Creative Destruction

The Economics of Space Exploration

2010-02-26T20:37:00.002-06:00

NOTE: Cross-posted to Getting There From Here.

Humanity's destiny is to spread out, first building orbital habitats, then colonizing other bodies within our solar system, and finally spreading out to other star systems. This isn't something I believe. It's not a matter of faith. It's a fact.

You know how I know? Because I have studied economics.

"Wait, what does economics have to do with space exploration (other than the fact that exploring space costs an arm and a leg)?" you might be saying. Exploration—of any type—is all about economics.

When European explorers crossed the Atlantic in the 15th and 16th centuries, they weren't coming to the Americas in search of scientific knowledge, or to meet the locals. They were trying to develop more efficient routes to Asia to beat their trade competition. They were looking for gold and other resources to exploit to enrich their own countries back home.

And, in the end, they did. Europe as a whole grew richer because of the exploration of the Americas. And in America, over time, the population grew and became wealthier as well, in some areas even surpassing the wealth of the Europeans.

Economics is not a zero-sum game, especially when you can explore and gain access to new sources of raw materials. What that means is that investments in exploration almost always pay off economically (maybe not always as intended, but they usually do pay off).

Here on Earth, we have a fixed amount of resources (actually, our resources grow infinitesimally larger due to cosmic debris constantly being deposited, but it's such a small amount as to be negligible), but a rapidly growing population. What that means is that when resources start to grow scarce (as may be happening soon with oil, uranium, platinum, seafood, and others) the amount available per person drops. If you consider resources as a form of wealth, then a fixed amount of available resources and a growing population combine to mean that the average wealth level is dropping over time.

If you consider land as one of those resources (as economists generally do), then the amount of available land per person is dwindling even more rapidly, as water levels are rising and erosion is eating away at land area (although, to be fair, there will be a lot more usable land available in Canada, Russia, Scandinavia, Greenland, and Antarctica before too much longer). Crowding is becoming a major problem, and finding solutions here on Earth (short of starvation, disease, wars, or genocide) is difficult.

Throughout history, we solved this problem by developing new forms of resources through exploration. We found new lands and new sources of metals, woods, and fossil fuels. We explored the depths of the oceans for food resources and oil. We developed new power sources such as nuclear power through scientific exploration. But we're running out of places on Earth to explore; we're running out of new sources of raw materials to exploit. In our quest to produce more resources and feed more people, we're damaging our environment and driving other species to extinction at an alarming rate.

But all we have to do is look up to the heavens, and our problems will be solved. I'm not talking about religion; I'm talking about the quadrillions of dollars in raw materials that are floating around in our solar system near Earth's orbit. Beyond that, there is literally an infinite amount of raw materials, not to mention room to spread out so that we're not crowding each other so much. All we have to do is make the investment in exploration.

But it's not going to be governments that do it. Spain did not send the Armada out across the Atlantic Ocean looking for more efficient routes to China and India. It contracted out with private explorers and reaped the benefits of their success. Once the private explorers have proved the viability, governments in Europe took advantage and began to spread and reap the economic benefits. But the real economic beneficiaries were the private companies that threw resources into both the Caribbean Sea and the Indian Ocean—such as the Dutch East and West Indies Companies, and the British East and West Indies Companies. There are numerous other examples throughout history of private explorations for economic gain (take Marco Polo's expedition, for example).

For that reason, I don't believe that governments will lead the way in colonizing the Moon or Mars or Venus or other celestial bodies. That's not to say they don't have a role, just the same as Queen Isabela's funding of Christopher Columbus' expeditions paved the way for centuries of European economic development.

We've got a long way to go to Get There From Here, but I know that we'll get there eventually.

The So-Called Recovery

2009-11-25T13:49:00.000-06:00

I'm worried about the economy. Every day I see things that tell me that the economy is "bouncing back". I know that we're in a "jobless recoverey". But I'm concerned.

Mind you, I'm not worried that our economy is not growing fast enough. Nor am I worried that our economic growth will not be sustained.

My worries are in a different area altogether. I'm worried about the fact that our economy is growing at all.

