QE2 and 2012

Federal government intervention hasn't solved all our economic problems yet, so it's time to try the same things again, obviously. Without a gold standard or something similar, the Federal Reserve has the ability to create money, and put more of it into circulation. They claim this is to improve the economy. Interestingly, they expanded the money supply by 2.45 trillion dollars from Sept 2008 to June 2010 (the biggest expansion in history), and as you may have noticed, it didn't improve the economy. So now they're planning "QE2" to expand it by another 800 billion dollars (600B fiat and 200B from TARP funds) from now until mid-2011. It will have an impact, primarily by further enriching the biggest banks, who are at the front-end of the expansion, but it won't benefit the economy in accordance with their stated goals.

This makes it clear, once again, that these high-level leaders (Obama; Bernanke, chairman of the Federal Reserve; Timothy Geithner, Secretary of the Treasury; et al.) don't exercise common sense and appear to be too ignorant for their posts. They're guessing! Worse, they're gambling with trillions of dollars of our money. Bernanke just recently said that QE2's 800 billion dollar expansion is an "experiment."

Expand the money supply to stimulate the economy? Really? Consider this quote and see if it doesn't make more sense than our exalted leaders... "A lesson that was taught by classical economists that remains true: there is no ideal supply of money in a society. Any quantity of money will do, so long as the quality of the money is sound. Prices adjust based on the existing money supply. New quantities of money injected into society confer no social benefit. If production rises and the money supply remains stable, the purchasing power of the money will rise. If production falls while the supply of money remains stable, the purchasing power of money will fall." End the Fed, Ron Paul, page 203

Obama, Bernanke, and Geithner seem to have no concept that the money supply has quality, let alone that their actions are harming its quality. But whether I like it or not, QE2 is here. If, as I suspect, QE2 makes things worse in the long run, then Obama probably won't be reelected in 2012, because the economy will still be struggling. By then, a majority of voters will know or suspect that Obama and his czars' efforts to control the economy were guesses all along, and they guessed wrong. And instead of making things better, they made things far worse.

In 2012, the Democrats will almost certainly field Obama again, and no independent or 3rd party candidate is likely to win, so if we're to change presidential administrations, it will have to come from electing whoever wins the Republican primary. So let's not blow this deal.

I don't know who to recommend yet, but I know who not to recommend: Sarah Palin. Why? Lack of sufficient experience and knowledge. She's added to her knowledge since her vice-presidential candidacy, and can add more, plus she is an electric speaker (with polarizing charges - pun intended), and her experience is greater than Obama's was before he became President, but her experience is still not enough. I want a President with a lot more experience and a lot better understanding of economics than either Obama or Palin. Surely we can find someone better out of 310 million people. And while it is essential to have a candidate who understands the importance of a constitutionally-limited civil government, of financial responsibility, and of free-market economics, is it too much to hope that such a candidate could be more congenial than polarizing?

Imprecision and Bogus Econ

Just read a couple of different articles. One about evolution and one about how many jobs the most recent U.S. Federal stimulus program has created. They both annoyed me a lot, and for the same reason. What do these topics have in common?

Confusing or misleading imprecision by the authors.

Evolution: The author used the term repeatedly, but never specified when he was talking about evolution within species or among species. They aren't the same thing, but this author, and many others, seem to think they are.

Jobs: The author of the article I read, the interview subjects, and the reports cited estimate how many jobs have been created by the Federal government passing out tax money. In this article and in others, there's little or no talk about what kind of jobs.

For one thing, there's a big difference between creating a minimum-wage job and a job for a highly-skilled person. For another, there's an even bigger difference between a temporary job and a permanent job.

So, the Federal government takes $15,000 in taxes from you and I, then passes $12,000 to a company that will create jobs. (I don't really think the Federal government would have such a low administrative overhead, but I don't want to get into that issue here.) That company hires 12 people for one month each. Some reports were initially claiming that the Federal government's actions had created 12 jobs, but then people started catching on, so some folks started adjusting the counts to equal full-time employees for one year, making the example above equal one job created. Except that those were temporary jobs. When the handout money ran out, the jobs ran out. That might not be so bad if the Federal government could keep taking enough money from taxpayers to keep shoveling money at companies and organizations to keep people employed, but they can't. So, the Feds have "created or saved" X number of jobs. Please. They created or saved X number of temporary jobs. Does anyone think a very short-term temporary job is as good for the economy as a permanent job? Of course not.

