Tag Archive for 'economics'

Thinking About The Economy

Published by Bryan September 29, 2008 in Religion, Current Events, Philosophy and Theology. 3 Comments
There is one bit of advice given to use by the ancient heathen Greeks, and the the Jews in the Old Testament, and by the great Christian teachers of the Middle Ages, which the modern economic system has completely disobeyed. All these people told us not to lend money at interest; and lending money at interest - what we call investment- is the basis of our whole system.

Now it may not absolutely follow that we are wrong. Some people say that when Moses and Aristotle and the Christians agreed in forbidding interest (or ‘usury’ as they called it), they could not foresee the joint stock company, and were only thinking of the private money lender, and that, therefore, we need not bother about that they said. That is a question I cannot decide on. I am not an economist and I simply do not know whether the investment system is responsible for the state we are in or not. This is where we want the Christian economist. But I should not have been honest if I had not told you that three great civilizations had agreed (or so it seems at first sight) in condemning the very thing on which we have based out whole life.

-C.S. Lewis, Mere Christianity

By providence I was re-reading some of Mere Christianity last week, and this section is a good place to start a discussion on Christians and the current economic crisis. Christian responses to what has happened are just beginning to appear. The most notable being The Archbishop of Canterbury . Although the ABC throwing Marx into the mix is bound to stir up some controversy, it is encouraging to see discussion on the issue that goes to actual discussion of how the economy should be set up.

I firmly believe that any response Christians give to a crisis must have both an immediate action attached, and a long term consideration of the situation.  Often the Church does the first, but leaves the second.

What do I mean by an immediate action in response to a crisis?   I think the end of It’s A Wonderful Life is a great example. A need is discovered, people rally around and do what they can to bring the person out of the immediate situation. I’ve heard that this has happened in this case with some churches offering counseling to people hit by this, and I have no doubt that when people loose their jobs the church will be there to offer financial support and friendship (If it does not drop the name church please).  Even Starbucks understands the importance of this when right after they were offering free coffee in the morning to people who worked on Wall Street.

What the church likely won’t be as good at, is offering comment on the economic system as a whole.  I don’t mind the church waiting a bit to do this, deal with the immediate concern first, but I fear it just won’t come.  I’m glad the ABC has begun this, but where are the other voices?  The ABC may be an intelligent man, but he is not an economist.  Where are the economists to answer Lewis’ questions?   Where are those from within the Church that can offer comment on how the economic system works?  Where are they advising Christians how far to enter into it?  How much of a role is the sin of greed at fault here and how much was poor decision making?

I think this is yet another example of a place where the church could step up to it’s calling and be involved in bringing God’s kingdom to the world, but instead will choose to continue in irrelevant pursuits (I’m building a growing list). I believe I’ve bemoaned the fact that the church has embraced a dichotomy that separates it from every “non-religious” concern enough that I don’t need to get into why it’s happening or why it’s wrong again, but it still saddens me when I see such an opportunity go to waste.

A Few Bold Predictions for Our Economy

Published by Colin June 9, 2008 in Essays and Politics. 11 Comments

The first thing anyone who studies human history will notice first is that, despite varying times, places and cultures, societies and individuals fall into predictable repeated patterns. So when I say that I am going to make predictions, I want it to be understood that I am merely looking at two things: 1) what has empirically happened in the past, and 2) what logically follows from economic theory.

The Housing Market
I have already mentioned that I think buying a house right now, on the whole, is an especially dumb financial move. There are always exceptions based on local markets and circumstances, but the market has not bottomed out yet by any means. The biggest indicator of this is the fact that the Federal Funds Rate has not yet been raised to deal with inflation.

The current housing problems are due to a shifting of various financial bubbles and the fallout of malinvestment from the last fed-created bubbles. The biggest factor in housing prices is the supply and demand of debt. All of this uncertainty in housing has been caused without the price of debt rising significantly. If the Fed feels that it needs to stave off inflation (as Ben Bernanke has been inflating the dollar like mad) then the first thing they are trained to do is raise interest rates. Remember, it was only a drop in interest rates of about 5% that created the housing bubble. Imagine what a raise of 5-10% will do!

In fact, this housing slowdown is in spite of declining interest rates. This signals that the market is literally perched on the edge of a cliff, and as soon as inflation becomes a bigger priority, housing will be one of the first casualties.

There is no question that if the Fed decided to fight inflation the way that their models tell them to: by raising rates, we will see a significant drop in the real value of homes. If the economy is still sour when this happens, then this fall will be augmented by struggling families looking to sell the house that has become a noose around their necks.

