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

That’s right, I don’t own a flat screen, I still have my old school 27” RCA Remote Monitor ColorTrak (Picture embedded in the post) that came with the Co-op when I bought it almost 4 years ago. It never went bad, so I never replaced it. Until that day comes, I’m rocking the RCA 27” till the tube explodes like a spark from those old school cameras that used flash powder (aluminum and potassium perchlorate) to light up the pictures. Unfortunately this post is not about my electronic frugality, but close to the topic at hand. Last night my wife and I attended Poetic, People and Power 8th annual show Price Check: How We Became a Culture of Consumption. Here’s a bio from the website:

Poetic People Power was founded by writer/performance poet Tara Bracco in 2003 to create an ongoing project that combines poetry and activism. Each year, a diverse group of poets are commissioned to write new works on a political or social issue. The new poems are then brought to a public audience in April to celebrate National Poetry Month. Poetic People Power entertains and informs. It raises awareness on specific topics and engages audiences through the expressive art of poetry.

Right now it’s 6:52am, and I’m postponing my P90x routine this morning to write about this, because I was so moved by the poet(s) poetry. This particular show was about the power of consumerism and how our society has become somewhat enslaved to an ideology of spending and debt. I touched on this topic in a post I wrote in 2006 called Slave to Fashion Dominatrix to Prices. This is not just about people who overspend, it’s also about the cost of living (healthcare, education, etc) skyrocketing and how wages have stagnated (relative to inflation), while pushing many of us further into debt.

In light of the recent financial crisis, this is extremely important. I cannot find the exact words to explain how last night’s topic is connected to the happiness and financial solvency of the average household, but I’ll leave you with this.

In the foreward of Tim Kasser’s book The High Price of Materialism, Richard M. Ryan summarizes Kasser’s research by stating.

Once people are above poverty levels of income, gains in wealth have little to no incremental payoff in terms of happiness and well-being.

Also check out this very eye opening and disturbing documentary on how our kids are becoming indoctrinated by a new culture of consumerism. I have 1 year old so for those parents out there, keep your third eye open.

Get informed, Get Active, and Become a smarter consumer!. There are resources below for those who are interested:

• Affluenza: The All-Consuming Epidemic ~ John de Graaf (Author), David Wann (Author), Thomas H Naylor (Author), David Horsey (Illustrator), Vicki Robin
• The Overspent American: Why We Want What We Don’t Need ~ Juliet B. Schor
• The Hight Price of Materialism by Tim Kasser
• Credit Card Nation by Robert D. Manning
• The Paradox of Choice: Why More is Less by Barry Schwartz
• Your Money or Your Life by Vicki Robin & Joe Dominquez
• No Logo by Naomi Klein

In the wake of the new maniac and psychopath of the month (i.e Joseph Stack who did a homicide-suicide plane crash into I.R.S. building in a failed attempt to kill hundreds to Faisal Shahzad failed Times Square bombing that could of maimed/killed hundreds, maybe even thousands) who in some twisted sense of righteousness believe that killing innocent civilians equates to some deed of salvation or proper retribution for past misgivings. These characters are some of the more obvious examples.

terrorism, act of terrorism, terrorist act (the calculated use of violence (or the threat of violence) against civilians in order to attain goals that are political or religious or ideological in nature; this is done through intimidation or coercion or instilling fear)

Here is my open letter to “The Terrorists”, current and aspiring psychopaths and cowards who might not have thought they “fit the profile”.

Dear Terrorists,(but not limited to)

The “loose cannon” who claim they are Muslim and follow the Quran and Hadiths in Islam who like to blow themselves up (and others) thinking (Allahhualim) that they are going to see Jenna (Heaven). You better go back to the deen of Al-Islam (if you haven’t already blown yourself up) and re-study because your eyes, ears and hearts are sealed with wickedness and the shaytan.
That’s violent terrorism.

Police officers and those in authority in the justice system who beat down and kill civilians mercilessly because you think they are expendable. You have the disease of cognitive dissonance towards those that you’ve concluded have an “otherness” about them which does not fit into your own cultural matrix.
That’s enforcement terrorism. (not to mention xenophobic and prejudice)

The executives and investment houses/banks/firms sitting in their ivory tower embezzling tens of millions and creating questionable investment instruments (money schemes) while undermining the integrity of the financial system. Impoverishing tens of millions for your own selfish benefit.
That’s financial terrorism.

For the murderers and killers who worship gang violence while killing people in your own community including innocent women and children because you want a quick drug profit.
That’s social and urban terrorism.

Those in the halls of Congress (politicians and law makers at the state and federal level) that play up people’s worst fears to usurp power and mislead your constituents with a divide and conquer strategy. Laying in bed with lobbyists and playing both sides of the political coin for your own one dimensional power grab.
That’s political and institutional terrorism.

For the country that goes into other countries claiming (lying) that another country has WMDs (Weapons of Mass Destruction) because so-called intelligent organizations with fancy acronyms “certified the facts” with a faulty threat matrix then mercliessly kills over 150,000 plus innocent civilians (45 9/11s) for almost 10 years while injuring millions then arrogantly occupies the same country creating more violence and misery for the citizens. Or any country that uses occupation as a foundation for foreign policy.
That’s sovereign terrorism.

For the governments and related banks that are in cahoots with one another who indulge in “too big to fail” bailouts and print money like it grows on trees while causing inflation and devaluing the dollar. Not to mention the draconian practice of fractional reserve banking and usury which buries people under so much interest that they are financially impotent.
That’s economic terrorism.

For the racist bigot (and many don’t even know they are and will read this and say, “Oh that’s definitely not me”….well not so fast, it might be you) individual that foolishly claims to believe in God but sympathies with their ethnic, racial, or tribal identity over the inclusive and humanitarian guidelines of all monotheistic ways of life. Now called religion. 
You are a community terrorist. (Not to mention a hypocrite)

For the so-called news organizations that are muliti-milllon dollar partisan hack misinformation “non-thinking” tanks that spew misleading, demeaning, information and purposely confuse the public with empty politically inspired anecdotes and regurgitate sound bites from their corporate/ political slave masters.
That’s information terrorism.

If there was anyone who thought any one group of people have cornered the market on “terrorism”, you have not done your homework.

“He who kills a person without (the latter) having killed another person, it is as if he has killed all of humanity, and he who makes one person survive, it is as if he has caused all humanity to survive” – (32,5) – Quran

In less than 1 billionth of a second after signing into law the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, by Barak Obama on March 23rd, 2010 every political pundit and economist gave their two cents on what the impact is going to be on the economy and health care in America. I have heard such ludicrous responses that that healthcare will be “Armageddon” to Healthcare reform will fix all our problems. I wonder if a truck of DeLorean time machines were hijacked because apparently every single person knows the intricate details of how this bill will impact this country in the near and long term future. I mean, all I hear is speculation after speculation on what is going to happen and the reality is we don’t have the exact details of the outcome, good, bad or indifferent. We can assume, but that’s just about it. I would ask the “crystal ballerz” to tune down their flux capacitor‎s because your noise is inhibiting the process of people assessing the merits of the bill in an objective fashion.

