Monday, April 27, 2015

Do You Believe $70,000 Minimum Wage?

You heard this story - 
Dan Price, founder and CEO of Gravity Payments, shocked everyone last Monday, including his 120 employees, when he announced that he would raise the minimum wage at his credit card processing firm to $70,000 a year
And here is his reasoning...
In 2010, he read a study published by two Princeton researchers declaring the happiness tipping point to be roughly $75,000; the authors said anyone making much less would be prone to emotional pain and general dissatisfaction."That had a big impact on me," Price says. So much so that he started crunching numbers, hoping to figure out a solution for his own employees.
Price is smart guy.  He knows one study is not science.  When was the last time you reorganized your life over a magazine article?  So he cut his salary from $930,000 and raised his lowliest worker to $70,000.
Price, the New York Times reports, drives a 12-year-old-Audi and isn't much for extravagances. He told them he will slash his own salary from nearly seven figures to $70,000 in order to actualize his new definition of minimum wage. He also told the Times he plans to direct a large chunk of his company's estimated $2.2 million in profit this year towards salaries.
Gravity is a credit card processing company, so he is an accessory to the banking industry.  He won "Entrepreneur of the Year" (what is that?) award last year, which celebrated him mightily, so he has a tremendous PR machine.

Remember: property, paycheck, pension and portfolio are all forfeit in credit deflation.  To cut his salary from $930,000 to whatever, and to distribute the estimated $2.2 million in profits is just to keep it from Uncle Sam.

The devil is in the details.  What happens if competition not paying $70,000 a head beats him on proce in a commodity service business?

Watch insider transactions closely.  He has mentioned he picked up new clients for this news, and perhaps he is primping for some untold move.

Charles Keating was notorious for paying his secretaries up to $250,000 a year (in todays dollars.)  So yes, this may sound cynical, but sometimes you have to behave very cynically to do the right thing.  Price may see the game is over, and is throwing out some crumbs (for how long does he actually need to cut checks in this amount to achieve his goals?)  but this strikes me as yet another  example of the smart escaping into anarchy from the chaos of hegemon.

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An Edifying Anarchist Essay

Ricardo sends shares this link:
Similarly, a freed society and freed market don’t guarantee that nothing bad would ever occur. Non-libertarians often ask libertarians what would happen with neglected and abused children or mistreated animals—the list of possible abhorrent acts is endless. Our interlocutors are unfazed by the fact that all societies have such problems, even those with the most activist governments. It’s always possible for unfortunate people to fall into the cracks, so it is no blemish on the libertarian philosophy that it can’t offer an ironclad guarantee against such things. All it can assure is that wrongdoing won’t be paid for by taxpayers (because no one will be a taxpayer). We anarchists can also assure that, for obvious reasons, no abuse will be committed by government officials.
Sounds like me I am told, and Reason magazine is fairly mainstream.  Good tos ee ideas making it forward.

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Sunday, April 26, 2015

Would Capitalism Ever Allow A Hong Kong To Thrive?

Here is a fine success story from a territory the USA needs to emulate:
On paper, Lai’s early life would seem unlikely to produce a “real hero.” He was born in China the year before it fell under Mao Zedong’s dictatorial rule. Lai was smuggled out of the country and into Hong Kong at age 12. In the absence of child-labor laws, which would have ensured his deprivation there, too, Lai went to work in a garment factory for $8 a month. Fifteen years later, he bought his own garment factory and built it into the giant known as Giordano, now a leading international retailer. Lai’s boundless entrepreneurial zeal, free to operate within Hong Kong’s laissez-faire business environment, yielded jobs for thousands and consumer goods for millions.
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Is Communism is More Reliable for Business than Capitalism?

Comes HSBC, a Scottish company, with the news:
A Conservative spokesman declined to comment on HSBC's announcement, but said Britain's future membership of the EU was a decision for the British people.Labour's plans to raise taxes on banks if it comes to power may also influence HSBC. The bank is already expected to pay $1.5 billion under a UK bank levy this year, or about 7 percent of expected profits because it is taxed on its global balance sheet. That charge is up from $1.1 billion last year.
It takes 15 years to recover your money form a high rise.  In 1982 bets had to be made on whether Chinese Communists would leave Hong Kong along or not after the handover in 1997.  Jardine Mathison bet not, and move to the Caribbean.  Bad call. Hong Kong & Shanghai Bank (a Scottish company), (HSBC) bet yes, with a hedge.

