Heaven Now or Later?

One of the great issues in human history has been the struggle between the haves and the have nots.

The have  nots generally greatly outnumber the haves so the haves have invented various ways to maintain control.

One of the most powerful of these forces is religion, since it promises so much in return for obedience today.

Religion exists everywhere because it is needed to maintain the social order.

Of course we are all entitled to our religious beliefs but one should wonder why a being with absolute power and infinite wisdom would need some of his creations to worship him?

Still believe what you want but realize that the promises being made are unenforceable if they don't materialize.

It seems like time would be better spent pursuing equality and justice here rather than letting the haves continue to control everything.

In the stories about Jesus he attacked the organized religion of his time, driving the money changes our of the temple.

Wonder what he would think of all the money involved in religion today?

Thoughts on Politics

Have you noticed how quickly someone can go from being one of the best to a terrible lowlife in the current administration?

We see an all out attack on Omarosa since she is publishing a tell all book that is by all accounts pretty unfavorable to the dontard.

He attacks his sitting Attorney General for not taking his side without question.  Guess he has some protection from his many connections in the republican party.

It seems that many sitting republicans expected their constituents to be excited about that tax cut that mostly went to businesses and wealthy people.  This is a particularly clueless group so the amount of reduced taxes was barely noticeable and generally the increase in health care premiums more than offset it.

Most people were unimpressed and of course now the tariffs are starting to add up.

There is little being done in Washington that is going to help most Americans.  What would of course help them is better schools, affordable college, health care, child care, better jobs, stable retirements, sound senior benefit programs, affordable housing, less pollution and cheaper goods and services.

There are special interests who make a lot of money over how these things work now and that money talks loudly to politicians who need it to run for office.  Money over people seems to be the credo of all politicians generally but maybe republicans also drink the Kool-aid they are selling about how less Government regulation will make things better.

It will certainly allow the to make more money and therefore donate more so we see where the influence lies.

Interest Rates

We see some increase in interest rates and it gave the stock market a bit of a shock.  The rate on the US 10 year creeped over 3% but it has gone back below that threshold now.

These are still pretty low rates but there is a ripple effect of rate increases.

In general it makes money more expensive which makes debt more expensive and effectively has a negative impact on the money supply.

While the US Mint does in fact print currency, that is just a representation of the money in use.

The supply of money is determined by a number of fairly complex factors which simplistically can be equated to the value of all assets backed by US dollars.

Not all this money is readily available (liquid) but if I have a house (asset) with $50,000 of equity in it, I effectively have that much money to leverage.

Where it gets complex is in how that leverage works, and if credit gets more expensive it makes assets less valuable reducing equity and leverage reducing the money supply.

Now, it is in many ways more complex than that, but in the financial crises we saw credit become unavailable, equity crash, money virtually disappear and everyone felt the pain.

A firm can be valued in the billions one day and have effectively no value the next if they have high debt and declare bankruptcy.

This is why changes in interest rates that seem almost insignificant can have dramatic impacts.

Of course in rising interest environments, you might want to deleverage and put your money into instruments that benefit.

You might.

The Best Rule I Ever Sort of Learned

When I say I learned this rule, I don't mean I always follow it, it just works every time I do.  Its pretty simple and I read it in a book on investing many years ago.

I don't remember the name of the book and who wrote it, but I'm sure he was a successful wall street person.  The book was mostly technical about how the stock market worked and explained calls, puts, margin calls, and every type of exotic trade that existed at the time.

In the very beginning of the book he shared what he considered his secrets to success, and they included most of the things I have heard many times since about diversifying, managing risk etc.

The one that stuck in my mind and which always has worked for me is based on ignoring your emotions in the stock market.

We tend to fall in love with our decisions and stick with them long after we should.

The simple advice was to acknowledge that you were wrong and get out of the trade if it doesn't do what you predicted.

This is basically a cut your losses strategy and its so very easy to follow, except it isn't, because you do obstinately fall in love with your decisions.

Another saying on wall street is that the stock market can be wrong longer than you can stay liquid.

If all your analysis indicates that some stock should go up and you invest in it, but it goes down, we tend to rationalize to ourselves that tomorrow will be when the market corrects.

Maybe, but just admitting you might have been wrong is the best strategy.

You can always buy it again when the market comes to its senses.

If it ever does.

Now this is a bit more for speculators than long term investors, but why follow an investment down thinking it might go up some time in the future?

Admit it, you are wrong, maybe as often as you are right.

Money Supply

In a simplistic view, the amount of the deficit is seen as increasing the amount of money in the system and therefore leading to inflation. This view is only true if the money theoretically created gets into circulation and is greater than the amount of money that leaves the system.

Money is created in part by banks making loans. Based on the reserve requirements, banks can lend more money than they have in deposits. The idea behind this is that they have enough in reserve to meet demand while increasing liquidity in the system.

