Category Archives: Economics

The Biggest Problem the World Faces: No Stable Unit of Account

Here’s the best way to put it: Quantitative Easing (QE) is like saying that simply feeding a guy will make him exercise more. It doesn’t. It just makes him more fat (inflation). On the other hand, someone who is working out and growing muscle (ie, a metaphor for a growing economy) does need to be fed more (i.e. in economic terms this is the time to increase liquidity) or else his body won’t have the energy or building blocks to create the new muscle (i.e., analagous to derailing a growing economy by raising interest rates and choking it.) Either way, whether we have growth or recession, we can’t win. And that’s why we have continual crisis after crisis, at a time in our Civilization’s history when there should instead be a Cornucopia of Abundance for all and a Golden Age.

The sole mandate of the Federal Reserve, or any “Central Bank” should be to keep the supply and demand of liquidity (a fancy word for money) in balance. If there’s too much supply in relation to demand, then you get inflation. And this is the ONLY cause of inflation. They would have you believe that growth causes inflation, and that inflation is somehow a ‘natural’ occurence. But growth in no way causes inflation. Because growth causes an increase in production as much or even more so than it does in consumption. Growth also causes innovation with increases in productivity and efficiency. They try to make you believe that inflation is a natural occurance so that they can keep their jobs, their huge budgets, and their elevated status in society of some kind of Knights continuously “fighting inflation.”

On the other hand if demand for liquidity outstrips supply, which is the case usually during economic booms, not only does this cause ‘deflation’ but even worse it chokes off the “air supply” of much needed liquidity and kills the boom in it’s tracks. An example of this would be the late nineties economic boom caused by the Internet boom that went suddenly bust in 2000, not because of failed business plans, but because the air supply was cut off. An example of the deflation of that period was when oil hit $10 a barrel.

So, the Federal Reserves actions not only cause and unstable unit of account, they actually cause the downturns and “Financial Crises'” that seem to be a continual part of our lives, which is so ironic considering the times we live in: Technology and Science, whose knowledge and actual physical products are doubling in power and efficiency every 12-18 months, driving productivity increases throughout every area of our economy. Indeed, under such salutary conditions, it should be impossible to have any kind of economic crisis. There must be something that is throwing a monkey wrench, so to speak, in our economy, and unnaturally derailing it.

The biggest problem in the United States and the World is that adding Monetary Liquidity doesn’t stimulate economic activity. It only causes inflation. And through inflation, it actually sludges up and slows the economy even more. That’s the biggest problem that the World faces: is that we don’t have any Standard Unit of Account.

Only three things can increase economic activity: An increased appetite for risk, more work, or more efficiency, which is usually supplied through innovation.

People are only going to work more if there is a financial incentive (unless they are one of the lucky few who love their work so much, that they’d rather be doing that than what they like to do in the free time. This is why a lot of people advise that whatever it is that is your hobby, you should consider making into your career. Or the other famous phrase that’s been used so much that it’s almost lost its meaning: ‘Do what you love.’ Or Joseph Campbell’s famous phrase: “Follow your Bliss.”)

So, basically, the only way to achieve this kind of productivity, is through fiscal policy, reducing the amount of tax upon physical work. Allowing workers to keep more of what they earn.

Increasing productivity through efficiency is intimately tied to innovation, which not always, but almost always is tied to the first part of the equation, which is an increased appetite for Capital Risk. This second part can only be achieved fiscally as well. A decrease or elimination of all unnecessary regulation (ie, regulation that is not helping or protecting the public) and a lowering or completely zeroing out of the Capital Gains tax. Indeed, many Economists believe (Alan Greenspan being one, I think) that the no. 1 impediment to raising the standard of living for all is the Capital Gains tax.

This is not a tax on merely the “Wealthy.” For taxing Capital Gains directly decreases the amount and the rate of innovation in every area of society and the economy, which has a direct impact on the standard of living for all. Also, the Capital Gains tax is applied to every amount. So if a middle class or lower middle class person makes, say $1000 on a successful use of his mind and productive flow of capital into an area of growth in the form of a successful investment, he is taxed the same rate as someone who makes a million. And one could argue that the $300 confiscated from him is more of a discouragement as well as a practical harm, from a day to day living standpoint, than the $300,000 confiscated from the Wealthy person.