HSBC announced in 1982 it was building a fantastic, futuristic new headquarters in prime real estate in Hong Kong Central. Very pleasing vote of confidence in Chinese stability after the handover.

Within a few years the building was constructed, and an odd thing it is.  It looks rather like a Erector Set Toy, like it could be taken down easier than it went up.  Well, it could.  The whole thing is drop in, bolt on, plug and play building.  Plus, HSBC bought a platform in Australia, which if need be, and HSBC took down this new building, shipped it to Australia and rebuilt it, they could.

So they bet, with a hedge.  If things went band, HSBC could pack up their building and take it away.

Another reason I like that bank so much.

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Central banks Now Buying Negative Yield Bonds


When the central bank bets on bonds that guarantee to lose money, should you notice?
The European Central Bank started buying covered bonds with negative yields as its asset-purchase program reduces the supply of the highly rated debt, according to two people familiar with the matter.
...
“The ECB has caused this situation by being a big buyer and has exacerbated the already negative net supply of covered bonds,” said Joost Beaumont, a fixed-income strategist at ABN Amro in Amsterdam. “If the ECB buys more, yields will go still lower and that’s going to affect the ECB itself.”
...

The ECB, which is also buying government bonds and asset-backed debt, has said it will buy negative-yielding securities up to its cash deposit rate of minus 0.2 percent.
...
“Supply in positive yields is getting scarce and the ECB may have no other choice to fulfill its targeted purchase volume than to buy negative-yielding bonds,” said Tobias Meyer, an analyst at Norddeutsche Landesbank in Hanover, Germany.

So deflation is a monetary event in which currency is destroyed, and herefore prices fall.  Credit deflation is a monetary event in which credit iss dtroyed and prices of things denomited in credit fall.   Seciurities are real estagte are largel denominated in credit.

Bu prices are rising in bot right now.  Yes, but at a negative interst rate, the tide has turned.  Negative .02 % interest is not an anomaly, it is just the start.  Not a warning signal for the bankers to adjust, the warning signal the bankers cannot adjust.


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Saturday, April 25, 2015

The Origins of Money: Labor Extending Credit

Yesterday I left out one huge pool of usury-free credit extended: payroll.  Back in the day people were often paid monthly, because they settled up their tabs around town monthly.  But whether you are paid bi weekly, weekly or end of the day for that matter, an employee extends his employer credit (pay owed) for the length of the pay period.

So when I said
So woodsmen fell oak trees, who sell to saw mills that create staves, which are sold to coopers who make barrels, and in turn are sold to breweries who fill them with water, barley and hops, who in turn sell them to pubs.  Every step of the way each level gave the next time to pay, extended credit at no interest.  At the end of the day the woodsman, miller, cooper and brewmaster gather at the pub and have a beer.  At the end of the month they pay their tab, and the real bills are successively extinguished all the way back.  Mostly credit in this system, the free market.
Who went first?  Who extended credit?  The workers in pre-history, as agriculture spread, the workers agreed to share produce with a guitar player to play and sing as the others worked.  Artists are the only people who create something of value which does not require extinguishing something before or after. This practice of supporting artists to make life better introduced the concept of credit, and from there it advanced division of labor, innovation, specialization, and an economy. 
Add in the "float" of all those employees and contractors nationwide, adding daily the money due them for work, for however many days of the pay period, as credit extended to the employers, the businesses.

Along with the artists, those extending credit as laborers who actually produce goods and services go the whole economic system kick-started.

Prediction: pay period begin to elongate as people realize the longer they wait for their money the harder the currency in which they are paid.

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Friday, April 24, 2015

Wait... Is It Credit Hyperinflation?

Many Austrians saw the USA QE as a precursor to hyperinflation, for example, Dr. Gary North.  On the other side Mish said no way.  The two traded barbs, and Mish had the better of it with his insight as to QE is credit expansion, a monetary event, but not currency expansion, an inflationary event.