Inflation and Increased Economic Controls
Food and energy prices (ironically not considered at all as part of the inflation equations by state economists) have been shooting up. The value of the dollar has been plumetting. Gold is hovering around $900 and ounce. These are all demonstrating that inflation is here. This is Bernake’s philosophy of inflation:

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

In other words, we may see an amazing amount of inflation in the coming decade because this is the philosophy that is now behind the printing presses. This means your gas, food and energy costs are only going to go up and up and up and up.

In every period of high inflation, even the most recent one in the US, governments always try to then control the economy through wage and price controls. From Richard Nixon to Diocletian 1700 years ago, governments, after destroying their currency, will blame “greedy capitalists” for raising prices and prescribe that it is essential for them to take control over the price system and legislate prices from on high.

Rather than bring stability, this move shifts the chaos from the economy to real life. Massive shortages ensue as goods will not be produced and sold at a loss to businessmen. Large companies will begin to fold (the small companies already went bust from the inflation) and basics like gas and food, which were originally just expensive, now are unavailable. Crime increases as men get more desperate to feed their families. Depending on how long the government controls prices, and how effective they prosecute, society begins to degenerate.

Unfortunately, the framework is in place for these kind of controls with state and federal “anti-gouging” laws and public sentiment currently whipped up against corporations and businessmen.

Wars and Rumours of Wars
Growing discontent in the population either requires war on the population itself or war on an external entity. In my church last week, I was appalled to be treated to, instead of a sermon or bible study (normally what we go to church for), a 40 minute political video on the “Islamic Threat” and how these evil towel-heads are going to run all over truth, justice and the American way. The other racial group this “threat” was tied to was Mexicans, who are “invading” our country and “sympathize” with the violent extremism of “all” Muslims.

If the government decided not to war on us when the effects of price controls are felt, then these groups are definitely easy targets. They also have the benefit of being a different culture and race - which is a historic enemy of governments going down this path.

Even with gas prices rising almost solely because of inflation from our government, the anti-Arab emails are flying around with pictures of the wealth in Dubai. We are setting ourselves up as a nation of looters, who may justify wars of booty-sacking the Arabs who practice that evil capitalism and are threatening our freedom with their greed. Again, governments tend to augment this racism by encouraging these wars - as wars provide the best justification for economic control, and temporarily provide the public unity to go along with a centrally planned economy.

I am not saying the US is going to turn into 1930’s Germany. What I am saying is that as government looks to gain more and more control of the economy (even for benevolent reasons) the unintended (but easily predictable) consequences tend to compound. Most people realize that we are moving in the wrong direction, but most people are also afraid to conclude that “the wrong direction” doesn’t lead to infinity - that eventually we arrive at the wrong place.

Right now we just have the beginnings of inflation and a housing market teetering on the brink. But depending on how the government decides to “solve” these problems, we may find ourselves in deeper and deeper trouble as history repeats itself once again.

How to Mess Up Your Life: Buy A House

Published by Colin March 10, 2008 in Essays. 39 Comments

Let me begin by declaring that I am not a Realtor, government official, investor or another other expert in the housing market. However, I have spent several years working for a Real Estate and Mortgage company (and watched it go from a local powerhouse to a failed business) and I have watched the housing market for years. Here are a few of the things that I have learned:

Buy! Buy! Buy! Now is the Time to BUY!
In doing the marketing for a Real Estate company during both a boom and bust in the market, I can tell you with confidence that the realities of the market have absolutely no bearing on the use of the term: “now is the time to buy!” While the company was laying people off left and right, and agents who had done business for twenty and thirty years were falling by the wayside - their dying words were all about the housing market being strong as ever.

When things were going well, they cited the statistics on house prices rising to point out a great investment. When things started going upside-down, they cited the statistics on new homes available (actually an indicator of market instability, but gullible people don’t do research).

The Sheep Lifestyle Pattern
The problem with housing is that a basic lifestyle pattern has been hard-wired into American society. It goes something like this:

  1. Graduate High School
  2. Go to college
  3. Marry
  4. Have a Couple Kids
  5. Buy a Minivan/SUV
  6. Buy a House

People obey this pattern like sheep eating grass, although sometimes changing the order of the last three. They go to college, whether their career demands it or not (and get into debt). It boggles my mind that women especially do this, seeing as how many of them do not pursue work that requires a college degree and many want to raise their children. People then can go into more debt for their wedding. Their SUV/Minivan purchase is usually a newer vehicle (and incurs debt).