That sounds crazy, right? Maybe. But our economy has been artificially propped up for so long, that continuing to do so bothers me. I guess that anything artificial about our economy bothers me, because I'm a fan of fundementals. And what do I see when I look at just the fundementals?

I see weakness. Not in comparison to any other national econonmy, mind you. The economy of the United States is still in good shape, if you look at a snapshot comparison to any other national economy. We produce more than anyone in the world. In fact, more than twice as much.

It's the trends that concern me. Our economy is shrinking or stagnating, while the economy of China (not to mention several other countries) is growing. Is that what bothers me? Am I worried that China's economy is going to become larger than ours?

Nope. That doesn't bother me. In fact, since China has more than four times the human resources of the United States, I would expect—all things being equal—that China's economy will surpass ours within the next decade. And that doesn't bother me.

So what does bother me? Well, regular readers of this blog—if there are any—know that I believe in freedom of information, and that if information does not flow freely, the economy—no matter its trappings—is not a free economy.

With that in mind, I point out that I have said before that our (the United States) economy is in great need of correction. What I'm saying now is that what we've done so far is not nearly enough. Our economy is bouncing back, and that's what bothers me.

You can only artificially push something up so far before it collapses, and that's where the U.S. economy is. Not because of the strength of the economy (which, I'll admit, has surprised me during this recession) but because of the lack of weakness in this economy. Yes, I've studied it (insofar as someone without a Ph.D. in economics can) and it frightens me.

Right now, I can buy a plasma television at a reasonable price because the dollar is artificially strong against pretty much every currency in the world.. This is the case because foreign governments are buying dollars in order to keep the dollar strong. If you're China, why do you want the dollar to be strong relative to the Yuan?

Because a dollar that is strong relative to the Yuan means that dollars will be spent to purchase goods (plasma televisions, etc.) that are denominated in Yuan instead of goods that are sold in dollars. As a result of the artificial strength of the dollar, goods are being made in other countries and manufacturing jobs are leaving the U.S.

OPEC has been considering for a couple of years now plans to stop traiding oil in dollars and move to other currencies. Why would that be important to them (and you)?

It's important to OPEC because if they trade in other currencies—say, the Chinese Yuan—the dollar can lose value relative to the Yuan without affecting how many Yuan OPEC is bringing in with each sale (actually, there would be an effect, because oil would be more expensive to people spending dollars, so demand for oil would drop a small amount, putting downward pressure on the price).

And that brings us to you. Because if oil is traded in Yuan the the Yuan strengthens relative to the dollar (which looks, to me and you like a weak dollar) then our price for oil (and, thus, gasoline) goes up. Very few people in the U.S. want to pay more for gasoline, but that's our future.

What's worse is that foreign governments which have been buying dollars as a reserve currency—with the intent of keeping the dollar strong so that Americans can easily buy goods made in their countries—will start to unload their dollars. It'll start slowly, as they determine that European, Chinese, Indian, Russian, and Brazilian citizens can buy their goods, too, and start increasing their holdings of currencies from those nations.

And once it starts, there will be more downward pressure on the dollar, lowering its value. And when those countries' central banks see their currency reserves (currently more than $6 trillion for just the top ten largest holders of dollars) dwindling in value, they will increase the pace at which they try to exchange them, accelerating the decline. In fact, when and if this happens it will actually cause the dollar's value to be artificially lower than it should be.

A dollar with lower value sounds like a bad thing, because a strong dollar is a symbol of the power of the United States. And it is a bad thing, in some ways, because anything you buy that has to be imported (like gasoline or that big plasma television) will become more expensive. Items made in the U.S. will become cheaper to foreign buyers, which means that they will start to purchase more goods made in this country. That will mean more jobs, but more demand also means higher prices for those goods in dollars (even with higher prices for the goods in dollars, the weakness of the dollar means that it will cost fewer rupees to purchase the item) which means inflation.