Yes, the head aches at this arcania, but it matters as you place your bets.

When we have hyperinflation, the value of the currency is destroyed as it goes down to worthless.  I was gifted some trillion dollar Zimbabwe notes a few years back.  A one hundred trillion dollar note reflects currency inflation, and monetary event.  The impressive numbers reflect the degree to which currency was printed, created, to pay bills when there was no money in the till.  One might guage the trust



Now, what if instead of printing currency like drunken sailors who found a press, we had wicked central bankers issuing credit with the reserve of drunken sailors. Would we not then have hyperinflation in credit?  That is the value of credit issued goes down to zero?  Or negative?  Like a Zimbabwe 100 Trillion dollar note?

If prices are falling, who wants to owe $500,000 on a million dollar home purchased today, that will valued at $100,000 in ten years?

Falling prices while benefits increase does not stop anyone from buying today, as we see in Apple products.  But it does dissuade people from using credit at interest to buy.

Prices fall for various reasons:

1. Wicked bankers flood the market with EZ Cheap credit and the unscrupulous use it to roll-up whole industries.  This is destructive.

2. Some temporary event, like a bumper harvest of peaches brings the price down for everyone.  This is neutral.

3. The economies of scale are applied to innovative, specialty products over time by larger commodity producers and are able to offer more, better, cheaper faster whatever to a market the innovators could not service.  This is beneficial and the process in free markets.

We are always in some mash-up, more or less, of all three.

Now, I have been pushing credit deflation as a theme.  I wonder, is what we are seeing credit hyperinflation?  Given negative interest rates, is asset-less-backed usury-based credit too plentiful to be of any value?  Is it now priced in the negative (well, yes) like the money lost bothering to print a 100 Trillion dollar note?  Has there been a crash in the wicked kind of credit?

We need more of the good kind of credit, non-usurious freely offered among traders, like the Swiss have in their WIR.

The root of the word prosperity is spes, hope.  Price reduction is fundamental in prosperity, for dreams of contributing are realizable (what?  the unseen!) ...  you can dream of providing a value and there are not predators awaiting to legally lend you air and take away your home if you fail...

Your suppliers finance you, you your cusotmers, and the customers eventually extinguish your debts...  customers is were we need to shift focus, away form bankers.

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eBay and Credit Deflation

Another one in trouble, eBay in stock buybacks and spinoff of its PayPal funny money processor...
On July 18, for example, eBay reported it had bought back $355 million of stock during the second quarter and would repurchase $2 billion additional shares. The primary objective, the company said, was to offset the additional shares being issued as compensation.
Our rules reveal our weaknesses:
"We are deeply committed to setting up eBay and PayPal to succeed and to deliver sustainable value to our shareholders," Donahoe said.
...
For the quarter ending March 31, marketplaces revenue fell 4 percent to $2.07 billion, hurt by the stronger dollar. But the company said it sees signs of stabilization in active buyers and gross merchandise volume, or the total amount of goods sold, excluding the impact of the stronger dollar.
So the question is how will they offer a value to shareholders (isn't value something you offer to customers?)  That falling dollar trope again...  the game of laundering profits overseas no longer works in credit deflation...  "signs of stabilization?"  Like McDonalds, just what is the plan?  No plan, really.  Noting can be done when the business you built is predicated on EZ cheep credit.

For the last forty years the mantra pushed by the FEDS was "get big or get out. "  Now the mantra is "If Big, Viability in Doubt."

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Austrian Economics and Deflation

Jesus Huerta de Soto is an Austrian Economist with fairly conventional views:
You already know that the state is the embodiment of evil and the source of all the ills that afflict humanity… One of these ills, as we will analyze in a moment, is deflation deliberately induced for political reasons or caused by errors of the state.
But he also holds a controversial view:

... we need a single currency which cannot be manipulated by each nation state, and which somehow simulates the functioning of the gold standard. Nowadays that currency, as you know and I have tried to articulate in various academic papers and, on a popular level, in my article and film, “In Defense of the Euro,” is the euro.

