Category Archives: Economy

Sucked into the green zone

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I ran across a blog post that includes an article called Sucked into the Green Zone, by Andrew Redleaf (Dec 2008). It presents an interesting perspective on how government-backed borrowers are crowding others out of the market:

Here’s an excerpt:

When a massive and sudden deflationary credit collapse hits a modern economy, borrowing becomes extremely expensive for everyone—almost. The government, and certain government backed institutions, will still able to borrow at pre-deflation rates. With money plentiful and cheap on one side, the government’s side, but scarce and expensive on the other side of the room, assets will flow toward the government’s side of the room like water flowing downhill. Over time all ‘normal’, not government-backed, asset holders who can borrow only at high rates would lose everything they own to those who can borrow at the government rate. If government backed entities can finance an asset at 5 percent, and everyone else in the room is obliged to finance it at 15 percent, and if this condition could long endure, ultimately every asset in the economy would be owned by the government backed crowd.

Thus, just as in an inflation, by precipitating a sudden catastrophic deflation the government not only shifts wealth from one citizen to another, the government itself can massively confiscate assets.

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Home mortgage modifications from Fannie & Freddie

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Fannie & Freddie have started to offer mortgage loan modifications. As of the moment, the loan mod is voluntary.  Accepting this ’solution’ means you:

* Acknowledge the full debt regardless of the value of the home
* Waive all rights to fraudulent or predatory lending claims in the future
* Turn your loan into a full recourse loan that could follow you for life even if you choose foreclosure down the road
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Food Shortages

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There are more and more reports in the news about food shortages. Riots have even started in some places, like Haiti. And of course, when their citizens start to feel threatened, governments feel compelled to respond. Unfortunately, that always makes things worse. What many don’t understand yet is that the reason for the shortages in the first place is entirely because of government “controls” or various other forms of intervention.

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Producer vs. Consumer Jobs

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The Bureau of Labor Statistics’ in the US recently published numbers for how many people are employed in various areas of the economy can break this down slightly differently than how they do it, according to producers (those who are creating things of value) and those who are either consumers or whose jobs directly depend on the producers (accountants, lawyers, etc). Using their numbers:

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Interest rate manipulation

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The problem with central banks like the Fed is that they distort the markets by setting interest rates at artificial levels. That sends incorrect signals to investors and businesses. For example, low interest rates cause business valuations to rise, so stocks go up. Or apparently cheap money might allow a business to justify a loan or an expansion that wouldn’t be possible if rates were higher. That’s the boom phase. What happens next is that when the economy gets “overheated” (high inflation), the central banks raise rates. Things then start to unwind: company valuations drop, new loans are no longer affordable, etc. That’s the contraction (recession) phase.

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Bush Economic Doublespeak

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In the article below, President Bush uses a lot of doublespeak, which I’ve attempted to translate here:

  • “the country is not recession-bound” –> “the country is already in a recession”
  • “concern about slowing economic growth” –> “concern that the election won’t go the way I want and the next president might not carry on my policies”
  • “rejected for now any additional stimulus efforts” –> “planning to hand out more cash right before the election”
  • “We acted robustly” –> “we didn’t know what else to do”
  • “We’ll see the effects of this pro-growth package” –> “everyone likes more money, so this has to help”
  • “Why don’t we let stimulus package 1, which seemed like a good idea at the time, have a chance to kick in?” –> “We have to number the cash hand-out programs now, because there will eventually be so many that you won’t know which one we’re talking about otherwise”

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Is the US Economy Healthy?

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If you’re still having second thoughts about whether the US economy is healthy, here are few things to consider:

  • Over the last two years, the dollar has lost 20% of its international purchasing power
  • The impacts of a weaker dollar include more expensive imported goods, including oil
  • Look at the prices of all commodities over the last few years (or even over the past few months), especially gold, silver, platinum, wheat, corn, oil, etc.
  • The price of wheat about a year ago was around $5/bushel. Within just the last week it went up by more then $5/bushel to an all-time high of around $30.
  • Think about the prices of things you buy on a regular basis. How much have they gone up over the last year? Do those increases match-up well with the government’s claim of 4% inflation?

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Presidents Can’t Manage the Economy

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In John Stossel’s recent article: Presidents Can’t Manage the Economy, he says:

Manufacturing jobs are no better for America than other jobs. Some argue that they are worse. How many parents want their children to work in factories rather than offices? Increasing service jobs in medical, financial and computer sectors while importing manufactured goods doesn’t hurt America. It helps America.

This is a common misconception in the US, and regardless of what parents might want, I strongly disagree.

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