Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts
Tuesday, October 15, 2013
Tuesday, March 6, 2012
Saturday, December 17, 2011
Sunday, November 13, 2011
Monday, October 3, 2011
Wednesday, September 28, 2011
Sunday, September 25, 2011
Tuesday, September 20, 2011
Wednesday, September 7, 2011
Wednesday, August 31, 2011
Thursday, June 16, 2011
Recessions and Depressions in American History
Recessions and Depressions in American History
by Alex Merced
by Alex Merced
A common narrative of depressions during the period on which the United States was on the classical gold standard (1873-1933)[1] is typically mischaracterized to be the fault of the gold standard itself. When given closer examination it’s easy to see that these downturns had less to do with the lack of an elastic money supply or central bank but more to do with structural changes in the economy and market corrections to speculative bubbles usually due to credit expansion. So what we’ll take a look reoccurring themes of economic downturns during and after the gold standard to see that no matter what is the monetary system the same factors play into recessions and depressions.
Abrupt Changes to the Monetary System
In the history of the United States the monetary system has changed fairly regularly every 40-50 years. First major change is the ending of the First US bank in 1811 at the hands of Thomas Jefferson then only a few years later another major change with the Second US Bank which was then later also put to an end at the hands of Andrew Jackson. From 1936 to 1973 the United States was on a pseudo free banking system (still heavily regulated on the state level). From 1973-1933 the United State adopted a gold standard which was briefly abandoned in the 1933 – 1944 with a FIAT (paper) monetary system. In the 1944 the Bretton Wood Accord resulted in the Bretton Woods system which was a highly specialized gold standard. The Bretton Woods system eventually fell apart in 1971 and since we’ve been on a FIAT monetary system which has been able to sustain itself due to the reality that after the fall of Bretton Woods most nations found themselves which large reserves of US Dollars giving them a stake in the value of the US dollar despite US Domestic policy.
This is all important since the years preceding many of the changes in the monetary system result in economic downturns which is to be expected. When the monetary system changes abruptly it’s reasonable to think that this may alarm the banking sector and they may withdraw from taking too much risk until comfort is developed in the monetary environment, this period of discomfort results in credit contraction. So downturns in the early 1870’s (transition to gold standard) and the double dip recession in the mid 1930s (transition off the gold standard) can be explained by this uncertainty in the environment.
Structural Changes from a Peace/War Economy
If you follow the beginnings and ends of most wars, they are usually also marked by economic downturns which can be easily understood. When an economy must make the transition into a war economy the entire structure of production will have to retool itself to produce the goods needed for the war. This creates a massive demand for credit as factories shift from producing consumer goods to military goods. At the same time as people are sent off to fight in the war, this results in a huge drop of business for many consumer oriented businesses which are also suffering from increases in costs since so much of the productive capacity of the economy is being used military goods meaning the remaining capacity is more expensive to use. So with the reduction in consumer business many people end up decreasing their savings to compensate for higher prices and scarce production which means the available savings to be lent out drops while the demand for it is increasing (factories retooling). When the war is over, the opposite must happen causing another disruption in the economy.
Taking this into consideration we see that World War I is perfectly bookended by recessions in 1913/14 and 1919/20 (note 1913 was also major change to the monetary system with the creation of the Federal Reserve). World War II began at the end of the double dip recession in 1938, yet despite economic numbers this transition and the war period was not a period of great prosperity.[2] During this period of time there was rationing of consumer goods such as meats and fuels was rampant because government had got into the habit of price fixing to keep the inflation numbers from reflecting the economic reality of having less productive capacity to use on the goods people needed domestically. Wartime is not a good time for the economy and economist Robert Higgs has done great work explaining the problems with traditional economic statistics during a wartime economy. In the end, when World War II ended, sure enough a recession occurred in 1945.
So whether it was during World War I which happened during the classical gold standard or World War II which occurred under a fiat paper system except in its last few years when the Bretton Woods System was put in place (1944), we see that economic downturns had no definitive tie to the gold standard as many mainstream economists try to make.