But, a temporary job is better than nothing, right? Well, what was the cost of that short-term job? Money taken from taxpayers, both individuals and companies. What might that money have been used for, if it hadn't been taken as taxes and redistributed? Most individuals would have used their extra money to buy things. Which would have... wait for it... stimulated the economy! Except that this is longer-term stimulation. Most companies would invest their extra money. In what? Primarily raw goods, services, and payroll. Which would have... you got it: stimulated the economy! And again, with much longer-term repercussions.

These ignorant folks waxing eloquent about the success of the Federal stimulus package may have been some of the same folks who claimed that the cash-for-clunkers program was a great success. Well, if success was subsidizing car purchases for a month or two, then it was successful, alright. However, many of those purchasers were enticed to purchase a new car to replace their old car sooner than they otherwise would have. The secondary impacts include this: For each one of those people who would have otherwise purchased a car next year, now they won't. All the cash-for-clunkers did in these cases was to shift a small number of future purchases to current purchases, weakening the future economy.

Sigh. Sometimes I wonder if any of our bone-headed politicians have even read an economics textbook?

Being God's Pockets

From an article in the NY Times: The paramount moral challenge... in this century, is the brutality inflicted on so many women and girls around the globe: sex trafficking, acid attacks, bride burnings and mass rape.

Regardless of whether you like the NY Times or not, regardless of whether you can think of other serious issues to give your attention, this is certainly an area where the Body of Christ can and should make a difference in the world. We're familiar with the idea of being God's hands and feet by being missionaries and personally going overseas to preach the Gospel. But you can also stay home and give money to support other people who work as missionaries. And you can also provide very small no-interest loans to desperate people around the world, through organizations like Kiva. You don't have to do this instead of contributing to missions, you can do it in addition. As little as $25 can make a huge difference in people's lives.

That's why I've tagged this NY Times article. Read the first page and you'll see how a mere $65 changed the life of a Pakistani woman named Saima, who was in a very nasty situation. And you'll see how the effect of that loan grew to help other families through Saima.

Typically, multiple people each put up a small portion of a loan, sharing the risk. Note making zero-interest loans is not a way to plan for your retirement. But it is a way to help improve lives and make poor societies more stable, and therefore likely to produce fewer terroristic maniacs.

The more financially stable families there are in a country like Afghanistan, for instance, the less power groups like the Taliban have. So please consider making a loan to a hard working, but poor person, just because you like helping people, or to make the world a little safer place for you, your family, or for the missionaries in those countries.

Mortgage Meltdown, Addendum

Here's another idea that seems obvious I forgot to put in the previous article.

It's normal, when a homeowner defaults on a mortgage, that the lender evicts the homeowner and sells the house. Normally, however, there's not a tremendous glut of houses for sale at very high prices, so houses are sitting on the market for very long periods of time. For example, the house at 100 Main Street, the owner gets evicted, and the house sits empty for a year before the bank can get it sold. Say the original mortgage amount was $2400 a month, so the total revenue to the mortgage company was $28,800 for one year. Instead the bank's revenue for that period of time is $0.

Mortgage companies, and especially mortgages backed by FHA, Fanny Mae, and Freddie Mac, instead of evicting homeowners, ought to try to work out a deal that lets the homeowner stay in the house and pay some amount of rent. Suppose the homeowner can pay half the amount they were paying in mortgage payments. If they can pay half, then the lenders' revenue will be $14,400 for the year, instead of $0. They can still try to sell it while it's occupied, but they also have the option of selling it as a rental unit that is already rented.

:typed and edited by Promise Lambert

Mortgage Meltdown

I don't feel like writing a lengthy treatise, but I have to say something about the mortgage crisis, since our political leadership doesn't seem to see what I think is an obvious technique to improve the situation. None of them will see this, probably, but at least I'll get it off my chest.

