Well, tonight’s South Park took on the economic collapse. If that’s not a sign of the market bottom, I don’t know what is!
Archive for March, 2009
Want to hear what’s going on at AIG from the perspective of one of it’s executives? Even if you are as angry as the pundits and politicians claim everyone is about these bonuses, this acts as a reminder that it is far too easy to generalize a problem that may be localized and be misdirected by those seeking to take advantage of your our ignorance and emotions.
Via the New York Times: Dear A.I.G., I Quit!
You may or may not have heard that the Fed is doing something it hasn’t done in about 40 years or so. They are going to buy long term Treasury bonds straight from the Treasury. This sounds crazy: why is the government buying something from itself, what is that going to accomplish?
I would be disingenuous to suggest I fully understand. But here is what I do know. The Fed is scared of deflation, probably because Ben Bernanke (the fed chief, see picture) is a student of the Great Depression. One of the many mistakes that made the Great Depression so “great” was that the fed was too “tight” with the money supply. This means that they did not print enough money to satisfy the number of goods and services in the economy. This creates deflation (drop in prices). At first glance, deflation may sound like a good thing since everything becomes cheaper. The problem is, when people expect prices to be less in the future they stop spending money while waiting for prices to drop further. This crushes the economy, and eventually we would have to settle for smaller paychecks. People generally don’t care for shrinking pay, therefore, the Fed tries to keep inflation small and positive to give them enough buffer against deflation.
In the current crisis, people stopped spending money out of fear and the lack of available credit. This drop in “velocity” also can cause deflation since retailers will be forced to drop prices to keep selling their wares. The only way for the Fed to counteract this is to print more money. Usually, they do this by dropping their target Fed funds rate and then buy and sell treasuries (US bonds) on the open market to keep the rate at that level. The lower the rate, the more new money gets into the economy. The rate in currently near zero, so the Fed is pumping money as fast as it can using the market. Since it would like to put more money in it’s only avenue is to “monetize” the debt. This is where it gets fuzzy for me.
Monetizing the debt means it buys treasuries straight from the Treasury (follow?). Then the Treasury uses the money like it would any other money it raised from selling bonds, to finance the government. Instead of taking money out of the economy by selling bonds to people, the bonds are bought with newly printed money from the Fed. Thus, the newly issued debt is turned into new money and the new money is put into the economy. This, I believe, is where the term monetizing the debt comes from – turning debt into money.
Now, this opens a whole can of worms I can’t get into in this post as to whether this is a good or bad idea and what the consequences are. I wrote this, first, to see if I understood it, and second, to try to relay the information to those even more layman than me. Here is how I see it as of now. There are many people who are not worried about deflation as much as the Fed, and some who are much more worried about inflation (which happens when the Fed prints too much money). The Fed is definitely printing a TON of money. The likely outcome is we will avert deflation easily and economic growth will resume in the about another three months. The Fed will not be able to soak up all the extra money as well as it needs to (something it promises to do) and inflation will be high over the next couple of years. This is a hit we will just have to deal with because a little too much inflation is a much better outcome then even a little deflation.
I hope this is fairly clear to most, but if there are any questions please leave a comment. I’d be happy to update it.
I doubt many people reading this would have much experience with the subject of this post, but now that I have started to establish my presence here, I would enjoy some responses to what I’ve been saying. For now, I will settle for anything, so even if you don’t have an opinion or question on the subject, just say hi or something off topic. Feel free to comment on previous and future posts as well. 🙂
I bought a house in 2006 and while the house was in good condition, the yard and surrounding area was very neglected. For the past 2+ years I’ve been repairing it and trying to spruce it up. Currently, I am working on filling out my lawn. This is kind of a daunting task because I have no experience and there is a lot of mistakes one can make. I’m trying to go all out while not breaking the bank. Meaning I’ll do everything I can that is a reasonable cost.
Apparently, an important part of making a lawn look good is a process called overseeding. With overseeding you prep your lawn and then throw seed down over the whole thing to try to fill in bare spots and make the lawn more dense overall. Apparently, this is more effective in Fall, but it’s Spring now and I am impatient. I found advice online that rye grass has the best chance at germinating enough before it gets too hot, so that’s what I bought.
As for prepping the lawn. I am having the soil tested at a local lab for pH and fertilization levels ($15). I also am having my lawn professionally aerated which only costs $40, less expensive than doing it myself. Beyond that, you are supposed to cut the lawn very short right before you throw down seed which I haven’t decided if I am going to do yet since it makes me nervous. I did buy a new blade for my very old mower, so hopefully that will help.
Maybe I’ll put up some before and after pictures if it’s sufficiently impressive when I’m done.
