Thursday, October 30, 2014

FOMC Finishes the Taper

The Federal Open Market Committee issued its latest statement on monetary policy on October 29, 2014.  It finally finished its "taper" that has been going on since the beginning of the year.  As of a couple of weeks ago when stocks were going down, I wasn't sure if the Fed was going to make it to the end of this one.

This marks the end of QE3, or whatever you want to call it.  This round of quantitative easing (QE) started around September 2012 at $40 billion per month for mortgage-backed securities (bank bailouts).  But the Fed quickly more than doubled this amount a few months later.  In December 2012, the FOMC statement announced additional buying of $45 billion per month in longer-term government debt.

Combined, this meant Fed purchases of $85 billion per month in 2013, or approximately one trillion dollars in one year.  So QE3 was really the biggest money creation scheme in world history, at least in terms of real wealth.  Zimbabwe was creating hundreds of trillions of dollars constantly for a time period, but this was essentially worthless money.

Here is the key part of the latest FOMC statement:

"Accordingly, the Committee decided to conclude its asset purchase program this month.  The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction."

If the Fed does what the statement says, then the adjusted monetary base should stay relatively steady for now.  This is after it has quintupled in size over the last 6 years.

While the media obsesses over interest rates, I am mainly concentrating on the monetary base.  I am also paying attention to the excess reserves held by banks to see if more money gets loaned out.

The federal funds rate is only mildly interesting at this point.  It was important in the past because it tended to dictate monetary policy.  A lower rate meant more money creation.  A higher rate meant a tighter monetary policy.  But in today's world, this rate doesn't really matter much, as we can see by the changing monetary policy, despite the federal funds rate target being below .25% for about 6 years now.

If the excess reserves held by banks don't decrease significantly, then I expect a downturn in the economy.  I believe in the Austrian Business Cycle Theory.  The Fed's policies over the last 6 years have misallocated resources and caused something of an asset boom.  With a tighter monetary policy now, this boom is going to end.  It may happen within a month, or it may take a year or more.  But it is almost certain to happen, assuming the reserves stay bottled up and the Fed keeps a tight policy.

I expect the Fed to reverse course and begin to ramp up another round of QE, or digital money printing.  It will do this when the economy shows severe weakness.  That will probably be the time to start loading up on gold and other real assets.

Wednesday, October 29, 2014

Don't Share Your Food With Homeless People


The National Coalition for the Homeless (NCH) released a report on Monday stating that 21 cities in the United States have some kind of restrictions in place for sharing food with homeless people.  Houston, Seattle, and Salt Lake City are among some of the bigger cities with restrictions.

While most of these are in the form of legislation, there are also some areas that have community-level restrictions that are enforced by homeowners and business owners because they don’t want homeless people congregating in their areas.

It is certainly understandable that homeowners and businesses want to clean up their area.  Not only do homeless people put off a bad appearance, but it is often symbolic of an area with high crime.

With that said, passing legislation to prevent people from being charitable is not only anti-freedom; it is also just plain cruel.

The government pretends to be this great protector of people and advocate of those in need.  But here, as in so many other circumstances, it stands in the way of people trying to be good and charitable.

The NCH report stated, “One of the most narrow-minded ideas when it comes to homelessness and food-sharing is that sharing food with people in need enables them to remain homeless.”

If you visit a national park with a lot of wild animals, you may see signs telling you not to feed the animals.  They don’t want the animals becoming dependent on handouts because they lose their ability to fend for themselves.

And while this analogy can certainly apply to humans at times, it is hard to see how preventing food sharing will actually help homeless people.  It is not as if some homeless guy will just say, “oh, nobody is feeding me today, so I think I will get a job.”  I suppose that is possible, but probably not likely.

Government vs. Voluntary

Of course, the main point here is that this is a case of government force versus voluntary action.  You are forced to pay your taxes or else you risk going to jail.  Your taxes will be directed to whatever the politicians and bureaucrats decide, whether you agree with it or not.

In the case of charity (such as food sharing), it is voluntary (or should be).  If you think that a homeless person doesn’t deserve to be helped, then it is your choice not to give him anything.  If someone else wants to help, they can voluntarily give their own food or money without forcing anyone else to participate.