Other Trends
If we take a look at other downturns during the classical gold standard we see that they are very similar to downturns in today’s world. For example the 1929 stock market bubble is quite similar to the dot com bubble in 2000 where expansion of credit from the central bank resulted in a bubble in stock prices.
The panic of 1893 is quite similar to the housing crisis that began in 2008. The panic 1893 occurred due government favor when it came to railroad investment (similar to government with housing in modern times), thus many investors invested heavily in the production of railroads (similar to investment in housing over the last few decades). When the Reading Railroad failed it caused a stock market crash and a collapse of the financial system again very similar to the fallout of 2008.
Conclusion
Economic Downturns as with any other economic event are the aggregated results of individual motivation and decisions. Modern day economist may spend much of their time claiming “when number x goes down economic consequence y occurs”, but what is it about individual motivation and decisions in the economy that cause variable x and y. luckily, economist that spend time looking at these human elements are becoming more influential everyday whether it be a Robert Murphy of the Mises Institute or a Dan Ariely of Duke University, economics is slowly but surely returning to where it began, studying how decision and choice create the world we see around us.
Saturday, October 9, 2010
The Difference between Debt and Equity Financing
The Difference between Debt and Equity Financing
by Alex Merced
One thing we emphasize here at LibertyIsNow is the relationship between economics and liberty, and without understanding the two neither can see progress. So today I thought I'd briefly introduce an important concept that will shape much of the debate going forward. Financing just means getting the money you need to make some purchase whether it be car, home, or to start a business. There are two types of financing, Equity and Debt financing.
Equity Financing
Equity Financing is done by selling ownership in something to get the money to buy it. For example let's say I wanted to buy a bike and didn't have all the money make the purchase I can ask my friend for the money and we agree we'll share the bike on certain days. Since we both have ownership in the bike, we both have interest in bikes well being because if the other crashes and destroys the bike we both lose our investment. This is similar to the purchase of Common and Preferred stock of companies.
Debt Financing
Debt Financing is done by borrowing the money, which means the borrower retains sole ownership of what is purchased yet has an obligation to pay the lender the original money borrowed, often with a little extra called interest (the reason they would lend it to you in the first place). In this case if I borrowed money from my friend to buy the bike, he could care less about the condition of the bike cause whether I crash the bike or not I am obligated to pay him back his principal and interest. This is similar to the purchase of bonds from a company.
Most of the world is a debt based economy, we borrow to buy cars, homes, and start businesses. This preference for debt financing is a symbol of many things culturally because people could just as easily share in ownership of cars and homes through equity financing and not have to suffer the burden of debt. This cultural characteristic also ties further importance since it ties people down much more to the value of the currency since debts don't adjust with money supply changes like asset prices do. Was this aspect of our culture something that naturally manifested or has it been pushed to extremes by policy decisions promoting lending and borrowing, something we'll be looking into over the next few posts here at LibertyIsNow.
by Alex Merced
One thing we emphasize here at LibertyIsNow is the relationship between economics and liberty, and without understanding the two neither can see progress. So today I thought I'd briefly introduce an important concept that will shape much of the debate going forward. Financing just means getting the money you need to make some purchase whether it be car, home, or to start a business. There are two types of financing, Equity and Debt financing.
Equity Financing
Equity Financing is done by selling ownership in something to get the money to buy it. For example let's say I wanted to buy a bike and didn't have all the money make the purchase I can ask my friend for the money and we agree we'll share the bike on certain days. Since we both have ownership in the bike, we both have interest in bikes well being because if the other crashes and destroys the bike we both lose our investment. This is similar to the purchase of Common and Preferred stock of companies.
Debt Financing
Debt Financing is done by borrowing the money, which means the borrower retains sole ownership of what is purchased yet has an obligation to pay the lender the original money borrowed, often with a little extra called interest (the reason they would lend it to you in the first place). In this case if I borrowed money from my friend to buy the bike, he could care less about the condition of the bike cause whether I crash the bike or not I am obligated to pay him back his principal and interest. This is similar to the purchase of bonds from a company.
