Since the unraveling of the U.S. economy you hear many people shouting from the rooftops “I want my country back”. At the gist of this statement is a need to capture the greatness of a previous moment in U.S. history that was for the betterment of the individual. As many would say, “the good ole days”. For many, the current economic and political environment has created a lot of uncertainty in their lives. However, I have a couple issues with this statement. First off, who are the individuals who want to go back in time? Second, how far back would they like to go? Third, who do they feel took the country from them? Fourth, where do they live? Five, what is their current economic level? Six, what was their current economic level at the time they would like to go back to? If you posed this question to a million people you would probably get a million types of answers.

A lot of people in this U.S. have had their heads in the sand for a while (On certain things I can include myself in this category). To be honest, I have been part of the problem in one way or another, so these criticisms are not only leveled at others, but also myself. We have now become so delusional and desperate for an economic antidote that recent polls show that 36% of Americans wish for the economic policies of Ronald Reagan. I would like to know who these people are, but that’s quite a considerable number knowing the “Gipper’s” economic policies were pretty disastrous. Although many have debunked the merits of the “Reagan Revolution”, many romantic nostalgists just won’t let go. That’s not to say there weren’t people who benefited from the policies of Reagan, but collectively his policies were a disaster. Just ask former budget Director David Stockman on how ‘wonderful” the economic Reagan era was.

The disruptive social and economic “bullet” was fired decades ago. Let’s paint a picture. Just imagine millions, maybe even billions of people lined up after one another. An individual fires a bullet (economic instability and social disruption) from a gun. When you get hit with that bullet it’s economic anarchy for you. In that same line, many folks were, lets say number 10267 to get fired upon. Some were even in the hundredth and millionth or billionth.  If you were towards the back of the line it wasn’t your problem because  33,  672, 45976, 273192, 834165, 5938200242 are getting socially and economically “murked” way before you. Many even thought, “oh it will never get to me” or even “Maybe the bullet will lose its momentum and velocity” before it gets to me. Or maybe in denial about the destruction of the bullet, “Maybe the bullet won’t hurt when it gets to me”. Maybe they felt it was someone else’s problem.

Now that the bullet is racing forward and it’s, as O.C. said, “Times Up“, people are clamoring around for answers as to what happened.  Of course it would be “nice” to go back in time when the bullet wasn’t so close to home. The net of economic disruption had already been cast. Now that person is in the net with everyone else.

This reminds me of the Columbine father that said the following:

I am here today because my son Daniel would want me to be here today. If my son Daniel was not one of the victims, he would be here with me today. Something is wrong in this country when a child can grab a gun, grab a gun so easily, and shoot a bullet into the middle of a child’s face, as my son experienced. Something is wrong. But the time has come to come to understand that a Tech-9 semi-automatic -bullet weapon like that, that killed my son, is not used to kill deer. It has no useful purpose. It is time to address this problem.

It’s sad to see any father lose their son to such horrific violence, but at the time, we had already reached the tipping point where guns were in the hands of our youth. The carnage has now reached “everyones” doorstep, but many doorsteps have already been visited by gun violence. The anarchy is now more widespread. Now that we have shared economic grief, we are harking back to the “good ole days”. Keep in mind that there were many before you that have been living with these wounds, but your wounds are now fresh.

I remember a discussion I had with a close family member in the mid 90s and we were talking about the gang violence that had been prevalent in a neighborhood right next to ours. The town was Roosevelt, Long Island in New York. At the time the Bloods and Crips had made significant inroads into the neighborhood. We lived in Uniondale, about a stones throw away. The conversation went something like this:

Me: Wow, we really need to do something about this gang violence. A lot people getting killed in Roosevelt
Family Member: Well that’s Roosevelt, you know how THEY are
Me: Hmmm…well what happens when the gangs come to Uniondale?
Family Member: No, that won’t happen. This is Uniondale, gangs don’t come to Uniondale
Me: I don’t think so. If we don’t take care of the surrounding communities around us, we are definitely going to have gangs here
Family Member: [blank stare]

As expected, the Bloods and the Crips made their way into Uniondale and although the degree of our gang problem was lesser than Roosevelt, we still had people getting shot over gang violence and whatnot. In short, when the economic plane goes down it won’t matter that you paid $5000 dollars for your first-class ticket. Irrespective of your seating arrangement, we are all going down. It’s just a matter of who hits the ground first.

In September 2009 I wrote a post about learning the roots of the 2008 Financial Crisis. It really gets to the crux of why I was compelled to go on somewhat of an economic “expedition” to find out what went wrong with the U.S. economic system in 2008. Prior to the crisis there I wasn’t aware of any body of economic work that intelligently outlined the causes (not just the symptoms) of the financial crisis than the Austrian School of Economics. As I’ve said in earlier posts, I truly believe that the Austrian Business Cycle Theory (ABCT) is by far one of the most complete descriptions of the “science”, if you will, of economic booms and busts. In addition to the ABCT, I believe that the Austrians have a way of interweaving a healthy amount of skepticism when it relates to the government intervening in the broader economy.