It is ironic that some government officials would support these bans on food sharing with the reasoning that it creates dependency.  That is the government’s main profession.

I would much rather see a homeless person helped and kept from starving than to see government handouts that enable capable people to buy cell phones, cable television, and alcohol while not working.  Homeless people aren’t typically collecting government welfare in this manner.

It is also ironic that it is government that is creating the problem of homelessness in the first place.  Many of these big cities have people living in the streets because they can’t afford to live anywhere because of rent control and strict zoning laws.  And they can’t get a job because of minimum wage laws.  And they can’t afford consumer goods because of taxes and regulations that add to the prices.

This is not to say that many homeless people have not made some bad choices in life.  But do we need the government perpetuating the problems by making it harder to recover?  Do we need the government preventing charitable people from helping them out?

The message is clear: Don’t share your food with homeless people.  Instead, pay your taxes and the government will decide for you.

Thursday, October 23, 2014

Prostitutes and Drugs Save Italian Politicians


Italian officials have decided to turn to things such as prostitution and illegal drugs to save their economy.  They are not making these things legal, but they are including them in GDP figures now.

The office of national statistics in Italy previously announced that it would begin calculating the country’s gross domestic product to include illegal activities.  This is to include “drug trafficking, prostitution and smuggling services (cigarettes and alcohol).”

There is no word yet on whether political bribes will also be included in the GDP figures.  (Sorry, that is my sarcasm.)

Due to the change in calculating the statistics, it has effectively taken Italy out of a recession.  If GDP were calculated on the old, traditional basis – meaning not including black market activity – then Italian politicians would have to face questions about a recession.  But by including drugs and prostitution, there is no official recession now.

As a libertarian, I believe that drugs and prostitution should be legal, as long as nobody is harming someone else.  There should not be victimless crimes.  If someone steals money to buy drugs, then he is guilty of stealing.

In addition, I believe that most black market activity is legitimate.  People are just trying to avoid bad government laws.  But seeing the government trying to include economic activity for things it deems illegal is just desperation.  It is blatant manipulation of the numbers to paint a rosier picture.

By counting drugs and prostitution, it doesn’t make the average Italian’s life any better.  It doesn’t raise their standard of living by officially not being in a recession.  It doesn’t get anyone a job.  It doesn’t produce anything, other than different numbers on a report.

GDP as a Measure of Economic Health

I have had issues with using GDP as a measure for quite some time now.  It is a good measure of the long-term success of a country or society, but it does not necessarily give an accurate picture of what is actually happening in the present.

I have a good analogy for analyzing GDP statistics.  Think about the spending habits of different families, but don’t take their income into consideration.

For example, let’s say that one family spends $150,000 per year.  Let’s say another family spends $50,000 per year.  Without knowing anything else about these two families, you can probably guess that the family spending $150,000 per year is better off.  They will probably continue to be better off in the foreseeable future.

You might be wrong in this guess, but you will probably be right in most cases.  It is reasonably safe to say that the family spending $150,000 per year probably has a much higher income than the family spending $50,000.  But there are exceptions.

But what about two different families that each spend $150,000 per year?  Just because they spend the same amount, does this mean they are in the same financial position?

One family might earn a net income of $200,000 per year.  They are saving $50,000 per year and have a considerable net worth.  The other family may earn a net income of $140,000 per year.  They are running a deficit of $10,000 per year.  They are accumulating more debt each year.

These two families are currently spending the same amount, but that doesn’t give you a good financial picture.  You know they both earn far more than the average family that spends only $50,000 per year.

However, the family that is running a deficit is probably going to have to cut back soon.  They won’t be able to service their debt at some point.  Meanwhile, the family that is saving and investing an extra $50,000 each year will probably be able to increase consumption at some point, even just with interest payments from their savings.

The GDP measure is very similar.  It tells you about current economic activity, but it doesn’t give you a good picture of savings and investment, which really are the key to long-term growth and productivity.

The fact that Italian officials changed the statistics means absolutely nothing, except that they are desperate for some good news.  It doesn’t help the Italian economy one bit.

These Italian bureaucrats should get a real job.  At least the prostitutes are selling their services on a voluntary basis.