Lastly, regardless of where the market is, they take out another $150,000 - $300,000 in debt for a three bedroom, two bathroom house with hardwood floors, vaulted ceilings and a nice backyard. Despite housing being somewhat volatile (especially in the short-term), the largest purchase they make is usually made completely ignorant of the market.

I really cannot explain why people do this. I have always had small cars, they drive great, efficiently and I can fit all my guitars and stuff in them. If I need to move something, I borrow or rent a truck. I have always rented - I don’t have to pay for maintenance, it is cheap and I have complete freedom to find something better or cheaper on short-term notice.

A House is Always a Good Investment
This is not true at all. It is especially not true if your house is costing you over 25% of your income, you have little or no equity and you buy it anytime from 2006 to the next five years. One thing more unstable than housing is employment. Everyone almost certainly will go through periods where work is harder to come by. Being responsible for a high mortgage regardless of this fact will get you foreclosure after being unemployed only a few months. Your house will then be sold for less than you bought it and you will now be homeless, a debtor and have dependents who cannot be fed.

A good investment is something like mutual funds or even treasury bonds. A house can be a good investment, but not if the market is ignored.

Buying a house right now as part of the sheep-lifestyle, for example, (depending on local factors) is suicide. If (and I mean if) you can hold on to your house through the next five to ten years of depreciation and flat-prices (a predictable pattern based on equity, supply, interest rates, etc…), then you might make it out with only a few scratches and bruises. That is, if you hate your job now - learn to like it because, you cannot go without work for very long while trying to pay a mortgage. In fact, expect your general quality of living and free-time to evaporate as you break/fix things, worry about the bills, pay your debts, work a job you hate and forgo recreation and relaxation activities.

Why You Should Ruin Your Life
The most recent doomsday statistic for housing is this one: equity has now reached record lows below 50%. This means that there is a significant portion of the housing supply on the brink of being vacant. Why? Because the economy is on the brink of recession. Unstable employment, means unstable mortgage payments, which means foreclosures, which means lots of houses suddenly for sale. Lots of houses for sale in an economy where people cannot buy them either because they have no jobs or the interest rates rise (very likely) causes the price to plummet. I’m not making this up - this has happened before.

A normal housing cycle happens based on over-construction and malinvestment. More houses are built than demanded during the boom, sowing the seeds of a small bust in the future. We hit this last year. However, this can be compounded by market failures, lending failures and government failures (all of which are likely to hit in the next decade).

I admit that there is some selfish anticipation on my part about this upcoming market bust. When housing prices plummet and interest rates rise, I will not have participated in the debacle. I’ll have good credit (by not going bankrupt over my too-big-for-my-britches house) and have plenty of equity cash (from saving it and not buying said house). I look forward to buying about two or three houses, and selling them at the peak of the next boom to put my kids through college and buy the wife a new bedroom set.

The Drug War and Everyday Economics

Published by Colin February 25, 2008 in Essays, Politics and Current Events. 17 Comments

There are some basic laws in economics that most people understand. If not intellectually, they definitely can grasp these laws intuitively as they interact with others in the marketplaces of idea, goods, services, politics and human relationship.

Everyday Economic Examples
For example, we may not think about it as much, but all of us who are married are monopolists. We have obtained a scarce resource - our spouse - and made a contract with them guaranteeing us exclusive use of their bodies (at least). Monogamy is a monopolistic concept. If another man engages in force to break this contract between my wife and I, or if my wife willingly violates this law with another man - many people would see me as justified in seeking justice over the broken contract.

We can understand the basics of supply and demand. Many people might notice that HDDVD players dropped in price quite a bit over this last month, almost half in some stores. People paying attention to the news on this know that Blue Ray has won the next gen format war and that HDDVD support is going to dwindle. It is no shock to them, then, that prices have gone down, as the demand for these goods is sloping downward in favor of the victor.

Rising prices is something that is understood in the same way, but the inherent emotionalism of people often clouds the interpretation. Nevertheless, there is still some basic part of everyone that can rationalize why Superbowl tickets can sell for over a thousand dollars. It does not take an MBA to know that there are literally hundreds of thousands of people who would like to go to the Superbowl, but only about 70,000 seats. The demand far exceeds the supply - this is going to push the price up dramatically.

The Universality of Economics
Yet while people do generally understand the way the world works (for this reason, much of economics fits into a broader category of science and sociology called “natural law”) they fail to apply these principles universally. Professor Edwin W. Patterson said it thusly:

Principles of human conduct that are discoverable by “reason” from the basic inclinations of human nature, and that are absolute, immutable and of universal validity for all times and places. This is the basic conception of scholastic natural law … and most natural law philosophers.