So job growth will come back, especially in the manufacture of exports, but we'll have a bunch of inflation to go along with it. The export/import balance will finally start to correct and may even become positive if the dollar weakens enough. Some other much-needed corrections will come during this period, but not if foreign (and domestic) governments continue to intervene in what is supposedly a free market economy.

The longer such interventions—such as artificially strengthening the dollar—continue, the harder will be the collapse when it comes.

This post is already pretty long, so I'll post more later on specific topics where I see intervention being a bad thing.

Mankiw on Obama

2008-08-14T17:09:00.002-05:00

Greg Mankiw posted on Sunday about Barack Obama's plan for a windfall tax on oil companies. Not surprisingly, Mankiw seems to be opposed to this (as most reasonable economists would be, I would imagine). But for the sake of argument, let's look at some numbers. Mankiw quotes Obama:

"I think oil companies are amoral. They want to make as much money as they can for their shareholders, which is what corporations do," he says. "The difference is the nature of the kind of outsized profits they make that may have no relationship to their investments or their production. The fact, for example, the shortage of refinery capacity could actually increase their profits so the less they invest the more they make indicates that you are not dealing with someone making widgets out there."

First, I don't think that oil companies are making out-sized profits. Take the biggest "offender," Exxon Mobil, for instance. While I'm no fan of this company (or of fossil fuels in general) I don't think that Exxon Mobil has engaged in any immoral behavior (amoral, perhaps, but that's not the same thing). People are offended by the size of their $11.68 billion quarterly profit because it seems outrageous. But consider a couple of things:

That was on sales of more than $138 billion, a profit margin of less than 8.5 percent
Their pre-tax income was about $22.2 billion, and the taxes they paid for the quarter were about $10.5 billion, giving them a tax rate of more than 47 percent

Should Exxon Mobil be held to a different standard? People are obviously not unhappy with their profit margin, just their total profit. But that total profit is driven by their sales. If you don't want them to make that much money, stop buying what their selling. Supply and demand. But I don't think they should be penalized by having to pay a 75 percent income tax rate because they are providing a product that has such high demand.

Still, I'm looking forward to a time when the powers of Creative Destruction have made the fossil fuels industry obsolete.

Economic Projections for China

2008-06-23T11:39:00.003-05:00

Next Big Future has information on economic projections for China. Some of the results are pretty surprising, but I'm not sure how long China can sustain the incredible growth rates.

Biofuels and the Food Supply

2008-05-23T11:58:00.000-05:00

CNET News' Green Tech Blog reports on research by clean-energy research firm New Energy Finance that says that oil prices have a bigger impact on food prices than biofuels. And I believe it.

The report also states that changing food patterns around the world (i.e., rising middle classes consuming more meat and less grain), growin gpopulation, rising input costs are impacting food prices.

The report stated that

In grains, during the period from 2004 to April 2008, global dollar prices increased by an average of 168 percent. The rising price of oil accounts for an increase of 32.5 percent and other inputs--such as land and labor costs--contributed 7.4 percent. Dollar depreciation accounts for a further 17.9 percent. Supply and demand imbalances account for the remaining 57.7 percent, with biofuels responsible for up to an 8.1 percent increase in global average grain prices (the impact on U.S. corn was clearly above average). The biggest issues were the failure to improve yields to compensate for global population growth, along with the failure of the Australian harvest.

Biofuels may not be the main culprit in food prices, but given that they will have little or no effect on oil prices they appear to be a waste of resources that could be better spent on something with a greater likelihood of success.

Farmer Ditches Powered Tractor for Mules

2008-05-22T10:33:00.003-05:00

The Associated Press reported yesterday on a farmer in Warren County, Tennessee, who had what some may consider an unusual reaction to higher fuel costs: he hitched his tractor rake to a pair of mules instead of using the tractor's engine. The mules cover the fields slower than a petroleum-powered tractor, but apparently the cost of the fuel for the tractor exceeds the cost of feeding and caring for the mules and the cost of the extra time.

Is this the shape of things to come? Are we destined, because of higher fuel costs, to slide back to the Middle Ages? I don't think so, but just the same it may be time to invest in mule- and donkey-futures. Besides, with the terms of the new Farm Bill, farmers in this country should never have to struggle again.

