Counterfeiting in the Revolutionary War, the American Civil War and World War II

Posted by PITHOCRATES - September 24th, 2013

History 101

Governments often turn to Printing Money to Pay for War

It takes money to wage war.  A lot of it.  War spending is always a country’s greatest expenditure.  Because fighting wars is costly.  And the longer they last the more costly they become.  Pushing countries that are waging war to the brink of financial collapse.  Opening the door for another means of waging war.  Counterfeiting.

How do you wage war with counterfeiting?  By pushing a country’s economy into a financial collapse.  If you can’t defeat your enemy with bullets and bombs you destroy their ability to make bullets and bombs.  And everything else.  Including food.  And you do this by devaluing a country’s currency by flooding the money supply with counterfeit bills.  Increasing the money supply causes inflation by having more dollars available to buy the same amount of goods.  Requiring more and more dollars to buy those same goods.  Thus raising prices.

As people struggle with rising prices they buy less.  Because they lose purchasing power.  Businesses see their sales revenue fall.  As people have less disposable income to buy their goods.  With falling sales they lay off workers.  All of this causes a dramatic fall in tax revenue.  Just when they need more to pay the costs of waging war.  As well as providing relief for those no longer able to afford food and housing because they lost their jobs.  Which is why governments print money during wars.  As it is the only choice they have to pay for the high costs of a nation at war.

By the End of the American Civil War about Half of all Money in Circulation was Counterfeit

One of the problems the British had during the American Revolutionary War was that it turned into a world war.  The British were also fighting the French and the Spanish.  Their entering the conflict stretched the British resources thin.  So they turned to counterfeiting.  The Americans were already suffering a terrible inflation as the Continental Congress had little choice but to turn to printing money to pay for the war.  They printed so many continental dollars that people began to refuse to accept it in payment.  Making the continental dollar more and more worthless.  Hence the expression ‘not worth a continental’.  The British tried to push the American economy into collapse by adding to that currency devaluation.  It was so destructive to the American cause that General Washington hanged counterfeiters.

During the early years of the American Civil War the North was running through her gold reserves.  So Congress passed the Legal Tender Act (2/24/1862).  Authorizing the printing of paper money to pay for war.  Just like they did during the Revolutionary War.  A new national currency was a counterfeiter’s dream.  Instead of different banks issuing different banknotes across the country there was now only one.  Counterfeits were easy to pass as few could tell a real one from a fake one.  And with the Confederate dollar worthless even the Confederates wanted these new dollars.  To buy things the Confederate dollar no longer could.  The new counterfeits were even easier to pass in the South as there was no official currency trading hands there.  Counterfeiting was so bad (by the end of the Civil War about half of all the money in circulation was counterfeit) that the Lincoln administration created the Secret Service to combat it.

The Nazis tried to bomb Britain into submission during World War II.  Or at least to weaken it enough for a cross-channel invasion.  The only problem with their plan was that the British had the Supermarine Spitfire.  One of the greatest fighter planes of the war.  And some of the finest pilots ever to fly.  Who had an able assist from the new radar.  Allowing these few to defeat the Luftwaffe in the Battle of Britain.  And made the cross-channel invasion impossible.  It’s these few Winston Churchill’s “Never in the field of human conflict was so much owed by so many to so few” refer to.

Counterfeiting is a very Effective Way to Wage War while being Cheaper and Less Risky than Conventional War

The Nazis took a beating in the Battle of Britain.  So Hitler turned his war machine eastward.  And invaded the Soviet Union instead.  But he did not give up on Britain.  For Britain was a great thorn in Hitler’s side.  They were in the Mediterranean and North Africa.  And they were producing oil in Iran.  They had the shipping lanes.  As well as the United States as an ally.  Who was feeding food and war material to Britain.  And using that island nation to base their bombers out of.  As well as building up an invasion force there that would one day open up a second front in the West.  Enter Operation Bernhard.

Operation Bernhard was a Nazi plan to flood the British economy with counterfeit money.  To destabilize the British economy.  And push it into collapse.  They set up operations in concentration camps.  And were printing about 1 million counterfeit banknotes a month.  The Nazis then laundered the money.  And used it to buy the war material they needed.  The counterfeits were so good that they were still turning up in Britain a decade after the war.  Forcing the British to withdraw all notes (larger than £5) from circulation and replacing them with a more counterfeit-proof money.

The Nazis turned to the American dollar in 1945.  They set up printing presses in February.  But they cancelled their plans.  The war ended later that year.  Allowing the Americans to escape the economic damage the British suffered at the hands of the Nazi counterfeiting program.  But the idea lives on.  We see ‘superdollars’ (counterfeits so good that their quality is higher than the original) all over the world.  The U.S. suspects the source of these counterfeits are criminal gangs in Iran, Russia, China or Syria.  While suspecting the government of North Korea producing a share of these superdollars.  We don’t know for certain who is creating this counterfeit money but there is a lot of it out there.  Some may be doing it for financial gain.  While others may be doing it to damage the United States economically.  Whatever the reason the result is the same.  Resulting in the scourge of paper money.  Higher inflation.  Currency devaluation.  Higher prices.  And less economic activity.  Possibly even sending the economy into a deep recession.  Everything an enemy of the United States wants to do to the United States.  Making counterfeiting a very effective way to wage war while being cheaper and less risky than conventional war.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , ,

Quantitative Easing, Inflation and Gold

Posted by PITHOCRATES - September 23rd, 2013

Economics 101

The FOMC makes Money out of Nothing to Buy the Bonds for their Quantitative Easing

The Federal Open Market Committee (FOMC) decided to keep their quantitative easing.  Their monthly $85 billion purchase of Treasury Securities and mortgage bonds.  To stimulate the economy.  Which hasn’t stimulated the economy.  But it has greatly expanded the money supply.

When people buy Treasury Securities and mortgage bonds they have to first work and save up the money.  Then when they buy these investments they no longer have that money.  It’s how we buy things.  We exchange money for things.  So we can have the money or the things.  But never both.

Unless you’re the federal government.  That has the power to print money.  When they make these monthly $85 million purchases of Treasury Securities and mortgage bonds they pay for them with an electronic transfer of money.  They add money to the account of the holders of the Treasury Securities and mortgage bonds.  And that’s it.  They subtract no money from their ledgers.  Because they ‘printed’ that money.  Just made it out of nothing.  Literally.

The Danger of a highly Inflated and Devalued Currency is that it loses its Purchasing Power and People lose Faith in It

The Secret Service protects our presidents.  Ironically, the president that created the Secret Service was assassinated.  Abraham Lincoln.  Who created it not to protect presidents.  But to combat a great threat to the country.  Counterfeiting.  The scourge of paper money.

