• In one clear, crisp concise statement ‘Romney is free market but uses economic incentives to encourage productivity and keep a safety net for the disenfranchised in our society’. If you like that view of political Economy than Romney is your man. Please read on for more interesting elaboration.

Romney does support economic common sense, and not give aways to the fat cats on Wall Street, contrary to what his opponents try to represent.

Mitt Romney’s economic plan is free market but not to the end. The purpose of this post is to look in a summary form at the pros and cons of Romney’s economic vision for the USA. Since I was a kid, I remember the neighbor fathers talk about we need a businessman to be President of the United States. Well at this juncture, it looks like it is going to happen. So it is important to get a clear understanding of his economic ideas, right from his book, not the media or political ads.

I might seem critical of Romney,  but on a whole, I think he is a good man and his economic ideas would help the USA more than Obama’s. Romney is generally free market and has positioned himself as someone who can appeal to Democrats economically because he is not about ripping apart safety nets but rather encouraging jobs in the free market and yet retaining a safety net for the poor and displaced.

Endeavor t0 provide the dignity of work in every safety-net program where that is possible, evn if it costs the government more money to do so.

Mitt Romney’s economic – political ideas

Romney like Obama sincerely wants to help the lower and middle class American.  I have never doubted their sincerity, just their understanding of markets. I will use Mitt Romney’s book No Apology as a guide to understanding Mitt Romney’s view of economics and quote from it. It is not economic theory but more the ideas of a politician who understand economics to some extend.

Productivity

An economy  is a function of the number of people in the workforce and the productivity of that workforce.

Romney’s view is focus on productivity as the central idea for generating wealth in the USA. This comes from his business background. That is if you have ever worked in an office you know a lot is about increasing efficiency and productivity. It is about showing efficiency gains on a micro unit level that gets you as a middle manager your bonus.

For example, lets imagine a micro nation, has one hundred people raising the food, while 100 built houses. Then one day, an innovation like the plow comes a long. Wow this is a breakthrough and now this micro nation only needs 50 people to raise food. Would fifty people be unemployed?  Romney’s answer is not really. They would use their talents and brainpower in other ways to increase the well-being of society instead of manual labor intensive processes. Some of these displaced workers will be better off and some will be worse off, but no one would argue for the return to agriculture before the plow. Life for all would be harder.  Productivity gains are almost synonymous with economic progress.

Romney is correct that productivity is an important component of economic growth.

Two books discuss similar issues if you wan to examine this in more detail and different points of view are:

• The Power of Productivity: Wealth, Poverty, and the Threat to Global Stability – William W. Lewis
• Cities and the Wealth of Nations by Jane Jacobs

• I think it Romney needs to make his message clearer, that economic freedom accelerates innovation, not that innovation gives us prosperity and hence economic freedom. Further, not government economic plans or recovery initiative to jump-start the economy.  The economy is not an engine that starts and stops, it is me and you taking individual action. Romney needs to champion this point even more if he understands it.

Innovation is the engine of productivity gains

In the 1980s it took ten hours to produce a ton of steel, today only one hour. This was because of innovation in the process of production. It is not that people are working harder, maybe they are, but it is more about technology and the process. It is not just some earth shattering breakthrough in science but also process improvement and work flow.

A key component of getting the economy to function better as well as the government sector is free markets so innovation can lead the growth. This includes outsourcing government functions to the private sector.

It has been my experience that almost always government is far less productive than enterprises in the private sector. That’s why private companies build roads for governments and make equipment for the military. It’s also the reason why FedEx and UPS can make a profit shipping and delving packages while the U.S. Postal service loses money, even with its inherent competitive advantages.

• We can conclude Mitt Romney is free market in the general sense. So where does he fail in his economic understanding?

1. Increasing the military – the biggest waste in the world.  This is an economic issue. We have been fighting wars since I was a kid in the 1960s and that is not going to change. Romney argues for an increase in soldiers (he says we need at least 100,000 more) in the military because the percent of GDP is not that large. I tend to disagree, I will not go in detail on this but let you do your own research. However, I personally know a lot of military and ex military guys doing nothing in the USA, nor can I see them ever integrating into the economy in a meaningful way. I think the military has a profound psychological impact on the most productive years of your life and many times hurts those young people from finding their way in a complex post industrial economy (in contrast to the post WWII economy which was easier).  Remember we are not defending US soil but playing a political chess game and using brave Americans as pawns in Middle Eastern politics. Most people know this by now. I say a smaller military for home defense not micro managing the Middle East. The impact of having a bloated military is huge. For example, did you know the cost of the wars in the Middle East exceeds the revenue collected in individual income taxes. Yep, the income tax is not where the US government gets the majority of its income. We could have eliminated the income tax instead of fighting those Middle Eastern wars with the grande army. So why does Romney want to increase military spending and overseas influence?
2. Quasi free market but not really - Supported the bail out of the auto industry with managing restructuring. This is better than Obama’s cash infusion method. I would say the auto industry could have fallen and restructured without the cost to US tax payers. Maybe I am wrong on this, but I have always said let the markets work or the cost is higher prices, less innovation and lower consumer satisfaction.  I still think cars are expensive as anything and thanks to your tax payer dollars it looks like it will stay that way. Supported the bank bailouts. Banks now sit on a huge inventory of foreclosed homes and the prices are still high in my opinion. If you want affordable housing, let the reckless banks fall and deflation correct the market, then you would see the haves loose and have nots gain because the market would work naturally. Supported the Federal reserves anti-deflation monetization. Big mistake, we should let he markets work.
3. Barack Romney or Mitt Obama – they are more similar than different, despite the political noise. Obama focuses on social programs and Romney military build up, but besides that basically the same. Ron Paul would like to eliminate the income tax and the Federal reserve and balance the budget by cutting real spending not growth like Romney’s cut the rate of increase. Now that is free market and that is different. Mitt Romney is more a bit free market and a better choice economically than Barack Obama, I guess, however, I would have to see more  understanding of money and markets to be totally impressed. I think at this point I will vote for him, maybe. Obama did the opposite of what should have been done in many cases because accident economists advised him wrong and he did not have the understanding to go against them.
4. Mitt still thinks in a corporate way, that the economy is a big machine

