Saturday, February 27, 2016

Housing Prices and Usury

Mish Shedlock Gets This Exactly Right:

Dual Mandate Equals Mission Impossible
Here's the deal.
1. The Fed can control money supply but it will have no control over interest rates (or anything else).
2. The Fed can control short-term interest rates, but then it would have no control over money supply (or anything else).
That is the full and complete extent of the Fed's "control". Note that neither price stability nor unemployment is in either equation. The reason is the Fed controls neither.
That is a mathematical certainty, yet people have preposterous beliefs that the somehow the Fed can not only control inflation but also unemployment.
If the Fed, the Bank of Japan, the Reserve Bank of Australia, the ECB, or the Bank of England, or the central bank of China could control the unemployment rate, rest assured they would have done so long ago.
The economic illiterates will point out the unique nature of the Fed's dual mandate, but I will counter with the mathematical stupidity of such an idea.
At best, the Fed can control (using the word loosely) a maximum of one thing at at time, and employment is not one of those things.
He does a very good job defending deflation (properly understood). Then he flubs this a bit...
Lower Prices Spur Sales 
People hold on to things when replacement costs are high. Lower prices, not higher ones, spur sales. Sales spur employment!
Think about cars. If prices dropped 20% would that spur cars sales? I think so. If you could replace your aging car 20% cheaper and it had more features, would you do so?
What if they rose 20%? My guess is that, all thing being equal, car sales would plunge.
Well, I watched auto prices rise 20% ...  and houses 50% over a short several year period, and sales of both jumped up.  So is he wrong?  Well, no because he added "all things being equal.."
What also changed was usury, "cheap interest rates" distorted a market already distorted by usury itself, in which one who could afford the payment on a $200,000 at 9% could afford the payment on a $300,000 house at 6%.   What happened (new market entrants, over time) is such people merely paid $300,000 for a $200,000 home.
And it gets worse, that local property tax jumped up 50% to with the nominal increase in the value of the house.  An increase of taxes without a vote!  No wonder government loves Wall Street.

Once the camel's nose, in the form of usury, is in the tent, the loan sharks then can do what they want, there are no rational limits.

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Friday, February 26, 2016

Money, Currency and Credit

No sane people ever let government get involved with money, currency or credit.  There must always be a strict separation of monetary affairs and state.

If definitions are kept straight, one can understand how the media of exchange operates in an economy (and at the same time understand the confusion introduced by the bad guys, leading mega-economist Galbraith to comment ‘The study of money, above all other fields in economics, is the one in which complexity is used to disguise truth or to evade truth, not to reveal it.’

First money, normally gold and silver in history, can be reviewed here.

Money is used to extinguish a debt, where no further business is anticipated between parties.  Think caravan trade.

Of course, perspicacious business can lead to accumulation, and some people find they have more money than they need immediately, and will store it in a bank.  But usually excess gold and silver would be converted into plate, decoration and jewelry, the more precious metal accumulated, the more luxury.  If "money" became scarce, then the plate, decoration and jewelry would be melted down, to match demand.

Now backed by the money in a bank, people once issued warehouse receipts, titles to the gold and silver, so they would not have to actually carry the gold and silver around.  This is good for ongoing relationships, and tends to finance in a pinch.  Or expansion.  The amount of these notes in circulation was pitch perfect to the commerce associated with the warehouse receipts, of course.

As an aside, warehouse receipts for fungible items such a olive oil, wheat, or say beeswax would also emerge as currency, again pitch perfect to the commerce between the parties involved.

Next there is vendor financing, as when a baker delivers 3 dozen loaves of bread to a grocer, and leaves a bill to be paid at the end of the month. The baker was also extended credit, by the miller, who received credit from the granary, which received credit from the farmer, who received credit from farm labor.  Again, this is all asset backed credit, matched perfectly to the demands of commerce, no more no less.

Only in utterly corrupt regimes such as ours does the question "what is the right amount of money" occur.  (Although the question is inherently obtuse: neither warehouse receipts nor credit is money.) In a free market, the perfect amount of money, currency and credit is always available.

Since capitalism is now in the vortex of its death spiral, people who have some claims warranted by portfolio statements, deeds of trust, pension promises etc are wondering how to escape the denouement.   The smart guys are advocating holding gold.  the same smart guys, though, will tell you as the price of everything drops, so will gold.  but gold will still buy what it did before, and maybe more... just as two silver dimes, 20 cents in 1962, would get you a gallon of gas in 1962, can be sold for silver for a couple of bucks and get you a gallon of gas in 2016.  Money holds its value, currency does not (hence the "right now" root of the word.)

