qe2

Once again credit to my boy Mikey for this one.  The part about the prices of energy, food and healthcare rising is the best.

a couple of points

First of all, sorry to all my avid readers (if there are any) for the long break. I thought I would be able to write more often, but I am now working full time again, and I forgot how tiring that can be. I will try to do a couple of posts by the end of the weekend though. No promises.

I'm not sure if anyone besides me reads Matt Mosley's NFC East Blog on espn, but he recently asked his readers the following question: if you were starting a NFL franchise and were charged with winning a super bowl within three years, and you were allowed to draft 10 players from the NFC East, who would they be? I am not going to elaborate on why I would make these picks, but here they are in reverse order.

10. Brandon Jacobs, RB-NYG
9. Shawn Andrews, G-Phi
8. Brian Westbrook, RB-Phi
7. Jason Witten, TE-Dal
6. Asante Samuel, CB-Phi
5. Justin Tuck, DE-NYG
4. Jason Peters, T-Phi
3. Donovan McNabb, QB-Phi
2. Albert Haynesworth, DT-Was
1. Demarcus Ware, DE-Dal (He would be a DE for me)

Honorable mention to Santana Moss, Trent Cole, Marion Barber and Chris Cooley.

Apparently a bunch of people are making a big fuss because Supreme Court nominee Sonia Sotomayor apparently is a member of a club called Belizian Grove, which only accepts women as members. These people are claiming that if a male nominee were a member of an all-male club that did not allow women, then he would not be confirmed and labeled a sexist. What a bunch of cry babies. Although they are probably right that a male would have it held against him, they should stand up for their principles and say that this kind of thing doesn't matter. If they don't want that kind of thing used against a male nominee, don't complain now. What type of club you are in during your free time is nobody's business but your own. If Sotomayor wants to hang out in her girly club and talk about girly things, who gives two shits. So nobody should get pissed when I am nominated for the Supreme Court while I am a member of Augusta National.

President Obama is now trying to revive the "pay-as-you-go" rules for Congressional spending. In theory, this means that Congress cannot authorize new spending until it either finds a way to fund it through higher taxes or eliminating spending elsewhere. President Obama showing fiscal discipline? This is the biggest joke I have ever seen. It is so outrageous that he would propose this after all that he has spent in just 5 months, I cannot even comprehend how anyone would buy this shit. Does anyone really believe Obama has any, and I mean any, limits to how much he would be willing to spend? Sure, stupid people do. After a $787 billion stimulus bill that isn't stimulating anything other than the pockets of Washington special interests, hundreds of billions in bailouts for financial institutions through TARP, another hundred million of so for GM and Chrysler, and about $500 billion around the corner for socialized healthcare, sure I totally believe that Obama will now all of the sudden start being fiscally responsible. Not to mention that under the proposed pay-as-you-go rules, discretionary spending (which accounts for approximately 40% of the federal budget) and current entitlements are not included. So pet projects and programs like social security, medicare and medicaid would not have the rules apply to them. So basically all it would do would make it extremely hard to pass future tax cuts and limit increases in defense spending. Fuck that.

Inflation is on the horizon, and maybe even closer than the horizon. Unprecedented federal deficit spending, which has increased more this year (including adjustments for inflation, not just in terms of real money) than ever before in U.S. peacetime history. The fed has increased the monetary base at an extraordinary rate in an attempt to combat the recession. In fact, M1 (currency in circulation plus travelers checks plus demand deposits in banks) has increased more this year than at any time in the past 50 years. And its not even close. With a budget deficit that is 15% of GDP, and the total liabilities of our entitlement society after universal healthcare approaching an astronomical $100 trillion, there is no other answer. If the fed wants to keep tremendously high levels of inflation from occurring, the only thing they can do is to sell some of the trillions of dollars in U.S. treasuries it owns. However, does anyone think that is likely that the fed will do so, which would raise interest rates, especially since Obama will have to sell upwards of $2 trillion in newly issued treasuries over the next year or so to finance his enormous budget? Doubtful. In fact, the fed will probably end up buying some of treasuries that the Obama administration is issuing. At least this inflation will have the positive effect of making my school debt worth a lot less. But it is going to be tremendously harmful to the economy in general. My suggestion is to buy gold, silver, oil, wheat and other commodities. If you don't, then I told you so.