Unfortunately many other economic disciplines make wild assumptions, often very overly optimistic assumptions about the value of government intervention. At the same time, I have my own skepticism on the benefits of a 100% Libertarian approach to our social and political problems, but they clearly have the right pulse on many of the causes of how financial markets and economic incentives can be distorted by “well intentioned” governments. Private corporations don’t get off the hook, but in the context of the financial crisis, they worked in tandem with the government to completely destroy the economy.

I want to make a couple of points:

1. Be an economic policy skeptic. All policy isn’t created equal. As a matter of fact, many of the policy “prescriptions” by the government were completely backward and financially destructive and/or these policies were instituted to benefit a few while impoverishing many.
2. Read some of the suggested resources below. As a matter fact, read as much economic policy as you can. Many times you’ll get to the “real” intentions behind a lot of these policies.
3. Your Congress is bought (Thank you Dylan Ratigan from MSNBC). Please watch the video below and make sure you listen to every single word. If it’s not clear after you watch this video that voting for these cronies is a waste of time, then just off yourself. Okay..that was a joke..don’t off yourself but really understand that depending on our “do nothing” Congress is a waste of time.
4. The only option left is civil disobedience. What I like to call “soft” anarchy. Be an active participant in the economy. Vote with your pocket. Our government was not always enslaved to corporate interests. This can be undone, but it’s going to take a lot more than marching, waving hands, and holding creatively snark protest signs in different cities. There’s trillions of dollars at stake and if a high level of creative destruction doesn’t take place by the people, then we are playing a very dangerous, albeit participatory charade of musical “armchair revolutionary” chairs. Instead of sitting at home or in a cafe we are sitting in the streets.

Books

• Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America by Matt Taibbi
• Greedy Bastards: How We Can Stop Corporate Communists, Banksters, and Other Vampires from Sucking America Dry by Dylan Ratigan
• Economics in One Lesson by Henry Hazlitt
• Road to Serfdom by F.A. Hayek
• The Return of Depression Economics and the Crisis of 2008 by Paul Krugman
• America’s Great Depression by Murray N. Rothbard
• Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas E. Woods Jr. and Ron Paul

(AP Photo/Julie Jacobson)

At the root of every social movement is the will to change the present situation for something better. At the root of the Occupy Wall Street protest, which has now moved to other cities around the country, the intention of this movement is to unhook the almost parasitical tentacles of Wall Street from government policy (Washington). More on this here

I don’t believe ANY significant changes will happen via government policy or Washington’s intervention. Washington is an entity that is in the last stages of terminal “political” cancer. At the end of the day, this has to result in the banking firms that were responsible for this crisis to be reprimanded for their corporate malfeasance. We should reward (with our business) those financial institutions that are fiscally responsible, and move our money out of those financial institutions that contributed to the financial crisis.

I’m not convinced that the TBTF banks really understand what they did, nor does our government really care to prosecute these banks who irresponsibly unhinged the global economy for their narrow benefit.

So what we truly need to occupy, is our apathy. It’s our apathy and reluctance to being properly engaged in our political process that has contributed to Wall Street usurping power from the laymen and laywomen. In short, we kept our eye off the ball for too long. This corporate takeover has been happening for decades. Some would say it’s been happening since the inception of the Federal Reserve Bank. Regardless of when you think international banks started unsettling our political process, we are clearly at a tipping point where banks have complete control over our political process.

My suggestion is we engage in a bit of creative destruction to bring the balance of power back into the hands of where it belongs. the Proletariat and many of the hard working people of America (and around the world) who watched their jobs, wealth, financial security and personal livelihood go up in flames by the Wall Street, Federal Reserve Bank, Government-sponsored enterprise (GSE) doomsday machine.

We should start with the following approach:

1. Remove all your assets and loans (checking, savings, IRA, Mutual funds, Brokerage accounts, credit cards, car loans, mortgages, etc) from all banks that were given a bailout from the government.
2. Take all those assets/loans and transfer them to a credit union or firm that was not given a bailout.
3. Everyone who did the first 2 steps should draft a personal letter using their own words and explain to the banks/investment firms (who no longer have your business) why you removed all your money. In addition to that, explain why you moved your assets to the other bank/investment firm.

It’s time to transform our thoughts into action. Show these banks and our “absentee landlord” government that they cannot push our society to the edge of financial oblivion, while profiting off that same financial destruction.

A bank is a place that will lend you money if you can prove that you don’t need it. – Bob Hope

Related Links

This post was inspired by Langton Hughes’s A Dream Deferred.

Rather than go through the typical romanticization of our founders on July 4th while gushing over the 1st Amendment like a first born son, I’m going to write about some of the pressing issues of an America that has broken it’s promise with it’s citizens. Some contemporary patriots might scoff at me for suggesting such a thing, but my audience are for those who have been left behind, and not those how have fortunately benefited from the American fruits of liberty. Contrary to popular belief, everyone has not reached the promise land. Let me be careful with that last line. I’m not suggesting we start helicoptering pallets of money down to the masses. I’m suggesting that upward mobility is becoming more elusive and contrary to popular belief America does not have more mobility than other nations. In fact it has one of the lowest.

