Categories
Economics

Is deflation bad?

This post asks is deflation bad or good?

Deflation is good when:

  • It happens because technology and capital investment improve the production process and increase producer output, causing more supply of a good at a lower costs. For example, AI and Amazon delivering in 1 or 2 days. Computers in the 1970s were millions of dollars (today only a few hundred collars) not to mention the speed difference. Cell phones, exotic food now is common place like Sushi.
  • It is correcting a bubble. It is the way prices are brought back to the true market price and wild speculators are punished and hardworking savers are rewarded. When housing prices fell in 2008, I knew many hard working families that were saving, buying homes that they could not afford before.
  • It is a natural fluctuation in market prices, supply and demand rather than an artificial stimulus.
  • The 19th century in America was deflationary but we reach our gilded age with higher growth and more equality than today. 4.5% was a growth rate average compared to 2% today.
  • Prices are information points. If they need to adjust downward, they adjust for a reason. Either demand is less or supply is more. The market is trying to adjust and correct so the economy can be more healthy. Any prevention of this adjustment will result in a less than optimal disequilibrium.
  • Prevents a business cycle – If you try to maintain a stable price level, there is a probability you are distorting the capital structure and will cause a business cycle.
  • Austrian economists certainly would disagree that deflation is bad. Austrian economists Mises, Hayek, Menger believed deflation was the cure for credit expansion inflation. If housing prices went wild because of excess easy credit, the market needs to adjust.
  • Gold Standard Economists believe deflation is healthy as real investment and real savings are connected.
  • Please do not reinforce the status quo – I like it when the price of junk I want to buy goes down. For me it is good. Every price change has winners and losers, let the market decide, rather than intervene with printing money. For example, I would not mind if housing prices fell, along with the price of other assets like cars. Therefore, I could buy things at a lower price. I have cash and I am not a spender and I do not have credit. If financial assets, like the stock market tanks I know to quickly move my money into cash. I want to buy a cheap house for my family. What do I care if some guy with a half-million dollar house must live in my apartment and I can move into his house? People have a sense of entitlement. There are no guarantees in life. Economics is about change.
  • Wages are downward rigid – No one wants to take a pay cut. Therefore, instead of cutting salaries employers lay people off and try to improve efficiency. So the deflation story is not that simple as I have painted above, but it still comes down to letting markets work, or there will be a prolonged process of adjustment and unemployment.
    Market intervention is bad – If there was a bubble, it is better to let prices adjust then try to prop them up, which can cause another cycle or worse stagflation.
    Is Japan poor? – Everyone points to Japanese deflation and how bad it is, but Japan is a rich country and the citizens have a lot of purchasing power. The issue with Japan is really the Debt to GDP ration.
    Inflation – is the last resort of bankrupt banana republics and governments that can not manage their political-economic system and finances.

Deflation is bad when:

  • The government confiscates money or contracts the money supply irresponsibly. This rarely happens. Rather, the signature of central banks is to expand the money supply and cause a business cycle.

The ideal world is full employment and stable prices. By stable prices I have a different definition than the central bank. The central bank defines it as stable inflation of 2%. Knut Wicksell and early monetary thinkers defined it as literately stable prices.

  • Central banks have morphed stable priced into 2% inflation.

When deflation is a bad argument

Deflation is bad when it becomes expectational or runaway and has no relation to reality. Expectations can drive prices into a downward spiral. This does not happen. Expectational driven price changes usually are a hyperinflation experience. Deflation is more often -1%. Further, when you talk about deflation or inflation you are referring to the CPI or PPI and narrowly defined index. hen entrepreneurs make decisions they based it not on an aggregate number but the inputs ad choices relevant to their production or consumption function which is different thn an abstract aggregate.

  • The cliché argument that deflation suppresses demand because people put off purchases in hopes prices will fall is not true. If you look at history, periods of deflation do not always correspond with periods of poor economic growth. This is a historical fact. This is a huge point. In fact, there have been many times of prosperity and downward movement of aggregate prices. Read economic history, not just take the word of anyone, including the chairman of the Federal Reserve. Again, let the markets work and prices changes do their job.

Further, on a day to day level, people have different indifference curves and not everyone will delay a purchase based on future price expectations. Some people want or need to have something now. For example, think of all the people who stood in line for the new generation of iPods, or bought them soon after they came out, even though next year it will be cheaper.

The old IS/LM model with liquidity traps is simply out of date.

Causes of Deflation

There are many causes of deflation but basically, there is less money in the hands of each person. Therefore, the purchasing power of each unit of currency increases.

  • Supply-side deflation is the best. It is when technology and productivity gains lead to lower prices.
  • Demand-side inflation is what most people are afraid of and is associated with a financial crisis.

For example, during the great depression deflation, the cause was a contraction of credit, combined with Federal reserve tightening is a myth. If you read Robert Murphy or Murry Rothbard on the Depression you will see the facts. If you compare this to the recession of 1920 where the money supply was not inflated you will understand that deflation helps cut short business cycles.

The story that this decreased the money supply and went hand in hand with a general decrease in demand. When lending is depressed, so is demand, then corporate profits, then come more layoffs. Sound scary? It is a huge cognitive leap to say downward movement in prices causes this, rather it is still more a symptom. It is saying wet leaves on the trees cause rain. It simply is not true, but a cause-effect thing. Yes, in extreme cases deflation can exacerbate problems but generally, the markets should be allowed to adjust. The real question is, in times when there was a contractionary deflation, was deflation a symptom or a root cause. I think it is more a symptom and the way you fix it is to let the markets adjust.

Consider Japan’s experience with prices after a huge unrealistic bubble, prices have been dropping for years. The cause was a bubble, prices needed to adjust. It is interesting to note, Japan in 2006 gave up many years of quantitative easing by its central bank because it did not work. It was pushing against the wind.