Having grown up in Detroit, I tend to think in automotive terms. If we imagine that the economy is an engine, then capital is its fuel.  – Romney

The economy is not an engine. It is you and I. It is not fueled just by balance sheet capital but by intellectual capital like the people who started Microsoft or Google.  They are usually innovative individuals, not large companies to start. Romney supports a decrease in corporate taxes to increase company balance sheet retained earnings for research and development and innovation. I guess, but don’t you think a lot of that will be just paid out to someone instead of allocated to R&D? It is trickle down economics.  What about eliminating the income tax so people, who are the ones who often create the best innovation in the basements (I have known many people who start companies in their garage that have done brilliant things like one of my former employers SS&C, an Investment Accounting software company, it was started by Bill Stone in his garage). So Romney is good, but thinking in terms of his experience in the corporate world. In contrast, I tend to think from an ideological standpoint of maximizes individual liberties, including economic and markets in aggregate will take off. This is Adam Smith.

Romney on minor economic issues

Romney supports a moderate minimum wage (some people argue this hurts small business not large). And Romney supports unemployment insurance as a safety net (some people say this prolongs unemployment). I have no major problems with either of these ideas because they do not have a huge economic impact. I think both have a libertarian solution but this is not the source of our massive economic problems.

What is the real source of the economic problems?

The Federal reserve creates business cycles with easy credit and excess spending with Keynesian fiscal policy. This  displaces productive people from the private sector to the sluggish,  wasteful government sector. Not just a trade-off between one sector and another. Remember the post Keynesian model C+I+G=GDP? Wrong. Spending is a not an accounting equation, but one of crowding out and opportunity cost that is usually over looked.

For example, when someone is getting your income via taxes by being employed by the military in the desert as an artilleryman, does he have a job? Yes, but what if that young fertile brain was in the private sector using his 20s to create something innovative. A major displacement of intellectual capital.

Other economic quotes by Romney

The best way forward is not to erect trade barriers but instead to facilitate innovation and productivity that will sustain our global manufacturing competitiveness.

I agree. Trade protection will make every consumer good higher priced, I will not be afford a lot. Focus on innovation.

Our Standard of living are the highest of any other major economy

Questionable but I am glad I live in the USA.

In his capacity as chairman of the Federal Reserve, Alan Greenspan made a decision to hold down interest rates for an extended period that didn’t help either. He was motivated by a desire to avoid deflation – and in that respect it worked.

Did not help? That was the  root cause not a helper in all this. And deflation, nothing wrong with it, it is the market working. To not have deflation if needed is asking for long-term slow growth and deprives the have-nots the chance to have. People point to the deflation of the great depression, but that was a symptom of a deflating bubble created by the central bank.

The fact that both parties have come to accept deficits and ever-higher levels of public debt is deeply troubling.

Agreed, Romney is much more fiscally responsible than Obama. But why not just way number one probity is a balanced budget amendment?

Increase our investment in science and basic research

Not libertarian but I like it. I was talking to a military guy at the park the other day when our kids were in the playground. He told me every new immigrant should be required to serve in the military, even in combat zones before they come to the USA. Yeah right, we would turn away brilliant minds in research and science and replace then with jarheads. We should focus on intellectual strengths not old world ideas of blood and iron like Bismark believed. We do not need more industrial factories but high-tech centers offering solutions. I think investment in science can be encouraged with government and private business, although I think the latter does a better job. US innovation is on of our saving graces, we need to make sure it stays that way.

Romney on economics and the USA

1. A Strong Economy
2. A strong Military
3. A free and Strong people

Mark Biernat on economics and the USA

1. A free economy – only way to achieve a strong economy and real stability is maximizes economic freedom like delete the Federal reserve and let the markets work. People criticize free markets, do not realize we have not tried it yet.
2. Military for defending America – To illustrate the waste, what if we spend 1/3 to 1/2 of our budget on helping childhood diseases or making our cities safe instead of being the British empire of the 19th century; we would have a safer America.
3. A free people -  You achieve this largely by a free economy, but not just.

In summary economics and the election

Here is Mitt Romney’s economic plan in detail.

Will I vote for Romney in a Obama Vs Romney election in 2012? I have to think about it, but I suppose. Maybe I will vote libertarian as Obama and Romney are pretty similar despite all the noise. The bottom line both candidates want to cut the rate of growth, not the baseline. Both support a Federal reserve and income taxes with adjustments here and there. Both support bailouts, although Romney tends to be more free market with managed bailouts. But for me they are more similar economically, than different. He is more moderate and will appeal to cross party voters, therefore, have a good chance of winning in 2012. However, Romney does have a radically better of understanding economics than Barack Obama and can appeal to both parties.

Despite my affiliation with the Republican party, I don’t think of myself as highly partisan – Mitt Romney

Romney will get the Neo-con vote anyway, as what choice do they have, they will not vote for Obama. in the 2012 presidential election. So he would be wise to tone down the strong international military stance during the election. The election will be about a battle for the middle voters, not the extreme. What are your thoughts on Mitt Romney’s economic plan.

