The Keynesian Abenomics is Raising Prices in Japan

Posted by PITHOCRATES - April 14th, 2014

Week in Review

Money is a temporary storage of value.  We created money to make trade easier.  We once bartered.  We looked for people to trade with.  But trying to find someone with something you wanted (say, a bottle of wine) that wanted what you had (say olive oil) could take a lot of time.  Time that could be better spent making wine or olive oil.  So the longer it took to search to find someone to trade with the more it cost in lost wine and olive oil production.  Which is why we call this looking for people to trade goods with ‘search costs’.

Money changed that.  Winemakers could sell their wine for money.  And take that money to the supermarket and buy olive oil.  And the olive oil maker could do likewise.  Greatly increasing the efficiency of the market.  There is a very important point here.  Money facilitated trade between people who created value.  Creating something of value is key.  Because if people were just given money without producing anything of value they couldn’t trade that money for anything.  For if people didn’t create things of value to buy what good was that money?

Today, thanks to Keynesian economics, governments everywhere believe they can create economic activity with money.  And use their monetary powers to try and manipulate things in the economy to favor them.  And one of their favorite things to do is to devalue their money.  Make it worth less.  So governments that borrow a lot of money can repay that money later with devalued money.  Money that is worth less.  So they are in effect paying back less than they borrowed.  And governments love doing that.  Of course, people who loan money are none too keen with this.  Because they are getting less back than they loaned out originally.  And there is another reason why governments love to devalue their money.  Especially if they have a large export economy.

Before anyone can buy from another country they have to exchange their money first.  And the more money they get in exchange the more they can buy from the exporting country.  This is the same reason why you can enjoy a five-star vacation in a tropical resort in some foreign country for about $25.  I’m exaggerating here but the point is that if you vacation in a country with a very devalued currency your money will buy a lot there.  But the problem with making your exports cheap by devaluing your currency is that it has a down side.  For a country to buy imports they, too, first have to exchange their currency.  And when they exchange it for a much stronger currency it takes a lot more of it to buy those imports.  Which is why when you devalue your currency you raise prices.  Because it takes more of a devalued currency to buy things that a stronger currency can buy.  Something the good people in Japan are currently experiencing under Abenomics (see Japan Risks Public Souring on Abenomics as Prices Surge by Toru Fujioka and Masahiro Hidaka posted 4/14/2014 on Bloomberg).

Prime Minister Shinzo Abe’s bid to vault Japan out of 15 years of deflation risks losing public support by spurring too much inflation too quickly as companies add extra price increases to this month’s sales-tax bump.

Businesses from Suntory Beverage and Food Ltd. to beef bowl chain Yoshinoya Holdings Co. have raised costs more than the 3 percentage point levy increase. This month’s inflation rate could be 3.5 percent, the fastest since 1982, according to Yoshiki Shinke, the most accurate forecaster of Japan’s economy for two years running in data compiled by Bloomberg…

“Households are already seeing their real incomes eroding and it will get worse with faster inflation,” said Taro Saito, director of economic research at NLI Research Institute, who says he’s seen prices of Chinese food and coffee rising more than the sales levy. “Consumer spending will weaken and a rebound in the economy will lack strength, putting Abe in a difficult position…”

Abe’s attack on deflation — spearheaded by unprecedented easing by the central bank — has helped weaken the yen by 23 percent against the dollar over the past year and a half, boosting the cost of imported goods and energy for Japanese companies.

Japan is an island nation with few raw materials.  They have to import a lot.  Including much of their energy.  Especially since shutting down their nuclear reactors.  Japan has a lot of manufacturing.  But that manufacturing needs raw materials.  And energy.  Which are more costly with a devalued yen.  Increasing their costs.  Which they, of course, have to pay for when they sell their products.  So their higher costs increase the prices their customers pay.  Leaving the people of Japan with less money to buy their other household goods that are also rising in price.  Which is why economies with high rates of inflation go into recession.  As the recession will correct those high prices.  With, of course, deflation.

Keynesians all think they can manipulate the market place to their favor by playing with monetary policy.  But they are losing sight of a fundamental concept in a free market economy.  Money doesn’t have value.  It only holds value temporarily.  It’s the things the factories produce that have value.  And whenever you make it more difficult (i.e., raise their costs by devaluing the currency) for them to create value they will create less value.  And the economy as a whole will suffer.

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FT217: “If you want to know what it was like living under an absolute monarchy just think of the IRS.” —Old Pithy

Posted by PITHOCRATES - April 11th, 2014

Fundamental Truth

Thomas Jefferson wanted to keep the New Federal Government and Money Apart

Thomas Jefferson did not trust government.  And he didn’t trust moneyed men.  Because when the two come together they cause nothing but trouble.  That’s why he hated and distrusted Alexander Hamilton.  Hamilton wanted a strong central government.  A central bank.  And an economic system favoring merchants and bankers.  With big city moneyed men financing the government in return for special favors.

This is why the nation’s capital isn’t in New York City.  It once was.  But one of the first deals the Hamilton and Jefferson camps made was the relocation of the nation’s capital to a mosquito-infested swamp on the Potomac River.  A long, long way from the moneyed men in New York City.  To try to keep the new federal government and money apart.  To restrict the influence of the moneyed men on the government.  And to prevent the government from having easy access to big money.