Politics and the Farm Bill

2008-05-21T10:37:00.000-05:00

David Brooks of the New York Times posted an editorial online yesterday that talks about actions and power of groups, politics, and the Farm Bill. It's a pretty interesting read, especially in terms of how the current presidential candidates have responded.

America Should Increase Its Gas Tax

2008-05-20T10:57:00.001-05:00

Gerard Baker of the UK's Times Online thinks that high oil prices are a good thing, and I couldn't agree more. Oil has been the main focus of U.S. foreign policy since the end of the Cold War, and has been a major element of foreign policy since the 1930s.

If we had no use for petroleum in this country, we would certainly have made dramatically different choices over the past two decades and our disastrous foreign policy moves might never have happened. Instead of cozying up to groups like the Saudi Royal Family, we would instead be criticizing their detestable human rights records.

But the fact is, here and now, we do need oil. And it costs a lot of money, too much many would say. So why do I (and Gerard Baker) disagree?

Markets power our society to adapt to changes. If the price of something is too high, market forces will work to lower it or to find alternatives. During the oil crisis of the 1970s, those market forces drove innovation in efficiency research resulting in dramatically more energy efficient technologies. In fact, if oil prices hadn't cratered in the 1980s and 1990s, our need for oil right now would be dramatically lower. But ease they did, and instead of driving ultra-efficient vehicles and powering our homes and businesses with solar, wind, and nuclear energy, we drive gas-guzzling SUVs and burn coal and even oil in our power plants.

Higher oil prices will hurt in the short term, but in the long term the country (and the world) will be better off. And if we can switch to using all-electric cars like the Tesla Roadster and powering them off of solar or wind energy, then maybe, just maybe, we'll reduce or eliminate our need to fund fascists and dictators in the Middle East and other parts of the world.

It's time for the U.S. to step up and be a world leader once more. What I would propose would be an increased tax on gasoline and diesel fuel. That's right, I said increased. Just as elimination of the Federal gas tax (the so-called "gas tax holiday") would have little or no effect on the price at the pump, so would a tax increase. Why?

Because prices are set by supply and demand. If the government throws another 17 cents onto the price of a gallon of gasoline, we'll start to drive less and carpool more. We're already doing that because of the high prices we're paying at the pump. The oil companies will be forced to reduce prices somewhat (such that a 17 cent per gallon tax would have about a 4-5 cent per gallon effect on prices). They can afford it, after all, given their massive profits.

And then the government could take that money and use it to fund programs in energy efficiency and alternative energy (and I don't mean biofuels, unless we're going to also eliminate sugar tariffs and start making ethanol from sugar instead of corn... but that's another blog post). The money could even be used for improved tax breaks for purchase of all-electric vehicles or hybrids. If we're willing to make minor sacrifices like these now, we can really make a difference for our future and begin to truly wean ourselves from foreign oil.

Ag Secretary Resists Changes to Biofuels Program

2008-05-20T10:37:00.002-05:00

Secretary of Agriculture Ed Schafer doesn't think that ethanol is having a major impact on food prices, and sees no need to make changes to programs that promote its use as a fuel source. Meanwhile, prices of commodities like corn, wheat, rice, and soybeans are setting records and food riots are happening in many parts of the world.

Schafer is right that ethanol subsidies alone are not the cause of high food prices. Right now the market is suffering heavily from increased demand (due to growing middle classes in China and India, and increasing world population, and, yes, diversion of food crops to create ethanol) and decreased supply (due mainly to droughts), combined with increased costs for transportation and storage.

But, while the effect of ethanol on food prices may not be as substantial as some people have indicated, it is definitely a part of the problem. Even if it can reduce food prices by a small amount, that will help starving people around the world as well as budget-constrained consumers here in the U.S.

And if ethanol subsidies are not having a major impact on food prices, it's clear that they are having no impact whatsoever (or possibly a negative impact) on oil prices, which is their very purpose. So Secretary Schafer, you need to re-think your position and consider changes to the biofuels program.