Most of the world is a debt based economy, we borrow to buy cars, homes, and start businesses. This preference for debt financing is a symbol of many things culturally because people could just as easily share in ownership of cars and homes through equity financing and not have to suffer the burden of debt. This cultural characteristic also ties further importance since it ties people down much more to the value of the currency since debts don't adjust with money supply changes like asset prices do. Was this aspect of our culture something that naturally manifested or has it been pushed to extremes by policy decisions promoting lending and borrowing, something we'll be looking into over the next few posts here at LibertyIsNow.
Tuesday, April 27, 2010
Saturday, April 24, 2010
Individualism, Creativity, and Innovation
Individualism, Creativity, and Innovation
by Alex Merced
Premise 1: That creativity comes from tapping into your inner child
Kids say the darndest things don't they? It's this innocent nature that we admire in kids, when they are young before society begins socializing, limits, values, artificial barriers in their minds. Even then, during their adolescents they typically rebel against many of these constructs until one day the fight becomes to much and "they grow up". It's when one loses the ability to think beyond the barriers given to you that creativity dissapears and only your ability to see what is seeable is there, and you lose the ability to see what is not there.
Think of all the people you consider creative, arn't they generally playful and childlike and then think of all the frumpy people you consider an "adult" and put their creativity into perspective. So in economics the idea of seeing the unseen is called "opportunity cost", the unseen costs of every action you take. To be able to appreciate opportunity cost you must have this childlike nature to see beyond the barriers given by society, you must be creative.
This is why I feel I see such a stark difference from when I see Austrian economist who are generally very light-hearted and humorous versus Keynesians who are usually more cynical and serious. Yet, it's the Austrians who are more equipped to see the unseen opportunity costs, and realize what could have been to look to the future to see what could be. Keyensians, on the other hand focus on only known results to draw conclusions, and only draw self-destructing solutions based on actions that have "visible" results even if the results don't accomplish anything.
(For example, deficit spending has the visible result of increasing GDP but it doesn't fundamentally fix the real, unseen problem of diverting capital).
Another place I noticed this was on a recent interview with Ron Paul on Hardball where the serious and cynical Chris Matthew interviews the optimistic and light-hearted Ron Paul and discusses how Paul remind Matthews of his childhood hero, Barry Goldwater, but then he grew up. This was a sad and depressing statement that shows that at some point he gave in to the barriers that society imposes and became an "adult", while Ron Paul was able to this day in his 70's retain that childlike innocense that allows children to see things for what they are not how society wants them to be.
Do an experiment, give the facts to a child on a issue, and ask for their response.
Premise # 2: Collectivism kills Creativity, while Individualism births it
Creativity must come from an individual with little barriers of the mind as possible, although to think in groups and collectives as done in a collectivist framework would mean imposing more barriers in order define yourself into this "Collective". To see why this would be the case watch this video on the difference between Individualism and Collectivism:
Premise # 3: Innovation comes from Creativity
Innovation results from finding news way to do the same things, which will results in needing less time and resources to survive and spend more time on leisure and personal interests which is a true increase in the standard of life which can be numerically measured. Although innovation requires two things:
1) Investment: These Innovations require capital to develop and distribute, without investment there is no way to develop the most useful innovations.
2) Creativity: You can have all the capital for investment but if there is no ideas to invest in, it's useless, so you need creative people to see the unknown whcih can be developed.
So creativity is pivotal in the process of Innovation, so creating a individualist framework for inviduals to grow up with actually would increase the rate of Innovation and increase the quality of life of these individuals who use these innovations.
Premise # 4: Government Destroys Innovation
Government with it's coercive monopoly on violence accomplishes two things that destroy innovation:
1) They destroy investment through taxation and borrowing which puts incredible constraints on the available investment capital.
2) They destroy creativity by imposing values of the ruling class on society, and creating standards that only impose even more barriers of the mind.
Without creativity and invesment, innovation can occur and this only hurts individuals in their pursuit to impove their individual lives.
by Alex Merced
Premise 1: That creativity comes from tapping into your inner child
Kids say the darndest things don't they? It's this innocent nature that we admire in kids, when they are young before society begins socializing, limits, values, artificial barriers in their minds. Even then, during their adolescents they typically rebel against many of these constructs until one day the fight becomes to much and "they grow up". It's when one loses the ability to think beyond the barriers given to you that creativity dissapears and only your ability to see what is seeable is there, and you lose the ability to see what is not there.