Why did Jefferson want to do this?  Well, they fought for their independence from Great Britain.  Which was a constitutional monarchy.  Where some in Parliament were no friends of British America.  And got the king to agree with them rather than the pro-British America faction in Parliament.  Ironically, the Americans got help in their War of Independence from France.  Which had an absolute monarchy.  Whose king ruled with no check on his power.  Both governments were in the big cities.  London.  And Paris.  Where the moneyed men were.  In the big cities.  Allowing these monarchies to do a whole lot of mischief all around the world.  And a fair amount of mischief inside their own countries.  Because the money and the government were in the same city.

Government + Money = Corruption

Great Britain and France were forever at war with each other.  And with other countries.  Requiring a lot of money.  Which they got from the moneyed men.  In return for special privileges that allowed them to get ever richer.  Of course the mischief grew greater as they fought a world war or two.  Requiring ever more money.  Which they got from, of course, taxing the rest of the people.  Even those who could little afford it.  And once this starts, once the government starts accumulating debt, that taxation will only get greater.

This is what Jefferson was worried about.  And why he so distrusted Hamilton.  The Founding Fathers were all gentlemen of the Enlightenment.  Disinterested public servants.  Honorable men who would never take advantage of their position in government for personal gain.  Because for these men honor was everything.  Some even fought duels to protect their honor.  As Hamilton did.  And died.  Washington, Adams, Hamilton, Jefferson, Madison, Jay and Franklin were men of exceptional integrity.  Men who could be trusted.  But here is where Hamilton and Jefferson differed.  Hamilton believed only men like them would ever enter government.  While Jefferson believed that government service would one day attract mostly scoundrels and knaves.

Of course, Jefferson was right.  For as the nation grew so did the size of government.  And the need for great big piles of money.  Which the moneyed men provided.  In exchange for special privileges.  Patronage.  Lucrative government contracts.  Etc.  Big piles of money flowed into Washington.  And favors flowed out from Washington.  With many a politician getting rich in the process of getting rich moneyed men richer.  Politicians who used their position in government for personal gain.  Corrupted politicians.  As government + money = corruption.  Which is why politicians always leave office richer than when they entered office.

Power + Corruption = Tyranny

This is how it started.  As the size of government grew corruption grew.  Just as Jefferson feared.  All that money flowing into Washington corrupted ever more politicians.  Who were not gentlemen of the Enlightenment.  But the scoundrels and knaves Jefferson knew would come.  Who used their position in government for personal gain.  Whose corruption grew so great it exploded federal spending.  So great that taxes from the moneyed men AND the middle class were unable to fund it.  So the taxation grew more aggressive.

The government created by the Founding Fathers had no income taxes.  They funded the few things the new national government did with tariffs for the most part.  People lived from day to day without any fear of the taxman.  The United States even did away with debtors’ prison.  Prison where people were sent who could not pay their debts.  A relic of the 19th century.  Sort of.  For there is one debt people can still go to prison for not paying.  Past-due taxes.  For the IRS can take everything you have and imprison you if you don’t pay your taxes.  And those taxes have grown great as of late.  As the tax code has grown convoluted.  Requiring businesses to hire armies of accountants and lawyers to comply with.  So the government can help the moneyed men who help the government.  In return for special privileges, of course.  Leaving the masses dreading April 15.  As they dread opening any letter from the IRS.

If you want to know what it was like living under an absolute monarchy just think of the IRS.  People fear the IRS.  Just as people feared the arbitrary power of an absolute monarchy.  A king could take your property and lock you away.  Just like the IRS.  And if you spoke out against the monarchy the king could make your life really unpleasant.  Just like the IRS.  During the 2012 election the IRS targeted conservative political groups to stifle their free speech.  Delayed their tax-exempt status approval.  And harassed them with costly tax audits.  And now their tyranny has extended to people in the middle class.  Who unbeknownst to them had a family member owe the federal government.  Years earlier.  Even a generation earlier.  And the IRS is arbitrarily seizing the tax refunds from these debtors’ distant relatives to pay these debts.  Even though they are in no way responsible for these debts.  And the government has no documentation for this debt.  Doesn’t matter.  Because they have the power to do this.  And these people are powerless to stop them.  Just like people living under an absolute monarchy were powerless to stop their king from doing anything to them.  And this is what Jefferson feared.  For after corruption comes tyranny.  For power + corruption = tyranny.  (Just look at every tin-pot dictator that has oppressed his people).  Which is why people fear the IRS.  And the federal government the IRS is beholden to.  Because they have become everything Jefferson feared they would.

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From Commodity Money to Representative Money to Fiat Money

Posted by PITHOCRATES - April 8th, 2014

History 101

(Originally published November 8th, 2011)

The Drawbacks to Using Pigs as Money Include they’re not Portable, Divisible, Durable or Uniform

They say we use every part of the pig but the oink.  So pigs are pretty valuable animals.  And we have used them as money.  Because they’re valuable.  People were willing to accept a pig in trade for something of value of theirs.  Because they knew they could always trade that pig to someone else later.  Because we use every part of the pig but the oink.  Which makes them pretty valuable.

Of course, there are drawbacks to using pigs as money.  For one they’re not that portable.  They’re not that easy to take to the market.  And they’re big.  Hold a lot of value.  So what do you do when something is worth more than one pig but not quite worth two?  Well, pigs aren’t readily divisible.  Unless you slaughter them.  But then you’d have to hurry up and trade the parts before they spoil because they’re not going to stay fresh long.  For pig parts aren’t very durable.