Some might say I’m being too hard on America and I should tone the “anti-patriotic” language down. When your country is at Defcon 1 in regards to social and economic issues, you have to ring the alarm to let everyone know that that we have a 10 alarm fire. Why should I save “patriotic” face when we are not living up to what this country has promised since the ratification of the Constitution? I see America as a country that is slowly losing it’s way. We hear a lot of lofty speeches from politicians, but when the citizens are asked to make hard choices we fall back to our ideological political camps.

Below you’ll find a video that is extremely telling in regards to the current economic shift that is happening globally. James Wolfensohn, former president of The World Bank and CEO of Wolfensohn and Co. does an eye-opening presentation for Stanford Graduate School of Business students on the coming global economic shift. In short, America and some of it’s Western compatriots are running out of time. It has debt to it’s eyeballs and waning political leverage on the global stage. It has financial obligations (Healthcare, Social Security, etc) that’s depressing it’s ability to leverage it’s internal resources. China, India, Africa and many other GCC countries are gobbling up global GDP faster than the cookie monster disintegrates cookies. If that wasn’t bad enough, we have a populace that does not have the 21st century education and skills needed to complete on a global scale.

Without further ado I give you James Wolfensohn, who asserts that in the next 40 years, a global power shift will see today’s leading economic countries drop from having 80% of the world’s income to 35%.

• Documentary: Citizen U.S.A.: A 50 State Road Trip
• Half of Americans say that they definitely or probably couldn’t come up with $2,000 in 30 days
• Van Jones Launches Movement To Rebuild The American Dream
• Think Again: American Decline by Gideon Rachman
• Busts Keep Getting Bigger and Bigger. Why? by Paul Krugman and Robin Wells

Over the years I’ve watched Jon Stewart eviscerate political hacks and pundits since 2004. I’ve decided to showcase some of Jon Stewart’s greatest political smashes. If you are still not a believer, keep in mind that the Daily Show beat Fox News in ratings in May. Without further ado, I give you Jon Stewart’s Greatest Political Hits:

Jon Stewart smashes Tucker Carlson and Paul Begala on CNN’s Crossfire on October 15, 2004

Jon Stewart highlights CNBC’s dishonest speculation and upside-down economics on March 4th, 2009

Jon Stewart gives Jim Cramer the truth razors in regards to Jim’s Mad Money being completely “Mad” on March 12th, 2009 Part 1

Jon Stewart gives Jim Cramer the truth razors in regards to Jim’s Mad Money being completely “Mad” on March 12th, 2009 PART 2

Jon Stewart gives Jim Cramer the truth razors regarding Jim’s Mad Money being completely “Mad” on March 12th, 2009 PART 3

Jon Stewart gives Chris Wallace from Fox News a tongue lashing for comparing news to a comedy show on June 18th, 2011

Let me be frank, understanding economics (at least U.B.E.P Understanding the Big Economic Picture) takes a lot of reading, patience and a hellava lot of googling archaic economic vocabulary that on the surface seems to make absolutely no sense. However, once you are able to get past the mysterious language of economics and understand the context of this vocabulary U.B.E.P becomes more concrete and eventually you’ll get the “Ahah” moment.

So why am I so relentless when it comes to economic stuff? Well for starters, the economic policies of government have very deep impacts on the amount of money we take home. From taxes, to interest rates, money in circulation, to how much our government spends on certain mandates and a slew of other things that would probably give me carpal tunnel syndrome in my fingers if I attempted to write out all the thousands of circumstances.

Below are 3 books which I believe are good starters or as I like to say “launch pads” into more sophisticated economic fields of thought. I believe there are several critical areas that each of these books cover. One is macro-economics (understanding how the sum decisions from individuals, firms, and governments impact trends, incentives and movements in the broader economic market), then personal economics (how your behavior fits into the larger scheme of the broader economic market), and how maximizing your personal utility is by far one of the most productive acts you can do to make your skills scarce, hence increasing your value in the broader economic market. These 3 books are as simple as it gets. No fancy language, no crazy complex charts, and lots of objectivity to give us an untarnished and balanced perspective needed to tackle many economic issues that challenge us on a day-to-day basis.

Naked Economics: Undressing the Dismal Science by Charles Wheelan

What is there not to like about this book? So simple and concise minus the ideological hyperbole of free markets vs government. Naked Economics strips away all the fancy rhetoric and explains economics in a language that just about anyone can understand. Don’t be discouraged if you bump into something that sounds unfamiliar. A simple “googling” of the particular word or phrase will get you back on track and it’s extremely rare that you’ll run into this issue. The author wrote this book because he was tired of all the “ivory tower” economist explaining economics in such a drab and complex way. If these mainstream economist are the only ones who understand each other and not the general public, what is the point? This book will clear the fog of economic misunderstandings, not to mention it’s pretty darn funny.