MEMRI Needs Your Help

2008-05-19T13:12:00.002-05:00

The Middle East Media Research Institute, or MEMRI for short, needs your help. This is a non-profit organization dedicated to helping people better understand the culture and economics of the Middle East, and they do a fantastic job. Efforts like these will invariably lead to people better understanding one another, and they foster a spirit of cooperation rather than animosity.

But operating their excellent blog costs them money, and that's where you come in. As a non-profit organization, donations to MEMRI are tax deductible, and they are asking for people to contribute to their mission.

This is an organization that does a lot of good and provides a lot of useful information to which we generally are not exposed in this country. Please try to help them out.

The Cost of "Free Coffee"

2008-05-19T11:43:00.000-05:00

Stephen Dubner over at the Freakonomics blog has an interesting post about the value of free coffee. And it made me think about costs.

In Etan Bednarsh's example, the iced coffee from Dunkin' Donuts was free, but it wasn't free. We should remember, in spite of what groups like the Free Software Foundation would have us believe, that there are costs other than just financial when acquiring items. In Etan's case, the cost for "free iced coffee" was the time he would have spent in line waiting for the coffee. How long? Let's say ten minutes, as an example. I've certainly waited in lines longer than that before, but let's just use that for the sake of this argument.

Ten minutes is one-sixth of an hour. How much is an hour of my time worth? When I do consulting work, an hour of my time is worth anywhere from $50 (if I really like you) to $150 (if I think you can afford it). But let's stay at the low end of the scale, and say $50. So ten minutes of my time would then be worth about $8.33. Compared to getting an iced coffee for $3.50 almost immediately, that "free iced coffee" is a pretty expensive cup of joe.

Why is it that so many people never think of time as a cost? I know people who will drive around a city and its suburbs looking for the cheapest gas so they can save maybe ten cents a gallon when filling up. They spend an hour of their time (again, worth at least $50, in my case) to save a buck or two filling up. Is there time really worth only a dollar or two an hour? Maybe it is, but not for me.

The lesson here is about the value of convenience. We live in a society of convenience, where some items we pay more for simply because they're convenient. This convenience comes in the form of time savings, and since time is money, there is (or at least, can be) a cost savings by paying more for an item. We spend more money, but have more of our time available to us.

What we do with that time is, of course, up to us. Most of us seem to use it these days to sit on our couches and watch television (and I'm as guilty of that as the next person). If that's what you're using your free time for, then by all means spend six hours driving around to every furniture store in the city to find the cheapest price on a new couch so you can save a hundred bucks.

For me, though, I'd prefer to spend a little more cash to gain some more of my time that I can put to some productive use.

"...A Floating Island Was His Home..."

2008-05-19T10:49:00.004-05:00

Are you tired of all the scheming, in-fighting, and general nastiness that comes from living in a "civilized" country? Hassled by crime, pollution, illegal immigrants, Social Security? Do you just want to get away from it all sometimes?

Apparently, so do Wayne Gramlich, Patri Friedman, and Peter Thiel. When Gramlich and Friedman presented their idea for floating islands (based on an oil rig design known as a "spar platform") to Thiel, the Paypal co-founder and early Facebook investor was excited enough to give the duo half a million in seed funding to advance the cause.

"Decades from now, those looking back at the start of the century will understand that Seasteading was an obvious step towards encouraging the development of more efficient, practical public-sector models around the world," Thiel said in a statement.

The idea is to build floating island cities (which may be clustered together) for individuals to live in to escape from nations. Some people, apparently, believe that, like businesses, governments should have to compete. In this case, though, the "customers" of government are the citizens. By creating independent floating island "nations," the Seasteading Institute believes that it will become easier for citizens to pack up and move to different "countries" of their choosing, thereby creating competition for bloated governmental bureaucracies.

Will it work? Probably not. Governments exist for a reason, and people put up with them for a reason. If I was that unhappy, it wouldn't be too hard for me to move to Canada or Australia right now. The reason I don't is because I have a job and a family here in Indiana. Also, governments defend their citizenry, provide protective services such as police and fire departments, and fund social and cultural projects. If I'm living on a floating island in the middle of the pacific with only a couple thousand other people, it's going to be pretty hard for me to go to an art museum, theater, concert, football game, or other event. By living in Indiana, I have all of those things available to me.