Property, pensions and paychecks are forfeit in the coming fights over who gets what from what is left of the USA productive capital base.  (Stock portfolio and gold holdings are property too.)

Why hold gold if it will be taken?  On the other hand, the means of production, a bakery or bicycle repair shop is too small and to diffuse to confiscate.  A small mill grinding heirloom (non-gmo) corn is of not value to the powers that be, too small to steal.  At the same time such companies are your escape as well as a partial solution to the problem.

Get your own business going, and understand the difference between money, currency and credit (and benecredit v malcredit).

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Thursday, February 25, 2016

Rock the Casbah!

Given my reaching into middle eastern wisdom for ideas the last week or so,  reader sent me this.... as John Lennon might sing... come together....


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Wednesday, February 24, 2016

A Review of Usury - Any Interest On Any Amount For any Duration

What Islamic scholars I have tried to engage are generally reticent for whatever reason, contrary to my experience of Moslem hospitality in general.  Perhaps the topic is too hot.

But I can engage Moslem scholarship, and I find a most excellent article here.
The rationale behind the prohibition of interest-based transaction is not beyond the common wisdom. If the funds are borrowed for consumption purposes, then charging of interest is clearly a sign of moral bankruptcy and inhuman behavior. In case the funds are provided for investment purposes, even then the prohibition is rational. It is obvious that such transactions involve a one-sided traffic. The entire burden of risk and uncertainty, being the norm of trade and business, has to be born by the debtor/investor. On the other hand, the creditor/saver is guarantied for a sure return.
I recommend this article for being succinct and comprehensive.

Although the rationale is not beyond common wisdom, there are also reasons beyond common wisdom to abjure usury, as I will note below.

Borrowing money to consume is to stay on a path of diminishing returns.  If you need to borrow money to live, then your life is not ordered to your best options.  Truly there are circumstances which are short term, or long term due to injustice, but to take a loan for consumption is to ignore the signal that something is wrong.  There is the term "deserving poor" in which a lender gives a hand to someone who has been in error and is reforming.  Charging interest distorts this person's recovery by making the lender's demands absolute while the borrower's recovery is relative.

Funds at usury are always available, for there will always be someone who can get more out of your life than you are willing to give, if only they can trap you.  Usury is a trap.  To refuse funds at usury certainly narrows the options for solving a problem, but it is within those very narrow options where one's unique talents are discovered, and the efforts at recovery are made on a most solid basis: you find where you are not only most productive, but where you are the best at what you do.  Usurious loans give a false sense of achievement (I got the loan approved!) versus the grueling trial and error of finding what talent you have which the world will reward.

Anyone making a loan ought to do so limited in scope to an act of charity.  As an act of charity, not only is there the loan, there is the opportunity of offering compassion in the form of advice from one who is doing well to another who is doing poorly.  If the loan cannot be paid back, there is even more opportunity for a charitable act, and that is to forgive the loan.  And non-forgiveness of a loan is a most mild rebuke to a borrower.  The only sanction is to not lend more.  The errant borrower is then obliged to go find another benefactor, from whom he will benefit from another round of instruction and bromide.  He who lent without being any help is improved by the experience that his lending in this instance did no good.

If it is easier to borrow than produce, few people will change their habits in order to be more productive.  Productivity is always measured to the degree you serve others.   "Welfare" is taking borrowed credit, credit someone else will have to pay at some time.  The state steps in and acts as usurer trapping the poor on one hand and obliging future generations with no say on the other hand to make good the loan.  For society to offer welfare is to lure incalculable potential into a dead-end, and leave the tab with lenders who have no say.  As Dorothy Day said, it is amazing hoe much you can get in the way of luxury if you just do without the necessities.  Simply compare the results of welfare when it was the job of mediating institutions with welfare as a state function, and the argument is done.

As to usury on a business loan, first we must follow Noonan in recalling all loans are an act of charity, and a business loan is a chimera.  The article on riba quoted above is correct, but to add to it, anytime "credit" is cheaper and easier up front than other means of finance, the moral hazard of taking easy or cheap or both in the form of credit will trip up the entrepreneur more often than not, and in any event, eventually.

Loans at interest are simply unnecessary to an economy.  The usury-free range of options are sufficient to the task of a prosperous economy.  And here again, the borrower's absolute needs become relative to the lender's desires.  Serving the customer becomes secondary to paying the usurer, this misallocating resources in the enterprise.

