|Last Updated: Mar 25th, 2013 - 16:46:15
Thought for the Day
In this era of paper money backed by nothing more than the promises of bankers and politicians we will continue to have to booms and busts. It also looks like these booms and busts get bigger and bigger as time goes by and in this globalised world of ours they seem to be getting more and more in sync across nations.
So far we have learned that as the boom starts it is a good idea to buy property and other assets with borrowed money as soon as you can so that as the increasing money supply promotes inflation around the economy your loan becomes a smaller proportion of your assets. You can then borrow more and get more properties.
I thought about this recently when someone wrote into the Sunday paper for advice. They had been buying houses and now had five houses worth $2m and mortgages worth $1.5m giving them a net equity of $500,000.
What should they do?
Well, if the inflation is still booming they can sit tight or buy another house. If they sit tight and the inflation continues for another 20% they will make an additional $400,000 - Assets $2.4m, loans $1.5m.
If the boom turns to a bust of 20% they will lose $400,000 and have a net equity of $100,000 - Assets $1.6m, loans $1.5m. Not so good.
If they sell all the houses except one worth $500,000 just before the bust then they will have - Assets $500,000, loans $0. If the market goes up 20% they will only gain $100,000. If the market goes down by 20% they will lose $100,000 and have - Assets $400,000, loans $0. Four times wealthier than keeping all houses!
Maximise borrowings in the boom; minimise borrowings just before the bust.
So there we have the full story of how to cope in this boom and bust world. It is just a matter of timing. Since Al Greenspan claimed to be unable to recognise a boom until it had turned to bust the rest of us may have some difficulty with the timing problem!
Jul 18, 2008, 09:37
I have come to the conclusion that main-stream economists are using mathematical tools inappropriately. This is a difficult subject which will take some thought and time to discuss in detail but it is interesting that some others also have their doubts.
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Jul 18, 2008, 10:11
Fed To Lend To Freddie, Fannie; Treasury May Buy Their Shares
For those of you who think that the credit crunch has been solved and that all is right with the financial world the news that Freddie and Fannie required rescuing by the Federal Reserve must be a surprise. When the boom turns to bust and money is hard to find the only place to look is at the Central Bank. This is because the Central Banks of this world can create as much money as they like. A few key strokes and "abracadabra" - more money.
This magic money may never be paid back. The Federal Reserve of the USA has been increasing its debt load consistently from 1913. When it was pushed into infrastructure and building businesses this was not so bad as it was earning its keep. But since it has been used for consumer delights the problem has been building faster and faster.
How long can this go on?
As long as people believe the words of those in charge.
Jul 17, 2008, 16:45
Russia Is Most Likely Midwife Of A Fairer World Economic Order
This article is a fair representation of the current world economic condition.
The author believes that the US Federal Reserve is stuck between a rock and a hard place and is now not able to do much for the American economy by jiggling the economic levers.
New Zealand is in a similar place with falling manufacturing, a property crash ongoing, a depreciating dollar and a high spending government.
Last week the economists at BERL sponsered by two politicians proposed that our Central Bank be given extra powers to solve this conundrum. If only it were that easy.
Unfortunately the easy money road with everyone racking up large debts leads eventually to economic cold turkey conditions no matter what anyone does while the easy money disappears and the losers wipe their tears away and get stuck in to rebuilding what they have lost.
Boom and bust are inevitable with fiat currencies and Bollard cannot save us any more than Bernanke can save the US. A number of countries are now in big trouble at the same time which is unusual and may cause even more problems as we struggle to find solutions.
I know the answer but no-one will implement it!
Jul 11, 2008, 11:37
Grand Theft Society
The Daily Reckoning PRESENTS: Surely, nothing makes folks happier – temporarily – than for them to find themselves awash in newly printed bills. This will lead to internal joy, consumer spending, and thus recovery... So believes the silly political class. Lew Rockwell expounds...
GRAND THEFT SOCIETY
by Llewellyn H. Rockwell, Jr.
A core problem with government is that its managers believe that all reality will conform to their wishes if they issue the right orders, pass the right laws, and put the right people in charge. Reality resists this simple-minded approach; witness the debacle of the war on terror. Sadly, the same group that has managed that war is now managing another one: the war on recession.
The tendency of these managers is to fabricate a view of cause and effect that conforms to what they would like to do. In the war on terror, we were told that the 9-11 attacks came about because shadowy bad guys from afar resent our freedom. If you believe that, the answer is more militarism and killing as a preventative measure. If, however, you realize that these attacks grew out of a desire for vengeance against American military policies, the implied policy solution looks radically different.