It reminds me of all the real estate bubble speculators and past Dow Jones average will go up by ________ [insert unrealistic speculative number here] thousand predictors, that had every piece of data, including data from the Tooth Fairy and Santa Clause to let them know that they were right. I realize that most people suffer from Historic Economic Amnesia or in this case IFAA, “Incorrect Future Assessment Amnesia“. So being that we have a 24/7 news cycle and data goes in and out the “Internetis-sphere Data-verse” and just about anything that anyone says about healthcare a month from now, will be crowded out with new information, I’m going to list below all the articles I’ve seen that are for, against, and middle of the road opinions on new healthcare reform. The page is a work in progress (meaning I’ll be constantly updating it as I get new articles) but you can always refer to it years later to see if the speculators were right or wrong. If you have articles that you’d like to see posted just comment on this post and I’ll add them. It doesn’t matter if the opinion is in support or against the bill, or even in the middle.

Lets keep the health care reform speculators honest!

Against the new bill

1. Lew Rockwell on Healthcare with Judge Napolitano
   http://peterschiffchannel.blogspot.com/2010/03/lew-rockwell-healthcare-judge.html
2. Healthcare Intervention: The Bigger Picture by Doug French
   http://mises.org/daily/4213
3. YouTube: Peter Schiff healthcare bill is insanity makes America a fascist country and bankrupt it
   http://www.youtube.com/watch?v=0seaAV2oSh8
4. Wishful Thinking on Health Care by Sheldon Richman
   http://www.thefreemanonline.org/columns/tgif/wishful-thinking/
5. Health care reform too costly for critic by John R. Graham
   http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/03/27/BA801CLCMG.DTL
6. Concord Coalition Reacts To Health Care Bill Passage: Cost Control Vigilance is Now Crucial
   http://www.concordcoalition.org/press-releases/2010/0322/concord-coalition-reacts-health-care-bill-passage-cost-control-vigilance-no
7. Obamacare Dystopia by Mark Steyn
   http://article.nationalreview.com/429537/obamacare-dystopia/mark-steyn
8. Pricing Out Private Insurance by By John E. Calfee
   http://www.aei.org/article/101841

For the new bill

1. Obama Finally Toughens Up – About Time!
   http://www.huffingtonpost.com/chris-dalby/obama-finally-toughens-up_b_515333.html
2. You did it. We did it. Real health care reform for America! by Move on.org
   http://pol.moveon.org/wedidit/
3. Sanders’ Healthcare Revolution by KATRINA VANDEN HEUVEL
   http://www.concordcoalition.org/press-releases/2010/0322/concord-coalition-reacts-health-care-bill-passage-cost-control-vigilance-no
4. Health-care overhaul begins now By Ezra Klein
   http://www.washingtonpost.com/wp-dyn/content/article/2010/03/26/AR2010032605600.html?sub=AR
5. NPR: Rep. Lee: Health Bill Not Perfect, But A Good Start
   http://www.npr.org/templates/story/story.php?storyId=124731511

• A new chapter begins on health care by Bill Adair
  http://www.politifact.com/truth-o-meter/article/2010/mar/24/new-chapter-begins-health-care/
• Health Care Summit Squabbles by FactCheck.org
  http://factcheck.org/2010/02/health-care-summit-squabbles/
• Healthcare Costs and U.S. Competitivene by Toni Johnson
  http://www.cfr.org/publication/13325/healthcare_costs_and_us_competitiveness.html
• Health Reform by Kaiser Family
  http://healthreform.kff.org/
• Health Care and Insurance Law Amendments by Project Vote Smart
  http://votesmart.org/issue_keyvote_detail.php?cs_id=29181

IMPORTANT DISCLAIMER: In no way shape or form is this post aligning itself with any particular economic school, political party or ideology like the Austrian School of Economics, Keynesian(s), Saltwater/Freshwater Economist, Democrat, Libertarian, Republican, Left, Right, Socialist etc. The purpose of this post is a conversational starter about the questionable merits of interest. Although this topic is highly controversial and the world at large has accepted interest as the norm, it’s worth having a debate on the distortions that interest brings into the economy.

Shout out to Br. Halit for giving me the title for this post, originally titled The Case for NO Interest. I am no Islamic scholar or fancy economist. I’m a student of Islam and life. Although I don’t have the vast econ-textbook knowledge like many official economist, by the good graces of Allah, I do have common sense and a pragmatic mind. With all the thousands of economist around the world, only a few of them had the insight to foresee the recent 2008 financial crisis, not to mention past crises. Doesn’t mean that we don’t need economists, but I see a lot rear-view/hindsight economists out there. I wrote this post due to my interest, no pun intended, in understanding the Islamic law regarding the prohibition of Riba (interest). Many of the themes of this post are related to Islam. If you have a problem with that and topics that have to do with Allah (God) make you too uncomfortable, then you should go here:

Table of Contents

1. Allah’s (God) ruling on Interest
2. I’m NOT Interested
3. Economic Sophistry
4. A Fair Alternative to Interest
5. Conclusion

Allah’s (God) ruling on Interest

The purpose of this post is a conversational starter on the questionable merits of interest. In addition I’m doing a bit of education here for non-Muslims because they ask me question after question after I tell them that interest is prohibited in Islam. I will address some of their questions in this post. Regardless of your way of life, clearly there is room for discussion on abolishing interest based transactions. From an Islamic perspective, Riba (Interest) is prohibited. Taking interest or charging interest is prohibited. A transaction can be prohibited by adding money on top of money (giving or taking) or by overpricing assets that are sold to the public. In Islam, every financial action should be just. You can profit, but not at the gross expense of others. The whole point of Islamic finance is to create a proper balance between the basic needs of society and the profitability of those business transactions that impact that society. In today’s world of secular based ideology, a person in power can justify any act through legal sophistry, even if the act undermines the person and the surrounding community. In Islam, you don’t “Rob Peter to Pay Paul“, then wrap an act or law in some fancy legalese, while ignoring the financial imbalances and “moral hazard” that is inserted into the economic system.

In my view, this is the root of the problem. As long as their are lawyers, financiers, investors, and government regulators that can justify questionable financial acts with legal and economic sophistry, we could have continued systemic problems. It’s not just Islam that prohibits usury (interest), but every monotheistic religion has prohibited usury. Over time, with re-writing and revisions of theological law, the use of usury has been used as an acceptable mechanism for profit. Allah knows best, but I do believe that interest is 1 head of a 5 headed demon of what is wrong with the economy. In addition to interest, clearly we are suffering from a ethical problem, financial illiteracy problem, debt burden problem, regulatory reform problem and definitely a hubris problem.

I’m NOT interested

When I get into discussions on economics and Islam, while making it clear that Islam does NOT allow interest based transactions, many people ask “Well how do you make any money in Islam?”. That would be like me saying “Hey I don’t drink alcohol”. Then they ask me, “Well how do you quench your thirst”?

I find it strange that the same people who say “Hey, let the free and fair market take it’s due course”, are the same people that aren’t as excited to deal with the burden of all that “free market” activity when the economy collapses. I like to call these people “Fair Weather Market/Economy Capitalists”. All the interest in the world couldn’t even save two major investment firms in 2008, Bear Stearns and Lehman Brothers. What about AIG? Those are just the more recent victims and had other firms not been bailed out, many more would have gone under. Remember Long Term Capital Management in the 1990s? I thought interest was supposed to account for risk over time? Uh, what happened?