The article goes on to eliminate the arguments for usury.  I'll only add the pro-usury arguments depend on terms that upon which few agree, thus winning by obfuscation. Money, credit, profit, rent, capital,  are all terms upon which among economists there is disagreement, even within a given school of thought. Even if within a school there is agreement on the definition of some terms, there will be disagreement on another, making conclusive argument impossible. Since no one has the others understanding of the terms in use, it is not possible to make an argument one way or another.  The practice of usury remains like a evil redoubt, unassailable for a lack of martialing reason to the assault..
Apart from the major differences in sale and usury contracts, and in the nature and functions of physical and financial capital, Islam prohibited the transactions involving interest on moral and social grounds. This is because it develops miserliness, greed and a selfish attitude in the individuals, and destroys the high virtues of kindness, sympathy, help and mutual regard in the society. It create a tendency among the people to earn wealth by hooks or by crooks.... It diverts the flow of investment to the projects offering a high rate of interest irrespective of whether or not these are socially desirable.
These are the rationales not immediately apparent.  Usury frustrates the creative and unitive aspect of commerce, as noted in this paragraph in the forms of misallocation and malinvestment.  This aspect is little appreciated must must be highlighted.
If one steps back and observes, usury is a relatively small part of the economy, that is to say the vast majority of commerce is usury free, with equities and vendor finance taking up the lions share of commerce.  This proves usury is unnecessary.  At the same time, the destructive elements in the economy can be traced to the relatively small portion of the economy that is usury based.  Like an otherwise healthy adult, the body economic can become quite ill over a tiny virus entering the system.

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Tuesday, February 23, 2016

Pick A Show, Any Show

For your start-up, a time deadline is a great motivator.  For a business, customers are the most important thing, and design (getting the product or service right) is the hardest thing.  A trade show puts you in the middle of the competition, and fires up your motivation, imagination and builds confidence as you realize "I can do this".  Not to mention the people you meet.

Pick a world class city, that is easy to get to and easy to work in.  I choose Hong Kong.  Sure, China is the 800 pound gorilla at Hong Kong shows, but for that same reason traders from Chile, Botswana, Jordan, Germany, Singapore, Mexico are all there too.  You can "go spartan" in Hong Kong and be clean, safe and healthy, or you can find rooms as expensive as anything in London or Tokyo.    Hong Kong's unique system allows for all at once.

Then there is the endlessly fascinating parts of Hong Kong, for example, competing private companies issue the currency.  You'll have several hundred Hong Kong dollars in your wallet, and several different designs, since they come from different private companies.  That in itself is work a long study.

All the big acts on World Tour stop in Hong Kong, last week Madonna had a couple of shows. Imagine the story of seeing Madonna in Hong Kong while you were there.  Or Yo-yo Ma or whoever your favorite happens to be. And then the Museums!

Hong Kong has an amazing selection of shows put on by many organizations.  I've long admired (going on 40 years now) the professionalism of the Hong Kong Trade Development Council and the shows they put on.  Wine, fashion, jewelry, film, housewares, you name it.

So pick a show, note the dates, start organizing a trip around a visit.

http://www.hktdc.com/info/trade-events/EX/en/Exhibitions.htm

Some people like a guided tour to such a new thing, and I offer that here.

But Hong Kong is so accessible, professional, safe and so on, you can do it on your own if you like.  Either way, discover Hong Kong soon!

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Monday, February 22, 2016

Two Assaults On Producers - One Defense

There were two news items in the last feww weeks tht stood out amongst the "sinking titanic economy"  daily deluge.  One was the worldwide move to eliminate high denomination cash, the other was seven US Marshalls arresting a man with a $1500 25 year old student loan bill.

AS to the first, this is a bit more clever than people think.
Well, not even 24 hours later, and another Harvard “scholar” and Fed chairman wannabe, Larry Summers, has just released an oped in the left-leaning Amazon Washington Post, titled “It’s time to kill the $100 bill” in which he makes it clear that the pursuit of paper money is only just starting. Not surprisingly, just like in Europe, the argument is that killing the Benjamins would somehow eradicate crime, saying that “a moratorium on printing new high denomination notes would make the world a better place.
A better place for whom, Larry?  You and your buddies who created this mess, and made sure you benefitted no matter what?  Certainly not for anyone productive.

USA has done this before, getting rid of the $10,000, $1,000 and $500 notes.  I recall seeing $1000 notes as a kid, people used them to buy cars and such and they were useful for keeping well hidden back in the day when stick-ups were common enough, due to no credit cards and folks carrying cash.

But here is the deal:  some $625 billion of the $853 billion in USA currency is in the form of $100 bills, and over half of all USA currency is outside of the USA.  So figure about $500 billion, a half trillion, in US$100 is overseas.  If one day Uncle Sam calls those bills useless, it is not that they cannot be traded for $50 or $20 or less, it is the process of exchanging involves explaining where you got $10,000 USA cash.  Just like getting pulled over by cops who search your car and find $10,000, it will be seized on suspicion of drug trafficking or terrorism or whatever.  You are guilty, when it comes to currency, until proven innocent.

