I’d never heard that term before a few weeks ago, but I get the concept.

Sometimes jobs are not outsourced or offshored…they simply disappear and no one gets them…or at least that is the concept.

As I think about machines taking blue collar jobs, and computers taking increasingly white collar jobs….it is only a matter of time until no one’s job is safe.

The economic concept there is that the increasing technology is a good thing:  We don’t want people farming with oxen and mules.  We’d all be starving to death…not enough food to go around.

We also like the automation of more complex work.  We complain when someone’s job is replaced by an Excel macro, but was the work really that worthwhile anyway?

Also, I worked on one of those big enterprise platforms for years (like the ones that handle stock trades, account balances, cut paychecks, etc).  Trust me, without stuff like that our society wouldn’t exist.  If the virtual paper pushed by those systems became real paper that someone had to process….every single person in the US would be employed as a paper pusher.  That’s no life.

We need those things; every job that is “lost” makes our society better.

So what’s the issue?

Well, two things:

First, the easy one:  Offshoring is great because we save money by allowing Indians to program our software and China to manufacture our goods.  We spend that money elsewhere, hopefully in some productive pursuits in addition to enjoying a higher standard of living…and we’re a little better off on average.

Now it gets more conceptual:  China is learning to manufacture.  India is learning to program.  What are we learning?

The concept is that China manufactures cheap, basic goods, and India programs low level software…but where do you learn how to manufacture complex goods and high level software……you start with the cheap and low level.  We are exporting our expertise to them, and not replacing it here.

The second point is a bit further out:  Goods get cheaper as we get better at making them…and we are definitely getting better.  Economics also says that as the marginal cost of making one more item drops to zero, the cost can also drop to zero.

Will we ever get to zero?  Will things ever cost nothing (or close to it)?

It isn’t a dumb question.  We live like kings if you compare us to someone  200, 300, 1000 years ago.  The cost of stuff IS dropping…just not quite to zero, and we think up new crap to get, so we end up on the hedonic treadmill.

I used to think that would last forever, but I am not so certain anymore.  I’ve seen some real big ideas come out of bio-tech, alternative energy, nano-technology, artificial intelligence, etc.  If even a few of those hit……we’re in for a ride.

Let the price of energy drop to near zero and watch the price of all other goods drop dramatically.

Let bio-tech add 50 good, productive years to everyone’s life and watch the most productive of us invent/outsource/unsource things we never dreamed of.

The biggest (probably most far off) bets are in nano-tech and artificial intelligence.  Imagine a nano-tech printer that can “print” anything you can draw up (there is already work being done with these kind of general purpose printers).  Now imagine you didn’t even have to draw it up…you ask your artificial intelligence to think of something for you.

Some of this isn’t so far fetched.  The printer idea will come in some form.  So will AI to rival human intelligence.  There are already self-improving algorithms that you can give a problem to and generation over generation (all on a computer) it (being the algorithm) will get better at the task…in essence evolving.

When this hits the price of goods will fall to near zero, and basically humans will be worthless, vis a vis the Matrix and Terminator.

Anyone that thinks I am advocating that we attempt to  re-cork the bottle and protect jobs here at home or become subsistence farming Luddites misunderstands.  I am simply playing out scenarios.  Protectionism wouldn’t work anyway.  Societies rise and fall.  The US is on the downslope.  Nothing will change that.  As for humans being useful, frankly I don’t think it matters.  Just as societies rise and fall, so do species.  Perhaps it is time to give something else a chance.

Ok, I’m off to bed.

Ok…really its two different topics, so I’ll take holistic thinking first.

So I do HR consulting, and we are always talking about the big picture…creating a holistic transformation, etc, etc.  Let’s think about holistic.  Its means whole.  You’re thinking about the whole thing.

Why is this is pipe dream?  Two reasons:

1. Employees, no matter how high up in an organization (other than the CEO/COO) only have a certain purview.  The Executive VP of Compensation….deals with compensation.  If s/he were to think about the effect of compensation, it is just one piece of what keeps an employee at a company and motivated to perform (there is also benefits, manager competence, even the comfort of the chair s/he sits in at work).  In short, the VP of Comp can’t afford to think holistically about “total rewards” or “employment brand”….their purview is too limited.
2. Some companies now have “total rewards” managers, or some other role, trying to get around this paradox.  Its a good idea, and likely works better than roles with more limited scope.  2 issues here:
   1. Its hard to find someone that knows a fair amount about everything related to Total Rewards or Employment Brand (It was hard enough to know just about Compensation).  Competence at this level will be difficult to come by….by definition.
   2. Here is the main issue, and my main issue with Holistic thinking….even in the best case scenario:  Complexity is hard to sort out.

