Friday, August 23, 2013

The "Evil" Price Gouger.

This is the story of two entrepreneurial young men providing a much desired product, only to be vilified and jailed due to the public's ignorance on the matter. In the end the product is not available for purchase at any price and the would be consumers of the good are at the mercy of an inefficient bureaucracy to eventually supply the good. In the meantime they are helpless to do anything about it.

A large Hurricane swirled several hundred miles offshore in the Gulf of Mexico. Bob and Franks lived in Indiana, a 12 hour drive to any of the Gulf of Mexico states. This is the moment they had been waiting for. Work was hard to come by in their home town in Indiana, but they had an idea on how to earn some. It wasn't a sure bet as a similar venture the previous year didn't pan out and they ended up losing a thousand dollars between the two of them. They decided to take the risk again this year.

They rented the largest truck they could find. They took it to a warehouse store and bought as many case of bottled water as the store had available. The truck was only half full so they went to several other stores and bought them all out as well. All in they were able to purchase over a thousand cases of bottled water. The men went back home and watched the TV to see where the hurricane would make landfall.

The storm was headed for the panhandle of Florida. As the men headed south on the highway Bob remembered the last time he had taken a similar trip. That hurricane suddenly had weakened so they turned the truck around mid way on his trip and cut their losses. Luckily they were able to return most of the water, but he still lost a lot on the truck rental and gas. Despite the financial risks, they still thought it was worth it for him to take a chance again on this hurricane. He calculated he could sell the water for 2 to 3 times what he paid and possibly make a quick $10,000.

When the men were about half way through Alabama they checked into a motel to get some rest and wait out the worst of the storm. Throughout the night the motel was blasted by torrential rain and strong wind gusts. The hurricane had made land fall in Florida with winds of 130 miles per hour. According to news reports, it was still a moderate tropical storm as it passed over them during the night.

Several coastal communities in Florida were badly damaged. In the morning Bob and Frank set off to make their much anticipated profits. To their dismay, a large tree branch had broken the windshield of the truck. Frank cringed and remarked to Bob how much they were going to have to pay have that replaced when he returned to Indiana.

When the men approached the storm ravaged areas they had to slow down and stop often. The damage was visible everywhere. Windows were broken. There was no power so the street lights were all out. Many of them had been blown down. Several times they had to back up and retrace their route when the road became impassable. They didn’t see many people outside so kept driving until they found a strip mall with a supermarket. By now it was early afternoon. The local residents had already cleaned out the store the day prior as news of the impending hurricane developed. The men parked their truck in the parking lot, pulled up the rear sliding door and waited.

It wasn’t long before a middle aged man drove into the parking lot. He was clearly distressed that the grocery store was closed and empty. He saw the truck and made his way over. They sold the man 5 cases at $20 each. Things were beginning to look up for the men. As the day wore on and word spread a crowd gathered. Bob and Frank had sold almost all the water and there were still dozens of people remaining. When it became apparent they men were running out of water the remaining crowd became agitated. They wondered how long it would take him to make another trip out of the storm zone for a fresh load of water. The group of people became louder. Someone called the police. Two squad cars arrived and the police officers approached the crowd. People were screaming, calling the men price gougers. Within a few minutes the police had arrested the two men. They took them to the local jail which hadn’t been too badly damaged.

There was no drinking water in the jail however, so after a long hot night the officers decided to let the men go. They would have to return for their court date and hefty fines the following month. If the men were lucky they would not have to spend any more time in jail. The men climbed into their damaged truck and made their way home. “Never again!!” Bob said as they drove off.

When they arrived back in Indiana, they watched news reports of the affected areas. Apparently the people were still unable to find any supplies. The stores were not yet restocked and no relief agencies had arrived. The reporter showed a line of volunteers bringing food and water to local collection areas in the surrounding states. They hoped to have the first truckload delivered by the end of the week.

Saturday, October 27, 2012

Is the Chinese Government Less Secretive than the U.S. Government on Weather Science?

Fifteen years ago the Chinese government made it snow by seeding the clouds. They have a Beijing Weather Modification Office. See here:

The U.S. Government has been involved in some publicly released weather modification dating back as far as the 1950s.  There has been some legislation proposed but not passed back in 2005 and 2007.

Either we dropped the ball on the technology that could potentially weaken these deadly storms or the U.S. government is less forthright than red China.

On a side note, it is certainly interesting that the climate change propagandists seem to revel in these monster storms.

Wednesday, October 17, 2012

The Business Cycle is Caused by the Federal Reserve's Low Interest Rate Policy.

In a free market, interest rates are set by supply and demand.  Rates adjust up or down as the public changes its opinion on the premium one dollar in the future should have relative to a dollar today.

The meeting point of the supply and demand is the natural interest rate. The banks don't care what the rate is. They make money on the spread between the lending and borrowing rates. Their real profit comes from lending more money then they take in through the magic of fraction reserve money creation.   See here for more.

There is a major difference between a low rate caused by free market forces and one set there artificially by edict of the Federal Reserve. The first scenario is a healthy environment to embark on long term projects. The second scenario however is a disaster waiting to happen. 

In a free market where rates are low, that signals to an entrepreneur that there is a good deal of savings in the economy.  Rates are low precisely because of the abundance of capital.  That savings will be available to be spent upon the completion of the project.  In a Fed induced low interest rate environment however, borrowers are tricked by a false signal. The savings indicated by the low rates do not actually exist.  When the time comes to cash in on the investment the money was borrowed for, there will be limited power to purchase the goods than was anticipated on the outset.