Other causes of price movements downward are demographics, population changes, increases in productivity, decrease in the velocity of money and global trade can also cause deflation. Many deflationary episodes in history were caused by political-economic events, like the post-American civil war great deflation and the return of the gold standard.

Knut Wickell had a lot to say on the problem of price movement and the causes. He believed it was a mismatch between the marginal productivity of capital and the bank rate of interest. His cumulative process explained price movements better than most theories, including the IS-LM curve.

Whatever the cause it does not matter. The take away from this post on is deflation bad is let the markets work. If you do not, you will be in for prolonged pain. The next time someone tries to scare you with deflation, say ‘I think it is a good thing’, and watch a few eyebrows raise.

My hope is we enter a time of Great Deflation and sound money where real savings is connected to real investment and the Central Banks of the world are replaced with a commodity standard or free banking.

Categories
Economics

Swiss bank account – don’t open one

Swiss banking is a red flag.

If you are considering having a secret Swiss bank account, I highly recommend you think again. It is the biggest red flag in the whole world. It is crazy to even think of having an account there. There is one modern alternative to a Swiss bank account, it is called Anonymous Internet banking. I mention it only as a theoretical discussion point, and certainly not as a recommendation, in fact just the opposite. I believe if money flows can be made transparent, a lot of illegal activities in the world would stop, including terrorist funding.

  • Swiss banking gives you no secrecy. In fact, it will draw attention to you. If you have a Swiss bank account the US tax office works with people in Switzerland and they know about you. Even if the Swiss have privacy laws dating to 1934, it does not matter. For example, USB handed to the US government all the names of US citizens with bank accounts. A total of 4,450 accounts. Is that safe for you? They are now in big trouble with the law. The US has special agents in Europe probing more.  Credit Suisse could be next. If you have deposits in a small unknown shop, not a brand name than I think probabilities of being noticed are less.  Between the OECD and the 2001 Patriot act, the world of banking has changed. Look at Assange, with alleged US government influence they shut his bank account down in a day.
  • Offshore banking does not protect you from taxes. I am a US and EU citizen. I must report and pay taxes on all my worldwide income to the USA, even if I am a citizen of another country and live on the other side of the world and do my banking and business somewhere else. If someone has a Swiss bank account, you can report them under these guidelines for offshore banking. I even report my pittance I make teaching English. It does not matter where you live or citizenship you hold, US financial law applies to you. The US is one of the few countries to do this by the way.
  • Assets in foreigner countries – Your financial capital is not safe either. If you have a bank account that exceeded 10,000 USD at any point in the year, and you do not report it to the USA, you can go to prison.  So if you think you can hide money in some Alpine village, it is true only if you bury it in a hole.
  • Swiss investing has not had a good return on money, in fact, it is well below the market return on investments.
  • The Swiss franc has been fundamentally overvalued for a while, although you can keep your saving it in other currencies of course. Many people in the business I know have been burned by this. They took out loans and did business in the Swiss franc and lost when currency rates changed. The investment banks win.
  • Swiss bankers have hidden terrorist money and criminal assets – Do you want to do business with unethical people? I do not.

Financiers from Switzerland might be good if you need private banking and are a high new worthy client who needs money management. But in comparison to other global investments, it is not anything special. There are plenty of firms in the US that offer these services. The idea of Swiss banking is as outdated as investing in a typewriter manufacturer. They are also expensive.

Offshore and online banking alternatives

  • Where do people put their capital overseas? If you know of a place to stash money chances are others do too, so there are no secrets anymore. There are only temporary havens. Right now there is a lot of money flowing into Asian banks. People are doing things in Malaysia and Singapore. In Europe, Cyprus and Malta are where the money is flowing. People also set up money in developing countries like Ukraine or even Russia where the US and EU do not have an influence. The Channel and Cayman islands, as well as Luxembourg, are being opened up, but not as fast as Switzerland. Whenever things are remote or disorganized the is more opportunity for creative accountants.
  • Delaware better than Switzerland – With a creative accountant’s bad guys are using US banks for their illegal activities as it gives an air of legitimacy.
  • The best alternative to Swiss banking is anonymous Internet banking – With modern financial cryptography, that is the mathematics of public-key cryptography and blind signature algorithms there is almost no way, even with military computers, your secrecy can be uncovered. This is a good article on the basis of anonymous Internet banking. Interesting stuff. I am not recommending it, rather this is more a discourse about world events.
  • a legitimate business that are cash-rich – Tanning salons, Car washes anything that is hard to monitor. I am amazed at all the tanning salons that never had customers in my neighborhood. In fact, just to check it, I went in to asked the price, they looked at me all confused like they did not expect a client. I am sure it is all money laundering and highly illegal. I was tempted to call the police but I am sure they know about it.
  • Me? I am open. I have a simple US credit union (the same one I have had for over 30 years) and a discount brokerage Scottrade account. To be honest, my brokerage account is where all the action happens and where I have my money. A brokerage account acts like a bank, with insurance, money markets, and a debit card, but an added feature of trading stocks. A traditional savings accounts give me nothing. Maybe someday I will simply things to one Scottrade brokerage account, so my financial reporting is easier, but I like the folks at my credit union and they are not for profit. I also have a small amount of money in a Polish checking account.

I prefer to use my talents creating something and not scheming avoidance. I know tax avoidance is in vogue, but I highly recommend you obey the law and do not do anything illegal. This post is just about the world of secret money in the world not recommendations about money laundering in any way shape or form.

So, in conclusion, I see no reason whatsoever to put your money in a Swiss bank account. The world has changed and Switzerland is not a great country for investing or secrecy.

Categories
Economics

Causes of the Great Depression

The cause of the Great Depression is easy to understand. However, when I ask my students on an exam, they give me answers that they obtained from the web that have inaccuracies. Therefore, I thought it imperative to address the of the Great Depression in a way that would be palatable to students and the intellectually curious. I want to give an answer to the question that has an explanatory value from an academic standpoint but also understandable to everyone.