People are not smart enough to deal with real complexity.  No one is.  The human brain cannot deal with an unlimited number of variables.  If you make a manager’s scope too limited, they are not holistic.  If you make the scope larger, they run into the issue of complexity.  Ok….what’s the real issue?

They call it the Butterfly Effect or perhaps more accurately the Law of Unintended Consequences.  Bottom line, we are unable to predict the outcome of systems that get too complicated.  The weather is an example.  Businesses are another…at least currently.

I think business/management will eventually become more scientific.  The human brain often fails at modeling complex systems (no person can predict the weather), but science can do a little better given time.  Of course, we still can’t very accurately predict the weather…even with science.

Any advice for businesses?  Yeah, I do have some.  Its a vote for the next-best, iterative solution.  The great Holistic strategy is not forthcoming, and if it were…..it would be too complicated to implement.  Be willing to start something today that you know is a step, and isn’t perfect, and is full of holes.

Companies already do this.  They’re good at it.  Where then do they fail?

Short-sightedness.  They start on a step 1…by the time step 2 is supposed to happen, they’ve had turnover (the original planners are now gone), the business environment has changed….they’ve already come up with another plan.  Plan 1 isn’t anywhere near done, and they’re already on Plan 3.

There is an abundance of strategy in corporate America.  There is not a ton of execution/follow through.  Even I recognize this.  By the time I’m good enough at my current job to have real effect….I’m off to something else.  Sustained effort is gold.

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And then there is inflation.  I explained here what the US is doing with its monetary policy (printing money), and how we might bail ourselves out of this mess (other countries will finance our ir-responsibility).  It seems the Chinese know it too.

Another short bit on inflation:  I’ve heard the business press say wage pressure causes inflation (if people get paid more, then prices go up).  That’s shit.  Inflation is primarily caused by a change in the money supply.  The money supply is controlled by the Federal Reserve.  The Fed causes inflation.

What the Fed tries to do is even out the business cycle, to prevent inflation, to prevent boom and bust by slightly rigging the system all the time to ensure even growth and stable prices.  We get back to Complexity though (and weather prediction).  No one can predict economics.  The Fed gets it wrong….and thus causes our business cycles, not prevents them.

I’m not down on the Fed….I’m sure Ben is one of the greatest economists ever to live….but that don’t mean shit.  The greatest weatherman is still just some clown pointing at clouds on a map…..failing against Complexity.

Not all “stuff” is created equal….or is even useful at all.

I’m not talking about diamond studded toothbrushes for your toy poodle.  That’s fine with me.  If you want to waste money on your dog’s oral hygiene, so be it.

I’m talking about entire industries/sectors of the economy that don’t provide anything useful or are unduly bloated.  Their existence is a distortion; a fluke of a particular set of conditions at the marcro level (govt, laws, etc).

Here is an example often given:  Income inequality creates crime because the really poor want what the really rich have….so some portion of them steal it.  If there are more poor and more rich (the income distribution widens)….there is more theft.  To combat this situation the really rich simply move into gated communities, install security systems, etc. 

Some portion of the home/personal security market is a distortion due to income inequality.  In my opinion, although it adds to GDP, it should subtract from it.  It is a negative value service/product.

Though the US has a 12 trillion dollar GDP….I think much of it is a fantasy.  I don’t know what percentage might fall into this “useless” or “distortion” category…but it does make me wonder how “rich” our country really is.  What is rich?  Is it having enough money to buy stuff that will insulate you from the poor?

Anyway, these arguments have been made before, but the reason I’m bringing it up again is that there is another sector of the economy much larger than personal security that I think is of debatable usefulness…and whose size is certainly a distortion:  FINANCE.

Finance will of course always exist (as will Accounting, Financial Advisors, Insurance, Lawyers, etc); however, there are so many laws and obscurity in finance, that sometimes I wonder if much of the industry is a fiction….just pushing around numbers on balance sheets, or “trading” assets that aren’t backed by anything REAL. 

I’ll give two examples:

1)  Hedging:  In managing hedges, if someone makes a negative bet on company A, in theory it allows someone else to make a positive bet on company A and maintain the overall hedge.  In my example it is easy to see that there is no real value created, just two opposing bets in a zero sum game. 

But if you manage thousands or millions of those bets, and roll them up into a balance sheet and play some accounting tricks….it may look like you have real assets, which of course someone else could then potentially hedge against.  The fact remains it is a zero sum game, an accounting fiction adding no real value….just pushing paper. 

