Follow up on How to Stop Paying So Much for Gas

New information is being released by the IAEA that is confirming the logic presented below.  To see those reports, read on to the bottom of the article where the links are provided.  

A reader recently questioned on a Facebook link exactly how the logic works that by filling up with less gasoline, that prices might be affected.  I am following up with this article, which copies the response to the question that was posted on Facebook.  Click the link to see the previous article titled "How to Stop Paying So Much for Gas" if you haven't read it already.

       

The logic is explained a bit more in a previous article linked in this one. The idea is maybe better explained this way. Imagine that your family currently purchases seven 2 liter bottles every week, one for each day, and you purchase them all in one day. Then imagine that this is common practice among everyone to do this. Stores and suppliers then would expect to meet specific demand, meaning production, logistics, and inventory management need to be timed well to meet the demand. Also, because large quantities (7 per customer) are purchased in blocks, stores would know that they can charge a bit more if demand were to ever outpace their supply for a day or two.

Now imagine that instead of buying seven 2 Liters all at once, instead you buy a 3 day supply, and then imagine almost everyone changes to do this. This does a number of things to the distribution model. One, it means that there will be a sudden oversupply of soda bottles at the stores. Due to this, stores will either discount the items, because they know a truck with more bottles are coming, or they will find a place to store them, which decreases the margin the store gets for selling the product. Also, because there are now 2.333 more transactions occurring to sell the same amount of bottles as before, the store will either try to normalize by lowering price (buy 3 get 3 free!), or will tell the supplier not to ship as much product.

The supplier then has a few options. Store the excess supply they are receiving from production, at their expense, or lower costs to their downstream to move product, or tell the producers to slow production.

Now, most producers have specific mathematical models on how much product they must create in order to maintain profitability. If they lower production, they will almost assuredly run at an operating loss because though they might be able to furlough employees on the production line, the mothballed equipment on the accounting books will be depreciating on the books regardless. So, producers have that option (which shareholders will not like because it means a decrease in shareholder equity), or the factory can store the excess at their own expense, or they can lower price and *increase* production to maintain revenue levels and profitability. Doing so reduces price for everyone downstream.

In effect, this is what the OPEC nations did for decades that made oil prices per barrel get into the low teens. They produced lots and lots of oil to meet specific revenue numbers, knowing that if they didn't produce as much oil, even though they could fetch a higher price for what they did produce, their revenues would in fact be lower because they would allow more competitors into the market (such as US competitors), who would jump on the prospect of producing oil at 60 per barrel, but would never even think to produce it at 20. 

It is the same thing that is causing the glut in natural gas prices, but even at historic lows, producers are producing more than ever. 

Whether at the beginning of the supply chain model or at the end, disruptions of the model can and do have impact on the bottom line: price. The article is proposing that now that OPEC producers are no longer able to flood the world in oil (there is too much demand), that we as consumers disrupt their demand models. Futures traders would be spooked (I don't want to be holding a futures contract in gasoline if there ends up being too much supply on hand in July), meaning prices would go down, and mid stream producers (refineries) would lower prices as well to entice buyers. Refineries wouldn't be able to "stop" producing gasoline, because it is a bi-product of oil feed stock that produces many other chemical products. Slowing production at the refinery would reduce output for all products, some of which carry higher margins than gasoline. Refineries have been known to loss lead on gasoline for that reason.

Lastly (whew), human behavior is to binge on supply. Take the soda example. When you buy lots of soda in advance, most of the time you go through it faster than intended. The same goes for gasoline. And you'll be able to take advantage of price fluctuations since on that chance you come across a station with a really low price, you'll have at least a half a tank of empty space to stock up on it.

But don't take my word for it. It is open for debate and discussion. Let's find holes in the logic to improve it.

The interesting thing is that just today, the IAEA is confirming that the US is putting a lot of oil on the market.  This increase in supply, along with reported "demand destruction" are going to hold prices lower.  Let's keep up the pressure on prices from both the demand side and the supply side.

How to Stop Paying So Much for Gas

Previously, I wrote a few blog posts on how to "short" sell the oil companies as prices of gasoline increase. If you haven't read them, you can take a look at them here for some economics backrground of why this idea works.

I am reviving this discussion again because prices typically start to ramp up in the late spring for summer driving, and because I've been seeing Facebook posts telling everyone to fill their tanks full, among other things, to save money. You can view that article text here. There are a few reasons I don't agree with filling a tank full if you are driving only relatively short routes (around 50 miles per day or less). The biggest reason is explained in more detail in my previous articles, but briefly it has to do with "just in time" distribution. Energy distribution models today are highly efficient, and the distributors are counting on meeting certain demand numbers on average. Meaning they are expecting most people to fill their tanks full at each fill up, and will work to meet that demand. But, what if we change the demand from what they expect it to be? Remember supply and demand curves from your Econ class? There will be too much supply, and the price will go down until the curve reaches equilibrium again.