The Federal Government should pay off 2nd and 3rd mortgages up to 20% of the value of primary residence and take a 25% ownership of the property, if the 1st mortgage is a stable fixed-rate loan and this restructuring will enable the family to keep up with payments after the change. The valuation should be based on the valuation at the time of the last mortgage, not the current valuation.

The Fed is going to pump many billions of dollars into the mortgage crisis somehow. This method allows families to stay in their homes if they can afford it after the deal. They are lightly punished by losing slightly more home value than the percentage of financial assistance they receive. This punishment is appropriate because they bear responsibility for knowing what they could afford long term, and a deal that does not punish them is unfair to those who were more responsible with their finances. Yes, the homeowners were probably deceived by lenders pushing them into houses with payments larger than they could afford in the long term. Criminal charges should be pursued against lenders who misrepresented affordability to home buyers or misrepresented the quality of the loans to mortgage bundlers (for the mortgage resell market). This would minimize foreclosures, which will keep the maximum number of families in their homes and stabilize national home values as much as possible, contributing to a more rapid recovery of housing values than we'll otherwise have.

Rationing Health Care

Heresy! No one in their right mind would support rationing health care. Would they?

Well, since there is a finite amount of health care, and that amount is less than everyone would use if they could, the fact is that health care is rationed now. The current rationing mechanisms are complex, and involve many intertwined interactions between the free-market, public and private health insurance plans, health provider management organizations, volunteers, and other components. It's complex now, it's not going to become simple, and there are ways to improve it and ways to make it worse. In fact, most changes that would make one aspect of health care better will make other aspects of health care worse. So it would be prudent to make changes very carefully, understanding as much of the trade-offs as possible.

But not now. Now, it's national-electioneering time, and most candidates are going to be talking about health care. Lots of them are going to use the phrase universal health care, but what they'll actually talk about will be universal health insurance. It pains me to observe that there are so many people running for office that use "health care" and "health insurance" as synonyms.

The Politics of Health
Most politicians are not morons, so the reason they talk like this is likely that they are simply pandering for votes with sound-bites instead of carefully reasoned positions. I can't help but wonder, though, how many even realize that health care and health insurance are not the same thing. People don't need health insurance, they need health care -- health insurance is just one of several mechanisms to ration health care.

Universal Health Care. Sounds great! But people will never get what many politicians are promising... extending health care to everyone, without compromising quality. Politicians will never fulfill those promises because it's not economically possible for any society to accomplish that. Some of them make know that, but all of them will yammer about it and pass legislation that deals with health care, and they'll claim victory based on such legislation, regardless of the actual results of the legislation.

Ain't Gonna Happen
I'll use two extremes to illustrate why universal health care is not possible. The concepts are the same whether applied to a single nation or the globe, but since we're using the term "universal", I'll use global terms for this example. So let's assume a world population of 6 billion and total global wealth of 1.1 quadrillion dollars. Let's set aside an extremely meager 10% of wealth for food, housing, transportation, and all those other things people seem to like, leaving us with an even 1 quadrillion dollars for health care.

Great Health Care
For the first extreme, suppose researchers develop a vaccine that will make a person immune to all disease, but that the process to manufacture it results in a cost of one billion dollars per dose. (The pill requires a superconducting super-collider to spawn reactions that result in a molecular accrual rate wherein the energy and maintenance costs equal the billion per dose.) While were at it, let's pretend that there are no safety/side-effect concerns.

If we were to spend our 1 quadrillion dollars for health care on this super pill, we could create doses for exactly one million people, or less than two-tenths of one percent of the world's population. Um, that's noticeably less than universal. But, we run the machine because the researchers hope to discover a way to substantially lower the cost, and while they're researching, they create a few hundred of the pills. Who gets them? Who decides who gets them?