2)  Derivatives:  If hedging seems complicated, derivatives are even more mind blowing.  Let’s take the “assets” created in the previous example, and decide that we don’t want to invest/hedge on Company A anymore…..we want to invest in part of company A and part of company B.  Of course that entity doesn’t actually exist, but through derivatives you can create it on paper. 

Do you have a new asset?  If you combine a bunch of things based on a bunch of other things in a cascade of derivatives, you eventually get so far from reality that you don’t understand the assets backing the paper.  Are there any?  Is your derivative simply backed by another package of derivatives that folds back on itself or ends in a dead end?

It is easy to see that if enough people play the game outlined above, you’ve created something from nothing.  Its a distortion too complex to get your head around, so you assume its real because really smart people are using big formulas at the top of tall buildings to work it all out.

In the end, I think much of the “cloud” of finance exists as a distortion.  In a world where people eat, sleep, talk, and move on things that EXIST in the real world……if all those fancy financial instruments didn’t exist would we be any worse off?

I don’t think so.  At least not materially (since of course there isn’t much material about finance).

What about all those jobs?  Legions of very, very smart people are employing their time in industries (Accounting, Finance, etc) that shouldn’t be as large as they are….which means they are NOT doing something else, which could be more useful:  Medicine, Science, Construction, Engineering, Teaching, etc.

Imagine how much better off we’d be if the brainpower of finance were focused on advancing clean energy technology?

Some may say, “Finance is enabling clean energy technology…by allowing money to flow into it.”

I say, “Yes.  Finance can be useful, parts of it are useful.  However, the bloat and complexity of the current system is not.  It is just dangerous paper pushing….created by distortions, enabling further distortions…..creating assets that don’t really exist and diverting brainpower from other industries where it could be better employed.”

I remember when Enron went bust I said, “Through fancy accounting tricks, one day a company is going to make a profit selling to itself.”  Well….its already happened.  The entire industry of Finance is making a profit selling to itself….forever pushing pieces of paper back and forth amongst itself….thinking that somehow it is creating value.

I keep hearing all this crap from the media about rising food prices.  And then they talk about the price of gas.  And then they talk about the falling home prices (which aren’t really falling, but simply returning to a more reasonable level after being inflated themselves).

But they always talk about them separately, as if they had nothing to do with each other.

They are very related…and the relation is to the value of our money, which is a fiat money issue.  It is related to ramping up the printing press, and a crisis in the faith of the value of the dollar.

Remember that fiat money has no value other than the agreement that it can be exchanged for things.  The US dollar is worthless if everyone decides we don’t want to use it for payments anymore.  At that point the govt must enforce its use, prevent by law the exchange of the dollar for something of hard value….and then the govt usually collapses some time after that.

So….what does this have to do with anything?  The recent rise in prices is caused by the devaluation of the dollar (a fiat money, printing press issue), not by any smokescreen the government or media may be reporting.

Here is the thought exercise:

The government is printing more dollars (through low interest rates), making each dollar worth less.  We see this, and the international community sees this. 

It is in everyone’s best interest to convert the value of your dollars into another store of value (gold, the Euro, real estate, etc.) that is more stable.  Every day you hold dollars, they are worth less…so you convert the dollars to something of hard value.

What do you choose?  The first option for the international community is probably another currency, because it is a quick, easy way to convert value….and we see this:  Major currencies all appreciating versus the dollar. 

But what happens when other central banks also depreciate their currency, or there is a crisis of trust in the fiat money system in general?  Easy:  We choose a hard store of value…something that doesn’t represent something of value (like a bill or coin), but actually IS valuable (like food, oil, real estate, etc.)

What is the most popular hard store of value ever???  Real Estate.  You cannot turn up the printing press on land.  Unlike paper bills, they’ll never make any more:  the supply side is fixed.  In uncertain economic times, land is a certain store of value.  And that’s what we saw:  Housing (and thus real estate) prices shot through the roof.  People liquidated their dollars (which were very cheap anyway due to low interest rates) and bought a hard asset.  We did it, and the international community did it.

So the “fall” in real estate values is not a fall so much as it is a return to more reasonable levels after a real estate bubble created by the process I described above.

Now lets look at Food prices:  Do you think there are suddenly more people eating?  Or that crops are failing all over the world?  No.  We buy most of our food from abroad, the dollar is worth less, so it takes more of them to buy food.

Now let’s look at Gas prices:  Is there a supply side issue?  Is less oil being pumped?  No.  Is there a sudden rise in demand?  Not enough to justify the current rise.   Here is the price of oil in gold instead of dollars:  our currency is plainly losing value.

