Intermediate Economics - The “Money Multiplier”

OK class, if you found the 1st Lesson informative and interesting here’s another (though a bit more complicated) discussion for you about why the creation of $7+ Trillion in debt is not a good thing for our Nation or the world at large.

First things first, you need to understand 2 fundamental concepts:

1. The Economic Theory that many/most of our financial systems and models are based on is/was largely derived from the assumption that people will act rationally and that specific industries work within economic vaccumes of sorts.

2. The “Money Multiplier” is a term that represents how a $1,000 deposit in a bank will allow the bank to lend $9,000 from the initial deposit over time and retain only $1,000 in hard cash as a “reserve”.

Alright, now that you have these concepts in mind, let’s jump into the meat of things… “The Roving Cavaliers of Credit” by Steve Keen

Debt Monetization = Inflation

OK class, here’s one of the most fundamental lessons in economics…

Monetization of market-less bankrupt debt with no guarantee of recovery in value is the ULTIMATE ACT OF INFLATION. For this case study we’ll speak directly to the US dollar.

Axiom: To monetize debt is to inflate currency

What Does Monetize Mean?
1. To convert into money.
2. To convert from securities into currency that can be used to purchase goods and services.

New York Fed Begins Purchases of Agency Mortgage Debt (Update1)
By Craig Torres

PS. The IMF and World Bank strictly prohibit their nation “clients” to monetize their debt… and yet this is EXACTLY what our Federal Reserve, Treasury and Congress are doing and have been doing for years to keep the perceived value of the dollar afloat.

PPS. Our founding fathers warned against this, and the creation of a privately held Federal Reserve, and the implementation of a 2 party political system…

Quotes from 2008

My dad’s a banker and sends me financial data, analysis and forecasts daily as he reads through mountains of this information and picks out the relevant/interesting stuff. Below is from an email he sent me today revealing just how ridiculous and off base some of the seemingly educated and informed talking heads are in the financial sector. Though this isn’t new news to most of us, it is entertaining. Enjoy.

…………

BusinessWeek published some good (I mean terrible) quotes from 2008. Here they are: (the comments are theirs, not mine).
1. “A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!” —Richard Band, editor, Profitable Investing Letter, Mar. 27, 2008
At the time of the prediction, the Dow Jones industrial average was at 12,300. By late Dece mber it was at 8,500.

2. AIG (AIG) “could have huge gains in the second quarter.” —Bijan Moazami, analyst, Friedman, Billings, Ramsey, May 9, 2008
AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it afloat.

3. “I think this is a case where Freddie Mac (FRE) and Fannie Mae (FNM) are fundamentally sound. They’re not in danger of going under…I think they are in good shape going forward.” —Barney Frank (D-Mass.), House Financial Services Committee chairman, July 14, 2008
Two months later, the government forced the mortgage giants into conservatorships and pledged to invest up to $100 billion in each.

4. “The market is in the process of correcting itself.” —President George W. Bush, in a Mar. 14, 2008 speech
For the rest of the year, the market kept correcting…and correcting…and correcting.

5. “No! No! No! Bear Stearns is not in trouble.” —Jim Cramer, CNBC commentator, Mar. 11, 2008
Five days later, JPMorgan Chase (JPM) took over Bear Stearns with government help, nearly wiping out shareholders.

6. “Existing-Home Sales to Trend Up in 2008″ —Headline of a National Association of Realtors press release, Dec. 9, 2007
On Dec. 23, 2008, the group said November sales were running at an annual rate of 4.5 million—down 11% from a year earlier—in the worst housing slump since the Depression.

7. “I think you’ll see [oil prices at] $150 a barrel by the end of the year” —T. Boone Pickens, June 20, 2008
Oil was then around $135 a barrel. By late December it was below $40.