I want to answer the question in simple, clear terms ‘why did the Great Depression occur?’.

Here is a PDF ebook on the Causes of the Great Depression:

Causes of the Great Depression

The above book my lecture notes from my college macroeconomics class. It goes into greater detail and clarity than presented on this site or any other site. If you are an economic student or a student of life I recommend the above book, it is free.

Download my book for free above

Below are some summary points, however, I recommend the above book to get a clearer more organized answer. It is a story that needs to be told. You can download it on any e-reader, phone or computer.

The Internet and Economists on the Great Depression

Unfortunately, much of the insights on the Internet into the causes of the Great Depression are written by non-economists. The number one answer I see is: the stock market crash of 1929 caused the Depression. This is not true.

From economists, most give a New Keynesian (Michael Woodford – Interest and Prices, 2003) or a money supply answer (Milton Friedman and Anna Schwartz – The Great Contraction, 1965). There are elements of truth in both of these examples. However, they still based on books written with a partiality from the time and paradym, they were written.

I see economists, who have taught in academia for years, even writing papers on this American and worldwide event, miss the fundamental point. The reason is, they do not go back to the classics in economics. They have never read the original thinkers and precursors in economic thought in the original text, such as Knut or even John Maynard Keynes. They rely too heavily on secondary sources or get lost in political agendas over the study of political economy.

There seem to be too many economists and experts bringing all kinds of theories and mystery to the Great Depression. There does not need to be.

The purposes of this post are to explain, in layman terms to non-economists who do not sit in an ivory tower all day, what caused the great depression in the USA. I am an Economics Professor, and I am working on my . There are competing theories, and there is statical data to support the different ideas (Keynesian, Neo-classical), however, from a logical standpoint, there was a primary cause.

  • The cause of the Great Depression was disequilrium in the market for money caused shocks to the real sector.

Do not stop here. That is just the start. Behind that statement is an understanding of money, the evolution of money and why this one market’s disequilibrium could cause such a prolonged catastrophic economic downturn.

I heard that you lost a lot in the crash, says the Ritz bartender. Implying his moral lapses, Charlie replies that yes, he did, but I lost everything I wanted in the boom. –  F. Scott Fitzgerald

Fitzgerald believed moral lapse caused by easy credit destroyed the economy. He was not too far from the truth. Let us explore this further.

This is my personal video that goes into detail on the causes of the Great Depression from two perspectives. You will see which one has more credibility. If you are looking for an answer on your exam or to understand the economy of today, I recommend it.

What caused the Great Depression?

  1. The depression in the 1930s was caused by excess expansion of credit during the 1920s. This over-extension by banks caused an unnatural disequilibrium in the money markets that initially caused a boom then a bust.  Booms are sure signs of impending busts when fueled by interest rates that were too low.
  2. When the financial crisis of 1929 hit, there was a panic. People withdrew money from banks, and banks went out of business. As banks got scared and tried to call their loans, more people withdrew money and more banks closed. It was a bank panic. The recession turn to Depression when the Federal Reserve did not allow markets to adjust and pursued a less than course of action. All this could have been avoided if it was an era of free banking or the Federal Reserve bank pursued different policies.

Therefore, in one sentence, the Great Depression, as well as the 2008 Recession and other business cycles, were caused by: The Federal Reserve Bank set the observable interest rate lower than the natural rate of interest and this cause disequilibrium in the money market that caused disequilibrium in the real sector. This created malinvestment which took years to unwind and was prolonged by Central Bank policy.

Why is the market for money is important?

This story of the interest rate and the Central Bank is a story of the market for money. This one market, the market for money created this . The monetary world matters because money is in every transaction. It is the blood of the economy. If over 700 banks failed, you could not expect the real sector (production and consumption) not to have been affected.

In an unfettered market supply and demand will bring individual markets to equilibrium, however, when the money market is out of balance, like a house of dominos other markets fall.

Money is evolutionary and organic – not understanding this has caused economic business cycles

To get a clearer view I recommend my book above. However, you need to understand money is organic. Money is not something printed by the US Treasury, it never was. Money evolved as for advanced economies to a medium of exchange. Its nature and definition are dynamic.

Money evolved as a medium of exchange to satisfy the double coincidence of wants issue that exists in a barter economy. When society started to use for practical purposes it gained an economic advantage of allowing people to exchange goods and services without relying on barter. However, with that advantage gained with the use of money and eventually credit, there was . The risk was if this monetary market was unbalanced than it could affect every transaction which used , that is basically every transaction.

The Central Bank understands, that money, credit and loanable funds have a direct influence on purchasing power and therefore, the Central Bank can steer the economy. However, this is not a free market solution to the money market and efficiency and stability is lost.

In the end, the credit boom-bust (the cause) resulted in the following long-term economic problems:

The Federal Reserve’s mismanagement of the supply of loanable funds was the practical cause. However, the misinterpretation of the idea of what money is the root cause. This was the primary cause of the financial crisis of the 1930s and crisis of today.

Elaboration on other Economic perspectives

You do not have to have a Ph.D. in Economics to look around you and understand the boom and bust cycles of today parallels the past cycles. Irrational exuberance regarding credit and asset values. It was the Federal Reserve’s fault plain and simple. People acting on greed and excess during the boom and panic during the crash was only herd movements shepherded by the Fed.

  • Lending came to a halt. Business confidence went to zero and people hoarded cash (Keynes described this as a Liquidity Trap).
  • This created a call in Consumption, Aggregate Demand was depressed and businesses failed.
  • Therefore, aggregate demand or C+I+G dropped to 50% and unemployment went to 25%.
State unemployment office of Florida during the great depression

The Austrian view of business cycles

America’s Great Depression was a book published by the Austrian school economist Murray Rothbard. It focused on the creation of the Federal Reserve in 1913 and the government monopoly on money and credit. If the government controls credit, rather than the market, this leads to boom and bust cycles. In my mind, it is one of the best treatments of the root causes of the great depression. It is also an argument for the elimination of the Federal Reserve and the return of free money.