And what is more is that it’s the millions of thousand dollar investments that make up a much more huge majority of the nations Capital markets than the few million dollar investments. Whether they are in the form of a stock certificate on Wall Street or a small business on Main.

 

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I wrote a comment to this Yahoo post:
“So true. Monetary “Stimulus” doesn’t stimulate anything except inflation. There’s no evidence of it ever stimulating economic activity or “growth.” The only way to create a runway for growth and jobs is to maintain a stable unit of account, which should be, in fact, the only mandate of a Central Bank. “

Considering an Investment in Pandora ($P) in Light of Spotify, Rdio, and Songza

I really fell in love with Pandora a year or two ago. I think the market cap was treading around 2 billion. I told myself that if the Market Cap hit 1.5 billion, I’d make an investment. Well, I haven’t logged it, but it seems like it must have bounced off 1.5 billion about 7 or 8 times in the last year and a half. Seems like it’s bounced between about $9.50-and $11.50 about the same many or more times during this period. From that perspective it seems it would make a great “Channeling” stock, as the traders call them.

But then, a couple months ago, I subscribed to Spotify, and from a consumer point of view I haven’t looked back. I love it so much. I thought I might still use Pandora occasionally for “discovery” but since then Spotify has launched their own “Radio” feature. So, for myself, I literally can find no reason to use Pandora anymore.

Still, I have Pandora (P) on my “Stock Watch” list. I still believe it’s part of the bigger paradigm of all media moving to the digital. So I still think it would probably be a good investment, just on the general paradigm itself. It’s hard for me to make an investment in a product that I don’t use, though. If, however that changes, and they launch some new features that make me want to use it again, I’m sure I’ll even be more excited.

Being in this state of wondering whether to invest or not, I was happy to come across this GigaOm article today: Despite New Competition Pandora Grows It’s Users

The take away is that Pandora is still growing fast in registered users and total minutes per month of listening, but the number of minutes per registered user is actually decreasing, which is weird, until I think about it: I’m a registered user, and my usage has dropped to Zero because Spotify finally picked me off. Back when I was in love with Pandora, I thought, I’d never pay a subscription, but I think seeing Spotify constantly in my Facebook Newsfeed finally wore me down. Like Ogilvy said about advertising: The first time you see an ad, you curse it. The tenth time you see it, you’re writing a check out for the product. Anyway, the GigaOm post inspired me to comment on his site, which I copy and paste here:

“I was a big Pandora fan last year, and I told myself I’d make an investment at a 1.5 billion market cap, which it’s close to now, and has bounced off of several times, but since I’ve become a Spotify Subscriber, or actually since Spotify launched their “Radio” feature, I don’t see any need to go back to Pandora. That’s what keeps me from making an investment, myself. I don’t use it. But I do believe it will grow with the whole digital revolution, as you mention. It definitely had a head start on mobile and has brand recognition.
Once crucial feature of Spotify and Rdio, which seems so vane and egotistical, yet very potent, is the sharing what you listen to to Facebook. I mean even if I own an album, I usually will prefer to listen to it on Spotify, to show everyone what I’m listening to, especially if the record or artist is considered “hip.” I guess Pandora has this feature, but I never see it in my feed. I constantly see Rdio and Spotify in my feed though, which obviously is also free and invaluable advertising for them too. I don’t know why Pandora doesn’t copy all of Spotify’s features (assuming they can) just as Spotify has copied one of the crucial features of Pandora: Discovery.”

The Natural Gas Revolution and How to Play It.

Update 7/17/12 – I saw Wilbur Ross, the famed Billionaire investor who made a lot investing in Coal and getting out with perfect timing, I’m assuming when the Nat Gas Revolution kicked in, he mentioned EXCO Resources Inc (XCO) as his main Natural Gas play. Of course, he is a director. But Richard Grasso, a member of the Fast Money Panel also agreed with him about Exco. I don’t know what the price is when you read this, but as I type it’s $7.07 with a 1.53b market cap.

