When traders say that a security has gone parabolic, they mean its price is increasing at an increasing rate. Naive investors are drawn to the security, but to experienced investors the rapid increases signal an incipient collapse. That's because the excessive price stimulates experienced investors to sell. The upward spiral ends, causing those who entered the market during the parabolic increase to sell too. The ensuing crash is excessive, and the price falls below the security's true value because investors who otherwise would have held the security sell from fear.
The Federal Reserve Bank has increased the money supply at a parabolic rate. The money supply has been increasing regularly since the 1930s. Once of the results of the money supply's increase has been excessive investment in real estate, especially in politically sanctioned projects. The projects include the urban renewal of the 1950s and 1960s, the construction of the suburbs, the development of the suburban mall, the expansion of retailing, and the sub-prime crisis. Some of these would have occurred, but to a lesser extent, without the Fed. Others, like the sub-prime crisis, would not have occurred at all.
The excessive real estate investment arose because the money the Fed creates is deposited with risk- averse money center banks that prefer guaranteed returns. Besides the real estate bubble of the past seven decades, there has been a government bubble. Rather than rely on democracy, which would not have supported the current level of spending if taxpayers had been forced to pay the market value of the cost of government each year, the central bank facilitates issuance of bonds, allowing the public to vote for politicians who spend more than the public has in resources. The public lacks the intellect to vote otherwise--its taste for doing what seems right or beneficial prevails because it lacks the ability to analyze the costs. The advent of Keynesian economics causes supposed experts to offer the irrational advice that the public favors on its own--to spend money it does not have.
Hence, the Federal Reserve is inconsistent with democracy because it permits the public to vote for politicians who spend more than the public would want them to if they were required to cover the costs, and to spend more than government can pay back. The resulting debt is becoming too large to pay back. Government will then deprive bond holders of their wealth by debasing the currency.This will harm those whose assets are in dollars or who receive wages.
The public does not want a dollar collapse--but it votes for it because the media and the government-financed school system advertise a distorted view of the costs and cripple citizens intellectually so that they believe the claims of supposed experts even when they are repeatedly wrong. A case in point is the economics profession. Few economists predicted the sub-prime crisis or the tech bubble. But, despite their history of error, economists and the news media continue to broadcast the same predictions.
The money center banks tend to invest with risk-averse, large corporations. It is evident that the corporations are risk averse because executives need to be paid in stock options whose purpose is to stimulate risk. Wall Street sanctions publicly traded corporations through the stock market. Executives are rewarded if the stock price rises. The corporations, then, only take risks of which Wall Street approves. The result of hiring psychologically deviant, risk-averse executives and then countering the risk aversion with stock options is that the nature of the risk the executives take tends to pander to Wall Street's needs. As a result, mergers and acquisitions tend to dominate firms' risk taking. Firms do not serve product markets--they serve financial markets.
The largest way that the Fed distorts risk taking is through its subsidies to the stock-and-bond markets, and, consequently, hedge funds through (1) direct lending to hedge funds and Wall Street banks, (2) issuance of government securities that Wall Street sells, and (3) depression of interest rates that cause the stock market to increase inversely. The rise in the stock market since 1937 is due to the Federal Reserve Bank. That rise has come out of the real hourly wage.
In 2008 the Fed began a massive quantitative easing that has caused bank credit to increase three fold and may potentially increase the money supply thirty fold. This is equivalent to a parabolic price increase in the securities market. The effects of the parabolic increase are (1) trivialization of technology at an increasing rate, (2) increasing crony capitalism, and investment in frivolous public-private partnerships, (3) subsidies to hedge funds and other socially unproductive financial firms, and (4) the current stock and real estate market comebacks.
The trivialization of technology is seen in the massive stock price increases of firms like Facebook and LinkedIn. In the 19th century, technology meant the invention of the automobile and A/C electricity. In the 21st century it means a program by which you add people unknown to you, called friends, to a computer program whose purpose is also unknown.
Like all parabolic price increases, this one too shall pass. But the collapse of the dollar's value does not just mean that a few greedy investors will be harmed. It means that all working Americans, suckers who have voted for Democrats and Republicans, will be harmed.
Showing posts with label innovation. Show all posts
Showing posts with label innovation. Show all posts
Friday, March 30, 2012
Thursday, March 24, 2011
The Federal Reseve Bank Has Driven Innovation to China
I recently subscribed to Gerald Celente's Trends Journal. In the winter issue Celente makes the following point:
Innovation, once the province of the developed West, and especially the USA, is now too “Made in China.” In 2009, the Chinese processed some 600,000 patents, compared to 480,000 in the US. China plans to raise that figure to one million by 2015 and double the number of its patent examiners to 9,000, while currently in the US there are only 6,300 such examiners.