Tuesday, October 21, 2014

States Vote on Marijuana Legalization


While I don’t hold out much hope for changes in the federal government, other than more big government, there is a little bit of hope for more liberty coming from the state and local levels.  When voters in Oregon, Alaska, and the District of Columbia head to the polls in November, they will have a chance at legalizing marijuana.

Of course, the term “legalization” is perhaps being used liberally, as there will still be government rules and regulations on the sale and use of marijuana.  For example, in Oregon, the ballot initiative would allow those of the age of 21 or older to buy and possess up to one ounce at a time.

Alaska’s amendment would be similar, but would also allow homeowners to grow up to six plants.

If the initiative in DC were to pass, then residents would have to grow their own marijuana or get it from someone who does grow it.  It would not be available through commercial production.

In other words, it is partial legalization in all cases.  While I am a purist on this issue (I think all drugs should be fully legalized/ decriminalized), I believe this is a good step in the right direction.  If these initiatives can help the residents there be at least a little more free, then it is a good thing.

This isn’t about whether or not you like marijuana or agree with others using it.  This is an issue of liberty.  The law should protect people against force or fraud from others.  It should not be used to protect people from themselves.  Drug laws make using drugs a victimless crime.  You are fining someone or throwing them in prison for supposedly harming themselves.  How does that help anyone?

And just like any bad law, there are unintended consequences.  I believe the worst unintended consequence from the war on drugs is the crime it produces.  When alcohol prohibition was instituted, violent crime spiked.  When it was repealed in the midst of the Great Depression, crime quickly fell back down.

The drug war is the face of the inner cities.  It is not the drugs themselves that cause the problems.  It is the fact that they are illegal.  It creates a black market and you end up with gangs in shootouts.  You don’t see beer or wine companies shooting it out on the streets.  If drugs were legal, you would likely buy them at a drug store, or from some other commercial store.  The legalization of drugs would probably cut overall violent crime in half in a short period of time.

My biggest issue with these measures to legalize marijuana, aside from the fact that they don’t go far enough, is that they are being used to collect additional taxes.  Many people cite additional taxes as a reason to legalize marijuana.  I think this is a bad reason.  The governments at all levels have too much money and they certainly don’t need more.

Federalism

The war on drugs and the push for some states to legalize marijuana provides many valuable lessons on liberty.  Another interesting thing here is that these state initiatives are helping to bring back the idea of federalism.

The U.S. Constitution is supposed to grant limited and enumerated powers to the federal government.  As the 10th Amendment says, the powers not delegated by the Constitution are left to the states and the people.  In other words, if it isn’t specifically spelled out in the Constitution, then the federal government should not be involved.  This would include drugs.  Therefore, the entire federal war on drugs is unconstitutional, like most everything else that comes out of DC.

We can see with these ballot initiatives that there are differences in what will be allowed.  Colorado and Washington already partially legalized marijuana, and those measures were different.

The limits will be different, the production will be different, the taxes will be different, and many other details will be different with each one.  Some states may have the initiative pass, while others don’t.

The key here is that there should be differences.  This is federalism and it is a better system than having the politicians and bureaucrats in Washington DC dictate how over 300 million people should live their lives (and that doesn’t include foreigners).

Decentralization is better for liberty.  People can see what works and what doesn’t.  When Colorado didn’t go to pot after legalizing pot, it sent a message to some voters that maybe legalization isn’t that big of a deal.

There are several states that allow medical marijuana and there are several more pursuing it.  Again, there are different rules in different states.  But it is better to have partial legalization than no option at all, with DC calling the shots.

In conclusion, I see these ballot initiatives as highly positive for the cause of liberty.  Aside from the additional taxes, they are mostly a step in the right direction.  I hope that more states continue to go on this path, which will eventually serve to nullify the unconstitutional federal drug laws.

Thursday, October 16, 2014

Politics in Our Healthcare


In 2011, Gilead Sciences, a major biotech firm, purchased another company called Pharmasset for over $10 billion.  Pharmasset had been losing money, as its experimental drug for hepatitis C was still in late-stage testing and had not yet been approved by the Food and Drug Administration (FDA).