Part of it is our dollar is worth less, so the price is rising.  On a related note, oil is priced in dollars as an international commodity, so the price cannot rise the same as non-dollar denominated assets.  So why the sharp rise?  Is inflation THAT bad?  I’m not exactly sure about this one…but it may be oil speculation.  The movers/shakers on the international scene are looking for safe stores of value for their money.  Currencies are being devalued (can’t invest there), real estate prices have already been run up (can’t invest there)….so what’s the next hard store of value to move to…..commodities (oil, metals, etc).  So the next bubble would be in commodities.

Is there anything we, as regular people, can do about the government devaluing our dollars?  Not really unfortunately.  For those with the determination, it is possible to denominate your savings accounts in other currencies, or gold….but I think most of us are stuck with inflation.

My two geek hobbies are happiness research and economics. I post about them often. Today I’ll talk a about economics and money as it relates to the big, bad looming/imminent debt crisis.

I’ve written before about Fiat money. Fiat money is money with no intrinsic value, backed by nothing of intrinsic value. It is just paper and we all agree that it will be treated as money, and so behave as if it had value.

Most modern economies (us included) use fiat money. In the early 1970s profligate spending mostly brought on by the Vietnam war forced us to abandon Bretton Woods (an agreement for currency backed by gold instead of fiat). Of course there would be no economic lessons to be learned about Iraq from Bretton Woods/Vietnam 😉

The problem with money that isn’t backed by anything of value is that its easy to abuse with a printing press. Government controls the printing press for money and everyone agrees to keep up the charade that it has value as long as the government is responsible with the printing, since a stable money supply equals a money of stable value.

That is the advantage of gold…even though gold doesn’t really have an intrinsic value either (its just a yellow rock)…it is of limited supply and it has a long history of value…so people trust it. (If we could figure out how to manufacture gold in a lab, gold would lose its value too.)

So the incentive is for a government to be responsible with the printing press of money, because they’ll make their currency worthless if they print too much. It is a dangerous temptation though to know that you can just print another reem of hundred dollar bills and you’ll magically have thousands more dollars. Printing free money is a temptation that government will eventually yield to (yes, I know I have a dangling preposition). Our government is currently yielding.

Once you get irresponsible with the printing press, you’re on your way to worthless currency…as well as wrecking your nation’s standard of living.

The US government creates money several ways, but the main way is by allowing banks to lend money in a fractional banking system and then regulating the lending and reserve rate. This is our complicated way of printing money; the effect is the same.

For instance, when the Fed “lowers the rate”, it suddenly becomes cheaper for banks to borrow money (they borrow money from the government, which creates money since the government doesn’t really have any money except through the printing press). The banks generally (but not always) pass along this savings to us….which makes money cheaper.

We borrow more, but the banks don’t have to keep all of it on hand. They may have 100 bucks in their bank vaults, but 1000 bucks in outstanding loans. That extra 900 bucks is created when they lend. The more they lend, the more money is created. The cheaper it is to borrow, the more we borrow, the more money is created.

So when the Fed “lowers the rate”, he is creating money. Creating money generally stimulates the economy. Why? Two reasons: 1) The loans (which create the money) are usually taken out to pay for some sort of business or personal investment, which is actually good for the economy (but what happens when it isn’t…what if its wasted on some foreign war like is happening now?). 2) Creating more money can give the illusion of being richer for a short time. “Flooding” the market with money (this is sometimes called “papering over” an economic issue) gives us money through inflation, which we spend, which stimulates the economy…but it is eroding the value of the currency at the same time.

What happens though if it is a big crisis? What if the crisis isn’t with a specific part of the economy, but with the debt/banking system itself (the worldwide financial markets get scared of “debt” because they think it won’t be paid off, that they haven’t valued the risk correctly. They will steer clear of the risk.)? Remember that trust is the ONLY thing that gives the US dollar value.

US debt was considered good and so people value the dollar. Now it appears the whole system is under stress (since debt itself is what creates our money). The debts people thought were safe, were not. The US dollar is not safe.

That creates two problems. 1) Even with a stable money supply, when the international community thinks your currency is more risky, the value falls. 2) We are creating more money by lowering rates to stimulate the economy. An increase in the supply of money devalues your currency.

Those two things are working against us in tandem. The more the Fed tries to rescue the economy by lowering rates, the more value the dollar loses….which is part of the problem to begin with. You’re in a catch-22.

There is a choice to make: On the one hand we can devalue our currency to try to stimulate the economy (which is the traditional approach). On the other hand if a debt crisis is what caused the economic problems in the first place…how can issuing more debt help?