Think of all the people you consider creative, arn't they generally playful and childlike and then think of all the frumpy people you consider an "adult" and put their creativity into perspective. So in economics the idea of seeing the unseen is called "opportunity cost", the unseen costs of every action you take. To be able to appreciate opportunity cost you must have this childlike nature to see beyond the barriers given by society, you must be creative.
This is why I feel I see such a stark difference from when I see Austrian economist who are generally very light-hearted and humorous versus Keynesians who are usually more cynical and serious. Yet, it's the Austrians who are more equipped to see the unseen opportunity costs, and realize what could have been to look to the future to see what could be. Keyensians, on the other hand focus on only known results to draw conclusions, and only draw self-destructing solutions based on actions that have "visible" results even if the results don't accomplish anything.
(For example, deficit spending has the visible result of increasing GDP but it doesn't fundamentally fix the real, unseen problem of diverting capital).
Another place I noticed this was on a recent interview with Ron Paul on Hardball where the serious and cynical Chris Matthew interviews the optimistic and light-hearted Ron Paul and discusses how Paul remind Matthews of his childhood hero, Barry Goldwater, but then he grew up. This was a sad and depressing statement that shows that at some point he gave in to the barriers that society imposes and became an "adult", while Ron Paul was able to this day in his 70's retain that childlike innocense that allows children to see things for what they are not how society wants them to be.
Do an experiment, give the facts to a child on a issue, and ask for their response.
Premise # 2: Collectivism kills Creativity, while Individualism births it
Creativity must come from an individual with little barriers of the mind as possible, although to think in groups and collectives as done in a collectivist framework would mean imposing more barriers in order define yourself into this "Collective". To see why this would be the case watch this video on the difference between Individualism and Collectivism:
Premise # 3: Innovation comes from Creativity
Innovation results from finding news way to do the same things, which will results in needing less time and resources to survive and spend more time on leisure and personal interests which is a true increase in the standard of life which can be numerically measured. Although innovation requires two things:
1) Investment: These Innovations require capital to develop and distribute, without investment there is no way to develop the most useful innovations.
2) Creativity: You can have all the capital for investment but if there is no ideas to invest in, it's useless, so you need creative people to see the unknown whcih can be developed.
So creativity is pivotal in the process of Innovation, so creating a individualist framework for inviduals to grow up with actually would increase the rate of Innovation and increase the quality of life of these individuals who use these innovations.
Premise # 4: Government Destroys Innovation
Government with it's coercive monopoly on violence accomplishes two things that destroy innovation:
1) They destroy investment through taxation and borrowing which puts incredible constraints on the available investment capital.
2) They destroy creativity by imposing values of the ruling class on society, and creating standards that only impose even more barriers of the mind.
Without creativity and invesment, innovation can occur and this only hurts individuals in their pursuit to impove their individual lives.
Monday, April 19, 2010
The Illusion of a "Standard" of Life
The Illusion of a "Standard" of Life
by Alex Merced
Government constantly uses the concept of a "standard" of life in justifying it's policies in the name of improving this standard. Can there really be a standard, this is only possible if you believe in objective values and that certain things all people will value the same cause of some sort of intrinsic worth. The reality is every experience, good, service, etc. is subjectively valued so even if you standardized the resources available (which we know an unsustainable practice) you still have varying levels of quality of the life individuals from how they value their own lives. Individuals will all subjectively value those identical resources differently and subjectively value the experiences they get from them differently as well.
There is no way to standarized how people value goods and services, and there is not accurate way to measure these valuations much less aggregate them. The quality of someones life can be vary to low or high whether someone is rich, poor, or in whatever condition they are in it's realtive to their preferences and understanding of the world around them. With all this in mind, it's impossible to construct any policy that can truly create real value other than pushing arbritary numbers higher. On top of it, these numbers (statistics) don't quite capture the resources wasted now, or the resources that'll be lacking tomrrow cause of the artificial upward pressure put on these numbers by government. (such as GDP, College Enrollments, Construction Projects)
The only way for someone to improve the quality of their life isn't to push some imaginary floor of quality but to free a persons autonomy to pursue the things they value and prefer as long as it doesn't interfere with anyone elses ability to do the same in a direct manner (indirectly, every action can arguably affect everyone). So policy shouldn't be geared to improving a standard life that can't truly be measured but to pursue the liberty for individuals to try to find happiness.