So, how can we do this? By not storing gasoline for the oil companies by filling your tank full and getting a 500 mile range of driving before having to fill up again. Instead, fill to half full or to a dollar amount that gets you somewhere near the half tank mark. There are plenty of gas stations around these days along most driving routes that making 2 or 3 stops per week will not make you lose much time. It might even save you from wasting time and gas idling at a red light if you stop at a station on a corner.

Another reason I don't see a need to fill to full unless driving a very long distance is that many tanks these days are 17 to 20 gallons. That's a lot of flammable fuel, first of all, and it isn't weightless either (meaning it does take energy to haul it around. Whether it is negligible or not is debatable). More importantly, cars that were much less fuel efficient in the 1950's and 60's had tank sizes around 16 gallons. If a tank that size was fine for a car that got 10 mpg fuel efficiency, why do I need to fill up with 20 gallons in a car that gets well over double the mpg's? If anything, 8 gallons should be fine. Something tells me they want us to buy more product for more revenue... kind of like how restaraunts have increased portion sizes so they can charge more, without you feeling completely ripped off. Fill to half full, and they'll think twice about their pricing models.

Yet another reason is that most cars these days have fuel pumps that won't be affected by low fuel levels, as long as you don't run out of gas. And they have built in screens to keep out any debris or settled material (which would end up at the bottom of the tank whether half full or not, which goes against the claims of the Facebook posts), and even then most tanks are built with very good materials these days that won't corrode easily.

Do you really need more reasons? Another reason is the widely used rule in investing of dollar cost averaging. Everyone knows you want to buy low, sell high. But how do you time it just right? Even highly trained professional traders get it wrong. Dollar cost averaging theorizes that if you just buy at smaller, more frequent, but evenly placed intervals, your cost basis will be better than if you try to time the market, or buy in lump sums (i.e., filling to full). Gasoline prices are volatile, and that is where dollar cost averaging by buying 2 or 3 times a week and filling only half full will help. This means that because you'll be filling at quite a few different gas stations along your many routes, you'll be averaging a better price than you would otherwise. And chances are you'll be able to take advantage of a "dip" in prices when you drive by that gas station with a ridiculously low price and you only have an 1/8 of a tank left, further averaging down your overall cost of gasoline.

Lastly, we all know it is human nature to conserve, or at least to remind ourselves to be more economical with, our goods when we see a limited supply. Hoarding, or in this case filling to a full tank, can lead to an increase in consumption just because of feeing comfortable in our bounty. Who knows, you may save two or three percent off of your weekly gas cost just due to the fact that you are more aware and keeping yourself from making unneeded extra trips because in the back of your mind, you don't want to have to stop at a gas station sooner than usual.

The Fed's Money Printing and Quantitative Easing

I've heard a lot of complaints over the spending bills, bailouts, etc. from the recent Tea Parties and most of it I agree with.  However, I disagree with the popular idea of Tea Party participants

that the Federal Reserve's Quantitative Easing policy is the problem - hardly so.  Quantitative Easing, or "Printing Money" in simplistic terms, is doing two things for the economy that investors and businessmen LOVE.  Just like a tax cut, QE reduces the interest rate, and thereby distributes wealth from the powerful banks and investment institutions to the businessmen and entrepreneurs.  Or should I put it differently as diverting wealth from the powerful banks and investment institutions and into the businesses they own. Lower interest thereby reduces the expenses on businesses and consumers.  It also reduces inflation - in the short term - by keeping prices moderated (businesses don't feel the need to increase prices when their expenses have been reduced), but at the same time stems deflation - which is absolutely the end all of economic disasters. 

You may wonder how QE policy can put the spending power in the hands of businesses rather than banks.  Steve will know the answer to this one.  Businesses and businessmen look at the interest rate as an opportunity cost standard for whether a business should simply earn interest on a bond investment, or whether they should make a capital investment and wait for a future return.  By reducing the interest rate (called "Printing Money"), the opportunity cost of capital investment is reduced, and the incentive to invest in a bond for future interest payments is reduced.  Therefore businesses would rather spend money upgrading.  It also has to do with present value of money.  By reducing the interest rate to zero as the Fed has done, the future value of money in nominal terms will be the same as the present value.  This is based on the equation Pv=S(1+r)N Where Pv is present value, S is the principle amount invested, n is the time in years, and r is the current interest rate.