For pennies you can have fun

At one level the investing theory is sound, and people who have interest in penny stocks at some level understand the idea of financial leverage. It is the idea of trying to amplify your returns with little capital applied.

Financial leverage is a way which many great investors got rich, like Warren Buffet. However, they did not do it with trading penny stocks. They did it with more sophisticated methods. Buffets did it with Insurance., you can read my article, how insurance companies make money.

Penny stock traders have the idea that, low price equities, under a dollar, have potential for large percentage gains with even a small movement in absolute price. For example, if a fifty cent stock goes to three dollars a share that is a 600% return on your money. Even if it goes to one dollar yo double your money. In theory this is correct.

The problem is statistically the rate of return on average does not match the normal equity market. Windfall profits are the exception rather than the rule. Even if you have some play money, expect to throw away more than you will get back. However, if you have 100,000 dollars in a portfolio and you want to risk a few thousand, go ahead, but I would active leverage with options, rather than penny stocks as I think this is closer to a zero sum game.

Why penny stocks do not yield a good return on average

• Penny stocks that are scraps in the junk heap – Stocks beaten down this far can come back but more likely they are only attractive to junk men searching through rubbish. I do not know too many rich junk men in the real world.
• Penny stocks that are the next artificial blood – When I was in Finance in Boston I would soften hear about these wizards working on the next big thing in technology or biotechnology. They had MIT or Harvard connections. Great ideas, even noble ideas, like artificial blood, that maybe someday will be a reality, but in a 12 month time horizon or even 36 month time frame, I personally never saw any of those great opportunities perform.
• Penny stocks that are selling air – These companies that really do not have much going on but the dreams of the eccentric behind them. I think you would better off selling air. Sure, get some fresh mountain air from the Rocky mountains and compress it and sell it to people in LA or NYC. You would make more money then 99% of the stocks I have seen trading at pennies a share. I had a tried selling stock for some home gym he designed. I never saw it come to fruition. Even I personally and working on a few products. When I have mine out the door and selling I will let you know, but I prefer not to tot my horn, until this time.

Why Penny stocks move up

• Pump and dump – the market builds excitement, often manipulated by some individuals then they are dumped. Micro cap fraud
• Stocks sold illegally under schedule S internationally – Chop stocks

I understand why investing in penny stocks is tempting, because earning money though working for a living is harder and harder. If you could just profit from two ten baggers, that is buy two stocks in a row, that go from one to ten dollars; with ten thousand dollars you would have a million dollars. It could be done in a year.

However, everyone wants to do that. But have such a good run with a cheap stock, is like making a hole in one on the golf course. You can not base your life on it. Better is to prefect your game in a more rounded fashion and if you do get a stock that rises to ten times for what you guy it for, be thankful. I have, but it was when I was younger and I made a fortune, only to lose most of it. It was a painful lesson.

If you want to play with a little of your risk capital I think Leaps or long-term equity options are better vehicles for leverage. The are also low.

Have I ever owned a penny stock? Sure in my 30 plus years of investing in the stock market I have owned a number, mostly at the start of my investing career. I did not buy them mind you, they were low price stocks that hit the pink sheets and went bankrupt, belly up. I was young and brash and thought buying low-priced stocks under 10 dollars would amplify my returns. I was always looking for something exotic and cutting edge.

What is the lesson we can learn from Penny stocks? – Leverage

Although most penny stock junkies will most likely never get rich they do teach a lesson. Leverage a key investing idea to amplify your returns. You can turn a small amount of investment capital into large returns. All you really need is a system of investing that does average, or even below average but consistently. Read my posts on quantitative investing and how to invest with logic.

• It is better to have a system that is consistent and below average, but leveraged than a system than going for a home run in the market with a hot stock.

Why is the economy not working? Let me explain economics so simple even Obama could understand, yet he will not. Nor will his Einstein advisers with wing-tip shoes and fancy degrees. I wish he would read this.

• The simple answer is this: Americans have to build a better mouse trap to compete with countless legions of hungry, educated and clever capitalists in the emerging markets who are lean and ready to do economic battle with US citizen Joe Blow who is looking to politicians to solve the mess.

Economics is ground up not top down, if politicians understand this we will all be better off in the USA

The solution is not a top down industrial policy that wise men (yeah right) in Washington choose. That is, which industries including banking and real estate, to develop, help, bail out or steer. The solution is to let the markets work, and people with their own innate intelligence and creativity will find the solutions to their personal economic issues. I mean can you imagine if the government ran Apple, what the company would have turned into? The solution to economic problems large and small will always be this. To let the markets work. The result of unintended consequences of aggregate economic activity created by individuals acting on their own enlightened self-interest.

Everything else is gobble goop analysis.

Economic challenge to the reader

What is so hard about that to understand?  I defy anyone to counter me on this point. Anyone at all can give their best shot as to why capitalism does not work and if there is a better way. Just leave a comment. I gets hundred of readers to this website daily so there has to be one person that can come up with something better for an economic solution.

Think of yourself as a consumer

As a consumer I will always try to buy the best product on the market for the lowest price. Americans as individuals, not as a country mind you, need to figure out how to provide services and goods of better quality for a lower price. It is that simple.

And before you hem and haw about unfair trade, if trade is unfair then use it to your advantage. For example, manufacture a product in China and import it here with your quality control, design and marketing. If the economy is unfair, find the way it is unfair and use it to your personal advantage and this will create wealth for those around you.

• Economics is not top down but bottoms up, it always has been. Government’s roles is to protect your personal liberties so you and I can find the best way to solve our own problems.