Millions have scratched their heads over that one...  the euro is a state creation.  But he has some interesting things to say about deflation:
According to Mises, deflation is a monetary change which consists of a decrease in the money supply. Or, to put it another way, an increase in the demand for money (to decrease supply is to increase demand).
Any contraction in the supply of any good or service brings about a relative rise in scarcity, and thus also a rise in the price, which is affected by the contraction in the supply. In this case, the contraction is in the money supply, and the effect, other things being equal, is an increase in the price of the monetary unit (the price of money is its purchasing power).
Yes, this is basic, if the terms hold their definitions.  He goes on and gets to this:
At that moment, a financial crisis erupts, because it becomes clear that a large number of the loans banks granted during the stage of credit expansion were granted for unviable or unsustainable investment projects. Furthermore, since the collateral for those loans from the bubble stage are deposits created from nothing (which, with all due respect to the new real-bills theorists, are money), it is revealed that banks’ assets have only a fraction of the value that was thought, while banks’ liabilities remain the same, and thus the entire banking system is in a state of failure. 
No!  His definition of money slips.  Real bills are simply receipts of some sort, I owe somebody $500 for materials in my warehouse, my customers owe me $2000, and I have the BsL and Invoice copies to prove it, a warehouse has issued a receipt for $20,000 worth of whatever I am storing.  All this is called commercial paper because it is recorded on paper.

When I give my customers 30 days to pay, I have not "created money."  I simply created credit, but even there not really, since there is an asset backing my loan, legally a call as much of the money my customer makes necessary to cover what I in effect loaned.

So real bills is actually the heart of human history, but where it goes wrong, as usual, is when bankers start creating derivatives, discounting the paper incoming and lending it at usury outgoing, then getting more and more reckless with mismatched maturities, fractional reserve, then bank runs, then... a call for a bank of last resort, the FED.
This is where a highly curious phenomenon occurs; I call it “the phenomenon of the pyromaniac firefighter.” For one of the most important conclusions to be drawn from the existence of this fractional-reserve system is that its survival depends on a lender of last resort (or central banker) who, as these errors are regularly discovered, heads off the collapse of the entire monetary system and our ultimate return to the very beginning of the process of monetary development, which would be a social tragedy, because as you know, money is the quintessential social institution, and we cannot do without it, not even in a fractional-reserve banking system like the current one.
"Like the current one" is referring to 2008.  Anyway, who is "we?"  If money is properly defined, then clearly he is wrong, for most people in most of history never handled money.  Almost all human interaction, quantitatively has been on credit.  Disaster comes and goes in direct relation to the degree the credit is asset-backed on one hand, and non-usurious on the other hand.  Let either go, disaster follows, let both go and disaster is exponential.  Both are gone wild.

Yes, sometimes debts are extinguished with money, usually by silver for the poor and gold for the rich, if all of human history is any guide.

So woodsmen fell oak trees, who sell to saw mills that create staves, which are sold to coopers who make barrels, and in turn are sold to breweries who fill them with water, barley and hops, who in turn sell them to pubs.  Every step of the way each level gave the next time to pay, extended credit at no interest.  At the end of the day the woodsman, miller, cooper and brewmaster gather at the pub and have a beer.  At the end of the month they pay their tab, and the real bills are successively extinguished all the way back.  Mostly credit in this system, the free market.

Who went first?  Who extended credit?  The workers in pre-history, as agriculture spread, the workers agreed to share produce with a guitar player to play and sing as the others worked.  Artists are the only people who create something of value which does not require extinguishing something before or after. This practice of supporting artists to make life better introduced the concept of credit, and from there it advanced division of labor, innovation, specialization, and an economy.  But back to the writing of Jesus:
Imagine what would have happened in the last cycle, which has just concluded, and from which we are beginning to emerge, if states had reacted just as Hoover and Roosevelt did. We would be in a severe depression with much more serious deflation. And it would not be owing to a lack of money injection by central banks, but to errors of specific economic policy. Or, to put it in today’s language, a failure to have implemented the necessary economic-liberalization reforms. 
Ungh!  Now he may be right, we are emerging from the recession, and the QE etc is all working well.  But my head aches to hear this from an Austrian.  But heck no, he is so far off track, and how come?  Definitions: money, credit and an acceptance of the charging of interest.
It is time for us to pause and think a moment. If, as a result of a process of productivity growth, particularly in this stage in which the economy begins to recover, the production of goods and services should grow faster than the money supply, which would mean an increase in the purchasing power of the monetary unit, economic agents, who are very nimble negotiators of their borrowing and lending operations, would take these deflation expectations into account and incorporate them when reaching an agreement on the corresponding market interest rate.