I've seen poor and rich be misrable, and I've seen them both be joyous, and no government can replace the journey that is the one to fulfillment, self-discovery, and happiness.
by Alex Merced
Government constantly uses the concept of a "standard" of life in justifying it's policies in the name of improving this standard. Can there really be a standard, this is only possible if you believe in objective values and that certain things all people will value the same cause of some sort of intrinsic worth. The reality is every experience, good, service, etc. is subjectively valued so even if you standardized the resources available (which we know an unsustainable practice) you still have varying levels of quality of the life individuals from how they value their own lives. Individuals will all subjectively value those identical resources differently and subjectively value the experiences they get from them differently as well.
There is no way to standarized how people value goods and services, and there is not accurate way to measure these valuations much less aggregate them. The quality of someones life can be vary to low or high whether someone is rich, poor, or in whatever condition they are in it's realtive to their preferences and understanding of the world around them. With all this in mind, it's impossible to construct any policy that can truly create real value other than pushing arbritary numbers higher. On top of it, these numbers (statistics) don't quite capture the resources wasted now, or the resources that'll be lacking tomrrow cause of the artificial upward pressure put on these numbers by government. (such as GDP, College Enrollments, Construction Projects)
The only way for someone to improve the quality of their life isn't to push some imaginary floor of quality but to free a persons autonomy to pursue the things they value and prefer as long as it doesn't interfere with anyone elses ability to do the same in a direct manner (indirectly, every action can arguably affect everyone). So policy shouldn't be geared to improving a standard life that can't truly be measured but to pursue the liberty for individuals to try to find happiness.
I've seen poor and rich be misrable, and I've seen them both be joyous, and no government can replace the journey that is the one to fulfillment, self-discovery, and happiness.
Sunday, April 18, 2010
Friday, April 16, 2010
How Laws + Taxes Divert Resources and Lowers Quality of Life
How Laws + Taxes Divert Resources and Lowers Quality of Life
by Alex Merced
Everyone thinks there needs to be more laws for this and that to basically prevent or control everything they don't like without realizing the consequences of laws, and if they need money to enforce this law they'll create a tax. The problem is that to keep this legal and tax institution manageable it needs an army of lawyers and accountants which require money, money that could of been used elsewhere to develop new consumer technology or medical innovations.
The only benefit you get from an army of lawyers and accountants is preventing being hassled by the federal government, this does not free up my day for more leisure time or make me healthier which would improve my quality of life. Actually it lowers my quality of life due to the leisure time lost having to keep track of receipts and documentation so that way the slightest mistake doesn't result in financial ruin in the courts, and I can't imagine the stress and paranoia of a more and more complex legal/tax system can result in a longer life span.
Some might respond saying that this is good, only with laws can we maintain some sort of preferred social order (which everyone has a different definition of) and we need taxes to enforce those laws. On top of creating this "ideal" social order it creates highly paid lawyer and accounting jobs.
These people assume that if the government didn't spend the taxed portion of peoples incomes they wouldn't of spent it, and I can tell your personally that is not the case. Where I would of spent that money is another sector of the economy that would of seen growth in activity and jobs if I had the money to spend there which probably would have been something that added value to my life and subjectively see it.
A concept that has left modern day is that of opportunity cost, the thought of what "could of been" if an action had not been taken. If I had not spent my extra income supposedly, then I probably would of saved it but then the bank will spend it by loaning it out to home owners and entrepreneurs who may develop a good or service I may value enough to withdraw that savings and buy later.
The bottom line is that resources are limited, and if more and more resources must be spent to keep up with a tax and legal system of growing complexity then that's less resources for something else and that is not optimal.
by Alex Merced
Everyone thinks there needs to be more laws for this and that to basically prevent or control everything they don't like without realizing the consequences of laws, and if they need money to enforce this law they'll create a tax. The problem is that to keep this legal and tax institution manageable it needs an army of lawyers and accountants which require money, money that could of been used elsewhere to develop new consumer technology or medical innovations.