Something you never knew existed may be one of the biggest reasons the economy has been in shambles for the past 6 months. Shortly after ENRON, the powers-that-be in their infinite wisdom reinstated (see below) some accounting rules called “Mark-to-Market.” These rules came into full effect in 2007, just in time to artificially exacerbate the downturn. Like most regulations, is sounds like a logical and down-right necessary rule. It says that companies must value their assets at the current market price and factor that into their bottom-line. What this means is when something is trading at 20 cents on the dollar, the company must subtract 80 cents for each of those dollars from their cash on hand and other assets, even if they don’t sell it and have no plans to. This is a problem, especially for banks. They hold a majority of these bad assets, called “mortgage backed securities”, that no one wants because no one understands how much they’re worth. Banks have capitol requirements in order to be considered solvent, but when they have to act like these 20 cent securities are real losses, they must hoard cash to make up the difference. Thus, they have no cash on hand to lend to others and we suffer the current “credit crunch.”
Notice at the beginning I said “reinstated.” This is because we have had this rule in practice once before. You may have heard of it. It’s called the Great Depression. Mark-to-market was in full swing early on until FDR got rid of it. Since then, we have had relatively smooth and prosperous economic growth, until now. Last week I wrote my senators and congressman and told them they desperately needed to get rid of M2M. I found out the next day that Brian Wesbury (my favorite economist) was asking his readers to do the same. This week there was a hearing on capitol hill concerning M2M and there is finally bipartisan support for its elimination (before now there was zero support). In true political fashion, congressman trucked in the regulators and chastised them on national TV as if Congress had not been equally an inept up until now.
However it happens, the elimination of M2M in its current form will mean a massive recovery in the stock market. If you are not already invested, you should be right now (assuming you have any money on hand). I am fairly confident that after we pull out of this, we will not see these market levels again. Meaning the stock market is now the cheapest it will be in any of our lifetimes. I’ve been investing the whole way down, and am currently down 40%. Any money that is put in now will be doubled just by the market getting back to the all time high (DOW=14,165). I have heard the peak is still a fair value if not slightly undervalued currently.
Politics – I enjoy politics, and I like discussing it intelligently with intelligent people without getting into arguments. I don’t want arguments exploding on my blog (assuming enough people eventually read it to have one), so I will probably keep politics to a minimum and as uncontroversial as possible. This doesn’t mean I don’t have strong beliefs, but I understand that there’s always room for refinement and the occasional complete revision (more on this later). I like to bring counter-intuitive ideas to people’s attention. By the way, I consider myself a Liberal Capitalist.
I just saved $345, and no, I didn’t switch to Gieco. I highly recommend getting a rental property, it’s a great deduction source. Originally, I wasn’t able to deduct my mortgage interest and property tax because I didn’t reach the standard deduction threshold. I submitted it yesterday, but then I tried putting those values in Turbo Tax under my rental property (I share my house equally with the guy I rent to so I call it 50%). This allowed me to take a deduction of half my interest and taxes paid without itemizing. On top of that, just for 2008, there is a standard deduction of up to $500 if you payed that much in property taxes. I payed just over $1000 in real estate tax in 2008. So half was deducted using the rental property and the other half with the standard deduction, all without itemizing. The trick is, when you have a rental property, you can include things such as depreciation to deduct from the amount you earn and even take losses. The losses are taken right from your AGI and not considered an itemized deduction.
Now I can mail in an amended return and only owe $200 instead of $550. Cha-ching!
Finance – Some may consider this similar to Economics because it also has to so with money, and I suppose it is economics on an extremely micro scale, namely a single person or family. Generally, I look for ways to best invest my money and use tricks to make a little cash on the side and try to earn the most interest on the money I’m saving. I try to keep the ratio of work involved/financial payoff as reasonable as possible. There are countless blogs about finance, and I would like to post things I find the most useful. I want to filter my favorite parts of what I read and put them here.
Economics – I have a deep interest in following current economic events and commentary. I am not formally educated in the subject. The only economics class I took was in high school, it might even have been middle school, I’m not sure. Still, I feel I am fairly well versed about the parts of economics that interest me, and I plan on reading a textbook someday and taking some classes eventually. For now, my economic opinions come from those I enjoy to read. I can see myself reproducing my favorite commentary here, likely with an extra jolt of optimism. On occasion people ask me what I think about what’s going on with the economy (especially now) and this would seem the perfect place to let everyone know. I’d like to keep it simple so most people would like to read it even if they don’t have much interest in economics itself. I think that’s going to be much easier said than done.
I think I might brainstorm out loud on what I’m going to talk about here. I guess the way I see it in the long run is a place to express my thoughts about current events relating to my interests. But the other point of a blog is for people to read it. Since I would call most of my interests intellectually intense and complex, I would like to find a way to lighten what I want to say and have posts that most people would like to read. People tend to like short and sweet blog entries, so the more concise I can say it, the better. Since I would like people I know to read this, I may fall back on traditional journal type entries on occasion if I do anything worth mentioning. Unfortunately, most of my days consist of thinking about complex (i.e. – boring) issues when I am not being social, so a day-to-day journal would probably not be interesting nor is it what I want. I will outline potential subjects in later posts.