What should not be forgotten is that a lot of money has left the system, based on increases in reserve requirements, the failure of both banks and private (shadow banks) lending organizations and the tighter credit requirements. Further, the value of one's assets represent money available to the system to the extent that the asset valuations exceed current debt. To have an increase in the money supply we would need more money created than has disappeared.

Considering how greatly asset valuations, particularly in home values, has fallen this represents a tremendous decrease in the money supply. As foreclosures have increased, the reserves to cover these foreclosures must be replaced or the total lending has to be decreased to maintain reserve requirements.

In 2008, about 11 trillion dollars of wealth was lost in the United States. This means an amount between 3-4 trillion dollars and 11 trillion dollars left the money supply depending on reserve requirements. The total deficit in no way is able to replace that amount of lost money.

There is less money in circulation than there was two years ago.

Inflation - Deflation?

There are still many who predict the United States and its citizens are doomed to undergo a major depression because of the tremendous debt and the Government intervention in the free market system. Dire predictions like these have been made many times before but in times of severe economic contraction they get a lot more attention.


There are competing doom scenarios, one that predicts severe inflation and one that predicts severe deflation. Now both end up with quite dire forecasts and it sort of reminds me of a Robert Frost poem Fire and Ice.

We have been experiencing deflation recently, although it is not fully represented in the CPI. The June CPI shows an overall decrease of -1.4 year over year. A lot of this reduction is due to the change in oil prices and it would have been much worse if the Medical and Services areas didn't continue to have price increases. The oil prices from last year are clearly a short term phenomena and do distort the index. However, I think most of us feel that whatever the official statistics show, the actual cost paid for many things is significantly less than it was one or two years ago. Consumer spending is down significantly and with less demand, the price curve goes down.

Now in order to combat weak demand and potential deflation, the Fed has lowered interest rates and the Government has increased deficit spending. This takes us to the inflation scenario, one in which proponents of monetary theory believe the increase in money supply can take us no where else.

It does seem that considering supply and demand, an increase in the money supply without a corresponding increase in demand will lead to a lower price for the dollar and therefore inflation. Of course this assumes the real money supply has increased, which may be debatable considering the higher reserves held at banks and loss of wealth (i.e. money) due to the drop in housing and equities.

So would either deflation or inflation be disastrous? Depends on ones definition of disaster.

Concerning deflation, one can look at Japan which has been in a deflationary period since the mid 1990s. There was some belief that it was starting to emerge from it, but recent events call that into question. The main problem with deflation is that economic activity slows, borrowing becomes difficult as debt becomes more expensive over time and economies tend to stagnate. However, looking at Japan over the period of deflation, does not indicate that society as a whole collapsed, and the standard of living for most Japanese had been maintained at respectable levels.

As far as inflation goes, there are a number of examples of ruinous inflation, perhaps most notably the Wiemar republic. Inflation there completely devalued the Mark, led to the fall of democracy, the rise of Nazism and ultimately World War 2. Now, other countries have also had sever inflation without having a World War as a result. Inflation makes everything seem more expensive and is particularly hard on those who live on fixed incomes. It certainly makes foreign imports more expensive but makes domestic exports cheaper leading to improvements in the balance of trade. Clearly, the rate of inflation has a lot to do with the ultimate impact. If prices grow at a slow to moderate pace it is not particularly problematic. It would be sudden and rampant inflation that would cause the most disruption. The other factor, is if inflation is expected, people demand higher returns to offset the expected devaluation of the dollar, causing borrowing to get more expensive and driving down the market p/e ratios.

Now, in our current scenario, we have seen the economy contract by about 15% over the last 4 quarters. This drop in demand is what has caused the recent deflation. It seems that the stimulus and cheap money policies may be bearing fruit and demand is starting to increase. However, we know that there is significant slack in the economy related to labor and commodities that would offset any significant inflationary trends.

Now, if the dollar continues to fall internationally, it makes American products cheaper and foreign products more expensive. It is possible that increased exports can reduce the slack in domestic consumption and lead to an increase in production, potentially fueling the inflationary fires.

So what will it be? It seems that we are at the bottom of the price reductions and that as demand starts to increase we may see modest price rises. Of course, it will take awhile for these prices to return to pre-recession levels and if we make significant progress in areas such as renewable, domestic energy sources, we may find the amount of dollars going outside the country significantly reduced. We also know that Americans are saving more, and those savings are reducing the amount of money in actual circulation, just as the increased bank reserves are.

So inflation is not guaranteed. I would like to think that as the economy picks up we take an intelligent approach to deficit reduction and debt retirement. The biggest challenges there include the cost of foreign energy and health care. I am pretty optimistic about both of these and think its time we fixed them.