The only benefit you get from an army of lawyers and accountants is preventing being hassled by the federal government, this does not free up my day for more leisure time or make me healthier which would improve my quality of life. Actually it lowers my quality of life due to the leisure time lost having to keep track of receipts and documentation so that way the slightest mistake doesn't result in financial ruin in the courts, and I can't imagine the stress and paranoia of a more and more complex legal/tax system can result in a longer life span.
Some might respond saying that this is good, only with laws can we maintain some sort of preferred social order (which everyone has a different definition of) and we need taxes to enforce those laws. On top of creating this "ideal" social order it creates highly paid lawyer and accounting jobs.
These people assume that if the government didn't spend the taxed portion of peoples incomes they wouldn't of spent it, and I can tell your personally that is not the case. Where I would of spent that money is another sector of the economy that would of seen growth in activity and jobs if I had the money to spend there which probably would have been something that added value to my life and subjectively see it.
A concept that has left modern day is that of opportunity cost, the thought of what "could of been" if an action had not been taken. If I had not spent my extra income supposedly, then I probably would of saved it but then the bank will spend it by loaning it out to home owners and entrepreneurs who may develop a good or service I may value enough to withdraw that savings and buy later.
The bottom line is that resources are limited, and if more and more resources must be spent to keep up with a tax and legal system of growing complexity then that's less resources for something else and that is not optimal.
Tuesday, April 13, 2010
Obama is not the Answer
The Failure of Obama is not catalyst to people believing that the Progressive philosophy is flawed
The Success of Obama is not the key to the nation all switching to the left
because...
a failure can always be attributed to events that occured before his presidency...
a success can always be attributed to events that occured before his presidency...
What is the truth can only be done through a deep understanding of history and economics
The bottom line is that the Obama presidency is only another in a long line of presidents who have centralized power and trampled over our liberties from the left and the right. His administrations performance is not the key to ending the divide of collectivist from individualist, in the end it's about ideas and spreading those ideas.
Ron Paul for that matter isn't the goal either, but his popularity is an indicator of our success in spreading the ideas such as Obama is an indicator of the ideas he represents.
So keep educating, keep spreading ideas, and we'll win.
The Success of Obama is not the key to the nation all switching to the left
because...
a failure can always be attributed to events that occured before his presidency...
a success can always be attributed to events that occured before his presidency...
What is the truth can only be done through a deep understanding of history and economics
The bottom line is that the Obama presidency is only another in a long line of presidents who have centralized power and trampled over our liberties from the left and the right. His administrations performance is not the key to ending the divide of collectivist from individualist, in the end it's about ideas and spreading those ideas.
Ron Paul for that matter isn't the goal either, but his popularity is an indicator of our success in spreading the ideas such as Obama is an indicator of the ideas he represents.
So keep educating, keep spreading ideas, and we'll win.
Tuesday, April 6, 2010
Treasuries, Investment, Interest Rates, and Risk
Treasuries, Investment, Interest Rates, and Risk
by Alex Merced
In todays world investment revolves around US Treasury debt cause it's AAA rating. Since the return yielded from treasuries is considered the "risk free" rate of return it establishes the minimum return someone should make from their investments. So since this interest plays sucha pivotal role in the investment decision and risk taking learning a little bit about how it works would be pretty important to understanding excessive risk taking by the banking system.
What is Treasury Debt?
We believe that it's taxes that pay for military, medicare, and all the other government services and programs we may approve or dissaprove of. In Reality, tax revenues are not enough to pay for the growing role of government and the public sector so money must be borrowed via bonds known as treasuries. As any debtor would, the government wants to pay the lowest rate possible so they have an auction for the debt similar to lendingtree in which the largest banks in the world known as primary dealers (for Primary Dealers include Lehman, Bear Sterns, Merrill, etc.) bid on the debt in order for debtor to get the lowest interest rate possible.
What is with all the demand for treasuries?
