January 28, 2009

Can we say: MORAL HAZARD!

So the Fed is now bailing out "distressed" homeowners. Here's the catch: you have to be two months delinquent on your payments. Wow! If that's not an incentive to stop paying your mortgage, I don't know what is. These people are totally oblivious to the concept of moral hazard. This is going to compound the problem more than imaginable.

Here's the link:


January 20, 2009

Negative Interest Rates: Can they be serious?!

There's an absolutely mind-boggling article here which makes some of the most outrageous claims I have ever heard. I couldn't let these claims stand unchallenged, even if my voice is only a squeak.
The article claims that the current Federal Reserve interest rate of ZERO percent is not low enough. In fact, one report from Goldman Sachs actually says that the Fed needs to cut the interest rate to NEGATIVE 6 percent to provide the needed stimulus.
It gets better. The article goes on to claim that inflation will soon be zero percent. What it said next almost made me fall out of my chair:

The solution is obvious: The Fed needs to deliberately raise the rate of inflation — maybe not all the way to 6 percent, but significantly above zero.
One way to do that is to print lots of money. The Fed can create money from thin air by purchasing assets such as Treasuries and mortgage-backed securities and paying for them by crediting the seller with newly created reserves at the central bank.

As if this wasn't good enough to pass as the worst idea in history, the author goes on to explain more:

That way today's zero interest rates would be negative in inflation-adjusted terms and the economy would get the boost it needs. Fed rate-setters would need to swallow hard, since 99.99 percent of the time they try to quell inflation, not raise it. But most of the voters on the Federal Open Market Committee are aware that deflation can be an even greater nemesis than inflation.

Honestly, I am now speechless. Not only is this paragraph full of lies, it deliberately misleads people into thinking that the Fed fights inflation. The Fed is the SOLE CREATOR of inflation. What is there to do in the face of such blatant disregard for sound monetary policy? Can they really believe that inflation is not a problem? If they follow this policy, there is nothing stopping us from becoming the next Zimbabwe.

January 14, 2009

Zimbabwe update: Just to prove my point

So remember how I said that the Zimbabwean dollar was $1 US = $9,570,555 Z? Well, as of today, the new rate is $1 US = $12,525,200 Z. So, the US dollar costs $3,000,000 (that's three million) MORE Zimbabwean dollars than it did TWO DAYS AGO!
This blew me away so I just wanted to share it. Don't think it can't happen to us.

January 12, 2009

Largest check ever written

So this must be the largest check ever written:

In case you can't read it, its one quadrillion, seventy-two trillion, four hundred and eighteen billion, three million dollars. Well, that's what you get when the inflation rate is 12.5 million percent. This check was drawn on a Zimbabwean bank. That's hyperinflation folks. By the way, $1 US = $9,570,555 Z as of a couple minutes ago...
Not sure what it is now....
Or now...

January 11, 2009

Israel, Gaza, and [the] US

I would like to make a quick note about the situation in Gaza as it is prominent in the news lately. First of all, most people will realize that there is nothing new going on here. Israelis and Palestinians have been bashing it out for decades. I could spend a lot of time talking about the history of this bashing. I could talk about the atrocities committed by both sides. I could present either side's case for its claim to ownership of the land. I could talk about the lopsidedness of the forces involved and those that suffer because of it. But it all is beside the point I hope to make. The point is: It's none of the United States' business.
And yet, the US government has been making it its business since the creation of the state of Israel. Sure, there are many reasons why, but none of them convinces me that it is in our national interest, security-wise or otherwise, to officially support Israel militarily or financially.
Israel can take care of itself. It has proven this for many years. Its enemies are vastly unequal to its power militarily. Israel cannot possibly need the military support of the United States. Furthermore, our support of other countries who are historically enemies of Israel has been counterproductive. Why do we continue to support both sides of an ongoing war? Are we not facilitating its perpetuation by our meddling?
These interventions have not made us safer or more prosperous as a nation. In fact, they have made us less secure by inciting hatred toward us in the Middle East and elsewhere. At the same time, our military ventures have placed undue strain on our financial resources, the consequences of which we are experiencing now.
Another point I would like to make is about Iran. Some have recently suggested that Iran has been supporting Hamas against Israel and that we should intervene to stop this. Frankly, I cannot understand this argument, even if the accusations are true. If we oppose Iranian (foreign) involvement in an area that Iran deems necessary to its interests, why should we not also oppose our own involvement in the area? Is this not a gross contradiction in principle?
Now, I do not wish to take sides in this conflict. Experience and research has shown me that there is not truly a side to which justice belongs and therefore I could commit myself. However, even if there were, this would not justify the intervention of our government in affairs over which it has absolutely no authority.
I am hoping to get some response to this post. What are your opinions on the conflict? What do you know about its history? What do you think the role of the United States should be, if any?

