Business & Economics: March 2013 Archives

Everyone in the world with a bank account broke into a cold sweat when they learned about the EU and the Cypriot government raiding private bank accounts to bailout the banks. That could never happen here, right? Well, what's happening in the United States is much more subtle and also much more sinister. Thomas Sowell describes how inflation is worse than stealing bank deposits.

Does that mean that Americans' money is safe in banks? Yes and no. The U.S. government is very unlikely to just seize money wholesale from people's bank accounts, as is being done in Cyprus. But does that mean that your life savings are safe? No. There are more sophisticated ways for governments to take what you have put aside for yourself and use it for whatever politicians feel like using it for. If they do it slowly but steadily, they can take a big chunk of what you have sacrificed for years to save before you are even aware, much less alarmed.

That is in fact already happening. When officials of the Federal Reserve System speak in vague and lofty terms about "quantitative easing," what they are talking about is creating more money out of thin air, as the Federal Reserve is authorized to do -- and has been doing in recent years, to the tune of tens of billions of dollars a month.

When the federal government spends far beyond the tax revenues it has, it gets the extra money by selling bonds. The Federal Reserve has become the biggest buyer of these bonds, since it costs them nothing to create more money.

This new money buys just as much as the money you sacrificed to save for years. More money in circulation, without a corresponding increase in output, means rising prices. Although the numbers in your bank book may remain the same, part of the purchasing power of your money is transferred to the government. Is that really different from what Cyprus has done?

The Fed has been printing money at a breakneck pace for five years now and we haven't seen a lot of inflation, right? Well, except for food and energy, which are conveniently excluded from "core inflation". Health care, ammunition and guns have gone up a lot, too. What's more, prices for goods that should be declining due to information technology improvements may instead be staying level, but that's a net level of inflation that's hard to measure.

Inflation has numerous advantages over stealing bank deposits:

1. Inflation lets the government tax everyone in the world who uses dollars. All dollars everywhere are devalued, which basically let's us "tax" all the countries and organizations who hold trillions of dollars in their foreign reserves. The Chinese can't just divest themselves of all those dollars, but they do complain a lot.

2. Inflation reduces the value of our national debt and deficit. This is the reason that I'm convinced that inflation is a goal for our government. There's simply no other way to pay off the debt we're accumulating. This is a good reason to be a borrower right now, as long as you can borrow at a fixed interest rate.

3. Equities and capital assets can float with (moderate) levels of inflation.

4. A weaker dollar enables greater US exports of all kinds.

5. Inflation helps moderate sticky economic factors, like wages and house prices. Unemployed people are very hesitant to accept jobs with a lower salary than their previous job. Homeowners are very reluctant to sell their house for less than they paid. Inflation allows salary and house price numbers to go up even though the value is going down.

So what's my advice?

1. Borrow at low fixed interest rates. Pay off your loans as slowly as possible, because future dollars will be worth much less than current dollars.

2. Don't sit on a lot of cash. Be fully invested in equities and hope they float with inflation.

3. Don't lose your job.

After quickly checking to make sure that my bank is wholly owned in the United States I literally laughed at Europe's new bailout template.

The euro fell on global markets after Jeroen Dijsselbloem, the Dutch chairman of the eurozone, announced that the heavy losses inflicted on depositors in Cyprus would be the template for future banking crises across Europe.

"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'," he said.

"If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders."

As Willie Sutton explained with regards to his bank robberies: "because that's where the money is".

Dijsselbloem's assessment of the economic incentives is basically correct:

"If we want to have a healthy, sound financial sector, the only way is to say, 'Look, there where you take on the risks, you must deal with them, and if you can't deal with them, then you shouldn't have taken them on,'" he said.

So now depositors have to share risk with shareholders, bondholders, and taxpayers. Most depositors aren't interested in that kind of arrangement, and they'll start withdrawing their money. Reserve ratios will drop. Interest rates will increase. Eurozone deficit spending will get even more expensive. The end of the euro.

What does it mean to "consider the impact on global warming" before the federal government approves development projects?

President Barack Obama is preparing to tell all federal agencies for the first time that they should consider the impact on global warming before approving major projects, from pipelines to highways.

The result could be significant delays for natural gas- export facilities, ports for coal sales to Asia, and even new forest roads, industry lobbyists warn.

"It's got us very freaked out," said Ross Eisenberg, vice president of the National Association of Manufacturers, a Washington-based group that represents 11,000 companies such as Exxon Mobil Corp. (XOM) and Southern Co. (SO) The standards, which constitute guidance for agencies and not new regulations, are set to be issued in the coming weeks, according to lawyers briefed by administration officials.

Stanley Kurtz says that Obama has found a way to shift blame for environmental restrictions from the government to environmental groups.

But let's concentrate on Keystone. The Bloomberg report makes it clear that Obama's order opens the way for further litigation and substantial delays on Keystone, whether the federal government officially blocks construction or not. That's because NEPA allows citizens and environmental groups to file claims against projects even after they win government approval.

So the Obama administration could green-light the pipeline, file a report that stops short of calling Keystone a major global-warming hazard, and still find the project delayed for years by environmental groups bringing court challenges under the new NEPA guidelines.

In this scenario, headlines loudly proclaiming Obama's approval of Keystone would shield him from Republican attacks. Simultaneously, the president could mollify the left by claiming credit for guidelines that effectively allowed his allies to stop the pipeline. And that would be right. Obama can publicly "approve" Keystone, while simultaneously handing the left the tool they need to put the project on semi-permanent hold. Environmentalists would take the political heat, while Obama would get off scot-free. Pretty clever.

By creating an opportunity for outside groups to challenge projects in court on global warming grounds Obama may have opened a can of worms. Will the most extreme environmental groups allow anything to be built without their blessing? What rents will they extract with their new standing to sue?

James Altucher interviews Alex Day who gives a first-person account of how to make success in the new economy.

I'll get to the meat of his story in a second. But basically, with no record label and mostly just the suppot of his YouTube fans, he released his latest album in the UK the same day Justin Timberlake did.

Here's the result:

Read the whole interview and then watch Alex's video about why record labels are rubbish.

I'm on the edge, but my kids will live entirely in this new economy.

Mo' money, mo' problems? Apparently the ideal salary isn't infinity, at least if you're trying to maximize your happiness.

Additionally, the trend data shows quickly diminishing returns on incremental salary as employees near the $200k mark. Across all industries, professionals reported being less happy the more money they made after $170,000 per year. Think about that: on average, professionals making $240,000 a year reported being slightly unhappier than those making $40,000.

So who is the prototypical happiest worker in the country? Drumroll please...our analysis shows that a city-dwelling techie, who works in the northeast during the spring months, and makes six figures (but under $200k) is the happiest employee in the country. Conversely, if you find yourself working a sales job in Sacramento, perhaps this research will persuade you to pack your bags and take a cross-country road trip this spring.

Of course, there are probably correlated factors that go along with higher salary that make people unhappy, and it might be possible to reduce those factors while still making a lot of money. In theory anyway!