Now why would banks bid treasuries to near below inflation/CPI levels when they could use that capital for other higher yielding investments? In order for this to be the case there must be some mechanism to stimulate the demand of these banks very similar to what happened in the housing crisis...
Why did lenders make so many bad mortgages, cause they didn't have to hold the loans they could just turn around and sell it to Fannie or Freddie so this created artificial demand for mortgage debt pushing lending rates low. A similar mechanism is used with treasuries since these treasuries can be used in a variety of ways in dealing with the central bank, the federal reserve.
The central banks primary role in this is to keep fueling the demand for treasuries by entering in repurchasing agreements with these primary dealers. In these agreement the central bank promises to buy back these treasuries and to do so the central bank must expand the money supply (inflation). Also, these primary dealers can use these treasuries as collateral for loans from the discount window in order to get emergency funds when these banks overlend or practice bad banking. Essentially, in exchange for facilitating the financing of government operations the banking system are given their own life support system in the form of the federal reserve bank.
So as government increases it's deficits need the demand of treasuries to increase meaning more pressure on the federal reserve to buy these treasuries from the bank with new money (aka monetizing the debt). So as the federal reserve inflates the money supply to facilitate government spending the increase reserves of these bank effectivly lowers lending rates sending a flase signal to the economy of non-existant savings causing the mal-investment charachterized in the austrian theory of the business cycle.
The effects of all this on investment and risk taking
At the same time, this inflation of the money supply will put upward pressure on price levels which increases the neccessary return from investment needed to maintain purchasing power. Also the increasing government debt puts upward pressure on taxes which means even more must be yielded from investment to make up for the tax burden. So effectively, when you combine the burden of inflation and taxes the return needed to make any profit is so high that modest medium risk investing just doesn't yield enough putting pressure on investors and investment institutions to have to take on risker investments to just walk away with anything at all.
Moral of the story:
- Inflation and Taxation only stimulates risk taking and distorts economic calculation of investors
- Inflation and Taxation are a product of growing government spending
- In order to maintain this Government Spending a strong relationship between Government and Banking must be established
- To be truly against bank bailouts and for main street you must be against the central bank and runaway spending which creates the moral hazard that strips the nation of their savings and retirement
- To believe in government entitlement programs you must be for the bank bailouts, cause without the bailout government cannot continue it's funding of programs like medicare and social security
- Money lent to the growing public sector is money not lent to the private sector, so as one grows the other must shrink along with the countries productive capacity increasing the burden over time as more and more people find themselves pushed out of an economy that can support less and less people everyday.
by Alex Merced
In todays world investment revolves around US Treasury debt cause it's AAA rating. Since the return yielded from treasuries is considered the "risk free" rate of return it establishes the minimum return someone should make from their investments. So since this interest plays sucha pivotal role in the investment decision and risk taking learning a little bit about how it works would be pretty important to understanding excessive risk taking by the banking system.
What is Treasury Debt?
We believe that it's taxes that pay for military, medicare, and all the other government services and programs we may approve or dissaprove of. In Reality, tax revenues are not enough to pay for the growing role of government and the public sector so money must be borrowed via bonds known as treasuries. As any debtor would, the government wants to pay the lowest rate possible so they have an auction for the debt similar to lendingtree in which the largest banks in the world known as primary dealers (for Primary Dealers include Lehman, Bear Sterns, Merrill, etc.) bid on the debt in order for debtor to get the lowest interest rate possible.
What is with all the demand for treasuries?
Now why would banks bid treasuries to near below inflation/CPI levels when they could use that capital for other higher yielding investments? In order for this to be the case there must be some mechanism to stimulate the demand of these banks very similar to what happened in the housing crisis...
Why did lenders make so many bad mortgages, cause they didn't have to hold the loans they could just turn around and sell it to Fannie or Freddie so this created artificial demand for mortgage debt pushing lending rates low. A similar mechanism is used with treasuries since these treasuries can be used in a variety of ways in dealing with the central bank, the federal reserve.