The basis for the free market solution to the US economic problems

• From Adam Smith and enlightenment thinkers you have the idea that individuals acting on their own enlightened self-interest will bring society on aggregate to a higher level culturally and economically than other social economic model. The USA will be a better place to live socially and economically.

From the Austrian economics we learn about value What is valuable?

• The human mind is what determines what is of value. The human mind alone. Something is valuable because you think it is. Period, end of sentence. This is illustrated in the diamond water paradox and answer the question why Karl Max was wrong. It also answers why a stock is worth what it is priced.
• I will pay for something based on what I think it is worth. This is so obvious that even a child could understand it.
• Value is determined subjectively by the human mind.
• To paraphrase Shakespeare ‘There is nothing valuable or invaluable, but thinking makes it so’.

What is the role of the market?

• The market though the price system orchestrates valuation between people who demand goods and people who supply goods. Consumers and producers are coordinated. Is there a better way to do it? No, because non-price rationing results like seen under communism where people had to stand in line for eight hours for a loaf of bread. The shop workers had a sense of power and entitlement, and no one was happy. My family lived through this surreal experience.
• Yes, you can make exceptions to the market allocation system of course. Public goods like the environment and help for the poor. But even with these, the market system can help. I have always said in a rich society like we live in we can help the poor.

I am not an economic evangelist for capitalism. What I convey is simply the way economics works and how to jump-start the US economy. This includes returning prosperity to the middle class. That is reduce the burden of government so you and I can find our own solutions. People have been lulled to think the burden of government is light, it is not, your income would be over double what it is now if the markets were free.

How can America recover? Americans need to read books by Adam Smith and other economics like: Carl Menger 1840-1921, Ludwig von Mises 1881-1973,F.A. Hayek 1899-1992. After they as individual understand how economics works, spend the time thinking about the better mouse trap. The government needs to reduce the heavy bonds and burdens placed on US citizens that prevent this from happening.

Basically if you watch this video you will understand what does not work with job creation. This video is not economics 101 some boring academic research video. It conveys a clear message in pretty funny video and can be applied to economics as a whole I highly recommend you watch this as pictures speak a thousand words.

The creation of jobs with the goal of full employment is what does not work. We all need jobs, but why must someone help us get one? Why must as a society we have a goal of 100% employment?

What is the best way to create jobs Mr. President?

What effect does just creating a job for the sake of employing people have on the person or the rest of society?

The communist tried that 1917-1989. It did not work. The Keynesians tried that in the 1930s and in 2008 and it was counter productive proportionally to the job creation pressure applied.

Many people think the biggest tragedy of communism was the poverty it created. It was not. It was the misapplication of human capital. That is bright young budding minds and old minds aspiring to better themselves, talent and skills being applied to something that was not their calling. Living below your potential in a world where jobs are created for you, not the creation of your own inspiration.

But to simply to employ people does nothing to allowing humans to strive and better themselves to be the best they can be.

The stifling of expression of human freedom. I am a libertarian leaning not a hippie, but if someone is destined to be an artist or hipster poet, let them be and let the market determine their worth and if people are willing to accept the costs and benefits of this, than hey it works. If they understand that the marginal product as demanded by others, there is no problem.

My take on it is there is something artificial in the market it withholding back the budding entrepreneurs from creating the American dream for the US economy. What is artificial? Job creation programs by the government.

Politicians talk of job creation

When the President talks of ‘job creation’ know this is a code word for ‘suppressing human creativity and expression’. Sure times are not the best but, ‘did you Mama ever tell you life was going to be easy’? The government is not some nipple for everyone to feed from.

• How do you create jobs? Government’s role should be to maximize personal liberties and let the markets work. Further a leader should inspire people to change people’s attitude towards life, not put hope in job creation. That is get the message out there that you can do anything you put your mind to. There are no judgements here, nor rights or wrongs of how to make a living. If you want to be an artist or musician or a stock broker or physical therapist or work in a coffee shop or eccentric entrepreneur, you can do it.

The question is, is this an accurate portrait of capitalism and the way we really interact in a modern human setting? Is capitalism is a moral and valid option for an enlightened society? Is a free market a good market?

As we have evolved, in our genes is not only encoded the survival of the individual but also the survival of humanity. Therefore, when individuals are given economic liberty, they generally gravitate to a greater good. Even if the greater good results from unintentional consequences of self-interest actions.

Our basic genetic equipment also includes the capacity of putting oneself in the situation and thoughts of others. It is in this and similar aptitudes of social behavior and the very great capacity of our species rests – Alfred Gierer Director of Max Planck Institute.

Humans evolved based on a survival of the fittest code, but not only. Further, as we continue to develop, this code  becomes less important. What is important and genetic research confirms this is, creativity, communication and cooperation.

If the human race is to survive, reptilian predatory genes need to yield to creative, communicative and cooperative genes in our species. Nature knows this even if humans do not. As resources grow scare and populations increases nature is pruning our DNA by allowing the creative and cooperative to proliferate and further differentiate our genetic material over simply the aggressive and strong.

Therefore, my thesis that positive human economic behavior in a free society is generally deeply ingrained in our being human.  I believe humans are innately good. Free economics create unintentionally positive outcomes.

When given freedom in economics, like in a capitalist model, generally people will bring good to their lives and those around them and society as a whole will be better off.

Evidence why capitalism is ethical

The same can be said about capitalism and economics. Think of your workplace today.