Here's an example.  The value of 10,000 dollars in three years at a 5% interest rate is:

=10000((1+.05)^3)

=11600

So in 3 years at a 5% interest rate, the value of 10,000 is 11600.  So if your expected ROI on a 3 year investment is less than 11600, you should just put it in a bond at 5% and forget investing in capital.  Also, this means that if 10,000 is worth 11600 in 3 years, it will theoretically take 11,600 to buy something that was worth 10,000 in today's current money value.  But if the interest rate is closer to zero as it is now, 10,000 today is still 10,000 tomorrow, both in quantity and money value.  This theoretically gives enormous incentive for investment in capital goods.  And capital goods are the core drivers of our economy.

So this easing policy is much like a tax cut, but from the Fed rather than the government.  However, the government should also be reducing taxes and expenditures while the Fed does this over the long term.  Short term it may make sense for the government to spend more, since they can get cheaper bonds.  The problem is the government already had enormous debt BEFORE the crisis.  So spending any money they don't have is dangerous.

The only caveat to Quantitative Easing is that you have to be very good at judging when inflation is back to normal from zero, or when GDP is positive from negative.  If you don't time it right, inflation will be more than normal.  This is based on the Fed's money calculation MV=PQ.  Increases in GDP raise the PQ side, and therefore to remain proportional, the Fed needs to increase the money site proportionally.  V is a constant velocity of money, and P for prices in the economy normally should stay the same to avoid inflation.  However, if GDP (prices or quantity) are decreasing, the fed can theoretically increase MV to force an increase in PQ.  It is leaving the large amount of money on the table for too long that increases P too much, causing inflation.

Also, one has to take into account Gregory Mankiw's new theorem (Mankiw is a conservative economist at Harvard) that inflation is only a problem if it outpaces average raises in wages.  Think of this:  Businesses normally don't give raises based on performance.  They have bonuses and promotions for that.  Most raises are usually "in line" with or a bit above the interest rate.  This means from year to year, the average worker maintains the same buying power, while GDP increases the quantity of selection as more and better products and services enter the market.  This means that you have more to purchase tomorrow or next year with the same purchasing power (because the quantity of dollars available to you increased through a raise). 

Currently, raises (if your company hasn't suspended them yet) are still outpacing inflation, which is somewhere near zero, or even slightly negative.  Even if you got no raise, it is still in line with inflation since it is at zero. Once the economy recovers, most companies will give raises that are larger than normal to "make up" for the previous suspension, while hopefully the inflation rate stays below or around 4%, which will maintain a slight increase in purchasing power that we have been used to since Reagan. 

Maintaining a 4% or lower inflation is the trick the Fed has to ensure.

Check out Mankiw's blog: http://gregmankiw.blogspot.com/ or this other blog by James Hamilton http://www.econbrowser.com/archives/2009/03/quantitative_ea_1.html

Now I want your dissertations and dissentions!

Tijs Limburg
Chairman and CTO of DMX - Digital Media eXceleron, Inc.
Get eXcited!
www.dmxed.com

Blogs:
http://phystrings.blogspot.com/
http://getoutofthedark.blogspot.com/

The "Don't Tread on Me" Flag: The First Navy Jack is enjoying renewed popularity these days thanks to an order from the Secretary of the Navy that directs all U.S. Navy ships to fly the First Navy Jack for the duration of the War on Terrorism.

Response: KEYNESIAN FALLACY

Thanks Steve, that was a great response.  I hope you don't mind these discussions as I think they are extremely stimulating and educational.  I am reminded of the letters that traversed between Newton  and Leibniz and contributed to the advent of calculus.  I may not have been as clear as I thought in my letter (lunch breaks are only so long), but I am a staunch advocate of the theories of Adam Smith, and heavily disagree with Keynesian Economics.  However, I do not believe government should have the power they seem to think they have at manipulating the "invisible hand" Smith used in his theory.  I think Smith's ideas would work much better if the capitalists of the world would be able to take back some control over the economy.  Not necessarily through laws or laissez faire poicies, but through the pure power of capital.  It is Adam Smith himself who said "It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country."  Unfortunately, even institutions advocated by these same capitalists who oversaw great capital expansions, such as J.P. Morgan who helped institute the Federal Reserve, have been infiltrated with too much government control in my belief to render the optimum productive use of this capital toward the increase in industry.

I apologize for my philosophizing, but I have always been attracted to and fundamentally rooted in philosophy, which is my prime motivation for learning and innovating.  My favorite lectures in any subject are always the ones involving theory.   My personality then leaves the execution of those theories to others who are better executors.  I know you will all agree that is true.

Tijs Limburg

Tijs,

I've written two responses to your email, one focused on the technical aspects of your economic analysis, and one on the philosophical foundations and ramifications.  I hope our dichotomy of views is helpful to others who read these emails as well as beneficial to each of us in our pursuit of knowledge, independence and freedom.