The central banks primary role in this is to keep fueling the demand for treasuries by entering in repurchasing agreements with these primary dealers. In these agreement the central bank promises to buy back these treasuries and to do so the central bank must expand the money supply (inflation). Also, these primary dealers can use these treasuries as collateral for loans from the discount window in order to get emergency funds when these banks overlend or practice bad banking. Essentially, in exchange for facilitating the financing of government operations the banking system are given their own life support system in the form of the federal reserve bank.
So as government increases it's deficits need the demand of treasuries to increase meaning more pressure on the federal reserve to buy these treasuries from the bank with new money (aka monetizing the debt). So as the federal reserve inflates the money supply to facilitate government spending the increase reserves of these bank effectivly lowers lending rates sending a flase signal to the economy of non-existant savings causing the mal-investment charachterized in the austrian theory of the business cycle.
The effects of all this on investment and risk taking
At the same time, this inflation of the money supply will put upward pressure on price levels which increases the neccessary return from investment needed to maintain purchasing power. Also the increasing government debt puts upward pressure on taxes which means even more must be yielded from investment to make up for the tax burden. So effectively, when you combine the burden of inflation and taxes the return needed to make any profit is so high that modest medium risk investing just doesn't yield enough putting pressure on investors and investment institutions to have to take on risker investments to just walk away with anything at all.
Moral of the story:
- Inflation and Taxation only stimulates risk taking and distorts economic calculation of investors
- Inflation and Taxation are a product of growing government spending
- In order to maintain this Government Spending a strong relationship between Government and Banking must be established
- To be truly against bank bailouts and for main street you must be against the central bank and runaway spending which creates the moral hazard that strips the nation of their savings and retirement
- To believe in government entitlement programs you must be for the bank bailouts, cause without the bailout government cannot continue it's funding of programs like medicare and social security
- Money lent to the growing public sector is money not lent to the private sector, so as one grows the other must shrink along with the countries productive capacity increasing the burden over time as more and more people find themselves pushed out of an economy that can support less and less people everyday.
Thursday, April 1, 2010
The Real Immigration Issue
Being a first generation American I have an appreciation for the immigration issue and it's complexities. Although at the end of the day I feel that many of problems in immigration isn't immigration but the struggle over remaining resource in a economy that is getting weaker and weaker everyday from a growing government. So in a debate at RonPaulForums.com about immigration I had this to say:
Correlation is not causation, there are two main problems economically with
the current state of immigration.
1) The Welfare State - due to having a welfare state
citizens and non-citizens are becoming more and more a drain on taxpaying
citizens and non-citizens... you have to dismantle the welfare system. The
solution to this issue is a supply response, not a demand response. As long as
there is a supply of government services, there will be a demand for it whether
it's domestic or foreign. We must dismantle the supply of government services
which taxpayers must pay for. Volunteered from private sources are encouraged
and a not a drain on those who choose not to volunteer their limited resources.
Also as far as immigration goes, these types of programs attract probably the
wrong people. If you have no welfare system there is no incentive for anyone to
immigrate unless it's to be productive and to have the opportunity to be
productive.
2) Growing Public Sector, Shrinking Private Sector - Due
to unions and a growing state the amount of public sector jobs have increased
which have very rigid wages, they don't go down, and they always go up. This
growing sector has consumed the amount of private sector jobs who have more
elastic wages that can adjust to changes in the supply of labor and demand for
the goods produced. Shrink the public sector, the private sector will grow
enough and be vibrant enough to handle immigration. With the growth in labor
there is a growth in demand for goods to offset it in a healthy free market
economy.
In countries where open borders have had problematic effects have had large
governments and small private sectors. Prosperous countries like Switzerland
have multiple languages spoken. As far as assimilation, culture is constantly
changing on a daily basis, so to argue that there is some constant standard of
values, traditions that hasn't changed in perception or execution is an
idealistic delusion. The beauty of humanity is how it's culture changes one
generation to the next.
None of us talk with a 1920's accent or vocabulary or wear 60's attire
(without a sense of novelty). The world is constantly changing faster and
faster, you either diversify your outlook, knowledge and skills to adapt or get
lost in the changes. It's in this diversity of culture, ideas, and values where
innovation is conjured.
Subscribe to:
Posts (Atom)