The 6 Pack Economist

Obama blessed be his name has decided that he will close the tax shelters used by corporations and individuals.  In other news new tax shelters have been opened in other places.  In thirty years they will clamp down on those shelters too.  Of course the first shelters would have been forgotten about and will be reopened.

Unfortunately for Obama blessed be his name did not get his memo that many of the people who put their money down in the shelters are the same people who put him in office.  Either that or his supporters got the memo a few weeks ago and have since switched to other forms of tax shelters.

I have a memo for them.  People hide their money in off shore accounts because the price to hide the tax is less then the tax to be paid.  A i thing happened to england back in the colonial days.  Although this was a tariff and not an income tax but the principle stands.  The short story is as follows.  The english government in trying to raise revenue for some bridge to nowhere or invasion, decided to increase the import taxes.  The taxes were so high that rich people would pay a smuggler money to avoid the taxes.  To combat the smugglers the english government hired police to watch the shore line for smugglers sneaking ashore.  For those who fell asleep during geography class the british isles have a rather long coast line.  So anyway the English government saw a net lose in tax revenue.  After they lowered the import tax to something reasonable, it no longer paid to avoid the tax.  Smugglers had to find meaningful work as tax collectors and the government saw more tax revenue.

What lesson can be learned from the above story.  Most likly not a goddamn thing, this is the internet after all.  But don’t make is so good to hide money and people won’t do it as often. 

On the bright side some spam engine just had something interesting to read.

Well it seems that there is a report out that the TARP program could be mismanaged and is open to corruption.  In other news water is wet and Lindsey Lohan is unstable. 

Did anyone seriously think that when the 700 billion dollar number came out that is was going to be spent wisely?   I thought it was joke when I first heard it, a bad one but still a joke.  It turned out that it was a joke on us.  To top it off a few months later we get a gigantic stimulus bill that will also have to be paid for.  Then the regular budget of the government will run into numbers unthinkable.  Who the hell is going to pay for all this?  We are.  The rich will pay for it directly while the poor will pay by inflation.

This whole debacle is just another in a long list of examples of government mismanagement of money.  This not just an American problem, all governments have the same problem.  It has to do with a combination of human conditions.  Greed and Sloth are the most prevalent.  Greed in that the various representatives want to get the money to pay back constituents and their own pockets.  Sloth in the bureaucrats and the elected reps in ensuring the money is spent after due diligence.  The reason they can do all of this is that it is not their money, it is ours.

I really thought I had more to write on this, but so much of it is too obvious.

I am sure that Black Beard, Blue Beard, and Jack Sparrow are rolling over in their grave watching these poorly styled amateurs pretending to be pirates.  I mean what happened to pride.  These guys are running around in Uncle Billy Bob’s dingy.  I want frilly shirts and Eye patches damnit!

I am happy to see that a ship full of American merchant marines fought off a group of these poor excuses for pirates.  But then you have some jerks stating that they should have just hung around and waited to be ransomed like a bunch of …..  Well place your favorite nationality here.  

The International Maritime Bureau basically wants the crews of these ships not to take any action once boarded.  Even prior to boarding they do not want the crews to take any lethal force just speed up and spray water on the attackers.  Unfortunately the people making the rules do not understand basic animal instinct.  And these guys are just animals.  Rule of the jungle states that “the weak and easy targets are eaten first”.   

I think (for whatever the hell that is worth) they should immediately change the rules.  The crews of these merchant vessels should be instructed in how to repeal invaders.  Ships should be equipped small arms and the crew should be trained in their use. 

This will immediately increase the cost of being a pirate.    Remember I believe in the whole risk and reward ratio.  This pirating business has become such a boon because there is no cost to the pirates.  They show up in a boat that seems to be something you would rent to go fishing while vacationing at the sea shore.  The crews of ships just stepped aside while the pirates took over ship and made the call to the company for ransom.  I think the call went something like this.