Technical response:

The use of Keynesian economic theory whenever there is a recession or depression is an attempt to provide a modulus for changing not only the current economic situation but the cultural and political foundations that created the economic situation in the first place. 

Keynes' first and most fundamental assumption is that the Adam Smith concept of the individuals "self-interested invisible hand" is at fault for the chaotic cycles in economies and is insufficient to maintain or bring about equilibrium.  As the son of an economist and a brilliant intellectual, Keynes was well-schooled in the social philosophies of the early 20^th century.  As a result, he held the belief that government, particularly big spending government, could have a more positive effect on smoothing out the cycles of economic expansion and contraction, cycles that wreaked havoc on social and political stability.   Government could accomplish this by deficit spending to generate consumption and thereby employment during an economic contraction.  To this end, modern liberal economists, who typically have a strong socio-political agenda, propound this theory not only as valid but critical to the survival of the nation.  Unfortunately, it is effective at appeasing the fears and appetites of the "special interest" class while placating the desires for fairness among the middle class.  But is it valid?  The clear answer is no.   

Nature provides the clearest reproof of the theory by the simple responses to negative environmental factors by all flora and fauna.  Built into all successful life forms (whether you believe in evolution or God) is a mechanism that enables them to store up reserves in times of plenty and to consume those reserves in times of scarcity.  In the macro-economic environment, people will acquire material goods, homes, car's etc., when times are good and shed them when times are bad, or at a minimum refrain from purchasing them when times are tough.  We add the concept of payment over time for the acquisition of goods to the equation and it gets a bit more complex as now we have the ability to anticipate an upswing in prosperity and get what we want ahead of time and stave off the wolf at the door by trying to pay off debt when times get tough.  But in all of these systems, there is a limiting factor:  the ability to acquire and store reserves and the time it takes to consume and shed them.  And economic history shows that the same thing impacts the Keynesian concept of government consumption: the amount of time it takes for government to impact or change the fundamental structure of the economy in terms of production and consumption far exceeds the typical cycle times for expansion and contraction.  As a result, we become saddled with government programs that arrive too late, do too little, cost too much, last too long, and saddle the future with the debt of the past.  Talk about trickle down economic theory!

So why so many advocates of the Keynesian theory?  Because, at its core, it provides a roadmap not for economic recovery but for socio-political change.  It posits that government will know better than the individual how to control and influence the economy and, therefore, should involve itself not only in consumption but production and distribution.  And remember, "He that controls Arrakis, controls the Spice, and he that controls the Spice, controls the Universe."  It empowers those who govern with an intellectual supremacy that masks their real agenda, thereby allowing them to indulge their political ambitions without obvious exposure to the electorate.  In a word, economic deception.  Not unlike the shenanigans of Wall Street and their bogus securitization of mortgages.

Now onto the trickle-down tax rebate theory.  It is, in fact, not trickle down at all but a flood.  The most effective way to win a war is to overwhelm the enemy.  This implies that arming every available citizen will give you the best chance of killing the enemy.  The problem is that, once armed the citizens will shoot what they believe is the enemy, which may or may not be what the real enemy is.  In the case of the tax rebate and the nonsensical assumption by government that everyone would go out and spend it on durable goods, the people clearly showed exactly what they thought the enemy was - their debt.  Everyone knows that if you don't pay your bills, somebody's going to come and take your paycheck, take your car, take your house.  And business is the same way.  Amazing that people are smart enough to use an umbrella to keep the rain off when it's raining instead of using it to balance on a wet tightrope.  But it has a silver lining – lower debt now means greater purchasing ability in the future.  All economists need to do to know what people will do is to get out of their ivory towers and note whether or not it's raining!  But, you say, this doesn't stimulate the economy.  Well congratulations, you're right.  Throwing money around doesn't stimulate anything but greed.  Economic stimulation always comes as a result of market demand regardless of whether you're a Keynesian, Smithite, or Luddite.  The trick is how to create the demand, which leads us to a review of your fearful consumer.

The concept of consumer and investor control is based on the assumption that neither party can control themselves.  Smith weighed this concept in his Theory of Moral Sentiments and concluded that man can make choices beneficial to society precisely because he can see in the mirror that society will benefit him.  In today's economic environment, the consumer is fearful not out of ignorance but out of experience.  He is reminded every day of the woes of the stock market, of the ever increasing unemployment, of the incredible escalation of national debt.  Everywhere he looks, he sees the onset of winter and this is his last chance to gather in the harvest.  It's interesting to note that seasons significantly impact consumer confidence.  I believe it is built into our genetic code.  But I digress.  When analyzing how to reconcile the fearful consumer or investor with the need to increase market demand, we have to look simply at what motivates a man.  At his core, he has a need for food, shelter, and sex (reproduction, technically speaking).  If he is fearful of loosing any of these three things, he will go into survival mode, storing and stashing whatever he can.  If, however, we can reduce his fear and help him to see that the rain will stop, we can motivate him to venture out of the nest again to indulge some of his higher desires.  The biggest problem is that it is still raining and government spending is a big part of the storm.  The reason for the tax deductions on home mortgages is because we have to compete with the government for available credit and it was a Keynesian incentive to increase home ownership in the post WWII economy.  I believe that, if the government would reduce it's consumption, reduce it's taxation, and reduce entitlements, the consumer would be instantly encouraged and would literally come out of hiding, along with the investors.