For such a large amount of money, this acquisition seemed really risky for Gilead Sciences.  But in our world of politicized healthcare, it is not so much about serving customers as it is about hiring good lobbyists with political connections.

Gilead hired Joseph Grogan, who previously lobbied for another biotech firm.  He also was a senior policy advisor for an FDA commissioner during the previous administration.  Grogan was also the executive director of an advisory council that included the CEO of Gilead.  It is amazing how almost everyone and everything seems to be connected in Washington DC.

In addition to Grogan, Gilead also hired several lobbying firms with strong connections in DC.  The lobbyists went to work quickly.

Not only did Gilead need to get FDA approval for its drug, but they also needed a recommendation from the U.S. Preventive Services Task Force so that the federal government and insurers would pay for screenings.  Gilead needs to find a good customer base for a drug that costs about $1,000 per pill.  (And we wonder why healthcare and insurance are so expensive?)

Playing Politics With Medicine

Unfortunately, the government – and this would include government at all levels – is completely entrenched in our healthcare system today.  There is very little left in the way of a true free market.

It is not a completely socialist system, but it is a mostly fascist system.  The federal government is the main insurer for most people over 65.  For everyone else, it dictates most of the rules.

The U.S. healthcare system was already a mess before Obamacare.  It is just an even bigger mess now, with one more layer of rules and bureaucracy.

For these big pharmaceutical companies to survive, they basically have little choice but to lobby Congress, FDA officials, and anyone else that matters.  They can spend a few million dollars in lobbying in order to make billions.  This isn’t really a matter of defending what they’re doing, or even condemning it.

It is a matter of pointing out this is a corrupt system.  Unless the political power is significantly reduced, the corruption and favor trading is going to continue.  If Gilead Sciences doesn’t do it, then another company will.

The FDA should be abolished.  The private marketplace can do the job of testing and certifying the safety of drugs more effectively and far cheaper.  At the very least, a step in the right direction would be to make the FDA advisory instead of mandatory.  People should be able to make their own choices on whether to take a drug.  They can take into account the possible risks and the possible benefits.

Of course, government needs to get out of the healthcare business altogether.  It should not serve as an insurer and it should not dictate what insurance companies should and shouldn’t cover.

The reason that healthcare and the associated insurance are so expensive is because there is almost no element of the free market left.  While the 1950s was far from perfect, the healthcare system in the U.S. was far superior to what we have now in terms of cost and service.  The technology is obviously better now, but everything else is far worse.

As long as there is great political power in the healthcare industry, we should expect to see lobbyists and political favors dictate profits and losses far more than voluntary consumers.

Wednesday, October 15, 2014

Volunteering Is Not Allowed


One of the recent outrages from government comes from a winery.  Bill and Jill Smyth are closing the doors of their small operation – Westover Winery – after getting fined $115,000.

So what crime or violation did they commit?  Were they selling wine that was dangerous to drink?  Were they selling wine under a false label?  Were they selling to minors?  Was there a safety hazard in their workplace?

No – it was none of those things.  They are being fined $115,000 because they committed the horrible act of allowing volunteers to work in their winery.

Yes, that is right.  The Smyth family owes a six-figure fine and is being forced to shut its doors because it is not paying the minimum wage to people helping out.

It should come as no surprise that this is coming from the left coast of California, one of the least business friendly states in the U.S.  The winery was issued a citation in July for not paying workers the minimum wage and the associated insurance premiums and taxes.  The citation and fine came without a warning being issued first.

One state official said, “People should be paid for their labor.  The workers’ compensation violations are very serious.  What happens if someone has a catastrophic injury at the winery?”

We can be sure that the government officials are looking out for the best interest of the volunteers and do not selflessly care about getting tax money or exerting power over others.

Minimum Wage, Maximum Pain

The state officials are missing a key point in all of this and that is the word “volunteer”.  The people working at the winery were not being forced to do it.  They wanted to do it, even though they weren’t getting paid.

This is a small winery that is only open 10 hours per week and which profits about $11,000 per year.  But some people wanted to work there, even for no wages.  They were excited about the opportunity to learn about making wine and operating a business.  One volunteer said he dreams of opening up a winery one day, so this was a great learning opportunity for him.