Suppose you have two pigs.  And someone has something you want and they will trade two pigs for it.  But there’s only one problem.  One pig is big and healthy.  The other is old and sickly.  And half the weight of the healthy one.  This trader was willing to take two pigs in trade.  But clearly the two pigs you have are unequal in value.  They’re not uniform.  And not quite what this trader had in mind when he said he’d take two pigs in trade.

Our Paper Currency Evolved from the Certificates we Carried for our Gold and Silver we Kept Locked Up

Rats are more uniform.  They’re more portable.  And they’re smaller.  It would be easier to price things in units of rats rather than pigs.  They would solve all the problems of using pigs as money.  Except one.  Rats are germ-infested parasites that no one wants.  And they breed like rabbits.  You never have only one rat.  Man has spent most of history trying to get rid of these vile disease carriers.  So no one would trade anything of value for rats.  Because these little plague generators were overrunning cities everywhere.  So rats were many things.  But one thing they weren’t was scarce.

Eventually we settled on a commodity that addresses all the shortcomings of pigs and rats.  As well as other commodities.  Gold and silver.  These precious metals were portable.  Durable.  They didn’t spoil and held their value for a long time.  You could make coins in different denominations.  So they were easily divisible.  Unlike a pig.  They were uniform.  Unlike pigs.  Finally, you had to dig gold and silver out of the ground.  After digging a lot of holes trying to find gold and silver deposits.  Which made it costly to bring new gold and silver to market.  Keeping gold and silver scarce.  And valuable.  Unlike rats.

But gold and silver were heavy metals.  Carrying large amounts was exhausting.  And dangerous.  A chest of gold and silver was tempting to thieves.  As you couldn’t hide it easily.  Soon we left our gold and silver locked up somewhere.  And carried certificates instead that were exchangeable for that gold and silver.  And these became our paper currency.

Governments Everywhere left the Gold Standard in the 20th Century so they could Print Fiat Money

The use of certificates like this is typically what people mean by gold standard.  Money in circulation represents the value of the underlying gold or silver.  And can be exchanged for that gold or silver.  Which meant that governments couldn’t just print money.  Like they do today.  Because the value was in the gold and silver.  Not the paper that represented the gold and silver.  And the only way to create money was to dig it out of the ground, process it and bring it to market.  Which is a lot harder to do than printing paper money.  So governments everywhere left the gold standard in the 20th century in favor of fiat money.  So they could print money.  Create it out of nothing.  And spend it.  With no restraints of responsible governing whatsoever.

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Why the Stock Market is so Good when the Economy is so Bad

Posted by PITHOCRATES - March 31st, 2014

Economics 101

No One is going to get Rich by Buying and Selling only one Share of Stock

It takes money to make money.  I’m sure we all heard that before.  If you want to ‘flip’ a house you need money for a down payment to get a mortgage first.  If you want to start a business you need to save up some money first.  Or borrow it from a family member.  And if you want to get rich by playing the stock market you need money.  A lot of money.  Because you only make money by selling stocks.  And before you can sell them you have to buy them.

Stock prices may go up and down a lot.  But over a period of time the average stock price may only increase a little bit.  So if you bought one share of stock at, say, $35 and sold it later at, say, $37.50 that’s a gain of 7.14%.  Which is pretty impressive.  Just try to earn that with a savings account at a bank.  Of course, you only made a whopping $2.50.  So no one is going to get rich by buying and selling only one share of stock.

However, if you bought 10,000 shares of a stock at $35/share and then sold it later at $37.50 that’s a whole other story.  Your initial stock purchase will cost you $350,000.  And that stock will sell for $375,000 at $37.50/share.  Giving you a gain of $25,000.  Let’s say you make 6 buys and sells in a year like this with the same money.  You buy some stock, hold it a month or so and then sell it.  Then you use that money to buy some more stock, hold it for a month or so and then sell it.  Assuming you replicate the same 7.14% stock gain through all of these transactions the total gain will come to $150,000.  And if you used no more than your original investment of $350,000 during that year that $350,000 will have given you a return on investment of 42.9%.  This is why the rich get richer.  Because they have the money to make money.  Of course, if stock prices move the other way investors can have losses as big as these gains.

Rich Investors benefit most from the Fed’s Quantitative Easing that gives us Near-Zero Interest Rates

Rich investors can make an even higher return on investment by borrowing from a brokerage house.  He or she can open a margin account.  Deposit something of value in it (money, stocks, option, etc.) and use that value as collateral.  This isn’t exactly how it works but it will serve as an illustration.  In our example an investor could open a margin account with a value of $175,000.  So instead of spending $350,000 the investor can borrow $175,000 from the broker and add it to his or her $175,000.  Bringing the total stock investment to $350,000.  Earning that $25,000 by risking half of the previous amount.  Bringing the return on investment to 116.7%.  But these big returns come with even bigger risks.  For if your stock loses value it can make your losses as big as those gains.

Some investors borrow money entirely to make money.  Such as carry trades.  Where an investor will borrow a currency from a low-interest rate country to invest in the currency of a higher-interest rate country.  For example, they could borrow a foreign currency at a near zero interest rate (like the Japanese yen).  Convert that money into U.S. dollars.  And then use that money to buy an American treasury bond paying, say, 2%.  So they basically borrow money for free to invest.  Making a return on investment without using any of his or her money.  However, these carry trades can be very risky.  For if the yen gains value against the U.S. dollar the investor will have to pay back more yen than they borrowed.  Wiping out any gain they made.  Perhaps even turning that gain into a loss.  And a small swing in the exchange rate can create a huge loss.