So it is with the economy and the proper policy response to recession. If you believe that there is no good reason for an economic downturn other than a wave of animal spirits and flagging public confidence, your response is to inject optimism via the printing press. Surely, nothing makes folks happier – temporarily – than for them to find themselves awash in newly printed bills. This will lead to internal joy, consumer spending, and thus recovery.
So believes the silly political class.
Consider a different view of cause and effect. If the recession is a correction to an overly pumped economic boom, matters change. The recession, then, is not an aberration crying out for correction; it is itself the correction for the unsustainable economic bubble that preceded it. It should be welcomed in the same way we welcome a sober day after a drunken evening, or the detoxification of an addict after a period of addiction.
But here again, government begins with a view of cause and effect that conforms to its institutional wishes. The recession is the problem, and the only problem, and it can be corrected through the usual means: issuing orders, passing laws, and giving more power to the right people.
It gets worse. A recession contains at least one feature that turns out to be a saving grace for consumers who are hit with economic instability. In the midst of layoffs, tighter lending standards, and a riskier entrepreneurial environment, at least there are some sectors that have declining prices. At least in some areas, the purchasing power of money is rising. This makes life a bit easier. In times when there is very little good news, this is something to hang on to.
But instead of seeing falling prices as the silver lining in the recessionary cloud, government (and the media as an echo) sees them as the cause of all other problems. So, wouldn’t you know, government sets out to stamp out falling prices on the theory that if this succeeds, the entire economy will rise like a phoenix from the ashes.
This was the view during the Great Depression. Herbert Hoover’s and then FDR’s economic team was convinced that falling prices represented not a saving grace but a mortal economic sin. They spent more than ten years trying to make all prices rise. This, they believed, would cause recovery. They tried inflating the money supply. They tried wage and price floors, with vigilante enforcement, and even all-around industrial price planning. Finally, FDR tried the ultimate sand-in-your-face tactic: he went to war, and sent all those unemployed folks to foreign lands to kill and be killed, or to make-work jobs in the military-industrial complex, the CCC on steroids.
What did we learn from that debacle? Let’s make it official: we have learned nothing from our experience during the Great Depression. Even now, people are under the impression that falling prices cause recessions. Here is proof from the lead to this New York Times story: “With sinking home values continuing to drag down the economy...”
Sorry, but it just isn’t true. Falling house prices are not good news for homeowners who believed that they had purchased an asset that would forever go up in price. But they are wonderful news for people who are shopping for homes. They can buy more for less, and avoid frightening levels of mortgage debt in the process. In macroeconomic terms, the housing bust is also a welcome event since it was precisely this sector that was wildly ballooned during the boom. Unsound investments (or consumption goods masquerading as investments) must be leveled out before economic recovery can begin.
But it is really true that an economy can survive and thrive with falling prices. Falling computer prices didn’t drag down the economy in the ’90s. Nor did falling clothing prices. And consider the Gilded Era, the most prosperous until that point in all of human history. The consumer price index fell from 47 in 1864 to 25 in 1900 – nearly by half. That’s another way of saying that money became twice as valuable. And where was the calamity? Savings and pay packets zoomed in value. This period is called the Second Industrial Revolution because of the astounding increases in productivity, population, and technology. Falling prices and sustainable economic expansion are positively related in all of economic history.
If government and the Fed succeed in propping up home prices or preventing them from falling as much as they might otherwise, what will be the result? Homes will continue to be overexpensive and, on the margin, unwarranted purchases. This will not bring about economic recovery. This will force American consumers to spend more at precisely the time when they should be saving and getting out of debt.
There are lessons here. One is never to permit the government to discern the relationship between cause and effect. Government invariably rules out the possibility that the structure of the public sector itself is to blame for the problem, whether that problem is terrorism or recession.
Another lesson is that we need to shut down the machinery that allows government to enact its plans. If there continues to be a slice of the population that gets its kicks from issuing orders and trying to make the world conform to them, these people ought to be given a video-game console to play with. The game can be called Grand Theft Society. The stakes are too high to permit them to play their games using real wealth and real lives.
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Editor’s Note: Llewellyn H. Rockwell, Jr. is founder and president of the Ludwig von Mises Institute in Auburn, Alabama, editor of LewRockwell.com, and author of Speaking of Liberty.
Jul 4, 2008, 08:59
Over The Rainbow; A political allegory?
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Jun 21, 2008, 17:38