The Supreme Court decided not to hear Chrysler's bondholders appeal of Chrysler's bankruptcy. Although I knew that would happen, I think I have developed a good legal argument for why the should have taken the case. 11 U.S.C. 1126(c) states that

A class of claims has accepted a plan if such plan has been accepted by creditors, other than any entity designated under subsection (e) of this section, that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan.

In the case of Chrysler, the banks who were receiving TARP money and were also secured creditors (BoA, Citi, J.P. Morgan, etc.) held enough debt to easily meet these requirements. However, subsection (e) states that

On request of a party in interest, and after notice and a hearing, the court may designate any entity whose acceptance or rejection of such plan was not in good faith, or was not solicited or procured in good faith or in accordance with the provisions of this title.

Although "good faith" is not defined in the statute the case law has developed so that it seems to mean "whether those parties in interest with respect to whom a motion for disqualification is made, had some ulterior reason for their action which looked to some special advantage to be gained thereby." American Mutual Life Insurance Company v. City of Avon Park, 311 U.S. 138, 85 L. Ed. 91, 61 S. Ct. 157 (1940). Furthermore, at least one court as found bad faith where "a purchaser of claims in voting the assigned claims is pursuing an interest in addition to its interest as a creditor." In re Allegheny Int'l, Inc., 118 B.R. 282, 289 (Bankr. W.D. Pa. 1990). Even more on point, although "selfless disinterest" is not required where the creditor "was not acting to protect or maximize its rights as a creditor but, rather, was acting to preserve financial advantages it would receive if the Plan was confirmed," bad faith could be found. In re Holly Knoll Partnership, 167 B.R. 381, 389 (Bankr. E.D. Pa. 1994). Although the facts in the cited case were different than the conflict of interest experienced by the TARP banks, this is a novel issue and the law must be applied in a new way. The banks accepted the plan not because they were maximizing their interest as creditors, but because they wanted to continue to receive federal TARP funds (and the feds received a 20% share of Chrysler, so it amounts to a party receiving equity in the restructuring paying more proportionally to some bondholders outside of any bankruptcy agreement than to others who have equal shares and rights, so that the plan will be approved). There is no way that agreement is made in good faith. The problem is that it would be very hard to prove. But what do I know.

The Phillies just won their second extra innings game in a row against the mets, this time 6-3, giving them a series win in New York and a four game lead in the division. Raul Ibanez hit a game winning 3-run home run. Man I am pumped. Great come from behind win. GO WORLD CHAMPION PHILS!

what are the u.s.'s employment goals?

Everyday there are new reports about further economic contraction and rising unemployment. A conservative estimate puts the current national unemployment rate is 8.6%. President Obama has made fighting employment one of his most important goals. The recent $787 billion stimulus bill, along with the $3.5 trillion budget, have attempted to create jobs by spending tremendous amounts of money - money that we get from taxation, borrowing and increasing the money supply (i.e. creating it at the federal reserve and buying U.S. treasury bonds). Now these may be very necessary initiatives; an unemployment rate that is near 10% is unproductive and causes many inefficiencies, decreasing the GDP and average standard of living. But what is the ultimate employment goal of the federal government? Is it an unemployment rate of 5%? 2%? Full employment?