I did my Master’s thesis on Kunt Wickell at Trinity. Wicksell explained the relationship between the natural rate of interest and the bank rate. Although Wicksell was explaining a process of inflation and deflation, his ideas were extended by neo-Wicksellians and Austrians into modern business cycle theory. That is disequilibrium in the monetary markets leads to imbalance in the real sector.

In the real sector, markets adjust naturally when unregulated because of the price mechanism.  However, the price of loanable funds is analogous to the interest rate. The interest rate is not controlled by the markets natural self-regulating mechanism but rather influenced by intervention by the central bank. Further repeated interventions create confusion when lags are a reality so economists can discern the true effect. This is because interest rates themselves are part of the econometric models which they use and the logic is circular.

The objective of the central bank policy is to match the bank rate with something called “R-Star” or the natural rate of interest.  The natural rate of interest is the marginal productivity of capital in an economy where barter ratios are used. The issue is the natural rate of interest is a hypothetical idea used in econometric models. Therefore, estimating the natural rate of interest might not be possible.

History has shown us that the Fed is always wrong with the money supply and how to manage the economy from its ivory tower command center.  Think about the recent monetary policy. The Fed was wrong in every case in the last 20 years. They did not prevent the Internet stock bubble they helped it. They told us that things were contained and under control in 2007 right before everything fell apart.

Alternative ideas on the Great Depression

John Maynard Keynes – Keynesian believe it was this C+I+G aggregate demand that suffered from depression of “animal spirits’. When Consumption is low, this suppresses Aggregate Demand. When Aggregate Demand shifts to the left, a economic crissis follows. This is not true, because it was more of the symptom.
Further, their idea of expanding government or the G component of the equation was ridiculous. Remember, the New Deal did not bring the country out of the crisis. New Deal I was a failure and New Deal II today is equally ineffective for long-run US competitiveness.

Milton Friedman – Monetarists believed the cause of the Great Depression was the money supply being tightened rather than loosened. The monetarist view is imprecise in explaining the initial reason. It certainly did not help the situation, but the chain of events that caused this deep and prolonged depression was set into play ten years before. A disequilibrium of that magnitude does not happen overnight. It is not the bust that is the issue but the boom.

Ben Bernanke -There are many other theories including everything from agricultural cycles, sun spots,  to saying deflation caused the depression.  Some of these might have been factors in the whole big equation, but not the root cause. For example, Ben Bernanke wrote a book Essays on the Great Depression. It was a monetarist view.

Bernanke needs to take a lesson from Adam Smith regarding the prevention of booms and busts. Central banking if you think it should exist, I do not, should focus on the role of prevention rather than fixing. Preventing overexpansion of credit and mania of speculation. You can blame regulation all you want, but who pushed the interest rate to a ridiculous 1% after 9/11 so we all could go shopping again? The Fed.

Further, he claimed deflation causes price uncertainty, and people postpone major purchases as asset values are falling. But this is more redistribution of wealth valuation rather than a cause of economic collapse. The debt deflation view is an Irving Fisher view supported by Ben Bernanke. It is wrong.

  • So the causes of the great depression of the 1930s were the same as the cause of the crisis of 2007. Mismanagement by the Federal reserve that resulted in a reckless disequilibrium in the financial sector with an expansion of credit.
Categories
Economics

Islamic economics

The purpose of this post is to explain Islamic economics clearly for a Westerner. I wrote this because I see a lot of information on the web about Islamic economics that is confusing because people are debating the details of economics according to the Koran and missing the overall intent. People get lost in the details. My thesis is there is only one major difference in the two economic schools of thought.

The three main ideas in Islamic finance are:

  • Riba – This is interest or usury which is forbidden. This by far is the most important concept in modern economics and Islam as it relates to the banking system.
  • Gharar – The idea of speculation on chance which is not allowed, such as insurance.
  • Zakat –  Taxing with a specific earmark for helping the poor.

These ideas all come from the Qu’ran. The first and second point is the most important and really only the first.

Islamic economics compared to Western Economics

I think the easiest way to understand the differences in philosophy is to compare Western political economy with Islamic political economy. The following are similarities between two systems of political economy.

Similarities in the Western and Middle Eastern economic systems

  • Belief in the free market and low government interference in trade.
  • Belief in a private property.  Like in the West in the Middle East property is divided into private property, public goods, and state-owned property. Before there was John Locke who wrote about the definition of property rights or Adam Smith about free trade there was Ibn Khaldun the father of Muslim economies in the 14th century, similar ideas about supply and demand were addressed.
  • Belief in the Muslim, Christian and Jewish world in charity and brotherhood of all people and helping the poor. Tilting is part of this.

Differences in economic thinking

Really the main difference is the banking system. The Muslim ideal is to have a banking system without interest. This was clearly written about in the Qu’ran. There is no question. Interest-free banking in the Muslim world.  However, because of the time value of money, it is very hard to run a modern economy based on these principles. Therefore, although Islamic banking does not have an interest they compensate by charging other fees which work out to be the same idea. That is they calculate the cost of lending with present value and risk factors. Then they charge no interest but fees. So, in the end, it comes out the same.

Therefore, although Islamic banking is central to economists and academic writing, in the end, there is workaround for day-to-day businessmen. The same is true for the insurance industry. The two ideas of riba and gharar are respected in spirit but in practice, a practical solution is found for the modern world.