What is so interesting is if you talk to the so-called “interest specialists” about interest they will give you some economic sophistry on how interest is needed for true capitalism or interest is not responsible for our economic missteps. Being that interest is so tightly coupled to our economy how could anyone believe that interest isn’t part of the problem when many of the 140 financial crises we’ve had since 1978 had to do with debt or interest rates. Many times they will quote me some “classical theory of interest-esque or time preference theory” response or something similar to the Wiki definition below:

Definition

Compound interest is very similar to simple interest; however, with time, the difference becomes considerably larger. This difference is because unpaid interest is added to the balance due. Put another way, the borrower is charged interest on previous interest.

Did you folks just get what I just typed? Lets also keep in mind that these are “THEORIES“, not laws. Charging interest on previous interest. And this is what we call an equitable transaction? Says who? The gatekeepers of the economy? Or I should earn a return on money that I have not earned? I guess the supermarket should charge me double the “regular” price of milk because they built the supermarket, bought the trucks to deliver the milk, hired people to put the milk on the shelves, etc.

The typical response:

You see that’s how it works. It’s absurd to think that someone shouldn’t pay for money over time. Look, the consensus is clear, we smart people say so, and we have the theories (not laws) and dusty economic books to prove that interest is needed for capital markets, so get over it. Don’t let me quote Jeremy Bentham.

Absurd huh? I guess as long as we are using text book definitions, here is the text book definition of alcohol (Ethanol):

Any of a series of hydroxyl compounds, the simplest of which are derived from saturated hydrocarbons, have the general formula CnH2n+1OH, and include ethanol and methanol.

“Of course, there is nothing in that definition that seems harmful, right?” Just a bunch of hydroxyls and hydrocarbon atoms doing the bounding “two step”.

Lets just ignore the amount of murders, car accidents,alcoholism, addiction, rapes, drug abuse, broken families, bankruptcies, domestic violence, financial cost to the health care system, human cost to livelihood, brain damage, etc that this psychoactive drug contributes to and all is well. Nothing but a lipstick on a pig. As long as we dress it up with sophisticated language and words that only phds and so called “economists” can understand, we should be happy to deal with interest in the economy.

Economic Sophistry

What is even more perplexing, is you’ll have pro-interest individuals stating, “Hey, without interest we wouldn’t have the proper growth in the global economy” Really? Do these individuals realize how many times governments and monarchies around the world since the French Revolution have literally printed themselves out of an economic crisis (yes printing money out of thin air) while debasing the currency and sending inflation through the roof? [See A Free Nation Deep in Debt by James McDonald] Is this what free and fair market is? Whenever I get into deep trouble just print more money to fix the problem and still call the system a free and fair market? Fractional Reserve banking? We arbitrarily choose who the winners and losers (bailouts) are in the economy and then call it a “free and fair” market? Is this not hubris?

I’m curious what the economies around the world would look like if money wasn’t printed out of thin air to “fix” the economy? Oh, no problem, well just have deficits that we will never ever pay back. Can you imagine an American citizen telling the IRS, “Oh hey don’t worry about my debt, that is just a deficit and I’ll just carry it over for the remainder of my life while printing up money from my house to pay for new bills. See, I fixed the problem”. And this is what they call a “free and fair” market? With that being said I am not for the printing of money because this is just another form of interest, not to mention it is a economically flawed approach to monetary policy. With all the interest that is being charged, none of it was enough to account for risk over time. The current crisis is yet another indicator that the same Wall Street titans that profit off of interest based financial instruments are nothing but “welfare” corporations who got done in by the same interest they charged. In fancy econ-world talk they call this “over-leveraged”. This is just another word for “Hey I can’t pay this loan back with interest”. Every major bank/investment firm was almost insolvent, if not insolvent in 2008. You name it, Citibank, Lehman, UBS etc, and some banks like Washington Mutual have been banished to bankruptcy land, never to be seen again.

As Nassim Taleb states in Black Swan regarding the Savings and Loan Crisis:

The same happened in 1983 with money center banks losing cumulatively every penny ever made, and in 1991-1992 when the Savings and Loans industry became history.

Take a look at the “free and fair” market looks like with bailout after bailout since the 1970s:
http://www.propublica.org/special/government-bailouts

So what happened banks and investment firms? Wasn’t interest and your high returning investments supposed to dig you out of the hole when financial disruptions strike? Apparently not. So if interest is not even a mechanism that can properly account for risk over time, then why are we doing it in the first place? Don’t be fooled by the fancy language, “Re-capitalize” is just another fancy word for “Corporate Wic Check”. Instead of food, the tax payers are buying toxic assets. I would use the term “buying” lightly. “Off-Balance Sheet” has now become another word for “hiding risky assets that I know would completely deteriorate my companies net worth and possibly make my company insolvent”.

Fictitious Banker Convo:

Banker: Uh Mr. Oxford I noticed that you had 40K in credit card debt. I think this is going to be a problem with getting you that loan.
Me: Oh no problem, you see you actually weren’t supposed to see that. I have this thing called “off balanced sheet” which hides that 40K debt so my balance sheet looks better than it is.
Banker: Hmm, okay that makes sense, why would I want to get an accurate representation of the risk. That just preposterous. Ha ha ha (laughs nervously)
Me: Exactly, I kind of felt the same way, so can I get a “do over”?
Banker: Sure. You are approved.

The stalwart supporters of this farce economy are like the following story:
Let’s say a bunch of engineers (Bankers and Investment Firms) create a recycling water cleansing system (RWCS). They say that as long as you have 800,000 liters of water (cash) in the system, the system can maintain itself. Whatever run off (bad investments) and natural evaporation (risk) that happens will be replenished by natural rain fall (interest and fractional reserve banking) and the efficiency of the system extracting more water out of the system (profitable investments). Then over time, instead of 800,000 plus liters of water in the system, the amount decreases by 50,000 liters every 3 months. By year 3 the water system is struggling with only 200,000 liters. Even with natural rain fall subsidizing the system, they still can’t cut it. Now instead of admitting that the recycling water cleansing system is not working, the engineers siphon water from the Atlantic Ocean (Bailouts and printed money) into the RWCS to artificially bring back the system up to 800,000 liters of water while patting themselves on the back and stating “Hey look, our system works. All we need is the occasional water subsidy and we are in business”.

What a sad state of affairs. Are we so blind?

A Fair Alternative to Interest

Some might read this and think I’m some wacko dogmatic socialist. As if creating a profit mechanism that is an alternative to interest based profit makes you a socialist. Ha! I’m no “Capitalist” which means my motivation in life is not just profit. When I do business, I’m for making a profit but not at the expense of what Allah has intelligently decreed for society at large. In addition, equality and being just is more important than mere profit, and it’s not like that ideology has served ALL of society well, considering the current circumstances. A title I’ll steal from John Kim which is a Capital Anarchy. This is what we are dealing with in the 21st century. Many people outside of Islam might believe that people who believe in following the guidelines of Quran and the Shariah of Allah (SWT) are bunch of mindless drones that don’t actually reflect and ponder on those same rulings with proper intellect. This is far from the truth. When I found out that usury (interest) was prohibited in Islam, I spent a substantial amount of time researching the law and the mathematics behind the prohibition. Not to mention, that are many Islamic scholars who can elaborate even beyond my amateur approach to explains Riba and it’s consequences to the global economy. If you are interested in thinking outside of the box, hit me up on Facebook and I’ll give you the sources. There are some sources below too.