Good news! The researchers have discovered how to significantly lower the costs! Unfortunately, it still isn't enough for everyone. So, you chose... do you want the pills to go to the oldest people, the children, or random chance selection? Okay, say we chose the children for the noblest of reasons. Now, at maximum production, we can provide one pill to 80% of all children born. Sorry, there's just not enough wealth to get to 100%. Maybe if we took some of our health care money and used it to improve the economy we could get there, but that would mean we have to create fewer pills now. How could you possibly chose to reduce pill production to cover only 70% of the children now in order to get to 100% some day in the future? Those are hundreds of millions of children you're leaving exposed to deathly disease. Okay, 80% it is. Which 80%?

Great Health Care Equality
Here's the other extreme. All world governments agree to a global health care plan that will be absolutely equal. In order to ensure that it is equal, everyone reluctantly agrees not to allow any health care other than the what is provided by the global health care plan, so the rich people can't have anything better than the poorest person. Yeah! Now that's truly fair to all! Okay, we know we can't afford to give everyone the best of everything, so we have to start from the other direction. We'll come up with a list of health care benefits that can be provided to every person on the planet, adding one item at a time until we reach our 1 quadrillion dollar limit. Now let's see how much we have to spend. One quadrillion divided by 6 billion people equals... $166,666.67!

Wow, jackpot! That's a whole lot of health care for every man, woman, and child on the planet! So, we can allocate for each person for their entire life. Oh, let's say, two boxes of band-aids, two emergency-room visits for broken bones, and we don't have those super-pills under this scenario, so we'll dedicate some funds for vaccines, one-heart attack emergency room visit, a few drugs such as cholesterol and blood-pressure control, and we'll allocate the rest to cancer chemotherapy and radiation. Unfortunately for you, you need a heart transplant, and that didn't make it onto the list.

Well, that's no good, so we'll make the universal health care plan so that everyone gets up to $166,666.67 worth of whatever they need. All right! Oops, it seems that your heart transplant would cost $200,000. Sure, if you sell your house, you can come up with the extra $33,333.33 to throw into the pot, but you're not allowed to. That would be unfair to all the people who don't have any extra money, and a fundamental principle of the universal health care plan is that we absolutely must be fair. No one can get anything extra just because they can afford the extra costs. Besides, we forgot about the time you broke your arm on the playground and had a doctor put a cast on it. Now you're an additional $500 short.

But then you realize that there are a lot of people who are healthy their whole lives and never need any health care at all. The health care money those folks don't use should be made available, equally of course, to all the folks who do need it. And joyously, it turns out to be $33,833.33, so it will cover your heart transplant!

Unfortunately, it took quite a bit of effort to get the world to agree to the universal health care plan, and now its managed by a United Nations bureaucracy, so it may take a little longer to get them to change things than you have left on your old ticker.

Promises, Promises
Okay, so what's my point? The point is that universal health care is what people need, but that universal health care without compromising the maximum quality of health care is not possible, and any political candidate who says otherwise is either woefully ignorant or is lying. So, please don't vote for morons or liars.

RE: Skyrocketing Oil Prices Stump Experts

"Skyrocketing Oil Prices Stump Experts" is the headline of a Washington Post article today. Perhaps the experts... aren't.

From the article: "People don't get it," said Sen. Herb Kohl (D-Wis.) at a Judiciary Committee hearing yesterday at which senior oil company executives were grilled about prices. Kohl said: "Demand is not crazy. Why are prices going crazy?" The article quotes from a wide variety of people that are allegedly experts, and they basically say they don't have a clue.

The answer is simple, really. The prices are high because a number of events occurred that tend to create pressure for prices to rise (e.g. increasing global demand), and people who choose to invest in oil futures have gotten auction fever. That drives the prices of future oil deliveries up, and the higher the prices go, the more "feverish" the investors get.

Joe's Story
As the price of oil futures are bid up, it has a carry-over effect on current prices. Over-simplifying, and exaggerating to make the point clearer, suppose Joe has 1000 gallons he wants to sell today to a gas station, he paid $1.50/gallon, he plans to sell it for $2/gallon, and oil futures that are about to "close" are selling at $1.50/gallon. Before lunch, the price for the futures that are about to "close" are driven up to $1.75/gallon, an increase of almost 17% in a few hours. Now Joe's gotta figure after he sells his gas, he's got to buy more at $1.75.