The Millionaire Next Door by Thomas J Stanley and William D. Danko

One of the first books that really helped me understand the difference between saving money instead of looking like you have money was The Millionaire Next Door. This book is the ultimate “Anti-Joneses” personal finance doctrine. What’s extremely helpful is this book attempts at destroying a lot of the myths and urban legends that surround wealthy people. Want to know why most millionaires are NOT entertainers and athletes? How is this possible..uh read the book. You’ll be shocked to know how much the average millionaire spends on his/her watch. Want to know? Read the book. Or how about how much the average millionaire spends on a car? Want to know? Read the book. I promise you, you’ll walk away with a new understanding of why saving is so important, especially when it comes to your own personal utility. Too many people carry a fictitious narrative about what wealth is and who are the fortunate few who’ve been able to reach the status of wealthy. I must read for those who are interested in finding out where the seedlings of wealth begin and how those seedlings grow into wealthy roots.

Outliers: The Story of Success by Malcolm Gladwell

One of the most difficult concepts to understand is the dynamic “magic” that keeps the economy chugging along. In short, incentives and human capital. Incentive is the factor that motivates an individual to do a particular act. In the context of economics, it’s usually more money and quality of life. In some instances aspiring for more money might not be tied to just material objects, but could be tied to savings which breeds financial security or other philanthropic aspirations. Malcolm Gladwell’s Outliers is all about the circumstances, timing, and incentives that allowed select individuals to do extraordinary things in the economy, while explaining what happens when people master the art of aligning their personal incentives with their stock of human capital. This is the driving force behind our global economy.

Honorable Mention

Economics in One Lesson by Henry Hazlitt

Once you finished with the first 3 books above, you can’t move forward with understanding economics before you read Economics in One Lesson. Although written within a Libertarian vein (I say this as a compliment), it’s does a pretty good job of removing a lot of the “economic myths” that seem to never go away. The language is a bit heavier than the books above, but it’s still a good read. Although written almost 60 years ago, the content is as relevant today as it was then. A must read for those who want to rise above the cloud of economic confusion and fallacious punditry.

Now that the 2010 midterm elections are over, all you have to do is view the NYTimes word train from both parties to see the growing dividing line between Democrats and Republicans. 2010 midterm word train vs 2008 election word train. The fault line between red and blue states is deepening. More polarization of ideas equals more congressional gridlock while getting less and less done for the country.

My mood is disappointed. Not because the Republicans gained more seats in the House and flipped several seats in the Senate. Not because the Dems got a licking because there are no jobs. Not because because some of the most extreme ideologues are now representatives in the U.S. government. Not because the youth and other Black/Latino voters decided to stay home during this midterm election. Not because the Independents were “fair weather friends” of the 2008 election that ushered in Democrat control of the House/Senate including the Obama Administration and have now “turncoat” in less than half a presidential term. This is not a “sour grapes” reaction, this is a “reality grapes” reaction.

I’m disappointed because the American people, yet again, have an extremely short memory and seemed to have absolved the Republican party of decades of policy incompetence. They have never been the party of small government, free enterprise, fiscal discipline and just because they say it a thousand times, doesn’t mean that this is the answer or that they should institute these policies that they espouse. We don’t need small government, we need a smart and accountable government. We not only need a policy that encourages free enterprise, but a ethical free enterprise system. I’m not convinced that any party, Democrat or Republican or the fringe Republican movement known as the Tea Party, have the vision or ideas that will lead to the needed policy changes that will pull America out of this economic funk.

It’s not JUST spending cuts, it’s what you cut, it’s not JUST tax cuts, it’s balanced tax cuts that benefit the whole and not JUST the rich, it’s not JUST small business that matters, but the working poor that need help too. The single most crushing reality of this situation is ideological rhetoric has trumped informed reality. Fiscal fantasy over fiscal discipline. The American people nor our congressional representatives are prepared to make the radical changes to fix our problems. The rapid “zig zag” movements between parties is a testament to this fact. The achilles heel of this political process is we do not have an objective citizenry (regardless of the left or right), that has the information needed to understand the difference between sound policy decisions that benefit the whole vs corporatist ideologues posing as honest politicians who pretend that they are offering sound policy decisions.

Understanding the hows, whys, and whats of domestic and foreign policy is difficult. To be honest, I spend a considerable amount of time probing for facts and I STILL don’t have a crystal clear understanding of this stuff . It’s probably why most people prefer 30 second sound bites that move them into certain ideological political circles than doing the grudging hard work of researching and objectively interrogating certain policy ideas. It’s easy to follow your emotions, while not challenging the status quo. People are constantly asking “Where are the JOBS?”. For you to understand this, you have to go back several presidential administrations to understand how we got here. It didn’t start with the Bush Sr. Administration or Clinton Administration although they exacerbated the problem and it most certainly didn’t start with the GW Bush Administration although they exacerbated the problem. And to think the Obama Administration was a prerequisite to this current fiscal crisis is absolutely ludicrous. You have to research all the fiscal policy decisions starting around the Marquette Decision (1978) which completely deregulated the credit card industry. If the so-called “big bang” was the beginning of the universe, then the Marquette Decision was the big bang for our future fiscal problems. Our current “jobless recovery” is a host of bad policy decisions (including Fed policy) that was institutionalized for last 30 years.