An example of where these workarounds are implemented is the Middle Eastern market success stories in Dubai. Although facing a downturn now, this sleepy port city was transformed into money center metropolis based on free market and trade. Let’s face it, besides being oil-rich, Arabian countries are very good at trading, wheeling, and dealing. I think no one can make a strong point that Islamic jurisprudence interference much with everyday business and market operations.

If anyone has anything to add to this please let me know as I tried to cover the main points of Islamic economics for the westerner. I have traveled to four Middle Eastern countries and in my personal experience, these economies show little difference in practice to western markets.

Categories
Economics

The next Great Depression

Every armchair economist has asked the question, will a Great Depression happen again? It is certainly a worthy question. I will answer it not based on economic theory, as this would have to be a very large post. I am arguing that there will be no great Depression because history never repeats itself in exactly the same way. There will be something very different, but nothing like the next Great Depression.

Many people want to make a name for themselves by predicting this (with timelines and all). It is even fun to hear about a little doom and gloom, like a big snow storm coming once you are hunkered down safe at home in your chair watching the news. But another economic collapse like the Great Depression of the 1930s will not happen. why?

Does history teach us about the future?

Many people cite the follow:

Those who cannot remember the past are condemned to repeat it. – George Santayana

Nice quote but it is not about predicting anything, it is about learning from the past.

There is no way to predict the future, and certainly not based on the past.

Can you predict your life based on the past?

Think about you own personal life. How difficult is it to imagine where you will be. Could you ever have imagined you are living in the place you are and married to the person you are. I am a Bostonian but live in Krakow, Poland now. I was worked in investment accounting, now I write software, have my own company in Eastern Europe and a dual citizen and speaking a couple of languages. How could I have ever imagined that? This is the nature of life. It is dynamic ever changing and never as you expect. Life is an exogenous variable.

Economics and the next Great Depression

This current downturn is not like the last or any other. Each business cycle has a unique set of reasons why market equilibrium was distorted and not allowed to adjust. The Depression in 1929 was a credit bubble caused by money over expansion. This was because the government is in a very dangerous business of controlling the money supply through central banking, rather than letting market forces regulate the supply and demand of this very important commodity.

You might say that this is exactly the situation today. Monetary disequilibrium spread disequilibrium to the real sector and caused the Great Recession of today. Basic this whole experiences is further support for Hayek’s theory of business cycles.

However, there will not be the next Great Depression because of my argument at the start of this post. That is history never repeats itself exactly the same. I could go on and say too many things are different to bring unemployment close to 25% and long bread lines. The world is different as are economics. But there is not need to go into this. This post is more a philosophical idea about the relationship between the past and the future, than an economic prediction.

Using economic analysis you can explain the process, make suggestions to policy makers how to prevent or improve the economy (like reduce the burden of government, do not try Keynesian New Deal type programs that did not work in the real Great Depression), but rarely predict major events like a Great Depression II. Sure there will always be people trying to make such predictions, but remember, even a broken clock is right two times a day.

OK, all this being said, I can not resist. Here is my prediction. I think the US economy will be stuck in disequilibrium and lackluster growth until the next large political, innovation or entrepreneurial wave of change. 

Update:  Two changes that have altered the course:

  • AI and the use of AI in everything from medical care to logistics and transportation.
  • Pro business environment such as business  tax cuts.

If in 2019 the production possibility curve will shift because of technological innovation such as AI we could avoid a crisis. However, if the current boom is caused more by lose monetary policy than it will be a crisis. 

Categories
Economics

Leave the USA to get rich

Why do I advocate for leaving the USA and living in a foreign country aboard? The job market is not great and how many reruns on TV can you really watch anyway? Political and economic news is boring after a while (except for my website, please subscribe). You check your favorite sites on the Internet, whether it be the Drudge Report or Huffington post. You have seen all the good moves on Netflix and you are waiting for something good to come along. Is this what your life is about? Commuting 8 to 5 and stressing about your job. On the weekends going to Wal-mart (or maybe WholeFoods).  It is not a bad life if you are really settled in. However, if you have ever thought of leaving the USA do it and you will become a richer person. My advice is to leave the USA now.

Leave America to leverage your capital and be an entrepreneur

Being an expat, that is living aboard,  is the ultimate leverage of investment savings, income and time. I am an American living in the country of my grandparents, Poland. I love the USA but my life is better abroad than in the USA. Every dollar you have will be worth two or three times more aboard, in most cases. This is financial leverage. This is being a real calculated risk-taker, a true leader. Go east or west young man, but go.

Cost comparison of living abroad

Krakow, Poland is a modern EU city with as much if not more things to see, do and buy than living back in Boston where I am from. The only difference is everything is about 1/2 the price of back home. An apple is an apple. An Apple is the same commodity in Boston as it is in Krakow (I think the ones in Krakow are more organic but that is another story). However, where I live it cost 1/3 the price of the USA.  Watching HBO or ESPN in Krakow is the same as HBO or ESPN in Boston.  The same apartment to rent is about 1/3 the price. Some things like computers are about the same price, however, generally, I would say that my costs are less than half of the States, and I have a better standard of living than I would have in Boston.

Everyone tells me things like oh but Boston is such a European style city, I say why not just live in Europe?

Do I not miss Wal-Mart and Target and 90% made in China products? Not really, and they have the same things abroad as in the USA if you really want your life to be about that. Are you not a little bored with your life in the USA? Be honest.

What about family connections once you leave the USA? When I want to come home to see my friends and family, I just take a flight. I almost see them more now than when I lived in Boston because I have more time ( I am not working long hours). And the time I spend with them is real quality time, not just fighting the traffic on Thanksgiving.

I am not spending as much time working for the same exact standard of living (actually better). Time is the most valuable good on this earth. Ben Franklin said ‘time is the stuff that life is made of, do not waste it.’  So you are saying to yourself the challenge is how to make money. If you have an entrepreneurial spirit, it is the same game anywhere in the world, only cheaper when you leave the USA. I did and so can you if you have questions just ask.

