, panic ensued.  People rushed to get their money out of the banks before their bank, too, failed.  This caused a run on the banks.  They started to fail.  This further contracted the money supply.  Recession turned into the Great Depression. 

The Fed started the recession by not meeting its core expectation.  Maintain the money supply to meet the needs of the economy.  Then a whole series of bad government action (initiated by the Hoover administration and continued by the Roosevelt administration) drove business into the ground.  The ONLY lesson they learned from this whole period is ‘inflation good, deflation bad’.  Which was the wrong lesson to learn. 

The proper lesson to learn was that when people interfere with market forces or try to replace the market decision-making mechanisms, they often decide wrong.  It was wrong for the Fed to contract the money supply (to stop speculators that weren’t there) when there was good economic growth.  And it was wrong to increase the cost of doing business (raising interest rates, increasing regulations, raising taxes, raising tariffs, restricting imports, etc.) during a recession.  The natural market forces wouldn’t have made those wrong decisions.  The government created the recession.  Then, when they tried to ‘fix’ the recession they created, they created the Great Depression.

World War I created an economic boom that we couldn’t sustain long after the war.  The farmers because their mechanization just grew too much stuff.  Our industrial sector because of bad government policy.  World War II fixed our broken economy.  We threw away most of that bad government policy and business roared to meet the demands of war-torn Europe.  But, once again, we could not sustain our post-war economy because of bad government policy.

THE ECONOMY ROARED in the 1950s.  World War II devastated the world’s economies.  We stood all but alone to fill the void.  This changed in the 1960s.  Unions became more powerful, demanding more of the pie.  This increased the cost of doing business.  This corresponded with the reemergence of those once war-torn economies.  Export markets not only shrunk, but domestic markets had new competition.  Government spending exploded.  Kennedy poured money into NASA to beat the Soviets to the moon.  The costs of the nuclear arms race grew.  Vietnam became more and more costly with no end in sight.  And LBJ created the biggest government entitlement programs since FDR created Social Security.  The size of government swelled, adding more workers to the government payroll.  They raised taxes.  But even high taxes could not prevent huge deficits.

JFK cut taxes and the economy grew.  It was able to sustain his spending.  LBJ increased taxes and the economy contracted.  There wasn’t a chance in hell the economy would support his spending.  Unwilling to cut spending and with taxes already high, the government started to print more money to pay its bills.  Much like Weimar Germany did in the 1920s (which ultimately resulted in hyperinflation).  Inflation heated up. 

Nixon would continue the process saying “we are all Keynesians now.”  Keynesian economics believed in Big Government managing the business cycle.  It puts all faith on the demand side of the equation.  Do everything to increase the disposable money people have so they can buy stuff, thus stimulating the economy.  But most of those things (wage and price controls, government subsidies, tariffs, import restrictions, regulation, etc.) typically had the opposite effect on the supply side of the equation.  The job producing side.  Those policies increased the cost of doing business.  So businesses didn’t grow.  Higher costs and lower sales pushed them into recession.  This increased unemployment.  Which, of course, reduces tax receipts.  Falling ever shorter from meeting its costs via taxes, it printed more money.  This further stoked the fires of inflation.

When Nixon took office, the dollar was the world’s reserve currency and convertible into gold.  But our monetary policy was making the dollar weak.  As they depreciated the dollar, the cost of gold in dollars soared.  Nations were buying ‘cheap’ dollars and converting them into gold at much higher market exchange rate.  Gold was flying out of the country.  To stop the gold flight, Nixon suspended the convertibility of the dollar. 

Inflation soared.  As did interest rates.  Ford did nothing to address the core problem.  During the next presidential campaign, Carter asked the nation if they were better off than they were 4 years ago.  They weren’t.  Carter won.  By that time we had double digit inflation and interest rates.  The Carter presidency was identified by malaise and stagflation (inflation AND recession at the same time).  We measured our economic woes by the misery index (the unemployment rate plus the inflation rate).  Big Government spending was smothering the nation.  And Jimmy Carter did not address that problem.  He, too, was a Keynesian. 

During the 1980 presidential election, Reagan asked the American people if they were better off now than they were 4 years ago.  The answer was, again, ‘no’.  Reagan won the election.  He was not a Keynesian.  He cut taxes like Harding and JFK did.  He learned the proper lesson from the Great Depression.  And he didn’t repeat any of their (Hoover and FDR) mistakes.  The recession did not turn into depression.  The economy recovered.  And soared once again.

MONETARY POLICY IS crucial to a healthy and growing economy.  Businesses need to borrow to grow and create jobs.  However, monetary policy is not the be-all and end-all of economic growth.  Anti-business government policies will NOT make a business expand and add jobs no matter how cheap money is to borrow.  Three bursts of economic activity in the 20th century followed tax-cuts/deregulation (the Harding, JFK and Reagan administrations).  Tax increases/new regulation killed economic growth (the Hoover/FDR and LBJ/Nixon/Ford/Carter administrations).  Good monetary policies complimented the former.  Some of the worst monetary policies accompanied the latter.  This is historical record.  Some would do well to learn it.

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