But I don't see that happening, do you?

So what about your analysis of Expenditure based GDP?  We're probably in agreement as to the status of the first two items, Consumption and Investment, although I believe we diverge on their cause and effect.  And the initial discussion of Keynesian vs Smithian economic theory pretty well establishes our differences on the Government Expenditure part.  So let's investigate the Net Exports concept.  While you spent a good deal of time discussing globalization, game theory, and Nash's equilibrium, you appear to have missed the most fundamental part – our economy is no longer based on the exportation of goods but on the consumption of goods.  This has come about because of the transfer of technology and industry developed in the US to other countries who are not bound by the same socio-eco-political rules (and that's eco as in ecological, not economical) nor have had to pay the price for industrial revolution in terms of time, capital outlay, or environmental impact.  As a result, they are able to produce oil, durables, etc., far cheaper than we can, even if we were to choose to return to an export based economy.  The upside is that we have steadily increased our standard of living.  The downside is that, in our pride, arrogance, and self adoration, we have put ourselves into environmental and political straight jackets that are all but impossible to get out of.  And just like the Chinese who lost the silk trade to thieving Indians who stole their great secret of the silk worm, we have yielded our industrial strength to the competition in order to appease our environmental guilt.  As a result, the ability to rapidly increase exports as a correction to the economic downturn is virtually impossible.  But that is a global view.  If we look internally, we still possess the ability to produce and trade internally in a way no other country can.  Freed from government restraint and the ridiculousness of the sue-happy eco-extremist left, we could produce all of our own food, fuel, and shelter far cheaper than any exporting country.  And we could do it with reasonable conservation and environmental stewardship.  And from this most stable of all economic bases, we could do some of what you suggest – export value added goods and services.  But don't kid yourself, the export genie is out of the bottle and has returned home to its master – China, the worlds greatest exporter for more than two thousand years.

So, what can we do now?  I believe that the first thing we need to do is to stop pretending that some grandiose economic theory justifying outrageous government spending and expansion will in anybody's universe result in improved economic stability and prosperity.  The second thing we need to do is reduce the size of government at all levels and give economic power back to the people in the form of earnings retention, resulting in the triggering of the first and strongest pillar of the expenditure based GDP - consumption. The next thing we need to do is to allow the recession to do it's job – collapse of businesses that are inefficient and outdated, reduction of extravagant salaries, bonuses, and dividends, smaller meal portions at restaurants, over-stocking in stores, general consumer wastefulness, political pay-offs and paybacks, a return to thrift and self-reliance, pain and suffering sufficient to change hearts and minds, etc., all of which I refer to as the leaning and weaning of America.  And lastly, but most importantly, the re-education of the American people as to both the rights and responsibilities of constitutional governance and individual agency.  Is this an economic theory?  I believe it is – it is the theory that good people, when left to their own devices and with full responsibility and accountability, will do good things not only for themselves but for their neighbors, their country and their God.  Not because they are forced by might or compelled out of fear, but because they choose good over evil.


Philosophical Response:

Don't warp out at me but you're at it again.  Over intellectualizing the theories leads to getting caught in the trap.  As you've heard me say before, regardless of what a man says or claims to think, watch what he does and where the money, power, and sex go.

The attached article by Dick Armey from the Wall Street Journal yesterday is one of the best "exposures" to the reasons behind the current use of Keynesian Economic Theory to justify the "stimulus" mentality sweeping the nation.  As with most theories, one must look carefully at the motivation behind the developer of the theory and his associated proponents. 

I've also included an article by Robert Reich on Keynes that gives you background on the man and his philosophies from one of the most liberal, interventionist, and, I believe, evil men in modern political times.

As I analyze Keynes economic theory and his life experience, two very powerful views come together and into focus.  Keynes firmly believed in the idea that an intellectually independent mind could throw tradition, experience, and history to the wind and come up with some better solution than the old tried and true.  He also believed that those so "enlightened" intellectuals should be given authority over other men's assets and lives in order to provide greater social harmony and put an end to both the economic and war cycles that plagued Europe for a thousand years.