Somali Pirate: “Hello, Damnit a god damn machine”
Corporate Computer Answering Service: “Press 1 for English, Pora Espanol dos” (I don’t speak Spanish sorry)
Somali Pirate: “I am going to go with English is just makes everything easier with the banks”
Corp Comp: “If you know your parties extension dial it now or press 1 for more options”
Somali Pirate: “What is that guys extension.  Damn it where did I put that number.  Oh here it is”
Corp Comp: “Now transferring you to:  Ransom Department”
Somali Pirate: “I hate waiting on hold. This is the problem with the ransom business.  So much competition that I have to wait on hold now for 30 minutes.”
Corp Comp: “Your call is very important to us please continue to hold”
Somali Pirate: “What bull shit.  If it was that important you would pick up the phone”
30 more minutes later.
Ransom Department: “ Hello may I help you”
Somali Pirate: “Yes I took control of the ‘We are big Wussies’ cargo ship and would like to be paid.”
Ransom Department: “Do you currently have an account with us?”
Somali Pirate: “Oh yes of course, I am not an amateur.  Account number is  ‘1231######’” (I have to protect the Pirates identity)
Ransom Department: ”Is your TaxId still the same.  And you are aware that this money must be reported as income per the IRS”
Somali Pirate: “Everything is still the same.”
Ransom Department: “And how much should we pay this time”
Somali Pirate: “I am running a special this week.  Since I have two of your ships I will give them both back to you for 15 million”
Ransom Department: “Seems reasonable,  you will see the money in about 12 hours”
Somali Pirate: “Oh thank you very much.  Nice Doing business with you”
Ransom Department:  “Please do not hesitate call for your next ransom, good bye”

These guys have set up a smooth process oriented business around this ransom business.  Well until recently that is.  This small act of defiance, despite the danger, will force the pirates to think twice once it is known that someone might fight back.  It won’t deter many, unless more crews fight back.  The turning point will be when some pirates actually get killed in trying to take over the ship.  The escalation will continue as both groups begin a little arms race and more people will die.  In the end though the pirates will be forced to take more precautions and the gold mine of pirating will decrease.  Those that stay in the business will have to up-gun themselves.

The act of up-gunning themselves will be the undoing of the groups.  Primarily the reason why they could not take these rinky dinky boats out to go do pirating is they would not stand up to the job.  They will have make or modify boats specifically for the purpose of raiding ships.  These ships will be more easily spotted and chased down.  The boats will be spotted at the bases of operations and then one night a squad of SAS or Seals leave a bunch of dead bodies.

This brings everything back to a very simple point of life.  If you don’t fight for yourself you will get walked over.  Once you are known as someone who will not fight back, then everyone else around you will also walk over you too.  On the other hand if you are known as not taking peoples crap then those around you will not give you any crap.  They will even think twice about giving you crap that you deserve.  Why, because it comes with a cost, the cost of you fighting back.

The current financial crisis is a big example of how nature will always equalize a system.  When the consequences of an action are eliminated the rate of the action will increase.  Eliminate the hangovers and people will drink more.  I would at least.

All things in nature will eventually equalize themselves, because a system imbalance cannot exist for long.  For instance if you eliminate the wolves; the deer will eventually over populate the area and start committing suicide by jumping in front of your car.  I think they miss the wolves too much.  So the system self equalizes. 

Another example of risk and reward system we should all me familiar with is our sex lives.   What do you think would happen if a bunch of 20 something’s were kept on college campus but were told that pregnancy could not happen and STDs could not be caught?   In three months half the campus would be pregnant and the other half would be scratching themselves wondering what is wrong with their pubes.  I am not condemning them.  I would have taken part in such an experiment too (I would have been a whore but nobody wanted to be a whore with me).  So much for memories, either way you should have gotten my point.

The current crisis can be tracked to who ever let Fannie Mae and Freddie Mac to buy very crappy mortgages.  The rest of the funny financials like collateralized debt securities and derivatives were simply the mold that grew from the cesspool of Fannie and Freddie taking risks no one in their right mind would take.   Normally when a private corporation would take unneeded risk it would burn out and die or outside investors would refuse to underwrite the endeavor.  What made Fannie and Freddie different was that they were tacitly guaranteed by the government.  This means that the underwriters had less risk of failure because if worst came to worst the government would take care of everything.  These underwriters, investors or gamblers saw rewards that were better than the risks of underwriting the companies. 

For period of time the imbalance of the system was balanced periodically without crashing the system because the gains and leverage were not great enough to cause the system to collapse.  Housing prices went up and went down for all of eternity.  What made this different was the timing.  Stocks were tanking after the dot bomb debacle (another example people not using their heads) and the Fed was trying to get the economy moving again.  The Fed lowered interest rates making money very cheap.  In any boom and bust cycle there are still winners.  These winners began investing in real-estate. 

Shortly before this time Herb Moses an executive a Fannie Mae was playing hide the salami with Barney Frank.  Barney Frank at this time was in charge of making sure Fannie Mae was doing good business.  He opposed the transferring of Fannie and Freddie oversight from the Department of Urban and Housing development to the Treasury Department.  Granted either one is still a government run.  It seems that a government department whose job is to get people into housing would have a conflict of interest with a company who provides financing for homes.  So if said company will provide additional financing for the department’s projects they would overlook the horrible risks they were taking.  I have no proof that this is what happened.  But it is not too much of stretch to think this is what was going on.  Especially since the ramifications became so clear a few years later. 