So there is big money to make in the stock market.  Making money with money.  And investors can make even more money when they borrow money.  Making money with other people’s money.  Something rich investors like doing.  Something rich investors can do because they are rich.  For having money means you don’t have to use your money to make money.  Because having money gives you collateral.  The ability to use other people’s money.  At very attractive interest rates.  In fact, it’s these rich investors that benefit most from the Fed’s quantitative easing that is giving us near-zero interest rates.

People on Wall Street are having the Time of their Lives during the Obama Administration

We are in the worst economic recovery since that following the Great Depression.  Yet the stock market is doing very well.  Investors are making a lot of money.  At a time when businesses are not hiring.  The labor force participation rate has fallen to levels not seen since the Seventies.  People can’t find full-time jobs.  Some are working a part-time job because that’s all they can find.  Some are working 2 part-time jobs.  Or more.  Others have just given up trying to find a full-time job.  People the Bureau of Labor Statistics (BLS) no longer counts when calculating the unemployment rate.

This is the only reason why the unemployment rate has fallen.  If you add the number of people who have left the labor force since President Obama took office to the number the BLS reports as unemployed it would bring the unemployment rate up to 13.7% ((10,459,000 + 10,854,000)/155,724,000) at the end of February.  So the economy is still horrible.  No secret to those struggling in it.  And the median family who has seen their income fall.  So why is the stock market doing so well when businesses are not?  When profitable businesses operations typically drive the stock market?  For when businesses do well they grow and hire more people.  But businesses aren’t growing and hiring more people.  So if it’s not profitable businesses operations raising stock prices what is?  Just how are the rich getting richer when the economy as a whole is stuck in the worst economic recovery since that following the Great Depression?

Because of near zero interest rates.  The Fed has lowered interest rates to near zero to purportedly stimulate the economy.  Which it hasn’t.  When they could lower interest rates no more they started their quantitative easing.  Printing money to buy bonds on the open market.  Flooding the economy with cheap money.  But people aren’t borrowing it.  Because the employment picture is so poor that they just aren’t spending money.  Either because they don’t have a job.  Only have a part time job.  Or are terrified they may lose their job.  And if they do lose their job the last thing they want when unemployed is a lot of debt they can’t service.  And then there’s Obamacare.  Forcing people to buy costly insurance.  Leaving them less to spend on other things.  And increasing the cost of doing business.  Another reason not to hire people.

So the economy is going nowhere.  And because of the bad economy businesses have no intentions of spending or expanding.  So they don’t need any of that cheap money.  So where is it going?  Wall Street.  The only people who are borrowing and spending money.  They’re taking that super cheap money and they’re using it to buy and sell stocks.  They’re buying and selling like never before.  Making huge profits.  Thanks to other people’s money.  This is what is raising stock prices.  Not profitable businesses operations.  But investors bidding up stock prices with borrowed money.  The people on Wall Street are having the time of their lives during the Obama administration.  Because the Obama administration’s policies favor the rich on Wall Street.  Whose only worry these days is if the Fed stops printing money.  Which will raise interest rates.  And end the drunken orgy on Wall Street.  Which is why whenever it appears the Fed will taper (i.e., print less money each month) their quantitative easing because the economy is ‘showing signs of improvement’ investors panic and start selling.  In a rush to lock in their earnings before the stock prices they inflated come crashing down to reality.  For without that ‘free’ money from the Fed the orgy of buying will come to an end.  And no one wants to be the one holding on to those inflated stocks when the bubble bursts.  When there will be no more buyers.  At least, when there will be no more buyers willing to buy at those inflated stock prices.  Which is why investors today hate good economic news.  For there is nothing worse for an investor in the Obama economy than a good economy.

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FT214: “The far left has been and always will be an aristocratic-thinking, privilege-seeking people.” —Old Pithy

Posted by PITHOCRATES - March 21st, 2014

Fundamental Truth

Lawyers make a lot of Money without Contributing anything Tangible to Society

An attorney was sitting in his office late one night when Satan appeared before him.  Satan said, “I have a proposition for you.  You can win every case you try for the rest of your life.  Your clients will adore you, your colleagues will stand in awe of you and you will make embarrassing sums of money.  All I want in exchange is your soul, your wife’s soul, your children’s souls, the souls of your parents, grandparents, parents-in-law, the souls of all your friends and law partners.”  The lawyer thought about this for a moment then asked, “So, what’s the catch?”

That’s funny, isn’t it?  Lawyers.  Ambulance chasers.  The butt of so many jokes.  Why?  Well, some will say they deserve it.  Because they do chase ambulances.  And will pass out their business cards if they’re on a sinking ship.  Because sinking ships are good for lawsuits.  And lawyers love to sue.  For they can make a lot of money without contributing anything tangible to society.  All they do is get between two parties when large sums of money change hands.  And put a portion of that money into their pockets.  That’s how they earn their living.  Taking money away from others.  They’re parasites.  Just to get rich.  And the big tort lawyers (those who sue people and businesses) get really rich.  Allowing them to live very privileged lives.

Take a class action lawsuit.  Where they bring a lot of wronged people together to sue a large corporation.  The old David and Goliath thing.  A little person can never take on a big corporation.  But a whole class of them can.  When represented by a tort lawyer.  Who liken themselves as heroes of the little guy.  Taking the big corporation on to make them pay for all the horrible things they’ve done to their clients.  But who do they really help?  Let’s say they win a judgment from a big corporation of $250,000,000.  That’s a lot of money.  From that sum they take their cut.  Let’s say 50%.  Leaving $125 million for the people the corporation wronged.  That’s a lot of money.  So the people won, too, right?  Not really.  For there are a lot of people represented in these class actions.  Let’s say 5 million in our example.  So if you divide the $125 million by 5 million that comes to $25 per person.  So, again, who did the lawyers really help?  The lawyers.  Which is why there are so many lawyer jokes.