During the American Revolutionary War the Continental Congress had no hard money (i.e., precious metals) to pay the Continental Army.  So they resorted to printing paper money.  Igniting massive inflation.  The more money they printed the greater the inflation.  And the greater they devalued the dollar.  Requiring more and more of them to buy what they once did.  Until no one would accept them in payment anymore.  Forcing the army to take what they needed from the people.  Leaving behind IOUs for the Congress to honor.  Once they figured out how to do that.

This is the danger of a highly inflated and devalued currency.  It loses its purchasing power.  Until it gets so weak that the people lose faith in it.  And refuse to accept it anymore.  Returning to the barter system instead.  Trading things that hold their value for other valuable things.  But the barter system has high search costs.  It takes a lot of time for people to find each other that can trade with each other.  Greatly reducing economic activity.  And crashing a nation’s economy.  Which is what Abraham Lincoln wanted to prevent.  And why a lot of America’s enemies have tried to flood the American economy with counterfeit bills.

The Hard-Money Prices remained Relatively Constant during the Inflationary Periods of the Revolutionary War

With the FOMC’s decision to continue their quantitative easing the stock market soared.  As investors were instead expecting a ‘tapering’.  A reduction in their purchases of Treasury Securities and mortgage bonds.  And if the government stopped creating this money out of nothing to buy bonds from these investors these investors could not continue to buy and sell in the market like they were doing.  Pocketing handsome profits in the process.  Which is why they were so happy to hear the FOMC would continue their currency devaluation to continue buying like they had been.

But this continued currency devaluation has a down side.  For it can’t go on forever.  There will come a point when it ignites inflation.  Causing prices to soar.  Requiring more and more dollars to buy what they once bought before.  So with this possibility on the horizon and with continued currency devaluation some people were taking steps to protect their assets.  Especially their cash.  For there is nothing worse than having a lot of cash when it’s losing its purchasing power at an alarming rate.  So they convert that cash into something that holds it value better.  Such as precious metals.  Which is why when the dollar tanked (after the FOMC decision) the price of gold surged.

So what’s the difference between gold and paper money?  Well, the government can’t print gold.  They can’t create gold out of nothing and add it to someone’s account.  So they can’t devalue gold.  And because of this gold will hold its value during inflationary periods.  Which was why during the Revolutionary War people sold things with two prices.  One was in paper Continental Dollars.  With these prices increasing sometimes daily.  And one in hard money (i.e., precious metals).  The hard money prices remained relatively constant.  Even during the inflationary periods of the Revolutionary War.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , ,

Tariffs

Posted by PITHOCRATES - September 9th, 2013

Economics 101

The Proponents of Tariffs say they will Protect Infant Industries and Domestic Jobs

Tariffs.  What are they?  And what are they for?  A tariff is a tax.  Or a duty.  The government applies tariffs to imported goods.  Making them more expensive.  So people have to spend more money for them.  Leaving them less money to spend on other things.  Which seems counterintuitive to trying to increase economic activity.  Increasing prices the consumers pay, leaving them less money to buy other stuff.  So why do they do it?

The argument for tariffs is typically to protect ‘infant’ industries.  To give them a chance to get off the ground and establish themselves.  So they can later compete with this more developed and less costly foreign competition.  Which they couldn’t do if those foreign competitors can sell goods just as good if not better at lower prices.

Another argument is that tariffs protect domestic jobs.  A lot of imported goods are less costly than the same domestically produced goods.  Because of less costly labor in these other countries.  Often developing economies.  Unlike the developed economies who pay their people more.  And give them more benefits.  All paid for with the higher prices the people pay for their goods.  Tariffs raise the prices of foreign goods so they are not less costly than the domestically produced goods.  To get people to buy domestic goods.  Thereby saving domestic jobs.

Americans have to Pay about $1.25 more for a Bag of Sugar than the Rest of the World

These arguments make tariffs sound noble and good.  For they’re helping the little guy.  And protecting middle class jobs from cheap labor in foreign countries.  But they also hurt the little guy.  And poor families.  Because tariffs raise the price of the things they have to buy.  For example, tariffs on sugar imports raise the price Americans pay for sugar higher than people can buy sugar outside of the United States.  So the sugar they buy, and anything that contains sugar as an ingredient that they buy, is higher than it would be if the sugar tariffs weren’t there.

The US population in 2012 was 313,914,040.  Let’s assume the adult population is approximately 250 million.  And that half of them buy sugar.  How many sugar producers are there in the United States?  Far, far fewer than 125 million.  The Washington Post noted in 2007 that there were only about 6,000 sugar farmers.  About 0.002% of the population.  While the sugar buyers are closer to 40% of the population.  Or more if you include the things we buy that have sugar in them.  The numbers are approximate but the point is clear.  The people helped by tariffs are an infinitesimally small number while the people hurt by tariffs are a much, much larger number.

Let’s crunch some numbers.  While people outside of the United States can buy a bag a sugar for $1 Americans have to pay $2.25.  Or $1.25 more.  To protect American jobs in the sugar industry.  The 6,000 sugar farmers.  Let’s triple this number for the corn farmers (for high fructose corn syrup) and the sugar companies.  Rounding it out to an even 20,000 jobs that sugar tariffs protect.  If half of all adults buy a bag of sugar that’s $156 million pulled out of the economy that goes to, for lack of a better term, Big Sugar.  Let’s say these adults buy two bags a year.  Bringing the transfer from the 125 million (sugar consumers) to the 20,000 (Big Sugar) to $312.5 million.  Let’s double that number to include everything we buy that includes sugar as an ingredient.  And then double that number to account for all the sugar and corn subsidies.  Bringing the total annual wealth transfer from consumers to Big Sugar to approximately $1.25 billion.

Tariffs transfer Wealth from the Many to the Few and Reduce Economic Activity

That’s an enormous amount of wealth transferred from less rich people to richer people.  From consumers to Big Sugar.  But is it accurate?  Well, according to an article published in the Washington Post, yes.  The article states:

The Government Accountability Office has estimated that the sugar program costs consumers and food processors between $1 billion and $2 billion annually in higher prices for sugar and a vast array of products that contain it. Meanwhile, the new sugar subsidy would cost taxpayers tens of millions of dollars a year, according to economists and U.S. officials.

So our crude calculation may be on the light side.  This is a lot of money taken out of the pockets of hundreds of millions of consumers to protect 20,000 or so well-paying jobs.  Nearly half of the US population supporting less than 0.02% of the population.  And those tariffs paid that 0.02% very well.  Because Big Sugar is very profitable.  And can pay their people very well.  As they have tariffs to increase their selling prices and subsidies to lower their costs.  Which greatly fattens the bottom line.