Without anyone to watch over Fannie and Freddie and many investors willing to take extra risks because the government would back any risks these organizations ran rampant.  The CEO’s of the companies and the attendant executives began writing bonus rules that had nothing to do with long term viability of the organization.  So the bonuses that were given were for the amount of assets in management (or mortgages owned).  There bonus had nothing to do with the quality of the assets.  Who here can see what is about to happen next?  Raise your hand.

Fannie began taking all the mortgages they could get from the private companies in the market.  These were sold as all kinds of securities and what not.  Investors not knowing what fannie was doing but believing the government would come to the rescue were willing to write checks to fannie.  The private companies realized that they would not hold the mortgage more than a few months to a year would sell the mortgages to Fannie.  The risk was off the private company but they still had the reward of the first year’s mortgage payments and other service fees. 

The price of homes began to sky rocket.  Soon few people could afford a home with traditional methods.  But the private company could make up crazy mortgages that started off with smaller payments.  The buyer could afford these teaser rates in the beginning but by the time the real rates came the mortgage would be owned by another company (usually Fannie or Freddie).  These artificial buyers could only maintain this growth for so long.  Soon the market collapsed. 

In this game of hot potato Fannie and Freddie were left holding the potato.  Which means that the we the American tax payer was actually holding the hot potato.

What fascinates the hell out of me is that some very smart people do not understand that not everyone can be rich.  Nor can everyone be poor either.  We are rich or we are poor based on the people around us.  Both Ted Rall and Cynthia Tucker do not understand how basic everyday economics work.

Although both are correct in criticizing the executive pay of these failing institutions, what they fail to recognize is aside from pulling back a little bit on the pay for CEO’s there will always be both wealthy, rich, poor, and a bunch of levels in the middle.  I also made a very conscience decision putting in both wealthy and rich as different levels. 

To the primary reason I wanted to post about tonight.  The amount of middle class people has not changed in percentage of the population.   The primary reason has nothing to do with economic policies or anything that complicated.  The middle class are the people who make more than the lower class but less than the rich.  The factory workers were never really middle class.  The manager at the plant was middle class and the diner owner was middle class.  Could the factory worker live comfortably with the two point five kids and a white picket fence?  Maybe it really depended on the supply of houses with white picket fences.  But that is my point.  What does the average person today have in comparison to thirty years ago?

Today the average household owns two cars (with reliability and features Mercedes Benz did not have), a HDTV in one or two rooms, air conditioning in almost every room, cell phones, cable TV with 100 plus channels, a computer with internet, some type of game system, and health care that those in the 1970s could only dream of (even if it’s expensive).   

Mean while in the 1970s when according to Cynthia Tucker all was great, the average American made car was complete junk, went 0-60 in 3.4 months, got about 15mpg, and were good for about 80K miles.  Air conditioning was something only the rich people in the neighborhood had.  A house might have two TVs only one worked.  Cable was something for rich people also, if they even had it all.  There were no cells phones.  Ok that last one is bonus.  The personal computer was just a series of blinking lights.  Geeks really were geeks.  The internet was for even bigger geeks.  And healthcare although cheap was abysmal by today’s standards. 

So where did all the productivity gains that the rich people ran away with go? It came back to the “poor people” in the form of better stuff for “poor people”.   One can argue that all the stuff is not worth it, but when it comes to economics the stuff and the services that people can have does matter.  Also if someone did not want the stuff they do not need to purchase the items.  

The second point I want to make is directly related to the statistic mentioned in Cynthia’s editorial.  I don’t think there is anything wrong with it.  I think it actually shows exactly what it should show.

A few years ago, Earl Wysong of Indiana University and two colleagues published a study on social mobility in this country. As outlined in the Economist, a right-leaning British news magazine, they “compared the incomes of 2,749 father-and-son pairs from 1979 to 1998 and found that few sons had moved up the class ladder. Nearly 70 percent of the sons in 1998 had remained at the same level or were doing worse than their fathers in 1979. The greatest social mobility occurred in those families already at the top of the income ladder,” the magazine reported.

So 70 percent of the study did not move up the income ladder?  No kidding.  Not everyone can move up the income ladder since they have to move past someone else and then that person would move down the income ladder.   I would bet the statistics would come out that 1/3 moved up, 1/3 stayed the same and 1/3 went down.  Also 66% is really close to “almost 70%”. 