The reason innovation is now made in China is monetary. Under a market-driven monetary regime, as existed prior to 1913, if excessive numbers of manufacturing jobs were to move to China, its currency, the yuan, would rise in price. This would cause demand for Chinese goods to slow. Manufacturing would stop moving there, and move back. But the Federal Reserve Bank has not allowed that to happen. Because the dollar serves as the reserve currency around the world, the Fed has been given carte blanche to inflate the money supply without short-term consequence. This has fueled the federal deficit, consumer debt and real estate and stock speculation on Wall Street. The dollar remains firm despite the Fed's profligate monetary policy because the Chinese and other central banks hold treasury bonds as reserves. It seems cheap to manufacturers to move to China.
Thus, by voting for the Democrats and Republicans, Americans have voted to disemploy themselves. They have voted for politicians who have empowered the Fed to inflate while holding the dollar at excessive levels. Consumers have benefited, but when those consumers put on a hard hat or a white collar they have been harmed. Younger Americans have been increasingly harmed. The post-war generation consumed at the expense of boomers' jobs, and boomers consumed at the expense of gen-x's and gen-y's jobs. One of the offshoots of unlimited monetary expansion has been the expansion of government education programs, which churn out ever greater numbers of unemployed graduates who lack skills necessary to compete.
One of the offshoots of de-industrializing America is loss of innovation. Creativity results from familiarity with processes. Most advances are made by engineers and laborers familiar with specific production processes and problems who attempt to build on the status quo with respect to a particular process. Innovation is particularistic, it is not theoretical. Einstein's science, while broad, imaginative and impressive, has done little for important innovation. Tesla, who lacked theoretical breadth, had an enormous impact on human standards of living. Innovation does not generally come from theory. It comes from creative thinking about specific practice. So if practical activity moves to China, then innovation will move to China as well.
The loss of manufacturing, therefore, has graver implications than loss of jobs. It implies the loss of America's future as the Chinese replace the Americans as the world's innovators. How long will it be after that until the Chinese grow weary of holding treasury bonds that steadily decline in value? The final step in America's turning itself into a Third World nation will occur when the Chinese and other nations sell, and the dollar crashes. Then consumers will find prices increasing just as producers they have been able to find only low-wage retail jobs.
Innovation, once the province of the developed West, and especially the USA, is now too “Made in China.” In 2009, the Chinese processed some 600,000 patents, compared to 480,000 in the US. China plans to raise that figure to one million by 2015 and double the number of its patent examiners to 9,000, while currently in the US there are only 6,300 such examiners.
The reason innovation is now made in China is monetary. Under a market-driven monetary regime, as existed prior to 1913, if excessive numbers of manufacturing jobs were to move to China, its currency, the yuan, would rise in price. This would cause demand for Chinese goods to slow. Manufacturing would stop moving there, and move back. But the Federal Reserve Bank has not allowed that to happen. Because the dollar serves as the reserve currency around the world, the Fed has been given carte blanche to inflate the money supply without short-term consequence. This has fueled the federal deficit, consumer debt and real estate and stock speculation on Wall Street. The dollar remains firm despite the Fed's profligate monetary policy because the Chinese and other central banks hold treasury bonds as reserves. It seems cheap to manufacturers to move to China.
Thus, by voting for the Democrats and Republicans, Americans have voted to disemploy themselves. They have voted for politicians who have empowered the Fed to inflate while holding the dollar at excessive levels. Consumers have benefited, but when those consumers put on a hard hat or a white collar they have been harmed. Younger Americans have been increasingly harmed. The post-war generation consumed at the expense of boomers' jobs, and boomers consumed at the expense of gen-x's and gen-y's jobs. One of the offshoots of unlimited monetary expansion has been the expansion of government education programs, which churn out ever greater numbers of unemployed graduates who lack skills necessary to compete.
One of the offshoots of de-industrializing America is loss of innovation. Creativity results from familiarity with processes. Most advances are made by engineers and laborers familiar with specific production processes and problems who attempt to build on the status quo with respect to a particular process. Innovation is particularistic, it is not theoretical. Einstein's science, while broad, imaginative and impressive, has done little for important innovation. Tesla, who lacked theoretical breadth, had an enormous impact on human standards of living. Innovation does not generally come from theory. It comes from creative thinking about specific practice. So if practical activity moves to China, then innovation will move to China as well.