Residents of seasteads like the ones being propsed may be able to avoid taxation, but that's pretty much the only advantage they would have (okay, they may end up with an awesome ocean view). The disadvantages seem to vastly outweigh the advantages. Sometimes it's important to remember that tax dollars are usually spent on things that are actually important. They're not all used for bridges to nowhere.

Also, it appears that the cost for living in one of these seasteads will run into the hundreds of thousands of dollars, but residents will only have about 300 square feet of personal space. The only time people spend that much to live in such tiny quarters is in college dorm rooms.

Farm Bill

2008-05-15T11:41:00.003-05:00

Greg Mankiw has a great new post about why the president should veto the new Farm Bill. I live in a farm state (Indiana), so this bill is pretty popular here.

That said, if it doesn't get vetoed, I may have to change professions. Farming is going to be more lucrative than I.T. pretty soon.

Free Trade in the Upcoming Election

2008-03-06T11:42:00.002-06:00

Free trade is a sticky issue for politicians, and the reason is because the vast majority of people don't understand economics. Free trade is a good thing over all. Free trade is not what has caused U.S. jobs to move out of the country. The reason jobs have moved out of the U.S. is because we have not had free trade.

That's right. I said it. The reason U.S. jobs have moved overseas is actually because the value of the U.S. dollar has not been allowed to fluctuate according to actualy demand. If it had, our massive deficits would have long ago driven the value of the dollar down further than they are now, an act that would have made U.S. labor cheaper in comparison to foreign labor.

As a result of allowing free trade of goods but artificially setting currency values, U.S. labor and goods prices are artificially high to the rest of the world, and foreign labor and goods prices are artificially cheap within the U.S. The result has been that the rest of the world has taken over a lot of the cheap manufacturing that used to be done in the U.S., and American consumers have had much cheaper products that have allowed us to have a standard of living far above almost everyone else on Earth.

But it was a situation that couldn't last, and it won't last. You can't have free trade of goods without free trade of currencies. That's what consumers—and voters—need to understand.

Since the American workers don't understand the economics of the situation, all they see is that Free Trade of Goods hurts them, and they want to put a stop to it. But Free Trade is a good thing, not a bad thing, as it helps raise the standard of living everywhere, but only if it is truly Free Trade.

In the current Presidential election, there are three major candidates left standing, and their positions on free trade run the gamut. John McCain supports free trade and wants to keep NAFTA and CAFTA. Barrack Obama is at the other end of the spectrum, and wants to pull out of both. I don't know if it's because he also does not understand the economics or because he does, but he panders to the voters even though what they want will hurt them in the long run. Hillary Clinton is walking the middle of the road, saying that NAFTA and CAFTA should be reviewed and modified as necessary, which may actually be the right answer.

I still haven't picked which candidate I support in this election, because at this point I don't think there's a seriously bad candidate left. Obama's stance on Free Trade bothers me a little bit. McCain's pandering to the far-right bugs me, especially since I know that he's going against his own principles in order to win an election. But I'm going to reserve my judgment on McCain until I see who he picks for veep. Clinton I'm not sure about, but I didn't mind Bill Clinton's economic policies, so we'll see.

Bernanke says Fed prepared to help U.S. economy

2008-02-27T17:00:00.002-06:00

Fed Chairman Ben Bernanke reported to Congress that the Federal Reserve "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks." I'm just not convinced they can do much.

A correction in the U.S. economy is long overdue, and I can't understand why the Fed is fighting it. A little bit of short-term suffering will strengthen our economy in the long-term, but we're so afraid of the R-word that we'll accept abnormally high inflation rates to keep it away. The greatest risk, as Bernanke himself has made clear is the return of stagflation—an economy that is stagnant or in recession coupled with high inflation rates.