Multiply the decision making process of one person by millions and you can clearly see how the Federal Reserve is behind the boom bust cycle. When the artificially low rates kick off the decision to build houses or other capital projects, the economy does in fact see increased activity. The Fed appears to have successfully ended a recession with its low interest rate policy. In fact all it has done has set the economy off on an unsustainable boom which will always be followed by a bust.  If the interest cost was too high, people would have taken a pass on the building the house, until there was sufficient savings. If the interest rate is low however, they will decide to go ahead with the project. 

Typically there is no analysis made as to why rates are low. People simply calculate whether they can make a profit by borrowing the money at the available price.  Even the savvy investors who know the situation is artificial often feel compelled to participate expecting they will be able to exit in time.  To the market as a whole unfortunately there is no possible salvation. The necessary savings simply doesn't exist.

The process repeats with each round of the business cycle getting more and more dramatic. The last two rounds have ended in a mania as the price of internet companies and housing respectively were bid up to the astounding levels only to come crashing back down during the bust phase of the cycle.  The real pain and suffering caused by the Fed fixing market prices for interest does exist however and like the severity of the cycle is only getting worse through time.

Friday, October 12, 2012

A US Government Default - The Fed will let it happen in order to save itself.

The US government debt and unfunded liabilities are too large to ever be repaid.  Any serious analyst knows this.  The question is when do these debts become too large to service.

There will be a point that the U.S. government not have enough dollars to fulfill its present obligations.  That is when the US will default.  The Fed will let it default in order to save itself.

Remember there are only two ways the government can collect revenue.  It can tax or it can borrow.  The Federal reserve is the one with the printing press, not the government.  The government must borrow the money by issuing bonds, notes and bills.  The Fed then monetizes the debt by creating the dollars out of thin air to buy the bonds when it engages in quantitative easing.

The debt is constantly being rolled over plus new debt is added to fund the current years deficit.  All of this is possible now because the interest rates demanded by the market are so low.  The Fed has been able to soak up supply without spooking the rest of the market into demanding higher rates.

When the interest rates do rise, the additional nominal interest on the debt in dollars will increase.  This only applies to new debt issuance, but since the government is constantly issuing new and rolled over debt it is a constant concern.

There will come a point when the US will default.  It is inevitable.

That point is when the higher interest payments required by the market in dollar terms exceed the amount of new debt the government can issue.

An example will clarify.  Suppose someone has $100,000 in credit card debt at 1% interest.  He has to pay $1,000 a year to cover the interest burden.  Now suppose like the US government he also runs a deficit.  It doesn't matter what his salary is.  The point is he spends more than he earns.  Say his personal deficit on present items is $5,000.  That plus his interest on his debt is $6,000.  This means in order to stay solvent he has to borrow an additional $6,000.  His new debt is $106,000.

This can continue forever if interest rates stay the same and he is able to borrow unlimited amounts with his line of credit. The problem occurs when rates rise.  In the real world, the act of borrowing more money will in and of itself cause you to have to pay a higher interest rate.

In this example if the credit card issuer were to realize the real default risk and suddenly adjusted his rate to a more realistic number of 6%,  the interest payment on $106,000 would be $6,036.  At that point he cannot continue the can kicking.  The increased dollar cost of interest exceeds the $6,000 he needs make the payments on his already existing debt and yearly deficit.

When will this point occur for the US government?  It will occur when existing debt holders stop buying new debt in larger dollar amounts than the Fed is doing in QE.  Technically the Fed could create the money to buy all the bonds needed to finance the debt and current deficit, but that would certainly be the death of the dollar as a currency.

If one assumes the Fed would like to survive, it needs the dollar to not completely hyperinflate to worthlessness.  The only way to do that would be to not buy the bonds when the market is panicking to unload them.  Let interest rates rise and yes let the US default on its debt.

Tuesday, October 2, 2012

Uh Oh, Big Pharma is Sending Out the Call to its Media Mouthpieces to Try to Trounce Parental Rights.

If ever we needed a reminder that the NJ Star Ledger is a mouthpiece for big government intruding on personal liberty this is it.  In this case, big pharma sent out the call for some heavy lifting and this article was the result.  Article linked here:

In a free society people have the right to choose how best to live their lives.  NJ law currently requires that all kids in day care or nursery school have an annual flu shot unless they write letter claiming a religious exemption.  As absurd is this requirement already is, they want even more compliance and are pushing for parents to jump through even more hoops.  The poor will have to comply but the wealthy will pay for an attorney to take care of the process.  

As a parent, it is my choice to decide how best to weigh the risks and rewards of everything in life.  I choose to have them vaccinated against the Pertussis, diptheria, tuberculosis, measles, mumps, rubella, chicken pox, hepitita A, hepititis B, polio, pneumococcal bacteria, and Haemophilus Influenzae.   Most of these require multiple vaccinations.  Some have to be given 5 times.  In my view that is already a lot for their still developing immune systems to handle.  I choose to space them out a bit more than the CDC posts as their recommendation.  

I choose to skip the annual flu shot and will also be passing in the cervical cancer vaccine.  In my opinion the risks to not justify the rewards on the latter two.  The flu shot is largely ineffective as it by necessity is using last years strains which have since mutated.  Contrary to this article's statement, it often does contain thimerisol which contains toxic mercury.  The cervical cancer vaccine has caused death and also paralysis.  Google it yourself for more information.  The odds are not great, perhaps one in 10,000 or larger have a serious reaction, but the decision for my child's health is mine not big government or big pharma.

Governor Christie ran on a platform that included increase parental involvement in vaccine decisions.  So far he has done nothing to try to repeal the draconian mandatory flu shot vaccine.  At the very least he can veto this atrocious bill if it does pass the state senate.