Economics for One

Here’s a scary chart.

This is the growth of the Monetary Base, as reported by the Federal Reserve Bank of St. Louis. As you can see, the money supply has grown steadily over the years. But in the past 18 months it has more than doubled.

What are the implications of this?

G. Edward Griffin’s The Creature From Jekyll Island: A Second Look At The Federal Reserve will profoundly change the way you view the entire banking and monetary system in the US and abroad. It is a fascinating read.

The title refers to the creation of the US Federal Reserve Bank, which took place at a then-secret meeting in 1910 (later confirmed by the participants), at a resort on Jekyll Island, just off the coast of Georgia.

Most of us grew up thinking of the Federal Reserve as a quasi-government organization that helps stabilize our money supply. How it does that is often a bit of a mystery, although it involves interest rates, and possibly reserve requirements. And it isn’t always clear what the relationship is between the Federal Reserve and the US government.

Read more…

Here is a list of the banks that have failed so far this year. Read more…

Energy companies can often make a great investment. So it’s worth taking a moment to understand how these companies operate.

The energy business (more specifically the oil industry) can be split into two main areas: Upstream and Downstream. The Upstream business acquires “crude” oil (the raw material removed from the ground), while the Downstream business takes the crude oil and “refines” it, turning it into a finished product that end users want to purchase, and sells it to them. Read more…

The US House of Representatives has just approved another $2 Billion for the “Cash for Clunkers” program.

Under this program, people will receive $3,500 to $4,500 when they trade in a car and buy a new car that gets better gas mileage than their trade-in did. That covers approximately 500,000 new cars.

If you are thinking of purchasing a new car, this may be a nice additional incentive.

Of course, the skeptic in me notes the irony that the Federal Government is working to boost demand of an industry in which it now has a major financial stake. (Where are the $500 rebates for trading in an older computer, or television, for a newer model that uses less power?)

There seems to be no end to the efforts to rescue dead business models and dying industries.

Here’s an interesting graphic (“Turning a Corner?”) courtesy of the New York Times. It shows the pattern of economic cycles, over a period of decades.

www.nytimes.com/interactive/2009/07/02/business/economy/20090705-cycles-graphic.html

This graphs plots the relative amount of industrial output against the change in industrial output over a running 6-month period. As you move through the 9 images, you can see how various recessions have progressed.

It’s a neat visual, and shows some interesting patterns, but doesn’t provide much fundamental insight.

This month the US Federal deficit passed $1.09 Trillion. That’s the amount of money the US has borrowed so far this year. It does not include debt from past years. The previous record was about $500 Billion.

It’s a pretty ignominious accomplishment. And since the year is not yet over, and the US continues to spend, the debt is continuing to pile up. Based on current spending projections, this year’s debt is expected to hit nearly $2 Trillion by October.

How much is $2 Trillion? It’s about $6,500 per person in the US. For a family of four, that’s about $26,000 in debt accumulated this year.  That’s on top of all previous debt, as well as any consumer or household debts.

But does it really matter? It isn’t like the taxpayers will ever have to pay this debt, right?

Wrong.

The US government’s credit rating is so good it is considered “risk free” by most of the world. The people who loaned the US this money absolutely expect to be paid back. If they are not, it will rock the worldwide financial markets so strongly it will make the recent financial crisis look tame by comparison.

The only ways the US government can pay back that debt are 1) by raising taxes and / or lowering spending, or 2) by devaluing the US dollar through inflation. Higher taxes means less money to hire employees, and less money for those employees to take home and spend.  Inflation makes the dollar worth less relative to other commodities, goods, or services. But while it makes the US debt effectively smaller, it also lowers the value of everyone’s existing savings, investments, and retirement funds.

Given the politics of Washington, DC, which do you think is the more likely scenario?

First, some disclosures:  I’ve met Steve Jobs; we live near each other and have several friends and acquaintances in common.  Also, my wife worked at Apple for a while, and we have a number of friends who still work there.  Notwithstanding his reputation as a tough boss, the limited interactions I’ve had with Steve have all been pleasant, and he has been very gracious.  I also hold Apple stock.

Recently, we’ve learned that Steve Jobs had liver transplant surgery in Tennessee two months ago.  This has led to a public debate about whether or not Apple’s board should have revealed the extent and significance of Steve’s ongoing health issues.

On the one side are professional investors, such as Warren Buffett, who say the information is material, and therefor should have been revealed.

On the other side is Apple’s Board, supported by many members of the public, who say Steve’s health issues are a personal and private matter, and really nobody’s business.  It’s a compelling argument, and is consistent with most people’s beliefs that health matters should always be private.

But they are wrong. Read more…

One of the challenges the insurance industry faces is “Moral Hazard.”

Moral hazard is a the observed phenomenon whereby, because something is insured, it becomes more likely to occur.  If a bad event (e.g. breakage or theft) will cost a certain amount, then if that event is insured, it will cost a bit less.  This makes the bad event less bad–which is the point of insurance.  Unfortunately, it also means that the insured person will not work quite as hard to prevent the bad event from happening, or, in extreme cases, may even cause the bad event to occur.

A silly illustration: if a grocery store could somehow insure every dozen eggs for $1000 against breakage, “Moral Hazard” is the insurance industry’s way of recognizing that there would somehow be a lot of broken eggs.

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American Express has begun demanding that some of their customers send in copies of their personal tax returns or face a cancellation of their account.  These US tax returns are then sent to India for review.

Customers who refused to send copies of their personal tax returns to American Express have had their accounts closed with prejudice.  They lose any reward points they may have accumulated, are required to immediately pay off the balance of any revolving credit, and have a negative report sent to the credit rating agencies, which results in a drop in their credit score.  If they fail to immediately pay off the revolving credit in full, they are sent to collections and face additional penalties.

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