Unfortunately, we seem to already be there. The Fed's solution to stagflation seems to be to deal with the stagnant economy and play the ostrich on the inflation side of things.

Thinking About Profits

2008-02-20T15:08:00.002-06:00

The nature of business is to make a profit. The most common way of making a profit is by acquiring a widget for a low price, doing something to add value to the widget, and then selling it for a higher price.

That's why I give you a penny for your thoughs, but when I add my value to them and turn around and unload my thoughts, I give out my two cents' worth.

Consumer Prices Go Up... and People are Surprised?

2008-02-20T10:53:00.004-06:00

According to a recent report, January consumer prices spiked up at "an unexpectedly strong 4.3 percent" rate. I'm not sure who wasn't expecting that... I've been saying for months that the continual cuts in the Fed's interest rates was going to cause inflation, and pretty much every economist I read has been saying the same thing.

And, oh yeah, the housing market still sucks.

A Better Economic Stimulus

2008-02-12T15:16:00.000-06:00

Business Week's Roben Farzad points out how U.S. corporations can do more to stimulate the economy by using the cash on their balance sheets than the Federal government can by giving rebates.

Fed Cuts Rates (Again)

2008-01-30T15:37:00.000-06:00

Okay, so if you read my predictions, I was obviously wrong this time. The Federal Reserve cut rates by a half-point, which was more than the quarter-point I expected. I also predicted that, in the face of a quarter-point cut, the stock markets would be down.

Immediately following the half-point cut, the markets spiked up, with the DJIA leaping to 12,681.41 before coming back down to where it was before the announcement.

Small Predictions

2008-01-30T08:34:00.000-06:00

Just a couple quick predictions over the next couple of days. The Fed is in the second day of a regularly-scheduled two-day meeting today, and is widely expected to make some additional rate adjustments. In this case, I'm predicting a quarter-point cut as a follow-up to their three-quarter-point cut last week.

My next prediction is that the stock market will drop after this cut, as a quarter-point cut will be seen as the Fed not doing enough to boost the economy and will be a sign that the board is concerned about inflation (I maintain, however, that if they were really concerned about inflation, they wouldn't have cut rates as much as they have).

If any of my predictions turn out to be wrong, I'll come back with an analysis.

Economic Stimulus

2008-01-29T08:56:00.000-06:00

The House of Representatives has already passed, and the Senate soon will, an "economic stimulus" package, and that's good news!

Or is it?

The fact is the bulk of this "stimulus" package will not actually do anything to stimulate the economy. In 2001, the last time the government provided "tax relief" in the form of rebates, approximately 75% of the money was put into savings accounts or used to pay debts such as mortgages, car payments, or credit card debts. That money did nothing to stimulate demand for products, and thus did nothing for stimulating the economy.

House Republicans also included $50 billion in provisions to help businesses, many of which should stimulate the economy. Most notably in my mind, a rule allowing businesses to deduct from their taxes 50% of any capital expenditures made this year. That is a provision that many businesses will take advantage of, and the capital expenditures will help drive economic growth, much as they did in the 2001 tax cuts.

Is this time any different? In some ways, yes. While the bulk of the rebate checks will once again be used to pay bills (I'll likely use mine to eliminate some debt), this time doing so will provide some much-needed liquidity to financial institutions already struggling due to the mortgage crisis. It won't do much to stimulate economic growth, but it may help some consumers from getting foreclosed and even help banks from having to lay off employees. If it does, it may help us ease out of recession earlier (assuming we're in one by June).

Plus it will help taxpayers relieve a little bit of debt. If every one of us puts our rebates into paying debt, American consumers will take a big step toward reducing the staggeringly large amounts of debt we all live with on a daily basis, and that's a good thing.

Unless, of course, paying off your credit cards just means you can go rack up new purchases on them.

Can a Credit Card Help You Financially?

2008-01-28T09:09:00.000-06:00

A lot of personal finance experts will tell you that using a credit card is among the worst things you can do to yourself financially. The interest rates are exorbitant, and they lead to people spending money they cannot afford. The experts tell you to only spend cash, since that way you cannot spend more money than you have.