In the United States the price of sugar is so high that businesses have turned to high fructose corn syrup for their sweetener.  Which our tax dollars also subsidize.  Making it a very profitable industry.  And as an added bonus for Big Sugar, some studies have indicated that high fructose corn syrup doesn’t satiate your appetite like regular sugar.  Causing us to overeat.  Which lets the soda pop industry sell more soda pop.  The (sweetened) food industry sell more food.  And, of course, Big Sugar sell more sweetener.  Making them richer.  And the people poorer.  As well as obese.  All of this to protect a very few jobs in some very old industries.  Transferring wealth from the many to the few.  And reducing economic activity.  Pretty much the exact opposite of what the proponents of tariffs say tariffs will do.  But what they in fact do.  Help the few.  At the expense of the many.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , ,

Food Surplus, Artisan, Guilds, Industrial Revolution, Mechanized Looms and Luddites

Posted by PITHOCRATES - May 14th, 2013

History 101

As the Middle Class grew Artisans joined Guilds to Restrict Entry into their Trade

For most of our existence on this planet we were hunters and gatherers.  Like the animals in the wild.  Dependent on our environment for our food.  Which was often scarce.  Leaving our distant relatives with a chronic gnawing hunger in their bellies.  Sometimes the environment provided so little food that there wasn’t enough for everyone.  So a great many went hungry.  And a great many eventually died from that hunger.  Such was life for hunters and gatherers dependent on their environment for food.  Then we started thinking.  And figured out how to farm.

As farmers we took control of our environment.  Instead of eating only what the environment gave us we grew what we needed.  And grew even more to have a food surplus.  To get us through times when the environment did not provide a good growing season.  Having control over our food turned that chronic gnawing hunger into a rare and infrequent occurrence.  Which established us at the top of the food chain.  And made us master of the planet.  Where we shaped it to serve our needs.  Instead of living at its mercy.

With a stable food supply we were able to do something else.  Something other than grow food.  We could build things.  And an artisan class grew.  Potters.  Shoemakers.  Blacksmiths.  As time passed the artisan class grew.  Creating a middle class.  Markets where people met to trade their goods grew into cities.  The economy grew more complex.  The cities grew more crowded.  And the artisans became protective of their trades.  Joining guilds that restricted entry into their trade.  By maintaining a maximum number of artisans in each trade.  For though there was more food than ever the fear of hunger never went away.

In Medieval Europe Cloth Production was Second only to Food Production

Artisans joined guilds for one reason.  So they wouldn’t starve to death.  Basically.  By restricting entry into their trade they limited competition.  This allowed them to charge higher prices for their goods or services.  And that healthy income allowed them to buy all the food they desired.  Whereas if other artisans were allowed to set up shop in town they could offer their goods or services for less.  Forcing other artisans to lower their prices.  Which is good for the masses.  Allowing them to pay less for the artisans’ goods or services.  Helping them to push off hunger themselves.  But not good for the limited few who saw their wages fall with more artisans entering their trade.  Hence the guilds.

But artisans had more to fear than just people trying to take food off of their tables.  There was something else that was a far greater risk.  Technology.  Which led to increases in productivity.  That is, producing more with fewer people.  Replacing some highly-skilled artisans with lower-skilled and lower-paid people operating machines.  And without a job it was difficult to put food on the table.  With the specter of hunger haunting them some artisans did something about that new technology putting them out of a job.  They fought back against the machines.

Besides food there was another basic necessity the people needed.  Especially in England.  Where it got pretty cold during the winter.  To live in the northern climes you needed to wear clothes.  Or die of exposure.  In Medieval Europe food production was the number one occupation.  The number two occupation was cloth production.  To make the clothing people needed to wear to keep from dying of exposure.  Highly skilled weavers filled factories as they manually worked their looms.  Making the cloth that others would turn into clothing.

The most Infamous Neo-Luddite was the Unabomber Theodore Kaczynski

Their meager production rate kept clothing prices high.  Then came the Industrial Revolution.  First they mechanized spinning.  Creating more thread than a weaver could ever use.  Then they mechanized weaving.  Turning that thread into cloth at an incredible rate.  Turning cloth-making from a skilled trade into an automated process.  Producing more with fewer people.  Lowering the price of clothing.  And reducing the need for skilled artisans.  Making the people happy.  For they could buy more clothing.  And still be able to afford enough food to ward off that gnawing hunger.  Everyone was happy except, of course, those artisans put out of a job thanks to those new machines.

Britain was at War with Napoleon’s France in 1811.  During war the home economy typically suffers.  And machines replacing people didn’t help.  Highly skilled weavers either lost their jobs.  Or had to take steep pay cuts to compete with other unskilled laborers working the new mechanized looms.  Lower incomes made it difficult to buy food when prices were rising.  As they typically do during war.  Pushing some people to the breaking point.  And some people rebelled against the machines.  Smashing them.  And burning them.  These people were Luddites.  Their rebellion against technology was so great that at times more British Red Coats were in England putting down their rebellion than were fighting Napoleon’s Grande Armée.

But in the end the Luddites loss their struggle.  By 1817 the British had put down the rebellion.  And the Industrial Revolution carried on.  Making life better for the masses.  The modern economy flooding us with new must-have products at reasonable prices.  And creating scores of new jobs the Luddites never could have imagined.  Still, their anti-technology philosophy lives on.  Perhaps the most infamous neo-Luddite being Theodore Kaczynski.  The Unabomber.  Who fought against technology by planting or mailing bombs.  Killing three.  And hurting 23 others.  Who they finally found holed up in a primitive cabin in the Montana wilderness.  Where he rejected all technology.  Living without any of the creature comforts technology gives us.  Like electricity, fresh water or personal hygiene.  Being a Luddite to the extreme.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Labor Theory of Value and Prices

Posted by PITHOCRATES - May 13th, 2013

Economics 101

“Do you know how many men you and that machine are putting out of a job?”

Ditch digging is back-breaking work.  Often under a blistering sun.  Where laborers swing picks into the hard soil.  Breaking the compacted soil and rock into loose chunks.  Then another laborer thrusts his shovel into the loosened soil.  Scoops up a load and transfers it to a large bucket.  When full other laborers topside heave the bucket up from the trench.  And empties it onto a cart.  Then returns the bucket to the bottom of the trench.  Then laborers swing their picks.  And scoop up more soil.