In the Private Sector if you want to spend Half of your Life Retired you have to Pay for It

Lawyers vote Democrat.  Because they like being privileged people.  They don’t want the laws changing that allow them to get so rich when money exchanges hands.  Which is why they donate heavily to the Democrat Party.  And don’t donate to the Republicans.  Who complain about the high costs of frivolous lawsuits to businesses in an overly litigious society.  It’s so bad that a footnote in the financial statements of a corporation about a lawsuit is not that big of a deal.  Why?  Because so many corporations are sued that investors are more surprised to see one that isn’t being sued.  This is why Republicans want tort reform.  And pass ‘loser-pays’ into law.  Like many other countries have.  Where the loser in court pays for the attorney fees for the side that wins.  Which would greatly cut down on frivolous lawsuits.  And cut the costs businesses incur from these frivolous lawsuits that they pass on to their customers.  So the lawyers donate to Democrats.  To prevent any tort reform that would change the easy way lawyers have of getting rich.

It’s the world’s oldest profession.  Screwing people for money.  But lawyers aren’t the only ones seeking privilege.  There are a lot of others, too.  Interestingly, they, too, support the Democrat Party.  Such as the United Autoworkers.  They donate heavily to the Democrat Party to keep labor laws favorable to unions.  To make it more difficult for their nonunion competition.  And to use the power of government to force people to pay may for a union-made car.  Allowing their union members to live better lives than those outside of the UAW.  And when even that doesn’t allow General Motors to pay its bills when selling a record number of cars the UAW goes to government for a bailout of their woefully underfunded pension fund.  So their union members can continue to have a more generous retirement at an earlier age than those outside of the UAW.

Teacher unions seek privilege, too.  You hear a lot about how the teachers don’t earn that much.  But then again, they don’t work that much.  Getting 3 months off in the summer.  So you can’t compare their wages to people who don’t get the 3 summer months off.  But for teachers it’s not so much about the paycheck.  It’s the benefits.  Very generous health insurance coverage.  And pensions.  Which have gone the way of the dodo in the private sector.  Because people are just living too long into retirement.  When they first set up these pensions people were dying in their sixties.  The actuaries never saw people living into their eighties as common.  So in the private sector if you want to spend half of your life retired you have to pay for it.  And you work as long as necessary to fund the retirement you want.  The union pensions just can’t work these days as they once did.  Which is why teacher unions like the United Autoworkers and lawyers support the Democrat Party.  They want to keep their privileged lives.

The Wealth Transfers of the Welfare State give Democrats Money and Privilege

Of course privilege is nothing new to the Democrat Party.  They have long stood for privilege.  Even now.  As the Democrats provide themselves all kinds of exceptions from the Affordable Care Act.  For more expensive and lower quality health insurance is good for the masses.  But not for the privileged elite.  Or their special friends who support them so generously with campaign donations.  Congress has had a history of exempting themselves from the laws they pass for us.  It took the Republican winning of the House in the 1994 midterm elections to change that.  The first Republican-controlled House since 1952 required Congress to be held to the same laws as the rest of us.  A bitter pill for Democrats to swallow.  For their feelings of privilege go way back.

The Democrat Party can trace its pedigree back to Thomas Jefferson’s Democratic-Republican Party.  The party of the slave-owning planter elite.  Who from day one fought for their privilege starting with the Three-Fifths Compromise.  To give them a greater say in the new national government than their voting population allowed.  The planter elite’s South turned into an Old World aristocracy.  With great manors for the landed aristocracy.  And vast lands worked by slaves.  Very similar to feudalism in the Old World.  And something they fought hard to keep.  Their privilege.  The Southern Democrats used the power of the national government (such as the Fugitive Slave Act) to interfere with state laws in the North.  To protect their feudalism by keeping slavery legal as long as they could while the north was industrializing and modernizing.  With paid laborers.  When they lost control of the House due to the growing population in the North they turned to war.  Saying that the national government was interfering with state laws in the South.  And getting poor southern farmers who owned no slaves to fight and die so the southern aristocracy could live on.

When the Southern Democrats lost the American Civil War they scrambled to maintain their privilege.  They unleashed a terror on the freed slaves and Republicans with the KKK.  The Democrats then wrote Jim Crowe Laws.  Separate but equal.  Government-enforced racial segregation.  During debate of the Civil Rights Act of 1964 Democrat and former Exalted Cyclops of the KKK Robert Byrd filibustered for 14 hours.  To keep the South segregated.  With power and privilege in a new aristocracy.  Centered not on land but political power and cronyism.  Even becoming the party for blacks as ironic as that is.  Trading government programs for votes.  And destroying the black family in the process.  Aid to Families with Dependent Children (AFDC) replaced black fathers with government.  And moved single mothers and their children into housing projects that became infested with drugs and crime.  But this large (and failed) welfare state transferred a lot of wealth to the Democrats.  Giving them money and privilege.   That they can use to maintain their power.  By taking care of those who take care of them.  Lawyers, the UAW, teacher unions and other privilege seekers.  For nothing has changed on the left.  They have been and always will be an aristocratic-thinking, privilege-seeking people who want to live better than the rest of us.  While we pay for their privileged lives.