The second part of the statement deals with that most of the social mobility was in the upper income brackets.  This too can be easily explained without it coming down to something evil republicans did by reducing taxes.  In 1979 a college degree was still a premium and those with them came from more affluent backgrounds.  While a high school education pre 1979 may have been good enough, after that is simply was not good enough.  One needed to have something besides a high school education.  So simply showing that those who were affluent made better gains was primarily because they had access to a college education and valued it earlier.  In addition it tends to the children of the rich that become the wealthy.  The grandchildren become drug addicts and home move porn stars.  So it sort of works out in the end.

Did some people become obscenely rich, while others were brushed to the wayside?  Yes.  Do I wish that people could live in a minimal of comfort even when they are on the lowest rungs of the economic ladder?  Yes.  And they do, but in comparison to the truly poor in this world they are doing pretty damn good, even if everyone else around them is doing better.

If you are searching for some smut related material you are going to be sorely mistaken.  I am not going to be discussing about the actual act of getting laid.  Only getting to the bedroom, after that you are on your own (what perv searches blog posts looking for porn).

This insight came to be in a discussion about minimum wage.  I know minimum wage and sex how did they go together.   Well as a buddy and I were discussing the raising of minimum wage and the living wage laws, and we were drinking of course (see title of blog).  It came to me.  Why is a BMW different then a Ford, aside from actual driving dynamics, it is its exclusivity.  So why is exclusivity so important?  Because it shows the ability to gather resources and there by make a better life for your potential offspring and partner.  People like to hang with people that can make their life easier.  And in general people that have more money have the ability to make the life of those immediately around them easier. 

But here is the kicker to this whole thing.  Money or the amount that you have is relative.  A millionaire in a room of billionaires is the poor guy.  In more ancient times it was litarlly the size of your club.  And I am not speaking of the club between your legs.  The cave man that could swing the big club and kill the bigger animal or smash the guy who just worked hard killing the bigger animal had an advantage.  It really depends on your morale standard.  They could get more resources in this case food and there by those around them could have more to eat.  Being a little plump was at a time a sign that you were affluent now it’s just a sign you eat too many fries and quarter pounders. 

Ok now your fat and have a big club big deal what does it actually get you.  That’s right a mate.  We have evolved to search for things in our mates that are a sign of health and fertility.  Given our male dominated society this means that men who bring home lots of bank are more attractive.  Women with nice shapes (which depend on your taste, boob guys, butt guys, and leg guys) are a highly desired commodity.  Sorry ladies I am not trying to demean you.  But lets face it the hotties have a selection of men while the rest bitch and moan about blog posters. 

I previously stated that hotties have a selection of men, they begin their selection on some very superficial criteria.  Yes ladies you can be superficial too.  The guy you choose to end up marrying may be completely different from what you went for on first impressions, but getting past date one for those guys was a lot harder then most I am sure.  Just remember we are talking about generality’s here and not a case by case basis.  But lets be honest, a guy who takes you out on a date in a beat-up 80’s hatch-back is not nearly as impressive as the guy with the new Benz.  Why?  Simple a guy with access to the money for a Benz simply shows the ability to make you and your children better off and more likely to succeed. 

Now that we have established guys with cool stuff are better we must take in the relativity factor.  In high school, we students not in the 90210 zip code were moved to the top of the heap by just having a car.  (I did not have a car but I did have access to my parents van.  Yes I was the van guy in high school.  My buddies loved me, but it did not help me a whole lot.)  Having a car was a sign of some sort of success.  It was also and easy way for people to get together.  Of course after high school a car was not enough.  College brought on more competition.  Now you had to have a nice looking car.  You were not at the BMW, Lexus, or Benz level yet but a nice looking one of those cars was pretty useful but not a deal breaker.  After college the badge on the front of the car started to really matter.  So your level of success or access to resources depends on your competition. 

What the hell does this all have to do with minimum wage?  Simple if all you do is raise the last rung of the ladder nothing changes.  It is not about which rung on the ladder you are on or the height at which the ladder is at.  It’s about the height of everyone else on the ladder.  And chicks dig the guys at the top of the ladder.   

Eating the rich has always been sort of a sport for most of human history. Unfortunately eating rich people is like eating your seed stock or slaughtering your birthing age cows. Sure the seeds make great bread and the cows make for a really succulent steak sandwich, you will starve later.

If you don’t believe me, when was the last time you worked for a poor person? Ok all of you social workers sit down those people don’t actually pay you. As much as I don’t really like mega-rich people, especially those that did nothing to get it besides win the vagina lottery. They are a necessary evil. They are the only ones that have enough disposable income to invest it into non-consumption based spending. In other words expanding supply by investment.