The current use of his theories is not because they are correct in the slightest but because, as Dick Armey so clearly puts it, it gives those who gain power from politically motivated spending the intellectual cover to dupe the middle and "special interest" classes into believing them.  As with all intellectual deception, it is insidious, contagious, and damning because, at it's heart, it is an attempt to usurp the agency of man, co-opt his future and dreams, and garner power, glory and honor (and thereby money and sex) unto the deceiver.

I recommend reading both articles and then the following:

Moses 4:1-4

1. And I, the Lord God, spake unto Moses, saying: That Satan, whom thou hast commanded in the name of mine Only Begotten, is the same which was from the beginning, and he came before me, saying—Behold, here am I, send me, I will be thy son, and I will redeem all mankind, that one soul shall not be lost, and surely I will do it; wherefore give me thine honor.

2. But, behold, my Beloved Son, which was my Beloved and Chosen from the beginning, said unto me—Father, thy will be done, and the glory be thine forever.

3. Wherefore, because that Satan rebelled against me, and sought to destroy the agency of man, which I, the Lord God, had given him, and also, that I should give unto him mine own power; by the power of mine Only Begotten, I caused that he should be cast down;

4. And he became Satan, yea, even the devil, the father of all lies, to deceive and to blind men, and to lead them captive at his will, even as many as would not hearken unto my voice.

The acknowledgement, ennoblement, and empowerment of the agency of man, along with the requisite accountability and responsibility, in our constitutional form of government is what has made us powerful, wealthy, independent, and resistant to the political machinations of other nations and peoples.  

Unfortunately, we (as a society, not necessarily individually) have abused that agency of late and have taken more than our share while selling our birthright for a bowl of pottage.  As a result, we are faced with accepting and dealing with the consequences.  To remove the consequences and the associated pain is to deny society the opportunity to repent, change, and improve and to ultimately usurp the agency that we have suffered so long and fought so many wars to obtain and defend.

From the macro economic view, getting government out of the way has a much more powerful effect than getting them more involved.  I think that if you carefully examine the results of government consumption to stimulate the economy in terms of the increase in the size of government and the loss of individual control, you will find exactly the opposite of what you claim.  In every case, the recessions have been prolonged due to governmental "stimulation."  To use your medical analogy, we treated the pain caused by a cancer but failed to remove the cancer infecting us.  And as a result, the cancer has grown with each successive cycle to the point that we are now facing a global economic collapse.

And what is that cancer?  The cancer of covetousness, gluttony, self-indulgence, and self-centeredness.  

And what is the cure for us in the US?  The purging fire of suffering, loss, and humiliation, coupled with the most powerful redemptive construct in government ever know to man – bankruptcy.

This is what has enabled Americans to take risks, fail, and try again.  Is it tough?  Yes.  Is it uncomfortable, Yes.  But it enables us to keep the hold of the greatest source of growth, liberty, and prosperity – our individual agency.

This is also what will most effectively turn the political tide.  If those who have robbed the middle and upper class, who would rob from our children and grandchildren to pay for their political promises to the "special interest class" are cut off from their drug supply and can no longer feed the habit, the "special interest class" will turn on them like a shark to a bleeding swimmer.  And who will be there to take care of the reasonable needs of the "special interest class?"  Hmmm, let me think.  Would it be those who already give 3 to 1 over their liberal counterparts?  Indeed, it will be those whose self-reliance has made them prosperous, who know the struggles of life first hand, and who have suffered enough that they would that no one else should suffer.  It is they who will feed the hungry, clothe the naked, visit the sick and afflicted because they will have the desire, prosperity, and agency to do it.

If you're still with me and have read the article by Dick Armey, I think you will see that putting the needed recovery in the hands of the individual by reducing taxes – and the requisite REDUCTION in federal spending – is far faster, powerful, and lasting than anything the government could possibly spendulus.  Yes, people will conserve, pay off debt, and save instead of spending but that is what we should have been doing anyway. And in the end, we will return to what has made us the greatest nation in history – a nation of individuals who can not only provide for themselves but willingly for their neighbors, who can rise from the ashes of defeat to try again and again, a people who will individually and collectively grow and learn, innovate and expand, protect and defend, live and let live.

It's not just a dream, it's the true path and where we need to be.

Individual agency, my friend, is not just an inalienable right, it is the key to true economic freedom and stability.

Thanks,

Steve Dupaix

Thoughts on the KEYNESIAN FALLACY

My Two Cents

Interesting that Dick Morris would bring up John Maynard Keynes in his article.  We just discussed Keynesian Economic Theory last night in my Macro Economics class.  What I find interesting about Keynesian Economic Theory, is that the focus is more on demand management than the Smith-like theories of self-interested consumers being the drivers of the economy. 