Pointing a finger at any one political party is a waste of time. For what it’s worth, the one single book that has given me more food for thought on the nature of regulatory reform, fiscal policy decisions by the U.S. government, global monetization policy, Fed monetary policy and the roots of economic booms and busts including our current fiscal crisis is the book Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan. You can also read Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips which helps to understand these fiscal issues too. Start there and use this as a guide so you can understand why jobs have been obliterated from the U.S economy. In short, our extreme financialization of phantom assets/equity, erroneous reactions from the Fed have severely hampered the U.S. economy, not to mention financial illiteracy by the general public. It’s not going to take half of a presidential term to get out of this. We are 3-4 presidential terms away from getting even close to fixing the fundamentals of the U.S. economy. If that. Jobs can only come from the efficient use of resources in the economy. I repeat, there is no political party that can get us out of this. Once we realize that we are all in this together, irrespective of party affiliation, things will start falling into place.

Books

• Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan
• Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

I’m going to be honest, understanding economic policy is as exciting as counting the amount of sand grains in the Sahara Desert. There is no way to make this field of finance as exciting as watching the latest “crash and burn” reality show or sucking up the latest tabloid. It’s unfortunate that the latest statements from Ben Bernanke, current Fed Reserve Chairmen on printing more money to “save” the economy, also known as “quantitative easing” gets as much attention as C-SPAN during the Super Bowl. The problem with this type of nonchalant attitude toward understanding monetary policy, is this quantitative easing and moving of the Feds funds rate has more impact on your livelihood than you might think. Your credit cards, the price of goods (inflation), jobs in the economy (or lack there of), housing, school loans, mortgages, U.S. treasuries and many other areas of your life.

Out of curiosity I took a look at Nielsen’s Top 20 Network and Cable shows. Quite sobering. The usual suspects are bringing in millions of eyeballs, Dancing with The Stars, Jersey Shore, Desperate Housewives, Keeping Up with the Kardashians, Hannah Montana Forever, etc. No shows from C-SPAN, No shows from CNBC, No shows from Bloomberg-TV, no shows from Book-TV, no BBC. The only news show that made the list was the The O’Reilly Factor. Need I continue? I’m not going to go any further with my “soap-boxy” rant but we need more balance. If we are going to know the in and outs of Snooki or the Kardashians life, we should at least know what quantitative easing is. If people are going to spend 20 hours a week listening to music, we should at least throw in a couple hours learning the impacts of U.S. economic policy. I get tons of invites on my FB to go to clubs and party all night (not that I even do these things), but can’t remember the last time I got an Invite for hundreds of people to sit in a room and discuss something serious. Where is the balance?

I get it. You’d rather run in shorts and a t-shirt through a car-wash on a winter day in Antarctica than read anything about monetary policy. The language the Fed uses is more foreign than Vulcan. I started reading up on this stuff because the decisions of the U.S. government and the Fed was severely impacting my bottom line. My dough, my cash, my duckets, my C.R.E.A.M, my clams, my dead presidents, I’m sure you get the picture. Once you mess with my money, now we got beef! I now love reading up on this stuff. I don’t think anyone needs to have such a wide appetite for this econ stuff, but we need to know the basics. Simply, you don’t have to be Mario Andretti if you want to drive a car. If you know the basics, you’ll be able to get from A to B.

Here’s the bottom line: This stuff is extremely important. I or anyone else in this country cannot afford to ignore this. If there was anything of significance which contributed to the 2008 Financial Crisis, it’s citizen apathy. It’s not just rogue banks or CDS (Credit Default Swaps), or CDO (Collateralized Debt Obligations, or Fannie Mae/Freedie Mac or irresponsible rating agencies (Moodys, Standard & Poor, etc), or just shadow banks that contributed to the current state of the economy. These different organizations knew we’d be sleeping at the wheel, so they did whatever they wanted. Government policy wonks knew we wouldn’t question the Fed, or question the backward policy of setting an arbitrary goal of who should own housing without looking at the underlying fundamentals of the economy (or those home buyers), or watching the 5 major banks push their capital requirement so low that a financial collapse was inevitable. Basically what I’m saying is we have a bunch of criminals running the government and if we don’t understand what these political thugs are doing, we are going to get robbed blind (again!). I’m not blaming the victim, I don’t want us to be victims again. If we really want to move this country in the right direction, we have to demand accountability from our government. If not, what will be left of this country?

Here are some resources to get you started:

Podcasts

• NPR:Planet Money
• Russ Robert’s EconTalk
• Bloomberg on the Economy

Online Media/Blogs

• VIDEO: Understanding Inflation in 13 minutes
• Gambling with Other People’s Money: How Perverted Incentives Caused the Financial Crisis
• NYTIMES BLOG: Economix: The Science of Everyday Life
• NYTIMES: Dismal Science, Dismally Taught by Robert H. Frank

Books

• Naked Economics: Undressing the Dismal Science by Charles Wheelan
• The Ascent of Money: A Financial History of the World by Niall Ferguson’s
• The Return of Depression Economics and the Crisis of 2008 by Paul Krugman
• End the Fed by Ron Paul
• Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas E Woods

Recently I’ve been reading a lot of articles on the housing market and how it’s been impacted by macro economic policy of the U.S. One article that stands out to clear the air on the roots of inflation and it’s so-called “archenemisis” deflation is Frank Shostak’s Is Deflation Really Bad for the Economy.