8. “I expect there will be some failures. … I don’t anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system.” —Ben Bernanke, Federal Reserve chairman, Feb. 28, 2008
In September, Washington Mutual became the largest financial institu tion in U.S. history to fail. Citigroup (C) needed an even bigger rescue in November.

9. “In today’s regulatory environment, it’s virtually impossible to violate rules.” —Bernard Madoff, money manager, Oct. 20, 2007
About a year later, Madoff—who once headed the Nasdaq Stock Market—told investigators he had cost his investors $50 billion in an alleged Ponzi scheme.

10. A Bound Man: Why We Are Excited About Obama and Why He Can’t Win, the title of a book by conservative commentator Shelby Steele, published on Dec. 4, 2007.
Mr. Steele, meet President-elect Barack Obama.

With all the talking heads out there, it probably wouldn’t be hard to find some silly comments, but these aren’t talking heads. These are Ph.Ds (they’re supposed to know what they’re talking about), politicians (they have huge staffs that can do massive research for them), journalists (they’re supposed to be experts in their field) and T. Boone Pickens (who should know better).

These quotes are the #1 reason I’m a technical analyst who doesn’t pay attention to the fundamentals or the story. The best and the brightest are often wrong. A chart will tell me very quickly if I’m wrong, but the fundamentals or story will lag so small losses turn into big losses. It’s much more reliable to study the price action – because you’re trading the price action – and leave the other stuff alone.

Lesser of 2 Evils - The Pro Life Ploy

So, as I’ve already posted a few times, I am most definitely not someone who believes in a lesser of 2 evils when it comes to voting. I take this stance because of a variety of reasons that have to do with my understanding of history, politics, economics, media, framing, and the systems that work to make up the reality we exist within here in America and on this planet.

Clearly this is yet another opinion I hold however that is counter cultural, especially as someone who proclaims to be a Christian, and a Catholic even, as nearly every 4 years I am fed a massive dose from pastors and priests alike the same mantra about the sanctity of family and the sanctity of life and that anyone who stands opposed to either of these “Holy Traditions” stands anathema to the “Christian way of life” and “the Judeo/Christian foundation our nation’s forefathers constructed.”

My father however, who I love dearly and have been having this on going debate with about the faulty logic of a Lesser of 2 Evils, shocked me a few weeks back when he sent me one of the most powerful and persuasive essays I’ve ever come across explaining, from a Christian perspective, why our Two Party System is a complete sham.

CHRISTIANS AND THE PRO LIFE PLOY - by G.C. Dilsaver

Whether you are Christian or not, “pro-life” or “pro-choice,” I HIGHLY recommend you give this a read through, as it will explain a simple logic that transcends religion and denominations and speak to the root of why a vote for a candidate who simply claims to be Pro-Life is not always the solution that will bring us any closer to achieving a more Just and Compassionate Nation or World. If however you are Pro-Life and Christian, you MUST read this essay.

10 Commandments to Save the US Economy

What should be at the top of Obama’s agenda for change?

Props out to Marcus Nelson and Rich White of UserVoice for their work putting together this pretty kick ass forum allowing people to vote on what they think Obama’s agenda should be for change moving forward.

I voted on a few, namely:

1. Repeal The Patriot Act
2. Get Rid of the Electoral College
3. Bring Back the Fireside Chat
4. Educate Americans on HOW our Financial Institutions Work — this is actually one I posted!

Lesser of 2 Evils?

I have found the following to provide some good context and insight into a discussion on the pros and cons of voting for a lesser of 2 evils come election day:

• Lesser of two evils principle
• False dilemma
• Framing (social sciences)

Been having this debate in fact with my father every 4 years since College, and I only become more convicted as I get older that a Lesser of Evils approach when voting follows flawed logic and is an acknowledgment that the principles of Liberty, Freedom and Democracy are no longer relevant and the principles of Fear and Desperation prevail.

Thoughts?

Lesser of 2 Evils - A Short Story

Imagine you are exhausted and starving and sit down at a table in a restaurant where the waiter places in front of you 2 plates; A moldy apple with maggots growing inside and a piece of dog poo.