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Hard Money versus Paper Money

Posted by PITHOCRATES - March 17th, 2014

Economics 101

(Originally published April 1st, 2013)

Money would have No Value if People with Talent didn’t Create things of Value

Money is a temporary storage of wealth.  We created it because of the high search costs of the barter system.  It took a lot of time for two people to find each other who each had what the other wanted.  And we started trading things to have things we couldn’t make efficiently for ourselves.  Someone may have been a superb potter but was a horrible farmer.  So, instead, the potter did what he did best.  And traded the pottery he made for the things he wanted that he was not good at making.  Or growing.  Before that we were self-sufficient.  Whatever you wanted you had to provide it yourself.

As we go back in time we learn why money is a temporary storage of wealth.  For it was the final piece in a growing and prosperous economy.  And at the beginning it was people with talent, each creating something of value.  Something of value that they could trade for something else of value.  It’s the creative talent of people that has value.  And we see that value in the goods and/or services they make or provide.  Money temporarily held that value.  So we could carry it with us easier to go to market to trade with other talented and creative people.  Who may not have wanted what we made or did.  But would gladly take our money.

So we took our goods to market.  People that wanted them traded for them.  They traded money for our goods.  Then we took that money and traded for what we wanted elsewhere in the market.  Trade grew.  With some people becoming professional traders.  By trading money for goods from distant lands.  Then trading these goods for money at the local market.  People who didn’t spend time creating anything.  But bought and sold the creative talent of others.  Who were able to do that because of money.  The creative talent came first.  Then the goods.  And then the money.  For money is a temporary storage of wealth.  Which has no value if no one is making anything of value.  Because if you can’t buy anything what good is having money?

There were no more Gold Certificates in Circulation than there was Gold in the Vault to Exchange them For

These early traders used a variety of things for money.  Pigs, tobacco, grain, oil, etc.  What we call commodity money.  Which was valuable by itself.  As people consumed these commodities.  Which is what gave them the ability to store value.  But because we could consume these they did not make the best money.  Also, they weren’t that portable.  And not easy to make change with.  Which is why we turned to specie.  Such as gold and silver.  Hard money.  It was durable.  Portable.  Divisible.  Fungible.  For example, all Spanish dollars were the same while all pigs weren’t.  One pig could weigh 30 pounds more than another.  So pigs weren’t fungible.  Or durable.  Portable.  And, though divisible, making change wasn’t easy.

So in time traders big and small turned to specie as the medium of exchange.  For all the reasons noted above.  If you worked hard to produce fine pottery you trusted in specie.  You would accept specie for your pottery goods.  Because you knew this hard money would hold its value.  And you could use it in the future to buy what you wanted.  No matter how long that may be.  Why?  Because the money supply remained relatively constant.  As it took a lot of work and great expense to mine and refine ore to make specie out of it.  So there was little inflation when using hard money.  Which meant if you saved for a rainy day that hard money would be there for you.

Gold and silver could be heavy to carry around.  Anyone struggling under the weight of their specie were targets for thieves.  Who wanted that money.  Without creating anything of value to bring to market.  So we found a way to improve a little on using gold and silver.  By locking our gold and silver in a vault.  And carrying around receipts for our gold and silver to use as money.  These gold certificates were promises to pay in gold.  People could continue to use them as money.  Or they could take these receipts back to the vault and exchange them for the gold inside.  These gold certificates were as good as gold.  And there were no more gold certificates in circulation than there was gold in the vault to exchange them for.

Governments Today use nothing but Paper Money because it gives them Privilege, Wealth and Power

Some saw advantages of expanding the money supply with paper currency.  Money that isn’t backed by gold or any other asset.  Money easy to print.  And easy to borrow.  Allowing rich people to borrow large sums of money to buy more assets.  And get richer.  Giving them more power.  And if you were the one printing and loaning that money it gave you great wealth and power.  So having a bank charter was a way to wealth and power.  You could make it easy for those who can help you to borrow money.  While making it difficult for those who oppose you to borrow money.  So there were those in business and in government that liked un-backed paper money.  Because a select few could borrow it cheaply and get rich and powerful.

While some liked these banks and that paper money there were others who bitterly opposed them.  Some who didn’t like to see so much power in so few hands.  And the hard money people.  Who wanted a money that held its value.  The common people.  People who couldn’t borrow large sums of cheap money.  But people who had to get by on less as the inflation from printing all those paper dollars raised prices.  Leaving them with less purchasing power.  Making it harder for them to get by.  Often having to turn to the hated banks to borrow money.  Again and again.  Such that the interest on their loans consumed even more of their limited funds.  Making life more tenuous.  And more bitter between the classes.  The rich who benefited from the cheap paper money.  And the common people who paid the price of all that inflation.

Rich people, on the other hand, loved that inflation.  It helped them make money.  When they bought something at a lower price and sold it at a higher price they made a lot of money.  The greater the inflation the greater the selling price.  And the more profit.  Also, the money they owed was easier to pay off with money that was worth less than when they borrowed it.  Allowing rich people to get even richer.  While the common people saw only higher prices.  And the value of their meager savings lose value.  So this cheap paper money fostered great class warfare.  The hard money people hated the paper money people.  Debtors hated creditors.  The middling classes hated the large landowners, merchants, manufacturers and, of course, the bankers.  And those who had talent to create things hated those who just made money with money.  The greater the inflation the greater the divide between the people.  And the greater wealth and power that select few acquired.  This is what paper money gave you.  Privilege.  Which is why most governments today use nothing but paper money.