One must ask, why does Keynesian Economics crop up every time there is a recession or depression, and why do we always return to the long debate between "trickle-down effect" and Compensatory Government Stabilization policy during these times?

In my opinion it is largely due to the fact that spending effects of "trickle-down" tax rebates to consumers are extremely hard to predict.  Economists can no more say that one person will put their check into a purchase of a durable good (tv, refrigerator, car, etc) than into savings (bank accounts, paying off debts, or investing in stocks).  And the effects of Compensatory policies can take years to evaluate and have very few control features for the measurement of success.  Take a look at the recent tax year of 2008.  We've had opportunities to examine both types of policy.  We had a tax rebate for consumers and an additional tax deduction for Capital Investment from businesses.  Neither has worked much in the way of stimulus to this point.  Most Americans used their stimulus check to pay down debts as did most businesses.

We had 350 Billion (and much more injected from the Fed) of Government spending, which all of the analysts are saying ended up in savings as well, not in stimulus.  I think Paulson made a huge error in bypassing the heart attack by purchasing equity in the banks rather than stinting the arteries to remove the blockage by purchasing and holding the bad debts.  That's where Reganists got the S&L issue in the 80's correct. 

In other words, the way I'm evaluating the current situation is this: While normally consumer and investment control are the best policies, putting too much control in the hands of a fearful consumer equates to increased savings.  Putting too much control into semi-nationalization of firms and investments equates to increased savings.  Expenditure GDP is based on four components: Consumption, Investment (Capital Investment), Government Expenditures, and Net Exports.  We've discuessed the first two and found the net result to be toward savings.  There are only two parts left in the overall GDP equation:  Government Expenditures and Net Exports.

We've used government consumption in one form or another in nearly every economic downturn including the Great Depression, and the results are arguable as to their success; I am one to believe they mostly worked in each case, some more than others (I believe the Republican based expenditures worked better than their Democratic counterparts).

So why don't we figure out a way to do something untested, and revitalize our Net Exports?  To me, that is the part of the equation that has gone unnoticed, yet in my mind has great untapped potential to energize the economy, create jobs, and transfer large sums of wealth back into the US economy.  In my mind, there is a key difference between our situation now and the situation in the early 1930's.  In that time the economies of nations were not nearly as global.  Today they are, and if you look around, all of the economies in the world are trying to lean on government spending to increase GDP and swing things around.  Today's globalized economies are all after one thing: economic equilibrium.  All of which is a good self-interested ideal, but in the context of game theory, this "co-operation of nations" to spend their government capital would be something close to Nash Equilibrium.  Nash Equilibrium does not always stand to benefit the whole group, and if one player finds a strategy that can break from this equilibrium, they can usually make the biggest gains. So, if every player in the global economic game has tried and is trying manipulations of the first three GDP components, naturally I think that everything we do in an effort to remake our economy should focus either implicitly or explicitly on increasing the Net Export number - beat the competition to increased exports, and we win the game.  Somewhat of a Net Exports "Arms Race".  Who really cares right now how much we sell to each other domestically.  We can sell insurance to one another all day but if there is nothing to insure it profits no one.

How can we increase the Net Exports component of GDP?  Create a revitalized financial system that foriegn investors are attracted to investing in (import currency holdings (not loans), export financials), produce and use more domestic energy (decrease energy imports), export energy resources, aquire foriegn companies (exchange of currency, export of business processes), help "manufacture ready" products and projects get to market (export products other nations need but don't have), create new breakthrough technologies (export US made technology), create and export US made media demand, export "Value Added Products" (especially ones that use materials that can be created easily within our own economic borders), etc., etc. 

I think the biggest component of Net Export revitalization would be to export energy and energy resources that are new and high tech, and that are produced by technology that only the US has, or harvesting energy resources from places (such as space) that the US has superior control over. 

Here's to winning the GDP race of the 21st century. 

Tijs Limburg

KEYNESIAN FALLACY

By DICK MORRIS

Published on TheHill.com
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There are very few economists who really buy into Keynesian theory
anymore. Instead, the idea of "rational expectations" has taken its
place. The difference between the two approaches is essential to
understanding why Obama's stimulus package won't work.

Keynes felt that people would react automatically to a few dollars in
their hands. Consumers would run out and buy new products, and
businessmen, seeing the uptick in sales, would rush to open new plants
and hire new workers who would, in turn, generate more demand.

But that's not the real world. In reality, consumers, knowing there are
hard times ahead, save any money they get either by salting it away or
by paying down their debts and bills. That's why the personal saving
rate in the last quarter of 2008 was the highest in six years and
spending on residential construction was down 22 percent over the past
year. And the savings rate rose from 2.8 percent in November 2008 to 3.6
percent in December as the storm clouds grew grayer. And, in the real
world, banks hang onto their money for fear of making bad loans, no
matter how many bailouts or stimulus packages Washington passes.