As I said earlier, there are lawful ways to profit that don’t involve interest. I’ll use the example of buying a house, which is a business transaction that most people can relate to. I touched on the Islamic Financing option in my the First Part of Economics Made Simple Renting vs Buying a Home.

As you can see the transaction is a equitable one that balances the risk. Each party owns their fair share of the investment, which brings me to my next point of Profit-Sharing also know as Mudarabah. You can read about more Islamic Financing options from here. There over 8 different options and all of these options cover various financing needs, whether a line of credit is needed, financing of large purchase items like a house, etc.

I don’t see how one of the main approaches from various venture capital firms is something that cannot be utilized in more areas of finance. If profit sharing was so inefficient why do multi-million dollar VC companies exist? Why don’t they charge interest on the money they lent you? It’s simple, what ever you put in is what ever you get out of the investment. If you own 25% of the investment you get 25% of the ROI (Return on Investment). If you own 66.6823% of the investment you get 66.6823% of the ROI. What is also very beneficial with this model is it allows people with smaller amounts of liquidity to get in on the ground floor of a particular investment. Very similar to how a fractional shares work.

Check this out:
Just imagine that a supermarket wanted to move into your neighborhood. Instead of going to a bank with interest, the locals of the community can become investors too. So the total start-up cost for the supermarket, let’s call it GroceryMart, Inc need 20 million dollars. The company has the first 10 million. So they go to an Islamic bank for the 7 million and that Bank now own 35% and the rest of the 3 million is financed by the local community giving them 15% of the business. If anyone wants to offload their shares, you find another buyer or negotiate with GroceryMart.

As income streams into the business, money is equally distributed based on the percentage of ownership or other contractually negotiated payment schedule. In the contract it is stipulated that at any point in time GroceryMart can put in a bid to buy out shares of the other share holders. No different than when a company on the stock market buys back shares. Now what is great about this scenario is the risk is evenly distributed. If the business does well, we all do well and if the business does bad we all do bad. Although I mentioned the stock market example, none of these shares can be traded or bid up in price. The only way the values of the shares go up, is if the company brings in more income.

There are couple things that are accomplished with this one tactic of Islamic Finance:

1. Risk is evenly distributed based on how much you put into the business
2. There is no compounding interest that is exponentially accruing on one side of the business transaction.
3. This will actually allow people who don’t have a lot of disposable income to become investors. No different than buying fractional shares. This will greatly contribute in upping the financial literacy of the community and create a starting point for non-wealthy individuals to invest in simple straight forward businesses.
4. No more winner take all.
5. No distortion of assets from speculation and interest. Because there is no interest we don’t have wild swings in asset valuations running away from the actual value of the asset. (Very similar to what happened to the housing market in 2008)

Now some may argue that this methodology is crude or inflexible and might not maximize the highest potential for profitability. I would ask, in comparison to what? To the current so-called “free and fair” market that gets the luxury of being bailed out with printed money out of thin air whenever an economic financial crisis happens? Since the 1900s we have never had a market that did NOT have the luxury of being bailed out. In just about every instance there was never enough interest earned to properly cover the inherent risk over time. So not only do the banks and investment houses get the luxury of charging interest which is supposed to account for risk over time, but when their risked based models fail miserably the tax-payers have to bail them out. If this is a “free and fair” market, then maybe we should go back to sharecropping because this is no different.

Conclusion

I would like to reiterate that this post is a conversational starter. I would like for pro-interest individuals to watch the movie Life and Debt, or read the history of how IMF and World Bank policies have “benefited” the countries that they have done business with, or read about PayDay loans, or the 1978 Marquette Decision, or The History of the Credit Card by Frontline or any financial crisis that has happened since the 1900s. In every circumstance interest was involved which distorted the true value of assets in the market or the interest rate that banks were charging were incorrectly pegged against the assets that they were holding. In many instances, the wealth was completely wiped out be taking on loans with interest. Also keep in mind if we had let the “free and fair market’ play out, there would be way more companies going under. What we are seeing today is a fraction of bank failures due to this fiat currency/interest/fractional reserve based system artificially propping up the system.

Some might argue about savings and not getting interest. In today’s fiat based economy a dollar today is not a dollar tomorrow. The amazing part is no one every asks the big word..Why? Well, if I’m a government and I keep printing money out of thin air and dumping it all over the economy, that’s is going to lead to inflation and that milk, beans, bread or whatever is going to keep going up in price. Reserve banking (not fractional reserve banking) and stopping the demonic practice of printing money out of thin air would dramatically help in keeping prices tame. There is no reason why prices shouldn’t go down if there is not enough savings and resources in the global economy to buy everything. It’s almost impossible to know what the true price is of anything because of all this tinkering with the money supply.

In addition to this, how on earth can we trust a practice that financially punishes the most vulnerable people on the planet with higher rates of interest? Is that just? To add insult to injury now these “Credit Card Banksters” want to charge annual fees on credit cards users who don’t use their card as revolvers. What type of nonsense is this? Should we just continue this practice because the so-called financial specialist in their ivory towers say so? I would also ask those same individuals that claim to adhere to any one of the monotheistic religions to re-read their religious doctrine and put the use of usury under a microscope.

Here are some links to get you started

Bible: Kings James Bible on Usury
Torah: Judaic Ruling on Usury
Quran: Quranic Ruling on Interest

Profit sharing is class independent. It’s fair, transparent and easy to implement. With true profit-sharing, there is no distortion of the money supply (whether through interest or printing money out of thin air). For the most part, every dollar can be accounted for.

Even Warrent Buffet had to admit the following:

But Mr Buffett argues that such highly complex financial instruments are time bombs and “financial weapons of mass destruction” that could harm not only their buyers and sellers, but the whole economic system.

He gave this warning in 2003.

How much financial carnage do we have to see to understand that interest distorts markets? Are we not tired of being thrown around like a rag doll in the economy by the so-called “financial czars” and “phd interest specialists” who act like they are the gate keepers of this economy? Do you actually feel like this market is fair or you actually feel that you have economic freedom in such a distorted market?

God willing, the root to proper economic prosperity is transparency, financial equality (ethical capitalism), efficient production, fair competition which is underscored by socially responsible driven economy. These 5 principles should underscore our financial decisions and destroy the 5 demons of the economy I mentioned earlier. Not speculation, wild gyration in interest rates, and corrupt laws that protect corporate malfeasance.

If you are going to live and die by the gun of “Russian Roulette” interest, I find it quite hypocritical for the same individuals to expect the bailout ambulances to come running to their rescue.

I refuse to sit as a back seat driver and go for the ride with “financial legalese that justifies interest, which no one can understand” driving and “economic sophistry” riding shot-gun. It’s time to pull over and get out the late model White Ivory Tower EX Edition sedan.

• Why Greece Matters
  http://www.npr.org/blogs/money/2010/02/podcast_yes_greece_could_defau.html
• Warning Against Riba Transactions
  http://abdurrahman.org/economics/ribaIbnBaz.doc
• Foreclosures Are More Profitable Than Loan Modifications, According To New Report
  http://www.huffingtonpost.com/2009/10/21/perverse-incentives-lead_n_328378.html
• How massive student loan debts are sinking American dreams and causing a national economic headache.
  http://www.pbs.org/now/shows/525/index.html
• Nassim Taleb
  http://rs.resalliance.org/2008/09/17/financial-resilience-taleb-and-mandelbrot-reflect-on-crisis/

I meant to write this blog post about a month ago, and I’m still bringing the final touches on the last installment of Economics Made Simple, The Case for NO Interest. However there are other pressing issues that have just as much to do with economics and that is you own personal health. If you want to jump straight to the Banana Coconut Porridge recipe AKA Banana Morning Surprise, click here. (this will take you straight to the recipe). I came up with the porridge recipe after a bit of frustration with the powdered banana cinnamon porridge mix I used to buy from the local Jamaican store that just took way too long to make and required continuous mixing throughout the entire 20 minute cook time. Even then the mix would be lumpy, uneven, and if you didn’t add the right amount of sugar, the porridge would taste awful.

