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?

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

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?

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.

Read more…

Conventional wisdom says that in a recession, the government should lower interest rates to help stimulate the economy.  Unfortunately, this is like saying the cure for a bad hangover is a bottle of whiskey. Read more…

Sometimes the timing of recessions in your life matters.  If they occur at the end of your career, you should have enough cushion to ride things out.  If they are early enough, you can reduce your expenditures, move in with your parents or friends, and seek low-paying jobs to hold you over.

But what happens when you get hit with two recessions back-to-back when you are starting a family, just buying your first house, and just beginning to build a career?  You can only reduce expenses so much, especially with kids.  And you don’t have much cushion.

Here’s an interesting little bit about the effect of the current and past recession on Generation X (born 1961 – 1981).

www.msnbc.msn.com/id/29497408/

Here’s a great chart comparing the losses in the stock market during various economic downturns, courtesy of www.dshort.com.

Four Bad Bears

From 2006 – 2008, Peter Schiff appeared on numerous shows predicting the economic collapse.  This compilation of some of those clips shows him clearly articulating not only what would happen in the US and world economy, but also the mechanism and timing of the collapse.

Despite his solid reasoning and clear articulation, many of the other panelists and hosts openly mocked and ridiculed him.

This clip demonstrates two things: 1) the predictive power of the Austrian school of economics, and 2) the profound ability of otherwise intelligence people to ignore excellent arguments and instead believe what they want to believe.

Here’s a great Op Ed in the Wall Street Journal.

http://online.wsj.com/article/SB123544318435655825.html

They give a great argument for focusing the Stimulus on Entrepreneurs, rather than traditional, moribund behemoths.

A healthy, competitive economy is like an ecosystem.  Unsuccessful businesses die young.  Successful businesses are able to grow, accumulate resources, and age.  But eventually they too give way to younger, more competitive companies.

By propping up the older firms, we are basically preventing the new, more competitive and more effective firms from taking their place.  This stifles innovation and weakens the overall system.  On the other hand, by encouraging the creation of new businesses, we find those more effective replacements sooner, and create a stronger, healthier economy.