I spend a lot of time on mises.org. Not because all my ideas on economics fall in the so-called “Libertarian” camp, although I find many of my own views inline with many Libertarian views, but I can get straight non-partisan, non-baised information on what makes the global economy tick from the likes of mises.org.

It’s not for lack of trying to understand the “conventional” mainstream economic wisdom, but at some point you have to let go and look for greener pastures of understanding. So as we all know, the source of our economic woes was a huge bubble in real estate, prices soared beyond their intrinsic value, investors hedged their bets on those inflated prices and when the cheap credit and cash ran out, prices corrected themselves and we are now experiencing a dramatic price correction in the economy. Unfortunately we are experiencing a huge price correction on all areas of the economy because the real estate industry doesn’t happen in a vacuum. There are many industries that are tethered to real estate, so if real estate gets the “financial flu”, everyone else is going to get “financial pneumonia”.

As stated in the title of Shostaks’ article, “Is Deflation Really Bad for the Economy?”. Well..in the case of the U.S economy yes and no, but overall…No. It’s going to be bad for those individuals who were apart of those jobs in industries that experienced “bubble” prices. Meaning those prices weren’t real and any macroeconomic attempt by the Fed to prop up those inflated prices is a recipe for disaster. The prudent way to go is getting an asset back to it’s “real” price and not the fake “bubble” price. You can’t build off of something that was never supposed to be there in the first place. The “Great Recession” that you are seeing in the U.S. and other economies is a price correction. If there are pockets in the economy that are experiencing a value/price correction, then this is a good thing.

How is any economy going to experience any efficiency or proper recovery if you prop up areas of the economy that are correcting themselves? There are only x-amount of savings and investment resources in the economy and propping up “dead areas” of the economy will create artificial demand (i.e. housing) which is just another bubble. A bubble is just a misuse of resources, not something that is healthy for any economy.

I’ll close with Thomas Wood’s wonderful analogy from his book Meltdown: A Free Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. No better explanation can sum up the danger that lies ahead if we continue to artificially maintain areas of the economy that deserve a value correction:

Consider a circus that comes to town for a few weeks. A restaurant owner may expand his seating capacity in the false expectation that the circus and the related demand for his food that it brings in its wake will last forever. But when the circus leaves town, he’ll find he has “idle resources” on his hands. We should not want to put these idle resources to work. Doing so would only draw labor and other resources away from other sectors of the economy, where they are employed in the satisfaction of real consumer demand. The expansion of the restaurant should not have occurred in the first place. We should want this bubble activity to shrink back down to size, in order that other, non-bubble activities in the economy can be correspondingly strengthened.

In the wake of a previous, unsustainable boom brought about by the central bank’s credit expansion, the market economy and its price system, left to their own devices, will adopt another arrangement of resources that employs available factors in the service of producing goods and services that correspond to real consumer demand. During the bust, free individuals interacting within the market nexus sort out which projects and business ventures are healthy and sustainable, and which are bubble activities that cannot survive without a constant artificial increase in the money supply, and cannot (and should not) survive now that reality has reasserted itself.

• Tooth Fairy Economics by Thomas Woods
• Our Insane System of mortgage finance? by John Papola
• The Fed Can’t Solve Our Economic Woes by Gerald P O’Driscoll Jr.
• Is Deflation Really Bad for the Economy? by Frank Shostak

Table of Contents

1. My Umbrella Story
2. Windproof Umbrella Conspiracy
3. Now tell me what windproof umbrellas and diamonds have in common
4. Conclusion
5. Related Sources

My Umbrella Story

I know these two products seem like quite the odd couple, but when I finish this post, you’ll see the similarities. About 3 or 4 years ago, I bought this great black windproof umbrella from the Walgreens right around the corner from my house. It was raining like cats, dogs, giraffes, elephants, tigers, and dinosaurs at the time so I was ready and willing to put down some good money for an umbrella, and when I say good money..um that’s about $15.00-$20.00 dollars. Normally I get those cheap-o street vendor $5.00 dollar “I’ll last about 10-minutes in the rain then evaporate” black umbrellas, and when it eventually meets it’s short demise I kindly dunk it in the nearest garbage can with the rest of the $5.00 dollar umbrellas that have been imploded or exploded by the wind or rain.

So I walk into Walgreens and I’m looking at the umbrellas. One side (left) has the the $7.00 – $9.00 dollar umbrellas and the other side (right) has the $13.00 – $15.00 dollar umbrellas. The umbrellas on the left side seem enticing because I know these umbrellas are better then the street vendors and that extra $2-3 dollars will be well spent. I then look over to the right side and see a set of windproof umbrellas and instantly forget I was looking the first set.. I give it a couple looks, test it out for a minute or two and I’m sold. I now own my first windproof umbrella. This umbrella was a champ. No matter how windy or rainy, it held up. No more inverted umbrella embarrassment, no more charging forward and jousting with my umbrella in the wind looking to attack the next pedestrian, and no more buying cheap umbrellas. I have officially upgraded.