What if lowering the rate doesn’t stimulate the economy? Well, they lower it more…further devaluing the dollar, causing more of what got us into the mess in the first place: too much debt.

The Fed pumping money into the system to “save” the economy is only postponing the debt crisis and making it worse. The Fed knows this as well, but I am guessing there is tremendous policital pressure to keep the economy limping along. No politicians will take the pain now for a better day tomorrow…since there won’t be a tomorrow (no re-election) if things aren’t good today.

People can also invest in (lend to) the government, as well as borrowing from them. The government sells bonds, and US government bonds are considered one of the safest investments in the world. They yield a low but passable return, let’s say 5% annually.

In this scenario the government is in debt to us (the US citizens), and we get 5% interest on our loan to the governement. But what if the government inflates the currency 5%? We break even, which is just like hiding money under the mattress..not a good investment. Investors (<– the people with the real money) get really mad about inflation, since it erodes their profits.

What happened to the 5% return we were supposed to get though? This is where it gets interesting: The government stole it back from you. They spent too much money (on wars or whatever), and didn’t want to raise it with taxes, so they raised the money a different way: Instead of paying back your loan to them with 5% interest, they inflated the currency and kept the 5%. They pay back their debts with ever more worthless money, and we can’t do anything about it. In the process they are eroding our savings (since every dollar we have saved is now worth less…we need ever higher rates of return just to maintain its present value).

In the extreme scenario, you can see that an overspent government is forced to inflate the money more and more to make paying back the interest on their loans less painful. In essence, as you inflate/devalue the currency, any debt denominated in that currency becomes cheaper.

Here is another extreme example: The government owes me a trillion billion dollars. They obviously can’t pay it off. What does Uncle Sam do? Prints off a trillion billion dollar bills and gives them to me; yet in the act of doing so has made them worthless. I can’t do anything because technically the debt has been paid.

Let’s think about this internationally: Many commodities are priced in US dollars. Oil is one (but anything priced in US dollars follows the analogy). Many oil rich countries are mad about our inflationary monetary policy, and have threatened to price oil in Euros and break their peg to the dollar.

What is the effect of dollar denominated oil as we’re inflating our currency? We get to buy oil with every more worthless dollars (in essence, stealing). If oil were priced in another currency, we’d see the price of oil rise for us, but it would be stable for everyone else. We’d price ourselves out of the market for oil (since it would be so expensive for us), and would have to stop the devaluing of our currency (since we couldn’t buy anything with our worthless currency. In the extreme case, countries would no longer accept US dollars as payment). But since its in US dollars, the price can’t jump that high, because the price would also jump for everyone else. Again, in essence we’re forcing the rest of the world to deal in and accept our ever more worthless currency. (Coincidentally, the price of oil is at an all time high and is rising…much faster than inflation…which makes you wonder how accurate the inflation numbers are when all goods/services depend on oil.)

Also, there are the countries that peg to the dollar (lots of them): We are exporting our inflating currency to them as well, and many of their economies are not as stable as ours. Exporting inflation (as we saw in the other example) is sort of like the government stealing from you. There is a good reason many countries are mad about what the US is doing. We are stealing from, and exporting our problems to them.

Everyone pegged their currencies to the dollar and priced international commodities in dollars in the first place because they trusted the US government and its responsibility with its currency. We have broken that trust.

But what if the debt train stops (they don’t buy our dollar denominated debt), and commodities are no longer priced in dollars? What if a country’s foreign exchange reserves are no longer dollar denominated?

The government fails. The dollar is worthless. We’ve printed ourselves into oblivion. (This actually happens occasionally)

The government fails?? Really? I know you’re thinking that can’t happen….but it can. A government supported by worthless money can yield no power. No one would accept their payments. They wouldn’t be able to afford upkeep of their infrastructure (roads, military, etc.). You can’t trust them…and it really goes back to that trust.

A crisis of the debt agreement (what we have now), is much more significant than manufacturing jobs leaving, or the auto market struggling. A crisis of debt is a crisis of the foundation of the economy, and government.

Not to sound too alarmist though: Our government will not fail (at least in the same manner as my extreme example). Why? Because other countries will and are subsidizing us. And they aren’t happy about it. In essence, we are stealing from them in a very sophisticated way.

All the countries out there pegged to the dollar (and many others in general) are holding US dollar reserves to stabilize their country’s currency. If all of them suddenly liquidated those dollars for another currency….we would see a glut of dollars hit the market, and a fall in demand for the dollar. Again, rising money supply = inflation, and fall in currency demand (less dollars would be demanded because country X has decided it no longer wants dollar reserves) = less value for the currency.