A ditch digger may hate his job.  The immense physical requirements wearing him down.  Working in unbearable heat.  And the monotony.  Just dig, dig, dig.  Pausing to wipe the sweat rolling off his face with his shirt sleeve.  To grab a deep breath.  Or a swig of water.  Then back to the pick.  Or shovel.  Calloused hands gripping a splintered handle.  As his burning muscles drive it back into the earth.  All the while thinking that there must be a better way.

Then the day comes when a truck pulls onto site.  Pulling a trailer.  And on that trailer is the future.  A mechanical excavator.  With a 44″-wide bucket on it that can move more soil with one swipe than a laborer can dig in a day.  A machine that would revolutionize ditch digging.  As one machine and a crew of a few men could do the work of 100 ditch diggers in far less time.  As the machine operator prepares to drive the mechanical excavator off the trailer a grizzled ditch digger walks up to him and says, “Do you know how many men you and that machine are putting out of a job?”

Something is Worth what Someone is Willing to Pay for it Regardless of the Quantity of Labor

The labor theory of value would say this ditch is very valuable.  Before the future arrived on that trailer.  For this theory states that value is proportional to the quantity of labor it takes to make or do something.  The more labor hours required the more valuable it is.  It’s not the market that determines value via the laws of supply and demand.  As happens under capitalism.  No.  It’s labor that determines value.  A theory championed by labor movements.  And Karl Marx.  The father of communism.  The greatest anti-capitalist of them all.  Which reveals the true motive behind the labor theory of value.  To give more political power to labor.  While having nothing to do with economics.

To illustrate this let’s look at ditch digging.  The way it was.  And the way it is.  For this exercise let’s consider a ditch for a 60″ storm drain.  Which requires a deep, long trench.  Let’s say it takes a crew of 100 laborers to hand-dig the trench in 6 weeks.  While a crew of 10 laborers and a machine can do the job in 1 week.  Each laborer has $25 worth of tools.  And the mechanical excavator costs $25,000 to rent for one week.  Now let’s assume two construction companies put a bid together for this work.  One bases their estimate on the way it was.  Men digging by hand.  The other bases their estimate on the way it is.  Using a machine.  The value of this trench is the cost of their estimates.  That is, the value of the trench is the cost to dig it.  Which is the price someone must pay to have this ditch.  We summarize these two estimates in the following table.

Ditch Digging

The bottom line in the table is the value of the dug trench.  Which you will notice has two different values.  Even though both methods result in an identical thing.  A trench the same length, width and depth.  Yet if dug by hand the price is $1.8 million.  But if we dig it with a machine the price is $55,250.  How can this be?  How can two identical things have two different prices?  Well, they can’t.  What we have is two prices.  But only one price someone will pay.  The low price.  Because that’s all the trench is worth.  The price someone is willing to pay.  Regardless of the quantity of labor used to dig it.

The Labor Theory of Value is a Flawed Economic Theory used more to Attack Capitalism

So Karl Marx was wrong.  As are those in the labor movement.  While the capitalists were/are right.  Labor does NOT determine value.  The market does.  Something is only worth what someone is willing to pay for it.  Based on the laws of supply and demand.

For example, a lot of labor hours go into building a caboose.  The last car on a train before FRED (flashing rear-end device).  The steel wheels, the brakes, the enclosure, the wood burning stove for the brakeman to warm up by, etc.  Which gives it great value based on the labor theory of value.  And a high selling price.  But trains today don’t use cabooses.  For they have no brakemen running along the top of moving trains to turn the brake wheels to stop the train.  Thanks to George Westinghouse and his air brake.  So there is very little if any demand for cabooses by today’s railroads.  Making it all but worthless.  Despite the high price tag based on the quantity of labor used to build it.

Again, supply and demand determine prices.  Not the quantity of labor.  And you can see this anywhere you look.  Another good example is housing.  You can build identical houses in two different locations and they can sell for two different prices.  Despite being built with the exact same amount of labor.  That house on the beach in Malibu will have a far higher price than the same house in Detroit.  For when it comes to real estate three things determine the price of a house.  Location, location and location.  Regardless of the quantity of labor used to build it.  Whether 100 workers build it using nothing but hand tools.  Or a crew of 10 using the latest in power tools and equipment.  It will cost more to pay 100 men to build it using nothing but hand tools.  But it won’t sell for any more than the one built by the crew of 10 using the latest in power tools and equipment.  Because the labor theory of value is a flawed economic theory.  Used more to attack capitalism.  To transfer power from the capitalists to the labor movement.  And the unions that represent them.  As well as the government officials that protect the unions in exchange for campaign contributions.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , ,

How a 12-Year Old Canadian and U.S. Unions see Business Differently

Posted by PITHOCRATES - May 12th, 2013

Week in Review

Advancing technology has greatly increased productivity.  Allowing fewer workers to do what workers a generation earlier did.  Causing our workforce to age.  Fewer workers are entering the workforce than are leaving it.  And costly union contracts paying pensions and health care to those who have left the workforce has decimated union membership.  For the costs they place on business have made these businesses uncompetitive in the market place.  Chasing manufacturing jobs out of the country.  Leaving union membership in the private sector at its lowest rates since the heyday of the labor movement.  To understand why let’s take a business lesson from the Canadians.  Who are trying to encourage their kids to become entrepreneurs.  Unlike in America.  Where business and profits have become a 4-letter word (see Canadian entrepreneurs: Born or made? by BARRIE McKENNA posted 5/10/2013 on The Globe and Mail).

[Entrepreneurial Adventure] pairs students with local business people to create a business, design a product, sell it and then give the profits to charity.

Why?

Evidence suggests Canada suffers from a weak entrepreneurial culture. While it’s relatively easy to start a company, the record of turning start-ups into fast-growing and successful enterprises is less convincing.

A 2010 study by Industry Canada…

… found that Canada generates a lower proportion of fast-growing companies than other developed countries, that relatively few small companies export and that the age profile of business owners is getting older…

Many business schools, including McGill University and the University of Toronto, now offer special entrepreneurship programs.

This is a problem.  For the number one job creator in any free market economy are small business owners.  People who go into business for themselves.  Taking great risk.  And hiring people as they grow.  This is the entrepreneurial spirit.  People who start out small.  And become someone like Steve Jobs.  Most people don’t understand the entrepreneurial process.  And the importance of having a business-friendly environment to encourage entrepreneurialism.  To create jobs.  To grow a healthy economy.  Creating new products that make our lives better.  And to do that one of the first things an entrepreneur must learn is what this 12-year-old learned.

“Some things work and some don’t,” acknowledged Alim Dhanani, 12, who worked on project management and Web design for the company. “To sell something, you have to have the right price. Not too small, so you have a profit, but not too big, so people will buy it.”

