Freedom isn't free

And neither was my lunch. But only one of them costs $500 billion a year. The Dutch are in many ways freer than we are (i.e., not just pot), and seem to spend way less on their military. Maybe we could get some better freedom for cheaper if we'd shop around a bit instead of going to that damn defense industrial complex megamart every time.

Another Inconvenient Truth

The Austrians would be way less irritating if they would quit calling it... Quoth Ron Paul:

However, despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policies of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

As noted earlier, what the Austrians are saying now is that hyper-inflation is on the way. Hopefully they'll be wrong this time. I guess we'll see.

On the auto bailout

This is as good a rip on the automaker bailout as I've seen

Christmas 2008

So we watched a lot of basketball and some movies, played with the dog, and had a tofurkey feast. Tofurkey is one of those things that sounds like it'll be awful, but then you try it and it beats your meager expectations. It's not great, but the hilarity of the thing makes up for a lot of taste deficiency. I never really liked real Turkey either, in fact I'd say that I prefer tofurkey, though on any given day I'd rather have something else than either one...

Merry Christmas

For anyone that doesn't live between, say, Las Vegas and the international date line, Merry Christmas. I'm in that first category there, but Christmas will get around to me shortly, when it's good and ready...

Can we pull an "Iceland" on ourselves?

To oversimplify a bit, the international component of the US economy is kind of like this: we buy materials, components and finished goods from foreign countries. They buy materials, food and other stuff from us, but in a lower dollar amount than our imports. This is an accounts deficit, which means that there's a net flow into the US of goods and services and a new flow out of the US in US dollars. Easy enough.

So, the foreign exporters are getting a bunch of US dollars. They're not spending them on US goods and services - if they were, we wouldn't have a deficit. What are they doing with them? Well, they're using them as currency among themselves. Some nations use USD as currency directly, others depend on it for purchasing oil, which is traditionally sold in terms of the USD. The rest of it? Used to purchase US government debt. The big debt holders are Britain, China and Japan, but there are scores of others holding onto US debt in smaller quantities.

That works great for us - we get a whole bunch of stuff from the foreign countries AND our government gets to spend what it wants without having to worry about covering expenses with tax revenue. It works great for the exporters too - they get a huge market for the stuff that they make, and they earn interest on our debt. Two great ways to build a national economy. As long as the US economy grows quickly enough that we don't get strangled by the interest payments on the debt (and so far it has), we're all set.

There's a crucial dependency here though - the value of the US Dollar. A few thoughts there:

1. I believe that some countries, notably Iran, are now pricing their oil in Euros rather than USD, bolstering the Euro and weakening the dollar.
2. If our current economic retraction lasts a while, our GDP growth won't continue to pace the interest on our debt, meaning that the overall percentage of the national budget that goes to interest will rise, at the expense of other programs, or even more debt (a vicious cycle).
3. If the Fed attempts to inflate their way out of the current situation (i.e., keep printing money until we recover), we're likely to see overshoot inflation, where the economy has recovered but the value of the dollar continues to fall.

A little of this might be okay - a weaker dollar favors US exporters and of course makes the overall debt picture more favorable. Too much though, and the foreign debt holders won't really want our relatively worthless USD anymore. We'll have to start paying more and more interest if we want them to buy our debt. Our economy also depends on imports. We can feed ourselves, but we need to buy oil, manufactured goods, and many of the raw materials that we use to drive our own manufacturing. We owe a lot of money to foreign countries, and our economy depends on the ability to get new loans going forward. If we inflate our way out of present debt, we could make the foreign countries very upset, shaking their faith in the dollar, and breaking our current cycle.

We could become like Iceland - unable to afford outside goods, struggling to pay for even basic necessities like oil for transport and heat, and with all the other bad side effects of runaway inflation - difficulties for fixed income earners, an even worse credit collapse, etc.

The Austrians, eternal enemies of easy money, are already worried, telling everyone that the deflation we're worried about now is way better than the alternative. Not sure how serious it is yet (what do I know really), but I'm certainly worried. I might be motivated to be the first rat off the ship, running to durable goods (dare I say gold?) at the first sign of inflation's return?

The Magic Roundabout

So roundabouts are kind of superior to how we roll here in the US. With a traffic light or a stop sign, there's always a chance (sometimes a significant chance) that folks will have to stop even if there's no one to whom they're actually yielding way. Our intersections also apparently take up more space and result in more accidents. Still, this seems a bit crazy (it actually exists, in England),

Happy Solstice

Exactly one month late, here are some photos from the SB Summer Solstice Parade.

Unintended Consequences

So guess NY discouraged Goldman Sachs from paying bonuses to their execs given that the firm was getting federal bailout $$$. Makes sense, but the unintended consequence? NY State lost $178 million as a result. We're nowhere near there yet, but this points in the direction of the class warfare endgame: whenever the middle class gets rid of the upper class, they become the upper class. If Wall Street isn't bankrolling NY State's expenses, then the remaining New Yorkers are (sooner or later).