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According to the Federal Reserve Board of St. Louis, the Fed is now
holding upwards of $1.7 trillion for American banks, more than twice
what it had in its vaults at the start of 2008. How did the Fed get the
money? Congress voted the Troubled Asset Relief Program (TARP) package
of bailout funds. The Fed purchased bank assets to get liquidity onto
their balance sheets. What did the banks do with the money? They gave it
right back to the Fed to hold in its vaults. They didn't lend it out.
They didn't use it to stimulate the economy. They are using it for a
nest egg to tap when times improve. Just like the theory of rational
expectations says they would.

If banks, suddenly awash in capital, don't decide all is fine and rush
to lend money; and consumers, given a tax cut or a pay raise, don't rush
to buy a flat-screen TV, then what good will the stimulus package do?


Not much. It is not until there is evidence that the underlying problem
-- massive personal and corporate debt -- is being solved that any
degree of confidence will return. And, without confidence, the rational
expectation theory means people sit on their money.

But the package will do a whole lot of harm by piling up capital that
people won't spend, banks won't lend and businesses won't invest. When
confidence rises and the money comes out of hiding, watch out for the
massive inflationary pressures all that extra cash will unleash.

Obama's stimulus package won't stimulate much except inflation down the
road, which will, in turn, mean the onset of another round of high
interest rates and renewed recession to check the inflation.

Republicans should defeat the stimulus package and then negotiate a much
smaller bill that emphasizes tax cuts and avoids the pork-barrel feeding
frenzy Obama has unleashed. You can see the stimulus package rotting
away before our very eyes.

People are turning against it as they see the things on which government
will now be spending money, just as they turned against Clinton's more
modest $35 billion stimulus package in 1993. Republicans should stay
away in droves. On this issue, they can recapture something they have
lost over the past eight years -- the mantra of less spending and
smaller government.

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Ron Paul - A Disaster for America

Ron Paul's Ideas Illogical

It was when I first heard of Ron Paul rejecting the idea of international trade and wanting to block trucks coming north from Mexico from entering the country, which is now allowed, that I wondered why he would attempt to run for president.

I then heard him say that the Federal Reserve was unconstitutional, unnecessary, and the cause for the "worthless" dollar.  I say worthless because his statistic of the dollar being worth 4 cents for every 1920s dollar would make everyone think just that.

However, consider this.  We have all heard our grandparents tell of a bottle of coke costing $0.05 in 1920.  This is confirmed by most recorded accounts. (see http://www.foodtimeline.org/foodfaq5.html#cocacola)  

Sounds pretty cheap, eh?  Especially compared to the price of a similar bottle of Coke at $1 today.  However, further analysis proves sightly different.  Many analysts estimate the average wage in 1920 to have been somewhere around $30 a month.  So lets estimate that to $1 a day in 1920s dollars.  To buy a Coke, it took 5% of your gross daily income.  

In today's terms, let's use the minimum wage of $5.85 in today's dollars to compare to the daily wage of $1.  Working a full time job at minimum wage, you would earn $46.8 gross.  (It should also be noted that many workers in 1920 probably worked longer than 8 hours a day.)  So in those terms, the cost of a $1 Coke of today takes just over 2% of your daily gross income to buy.  In effect, the cost of a Coke today is 238% less than it was previously.

Which would you rather have?  A Coke for $0.05 costing 5% of your daily wage, or a $1 Coke costing 2%?

Another argument that Ron Paul brings to his campaign is the idea of doing away with the Federal Reserve.  Such a move would be ridiculous.  Since its formation in the post 1929 crash era, the Federal Reserve has insured that we have not suffered  a depression as the one experienced at that time.  This is even more important considering the 1987 Crash -Of which this current month is the 20th anniversary. 

The 1987 Crash was the worst in US history.  The Dow fell a whopping 23% in one day, out-shadowing the 1929 Crash.  However, the Federal Reserve was in large part responsible for keeping the economy from going into a depression.  In fact, if you were to have bought shares after the 1987 crash, you would likely be up ten fold today -A much different result than in 1929, when by July of 1932, the Dow had lost 89%, and did not close above the peak level in 1929 until nearly 25 years later in 1954.

How can someone who is running for president justify his stance on dissolving institutions such as the Federal Reserve?  And more disturbingly, how can even 1% of the Republican voters be following him? (according to the latest Fox News poll.)

I think the economy will develop into a very important issue for 2008.  I just hope that the rest of the 99% of voters, republican or democrat, will be more informed of the workings of economics.