• Most of your day-to-day work life activities are a series of boring but important cooperation and communications with your coworkers.
• New clients are won often on strategic partnerships, contacts and business relationships.
• Creative ideas like thinking of the next big thing (Facebook and Netflix) or a cure to lower back pain will yield greater profits than squeezing out another 1% of market share from your competition. Innovation and entrepreneurship is rewarded in capitalism.
• Economics is not zero sum game. Generally markets are organically growing and new markets arise. Think of the search engine market and the number of new users coming online abroad everyday.  Economic trading is a Win-Win a mutual benefit of two parties operating on arm’s length transactions, is what trade is about.
• Philanthropy – An economic love of humanity – From Bill Gates to Warren Buffet to the Rockefeller foundation philanthropy is a positive outcome of capitalism. Sergey Brin’s ethos of ‘do not harm’ + ‘do good’.  Read about the morality of capitalism from a co-founder of Wholefoods. If this type of example continues I hope the world will be a better place.

So we can conclude that man is a social animal and to survived as a social animal positive cooperation is a part of competition. We are not simple reptiles, even if we wanted to me. I know countless wealthy honest normal business people, establishing small firms. Economic criminals who hit the headlines we take note of but are not the rule. They could not be or economic relationships would not exist.

Keep economic liberty but punish people who take advantage of the trust of others

We can not through the baby out with the bath waters because we have rule breakers or people that exist several standard deviations from the norm in terms of greed and selfishness.

People who violate the codes of ethical human behavior in the market place are punished. Maybe not all, but many.

A human ethic combine with liberty is playing a greater role in changing the way people do business. You can have a free market, with individuals accepting the responsibility of this freedom. People who play by the rules and creative and innovate are rewarded. In this way can enlighten self-interest work.

• Trust is the real global currency that markets are based on, and creativity and cooperation is what modern capitalism is about.
• This is a global economic ethics manifesto

The capitalism that I am talking about is enlightened self-interest of Adam Smith, not extreme selfishness and greed, but an ethically oriented economics that is played out in the economic field. It is of course easier to think in terms of absolutes like extreme capitalism or a straight jacket on personal liberty at the expense of ‘equality’, but for a healthy functioning body of human economic behavior works better if it enlightened capitalism. This will be better for individuals and society. Adam Smith was about enlighten self-interest, not selfishness and greed.

What about the idea that a wave of greed brought on the economic crisis

The economic crisis was caused by the central bank lowing interest rated down to 1% so we could all go shopping again after 9/11. I think the movie Wall Street 2 pretty well outlined this explanation of the financial crisis of 2008.

It was caused by the expansion of public and private credit, driven by central bank policy. It was like some farmer opening the grain storage bins and when the animals rush over and bloat themselves, blaming it on animal greed.

Animals will eat until their own personal demise if they are given free access to unnatural refined stores of grains. This is what the central bank does and why we should have free market money and less government not more. This is why capitalism has a bad name, distortions in natural grazing so to speak.

It was not caused by a wave of irrational greed that grip the country, but central bank policy that opened Pandora’s box.

Politicians played up on jealousy and fear to create social and class division.

 Criticisms of capitalism are mostly unjust

Although I am an unrepentant capitalist, I take these criticism of a free market seriously and do not believe in absolutes and extremes.

1. Not every person operating in a free capitalist society is enlightened and operating on enlightened self interest.
2. Further, there is great injustice in the world, particularly in economically and some created by capitalism.
3.  Lastly, even Adam Smith explained that there needs to be opportunities for people, to have a critical level of education, a good upbringing and guidance to be able to function efficiently in a free market.

However, most of these things can be solved with an understanding of  ‘public goods’ and a free market management of these things. Milton Friedman outlined a number of these solutions in his works. However, I admit not all.

Marxism rose out of  abuses of human capital, but also jealousy and resentment. Similarly, politicians in the US play with people’s emotions and turn them against the idea that people can handle their own economic liberty. I belive they can. I believe in the goodness of human nature and the human race that we are evolving to a greater level, a level of freedom

Ethical investing and consuming – what you can do?

Do you want to have a more just economic order? Instead of focusing on just on political change, first examine your own patterns of consumption and investing. For example, I will not invest in any company that even slightly feels to me unethical. No military contractors or tobacco companies or companies that pollute, take advantage of labor or part of the industrial military complex. I also do not consciously buy products from these companies. You do not have to be a peace and love Greenpeace person, but a factor in my consumption and investment patters is ethics.

My personal experience with ethics in the workplace

I have meet many times more people like jolly Mr. Fezziwig, than Ebenezer Scrooges in my professional life.

I like to think that I have generally treated people fair in the workplace. Both as an employe, a manager and employee.  I enjoyed treating people with kindness and always had a smile and good cheer in the workplace and this was a win-win for productivity but also for people’s lives.

In conclusion, my argument is that capitalism is ethical and a positive thing for humanity as I believe that humans are innately good. Given liberty they will generally do the right thing. In fact, this innate goodness is further being encoded in our genes by a nature that wants us to survive, that is the human race, just not the individual. That is why capitalism can work, but only if tempered by ethics and compassion, both on an individual and global level. Fortunately, most people have this capacity for empathy and ethics, don’t you?

• Capitalism is the best type of social justice there is.

Look at China or Poland, the middle class is raising not because of socialism but because of capitalism.

Socialism does not produce a middle class like this. Only when people are free to act on their own enlightened self interest does the pie get bigger and all live better.

I am an expert on Eastern Europe and post socialist economies as I have lived here a good part of my adult life as well as studied economics. Under socialism there was no middle class. Yes there was a lot of equality on paper but in reality it was some sort of surreal grey dream, not good.

If you look at the Gini coefficient of counties, a measure of wealth dispersion, you will say America has unequal distribution of wealth and in Easter Europe there is a more flat distribution. Well there are lies, dam lies and statistics.