Isn’t this the same as an internship?  Why do people do internships that are unpaid?  They do them to learn and to gain experience.  They can potentially lead to employment and business opportunities that do pay.

But the Department of Industrial Relations in California does not like any volunteering in a for-profit business.  If you are going to volunteer, it should be for something that “serves” the people, such as the government.

These bureaucrats really have nothing else to do but to make the lives of other people miserable.  They are putting the owners out of business, they are wrecking the opportunity of volunteers to learn about something that interests them, and they are denying customers the chance to buy wine from this place.

In addition, other wineries have taken note of what happened.  Any wineries with volunteers are quickly letting them go.  They do not want to experience the same fate.

It actually amazes me that there are any businesses left in the state of California.  As long as there is not widespread outrage over stories like this, then the anti-business policies will likely continue.

If vineyards were more common in Texas and Florida, then many of these wineries would probably be moving there by now.

Wednesday, October 8, 2014

Labor Participation Rate Helps Unemployment Numbers


The latest jobs report came out on Friday.  The big news is that the unemployment rate went down to a six-year low of 5.9%.  There was a surge in hiring in September, as employers added 248,000 jobs.  The July and August numbers were also revised upward.

Obama wasted no time in celebrating the numbers, claiming that part of the good news is due to decisions that he and his administration made early on in his presidency.

Of course, things are a bit more complicated than that.  Before we get excited about an improving economy, we need to consider some factors.

These are the government’s job numbers, so we have to consider that they are somewhat biased.  There are over 7 million people who are working part-time jobs, but who would prefer full-time work.

We must also consider that real wages are stagnant at best.  If you consider the disastrous healthcare system, including Obamacare, health insurance premiums are skyrocketing.  So if you include this into salaries, then overall wages are going down quite a bit.

In other words, if wages are going down, then the market should clear to at least some extent.  It is certainly better for people to be working and making less than not working at all, but this is not some great celebration when you take it in context.

We must also consider than the Federal Reserve has quintupled (five times) the money supply over the last 6 years.  It has also maintained a policy of near zero interest rates.  This has certainly fueled something of an artificial boom, meaning that some of the jobs created are likely a misallocation of resources based on false signals.  In other words, it will likely reverse at some point when the artificial boom is exposed.

Labor Participation Rate

Perhaps the most shocking thing about these statistics is the labor participation rate.  The number of adults in the United States who are working has fallen to just under 63 percent.  That is down from about 66 percent before the 2008 recession.

This low rate is the lowest it has been since 1978.  For 36 years, the percentage of adults working has been higher up until now.

So how is there such a low labor participation rate and yet an unemployment rate that has gone down below 6%?  Obviously, there are more people who are not officially looking for jobs, which actually helps bring down the unemployment rate.

The problem here is that we don’t know why there are so many less people interested in working.  Is it because spouses are making so much more money?  This would have to be a small minority of people, since wages are stagnant.

Is it mothers choosing to stay home and homeschool?  Is it people working jobs under the table and just not reporting it?  Is it people going back to school full time?

I imagine that it is a combination of many of these things.  I can imagine a scenario where a mother might be able to get a low paying job, but she decides to stay home with her kids and save the daycare expense, assuming that the family can get by with her husband’s income alone.

There is always a cost-benefit analysis and most families will do it, even if not formally on paper.  Why would a mother work for $60 per day when it costs $40 per day to send her child to daycare?  It is a rational decision not to work.

While we may be able to celebrate that there are a few more mothers staying home with their young kids, we have to ask if it is happening naturally or because of government.

The government and central bank are to blame for the unemployment, the low wages, and the lack of job availability.  The government has managed to get millions of Americans who no longer want to work because they see more of a benefit of not working.  Or they can find better work that doesn’t get reported to the IRS.

The unemployment/ jobs picture is a lot different than what is being played in much of the so-called mainstream media.  The unemployment has improved a bit from 5 years ago, but that isn’t saying much.  It is not as rosy as it sometimes appears.

This is not to blame it all on Obama, although he certainly shares a large part of the blame.  He definitely shouldn’t be going around bragging about the low unemployment rate.  By the time he is unemployed, the numbers may look worse than they already are.