A 12-year-old can understand this.  The role of prices in the economy.  They have to be high enough to pay the bills.  But low enough to encourage people to buy from you.  Often times it’s not a matter of a business owner determining the price he or she wishes to charge.  They have to figure out how to pay their bills (and earn a profit) at the prevailing market price.  Something labor unions don’t understand.  Or they simply don’t care (see Fast-food workers in Detroit walk off job, disrupt business by Steve Neavling and Lisa Baertlein posted 5/10/2013 on Reuters).

Hundreds of fast-food employees in Detroit walked off the job on Friday, temporarily shuttering a handful of outlets as part of a growing U.S. worker movement that is demanding higher wages for flipping burgers and operating fryers.

The protests in the Motor City – which is struggling to recover from the hollowing out of its auto manufacturing sector – marked an expansion in organized actions by fast-food workers from ubiquitous chains owned by McDonald’s Corp, Burger King Worldwide and KFC, Taco Bell and Pizza Hut parent Yum Brands Inc.

Fast-food workers, who already have taken to the streets in New York, Chicago and St. Louis, are seeking to roughly double their hourly pay to $15 per hour from around minimum wage, which in Michigan is $7.40 per hour…

“People can’t make a living at $7.40 a hour,” said Rev. Charles Williams II, a protest organizer. “Many of them have babies and children to raise, and they can’t get by with these kind of wages.”

Those workers face high hurdles in their fight for better pay. Low-wage, low-skill workers lack political clout and face significantly higher unemployment than college graduates…

The Detroit action was put together by the Michigan Workers Organizing Committee, an independent union of fast-food workers, that is supported by community, labor and faith-based groups such as the Interfaith Coalition of Pastors, UFCW Local 876, SEIU Healthcare Michigan and Good Jobs Now.

The unions want to do to fast-food what they did to the automotive industry.  In this case the union basically gave unskilled workers the wages and benefits of skilled workers.  Sounds great if you’re an unskilled worker.  But the UAW priced the U.S. auto manufacturers out of the market.  The Big Three are a shell of what they used to be.  With both General Motors and Chrysler requiring taxpayer bailouts to avoid bankruptcy.  And pay for their crushing pension and health care cost obligations.  For GM was paying for more people not working than they were paying to work.  Even a 12-year-old can understand that this is a business model that just won’t work.

So what will happen in fast-food restaurants if you raise the labor wage from $7.40 per hour to $15 per hour?  That’s a labor cost increase of 103%.  In the restaurant business the rule of thumb for calculating your selling prices is as follows.  You calculate your food cost then triple it.  For in general one third of a menu price goes to food.  One third goes to labor.  And one third goes to overhead (utilities, rent, insurance, etc.) and profit.  Now let’s take a typical combination meal (sandwich, fries and beverage) price of $7.50.  One third of this price is $2.48 which represents the labor portion of the price.  The increase in labor is 103%.  So we take 103% of the $2.48 ($2.54) and add it to $7.50 to get the new selling price of the combo meal.  Bringing it to $10.04.

What will customers do?  Now that the combo meal will cost $2.54 more will they just continue to eat fast-food like they once did?  Will they stop adding an extra item from the dollar menu?  Will they just buy a burger and eat it with a beverage from home?  Will they just buy from the dollar menu instead of buying combos?  Of course, with the increase in labor costs that dollar menu will have to become the $2.03 menu.  Will people stop going to fast-food as often as they once did?  Some may decide that if they’re paying for a $6 hamburger the may go to a diner or bar for a $6 hamburger.  Worried about the lost business would fast-food owners try to cut their costs elsewhere to try to continue to sell fast-food at the market price?  By hiring fewer people?  Pushing current workers to part-time so they don’t have to give them costly health insurance?  Or will they just close their restaurant.  As people just won’t pay fancy restaurant prices for fast-food.

That 12-year-old in Canada would understand how the higher labor costs would affect business.  Causing changes in buying habits.  And changes in business practices.  He would not start up a fast-food franchise if labor prices were 103% higher than they are now.  For he would have to raise prices high enough to pay the bills.  But when he did they might be too high to get people to come in and buy food.  Causing a fall in business.  And a loss in revenue.  Making it more difficult to pay the bills.  That 12-year-old would see this as bad business.  Because he understands that a business owner can’t charge whatever he wants to charge.  He has to figure out how to stay in business while selling at the prevailing market price.  And though he may love fast-food he knows that his allowance won’t be able to buy as much as it once did.  So he would reduce his purchases at fast-food restaurants.  Just as his father will probably take the family out less often because of the higher prices.  Just as single mothers struggling to pay their household bills will, too.  But the unions don’t understand this.  Or simply choose not to.  Instead they just tell the workers that their employers are greedy.

It’s a sad day when a 12-year-old has better business sense than our unions.  Then again if unions cared about business they wouldn’t have bankrupted two of the Big Three.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , ,

Thales of Miletus, Olive Oil, Tulip Mania of 1636 and the Chicago Board Options Exchange

Posted by PITHOCRATES - April 30th, 2013

History 101

Thales of Miletus was able to Predict a Bumper Crop of Olives

Italian restaurants will have a bottle of olive oil on the table.  The more authentic restaurants.  That give you a taste of old Italy.  Where they give you bread to munch on while you wait for your food.  We pour a little olive oil on a plate.  And dip our bread in it.  And enjoy that Mediterranean flavor.  Something that some of us may believe the Olive Garden brought to the dining experience.  But olive oil actually predates the Olive Garden.  We probably started eating olives for the first time around the 8th millennium BC.  When our Neolithic ancestors were still using stone tools.  Someplace in ancient Greece.

Olive trees grew all around the Mediterranean Sea.  And the Mediterranean people probably started using olive oil around the 4th millennium BC.   That’s 4000 BC.  Awhile ago.  We began to produce olive oil commercially somewhere around 2500 BC.  And began trading this luxury good.  We ate it.  Used it in religious rituals.  In medicines.  And fuel for oil lamps.  Among other uses.  As demand grew we planted more trees.  And brought in large harvests at the end of the growing season.  And took the olives to the olive presses.  And waited for our turn.  To pay the pressman to press our olives into oil.  And during a good growing season you could find yourself waiting quite awhile.