If you can find a country that you have a connection to, as I did, I highly recommend this as a way to leverage your investment savings.

What if you do not have a connection to another country to escape the USA for?

If you do not have a connection to any country many people find Mexico or other exotic places like these nice cheap places to live and adventure.  If there is a will, there is away. You can always find away. Live your life now, not in future undefined point in time. If you can be an entrepreneur or have investment income to live on, you can live well, with a cook and maid and nice clothes and vacations for about 20,000 dollars a year in most countries, besides Western Europe or the USA.

What about living in a cheap place in the USA like some small town in the middle of nowhere.  My reply is if that is what you want to do, but it could be incredibly boring.

It is what you save not what you earn and how you live. You need to always look at things from the perspective of how much can you bank each month. Also consider your free time and added expenses not needed abroad, including your community, traffic, business clothes, and dry cleaners, these things are not needed in other countries, etc. There are a lot of extra fees and costs for living in the USA that you are not aware of, including opportunity costs.

Advantages of leaving the USA and living aboard

  • Cheaper
  • Leaving the USA is an adventure and your life will be more interesting
  • Gives you experiences that if you come back to the USA can be applied to business
  • You might find your other half if you are single, I can almost guarantee this
  • The USA will be there anytime you want to come back
  • More chances to start your own business as markets are not as developed and your investment capital goes further
  • Many other reasons for living abroad but I think this is something you have to find out for yourself, remember you only have one life

I am not a backpacker or sailing the world on a boat.  I have lived with my family abroad for many years.  Many people think that if you leave the USA you will fall off the edge of the earth. The earth is not flat and the water is warm so come on in. Whoever you are you have to ability to live and survive in another country and get rich doing so. If you have any thoughts about living abroad and do not know where to start just ask.

Categories
Economics

Economics in one lesson

My aim is to give you the basics of economics in one lesson.  If you are considering studying economics or studying now this post will be a useful summary. If you are in the workforce and have no academic interest in economics it will be of great value, as it will explain the way the world works when in comes to money and markets.

I have tried to skip all the verbose language and name dropping like Misses, Hayek, Jevons, Menger, Bentham, Walras etc. I want to give just a brief outline of economics in one lesson with lots of simple graphs.

I also have skipped the mathematics of economics. I think this is something that academics like to scare undergraduates with and tell them it is important.  In my opinion, pure theory is what economics is about, and not some mathematical ornamentation for the ivory tower professors to compete with each other for journal publications.  Economics is everyone’s business and there is a life time of verbal theory to keep people busy without intimidating people with equations.

Economics is about markets. In a market, people exchange goods and services. The market could be a vegetable market or e-commerce on the Internet, it could also be a market for money.  Why do people come together, they come together to solve the fundamental problem of economics. That is scarcity.

Microeconomics in one lesson

Microeconomics is really what economics is about. As an undergraduate, I always preferred studying macroeconomic issues because that what was in the headlines and was connected to hot political issues.  However, microeconomics is the base in of economics as it explains how people interact in a market to solve the problem of scarcity.

How prices are determined

How limited goods are rationed – Price is the primary way goods are rationed. There are also forms on non-price rationing like standing in line to wait for something, but a free market and price is the most efficient way to ration scares goods.

The intersection of supply and demand determined the price

Price is determined by only by supply and demand. Never is cost or what you or someone else has paid for an item have any relation to price. Nor is there anything called a natural value of any object. Karl Marx was wrong to think t value is determined by the amount of labor that went into something.  The value of an object subjectively, that is what someone believes it is worth. You do not believe me?

If you are going to buy a stock on the stock market do you care what the person who will sell it to you paid for it? Do you care what he thinks it is worth? I do not. A lot of confusion in finance and investing comes from people believing things have natural value.

Consider the diamonds water paradox and price . That is water which is invaluable for life is cheap while diamonds that have little intrinsic value are expensive. The Austrian thinkers emphasised that value is subjective.

Real life economic lesson  1 – Since value is determined subjectively or more precisely by supply and demand rather than any intrinsic or natural value, making money is easy. You need not spend a lifetime doing this, it is more about understanding the need of the market place .  Lastly, in my experience there is almost no correlation between salary and real value. Do not believe the work your way up the corporation myth. It is perceived value and not real value that is important. This is economics 101.

Marginal economics

The neo-classical school of economic thought emphasised marginal utility. The idea here is that people are rational and make decisions on perfect information (this is debatable but generally). This allows them to maximize utility and profits.

Utility is a level of value or satisfaction, you might even say it could be measured in utils. I get 10 utils from playing the computer game civilization, while another person might get 11 ultils from reading the theory of Alfred Marshall. Again value is subjective. We all have indifference curves however, each additional unit of something we get starts to decrease the value of it to us personally no matter how we value you it.

Diminishing and even negative utility with each additional unit of something

That is if you eat one apple your get a lot of utils, lets say 10 units. However, the next apple gives you only 8 and the next apple only will give you 5 utils etc.

Real life economic lesson 2 – If you want to do business in a developed country that has a reasonable purchasing power to satisfy demand of basic goods, the best way to make a profit is find a niche. If you can find a small niche that the public does not have, you will get higher utility. Instead of selling toys, sell educational toys. Something there is not as much supply of.  Things are too competitve in a global economy to bring a commodity product to market, as people are already far along their marginal utility curve. Find something new and unique and this will give people the greatest utility and you the greatest chance to make a profit.

Profit maximizers.

Now from a profit side of marginal economics, that is the economics of a firm the key equation here is profits are maximized where marginal cost equals marginal revenue (benefit).

Economics of the firm and equilibrium point

Indifference curves –

Everyone has a different indifference curve

Everything in life is a trade off. Money for food, free time for work time. The fact that we are all different makes the world go around. Yes everything has a price, even time, and there is where the idea of opportunity cost comes from. I might hold an investment for 10 years waiting for it to go up, while I could have simply sold it for a loss and bought another investment.