The loss of manufacturing, therefore, has graver implications than loss of jobs. It implies the loss of America's future as the Chinese replace the Americans as the world's innovators. How long will it be after that until the Chinese grow weary of holding treasury bonds that steadily decline in value? The final step in America's turning itself into a Third World nation will occur when the Chinese and other nations sell, and the dollar crashes. Then consumers will find prices increasing just as producers they have been able to find only low-wage retail jobs.
Thursday, October 16, 2008
Sherman Anti-Trust Act May Cause Innovation to Decline
The Sherman Anti-Trust Act (SATA) was passed in 1890. It was initially interpreted as a statement of common law concerning reasonable versus unreasonable restraints of trade. In 1896 in United States v. Trans-Missouri Freight Association the Supreme Court held that only competition amounted to reasonable price setting. In 1904, in the Northern Securities Trust case (involving a railroad trust) the Supreme Court held that even trusts or corporations that combined several companies amounted to unreasonable restraints of trade. Hence, corporate mergers were illegal in this period. In 1911, the Supreme Court revised that view, holding that the Standard Oil Company ought to be broken up because it involved unreasonable restraints of trade and was a "bad" trust. However, there are "per se" violations of the Sherman Anti-Trust Act that don't require a test of reason. These include "any...conspiracy in restraint of trade or commerce".
Thus, the Sherman Anti-trust Act after 1896 illegalized any cartel. But capital investment in manufacturing and capital intensive services may require a degree of price predictability. By making conspiracies in restraint of trade illegal, even where they do not result in excessive prices, the Supreme Court forced many businesses to consider two risks: (1) overproduction, which was characteristic of late 19th century industry as described in David Ames Wells's Recent Economic Changes and (2)prosecution under the Sherman Anti-Trust Act if they attempted to collude to limit the risk of over-production.
The remedy to the per se problem was merger that permitted "reasonable" outcomes. Thus, the automobile industry coalesced into three large firms that did not collude but in effect followed a price leader. But this policy may have had side effects that the Supreme Court did not consider.
In encouraging mergers rather than collusion the court limited the number of managements. Creativity often requires a diversity of ideas. By creating small numbers of top heavy firms with a small number of highly compensated executives with much at risk if their firms failed, innovation may have been curtailed. Part of the reason for the post-Progressive slow down in innovation may be the Sherman Anti-Trust Act.
Exactly why the Supreme Court and Congress preferred a few large firms over many smaller ones that might rig prices for a few years in order to avoid excess production is unclear. A few large firms can rig prices without speaking. So the difference, speaking or not speaking, seems to be of minor economic or moral significance. On the other hand, crushing many mid-sized firms into a few really big ones may have killed the most creative managers, who often may have been surpassed in the pyramid due to gamesmanship and corporate politics. Moreover, a few large firms face much greater risk with respect to experimentation than many small ones. This emphasis on large size coincided with the socialist perspective of Theodore Roosevelt and the Progressives. The Progressives loved large size because it seemed efficient to them, but they failed to grasp the underlying dynamic of creativity.
Thus, the Sherman Anti-trust Act after 1896 illegalized any cartel. But capital investment in manufacturing and capital intensive services may require a degree of price predictability. By making conspiracies in restraint of trade illegal, even where they do not result in excessive prices, the Supreme Court forced many businesses to consider two risks: (1) overproduction, which was characteristic of late 19th century industry as described in David Ames Wells's Recent Economic Changes and (2)prosecution under the Sherman Anti-Trust Act if they attempted to collude to limit the risk of over-production.
The remedy to the per se problem was merger that permitted "reasonable" outcomes. Thus, the automobile industry coalesced into three large firms that did not collude but in effect followed a price leader. But this policy may have had side effects that the Supreme Court did not consider.
In encouraging mergers rather than collusion the court limited the number of managements. Creativity often requires a diversity of ideas. By creating small numbers of top heavy firms with a small number of highly compensated executives with much at risk if their firms failed, innovation may have been curtailed. Part of the reason for the post-Progressive slow down in innovation may be the Sherman Anti-Trust Act.
Exactly why the Supreme Court and Congress preferred a few large firms over many smaller ones that might rig prices for a few years in order to avoid excess production is unclear. A few large firms can rig prices without speaking. So the difference, speaking or not speaking, seems to be of minor economic or moral significance. On the other hand, crushing many mid-sized firms into a few really big ones may have killed the most creative managers, who often may have been surpassed in the pyramid due to gamesmanship and corporate politics. Moreover, a few large firms face much greater risk with respect to experimentation than many small ones. This emphasis on large size coincided with the socialist perspective of Theodore Roosevelt and the Progressives. The Progressives loved large size because it seemed efficient to them, but they failed to grasp the underlying dynamic of creativity.
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