The reason is everyone is/was poor and then you have the elite. Moscow and Russia is a great study of this. You have people living in small blocks of flats and the super rich. But the Gini coefficient shows not as diverse wealth levels as the USA or the UK for example.

What is poor?

Eastern Europe is only now getting a middle class. In contrast, in the USA the ‘poor’ are not poor in my mind, they are with few exceptions living pretty nice lives.

In the USA I have even heard the poor have TV or radio and running water. Poor in Eastern Europe have no running water, no plumbing, no heat in the winter and no food and people sleeping on a floor in a one room studio in the winter with no windows. I have seen this and some of my friends almost live like this. Poor in the USA, and I lived in the south mind you, people have TV’s and radios and plumbing. Let me tell you, you do not want socialism in the USA. You do not want an entitlement state. You do not want anything but capitalism or the middle class will disappear.

Any libs out there that wants change and are anti-capitalists, be aware that you will go out of the fire and into the pan if you embrace a more socialistic state.

Do you really want to change from capitalism to socialism?

Once you set up an entitlement state you can never go back. People do not want their free milk from the state cut off. Basically the system would have to collapse for people to be free from this type of socialism. I am not saying provide no help for the poor, however, a socialism is not help for the poor.

• If you want to tell me about the nice European social states in Western Europe, try me and leave a comment.

If you want a pie that gets bigger and bigger vote generally libertarian or Tea party small government.

If you want a pie getting smaller and smaller and people fighting over the shrinking pieces vote tax and spend democrat or Neocon republican. Within both the democratic party and the GOP there are elements of good people who want to reverse the damage of government is having on the middle class and the poor.

The middle class is being eroded because of creeping government not because of capitalism.

The reason I wrote this post is, there is a lot of emotion and confusion circulating both about the role and the raison d’être for the central bank and the Treasury. The underlying premise is a government monopoly on the money supply is detrimental to the economy and ultimately limits people’s freedom as it promotes the expansion and control of the state.

So what is the function of these two organizations? The correct, but non important answer is the Treasurymints the money, including the paper currency in circulation, and collects the revenue  via the IRS. The treasury is actually a department of the US government. Read more about the functions of the US Treasury here.

In contrast, the Federal Reserve bank is autonomous. The Fed is the central bank for all USA banks and a lender of last resort. The Fed expands and contracts the money supply using the more broadly defined as M2 or even M3 definitions of money.Read more here about the purpose of the US central bank.

So what is the difference between the Federal Reserve and the Treasury and why is the Fed seen as the boggy man? Further, although the Treasury maybe not liked, (and the IRS constitutionally questionable) it is less out of the media crossfire today?

It is because the US Treasury is more transparent, and functional. It collects revenue, oversees the debt based on laws and the budget. It does not create the budget and debt but this is done by the President and congress. The Treasury is part of the problem but more taking marching orders from the President’s budget.

In contrast,  the central bank secretly and autonomously sets policy that dramatically affects your life. This is not democracy. It is no a conspiracy theory to say the centrally planned central bank royally screws things up.

Why the Federal Reserve is a failure? – Greenspan and Bernanke tried to help the US economy, but fail. Why? It is because there is a flaw in the economic theory that supports the central bank. The  central banking system is based on theory as archaic as the Geocentric orbit theory. It is based on an old fashion ideas, a fallacy that the government can fine tune the business cycle and central planning of money is superior to free money.

The economic theory that the US central bank is based on is as out of date as the Ptolemaic model. Ben Bernanke is a defender of harmful paradigm

What we have learned is, economics is not something that can be managed top down. Communism, Keynesianism, monetary management of the business cycle. It would all be better to let the markets work. Nothing is a clearer lesson in economics, than the failed economic experiments of the 20th century.

Why is the idea of the Fed creating money so bad? The central bank can in a round about way create money out of thin air. This can and does cause inflation. It exacerbates the business cycle and causes pain and suffering in the economy. It supports a government policy of increased debt, money creation and expansion. This is why today the Federal Reserve is taking a lot of heat.

What is important to know about the Federal Reserve:

The central bank was chartered:

to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes

• Logically seems to makes sense, but history shows it does not work. Further, there are other logical arguments by the Austrian school of Economics that would argue for free money and market forces determine the supply of money, rather than central planning of money.
  
• The Federal Reserve bank has  the power. It controls the interest rates. If you control interest rates than you control the world. In one day you could push interest rates to 50% or 0%. This means it has a lot of power. Of course it would not do that, but it does not matter. An incorrect choice of interest rate policy, which is almost always the case, affects the world on and large-scale internationally and on a small-scale.
• It could be argued the Federal Reserve caused WWII. I am not joking. An over expansion of credit in the 1920s created the great depression which lead to the rise of opportunist dictators. How was the Federal Reserve not responsible?
• The Fed was created in 1913 to provide liquidity to prevent financial panics, such as in 1907, which could turn into a real sector crisis. However, since the economy is complex and can not be micromanage by turning dials and nob. This is why the Fed consistently gets it wrong. For example, the great depression, the Internet Stock bubble, the housing bubble to mention a few. From 1836-1913 the USA had no central bank and prospered, including the American “Gilded Age” and free bank era.
• The people who work at the Federal Reserve are well-intentioned economists. It is the idea that an economy can be steer from a top down approach that is crazy. The road to hell is often paved with good intentions.

What is the treasury?

The treasury is in charge of revenue and finances. That is really it. Think of the treasure like the bean counters and the Federal Reserve the wheeler and dealer bankers.