But I must confess, I don’t know personally whether I’ll ever invest in this industry. I just can’t get my head around it. I like companies that have zero debit and are making a net profit after tax. If you look at the financials of some of these energy companies, especially the “exploratory” ones like XCO, boy you see a lot of red ink. I know it’s normal in this type of industry, especially with a young company, but man it just doesn’t make me feel comfortable, and I can’t seem to get my head around it. I’ll probably do some more reading and investigating in my spare time. Maybe I’ll change my mind.

I was watching “Fast Money” but not on cable or Dish, mind you, but rather late at night on my iPad. There’s another major trend, the Cloud, “Cord Cutting” et. Think Apple, Roku, Amazon, Google/Youtube, Facebook, et. al, which of course a sub component of the larger “All Media is Moving to the Web” (Think the infrastructure plays that are continuing to build that out (EZCH, RAX, etc.) but also think: Get your own website! And preferably buy your hosting on $RAX’s “Cloud Sites, through me, here: http://rackspacereseller.com/Plans.html (As Cramer would say, “Buy, buy, buy, buy, buy, buy!” hahhahahahahhahhah!

But anyway, back to the topic at hand. Another trend has been brewing for the last few years: Natural Gas. I’ve been mostly concentrating on Tech lately, but this episode of “Fast Money” reminded me of the Natural Gas trend. I believe it was either Dennis Gartman or perhaps the Chairman of (WTR) whom they had on who said, “In 10 Years the Whole Economy will be powered by Natural Gas.”

That took me aback. That’s a powerful paradigm. Dennis Gartman said that the best way to play it is through Chesapeake Energy (CHK). Wow I noticed they are down 6.5% today. I think the issue of the moment is that Nat Gas is very cheap right now because so much has been found and developed (via new “technology”) and yet the economy as a whole is just in the burgeoning phases of changing its infrastructure to utilize it for things other than your heat during winter. (Nat Gas cars, etc.)

One interesting point brought up was that the price for Nat Gas in Europe and other places is about 5 times higher. So there is a market for shipping, exporting it. The problem is that is a very expensive thing to do. So Gartman pushed back a bit on Cheniere Energy (LNG) which is the company building the ships (or are they purchasing the ships and then selling the shipping?) because of how expensive it was to do so. But then Grasso pushed back on him, saying that he was long ING because they were the only one doing it, the only ones with the permits, regulations, technology to do it, and so they had a monopoly on shipping the stuff. In the end Gartman agreed that LNG was a good way to play the paradigm in the long run. I believe he just had short term misgivings about the expense.

Another interesting Company brought up was Aqua America Inc (WTR), which is a Water Company in general, but a growing part of their business is supplying the water for the “Hydro Fracking” I believe they call it process. This company seemed to be a solid company overall, not just because of their Nat Gas exposure, and indeed the Nat Gas business was only adding about a penny a share in earnings at the moment, but was considered to grow substantially over the coming years.

Just as an afterthought, it wasn’t mentioned on the show, but a company my brother told me about Mcmoran Exploration Co (MMR), whom I haven’t taken the time to sit down an research, so I don’t know exactly what they do (although I know it’s in Nat Gas) They have been in my iPhone finance app though, and they haven’t done really anything as far as price movement (between $11-12 for most of this time) but you have to considered how dramatically Nat Gas has dropped over the last year or so too.

I remember like a year ago, listening to the Bloomberg Podcast app on my iPad and this analyst was highly recommending the Nat Gas ETF: United States Natural Gas Fund, LP (UNG) because in his opinion Natural Gas was priced for “Nirvana” and that any disruption would cause a spike. Glad I didn’t take his advice. I think the price is down 50-75% since then. So what’s next after “Nirvana”?

But anyway, will I invest in any of these? I don’t know. I’m so immersed in the tech field that I really “feel” its paradigms, and I don’t have a good “feel” for what’s going on here. But I do think I’ll do some investigating, because I like that sort of thing, and I like Paradigm shifts, and also it would be nice to diversify my portfolio a bit.