About a month ago a co-worker of mine provided me with a really great set of Raw food restaurants in NYC and recipe books. The Raw Food links and information are below. As some of you know, I used to be be a vegetarian…well actually a “Fishetarian“. Last year I went back to meat, but that doesn’t mean I don’t want a healthy diet. What I’m looking for is balance. A healthy amount of fruits and vegetables with a bit of meat. Last week me and the family went to The New York Botanical Garden in the Bronx. This is a really fascinating place. Just beautiful trees, vegetation, streams, and food markets that really put you at peace. I was so overwhelmed that we decided to get a yearly membership. On $120.00 a year. That’s $10 bucks a month!

I found a very fascinating book at the NYBG bookstore called What to Eat by Marion Nestle. Here’s a simple explanation straight from the book:

Marion Nestle’s What to Eat is a new guide for a new era in American food and nutrition the-the one book that tells you everything you need to know about food, with clarity, insight, wit, and wisdom.

A good friend of mine on FB posted, you are what you eat. So simple, so true, and often ignored. I would even go a step further and say you are what you think. We often ignore our mental health, while staying squarely focused on the physical.

So in the last couple weeks, I have felt a need to re-focus my efforts on taking a more aggressive approach to my own personal health. I just recently bought World’s Most Hardest Exercises and I’m looking to step my exercise game up. With all the talk about health-care, clearly there is a need for Preventive Behaviorism Healthcare (PBHC). What is PBHC? Being proactive about your health before you get some debilitating illness or sickness etc. It has been estimated that up 25% of every dollar spent on healthcare is related to personal neglect. Even if the number was 10%, that would still be too much. Just think of the efficiencies that can happen by just eating right and exercising. I know, it’s easier said than done, and there are whole host of political, regulatory reform, misinformation on eating habit, food education, class issues, that need to be addressed to bring about proper health care reform, but change starts with us. Not the just the government and private healthcare firms.

Is it any surprise to anyone that the most obese country in the world is suffering from a healthcare crisis? Is it any surprise to anyone that we know the top realty t.v. shows but don’t know what our local politician’s position is for true healthcare reform? Is any surprise to anyone that gossip blogs, nonsensical videos on YouTube, and other lude forms of entertainment get more traffic than intelligent discussions on ideas for healthcare reform on the likes of fora.tv, cpan.org, catoinstitute.org, etc but yet we still wonder why the government and private companies take advantage of our laziness? Is it any surprise to anyone that the number one way (if you haven’t already been inflicted with some debilitating disease) to “healthcare reform” is a low-fat diet, exercise, no smoking (of anything), no abusing your brain with illegal drugs, low sugar, low salt and clean living so you can stay out of the hospital in the first place?

Most times when people say “health care”, they immediately think of taking care of some physical ailment. But what about our mental health? Do we ever think about the types of things that we watch on television and how that impacts our social behavior? Do we ever think about our spiritual health? Do we ever think about how healthy we are in regards to controlling our desires? Do we ever think about how healthy we are in regards to respecting the people around us? How healthy is our sense of compassion for others who are less fortunate? How healthy is our sense of purpose in this world? How healthy is our general knowledge regarding pressing matters around the world? How healthy is our ability to have insight, intellect, and humility?

Healthcare Reform is more than just what the government or private healthcare firms have in store for us once the bill gets passed (Already passed in the House), but is truly about accountability towards our own personal health and helping the people around us.

Banana Coconut Porridge AKA Banana Morning Surprise
(1 serving)

Prep Time: 5 minutes | Ready In: 15 minutes

Ingredients:

• Instant Cream of Wheat (1 serving size)
  I actually use the instant Cream of Wheat so this is the only synthetic part but you can use regular Cream of Wheat if you like (takes more time)
• *1 Banana
• *2-3 good shakes of Cinnamon
• 1 teaspoon of Coconut Milk
• 1 Tablespoon of Wheatgerm (Kretschmer Honey Crunch Wheat Germ preferred)
• * 1 good shake of Nutmeg
• 2/3 Cups of Organic Mlik
• (optional) Handful of Blueberries or Strawberries
• (optional) chocolate chips

Directions:

1. Create the Cream of Wheat with the 2/3 Cup of Millk
2. Drop the banana(s) in the hot Cream of Wheat and blend till merged (Best to use a hand blender)
3. Add in Cinnamon, Nutmeg and Wheatgerm, and Coconut Milk while blender is on (as needed)
4. Drop in blueberries or strawberries.
5. Enjoy!

* If you want a stronger or sweeter banana taste you can add two bananas for each serving. As much or as little cinnamon as you like. Depends on your preference.

Obviously the chocolate chips somewhat moves it out of the “healthy” category but it’s nice to have every now and then. (probably can use organic cocoa for this) it melts real nice in the hot cereal

• Raw Food Made Easy For 1 or 2 People by Jennifer Cornbleet
• Raw: The Uncook Book: New Vegetarian Food for Life Juliano Brotman and Erika Lenkert
  
• Raw for Thirty: Raw food documentary about the people with diabetes
  http://www.rawfor30days.com/index_coast.html

One of the most painful things to see is how pundits, cable networks, commercials, and hearsay can dominate the headlines, but practical financial advice on how to stabilize the economy fall to the waste-side. So the latest distraction is a Dow 10000 and other personalities selling the idea that only the government can dig us out of this economic mess. If it wasn’t clear before, let me elaborate who the guilty parties are in this current economic mess:

• Federal Reserve Bank aka The Government
• Financial apathy among the citizens of the United State of America
• Poor ethics among various investment houses, housing appraisers, rating agencies, mortgage brokers, commercial banks, especially Freddie Mac and Fannie Mae
• Unintelligent Regulation
• Capitalism (sike)

No matter what anyone says, capitalism is not the problem for the current economic crisis. Unethical individuals taking advantage of the financially naive, coupled with a rogue Federal Reserve Bank that clearly has mixed intentions is the core problem. I’m no psychologist but I’m going to be the first to offer a condition that has plagued Americans since the FED was instituted. It’s called Historic Economic Amnesia (HEA) Syndrome:

It’s the inability to grasp past guidelines of economic history and current financial events to prevent future prediction errors.

As soon as a tiny spark hits the economy, we forget about what sound economic policy really is. We also forget who the villains are who created this problem in the first place. We also forget that our financial decisions are a big part of economic policy. What really boils my blood is to see the same individuals who caused the problem claiming that they have the answer. As I said in a earlier post, we are going to the arsonist who burned our house down for advice on how to put out fires. Of course an arsonist probably understands creating and putting out fires more so than the average person, but clearly there is a ethical problem.