The apple however has been dipped in dark chocolate and has beautiful edible flowers garnishing it.

The dog poo has been dipped in white chocolate, has been covered in caramel and has fresh strawberries around it.

You look around the room and see that most of the people are eating one or the other, with one person in the far back eating out of a bowl.

The waiter tells you all the wonderful things about the chocolates, the flowers, caramel and berries. Over and over again in fact he repeats how wonderful these items are and how “EVERYONE” is eating them without ever mentioning that beneath these items are in fact a moldy apple and a piece of dog poo.

A friend of yours who has been to this restaurant before stands next to you and is telling you exactly what is in them. He’s tried both before so he knows exactly what you’re getting yourself into, but you are SOOO hungry and focused on the plates presented you that you simply can’t imagine how such wretched things are underneath such beautiful garnishing and why EVERYONE would be eating them if they were so awful? The waiter is talking SOOO loud and being very animated that you can’t bring yourself to draw your attention away from what is right there in front of you.

During this whole process, you can sort of make out your friend tell you to look at the end of the table, so you take a quick glance and see a bowl of pasta with butter and a little parmesan on it, also on the table in front of you, but in such a position that you would have to stand up and push the waiter out of the way to reach it.

Now, looking at these 3 options the waiter starts pressuring you to pick between the dark chocolate or the white chocolate. So loud is the waiter that you can hardly hear your friend telling you about how great the pasta actually is, but none the less, you do hear him. You think to yourself, “Surely the waiter would tell me about the pasta if it was actually an option for me to eat right now?” And the waiter presses on, getting a bit angry and louder the longer you take to answer the question, “White or Dark??!! White or Dark??!! Caramel or Strawberries??!!”

You start to look around the walls of the restaurant and see a few old plaques with people sitting in the restaurant eating HUGE bowls of pasta and wonder how moldy apples and poo could have ever gotten on the menu….

You hear the people in the restaurant as well talking about how much they like white chocolate over dark chocolate, or caramel or flowers and yet with each bite they cringe and gag, but continue to go back for more. You briefly see the guy in the back eating out of a bowl looking happy, but also looking confused at the others in the restaurant as though they are out of their minds. You see him whisper to himself, “This pasta is simple, but definitely hits the spot!”

“Which one will it be!!” the waiter demands. “You must make a choice!!” he presses.

Well, which one would you chose????

Now, if you’ve made it this far, check out Framing.

Scroll down a bit and read the section on “Framing in politics”

By not answering the question “White or Dark Chocolate” one is not avoiding the options presented, only the question framed as the reality is the question is incomplete and irrelevant provided the context of the situation. Understanding this, if one is to answer the question “White or Dark?” they would only be able to do so “tongue in cheek” realizing that the answer is pointless.

So, again, which one would you chose? The white or dark chocolate? Or more accurately, the moldy apple with maggots, the dog poo, or the simple bowl of pasta?

I for one would throw the waiter out of the way, take the plates, cut the apple and poo open so that you can clearly see what is inside each and then grab the pasta bowl. I would then walk from table to table, sit down with each person and try and talk to them about the moldy apple w/ maggots or poo in front of them that they are eating. I would offer them a piece of pasta, so they could at least taste what a non poo/moldy item tastes like.

It is very plausible though that those who have been coming to this restaurant over and over again cannot even imagine eating the pasta. Some may even fear it because it is so different than what they are use to. Some may have become so familiar with the apple and poo that they say they actually PREFER it over the pasta, even though they’ve never had pasta before. Very likely, some may even go a step further and try and force me to eat some of their apple or poo and start telling me how great the strawberries are or the wonderful flowers.

The true power here is held by the person FRAMING the conversation. In this case, the waiter. So what’s the best way to encourage more pasta consumption? Become a very loud pasta eater, the chef, or become the waiter!!!