Also, we’d have to start buying the goods from that country at a real market rate (instead of our dollar subsidized rate). This is the same analogy as with dollar denominated oil above. As long as a commodity (bananas, or copper or whatever) is priced in dollars, we can just print more paper and force others to accept the money. Price the commodity in a stable currency (Euros or whatever) and we have to pay market rate by first buying Euros. In this scenario we don’t get the advantage of the “dollar subsidy”.

But Elliott (I hear you thinking), we don’t “print” money persay; we issue debt to create money. What if people simply quit borrowing? What if foreign governments quit holding US reserves, or quit buying or Govt T bills?

Well, the fact is there are trillions of dollars already out there…..many trillions…owned by other countries. If other countries “quit” all their dollar denominated assets…..they would essentially make them worthless by the act of selling them. There would be a “run on the bank” for US dollars.

Other countries have a vested interest in the seeing the dollar continue to be strong because they would devalue their own US dollar assets if the dollar failed. Also, many governments/economies depend on the US economy. If the dollar failed, the world economy is in real trouble.

Because so many countries have a vested national interest in US economy, we are able to devalue the dollar, and force the world to pay for it. The have to keep buying our crap in dollars…otherwise their own dollars become worthless, the US economy would fail, which in turn causes their own economy to fail.

Its a strong-arm tactic by the US government: They’ve spent too much money, and they’re forcing the world to pay for it…because they can.

So in reality, political pressure will save the economy if it happens…forcing foreign governments to finance our financial irresponsibility by continuing to invest in US dollar assets/concerns until the money supply re-adjusts to growth.

In the long term though, this won’t work. It only works now because we are the lynchpin in the world economy. We’re too big to fail, so other countries must bail us out. However, with the rest of the world economies growing and a distrust of the US economy/currency, they’ll cut us out of the loop, and the US will lose relevancy: death by a thousand cuts. We’ll look up in twenty years and realize we’ve lost the lynchpin status and we’re just a nation among many others, perhaps worse….no special favors available.

You think I’m just making this stuff up about the government “stealing” from us through inflation?

Here is what Alan Greenspan said (too bad he never remained true to it):

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the “hidden” confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

This plays out all the time in real life. The Dow Jones Industrial Average is doing ok these days, even if the economy isn’t doing all that well right? It sits relatively close to its all time high, even with all our woes. That depends on how you price it.

Think about inflation again. Priced in dollars, we can make the Dow look like its rising, even when its falling…just inflate the currency. But when we price the Dow against other assets (gold for instance), it tells a different story.

Here is the Dow priced in dollars:

Here is the Dow priced in gold:

Think it doesn’t matter? It does. You always pay the piper eventually (though admittedly perhaps not in our lifetime).

Also, I note that inflation, even today with all my alarmist rantings about what’s going on, is not that high. Well, the CPI (consumer price index), which is the general surrogate for inflation, is not a number without controversy. Many people think it far underestimates real inflation, and once you delve a bit into how the number is calculated…you’ll get suspicious too.

The basket of goods the BLS (bureau of labor statistics) uses changes (at their discretion), and they use several “weighting-factors” for quality of goods that basically allows them to massage the number to say whatever they like. It doesn’t mean they ARE manipulating the numbers, it just means that based on the way they calculate CPI….massaging is very possible. Under-reporting inflation would allow the government to steal and then tell us nothing is happening.

Fiat money is a pyramid scheme, but it is so complicated that it becomes very possible to fool all the people all the time…almost always. Sometimes the politicians even fool themselves and forget that printing money is not the same thing as creating value.

So when you hear talk about these bailout schemes by the government or complex financial products to help smooth over the crisis….beware…there is only one scheme that is being put on the table: Devaluing the currency (which forces us and other countries to bail out the US govt).

Why are we not outraged by all of this? Why are we not calling for the head of the Federal Reserve Chairman, a return to the gold standard, or writing our politicians asking them to stop fleecing us?

Easy: I have a masters degree in international business, read econ books for fun, and actually spend time thinking about these issues (as evidenced by this post)…..and its still hard for me to explain.

No one understands what’s going on. And even though I’m right, there is no way to know when it might all come to a head, or if our govt is crafty enough to really force the world to bail us out.

Several political candidates are talking about some sort of universal health care. Everyone knows I am for socialized medicine. If we provide free basic education because we believe education is a right everyone has, then how can being healthy not also be a basic right? I would say health is a basic right before education even.

Few would argue the basic premise there; the issue is that it is too expensive; however, all other industrialized nations provide universal healthcare at a total cost less than what we are already spending. In essence, we’re already paying for universal health care…so why don’t we have it?