I have seen this author on several news shows (Morning Joe, GPS) in the last couple days; his name is Robert Skidelsky. His new book Keynes: The Return of the Master explains the career of John Maynard Keynes and his influence on today’s economic policy decisions. If you don’t have the patience to read Keynes’s original classic The General Theory of Employment, Interest and Money, this book will serve as a “Keynes in 24 hours” overview.

I would also suggest folks to watch the documentary Broke: The New American Dream. It serves as a good reminder of what we are dealing with.

• Keynes: The Return of the Master by Robert Skidelsky
• Foundation for Economic Education
  http://fee.org/
• Broke: The New American Dream.

IMPORTANT DISCLAIMER: In no way shape or form is this post endorsing the use of usury (interest) or gambling when terms like debt, savings, lottery, credit cards, loan, borrow, etc are used. This is merely an explanation of my experiences with saving, debt, and credit cards.

Welcome to Part III of Economics Made Simple. I hope you have enjoyed the the first two parts of this series and if you haven’t had the moment to dig into the first two parts, the links are below.

1. Part I: Renting vs Buying a home
2. Part II: Why Can’t I Make Ends Meet?
   (How I found the Austrian School of Economics)
3. Part III: Saving Money vs Serfdom
4. Part IV: Casino Capitalism

At first I titled this post Saving vs Being an Idiot, To be honest, that title was a bit harsh, and I’m not here to demonize anyone or make them feel bad. What I really want to do is send a message that the alternative to preserving your money (AKA Saving), could potentially be a form of serfdom . Piggying-back of F.A Hayek classic book The Road to Serfdom, it’s important to understand where the road leads if we decide to treat money as if it grows on trees. So what does being a Serf or to be in Serfdom mean? Here is the definition:

A person in bondage or servitude.

Can you see where I’m going with this? Rather than bore you with a whole bunch of “savings rules”, (that most people ignore anyway), I’m going to go into a story about myself and how I went from a destroyer of money to preserver of money. Let’s begin, shall we?

Table of Contents

1. Mi av chree job (Patios to English translation: I have three jobs)
2. Syra-cash University
3. Rockbottom
4. Conclusion
5. Articles that will scare you into saving Money

Mi av chree job

So growing up in a West Indian/Jamaican family the importance of saving money or as my mother says “Saving for a Rainy Day” is one of those things that is drilled into your head as soon as you come out of the womb. I wouldn’t be surprised if my parents handed me a shovel and newborn work permit to get started at the nearest construction site. Although I jest a bit here, this ideology was one of the most important life skills that my parents gave to me. So as soon as I hit fifteen I got my work permit and started to get busy on the work grind. Very strange things start happening when you start working and you live in a Jamaican household. Similar to the parody of the Jamaican family called the Headley’s on In Living Colour, where having dozens of jobs was the joke, in real life, things aren’t so different.

No, I didn’t have 10 concurrent jobs, but I most certainly could not have 1 job. If you have 1 job in a Jamaican household, you might as well be seen as someone who is unemployed. With 2 jobs you are officially working, and with 3 jobs you are doing extra credit, if you will. So I started working at Waldbaums Supermarket in East Meadow, NY (Long Island) pushing carts. Not a very exciting job, but the $4.25 an hour was better than no dollars a hour. Right after school I would rush to do my 4:00pm to 9:30pm shift. Having 1 job was good during high school, but as the summer approaches, in probably the most natural and normal voice, my mother says “Su, wen ya start ya sekon job?” (Patios to English Translation So, when do you start your second job?”). As if that was what in the plans for my summer! Rather than dodge the question with, “What second job?”, I said “Oh, yeah..I’ll..um look around.”.

So my mother worked at EAB (European American Back) at the time, it is now Ciitbank, and I was able to get into the teller program at the bank. By the time the summer hit, I was promoted to cashier at Waldbaums, so I had a bit of experience handling money. Getting the teller job was not only a natural transition for me, but double the money I was making at Waldbaums. So I would work at the bank during the day (8am to 4pm) then rush over to Waldbaums to do my 6pm to 10pm shift. I always worked on weekends at Waldbaums and especially Sunday to get the time and a half. My weekend shift at Waldbaums started to get later and later. They needed me for the night shift, the 4pm to 11pm shift. Sometimes up until midnight. So that left a huge pocket of time during the day on weekends. Uh oh, step in mom dukes “Yu hav nuff tyme ina di day, huh?”. (Patios to English Translation: You have a lot of time in the day, huh?”. This my friends is a very passive aggressive way of saying “Hey, you have way to much time during the day, time for another job”.

So a friend of my mother, Bobby, big Italian guy that was known as “The Grape”, had a construction business. He needed help cutting down trees and busting up concrete for contract jobs around Long Island. I have no idea where Bobby is today, but let me tell you, this dude was the sweetest and nicest guy ever. He would bring fresh “muzzerallla” for my mother that was probably the best “muzzerella” I ever had. He’d buy lunch for the working crew and was just really easy going guy. Of course you had to work your behind off, but that was expected from a guy like Bobby. The job was roughly $100 bucks a day. At this point I feel like the Jamaican version of the Rothschild’s children. I had never seen or made so much money in one day. So I did a couple jobs with Bobby during the summers until it was time to go to college.

So there you have it folks, 3 jobs. I was a great saver then. I would save about 80% of my paycheck and use the rest for cds, clothes, and movies. With those jobs I was able to save about $4,000 to $5,000 dollars. That’s about $6,500 dollars in today’s dollars. Not bad. I would end up using this money for books for college, but during college I would reverse all my diligent and prudent savings practices which I will elaborate in the next section.

Syra-cash University

There is something very strange about going to college. It’s like the anticipation of going on a roller coaster for the first time. Although the anticipation of being sky-rocketed to 2-3 gs of force has you laced with fear and excitement, you can’t wait till the moment where you are at the top of the peak, and you are driven down at over 100 miles an hour down the track. Like any roller coaster with cork screws and swift roundabouts, if you are not careful you can get sick or even injure yourself. College is no different. Syracuse U. (or as I like to jokingly say Syra-cash University) was by far one of the most expensive, beneficial, and culturally diverse experiences I’ve every had in my life. Although I’m very close to paying off my school loans completely, one of the first experiences I’ll never forget is walking up on campus and seeing a row of tables with these professionally looking men and women standing before a stack of several dozen crispy white t-shirts. Before I can even blink, The nice women with the blonde hair and pearly whites says, “Sign-up for this credit card and get a FREE T-shirt”. Wow, I’ve only been on campus less than 10 minutes and I’m already getting “free” stuff. Not only do I get 10K in credit, but I get a t-shirt out it of it. Little did I know that this so-called “free” t-shirt was going to cost me almost 14K in credit card debt later on. That was the most expensive free gift anyone has given me, thanks a lot!

One of the most seductive parts of the credit card is it’s ability to fulfill the desire of instant gratification. In less than 1/100th of a second you can get whatever your heart desires. Need new shoes or clothes?, no problem, need new T.V.? no problem, need to go eat a nice restaurant? no problem, get depressed or sad and need to feel better, no problem, need to pay off the blasted credit card that got me into debt, PROBLEM. Here is a good example of what I’m talking about. There was this great little sandwich spot called Kostas. I mean, their cheesesteaks were the best. Yes, no disrespect to Philly but better than your cheesesteaks. Yes, Syracuse makes better cheesesteaks than you, get over it. However these cheesy steak subs of delight (Cheesesteak with onions, peppers, lettuce, tomato and mayo) cost me $1,000 dollars in one semester! I was to Kostas what a drug addict is to a heroin dealer. My mother called me, “Yu maad? Cyan spen dis tipe a muny an jus sanwige” (Patios to English Translation: Are you crazy?!! You can’t spend this type of money on sandwiches). Of course she was right, and there would be a host of other little subtle weekly expenses that would eventually balloon my credit card debt to 10K after I graduated from college.

After I graduated from college, my addiction to debt wasn’t getting any better. Now keep in mind that I always made the minimum payment aka share cropping payment. Like a share cropper you never ever grow or earn enough to make ends meets. All you are doing is rolling yourself into more and more debt, which was very typical of the share croppers during the 19th century. I never missed a payment, but my debt burden was not getting any smaller. Now it time to hit rock bottom.

Rock Bottom

So you would think getting a fancy job at one of the largest health care companies would stop the debt spiral, right? No. So instead of batting down the “cost of living” hatches and paying off my debts, I increased my standard of living, hence plunging me into more debt. To be honest, I wasn’t one of those debtors that buy huge expensive items. I was the most dangerous kind. I’m was what you call the “here and there” credit card user. I just used to it here and there for things I really didn’t need. My expenses, (car note, insurance, rent, etc) at the time were pretty manageable but it was the other “here and there” type of expenses that was doing me in. To be honest I can’t even remember half the stuff I bought, but by the time I was ready to move back in NY in 2000, I had less saved in my bank account than what I had saved in high school with over 12K in credit card debt. I couldn’t believe it. No only did I not have anything saved for a “rainy day”, but even a puddle of water could wipe me out. Although I was “cash poor”, I did have money in my retirement investments, but relative to how much I was making, it was a sad state of affairs.

So I moved back home and spent a couple years rebuilding my savings and getting back on track. Started reading tons of books on savings, investing, managing debt, and got so good at it, I could actually start giving advice to other people. My debt situation was self-inflicted. Through all the years I had a credit card, I never had any financial emergency where I had to wipe my savings out and go to my credit cards. I was living a way of life that I could not afford. I wasn’t living withing my means, and my debt was getting so overwhelming that every dollar I had was going to my debts. I’m happy to say I don’t have any credit card debt.

Conclusion

Every person’s debt story is different, but if there is one area that we need to be mindful of, is our psychology towards money. All the “getting rid of debt” guidelines in the world won’t mean anything, if you don’t have a hold on your desires, behavior, and a understanding of how you view material objects and self. In addition, many of us need to up our financial literacy. I’ve heard of people who literally did not know that they had to pay the debt back on their credit cards. They just thought is was free money. Nor did they know what compounding interest, debt-to-equity ratio, or what a FICO score is. If you don’t know what these things are, then you should not have a credit card.

Not only was my debt burden financially debilitating, but it also took away my freedom of mobility. It was like carrying around a ton of bricks on my back with fetters on my legs. Just think about all the opportunities that you miss out on. At the time, I couldn’t give as much to charity, help family when needed, not to mention I did not have money around if an emergency happened, and could not re-invest any resources in myself/career or even other entrepreneurial endeavors. However you look at it, it’s a Road to Serfdom, and if I can help it (Inshallah), I hope to never experience that type of slavery again. Man, 1st Financial Bank got me good, but it was one of the most important lessons of financial wherewithal and debt management that I have ever experienced.

Before I bring this post to a close, I’ll leave you with two very significant quotes from Nassim Nicholas Taleb’s Black Swan: The Impact of the Highly Improbable that should heighten your awareness on some of the very dangerous psychological ideologies that many times, have led us to stray into making poor financial decisions. One is “Cheap Signaling and the other is the “Prediction error”.

Cheap Signaling, pg 6

There were some obvious benefits in showing one’s ability to act on one’s opinions, and not compromising an inch to avoid “offending” or bothering others. I was in a state of rage and didn’t care what my parents (and grandfather) thought of me. This made them quite scared of me, so I could not afford to back down, or even blink. Had I concealed my participation in the riot (as many friends did) and been discovered, instead of being openly defiant, I am certain that I would have been treated as a black sheep. It is one thing to be cosmetically defiant of authority by wearing unconventional clothes—what social scientists and economists call “cheap signaling”—and another to prove willingness to translate belief into action.

Prediction error, pg 194-195

I searched the literature of cognitive science for any research on “future blindness” and found nothing. But in literature on happiness I did find an examination of our chronic errors in prediction that will make us happy.

This prediction error works as follows. You are about to buy a new car. It is going to change your life, elevate your status, and make your commute a vacation. It is so quiet that you can hardly tell if the engine is on, so you can listen to Rachimanioff’s nocturnes on the highway. This new car will bring you to a permanently elevated plateau of contentment. People will think, he has a great car, every time they see you. Yet you forget the last time you bought a car, you also had the same expectations. You do not anticipate that the effect of the new car will eventually wane and that you will revert to the initial condition, as you did last time. A few weeks after you drive you new car out of the showroom, it will become dull. If you had expected this, you probably would not have bought it.

You are about to commit a prediction error that you have already made. Yet it would cost so little to introspect!

Articles that will scare you into saving money

• The Collapse of Personal Savings Rate in America
  http://www.billshrink.com/blog/personal-savings-rate/
• Why do so many NFL players go bankrupt?
  http://sports.yahoo.com/nfl/blog/shutdown_corner/post/Why-do-so-many-NFL-players-go-bankrupt-?urn=nfl,190555
• Income Inequality Is At An All-Time High
  http://www.huffingtonpost.com/2009/08/14/income-inequality-is-at-a_n_259516.html
• Winning Lotto numbers not always the ticket to dreams, success
  http://www2.tbo.com/content/2009/oct/01/winning-lotto-numbers-not-always-ticket-dreams-suc/

IMPORTANT DISCLAIMER: In no way shape or form is this post endorsing the use of usury (interest) when terms like FED funds rate, credit, mortgage, stock market, investment, savings, loan, borrow, etc are used. This is merely an explanation of my fact finding mission on the different economic theories that have impacted the thinking of different economist across the world, and how this thinking has impacted the economic policy of the United States of America.

WIHTJ fans, sorry it took me so long to write Part II of Economics Made Simple. The series covers the following topics:

1. Part I: Renting vs Buying a home
2. Part II: Why Can’t I Make Ends Meet?
   (How I found the Austrian School of Economics)
3. Part III: Saving Money vs Serfdom
4. Part IV: Casino Capitalism

Table of Contents

1. Introduction
2. The Austrians and Mises
3. John Maynard Keynes
4. Conclusion
5. Economic Resources that will increase your Financial Neurons

After completing the first version of this blog post, I decided to send it to my good friend JP, who does the blog But What the Hell do I Know I wanted to get some honest feed back on my Keynesian vs Austrian School post. In so many nice and friendly words he was able to tell me…well..it sucked. Every now and then it’s good to eat some humble pie. So I did (that pie was pretty good), and I went back to the drawing board. Keep in mind that I consider my boy JP quite a seasoned economist, albeit unofficial, when it comes to the Keynesian and Austrian school, so I knew I had to go back to the drawing board.