A year later I mistakenly left that wonderful black windproof umbrella at a spot I used to get my locks re-twisted (at the time) and the young lady who does my hair (who now cornrows my wife’s hair) found it. I decided to part with my first windproof umbrella and let someone else reap the benefits. I’m pretty sure it was her first windproof umbrella and nothing would make me happier than passing down the legacy. So I go back to the same Walgreens to buy a new windproof umbrella and they only have blue and white (think New York Yankees). I really enjoyed my stealthy black windproof umbrella but I decided to go with the NY Yank themed windproof umbrella and I still have it till this day.

I know at this point you are asking..”Can we get the the diamond part already?”. Yeah, we are almost there, the finale is coming. Like most people you accumulate umbrellas at home because:

1. You forgot that it was going to rain today
2. You didn’t think it was going to rain even though the weather man/woman said it was going to rain (usually he or she gives a T-storm or isolated T-storm type of forecast and you say..”I won’t need it”)
3. You forgot your umbrellas somewhere. Normally when you go out you bring your umbrella because it’s raining. You reach your destination but when you are ready to leave it’s no longer raining. You are either going to remember “Oh its not raining let me bring my umbrella” or “Oh its not raining anymore [internal thought: I did not remember that I had an umbrella because it's no longer raining]

Then you get caught in a rain storm and you need something really quick. So you go with the cheap-o street vendor brand to prevent looking like you just jumped into a pool with your clothes on. Then you bring “I needed an umbrella urgently” no 846 home and soon the section where you keep the umbrellas looks like the area where people put their umbrellas at the door of a hotel. To your benefit, when company comes over and you need to go outside while it’s raining you can just pass them the cheap-o umbrellas while your “top notch top shelf” umbrellas remain in the special section that only you and your family know. It’s like a family secret. “shhh..don’t give them the good umbrellas”.

So a couple weeks ago…yeah you guessed it..I get caught in a rain storm with no umbrella. Damn you weather man. You should by hung, drawn and quartered for your weather prediction blunders. Sorry I digress. I go to my favorite Walgreens spot and I go straight to aisle 7 to pick up a windproof umbrella and to my surprise not one windproof umbrella. I’m shocked. I feel like a 3 year old kid that has been stranded in the airport. Now what? Okay, I’ll just go to your competitor Duane Read which is right around the corner and get it there. So I walk straight to the umbrella section and once again…no windproof umbrellas. I can’t believe this. I’m shocked. So I settle for some umbrella that is worst than the cheap-o street vendor umbrella but I have no choice. At this point, time is short and I don’t have the luxury to shop around.

So where did all the windproof umbrellas go?

Windproof Umbrella Conspiracy

To be honest I’m not sure where they all went. They went from being available like a kit kat in the candy section of any drug store to being scarce like looking for Scarface on VHS in BestBuy. However, I have a couple theories:

1. They fell out of fashion. Like any trend, there was a huge push then for some reason no one wanted them. A simple act of supply and demand. No malicious intent there.
2. Did those stores see a drop-off of their non-windproof umbrellas sales because the windproof umbrellas held up a lot longer? In my case, I usually have to buy several umbrellas a year because they get smashed by strong winds and rain. However, since I bought my windproof umbrella I haven’t had to buy another umbrella. It’s literally been 3-4 years. Let’s do the math:
   1. Hypothetical non-windproof umbrella sales if I didn’t buy my windproof umbrella:
      Roughly 2-3 umbrellas a year at $5-$10 dollars a pop for 3 years = $45-90.00 dollars. Now lets multiply this by several thousand because obviously I’m not the only one buying non-wind proof umbrella. Let’s just say 2,000 people for one store for each year. That’s anywhere between $90K-180K over 3 years.
   2. Hypothetical windproof umbrella sales using my windproof umbrella buying pattern in part a.
      So in 3 years I had to buy 2 wind proof umbrellas because I lost one. For the sake of this exercise, lets say the average person buys 1 wind proof umbrella at the price point I bought my windproof umbrella which was roughly $13 bucks over 3 years:
      1 wind proof umbrella at $13 dollars over 3 years = $13 dollars. Using the same 2,000 people for one store each year that’s 26K over 3 years.

   As you can see the hypothetical gross revenue of the windproof umbrellas is 40% less than the lowest revenue estimates for the non-windproof umbrellas and 85% off the highest revenue estimates for the non-windproof umbrellas.

   I was a lot more careful with my windproof umbrella because of the following reasons:

   1. It was extremely valuable/reliable (product value)
   2. I paid a little bit more so I didn’t want up another $13 bucks where $5 bucks (cheap-o non windproof umbrella) I felt less obligated to be responsible. Not to mention I knew it was going to implode any minute so my care for my non-windproof umbrella was a lot lower and reckless.(behavioral value based on price and quality)
   3. I was also less likely to forget my windproof umbrella at random places because it was a good umbrella.