Real life economic lesson 3 – If you want to make money in the stock market, consider the opportunity cost of holding an asset. Lose your pride and try to optimize.

If you want to understand microeconomic theory, further than my short micro-economics in one lesson (I hope to be updating and building on), I would recommend two books.  They are actually mystery thriller books by an author Marshall Jevons (pseudonym). One is called Fatal equilibrium and the other is Murder at the margin. Why read boring writings about people’s opinions on economics when you could learn microeconomic theory from some mysteries?

Macroeconomics in one lesson

When most people think of economics they think of GDP, inflation, debt, imports and exports. This is what economics is on the news. Further, many bright people and even economic think tanks have very different opinions how macro economic policy operates. They have their own theories on political economy. Take it from the guy who runs Political-Economy.com, Adam Smith as basically right.

Since I think everyone knows what GDP and taxes are etc, I think I can skip the basics and move to the key point of macro economics. Government crowds out private investment. Anything that the government does free people can do more effectively. There are some exceptions like public goods, but generally let the markets work.

Government involvement in markets rewards backward thinking people and penalizes the forward thinking people. Redistributions of wealth simply mean you will be working for another man’s wife.

I live in a post communist country. There was real poor here. Poor in America is like rich in Eastern Europe.  Do you understand?

An example of economics in one lesson for political economy

Think about microeconomics before you think about macroeconomics. You are some guy selling vegetables in a market. You know what to do to maximize your profit. Then some guy in a suit, looking a little like an agent from the movie the Matrix, come along and tell you what to do. He either takes some of your profit and gives it to someone else. He regulates the price or he puts some money in your competitors pocket to help him create a better vegetable stand. Maybe your competitor is making super profits doing something risky, and you are making zero economic profits.  Then  when he is in trouble the guy with the suit comes to you and take some of your money and bails him out. Not only is the consumer punished but the producer seller and everyone else is. All you want to do is sell your carrots.

Capitalism is good when people act on their own enlighten self-interest (Adam Smith) everyone wins society moves forward in a positive way. When there is government intervention, everyone loses. The market can not adjust and we sit in a long-term disequilibrium.

If anyone wants to dispute this be my guest. I do not care if you are a PhD in Economics or an advisor to the president of the United States, if you think governments should bailout or stimulate anything, you are wrong. Even the banks. Let them fall and collapse and a more disciplined dynamic system would emerge. Now we are stuck in debt that will hold us back for the next 50 years. It would have been better to give people money, they could have started new businesses with it.

Economics in one lesson comes down to this. Let the markets work.

Categories
Economics

Is capitalism bad?

Capitalists have a bad moral reputation. People see them as bad because their economic theory is based on self-interest. Even though I am an unrepentant capitalist, I totally agree many people who are capitalist are not good moral humans and lack love and compassion. Further, many are just plain jerks and think this economic system is some new-found religion and are rigid in their thinking.

The rich are stereotyped as greedy and heartless because of a large amount of earnings they make and yet no clear value to society. They are almost seen as parasites off the sweat of others.  However, this is where people get confused.  Capitalism itself is not bad, nor are all capitalist. Capitalism is good. People confuse capitalism with corporate America and do not consider the alternative socialism for what it is, fake.

Jealousy is the cause of people thinking capitalism is bad, not compassion

People think capitalist lack compassion and an alternative system like socialism will bring more peace and justice to the world. In fact, people think they are better people just believing in anti-capitalism. Wrong. The real poverty in the USA is spiritual poverty, not material poverty. The poor in America would be super rich in most places in the world. If you think capitalism is wrong, live in a post-communist country for a few years.

Socialism capitalism’s alternative

  • I live in Poland a post-communist country. How many anti-capitalists do I meet here? Hmm none, well one but she is American and rich. Polish people know socialism is all fake. It is the government and those in power taking power from the productive.
  • Capitalism has transformed the world I live in from poor to rich. Not just some people most people. What about the poor? The poor live better than they did under socialism.

What about greedy capitalists? You know what, some people are. Really they are heartless people. But most people who make a lot of money give a lot to charity and are kind gentle people. I know, I lived around them most of my life growing up in preppy Connecticut.  They are not rich and greedy, rather they are rich and live very modestly. Look at Warren Buffett he practically wears the same shoes he was married in, and did not he and Bill Gates give away all their money basically?

People fill their heart with resentment towards capitalist because they feel somehow when someone else wins someone else must lose. The reality is life is not a zero-sum game. To understand and meditate on what this means is important. It means that when someone wins someone else wins. Always, except in extreme cases.

Who is bad in the capitalist world?

I would say large corporations are pretty scummy.  I am an unrepentant capitalist, but I believe that corporate America does not uphold the ideals of Adam Smith. Adam Smith was a moral philosophy and believed in enlightened self-interest, not Ayn Rand selfishness.  It is too complex to explain in a short post, but there is a big difference from being a capitalist and working for working for corporate America. A capitalist is creative and risk-taking and wants to add value to society. Corporate warriors are more about a paycheck and bonus, two different things.

Next time you ask the question is capitalism good or bad, consider the capitalist vs the large corporation (corporate socialism). Consider Capitalism as we have in free America and the socialism that Poland or Russian had during communism. I think you will see the answer that capitalism is not bad at all.

What capitalism does

It allows you to express yourself and give you the freedom to choose. It does not promise to make everyone equal but rather lets you decide what you want to do with your life.  Is capitalism bad? No. The self-expression does not sound too bad to me. This means whether it is setting up a yoga school or writing a book or being an electrician like Lech Wałesa.

Categories
Economics

How to help the poor

When I was a teenager I really wanted to help the poor. I did not how I thought increasing foreign aid might help the poor or working in poor areas. These things do help and are good, especially in areas of drought and total poverty that need emergency help. However, how do you end poverty fast in areas that are just chronically poor?  The most efficient way to transform the lives of the poor is as follows:

How to help the poor – a real solution

Fly over a poor area with a helicopter and drop 1000s of copies of Adam Smith’s book Wealth of Nations. I am not being sarcastic or rude here. I have traveled a lot of the world and have degrees in economics and live in a post-communist/socialist country. Poor is relative. Poor people in America are rich in my mind. The poor in Poland where I live is living on less than 200 dollars a month. Few American poor live on 1000 dollars a year. During communist times there was only vinegar on the shelves, that was it. Two families would live in a one-room apartment, with people sleeping on the floor.

My friend who now owes his owns an international accounting and consulting company had to collect empty cans from the trash for his family to buy milk. There was nothing.  Some people would live on basically bread. Government programs did nothing and made it worse. That is real poor, not pretend poor like in America (I am American also).

Giving people the book, Wealth of Nations will change their view on the needy and how to uplift them. I have seen it with my own eyes, how people’s lives are transformed by changing their view on economics.

People are taught that life is unfair. However, if you want to end poverty and help the needy, tell them this message of hope. Tell them what Adam Smith thought. He believed no matter what, every person rich or poor has the ability to give in their own unique way to the economy. Poverty and being poor is a state of mind.

Charitable giving goes up the freer a society is, the more socialistic there is less charity.

Here are some resources to help mental poverty and aid the poor

  • I wrote an article on why the rich have money. Understand that there are two types of capital, financial capital, and intellectual capital. Intellectual capital will always pay more. Everyone has this and can generate money for themselves and their family and end financial problems for themselves.
  • If you do not like my capitalist view on aid or assistance to the poor, try this book. Small is beautiful – a study of economics as if people mattered by E. F. Schumacher. It is a very liberal almost socialist view but basically says the same things. It says that each person matters and can contribute to the world and should not wait for some big corporation to rescue them by giving them a job. Think of the movie Gandhi and what he recommended.
  • Read An Inquiry into the Nature and Causes of the Wealth of Nations
  • Adam Smith’s philosophy on the poor and rich

The best way you personally help is to donate to a respected organization like the Red Cross or any charity you prefer or check out www.charitynavigator.org is a good start.

Let me know your thoughts and ideas. This is a very general and not specific argument I have about the poor and how they can be helped. What do you think of my idea about dropping Adam Smith’s work by helicopter to end poverty now?

Categories
Economics

Is capitalism good or bad?

The purpose of this post is to ask you the question is capitalism good or bad? I am curious myself of the answers that are floating around the collective unconsciousness. Does capitalism work is a very relevant question? After studying economics and living in the USA and a post-socialist country I have an opinion but I want to look at it from both sides and hear what you think.

Today in the USA and Europe, the economy is doing nothing special and politically we are trending towards a social state. This question is important for the elections in the USA in 2010. However, it is also important for you personally because how you answer this question determines your life and your future. I have a poll set up and invite your comments. Please take the time to vote.

At the end of this post, you can read what I think about capitalism, it if is wrong or the best system. I tried to give a balanced argument but it is clear what I think.

[poll id=”2″]

Is capitalism bad?

The main argument that says capitalism is bad goes like this: people need to be controlled or the greedy and the powerful will use the good hard-working people of the earth and destroy the earth while they are at it. The world is made up of sheep and wolves and the wolves will destroy take what they want from the sheep even if it is unfair and inhuman.  An economy regulated by-laws will create checks and balances and give a safety net for those who can not manage for one reason or another.

Capitalist lack compassion and understanding about the suffering of people of this world. Socialism believe man is basically selfish, let to their own they would not care about the world and eventually most people will suffer.

Is capitalism good?

To understand why capitalism is good to consider the alternative. Socialism capitalism’s main alternative is the road to serfdom. There will be greedy and powerful people always, however, under socialism or mixed capitalism, the power is given to bureaucrats and not too creative people called entrepreneurs. Just like there were powerful in the Soviet Union or any state-run by bureaucrats. I live in a post-socialist country and see how it destroyed the lives of everyone but the people in government and special interests friends. The people who suffered the most was the poor and middle class.

Bureaucrats are the new oligarchs under a noncapitalist system – These people actualized their greed for power by using the government and law to keep their power and keep up the status quo and not competing freely with the rest of society. The haves keeps their power using the law and the have-nots are given fewer chances.  Government becomes the funnel for income redistribution penalizing the hard-working and creative and rewarding special interests.

Capitalism like democracy believes that men are basically good and when they act on their enlighten self-interest society as a whole is lifted to a higher level, just compare North Korea and South Korea.  Where would you have rather live West German or East German? People would rather work for their own families and then give to the poor like most of the wealthy from Bill Gates to Warren Buffet than being forced by the government to give their productive energy working for another man’s wife via redistribution of taxes.

Do I think capitalism works or does not work?

I am an unrepentant capitalist. I think except for some minimal regulation capitalism allows everyone to be the best that they can be. I live in Eastern Europe in an ex-communist country and for anyone who thinks capitalism is wrong or evil or does not work, should come here and see what the alternatives to capitalism did to the people of many countries.

Capitalism is not in my mind connected to religion. I am a religious man, but I think economics and religion are two different things. However, I do think capitalism is the most compassionate form of economics as it gives everyone a chance. Why? The best form of capital is intellectual capital, not financial capital. I believe that we are all equal and given talents unique to ourselves.

If you believe anything else you swindle yourself out of your own life.  If you tell other people they need help from the government to change their life, you are telling them a lie that they might live. Adam Smith believed men are equal. I similarly believe we are all given different sets of life circumstances but what you do with it is what is important, your life is your canvas.  This is why I believe capitalism is good.

What do you think, is capitalism good or bad? Have I given a fair assessment?