While this explains our inherent understanding of monogamy or HDDVD prices, it does not explain why it is that we still pursue such economically infeasible and irrational projects such as universal health care, farm supports, wage and price controls and even the drug war.

Application to Drug Laws
Take the issue of the illegal drug trade. The United States and most countries with anti-drug laws are entirely focussed on fighting drug use by attempting to overwhelm economic law. It is US policy to go after the “supply side” of drugs - dealers, suppliers and importers.

But this policy is inherently flawed. For instance, we know that it is demand for a good or service which drives the market. A good can be either scarce or abundant, but until lots of people want it, no one does much to bring it to market. Oil was never a valuable substance until it became an instrumental element of energy creation and expenditure. Drugs are heavily demanded because of their addictive nature. A heroin addict is going to want the drug (or a valid substitute) whether it is $10 or $1,000 a hit.

This is why supply-side enforcement practices fail. Every time the coast guard, FBI, CIA or police manage to prevent or arrest a supplier of drugs, the result is an increased scarcity (with no decrease in demand). This is akin to a drought in California, with steady demand for oranges remaining. The price shoots up, encouraging farmers of other goods to switch to making oranges to satisfy the demand (and obtain higher profits). Drug busts do the same thing - people who were doing law-abiding professions now risk criminality to grow a few pot plants on the side to cash in on the high price. This criminalizes more and more of society, and perpetuates and expands the drug problem.

Victory in Surrender
The very fact that were “fighting” the drug war is causing us to lose. With every single “victory” - we are bringing about more drug use and encouraging more of the anti-social and criminal activity that accompanies a black market.

But the irrationality persists. It absolutely baffles some as to why people like myself, who do not use drugs (nor ever will), could support the decriminalization of all drugs. I have been called unchristian, I have been called an anarchist (with malevolent intent) and I have been even called ignorant or reckless for such a proposition. But the reality is that universal natural law is on my side - because I detest drug use and the crime that surrounds it, I see no other moral alternative but to support the only rational solution to the problem.

Until we admit that we cannot “fight gravity” (that is, overcome natural law by government laws) then we are just going to keep jumping up towards the sky in futility, wearing ourselves out. We will devote more and more resources, better used in much more productive pursuits, to an unwinnable war. We will drain the economy, encourage crime and strengthen the “enemy” until the economic backlash against us is so strong that it will knock us over.

The Gospel of Wealth

Published by Kenneth Martens June 15, 2007 in Book Reviews. 1 Comment

A brief summary of Andrew Carnegie’s historic essay, The Gospel of Wealth: The Problem of the Administration of Wealth.

In 1889, steel mogul Andrew Carnegie published a short essay entitled Wealth, in which he discusses how the wealthy should use their personal fortunes. This essay was republished in the UK under the title The Gospel of Wealth. Carnegie went on to write a series of additional essays, which were collected and published in book form in 1900. Subtitled as The Problem of the Administration of Wealth, his original essay forms the first part of the twelve-chapter book.

The Problem of the Administration of Wealth begins with an analysis of the economic state of the world. Advances in industry had raised the standard of living for the poorest people to a level unknown to kings of earlier ages. But these advances brought another change: a heretofore unseen level of disparity between the rich and the poor.

Carnegie then offers a muddled defense of Capitalism before appealing to pragmatism: Capitalism is the order of the day and one must accept it.

This brings him to his main point: since Capitalism results in a few people amassing huge personal fortunes, what is the proper moral use for those fortunes? It being humanly impossible to spend that much money on oneself, Carnegie identifies three possible courses of action:

  • Leave the fortune to heirs
  • Bequeath the fortune to charity
  • Give the fortune to charity during one’s lifetime

The first he finds untenable because a man’s heirs are rarely able to put it to good use. Spoiled heirs squander and lose the money; it benefits no one.

Bequeathing one’s fortune to charity is little better than leaving it to one’s heirs, because there is no way to ensure the money is well spent. A charitable institution is not likely to be a better steward of money than an heir. Nor does bequeathing a fortune to charity deserve any respect, because a man who waits until his death to give to charity is a man who presumably would rather have taken it all with him.

The only proper use of a personal fortune, says Carnegie, is to use it for the public good during one’s lifetime. That is the only way to ensure that it is used properly, not wasted. A philanthropist should not spend the money in ways that encourage dependence and actually work to harm the recipients of charity, but rather use it only to fund enterprises that are genuinely helpful to the public.

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