But who has time to wait?  If only we could figure out some way to avoid that long line.  Well, as it turned out, if you were smart you could.  As Thales of Miletus did.  A Greek astronomer, philosopher and mathematician.  As well as a pretty good weather forecaster.  For he was able to predict a bumper crop of olives one year because of favorable weather.  Which would make those olive presses busy at the harvest.  So he went to the olive press owners and reserved time on their presses for a nominal down payment.  So when the harvest came in he would be at the front of the line.  If he was wrong about his forecast he would give up his nominal deposit.  And walk away.  As the press owners didn’t care whose olives they were pressing they were glad to take his money for this right to buy press time later.  They had nothing to lose.  And when Thales prediction proved true and there was a bumper crop of olives those options to buy time on those presses became very valuable.  Those anxious to get their olives into the presses were glad to pay him for those options.  To buy his right to be first to buy press time.  Which he did.  Getting quite wealthy in the process.  As well as proving a point.  Rational thinking had real value.  They could use philosophy to make life better.

As Tulip Prices continued their Meteoric Rise the Speculators entered the Market to Get Rich Quick

And the option was born.  You can use them to speculate about the price of something in the future to make a lot of money.  And you can use them for hedging risk.  Such as farmers do.  They enter contracts with people to sell their crops at a set price.  Which protects the farmer if there is a bumper crop and prices fall.  Those who didn’t enter an options contract will only get the market price for their crops.  And have an unprofitable season.  While those with options contracts will be able to sell their crops above the market price.  And have a profitable season.  But if there are droughts that reduce the harvest prices will rise.  Which protects the buyer.  As he is able to buy below the market price.  At the price in the options contract.  While those buyers without options contracts will have to pay the higher market price.  Thus entering a contract hedges risk for both buyer and seller.  One party may do better than the other if there is a large swing in price.  But neither party will suffer a bad loss.  So whatever happens in that growing season they will be around for the following growing season.  But the speculators, on the other hand, can suffer great losses.

Tulips were big in the 17th century.  The affluent adorned their homes with these beautiful flowers.  And they soon became a sign of affluence.  Today people go to the affluent shops on Rodeo Drive and buy the latest in high fashion to show off their wealth.  In the 17th century they planted tulips.  People were impressed with what they saw.  And soon had to have these wonderful flowers themselves.  Causing a great surge in demand for tulips.  Which tulip growers rushed in to meet.  But the supply couldn’t keep up with the demand.  So tulip prices soared.  Soon, growers (sellers) and wholesalers (buyers) start entering options contracts to hedge their risks in the volatile tulip market.  As tulip prices continued their meteoric rise the speculators entered the market to get rich quick.  This speculation grew into such a frenzy that people would even mortgage their homes to raise money to buy tulip options.  Waiting for the big payday when they could exercise those options.  And buy tulips at one price.  Then resell them at a higher price.  A much higher price.  The demand for options grew so great that an options market opened.  And people bought and sold tulip options.

All good things must come to an end, though.  As must speculative bubbles.  And that happened in the Netherlands in 1637.  For there comes a time where buyers simply refuse to buy anymore tulips at those high prices.  And when they stopped buying people with vast amounts of tulips to sell began to panic.  And started lowering their price.  As other sellers started doing.  When interest in buying tulips fell supply began to exceed demand.  Sending the tulip price into a freefall.  With falling tulip prices no one was buying options contracts.  Because the market price was falling so fast that it would fall below the price in those options contracts.  And when they did ‘fall out of the money’ those options contracts became worthless.  And all that money the speculators poured into the options market was lost.  People lost everything.  Even their homes.  Sending the Dutch economy into a nasty recession.

With the Advent of the Internet it’s Never been Easier to Buy and Sell Options

Stock options were a way to get rich quick.  And what made them so attractive to speculators was leverage.  A small investment could turn into great riches.  But that leverage worked both ways.  And it could take that small investment and turn it into a great loss.  Should the price move in the wrong direction and fall when you have a contract obligating you to buy at a higher price.  And with the tulip mania of 1636 investors were getting a little gun-shy of options in general.  Causing the volume of options trading to fall in London.  Concerned of the speculative nature of options London made options trading illegal in 1733.  A ban that remained until 1860.

Russell Sage inaugurated options trading in the United States in 1872.  These were over the counter (OTC).  There was no central stock exchange.  Or standardized options format.  Which made the trading difficult to say the least.  Brokers placed ads in financial journals for their respective buyers and sellers.  And waited.  For someone to read the ad.  And call.  Then haggled over the price a bit.  Signed a contract.  And then waited until the expiration date of the option.  Or placed another ad in some financial journal.  To find someone else to buy the option.

Then things started changing in 1935.  The SEC granted a license to the Chicago Board of Trade (CBOT) as a national securities exchange.  And in 1968, CBOT finally did something with that license.  They created the Chicago Board Options Exchange (CBOE).  Which standardized and organized options trading.  One Nobel Prize later to Fischer Black and Myron Scholes for their “The Pricing of Options and Corporate Liabilities” we had a ‘scientific’ way for valuing stock options.  And with the advent of the Internet it’s never been easier to buy and sell options.  Allowing some to hedge risks easily.  While others live dangerously.  And speculate.  Trying to score big.  Before they lose everything trying to get rich quick.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , ,

Coin Debasement, Currency Inflation and the Loss of Purchasing Power

Posted by PITHOCRATES - April 16th, 2013

History 101

The Roman Citizens welcomed the Barbarian Invaders as Liberators from the Oppressive Roman Regime

The Roman Empire pushed its borders out for centuries.  And when they did their legions conquered new territories.  And other civilizations.  Allowing them to send a lot of spoils back to Rome.  Providing the necessary funds for the empire.  With this lucrative stream of wealth flowing back to Rome they could leave the economy alone.  And did.  Economic activity was pretty much laissez-faire.  Then something happened.  The Romans had conquered pretty much all of the known civilized world.  And they stopped pushing their borders out.  Putting an end to that lucrative stream of wealth flowing back to Rome.

This created a problem.  For the empire was never larger.  With a greater border to protect than ever before.  And more territory to administer.  Which meant more soldiers.  And more civil servants.  Neither of which worked for free.  Which changed how the Romans handled the private sector economy.  They began to tax and regulate the hell out of it.  To raise the funds to pay the costs of empire.

Things got so bad that some people just started disappearing.  So the Romans introduced something that would evolve into European feudalism.  They forbade people from leaving their jobs.  Ever.  They even forbade the children from leaving their father’s profession.  While they were doing this they were debasing their coins.  The gold a little.  As it paid the soldiers and the civil servants.  And the silver a lot.  The money of the common people.  Who weren’t as important as the soldiers and the civil servants.  Until their silver was nothing but worthless slugs.  Causing prices to soar.  And the economy to collapse back into the barter system.  Hastening the fall of the Roman Empire.  As the Roman citizens welcomed the barbarian invaders as liberators from the oppressive Roman regime.