His whole article is supercilious and at times sacrilegious.  Free markets came to North and West Europe via Islam up through Spain, the Spanish scholastics who passed it on to the French, in turn to the Scottish Catholics and absorbed by Scottish Protestants who landed it in Hong Kong and USA at the same time.  Spain owns free markets, having seized the ideas from the Moslems they conquered.  It is sad to see it given up so easily.  I can only guess de Soto believes the euro is here to stay and is betting on a nice sinecure as some director.  Well, everything on red.
We could go a step further and add, as Mises does, a component for pure entrepreneurial profit. We could even make a concession to the absurd new real-bills doctrine because, sure enough, to the extent that those loans are short-term secondary media of exchange, they will have a negative premium, because they are very liquid, but we will set this topic aside now…

Absurd?  Well, if real bills includes bank brokering and the problems of discounting incoming and usury-based outgoing, then it is fraudulent, but quite rational. 
Moreover, this happens with greater intensity the closer the nominal interest rate gets to zero; but as is logical, in no case will the nominal interest rate become negative.
But there are bonds at negative rates! How can de Soto, Mish and others say this when in fact bonds are sold at a negative interest rate:
 The Swiss bonds were sold at a negative 0.055 percent rate and were comfortably gobbled up on the market. Their eventual yield, in 2025, will be a modest 1.5 percent. The amount sold was $241.3 million.
Yes, the face value is 1.5% on the bond, but people are buying that promised interest rate to be paid out in 2025, today at a negative interest rate.  People see that the interest rate is negative, and they still buy:

http://www.investing.com/rates-bonds/switzerland-10-year-bond-yield

So, yes, bonds are sold at negative interest rates.  That bridge has been crossed.  What Mish and de Soto are saying is  "it will never happen that the Swiss or anyone else will issue bonds offering negative interest rates, for why would people wittingly buy bonds at a negative interest rate?  

Again, that bridge has been crossed.  What deSoto and Mish et al have not figured out is there are plenty of people who would rather lose 2% in ten years on Swiss bonds than 50% on stocks, real estate or any of the other bubble assets on offer right now.  Plenty of people see what deflation is, and that is the longer you wait to be paid, the harder the currency with which you will be paid.  Your 2% less in ten years will buy far more in deflation than what you'll get out of liquidating stocks in a decade.  Since that bridge has been crossed, I expect be "absurd" and "impossible" to happen: the Swiss and others eventually offer bonds denominated in negative interest rates.

Back to Jesus Huerta de Soto:
Even in the academic sphere, we must admit, as Mises did, that a sound, suitable, and complete theory of deflation is sorely missing. To remedy this academic deficiency, Professor Rallo, Professor Philipp Bagus, and I have devoted our efforts in the writings I mentioned at the beginning. 
Indeed, the topic is not very well understood.  We are in new territory.

At a conference on world trade and cross-border eCommerce, I had a chat with a senior international banker regarding credit deflation and such and he said the problem from the bankers point of view got down to one word:

trust

Banks cannot trust anyone's word any more, top to bottom, left to right...  government or private.  All that paperwork is untrustworthy, performing due diligence gets you nothing, and few assets are marked to reality.

Credit is at its root trust.  The trust is gone, and so goes their system.  We once had a system in which the players all knew each other, trusted each other, behaved for each curbed the enthusiasms of others, and it all worked well.  I saw if, or the tail end of it.  I watched the change to inflation-based economy, and the destruction therefrom.

We will go back, but who knows what adventures between now and then.

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Thursday, April 23, 2015

Cal Poly SLO World Trade Start Up Boot Camp

You can get going in international trade in a one day live, in-person intensive held at Cal Poly SLO, which is exactly midway between San Francisco and Los Angeles, so it serves both communities as well as the central coast.  Make a weekend of it, May 9, 2015.  Details here...



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