Let’s run a simple thought experiment (luckily no economists read this page) that models the health care market, and allows us to see why costs might spiral a bit…and mainly points out why more government intervention in our current health care system will raise prices, not reduce them:

Let’s say there are 3 people in the economy and they each have 1 dollar. One is sick and has to go to the hospital. How much can the hospital charge? One dollar. Nothing can cost more than a dollar, because the hospital will go out of business if it charges more (because no one can pay).

Let’s say insurance companies get into the mix and you buy a 1 dollar insurance policy, and of course you potentially get more than that in health care. Now there are two hands in the pot. Your 1 dollar and some amount from the insurer…for the sake of argument let say they are adding an extra dollar on top. How much can hospitals charge now? 2 dollars.

Let’s say the government gets in the mix, and subsidizes health care by 1 dollar. How much can the hospital charge? 3 dollars. Now we are starting to get the picture…

Every dollar added to the total pot to spend on health care expands the total dollar amount that can be charged. You can never charge more than what people can pay. Conversely, the price a market charges for a good/service will always expand to fill the total money in the pot.

Everytime the government says they will pump money into the health care market, they are raising prices because more total money is available to be spent. If there is a tax credit of 30%, in the most simplistic model, prices rise by 30%. The goverment is accomplishing the very opposite of what they’re hoping to do.

On a related note, here is the reason why the goverment may or not pander to universal health care, but nothing will really change: Too much is already invested in the current system. Thousands of jobs and billions of dollars in business revenue would disappear.

Imagine the extreme model (again simplified): Nationalized Health Care.

Nearly the entire health insurance industry (BILLIONS of dollars) could close up shop overnight. What good would private or employer-provided health insurance do if you already had it through the govt? It would be useless. All those jobs, gone. (some could get a job with the govt…but not nearly the same numbers would be needed.)

Employer provided benefits disappear. HR departments would thin out significantly…no more Benefits department. All those jobs, gone. You may think non-health care employers would be all for that, but the US is unique in that you HAVE to have a job to get health care…that sort of forces you to get a job (and keep one). I’m not so sure employers would be for it (although surely some would).

Health Care Consulting/Outsourcing would disappear overnight. I actually worked for nearly 4 years in health care outsourcing. This business is billions of dollars a year…just helping companies sort out all the laws and options, and helping adminstrate (coordination between all the health care providers, the business, payroll, employees, etc). 10,000 plus jobs…gone.

The health care providers (hospitals, doctors, etc) would see prices drop in nationalized healthcare. There might be price controls, health care would no longer be a for profit business, a single payer system (if that happened) would put a natural cap on what could be charged. Overall, health care providers have a profitable and fairly predictable business model right now….fear alone would give them a vested interest in the status quo. (unlike insurance/consulting/outsource though, at least most of these jobs would remain)

Big-pharma would lose too…they are some of the big winners (profit-wise) in the current health care system. Anything that damages their pricing structure is a threat. Drug companies would still exist in a nationalized system; however, they will complain that reduced profits means less money to research new drugs (which may be partially true).

So you see three things here: 1) The vested interest of these multi-billion dollar corporations is to continue the current system…so we’re unlikely to see a change no matter how well-intentioned (<– yeah right) the politicans are, 2) SOOO many people are employed in the health care industry who would almost instantly be put out of work……nothing is going to be done, and 3) All these thousands of people and billions of dollars in revenue is a large part of WHY your healthcare costs so much today…the more hands in the pot, the more it will cost.

Or more to the point: does it make sense for me?

In a word, No.

I’ll explain why: A 150 to 200k dollar mortgage ends up between $1000 and $1200 bucks a month. Then you add on internet, gas, power, maintenance, cable, insurance, etc, etc, etc. The price is getting up there past $1500 bucks a month…not cheap for one person (me).

Currently, I pay a ridiculously low rent of about $500…that includes power, gas, internet, etc.

You can run the numbers on that as many times and as creatively as you like: Its a better financial decision for me to stay where I am…period.

But what about the tax write-off? After its all said and done that may lower my monthly payment by 100 to 150 bucks…no where making up the difference. Additionally, the vaunted tax break on mortgage interest really is no tax break at all, but simply avoids double taxation. How? Easy…you still pay tax on the value of the asset (property taxes). If you paid tax income tax on the mortgage interest and paid property taxes, you’d be taxed twice on the same thing. There is no real tax break for homes….simply the lack of being double taxed.

Additionally, even the mortgage interest you do write off is only eligible once you pass the standard deduction. If you can’t reach that, then there is no deduction at all.