Does the Federal reserve create money?

Yes. The Chairman of the Fed might not operate the printing press, but he expands the money supply more broadly define with open market operations. The key point here is the money supply is more than just paper money.

What is money?

Anything people use as a medium of exchange. It can defined as gold, or anything people want to trade with. The economic definitions of M1, M2 and M3 which are modern definitions that take into account highly liquid deposits.

What about the idea the Federal reserve makes a profit, therefore is it good?

The idea that the Fed is a profit center is again wrong. They have made an accounting but not economic profit. They do not create anything. It is accounting and security trading -  buying and selling. In my mind this is not value added profit. The Fed’s profit means it takes money and ‘crowds out’ money from the private sector and gives it to the public sector. The Federal Reserve bank is evil any way you look at it.

I know that is strong language, but they literally have screwed things up and made millions suffer their inept policies. It has not stopped business cycle so it is time we abolish the Federal Reserve Bank and replace it with sound money. Sound money being optimally free money or at least replace fiat money with a gold standard.

The US economy is a sinking ship, but need not be. It can be saved not my the government but by letting people work.

What would help the US economy:

• Eliminate the income tax – This could be replaced with something else besides direct taxation, which is constitutionally questionable and a complex way to penalize the productive. Even a country like Slovakia has a better tax system with a simple, do it on the back on an envelope flat tax. Why is the USA so great? – Spending cuts and taxes
  
• Balanced Budget amendment – This alone would not to anything other than make government responsible and people would feel the pain of expansion. It would eventually free up fund that are siphoned off by the government that squash free market initiative and innovation (crowding out effect). – Balance the budget
• Eliminate the Federal reserve – Replace it with either a gold standard or free money – This would decrease monetary shocks and the government’s micro managing of you. The economy by its nature  is not something you should micro manage. The economy is me and you, not some engine that starts and stops.The Federal reserve is dangerous. -  Abolish the Fed
• Stop being the police officer of the world – Bring the troops back home – Strengthen US defenses by shifting focus on high-tech and not WWII type military tanks and submarines and ground troops. Focus on home defense. We will be paying for these wars for the rest or our lives via government benefits. I know it is not politically correct and I come from a family of veterans (who were drafted) but war is an a waste of fertile productive young minds. These brave people could have developed great things with their youthful minds. Instead they were sitting in a desert. What a waste. We create enemies to fight. What will we do about Pakistan now? Will there not be terror units formed there? Focus on home defense.  – Military is a waste
• Let the markets work – Zero tolerance for bailouts, pork or government waste. Cut regulation and market distortions that lead to high prices. – Free market
• The government is not your mommy and daddy – People need to stop seeing government this way. People do and it takes money from the poor and those who need to be helped. It takes money not from the rich, who will be rich but the poor. I know it seems to be untrue but thing about East Germany compared to West German. Which was richer? Anything the government does free market does more efficiently. Just live in a communist or post socialistic country for a while and you will see what I mean. Look at UPS Vs. USPS. – Health care insurance solved

These ideas seem radical but they are not. They are simply bringing the US back to respecting the constitution and how the USA was for a good part of its history to one degree or another. What will it take? I do not know. I do not think American is doomed. However, I do not see we have any way out of this either. It seems like we will have bigger and bigger government that will not be solved by slowing and I repeat slowing the leak.

• 37% in the last year
• 234% in the last ten years

For me that brings food prices to dizzying highs. I like to eat. I do not like it when I do not know how much this hobby will cost me from month to month.

The purpose of this post is simply to examine why food inflation is important for the Average American. At the end I also offer a solution for those who are not afriad to get their hands dirty.

The trend in world food prices is both up and just as important is more volatile

Stable food and commodity prices are  important because volatility creates uncertainly with price expectations and makes it hard to plan budgets both in business and your own household cashflow month to month. Since we have seen not just increased prices but price volatility this increases hardship on families.

• Economics is about prices and expectations. Prices transmit information and expectations allow individuals to create plans for the future.

American is rich but the cost of groceries still affect home economics

The percentage of income spend on food indicates the relative level of wealth of a country. For example, the average American household spends 12% of their family budget on food. However,  in a country like Romania, a household might spend up to 50% of their earnings on groceries each month.

The poorest ten percent  in the USA spends about 35% of their budget on food and the richest ten percent about 7%. I am sure the diets are different.

The following video must be for one single person living in a city including dinning out as it is very different from the family of four model.

Wealthy countries feel the pinch when disposable income shrinks – Just because a country is wealthy  does not mean that food increases do not affect American households. This is because budgets and disposable income in the USA are pretty tight. People have large mortgages and fixed costs, and small increases can push people over the line. I can feel this, when I am living in the USA.  In contrast, I feel financial stress less when I live in Poland with less income.

• The average American family of four spends about $750 a month on food. For me that seems too little actually and I question that number. However, what if it doubles to $1500 a month. I think this would push many people over the edge in terms of financial security. Food inflation is the worst type of inflation because it affects your health and can drive a family to the edge financially. I can not have a car or even be cheap on heating, but food is an absolute necessity.

My experience living in a less wealthy country with food – People in poorer countries (I am not talking impoverished) have access to locally growth and home-grown food more than countries where agriculture is agribusiness. For example, my wife’s parents have a farm, like 30% of Polish people. We get a lot of food for free from her parents farm. It is by default organic, not by plan as who has the money to spend on agribusiness chemicals. If the world had a crisis and ran out of food. I am 100% certain Poland would be fine. People grow food everywhere. Even in the city of Krakow which has a million people, there are vegetable gardens and everywhere.

In contrast I do not know too many American farmers personally. Many people have small gardens but it is not the same. If there was a world side crisis, I know few people in Poland that would go without food. However, think of all the professionals in L.A., Boston or Washington, D.C. that could not fend for themselves.

So my point is, yes food price increases affect people, even in wealthy countries. In the USA when food prices go up as much as they have, people feel it. I feel it. I am no longer buying arugula, but bags of potatoes. Cans of Tuna replace Sushi. They call it ‘Hamburger helper’, but it does fine just all by itself. Is this the way you want to live? And sweating the next mortgage payment? That is not prosperity, nor the land of milk and honey.

I guess I have a pretty steep utility curve when it comes to healthy food but I still have limits. Food inflation affects me the most of any type of price volatility.

The cause of food price increases are:

1. Increased demand world-wide
2. monetary stimulus
3. Supply shocks

Further, food production is being concentrated in the hands of fewer and fewer companies and regions.  I do not know if I like this.

What will I do if prices continue to increase?

You know during WWII the British had something called “victory gardens”. You can look into the history of this.

The point is not the money. It really is not. To compensate when we move to the USA for sure we will have a garden and have even considered a few chickens, even though they are pretty stinky and my wife keeps saying what if we go on vacation. The point is I like fresh food and do not want to be dependent 100% on whole food prices from large companies.

You can buy dwarf fruit trees that grow pretty fast and potatoes in all their varieties and colors grow in almost any soil. Herbs can really save you money if you growth them at home. You can do a lot in your back yard. I see people doing it in Poland. Small micro farms supplying a year’s supply of food for the family and surplus.  It is really not  a lot of work if you know what you are doing. I am trying to get my wife to do a videos about this. As I think there is a small market for food crisis videos. That is, how to live A to Z on your own and believe me Polish farmers in the village are masters at this. Yep, I married a farmer, a potato princess I joke.

My hope is the world will learn to adapt. That is increase production and supply as well as quality. I do not believe in Malthusian economics because demand tends to expand algebraically but technology exponentially. However, I would say that food problems in the world are more an allocation problem, that is some people have too much and others have nothing. This will be solved with a mix of innovation and compassion. If you want to read more about the world food problem you can go here: UN food and agriculture organization. It has good statistical data if you like numbers and graphs like I do.

Or everything you need to know about prices changes, but were afraid to ask.

Biflation or mixflation is when, somethings on the store shelves are going up in price and somethings are going down in price.  This makes sense, yawn. You might say this is a normal situation.  However, what we have now is anything but a normal situation. The difference between stable prices, with small changes in prices for individual items, and mixflation is, the latter affects the average person in a more dramatic way. It gives people butterflies when they go to the shop, like the first dip on a roller coaster you regret you got on to.  This is because although the average price level is stable,but individual items have erratic swings. This makes it hard to plan a budget, sell a home or do anything when your salary or income is near the same level year to year. The cost of goods sold are stable like a roller coaster and your in the back car.

Prices are like the weather

Consider a day that the temperature is 80 degrees and sunny out. Then a huge wind and hail storm hits and the temperature falls to 50 degrees in a few hours and the sky is dark. The average might be a pleasant 65 degrees that day, but it is too unstable outside to plan anything is it the weathers persists in this pattern. This is what Mixflation does to the economy.  I am surprised more people are not talking about prices in this way. In contrast people are trying to predict inflation or deflation.

Uncertainty and instability is hurting the economy as a lot of economics is based on expectations. Here is a great video on that sums up the uncertainty about aggregate price levels and the economy.

Housing, food and gas prices

Turning to a more concrete example, the aggregate price level could appear fairly stable with mixflation, because it is just that, a statistical average. That means as economics and policy makers look at the price level there is not much change. However, the average guy hears this news and wonders how that could be. What if he needs to sell his house and the market is tanking. What if is month to month food, gas and medical budget is increasing beyond his salary? He is in trouble.

Consider this with mixflation, what might really be happening is food prices have a quarter to quarter hike in price for several years straight. This is not good for the consumer.

While simultaneously housing prices are falling (eroding expected retirement wealth as well as pressure on those who lose their job and can not pay the mortgage. In times of slow wage growth means it is a double squeeze on many people’s pockets. It is deflation and inflation. This is in contrast with a stable price level. Again in aggregate you might not see much change in the CPI but in reality it means pain for the average guy.

Mixflation – Where is the good news in all this?

The first thing is price movements are nothing more than a reallocation of wealth or at least wealth flows.

It means that some people win and others lose. You have to make sure that you position yourself and protect yourself by being on the winning side. The problem is consumer goods do not have good hedging options in themselves.

• How to beat inflation and deflation – The good news if you are an investor in stocks, futures or options you can play these price movements. You can play currency exchange rates (the relative price of money), Interest rates (interest rate futures) commodity prices (gold, oil, grain futures), stocks (companies that are benefiting from outsourcing or off shoring and price of labor decreases), REITS (real estate), you can short or use put options. Every price change is opportunity. Mixflation might affect your budget when it comes to cashflow but it does not need to prevent you from making profits in the market.

So are pricing rising or falling?  Will there be Q3? Quantitative easing, printing money and the debt is the argument for inflation. Weak demand, outsourcing, improved efficiencies, and run away prices from the last boom above the shilling index is the argument for deflation. The Federal Reserve is clueless, as markets not the government should regualte money and prices not the Chairmain of the Fed, but that is another topic.  So what will it be inflation or delfation? I think both or biflation. Housing prices and wages are falling and food and energy prices are rising. As a whole the pie is not growing, but redistributing. Just make sure you are on the winning side of this round of musical chairs by investing.