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Christmas and Keynesian Stimulus

Posted by PITHOCRATES - December 23rd, 2013

Economics 101

(Originally published December 24th, 2012)

Christians may not like the Crass Commercialization of Christmas but the Left Loves It

The Left does not have a war on Christmas per se.  For they love the consumer spending part of Christmas.  Which is pure Keynesian.  People go into debt to spend more money at retailers.  They love that part of Christmas.  What they don’t like is the religious stuff.  Especially Jesus.

They don’t like Jesus because He is the God the Christians worship.  Their Lord and Savior.  It’s these Christians that bother the Left.  Because of their opposition to birth control (mostly Catholics), abortion and having fun in general.  The kind of fun adults enjoy.  The kind of things Christians frown on.  Premarital sex.  Gay love.  Drinking and using drugs.  Coarse language and sexual situations on television shows and in the movies.  Things they champion on the Left.  Which makes the Left hate Christianity.  Which they see as nothing but a great killjoy.

It’s the moralizing the Left does not like.  But the one thing Christians don’t like about Christmas, its crass commercialization, they do like.  So the Left will try to band images of Christ from Christmas displays wherever they can.  Despite Christmas being the celebration of Christ’s birth.  But they will gather in Rockefeller Center to party when they light the Christmas tree.  Though they would prefer that we call it the holiday tree.

Retailers often become Profitable for the Year only because of this Temporary Spending Surge at Christmas

So there are two Christmases.  The one where Christians celebrate the birth of Christ.  Wish for peace on earth.  And good will towards man.  And the other Christmas.  The one marked by the orgy of consumer spending.  Much of it funded by one-time Christmas bonuses.  A celebration of demand-side Keynesian economics.  Where people spend their hard earned money instead of saving it.  And when their money runs out they spend even more using their credit cards.

Keynesians have a bunch of charts and graphs showing how great a stimulus this Christmas spending is to the economy.  And mathematical formulas.  They can tell you about the velocity of money. How fast money travels through the economy when it goes from consumer to seller.  The seller then becomes consumer.  And spends the money they just received.  Then the person who receives this money in a sales transaction goes out and spends it as a consumer.  And on and on it goes.  Flying through though the economy at breakneck speed.  Generating a whole lot of economic activity.

Retailers often become profitable for the year only because of this spending surge at Christmas.  In fact, to handle this surge in business they hire a lot of people at Christmas time.  Part-time people.  Proving again that pumping money into the economy creates jobs.  The main tenet of Keynesian monetary policy.  Pump cash into the economy and people will spend it.  Something the Keynesians have been doing since Richard Nixon decoupled the dollar from gold in 1971.  Ending any semblance of responsible monetary policy.  And recessions forever.  At least, that was the plan.

Keynesian Stimulus is nothing more than an Orgy of Temporary Consumer Spending just like at Christmas Time

When the economy slows down and people stop buying stuff businesses have to lay off workers.  So they won’t build stuff that no one will buy.  Laid off workers no longer have money to buy things.  Which causes other business to lay off workers.  So THEY won’t build stuff that no one will buy.  It’s a vicious cycle.  In fact, we call it the business cycle.  The boom-bust cycle.  From expansion to contraction.  From an economy hiring people to an economy laying off people.

Keynesian economics was supposed to remove the contraction side of the business cycle.  By picking up the spending slack.  When consumers stopped spending money the government would step in and replace their spending.  We call it stimulus spending.  Often spending money the government doesn’t have.  So they run a deficit (i.e., borrow money).  Or simply print money.  Which they did a lot of in the Seventies.  Unfortunately, as it turns out, you just can’t do that.  For when you print money you devalue it.  Which raises prices.  As it takes more of these devalued dollars to buy what they once did.

And this is why Keynesian economics doesn’t work.  Because a Keynesian stimulus is nothing more than an orgy of consumer spending.  Just like at Christmas time.  Which happens only for a limited time.  Businesses hire temporary part-time workers at Christmas because this spending does not last.  As it does not last during a Keynesian stimulus.  It doesn’t create any full-time jobs.  Because employers know it is only temporary.  And they know that higher prices will soon follow.  As they do after Christmas when the discounting ends.  Which will reduce future economic activity.  As it does after Christmas.  Once the deals end so too ends the orgy of consumer spending.  Leaving people to deal with the aftermath.  Depleted bank accounts.  A lot of credit card debt.  And a little buyer’s remorse.

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High Taxes and Inflation reduce Disposable Income and our Music Purchases

Posted by PITHOCRATES - December 14th, 2013

Week in Review

If you’re old you remember going to a record store.  Putting a flat piece of vinyl on a spinning disc.  Lowering a needle on it.  And listening to that song through a pair of headphones.  If the music was awesome you bought that piece of vinyl.  If it wasn’t you listened to other songs until you found the one you wanted to buy.

Then came the audio cassette.  Where people would borrow their friend’s records and record them.  So you could enjoy the ones you paid for.  And the ones your friends paid for.  But the audio cassette did not put the music industry out of business.  For people still bought music.  In fact, some people may have bought even more as they could record the one song or two they liked onto a ‘mix’ tape.  Creating a ‘mix’ for each mood.  Hard rock.  Soft Rock.  And the more records you owned the more mix tapes you could create.

But since those days taxes and inflation have sucked away our disposable income.  And we’re not buying as much music as we once did (see Why It’s Hard to Charge for Music by Matthew Yglesias posted 12/13/2013 on Slate).