But what about the equity? You don’t really get any in the first 5 years. Most of it is interest. There isn’t much difference between rent and interest.

But what about the small amount of equity you would gain? Yes…I would get a small amount. But I currently get another kind of equity each month paying rent that is very useful: Cash. The difference between my mortgage and rent ($1500 minus $500)….about $1000 bucks a month…is mine. I build a thousand bucks of equity every month by not buying a house. (In reality I spend some, but not all, of that. If I bought a house I would have to change my spending habits…which isn’t all bad).

But houses are good investments? A) Uhh…..not in my situation. B) I’m tired of hearing that “home values always go up”. The Titanic was unsinkable. The world was flat. Yeah, yeah, yeah. The fact is that they are dropping now. Yes…this very quarter.

But they go up in the long run? Uhh….in the long run we’re all dead. In the medium run though…not always. In Japan the market has been depressed for over a decade. In economics there is the concept of “no money left on the table”. If houses ALWAYS went up; everyone would buy them…thus driving up the prices. At some point the price becomes overinflated….and it must drop. That time might be now…or it might not, but to say “home values always go up”….that just isn’t true. In finance there is also the concept that “past performance is not an indicator of future performance”. I don’t care if housing has ALWAYS gone up in the past. That doesn’t mean it always will in the future.

Here are some other myths vs realities about home ownership.

Regardless, I’ve been looking pretty hard for something. I’ve seen just about every home and townhouse in the Smyrna area at this point. Why?

Well….if I’m staying in Atlanta, which seems to be the case since I’ve gotten a job I want….then I might actually LIKE to have a house. It may not be the best financial decision, but it is not a bad decision if that is what I want, and I can afford it.

I will say to those who buy a house because it is a “good investment”…you are speculating. If you’re going to speculate, you might as well buy stocks, or start a business, or even gamble. If you buy a house, fix it up, and try to sell it…you are speculating. You are running a small business. Nothing wrong with that…but lets call a spade a spade.

Buying a home is about wanting a home, and making a commitment to a place. If you start talking about doing it for the purpose of making money…then I hope you know about homes…because its the same concept as knowing about stocks, or a particular industry. The only thing that makes real estate speculating less risky than other types of investing is that there is less volatility. Home prices go up a little, or down a little…they don’t peak and trough nearly as quickly as stock prices (as a general rule).

Home buying also does not have the upside of stocks, or owning a business. A home remains a home, and the land remains much the same. The demand is much the same (unless there is a large, immediate influx of people with money to the region)…and the supply is much the same (it takes time to increase supply and it will never fluctuate wildly, unless there is an earthquake).

Stocks/owning your own business though…those can go from zero to a million bucks a month rather quickly. The building and real estate that the business sits on…its value will remain much the same, much as your house will; however, the value of the business, because it performs some other function that can increase in value (the service it provides)….can really appreciate quickly.

The price of a home can only appreciate as quickly as more people move to the area that have money (which increases demand)…or you happen to own a house that has features that are in vogue (which increases demand). Increases of supply (building more houses) decrease the value of your home.

But home prices do appreciate, right? Yes. For two main reasons (yes, this is a simplified explanation): 1) Inflation. Home prices largely track inflation. Since that runs at 3.5% a year or so…your home price does increase. But that is an illusory gain. 2) Increase in GDP: The economy itself (mostly productivity) grows at 3% or so a year. As total wealth increases, people are more able to afford homes. (You can argue, that its JUST inflation that matters. With a fixed money supply (notes in circulation), economic growth actually produces deflation, which would cause your home value to drop..even though it was actually worth the same amount in absolute terms.)

If homes aren’t really good investments, then why is everyone so high on them? 1) You can live in them. You can’t live in a stock certificate as an investment. That is hard to beat. 2) They tend to work out as investments. The reason being that they FORCE you to save money on the tail end of the loan when you’re building equity. Most people wouldn’t save any money otherwise, so it seems to work out for them. If they’d been more financially disciplined and invested the extra cash in the stock market…they might have come out ahead. But because no one does that, its useless to talk about. Home ownership IS a good investment for most people, because it is their ONLY significant outlay of cash that has any chance of appreciating…and it usually does…a little bit.

Lastly, yes….on the tail end of your loan, when you get to that point…its a good idea. You are essentially not paying ANY rent anymore. All the mortgage value goes to equity.

So…..will I buy a house? Yes…mostly likely, because I want one. It won’t be my best financial decision though. That would be to live in my parent’s house, never buy anything, save everything, invest heavily in the market, and wait to retire in a Central American country. I’d be living on the beach in Panama like a king (maids and all) by my early 40s…..and never work another day for the rest of my life.