I am sure that most of you would recognize full employment as an admirable, but unachievable goal. But does the fact that full unemployment is probably unachievable make a policy goal of full employment any less desirable? According to the Obama administration, the answer is no. His policies are designed to save millions of unproductive, over-paid UAW jobs at Chrysler and GM, while attempting to create millions of "green" jobs, betting the future of the U.S. energy sector on the belief that biofuels, solar and wind energy are going to be economically feasible and efficient with the next few years. Regardless of the merit of saving/creating these jobs, if the Obama administration's goal is to create jobs and lower the unemployment level to something more akin to bullish economic times, then there are several other policies that it has proposed which have the exact opposite effect.

First, Obama has consistently supported and voted to raise the federal minimum wage. However, economists have all recognized that raising the minimum wage will raise unemployment. Generally, raising the minimum wage will cause a decrease in the number of entry-level and low-skill jobs available. By decreasing the number of entry-level jobs, the government prevents the poorest and most uneducated people from joining the workforce. Although the wages for these jobs are low, employers are forced to train these workers who have very few skills that make them attractive to employers. Instead of giving these working poor the chance to enter the work force and learn skills that could help make them more marketable to future employers with higher paying jobs, the minimum wage eliminates their chance to learn through experience. Instead, these people often rely on the crutch of welfare since now jobs for which they are qualified are unavailable. For a detailed U.S. House of Representatives report on the minimum wage and its effect on unemployment, see this link.

Similarly, Obama's strong support for labor unions also has the effect of decreasing employment opportunities. Inherently, labor unions operate to limit the number of possible applicants for a given job. The gains that a strong union achieves for its workers come primarily at the expense of other workers. This is inherent in the law of demand. By increasing the price associated with a given product (in this case labor), the demand for that product will decrease. A successful union will decrease the number of jobs available in which it controls. It can thereby increase the price of its labor force without fear of losing jobs. However, the results of this process are decreasing opportunities for employment in the unionized industry and flooding non-unionized industries with the excess labor, thereby lowering the price that could be charged by these laborers. The effect is that fewer laborers are hired than would have been employed in unionized industry absent the union, and the non-unionized labors have fewer opportunities to find employment and are only able to demand lower wages than they would absent the union.

In addition to supporting many measures that actually decrease employment levels, the Obama administration (as well as the Bush administration before that) continued policies that have the effect of lowering effective wages of all workers. By supporting a full employment policy through government spending financed through deficits, Obama is fueling inflation and chipping away at the spending power of the average worker. Government spending can be represented to the public as adding to employment, while taxes are represented as decreasing employment. Therefore there is a strong incentive for officials to spend in the guise of creating jobs, but not to increase taxes to finance the spending. However, the spending that is not financed through taxation must be paid for either through borrowing (either domestically or internationally) or through increasing the money supply. Excessive borrowing is also not politically expedient, however, there is little public outrage aimed at increasing the monetary supply. As a result, politicians have found it relatively easy to spend, spend, spend, and finance it all by printing more federal reserve notes. As I have repeatedly emphasized in previous posts, increasing the money supply faster than economic output will cause inflation. Although many wages will be forced up by this inflation, over the past half century the wages will not grow as fast as inflation. Below is a plot of real wages and nominal wages over that time period.


As you can see, although wages have increased with inflation, despite productivity growth real wages have remained relatively stagnant. One thing that should be considered is that the federal income tax rates do not change with inflation. So the government actually benefits as consumers are making more money (although the money is not worth as much) so they will move into higher tax brackets in our progressive tax system, even though they have no more spending power than before. It has the effects of a tax increase without having to pass a tax increase. Talk about taxation without representation! But no one ever questions how the federal government is the complete and only cause of inflation, and only they can cure it from occurring.

In conclusion, the Obama administration needs to be upfront about their employment goals. If its main goal is full employment, then it should be upfront with the American people about how its minimum wage and union policies counteract other efforts to achieve those goals. Additionally, it should take efforts to eliminate the deficit spending that is financed by the federal reserve. If not it should acknowledge is role in the inflationary boom and bust cycle, and let workers know the effects that this inflationary policies have on their wages and tax burden.