The problem here is one of supply and demand. It’s not that people won’t pay for Pandora because they don’t see any value in Pandora’s service. It’s that Pandora’s paid service has to compete with Pandora’s ad-supported service. Pandora could solve that problem by eliminating its ad-supported service, but it’s pretty clear that there’s a robust market for an ad-supported music-streaming service so then Pandora would need to compete with a new player. Personally, I really do enjoy an ad-free music streaming experience so I have a paid Rdio subscription which works on my computer, on my mobile phone, and on my home Sonos setup.

So good for me. But if I was a teenager with no money or ran into financial difficulty as an adult and needed to cut back, this would be an easy call to chop. Not because music isn’t valuable but because the margin of convenience offered by a paid service versus a free one just isn’t that big.

It’s the loss of disposable income that is hurting the music industry.  As well as paid subscription services.  In today’s world it is not uncommon for someone to pay for cable television AND a broadband Internet connection AND satellite radio in your car AND a mobile device contract with a monthly payment as large as a car payment.  People have never spent more money on entertainment.  And paying for live-streaming music on top of all this is just one paid subscription too many.  That’s why people aren’t paying for music if they can get it for free.  They love and value their music.  But they love and value so much other stuff as well that they don’t have any disposable income left to pay for music.  Thanks to higher taxes and inflation shrinking everyone’s take-home pay.

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The Price of Gold falls as Responsible Monetary Policy appears Imminent

Posted by PITHOCRATES - December 14th, 2013

Week in Review

You can print paper dollars.  And create dollars electronically.  Which is why governments love fiat money.  Money that has no intrinsic value.  Just the government saying ‘let it have value’ gives it value.  Which is why they love it.  Because they can print it to spend when they have no further room to raise taxes.

But printing money creates inflation.  And devalues the dollar.  Which is why some like to buy gold.  Because you can’t print gold.  Or create it electronically.  So it holds its value.  Especially when the dollar doesn’t.  And the price of gold has been on the rise all during the Federal Reserve’s quantitative easing (i.e., ‘printing’ money).  The more the Fed ‘prints’ money the more they devalue the dollar.  And inflate the price of gold.  But once it looks like the Fed is going to taper back on their ‘printing of dollars’ gold investors stop buying gold (see Gold suffers biggest one-day loss since October by Myra P. Saefong and Sara Sjolin posted 12/12/2013 on Market Watch).

Gold futures took a hit on Thursday as concerns that the Federal Reserve could scale back its stimulus next week pulled prices down by more than $30 an ounce for their biggest one-day loss since October.

Investors stopped buying gold not because gold has lost value.  But because they think the dollar will stop losing its value.  For if the Fed stops their quantitative easing the devaluation of the dollar will halt.  As will the rise in the price of gold priced in dollars.  So it will no longer take more dollars to buy the same amount of gold that it once bought.  Like it did under the Fed’s quantitative easing.  And those who bet on a further irresponsible monetary policy that devalued the dollar want to unload some of their higher-priced gold before responsible monetary policy takes effect.

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President Obama is Good for Wall Street but Bad for Main Street.

Posted by PITHOCRATES - December 8th, 2013

Week in Review

The unemployment rate fell from 7.3 to 7.0 in November (see Table A-1. Employment status of the civilian population by sex and age).  With the government reporting 203,000 jobs created.  The economy must be turning around.  Things are getting better.  Especially for rich people (see Not fully inflated posted 12/7/2013 on The Economist).

TALK of bubbles is in the air again. The Dow Jones Industrial Average has hit an all-time high. A loss-making technology firm (Twitter) has floated its shares on a flood of investor demand. Private-equity groups are buying companies using amounts of debt not seen since 2008. A record price (more than $50m) has just been set for a penthouse in Manhattan. A triptych by Francis Bacon became the most expensive piece of art sold at an auction when Christie’s flogged it for $142.4m last month. Robert Shiller of Yale University, who correctly identified bubbles in tech stocks in the late 1990s and in property in the 2000s, has expressed unease about giddy American share valuations.

All this suggests that wealthy investors have become increasingly confident.

The rich sure are getting richer under President Obama.  But that’s Wall Street.  Where if you have friends in Washington you do well.  And Wall Street has a lot of friends in the Obama administration.  But what about Main Street?  How are the rest of us doing?  Who don’t have friends in Washington looking out for us?  Well, when President Obama took office there were 80,507,000 that were NOT in the labor force.  Under the economic policies of President Obama this number rose to 91,273,000.  Meaning that President Obama has destroyed 10,766,000 jobs since he became president.  It will take another 53 months at this pace to replace the jobs President Obama’s policies destroyed.  Or 4.42 years.

This is how Main Street is doing.  Not good.   Unlike the rich.  Who are doing very well buying and selling assets by borrowing cheap money.  Courtesy of the Federal Reserve’s quantitative easing.  Basically printing money.  Making more of it available to borrow.  And because there is so much available to borrow interest rates are near zero.  Allowing the rich to borrow all the money they need to buy and sell assets with.  And as the Fed devalues the dollar it takes more of them to buy those assets.  Allowing the rich to reap huge profits when they sell.  Following the simple strategy of ‘buy low’ and ‘sell high’.  But that inflation also raises the prices of our groceries.  Which consume a larger portion of our paychecks.  Which makes us, those on Main Street, poorer.

President Obama.  Good for Wall Street.  Bad for Main Street.

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