Now tell me what windproof umbrellas and diamonds have in common

The point of this whole entire hypothetical economic exercise is to demonstrate several key economic and behavioral conditions that impact our buying decisions and patterns. In this scenario (I believe) windproof umbrellas and diamonds are both impacted by artificial or false scarcity.

In this specific case, I believe that windproof umbrellas are experiencing a certain type of “artificial scarcity” because it is less profitable at the low to mid-tier umbrella market to sell windproof umbrellas next to the non-windproof umbrellas. When I say “artificial scarcity” I’m stating that companies are purposely making the availability of windproof umbrellas more scarce because it is less profitable for them in regards to umbrella sales. My wife was just looking for a windproof umbrella and literally had to hunt every single pharmacy (i.e Walgreens, CVS, Duane Reade, etc) in NYC and could not find 1 windproof umbrella. She just happen to be in Home Depot at the time and on a whim looked for a windproof umbrella and found a few. Same price as the one I bought 3-4 years ago, $13 dollars. Even when you go to direct umbrella manufactures and suppliers windproof or wind resistant umbrellas are seldom mentioned. I’m not exactly sure if the distributers and suppliers are in direct “kahoots” with one another, but clearly the availability of windproof umbrellas has been minimized from the manufacturer to the distributer.

So in the case of the diamond industry De Beers buys up tons of diamonds off the market to lower the total amount of available diamonds globally, hence making them “artificially scarce”. Just imagine the natural amount of water that existed in the world was 5 trillion gallons. Then a water corporation, let’s call them De Water, would selectively buy hundreds of millions gallons of water out of the total 5 trillion gallons then put those hundreds of gallons in a water container. Over time the total available gallons would decrease hence making it scarce which means the price per gallon of water would slowly go up. In the case of De Beers just swap out water for diamonds and you’ll get a sense of what we are up against.

Since the late 1800s, De Beers has regulated both the industrial and gemstone diamond markets and effectively maintained an illusion of diamond scarcity. It has developed and nurtured the belief that diamonds are precious, invaluable symbols of romance. Every attitude consumers hold today about diamonds exists–at least in part–because of the persistent efforts of De Beers. Moveover, by monitoring the supply of diamonds throughout the world, De Beers has introduced and maintained an unprecedented degree of price stability for a surprisingly common mineral: compressed carbon. Such unique price stability lies within the cartel’s tight control over the world’s supply of diamonds. De Beers’s operating strategy has been pure and simple: to restrict the number of diamonds released into the market in any given year and perpetuate the myth that they are scarce and should therefore command high prices.

For more details on scarcity and marginality you can go to these great articles from Mises.org on marginality and artificial scarcity.

So simply, prices are impacted (excluding misnomers like government and cartel price controls) by the natural ease or difficulty on the availability, including cost of production, distribution, and manufacturing; of a particular product or resource. In addition there is also “subjective value”, which falls into the area of behavioral economics. (i.e. I prefer the windproof over non-windproff) In the context of diamonds, De Beers, who own roughly 60% of the diamond market have been accused of creating “artificial scarcity”. I don’t disagree with this accusation. They also put together one of the most successful marketing campaigns in history for their diamond business:

Over the last century, De Beers has been highly successful in increasing consumer demand for diamonds. One of the most effective marketing strategies has been the marketing of diamonds as a symbol of love and commitment.
A young copywriter working for N. W. Ayer & Son, Frances Gerety, coined the famous advertising line “A Diamond is Forever” in 1947.[31] In 2000, Advertising Age magazine named “A Diamond Is Forever” the best advertising slogan of the twentieth century.[32]
Other successful campaigns include the “eternity ring” (as a symbol of continuing affection and appreciation), the “trilogy” ring (representing the past, present and future of a relationship) and the “right hand ring” (bought and worn by women as a symbol of independence).

De Beers is also known for its television advertisements featuring silhouettes of people wearing diamonds, to the music of Palladio by Karl Jenkins. A 2010 commercial for Verizon Wireless parodied the De Beers spots.[33]

Conclusion

There are a multitude of psychological, marginal and environmental factors that go into a point of sale for any product. When products are sold there are a multitude of “micro” decisions and conditions that are related to psycho-science and economics. Or in this case, “neuralnomics”, if you will. Some of these decisions can be driven on a subconscious level. If you read how supermarkets sell their products, it reads like some white paper out of psychological science magazine. In many instances the line between psychology and business has become increasingly blurred.

As you can see I find the topic of behavioral economics and the roots of scarcity quite fascinating. You probably had no idea that something as random as windproof umbrellas have been brewing in my mind like this. Although this is a very simplified example, it’s just one example of how many variables can impact the sale of just one product.

• Thanks to Ads, Kids Won’t Take No, No, No, No, No, No, No, No, No for an Answer
• Tag Team: Tracking the Patterns of Supermarket Shoppers by KnowledgeWharton
• What Does Marginality Mean? by Robert P. Murphy
• IP and Artificial Scarcity by Stephan Kinsella
• From Louis Vuitton to the local street-corner brand, umbrellas tested. by Aja Mangum
• Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely