An open letter to the world…

Much of what you know about economics and indeed life in general can be divided into two categories:

1.) The information that you have learned from various conventional, bias sources.

2.) The common sense which I hope and believe you posses.

I just want to open your eyes to other possibilities. Challenge authority, question dogma, ask yourself what you believe. The purpose of this blog is to inform not by static writing but by sparking curiosity to move you to learn more and better yourself.  Not every post is about economics but economics is about everything.

Oh, and why is it called snuffs?

I will, for this blogs one year aniversary, explain the reason… if it lasts that long.

A Long Break

Hello again. I apologize for a long drought in writing. I’d like to be able to say “I was busy.” as a reasonable excuse and while i was, i was no more busy than before when i wrote consistently so don’t let me get off that easy. Instead i found myself trying to figure out what i wanted to write about and where i wanted this blog to go. I would like it to be as much of a learning experience for you as it is for me. I want there to be useful, current information and news about economics but at the same time i want the overall philosophy of liberty to shine through. As i learn and refine my own ideas I hope you bear with me and contribute along the way not just for my benefit but for your own. Learning is not a spectator sport.

Anyway… a lot has happened since my break began. We’re are in pretty much the same boat but there’s a little bit more water in the bilge. More or less what had been predicted by many others before myself has come true in that all the government intervention in the world cannot prevent a market from correcting itself from such artificial peaks. I have almost lost track of the amount of money being tossed around and so has the media. It seems trivial now to think that AIG just got another 40 BILLION dollars in light of the fact that the more common denomination used is trillions. The stock market has managed to effectively “boo” every move by this administration by shedding several percentage points every time a new ‘stimulus’ is announced. Not that i particularly want to be anti-Obama… im sure he’s a fine guy in any other arena, but in terms of economic policy he and his administration are doing it all wrong. Just like Bush before him and Clinton before etc. etc. I’m not partisan, i’ll thoroughly hate on whoever is making the bad decisions liberal or conservative.

What i plan to do here starting soon is lay out a series of longer, more focused and comprehensive economic theory posts, more detailed and sourced. My plan is to then use those as the foundations to refer back to when making further arguments on current events.

Anyway, those of you who are still occasionally checking in hoping for an update, here it is. For those who are newly stumbling upon this site, please bookmark it as it’s not dead, just resting. Thanks!

Buying Low

Looking around in the current economic landscape there are many opinions on what to do with your money, if you happen to have any. There are many actual examples as well. There are lots of mergers, acquisitions and smash-and-grabs in the corporate world of course, and the more basic if unconventional example of Morgan Stanley just buying a lot of oil. It is not by accident that this is happening.  It is the basic principle by which any investor makes money, buy low, sell high.

It is also not by accident that some businesses seem to be doing more of the merging and acquiring than others. When a recession hits, there are a few categories you can group firms into. Those that saw it coming, those who didn’t, and those who did that expect political connections to bail them out.

The ones who didn’t see it coming are the ones probably going bankrupt or getting bought out or perhaps finding themselves the unwitting recipient of some TARP money. The ones who saw it coming are the ones who were prepared for it and got their house in order. Those are the ones who are most active now.

Companies like GM and Chrysler surely saw this coming, no company that big fails to forecast such drastic changes in the economy. They are obviously now relying on political connection to keep them afloat despite their mismanagement.

I guess the point of this post is to remind myself and others of two things. Pay attention to the future and remember that there is always opportunity. When you see bad times ahead and you either save an extra penny a day or you make friends with the local politician, be prepared.

New Slogan, Same Junk

With a new year, president, and economic stimulus plan on the horizon, it’s easy to be lulled into believing that the fall of 2008 was simply a bad dream and are now delivered from disaster by the swift and wise of Washington. If we briefly look at what has been done so far, not much has changed. Just some money moving hands (like from the taxpayers, to the special interests.) if we look ahead we see much more fundamentally unsound shifts in wealth.

Obama is looking to take steps to keep unemployment at bay and keep our economy from being in a recession for too long into his story-book presidency. Not that i fault him for wanting such things, especially in our “do-something” economic policy era, but his failure to understand economics and basic human nature (a la free market) are really going to hurt our chances of economic prosperity any time soon.

Unemployment is bad, no doubt. Recessions are not good either. However when proposing a solution to both problems, one must consider that manipulating an economy is almost a zero-sum game that you’ll always lose.

When the government creates jobs via public works, the money to pay for those jobs must come from somewhere. Taxes are levied on businesses, which reduce the likelihood that such taxed firms are going to create jobs themselves, and upon consumers who will consume less, generating less profit for businesses and again reducing the new jobs created by genuine economic growth.

The government can also print the money, debasing the currency. This allows for short-term prosperity in the form of quickly created jobs and economic activity but in the long run it creates problems. Inflation distorts the distribution of true wealth, a topic i cover here, but in short:

Think about how much prices seem to rise constantly (like gas, food, etc.). Then think about your paycheck. If prices rise faster than your paycheck, you are experiencing the downside of our government’s inflationary policies.