But can a credit card actually help you financially, rather than hurt you? If you can manage fiscal discipline, the answer is yes.

Start by establishing a single credit card account, one with no annual fee, a 30-day grace period, and that preferably pays a cash-back award.

Whenever you are out shopping and you want to buy something, use the same fiscal discipline as the people who only pay cash: only buy things for which you have cash on hand. Then, when you get home, go online and transfer the exact amount of the purchase into an interest-bearing account. A high-yield money market savings account would be ideal.

When your monthly credit card statement arrives, transfer the money back out of your interest-bearing account to your checking account and make the payment. Better yet, use an online bill pay feature that lets you transfer your payment directly from the interest bearing account. That way, you can leave the money in the account a few extra days and earn a tiny bit more interest.

In addition to earning the interest on the amount of your payments, you should also be getting a cash-back bonus. If you can manage financial discipline, this is a plan that results in getting interest for using a credit card instead of paying interest.

Fed Cuts Interest Rates 0.75 Percent

2008-01-22T17:26:00.000-06:00

The Federal Reserve slashed interest rates by a larger-than-expected three-quarters of a point today, indicating that they are far more concerned about the sluggish economy than they are about inflation. The cuts affect the federal funds rate (now at 3.5 percent), which impacts how much consumers pay on credit card debt, home equity lines of credit and auto loans, as well as the discount rate (now at 4 percent), which is what it costs banks to borrow directly from the central bank.

What this means is that things will hopefully be a little easier for consumers and businesses in the short-term, which the Fed hopes will increase spending and help the economy stave off a recession (assuming we're not already in one). But it likely also means fuel for inflation, which is already running higher than normal.

Personally, I'm not at all surprised by the move (I had been expecting a cut in the range of a half to three-quarters of a point), just disappointed. I think inflation is going to be a bigger problem for most people than the stagnant economy. The average family of four with a meager income—for whom groceries are a significant portion of their budget—is already struggling with increasing food costs (PDF). These are the people who aren't going to be helped much by cuts in interest rates... those cuts are designed mostly to help businesses, not consumers. But increasing food prices, now, those are going to affect consumers.

I'm worried about that, even if the Fed isn't.

UPDATE: Brian Wingfield of Forbes agrees with me.

Fed Policy

2008-01-16T16:50:00.000-06:00

I've read some economic news today that has me puzzled.

First came a (completely unsurprising) report that consumer prices jumped by their largest margin in 17 years, a 4.1 percent rate for 2007. That's a sizeable jump over the 2.5% rate for 2006 and the roughly 2.1 percent rate we've been experiencing on average over the past fifteen years.

Second, I saw a report from the Federal Reserve's Atlanta office that says that the economy is still growing, but very slowly. So the good news is no recession (at least not yet).

But some economists are still expecting—nay, begging for—a large interest rate cut when the Fed meets again at the end of this month. Personally, I also expect the Fed to cut interest rates, as it has become increasinly clear to me that the Fed is far more concerned about slowing growth than about inflation.

Here's the kicker, though: it's not slow economic growth that's hurting people right now. It's the jump in prices. In fact, it could be argued that the jump in prices is causing the economic slow-down, as consumers are cutting discretionary spending in order to be able to pay for food and fuel.

The problem here is that cutting interest rates will spur economic development (whew! good news for businesses!) but cause inflation to grow at an increasing rate, making things even harder for consumers who are already struggling.

Brin Again, This Time on "Fair Tax"

2008-01-14T15:42:00.000-06:00

David Brin has written another excellent blog post, this time at his own blog. The topic this time is largely about the proposed "Fair Tax" which has been before Congress every year since 1999 and is currently being espoused by Mike Huckabee.

Brin mostly quotes from John Mauldin (and some others) before going into his own opinions, which agree wtih Mauldin. The rest of the post deals with Brin's dissatisfaction with the way the Republican party has been taken over by the Neo-cons.

While I agree with Mauldin (and, by the transitive property, with Brin) on the Fair Tax issue, I can't say I agree with him on everything else. Then again, I'm not sure it matters.