Banks won't want them because it will become a foreign banks' problem to explain where all that currency came from, and reporting just will not be worth it, way too much risk of seizure and denial.  It will not be a rush to the exits, there will just be no exits.  Unloading $100 will at once make the $100 very cheap, and the $50 and less more in demand.  All those people who carefully tucked away cash over the last decades seeing the iceberg ahead will lose their hedge.

But as the article notes, it will be a race to the bottom as all countries get rid of the big notes, wiping out gains, ill-gotten and otherwise, of countless smart money folk.

How to have avoided this?  See below after the second story....

Whereas a half trillion wiped off the liabilities side of Uncle Sam's balance sheet is one of many big moves Uncle Sam (and all the other uncles) can take, there are tiny moves too.  Student loans are federal, so when some private collection agency gets a judgment against a borrower, US Marshalls go full SWAT and do a takedown.  In this case over a 30 year old $1500 debt.

Why?  Well, one distinct feature of "over" for a regime is when it farms out collections to private companies.  Any sane entity would have written this off, and the judge's over-the-top comments remind one of "the lady doth protest too much, methinks."  With marijuana becoming more legal, there is not as much work for federal judges now, so student loan prosecutions means new income stream.  full employment for judges!  And US Marshalls too! Yay!

By the way.  The average student loan debt is some $35,000 in USA.  It is not bankruptable.  The last eight years we went from 500 billion in student loans outstanding to $1.5 trillion.  There is a way out, of sorts.  Join the military if you are under 40 years old.  We call it the poverty draft in USA.  All volunteer.  Despoilment for student loan debts, or "serve" your country.  Nice!

In 2011 the US Dept of Education did a SWAT raid in Stockton, CA over student loan issues, and got the wrong person, handcuffed kids, etc, usual SWAT stuff.  People were appalled and complained.  Now things have gotten worse.

So what is the same solution to both problems?  Never give or take loans at interest.  It is possible to get a BA degree without student loans, so do so if you want one.  It seems easier up front to get a BA with student loans, but the end result is a lifelong lesson in the miseries of taking EZ credit at interest with no asset backing.  At the same time, extend and take loans at no interest, as long as they are asset-backed (so there is mitigating recourse).

The difference between the two is benecredit and malcredit, benecredit being unitive and creative, and malcredit being divisive (the 1%) and destructive (see student loan bubble, housing bubble, stock bubble, auto loan bubble, ad nauseum.)

Self employed and small businesses never really need cash, so no stack of $100 bills, since they give and take credit as a matter of business.  The small business "stack of cash" is the untouchable net accounts receivable.

Step aside from the insanity of capitalism, and enter the sanity of the free markets.

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Sunday, February 21, 2016

Business Start Up: Valid But Not Reliable

When I offered as an example of valid, but not reliable, business success stories, in this instance Patron Tequila, a student offered Sammy Hagar Tequila contra my point that although hair-care tycoon Paul Mitchell conceived and built Patron Tequila based in Vegas in the early 90s, while valid, it is not reliable in the sense that anyone else could use his success as a template for one's own success.  But Sammy Hagar has done fantastically well building a tequila brand from scratch.

Yes, another instance of valid, but not reliable, in the sense of it worked for Hagar, but no one else can follow that trajectory.  You need the gift of ADD, a music career, one helluva delegator, and right place at right time.

The Harvard Business School (and copied by countless business schools) uses the case study method, where they study such success stories as templates for how you too can be "successful."

As I state, it takes passion (suffering) to spot in what entrepreneurial area you ought to work, and then finding joy in doing the work that confirms your mission.  Mitchell and Hagar have found both, serially, valid "success" stories, but no reliable because no other hair-care specialist or rock star has their  joy in solving what causes them to suffer.

What is reliable, after the passion/joy process, is to follow the reliable act of switching to science and establishing a reliable customer base for your solution to the problem you experience, to tweak it to the satisfaction of enough market to constitute your definition of success.

That is the work of business start-up.  You do not need finance, a logo, legal structure, advertising, you need only customers, which are not only the most important thing, they are the only thing that matters.  Everything else is trivial.  And although customers is the most important thing, getting your product or service right is the hardest thing, the only thing you get paid for, so the only thing at which you should spend your time.

Too late to join my seminars winter, but I have spring sessions coming up.  email me at the address upper right if you want info on these.

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