The Spanish brought back so much Gold and Silver from the New World that it actually Depreciated the Money Supply

Europe met Asia on the Bosporus.  The straits that connected the Black Sea and the Mediterranean Sea.  And it was where the Silk Road brought the exotic goods of the Far East into Europe.  Which the Europeans just couldn’t get enough of.  Making the Mediterranean powers the dominant powers.  For they controlled this lucrative trade.  Until, that is, the European nations made better ships.  Ships that could cross oceans.  And were bigger than the ships that plied the Mediterranean.  So they could bypass the Mediterranean powers.  And sail directly to the Far East.  Fill their large holds with those goods the Europeans couldn’t get enough of.  Getting rich and powerful.  And shifting the balance of power to these European nations.

But the Europeans just didn’t go east.  They also went west.  And bumped into the New World.  The Dutch, the French, the British, the Portuguese and the Spanish all had colonies in the New World.  It was the age of mercantilism.  Colonies sent raw materials to their mother country.  Who manufactured these raw materials into finished goods.  And shipped them from the mother country on the mother country’s ships through the mother country’s ports.  For the name of the game was balance of trade.  Which meant you imported lower-valued raw materials and you exported higher-valued finished goods.  And because the value of their exports was greater than the value of their imports there was also a net in-flow of gold and silver.  Which was what mercantilism was all about.  Trying to accumulate more gold and silver than your trading partners.

And the Spanish hit mercantile pay-dirt in the New World.  Gold and silver.  Lots of it.  So they loaded it up on their ships.  And sent it back to Spain.  Where it entered the European money supply.  And none too soon as the Europeans were cash-starved.  Because of all those exotic goods the Europeans couldn’t get enough of.  While those in the Far East had no interest whatsoever in European goods.  Which meant that European gold and silver went to the Far East to pay for those exotic goods.  Leaving the Europeans starving for gold and silver.  But thanks to the New World, they were able to reverse that net outflow of gold and silver.  In fact, so much gold and silver arrived from the New World that it actually inflated the money supply.  Which actually devalued the currency.  And because the currency lost purchasing power prices rose.  Making food more costly.  And life more difficult.

President Andrew Jackson joined the Hard-Money People and refused to renew the Charter of the BUS

Responsible nations have chosen gold and silver as their currency as it is difficult to increase the money supply and cause inflation.  Because mining these precious metals, refining them and minting coins is very costly.  Unless you discovered a New World with gold and silver paving the streets.  But that didn’t happen every day.  The irresponsible government, though, figured out a way to make that happen every day.  By just getting rid of the responsible gold and silver.  And replacing it with paper notes.  Fiat money.

Fiat money dates back to 11th century China.  To the Song Dynasty.  Which allowed the government to spend more money than their taxes raised.  Especially during war time.  But printing money devalued the currency.  And when you make the currency worth less it takes more of it to buy the things it once did.  Reducing purchasing power.  And unleashing price inflation.  Making food more costly.  And life more difficult.  During the American Revolutionary War there was so little gold and silver available that the Continental Congress turned to printing money.  And they printed so much that they unleashed a punishing inflation.  Causing prices to soar because the money became so worthless.  People wouldn’t accept it for payment.  So the Continental Army had to take the provisions they needed.  Leaving behind IOUs for the Continental Congress to make good on.  Later.

Of course, not everyone suffered during times of inflation.  Speculators did very well.  For their friends in the government’s central bank could print money and loan it to them on very favorable terms.  The speculators then used this cheap money and bought and sold assets.  Pocketing handsome profits in large part because of that inflation.  As the currency depreciation raised prices.  Including the prices of the assets they were selling.  So the rich got richer during periods of inflation.  While the working class just lost purchasing power.  Which is why President Andrew Jackson joined the hard-money people.  Those who favored gold and silver over paper currency.  And refused to renew the charter of the Second Bank of the United States (BUS).  Being one of the first world leaders not to choose destructive inflationary policies.  Instead choosing policies that favored the people.  Not the state.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

The First Bank of the United States, the Second Bank of the United States and the Federal Reserve System

Posted by PITHOCRATES - April 2nd, 2013

History 101

Merchants raise their Prices when the Monetary Authority depreciates the Currency

What is inflation?  A depreciation of the currency.  By adding more money into the money supply each piece of currency becomes less valuable.  Let’s assume our currency is whiskey.  In bottles.  Whiskey has value because people are willing to pay for it.  And because we are willing to pay for it we are willing to accept it as legal tender.  Because we can always trade it to others.  Who can drink it.  Or they can trade it with others.

Now let’s say the monetary authority wants to stimulate economic activity.  Which they try to do by expanding the money supply.  So there is more money available to borrow.  And because there is more money available to borrow interest rates are lower.  Hence making it easy for people to borrow money.  But the monetary authority doesn’t want to make more whiskey.  Because that is costly to do.  Instead, they choose an easier way of expanding the money supply.  By watering down the bottles of whiskey.

Now pretend you are a merchant.  And people are coming in with the new watered-down whiskey.  What do you do?  You know the whiskey is watered down.  And that if you go and try to resell it you’re not going to get what you once did.  For people typically drink whiskey for that happy feeling of being drunk.  But with this water-downed whiskey it will take more drinks than it used to take to get drunk.  So what do you as a merchant do when the money is worth less?  You raise your prices.  For it will take more bottles of lesser-valued whiskey to equal the purchasing power of full-valued whiskey.   And if they water down that whiskey too much?  You just won’t accept it as legal tender.  Because it will be little different from water.  And you can get that for free from any well or creek.  Yes, water is necessary to sustain life.  But no one will pay ‘whiskey’ prices for it when they can drink it from a well or a creek for free.

It was while in the Continental Army that Alexander Hamilton began thinking about a Central Bank

During the American Revolutionary War we had a very weak central government.  The Continental Congress.  Which had no taxing authority.  Which posed a problem in fighting the Revolutionary War.  Because wars are expensive.  You need to buy arms and supplies for your army.  You have to feed your army.  And you have to pay your army.  The Continental Congress paid for the Revolution by asking states to contribute to the cause.  Those that did never gave as much as the Congress asked for.  They got a lot of money from France.  As we were fighting their long-time enemy.  And we borrowed some money from other European nations.  But it wasn’t enough.  So they turned to printing paper money.

This unleashed a brutal inflation.  Because everyone was printing money.  The central government.  And the states.  Prices soared.  Merchants didn’t want to accept it as legal tender.  Preferring specie instead.  Because you can’t print gold and silver.  So you can’t depreciate specie like you can paper money.  All of this just made life in the Continental Army worse.  For they were hungry, half-naked and unpaid.  And frustrating for men like Alexander Hamilton.  Who served on General Washington’s staff.  Hamilton, and many other officers in the Continental Army, saw how the weakness of the central government almost lost the war for them.