During a recession or depression (depending on your own personal employment status) there seems to be an excess supply of goods (and services) and a non-existent supply of money. This is only a short term situation. Soon the excess supply will be sold when the price is lowered enough and new goods will need to be produced. Unfortunately the people who owned the original production facilities were turned from rich producers to a rather succulent casserole by those less fortunate.

Unfortunately we normally do not see farther than our own noses when it comes to economics. Part of this is natural, after-all when faced with starvation we look to find food first. But if we eat next year’s food crop to eat for today we will only starve worse later. The more we as a people continue to take from those of us who are successful and give it to those that are not successful the more we eat our seed crop. I should also state that in reality rarely to the less successful actually see a bounty from those that are successful. Usually what happens is the money is transferred from the successful to the politically connected successful.
People have to remember that we are not rich or poor based on the money in our check accounts or stock portfolio but in our relationship to everyone else. And I don’t mean some squishy love crap I mean that if everyone else has the same as you then you are all poor.

And I prefer my “rich people” with a little butter and a nice merlot reduction.

So there seems to be a bunch riots going on over the finincial crisis.  Many of the acts of protest seem to be strikes or work stoppages.  Given that the businesses and factories are dealing with a surplus of product this is a good thing for them.  After all the plant does not have to pay people who are not working. 

This ends up being counter productive for the people actually performing the strike since they are not earning money and with the surplus of goods decreasing the price of the goods will stay steady.  Unless of course the whole damn system collapses and at that point who cares.

At first I thought this article about savers had to be a joke.  But alas it is real.

Someone should really take this person’s keyboard away before they hurt someone.  I guess he/she works from home.  After all how do you get to work when you have cart in front of the horse.

For those of you that think this is a good idea, remember that banks lend out money that people save.  Basically the interest a person earns on the money they keep in the bank account is their share of the interest the bank made in loaning it out. If there are no savers, there is no money to lend out.  We have been playing this juggling act of using leveraged assets to buy more assets and then leverage the total again, for too long. 

There is nothing wrong with leverage itself.  It actually enables our economy to function.  It allows most of the successful economies to function. Leverage allows people to take a risk and be rewarded.  But what we have going on now is that the leverage was out of control and that everyone was so leveraged the whole system threatens to fail.

The situation we have is like an alcoholic who functions by taking a shot of whiskey in the morning, we are making our situation worse.  We have to go through the hang over from over consumption. 

The government is going to have to spend money to get things moving but these things have to be done in such a way that the money that is spent is spent on things to enable more private commerce.  I hope the government spends money on new roads, bridges, power distribution, and other infrastructure work.  But we all know what is going to happen.  Think Boston Big Dig but with more money. 

As for the people saving their money and not spending it, well that is just the way things happen.  People afraid that they will lose their jobs try to save money. The problem is not the saving people.  Provided they are not saving their money by putting it under their mattress, which is the only way money is truly lost to non-circulation.  The problem is that banks are not lending money at all.  Unfortunately they are not lending to worthwhile companies either.  Perhaps if enough people put enough money in the bank it will be able to de-leverage it self out of bad situation.

What we need is moderation.  Some spending, not like we have seen, but we also need savers.  Some people have to get burned and some have to be rewarded.  After-all it is those people who saved their money are the same ones who we depend on to get a loan when we need it.

I see that the dollar is in a downward spiral again.  Which if you understand what money actually is seems completely rational.  We knock the interest rate to near nothing which will essentially put more dollars in the pool and with more dollars chasing the same amount of goods and services you have inflation.  This is what is happening with foreign currencies and the dollar now. 

I am not sure why the Euro is worth anything either as when was the last time you purchased an good or service (Amsterdam red light district excluded) from Europe that was not a super luxury item?  Volkswagen maybe but they are made in México usually. 

This brings me back to my point.  Money is merely a medium to allow an easily exchangeable representation of your good or service.  And when taken on a national level the goods or services you can purchase with the money of that nation.  If that was confusing let me give you a little story.

Tom works for a week at Widget Inc. USA for a week.  He earns 500 US dollars.  Tom then wins a free trip to some country in the EU.  Tom then takes his 500 US dollars and exchanges it for 370 Euros.  When Tom uses those Euros he should be able to buy things made by the Europeans in what he feels is equivalent to his week of work.  This does not mean that some European worked for a week to give Tom something specifically, it means that Tom agreed to an exchange of his week of work via the currency medium for some amount of some Europeans time. 

I will continue the discussion of worthless money in other posts.  And just remember that time is money.