Remember how earlier i said economic planning is almost a zero-sum game? If we are simply shifting jobs from one place to another then it doesn’t really matter does it? Whether Wal-Mart hires one more door greeter or gets taxed and someone is hired by the government to build a road, what difference does it make?

Besides the fact that the job for the Wal-Mart greeter was created via economic growth and the government job via a politicians whim, the problem is inherent in the name of the solution:

Job Creation

When jobs are created simply to create jobs, they are done inefficiently. That Wal-Mart greeter would have been paid fairly relative to his utility to the company and to the demand for Wal-Mart shoppers to be greeted upon entering. In other words, his job is sustainable and represents true demand and growth. That job wouldn’t exist unless it was profitable for the company to create it.

The government created job is inherently being done in the most inefficient way possible because the government isn’t concerned with profit or the benefit of anyone but the people it is paying. The government will hire the largest amount of people at the highest price possible because that’s the point, job creation.

It will be more expensive than it needs to be, the jobs will be temporary and artificial (once the work is done, then what?), and it’s all at our expense in one way or another. The economy is worse off in the end. The need and then supply for jobs is distorted in an unsustainable way and everyone pays for it.

Deflation: Not That Bad, Gold Standard: Excellent

Common rhetoric of the state-sponsored economist is that deflation is pretty much on par with satanic rituals and clubbing seals. Why is that? First, let’s define deflation.

Deflation could be the result of a couple things, the reduction or contraction of the money supply, or the increase in demand for the same amount of money. An example would be increased productivity resulting in a surplus of goods. The end result and how we define deflation is the general lowering of prices.

Now, this works because the world operates on a supply and demand logic. Money is the supply in this case and goods are the demand, more or less. In a normal, commodity-backed currency, like a gold standard, inflation and deflation of the money supply is quite gentle. This is because gold requires work  or capital to mine or buy. 

Because their is labor or investment involved, the amount of gold and thus money, is self-regulating. As gold becomes more valuable, mining or investment increases  until an equilibrium is met, as gold devalues, mining  or investment slows until again, an equilibrium is met. So far alchemists have yet to discover how to make gold out of lead, so counterfeiting the commodity is impossible. This is in stark contrast to a fiat money, like we have that is backed by nothing and printed as needed.

In the case of our economy, where central banks manipulate the amount of money in existence, invariably by increasing it, we are constantly experiencing inflation. Our currency devalues as more money is printed.

However, in the particularly bad crash we just experienced, the banking system’s previous machinations failed and debt was consolidated and in general the money supply contracted. This was in concert with an increased demand for dollars globally for the purpose of buying treasuries, thought to be a safe haven for investment. The result of these to related situations resulted in our currently stronger dollar.

A gold or commodity backed currency (essentially the currency is a commodity) prices remain quite stable and inflation or deflation is contained and gentle.

Disregard any claims that a modern society requires it’s currency to be ‘elastic’ or any other weird metaphor. That only means that bankers and politicians prefer a currency they can devalue to consolidate their own power.

Irresponsible spending, unjust wars, ludicrous forays into manipulating the free market via enormous bailouts are impossible under a gold standard. A government is held responsible for what it spends. Debts cannot be accrued and rolled-over indefinitely to be paid off by a devalued dollar in the future.

Responsibility, frugality, restraint… these would be words used to describe the financial nature of a government whose currency is backed by a commodity.

A Christmas Bubble

With retail numbers so low, unemployment growing and recession well underway, even in the light of the holiday (see: shopping) season, where do we go from here? What happens once the craze of gift giving falls off and winter sets in?

Isn’t every holiday season an annual retail bubble? Any business that projected it’s sales figures based on research done between Thanksgiving and Christmas would find itself shit out of luck come march. We are currently in an elevated, artificial state of retail demand right now. Yet we are still in a recession.

What happens when people stop buying gifts and refocus their efforts on the day to day grind, i.e. survival? Retail figures will drop. Further insolvency will ensue, and the recession will deepen. For this reason, among others… this is far from over.

Despite my prediction that sales will drop further in the coming months, I do not advocate any measures taken to ‘stimulate’ spending. If people don’t want to spend, that’s there prerogative. It’s up to businesses to figure out what people want and give it to them. It’s not up to the government to make people spend when they can’t or shouldn’t.

Remember we’re not in a financial crisis because theirs not enough to lend or because consumers aren’t buying enough. We’re in a crisis because of years of excess at the hands of our banking system and now they are clamouring because some got caught without a chair when the music stopped.

A Feeling of Doubt

Mainstream media, which generally follows the status quo without question, is beginning to question the moves made recently. Even if a bit misguided, a la Jubak, at least it will draw people to spend a little bit more time wondering who is manipulating our economy. This excellent Wall Street Journal article and this Bloomberg article display a wide range of opinions and degrees of distrust, but the general theme remains. Hopefully this can only mean more awareness and more oversight by the public in general.