It was while in the army that Hamilton began thinking about a central bank.  But that’s all he did.  For there was not much support for a central government let alone a central bank.  That would change, though, after the Constitutional Convention of 1787 created the United States of America.  And America’s first president, George Washington, chose his old aide de camp as his treasury secretary.  Alexander Hamilton.  A capitalist who understood finance.

Despite the Carnage from the Subprime Mortgage Crisis the Fed is still Printing Money

At the time the new nation’s finances were in a mess.  Few could make any sense of them.  But Hamilton could.  He began by assuming the states’ war debts.  Added them to the national war debt.  Which he planned on paying off by issuing new debt.  That he planned on servicing with new excise taxes.  And he would use his bank to facilitate all of this.  The First Bank of the United States.  Which faced fierce opposition from Thomas Jefferson and James Madison.  Who opposed it for a couple of reasons.  For one they argued it wasn’t constitutional.  There was no central bank enumerated in the Constitution.  And the Tenth Amendment of the Constitution stated that any power not enumerated to the new federal government belonged to the states.  And that included banking.  A central bank would only further consolidate power in the new federal government.  By consolidating the money.  Transferring it from the local banks.  Which they feared would benefit the merchants, manufacturers and speculators in the north.  By making cheap money available for them to make money with money.  Which is the last thing people who believed America’s future was an agrarian one of yeoman farmers wanted to do.

They fought against the establishment of the bank.  But failed.  The bank got a 20 year charter.  Jefferson and Madison would later have a change of heart on a central bank.  For it helped Jefferson with the Louisiana Purchase.  And like it or not the country was changing.  It wasn’t going to be an agrarian one.  America’s future was an industrial one.  And that required credit.  Just as Alexander Hamilton thought.  So after the War of 1812, after the charter of the First Bank of the United States had expired, James Madison signed into law a 20-year charter for the Second Bank of the United States.  Which actually did some of the things Jefferson and Madison feared.  It concentrated a lot of money and power into a few hands. Allowing speculators easy access to cheap money.  Which they borrowed and invested.  Creating great asset bubbles.  And when they burst, great depressions.  Because of that paper money.  Which they printed so much of that it depreciated the dollar.  And caused asset prices to soar to artificial heights.

Andrew Jackson did not like the bank.  For he saw it creating a new noble class.  A select few were getting rich and powerful.  Something the Americans fought to get away from.  When the charter for the Second Bank of the United States was set to expire Congress renewed the charter.  Because of their friends at the bank.  And their friends who profited from the bank.  But when they sent it to Andrew Jackson for his signature he vetoed the bill.  And Congress could not override it.  Sensing some blowback from the bank Jackson directed that they transfer the government’s money out of the Second Bank of the United States.  And deposited it into some state banks.  The president of the bank, Nicholas Biddle, did not give up, though.  For he could hurt those state banks.  Such as calling in loans.  Which he did. Among other things.  To try and throw the country into a depression.  So he could blame it on the president’s anti-bank policies.  And get his charter renewed.  But it didn’t work.  And the Second Bank of the United States was no more.

National banks versus local banks.  Hard money (specie) versus paper money.  Nobility versus the common people.  They’ve argued the same arguments throughout the history of the United States.  But we never learn anything.  We never learn the ultimate price of too much easy money.  Even now.  For here we are.  Suffering through the worst recession since the Great Depression.  Because our current central bank, the Federal Reserve System, likes to print paper money.  And create asset bubbles.  Their last being the one that burst into the subprime mortgage crisis.  And despite the carnage from that they’re still printing money.  Money that the rich few are borrowing to invest in the stock market.  Speculators.  Who are making a lot of money.  Buying and selling assets.  Thanks to the central bank’s inflationary policies that keep increasing prices.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Wall Street is Doing Well because the Fed’s Inflationary Policies keep Raising Prices

Posted by PITHOCRATES - March 9th, 2013

Week in Review

Investors like rising stock prices.  They don’t like falling stock prices.  Which is why Wall Street likes inflation.  And fear deflation.  Even though the economy is still sluggish with more and more people dropping out of the labor market (which is why the unemployment rate fell) investors are bullish.  Because of the Federal Reserve and all of their quantitative easing.

The more the Fed increases the money supply the more inflation there will be.  Investors like that.  Because inflation increases prices.  Such as the prices of their stocks.  As well as gasoline and groceries.  Making the current economic times odd.  For the stock market recently reached a record high.  Even though the labor participation rate (see THE EMPLOYMENT SITUATION —FEBRUARY 2013, page 4) continues to fall.  It is now at 63.5%.  Which means 89,304,000 people are not in the labor force.  A record high.  But you wouldn’t know this by looking at the official unemployment rate.  Or the stock market (see Stocks And Inflation: The End Of An (Abnormal) Affair? by James Picerno posted 3/69/2013 on Seeking Alpha).

The positive correlation between the market’s inflation forecast and the stock prices appears a bit looser these days, but it’s premature to declare that the link has been broken…

Normally, rising/high inflation doesn’t inspire the bulls. But the last several years have been less than normal in terms of the macro backdrop. The crowd has remained worried about disinflation/deflation, which means that signs of higher inflation in the future have soothed anxious traders…

And why not?  For when have inflationary policies ever caused an asset bubble? That burst into a long and painful recession?  Except the housing bubble that brought about the 1990-91 recession.  The dot-com bubble that brought about the 2000-01 recession.  And that other housing bubble that brought about the 2007-09 recession.  AKA The Great Recession.  So there is no worry that these record highs in stock prices aren’t just another bubble.  Just waiting to burst.  Bringing on another deflationary recession.  I mean, what are the odds of that happening again?

Actually, the chances are pretty good that 2013 will have a very painful recession.  Because we don’t have any real economic growth.  These gains in the stock market aren’t because businesses are expanding and hiring.  Not with a falling labor participation rate.  No.  For all intents and purposes we are still in the 2007-09 recession.  Only we should probably call it the 2007-(end date to be determined) recession.  Because the president’s economic policies haven’t helped the economy yet.  And probably never will.

There’s no reason to believe that the fifth year will be any better than the previous four years.  In fact, it will probably be worse.  In fact one would almost get the impression that he is not trying to help the economy.  But, instead, trying to destroy the Republican Party.  So he can win the House of Representatives back in 2014.  So he can pass even more anti-business policies.  To transform the country into something it was never before.  Less prosperous than communist China.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , ,

« Previous Entries   Next Entries »