In the first version, I tried to make a case for which economic school is a better approach (which I failed at) or attempt at framing what each school is (which I failed to do) or not distort what the Austrian or Keynes school is (which I mistakenly did). Unfortunately I lost track of what I really wanted to do. I will forgo the Herculean tasks of comparing each school and explain how I found the Austrian School of Economics. What I really wanted to do was frame the following rhetorical and general questions:

• Hey did you know that there is this economic school of thought that was driven by John Maynard Keynes, and this same school of thought dominates a lot of economic policy in the United States of America?
• In addition, did you know that the Federal Reserve Bank (FED) dominates economic policy in the United States of America? Do you know what the Federal Reserve Bank does?
• Why do we have financial crises and what is the root of how they get started, what caused them, and what fixed them?
• Did you know that there is a school of economic thought called the Austrian School of Economics, that is actually trying to offer a model that explains how the economic world works around us, but at the same time being humble enough to know they can’t understand every single move in the economy because it is a dynamic amoeba-like entity that has way too many variables to track?
• Are you aware that to understand this economic mess that it will take more than reading this short blog, but months and months, if not years of grueling eye-busting reading of books, articles, podcasts, etc.
• Are you aware that you are about to stop reading this blog post, because of what I said in the previous bullet?
• Are you aware that making the sacrifice to acquire this knowledge will make you probably make you more informed about why U.S. policy is the way that it is and when you vote (hopefully), you’ll actually have a clue (better) about why you are voting?
• Do you want to understand what true Healthcare reform means?
• Is it important for you to understand the true pros and cons of government policy decisions in the United Sates of America?

Now that you know the precursor, lets give it another go….

Introduction

I was probably hit by the “financial education” bug when I started cleaning up my debt situation around 2000. I’ve been waving the “Hey Folks, America’s household debt is unsustainable” flag for more than 10 years. I never knew what the source of the problem was, but watching the debt-to-asset ratio skyrocket while concurrently seeing the personal savings rate plummet was not a sign of good times to come. To be honest, I had no idea what was in store for the U.S Economy 8 years later. All I knew was that this is not a good situation. An eye opener for me was two things. The stock market bubble of 2000 and the last years financial collapse in October of 2008.

I played around in the stock market for several years. (Buying individual stocks) By following a true value investing/contrarian approach I was able to do pretty well. By adhering to those principles of investing prudence, raking across the 8-K and the 10-K while taking into account the intrinsic value of a companies stock, I was able to avoid a lot of the pitfalls that lured people into the “speculation” stock market bubble of 2000. Yes I made mistakes, but not deal breakers. I never cared whether we were in a bear or bull market. Bear and Bull markets do and don’t matter. (It depends on the situation). Stock market bubbles get headlines, but it’s the diligent investor who spends time understanding what he or she is investing in who wins in the end. This type of effort takes work, which is why most people will invest in whatever is coming from the “water cooler”

After 2000 I didn’t get into anything more than just personal finance. Around 2007 to 2008, the calamity started with Bear Sterns, Lehman Brothers, AIG, the housing market bubble, billion dollar bailouts for banks, investment houses, etc, and thats when it all started. Before these events, I was not aware of how tightly wound the FED was around the U.S. government. Other than the FED moving the fed funds rate up and down to allegedly “cool” or “heat up” the economy, that’s pretty much all I knew. I didn’t know the history of the FED, when the FED was started, not to mention what type of batting average the FED had in stabilizing the economy. I grew some “Rothbardian” legs, if you will, and the rest is history.

Mises and the Austrians

My first entrance into understanding the tip of “Austrian Economic” iceberg was a site called Mises.org. If the Austrian School of Economics was a trunk of a tree, this would be one of many branches off the trunk. For the sake of not making the same mistake twice, I’m going to leave it to you to go to mises.org and assess whether the information is useful or not. They have a wonderful blog called Mises Daily and it’s chock full of morsels of econ delights that will whet your appetite for information.

Lets be honest. Even at the introductory level, this is pretty heavy stuff, but that shouldn’t deter you. I do believe that one of the reasons why Americans are in the fog of economic war when it comes to U.S economic policy is they don’t understand the “whys” of a particular policy decision. Nor do we know where to go to get that information. If you go to the FED website, and click on one of their documents you would need a phd in economics to understand what they are talking about. We often fall back on our ideological partisan heels, without trying to truly understand the merits and consequences of certain policy decision. Should we have a minimum wage tax? What are the impacts of having a central bank that dials the economy up and down at will? What is the true impact of the Cash for Clunkers initiative on the economy? What was the involvement of the FED with past and present financial crises? What are the economic solutions available for bringing countries out of poverty and what examples do we have of countries that have already achieved this?

I could go on and on, but these are just a sample of questions about the things that impact our day-to-day lives. Now check out the latest Google Trends. Do you see any broad searches like “Federal Reserve Bank’, “Keynesian Economics”, “Austrian Business Cycle Theory” etc? These are three very powerful terms that you should familiarize yourself with, yet they never ever enter into our stratosphere of topics. Are we surprised that the FED can swoop in and not have any idea where 9 trillion dollars went and the Americans are more concerned about fictitious “death panels” in healthcare or whether the Obama earned the right to get the Nobel Peace Prize? We have bigger fish to fry, check out this shocker:

John Maynard Keynes

The first time I heard about anything related to Keynes was through mises.org. I had no intentions of investigating the ideologies of Keynesian Economics, but many of the ideologies from Keynes have weaved themselves into the current economic policy of the United States of America. I wanted to get at the heart of what inspires the U.S. government to do what they do. I’ll provide resources at the end of this blog post that will get you up to speed on who Keynes is and how his ideologies have influenced U.S. economic policy. There is a lot of history there, and it will take you a while to churn through all the books, articles, and videos about Keynes. Here is a good start: http://en.wikipedia.org/wiki/Keynesian_economics (Keynesians Economics).

Clearly Keynesian economics has made a huge comeback in recent years due to the current collapse of the economy. Are We All Keynesians Now?. I wonder what Keynes would say if he saw this current crisis? I’m sure Paul Krugman would be delighted. Keynes most famous work is the The General Theory of Employment Interest and Money. This is what what put Keynes on the map.

Conclusion

This post is about awareness. I have come to realize that not understanding the history of U.S. economic policy has not served me, or anyone else well. Especially those who consider themselves poor, downtrodden or apathetic about the political process. How are we to make educated decisions about government policy if we don’t understand what it is and how it works? How are to support bills that are created in the house and senate if we don’t understand what is being passed into law? I felt that my understanding about presidential candidates, tax policy, U.S economic policy decisions, local state regulations, etc could be compromised by not understanding the context of these economic policies I mentioned above. As a matter of fact, this is more important than what your party affiliation is. This is not a left or right wing post. This is not a pro free-market or pro socialism post. This is a post about making informed decisions and holding our government accountable, including ourselves. Regardless of whether you consider yourself someone on the left, conservative, right, republican, democrat, independent, rich, poor, middle-class, wealthy, religious, atheist, deprived, a victim, a power broker, keynesian, austrian, libertarian, socialist, indifferent, etc, you should consider what I just wrote in this post. Being a blind ideologue is easy, but spending the time to understand things properly is more difficult which is why most people choose the former instead of the latter. Two things to remember, there is no such thing as a free lunch and a government is only as good as the people who support it.

Books

• Economics in One Lesson by Henry Hazlitt
• The General Theory of Employment, Interest, and Money by John Maynard Keynes
• Road to Serfdom by F.A. Hayek
• Wealth of Nations by Adam Smith
• 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