“5 reasons the Fed is obsolete” – Jim Jubak

When I saw the title to this article, i was very excited to say the least. Between this fantastic Wall Street Journal article  (please read it.) and now the potential for MSN Money to be ragging on the Fed, perhaps the winds were changing. Unfortunately my hopes were dashed when I realized Jim actually just thinks the Fed hasn’t done enough… and even scarier that, in the face of globalization, i fear he is indirectly advocating some kind of global central bank to replace the Fed.

Some of Jim’s ‘reasons’ for the Fed’s bungle…

     “The Fed failed to use its power to set margin rates for stock trading in the run-up to the bursting of the 2000 bubble. “

While Jim is saying that interest rates should have been higher, he fails to recognize that the rates were low because of the Fed, or if he does, he fails to recognize that the Fed has no business manipulating interest rates period. Every time they do, they create an inflationary bubble that bursts. Interest rates are prices and should be left to market forces like any other. Price controls end in disaster. (like right now.)

“The Fed failed to use its power to raise reserve requirements for banks in the run-up to the bursting of the bubble in 2007.”

Notice the common the theme here? Failed to use it’s power? Clearly. Anyway, it’s the same as before, either Jim doesn’t realize that the only reason the banks keep such low reserves is because  FRB, or fractional reserve banking, is enabled by the Fed and the FDIC. Bank runs are inherent in a FRB because there is never enough money on hand. The Fed has no business telling banks how much money to keep in reserve. Let the banks do it themselves (and remove FDIC coverage for bank runs) and very quickly you will find the banks that practice FRB fail and people stop putting their money in them. Problem solved.

“The Fed let other central banks take the lead on innovative regulation. Contrast the Federal Reserve’s do-nothing approach to the latest financial bubble with the actions taken by the central bank of Spain.”

Oh Jim, why? All he is doing is detailing things that would happen naturally in a true free market, but he’s advocating them be forced by socialism.

“What this all adds up to in my arithmetic is an institution that talks mostly to itself. Whatever else the Fed may be, it’s surely not a cauldron of new thinking and different points of view.”

Well that certainly is true, but according to my arithmetic, Jim isn’t exactly a spring of new ideas himself. Just the same old  interventionist policy in the face of catastrophes that were caused by the same interventionist policy.

Strength In Emerging Markets

In a main-stream adoption of Peter Schiff’s assessment of the strength of emerging markets, this article points out a growing belief that emerging markets will outperform developed ones as we move through the recession.

Despite, and without, the macro-economic analysis, it is logically not that hard to figure out why this is so. Emerging markets generally have large natural resource reserves, translating to potential true wealth, while developed economies are stricken with debt and enlarged service and financial industries that produce little. That, in combination with generally lower wages, will attract what intact investment money survives from the developed economies of the world, furthering the gap between the two classes of economies.

Why Economics Isn’t a Science

Economics is the study of how humans behave, the consequences of those actions, and thus the best guess on what to do from there. It would seem as though it were simple enough. In any other science, like physics for example, certain truths are held by all physicists or at least most. There is an agreement from the far corners of the school on how the universe more or less works. Anyone learning physics does not have to chose between believing in gravity or not, they more or less learn what all of humanity has discovered up until this point without bias.

That is the key point, bias. In a science like physics there is little reason for a scholar to attempt to bend people to his way of thinking. There is no reason for him to renounce Einstein and introduce his own theory, unless it’s bloody right. This is not the case in economics.

Economics is used to manipulate people. It may not have started that way, or maybe it did, but it certainly is now.

When you have a science based on human behavior, would it not be beneficial for some seeking power to skew it? To bend it’s outcomes?

Of what use is an economist who tells the truth to a man who seeks power? The economist is like a priest of old, a keeper of wise secrets that is shrouded in mystery. He appears to have a neutrality because he is not a politician, but why would a power-seeker quote the words of someone who does not follow himself?

It’s as simple as cheating on your resume, favoring friends you like and ignoring those you don’t. It doesn’t make the truth disappear or the friend vanish, but it skews your world. You seemingly have a better work history and your friends seem a little bit cooler on the whole.

Just because we only hear economists who say that our leaders can do no evil, doesn’t mean they are right. What use is an economist who says that taxes hurt the people to a politician whose pay and ability to enact policies depends on taxes?

Government sponsored independent panels, commissions, review boards, all the machinations of political propaganda.The congressmen who create these things, these are men with agendas and motives, they have vested interests… why would they leave these to chance with truly impartial examiners?

Self interest is powerful, made more so by the constant underestimation that it receives.

Dollar Falls on Rate News

This article depicts the current state of the dollar in light of the rate cuts by the Fed. Several times from several contributors it is said that “quantitative easing” has undermined the value of the dollar. In other words, the Fed printing money has made our money a little more worthless. Thanks guys.

Not to mention the whole idea ISN’T working anyway. Banks have resorted to only lending to those who are capable of paying them back regardless of how cheap their credit is from the Fed. Thus the housing market is still not at boom levels that everyone seems to think it should be at.