Joe could sell the gas for what he already planned to, make the amount of profit he already expected, buy his next shipment of gas for whatever the market cost is at that time, and mark up his price accordingly. That's the way most of us want Joe to see it. But Joe doesn't see it that way. Joe figures, the gas I have is worth a lot more this afternoon than it was this morning. I'm going to charge the gas station $1.75/gallon this afternoon. And he'll make a lot more profit at the expense of the person who pumps it into his car later. Or maybe he's worried that he'll be accused of price-gouging, so he decides to sell it for only $1.70/gallon.

Good ol' Joe. It's not his fault, it's "just basic supply and demand". Except that the faster he raises his prices, the more it feeds the auction-fever frenzy of the oil future speculators.

If you haven't figured it out, Joe represents the people at the big oil refineries and distributors that decide how much and when to increase their prices.

Who's fault is it?
Well, the market pressures are what they are, and they've been creeping up. The oil future investors have been over-reacting to market pressures because their exchange medium is auction-based. The big oil companies' price setting policies have been exacerbating the problem.

What can be done?
There are several options: change nothing, lower demand, increase supplies, or regulate distribution.

1. Change nothing and the prices may soar to wild heights. I've heard people talking about the "extreme" possibility that gas could go over $5/gallon at the pump. That's nothing, over $20/gallon is possible. Why? Because when auction fever runs amok, prices have no top-end in the short-run. Have you ever been in an auction, started bidding, gotten caught up in it, and bid way more than you really thought the item was worth? It happens every day in every auction-based market. Remember the incredibly high prices of tech-stocks before the tech-bust? Same thing. Dangerous? You bet. Bad enough that nations can go to war to "protect their national interests". For example, oil was a major factor in Japan's expansionist policies leading into World War II -- they wanted to secure the oil resources their economy was becoming dependent on.

2. Lowering demand is not likely at all, and if a major effort were made, it would accomplish too little to cool off the auction-fever.

3. Increasing supplies is technically more plausible, but you'd have to get a majority of oil-producing nations to glut the market to stop the auction speculation frenzy. Those nations only have so much oil, however, and the faster they pump it out, the faster they run out, and they don't have anything to replace that income with, so they want to try to stretch it out. Plus they're getting much higher prices, so they're not as worried about the consequences as others are.

4. Which leaves regulation. There are many ways to regulate, each with their own strengths and weaknesses, from both practical and economic perspectives. Unfortunately, anything that will seriously cool off the oil futures speculators will cause a separate set of negative effects.

What will be done?
Things will keep going just like they have been, and one of two things will happen. The oil market will stabilize enough to cool the investment speculators enough for the last ones in to lose a lot of money, and then prices may start adjusting more slowly. Or, the price increases will continue to rise rapidly and cause repercussions that are so painful, governments will begin increasing regulations, and they'll implement them haphazardly and with increasing severity until there's a global crash.

What should be done?
For many decades, industrial nations have periodically had banking crises characterized by panics that are similar to run-away auction fever, and they've created more and more mechanisms to avoid panic and to intervene when panic does occur. Some of these mechanisms are always-present regulations, and some are regulatory powers that only kick-in under specific circumstances, and only until circumstances improve. It hasn't been perfected, but the overall effect has worked very well for a long time now in the banking industry.

Similar efforts should be made to regulate commodity markets, such as oil. For instance, if retail prices increase by more than a specified percentage in a specified period of time, oil companies could be prevented from increasing their profit-margins. This particular interference in the marketplace would not cause the long lines that rationing causes, but it would effectively cap the oil companies profits until markets stabilized.

Top-it-off
Okay, so I used the topic of experts being puzzled to rattle on about some ramifications of high gas prices and espouse what I think would be an improvement. Getting back to the starting line, I don't know why anyone is puzzled. The market for oil prices is an auction, and the investors playing in it have gotten auction-fever. The question shouldn't be what's driving the high prices, it should be what we're going to do about it, if anything.