January 4, 2009

Money: Part 2

Earlier I wrote about how money originates as a commodity through the barter system. While the origins of money may be clear, the idea of money may still be abstract for some. This is because our concept of money has changed dramatically from its original form. Our current system consists of a fiat paper currency which is nonredeemable for any commodity by the institution who issues it. That is, our “money” is simply ink on paper which the government forces us to use through legal tender laws. This paper money is issued by the Federal Reserve Bank, but the Federal Reserve will not redeem that money in any commodity other than an identical paper note.
Legal tender laws which establish the paper money as fiat money require that it be accepted as a form of payment for debts. This means that if fiat money was offered as payment for a debt, the courts will consider that debt paid. The courts will not enforce payment in any other form, even if that form of payment was specified in a contract (ever heard of the gold clause?...It was made irrelevant by legal tender laws).
The evolution of a commodity-based monetary system to a fiat paper money system is somewhat complicated, but I will try to explain the process as best I can. Originally, when gold was used as money, banks issued paper receipts to customers so that they could return and claim their gold at any time. People eventually began simply trading the receipts themselves as if they were gold because it was easier than withdrawing the gold to pay for everything.
Eventually, banks figured out that they could issue more receipts for gold than gold that actually existed in their vaults because virtually no one ever came to withdraw the gold. This led to what is called fractional reserve banking. That is, banks only held a fraction of the receipts in circulation in gold, but this practice was not particularly legal when it first started. This is because it was considered fraud. The receipts were titles to the property that existed in the bank vault. The bank was essentially committing fraud by issuing new titles to the same gold. The system became legalized through a partnership of the government and banks so that banks could provide quick and easy credit to governments to finance this project or that war.
However, there were problems with this type of system. Occasionally, banks expanded their credit or their paper receipts far beyond their actual reserves. When people started realizing this, they began to withdraw their gold from the bank before it was too late. If the panic grew, there was a “run on the bank,” causing the bank to fail. This wiped out the savings of those who falsely thought their money was safe in the bank because suddenly their paper notes where not worth anything as they were issued by an institution that didn’t exist anymore.
But instead of abolishing the system of fractional reserve banking, the government sanctioned it and setup a central banking system that linked all banks and regulated their activities. Central banks made sure banks kept a certain amount of gold in reserve and offered individual banks infusions of gold if problems arose. The problems with this solution may be obvious. The government could not prevent a full-scale bank failure (one that targeted all banks) it could only prevent isolated bank failures. Because the system was fully based on a fractional reserve, there would never be enough gold to cover the receipts, no matter how centralized the system was.
This led to the temporary, and eventually complete, suspension of redemption for gold of the paper notes. But this is not the end of the story; today we have moved into a whole new phase of currency evolution. Not only is our paper money not redeemable in gold in any way, our paper money itself has replaced gold as the reserve unit. That is, banks no longer hold gold in reserve, they hold paper money. They don’t even have to hold enough paper money to cover all their checking and savings accounts.
This new form of fractional reserve banking goes way beyond the old kind. But it is also somewhat strange, because it is, in a sense, also a 100% reserve system inasmuch as accounts are insured by the FDIC. The whole way that this came about is pretty complicated, as I said, but suffice it to say that the natural laws that govern money circulation and usage have come to bear on our current fiat paper monetary system. In order to prevent bank runs, the government has insured deposits, essentially removing the worries that one will lose his deposits’ nominal value. However, the government has not eliminated the workings of the fractional reserve system, such that banks can still lend more money than they have and collect interest on more money than existed in the first place.
In effect, this has created a monetary mess that can honestly only end in disaster for our currency. Returning to sound money, which is not subject to these weaknesses and caprices, would prevent a monetary disaster, but the transition would not be simple or easy. In the next part on money, I will give some of my ideas about how we can return to sound money.
What other weaknesses does our current system have? What are the benefits of our current system?