CHK, ING, WTR

The Major Mistake of Both Ron Paul and Paul Krugman


 

Vis a vi Monetary Policy:

The major mistake of the “Monetarists” like Krugman is that they believe Monetary stimulation stimulates growth. It doesn’t. All that it stimulates is stagflation. I’m a Paulista, but the one thing I would disagree with him is that there is a way to know how much liquidity the economy needs: The Price of Gold. The price of Gold is the most accurate barometer of supply/demand of money, ie allowing enough liquidity for growth, but not too much for inflation.

So what is needed both to insure that there is enough liquidity for growth but not too much for inflation is neither a “Hard” Gold standard, nor the current “fiat” target interest rate policy. What is needed is a “target the price of Gold” standard. So you don’t have a dollar backed by Gold: (This could lead to a dearth of liquidity during economic growth, and an actually run on the physical gold supply which is the reason Nixon took us off the Gold standard in 1971) What you have is a Fed that targets gold, uses it as a barometer. When the price of Gold rises, that is a clear indicator that the economy has too much liquidity. When the price of Gold dips too low (like it did in the late ’90s, remember $10/barrel oil? This was also a major factor contributing to the demise of Web 1.0 because there was massive growth, but no liquidity.) that is a clear signal that there is not enough liquidity.

So what we need is not to End the Fed, but rather a new mandate: Keep the Price of Gold in a tight trading range by printing money when it dips below the range and in reverse, selling bonds to mop up excess liquidity when the price of Gold rises above the tight trading range.

How to Return to a Gold Standard Without Disrupting Liquidity Needs

Follow the Yellow Brick Road...

All you need to do is change the Fed’s mandate from targeting interest rates to targeting Gold. The Fed can easily keep the price of Gold within a tight trading range by increasing liquidity when the Price of gold dips below the prescribed range (indicating deflationary pressures) and conversely selling bonds to mop up excess liquidity when the price of gold goes above a set trading range. This would create a “De Facto” gold standard and uses gold as a barometer for how much liquidity the economy needs at any given point in time. Because of it’s nature, Gold is the best monetary barometer available, much more accurate than the human guessing game which believes that growth causes inflation and that liquidity stimulus can somehow create growth. Both of which have the unintended consequences of creating inflation during downturns and starving the the economy during growth spurts.

With the technological advances of the last 50 years, we should be living in a “Golden Age” of living standards, but instead we seem to be living through unending economic disaster.

The cause of this is not the economy itself, but instead the unit of account.

Imagine trying to have a sporting match, conducting mathematics or science without a unit of account. It couldn’t be done. And the same goes with economics. Without a standard unit of account, a stable economy is not possible. And that’s what we are living through.

There is a Time For the Fed to Create Liquidity

Maybe the only thing I disagree with Ron Paul about, is that there is a time when the Fed should create liquidity, and that time is when, like in the 90’s due to the Internet and Communications revolution, there is a period of incredible growth. A growing economy needs liquidity like a growing body needs food.

The problem is, that it’s exactly during periods of growth that the Fed turns the spicket off and starves a growing economy of the liquidity it needs. This is one of the major reasons that Web 1.0 crashed.

And then during times of recession like the past few years the Fed does the opposite. It adds liquidity, which causes inflation and “stag-flation.”

This is why we don’t need so much a “Gold Standard” in as much as we need a “De-Facto” Gold standard, meaning Gold should be used as the barometer for when liquidity should be injected and or  “mopped up.”

Using the price of Gold as a barometer, the Fed, or whoever directs monetary policy, should keep the price of Gold in a tight trading range by adding liquidity when the price of gold dips below a certain target, and mopping up liquidity when the price of gold rises above the target.

This does two virtuous things: It gives a growing economy the right amount of liquidity it needs to sustain, and it also permanently ends inflation and deflation.

Other than that I totally agree with Dr. Paul that the Fed, as it acts now, should be ended, or given the tight mandate of using a Gold barometer for monetary policy.