Friday, February 29, 2008

#113 - Old issues in New Eyes

I always understood the general economic concepts that cements the Free Market/Liberty relationship. Now training to be a stock broker @ E1 Asset Management it's pretty good to have a teacher who's a fan of Ron Paul, and seems to be on the same page with me as far as economic principles and studying for the S7 has put things more into perspective than ever before.

Having a much clearer grasp on how the markets work and their relation to true economic activity and health has given me a crisp perspective when watching people talk about what's going on in the global and local economy. Now, more than ever do I believe a lot of these pro-fed talkers on CNBC are either brain dead or are in denial of economic realities.

On Kudlow and Company today I saw someone try to argue inflation as good for the economy cause it keeps prices from rising due to loss of purchasing power. My jaw hit the floor when I heard this, afterwards another commentator said America will be able to afford luxury items as long as the Fed keeps lower interesting rates and printing dollars to meet the demand... at this point my jaw dropped to the floor ripped off my skull.

So first let's explore the first statement and break it down:

"Inflation is good for the economy"

First off a weaker dollar hurts everyone. Here's How:

-Prices on food, gas another necessities go up while wages lose purchasing power faster than they rise.

- This decreases the labor supply for many small companies that can't afford to increase their wages to keep up with increase need for higher wages to keep the same standard of living, in the meanwhile their purchasing power is dropping with their productivity.

- imports increase in cost, increasing the cost of a lot of electronics, and the cost of materials used to make domestic goods in effect increasing domestic prices further.

- The increased purchasing power of other nations creates higher levels of ownership of the US economy by foreign nations, which will in the long term effect US sovereignty.

etc. etc. etc.

But the statement in question has another section that deserves scrutiny.

"the decreased purchasing power pushes luxury prices down"

To Be fair, this statement is partly correct but the implication of this reality isn't something to be optimistic about. The way this happens is that since a persons ability to afford necessities becomes so tight that many have to forgo luxury items, so things like IPODs and Guitars would have either drop prices to even out demand or increase the prices and charge a premium to the elite few who have the discretionary funds to buy these items.

So what does this mean?

- Gas and Good prices have gone up so they have to cut spending on leisure, this is not a good economic indicator for anyone unless your planning to sell Apple. Luckily, there is the Chinese market.

- With less demand for these kind of items you'll see less variety, which will result in less innovation from competitive pressure which slows the progress of society.

Now to go on to the second statement...

"The economy will be fine if the Federal Reserve continues to print money and lower interest rates"

No and No

Against Printing Cash:

When you have more of something, it becomes worth less thus the law of supply and demand. More money means it'll be worth less, and you have the economic effects above. This primarily effects the middle class and below who's economic world is primarily domestic. More wealthy people are suffering losses in their investments in the housing sector and many luxury items may hurt in the long term if this continues but at least these people usually have safety nets of foreign investments that are in some places less volatile than the US currently.

Against Lower Interest Rates:

I'm not against interest rates going down or up, but the federal reserve does this by manipulating the money supply which is essentially shifting the value of peoples assets in an indirect re-distribution of the nations wealth which is ridiculously immoral no matter which way you shift the interest rate.

Like if you and I both had a glass but yours was filled with water so I poured half of your water in my glass, while I didn't take your glass I did steal half the value from your glass. This is the effect of lower interest rates artificially.

Or if 10 people had glasses 1/10th full so I took all their water and put it in one cup. This would simulate the effect of artificially raising interest rates.

either way this manipulation of the value of the dollar shifts wealth. The answer is to let the market decide interest rates by ending the borrowing of money from the discount window so Banks must practice smart and safe banking.

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