Economics in 5 pages

Before you start reading and get bored, the first few paragraphs are just for some background knowledge and dramatic effects. So hang on!

You may be wondering: Why am I here? Why should I be reading this? Well you do not need to, but I am confident that most of you will invest your money at some point in your life, and will be looking at economic news and tips as to how best to protect or grow your money. With some understanding of economics, you will be a much more well-informed investor/saver/discerning news-reader.

Over the past century, we have people graduating from schools with so much knowledge about economics (or do they?). Unfortunately, I would like to contend that the economics taught in school is simply the wrong one. To be specific, it’s called Keynesian Economics. The economics school of thought that makes most logical sense to me is Austrian Economics. I will venture to say that 99% of the world doesn’t have a clue of what it is, and I would be the first to admit that I was once part of this 99%.

Keynesians basically contend that DEMAND AND SPENDING are the important stuff, and Central Banks can manage the economy by inflating or deflating the money supply. Austrians, on the other hand, say that SUPPLY AND SAVINGS are the important stuff, and Central Banks only screw things up (a problem compounded by the fiat paper monetary system).

CONTENTS

Chapters

1.       Savings vs. Spending, Productivity

2.       Inflation is Theft

3.       The Boom is the Disease

4.       The Bust is the Cure

5.       Conclusion

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Okay so on and on goes the debate. Here, I will try to come up with something that even my young sister can understand, something that is irrefutable, something that will settle the score once and for all. So please bear with me, it’s really simple to understand. The illustrations I’m about to made are my own ones, developed in the past few years. But I have to admit that the savings part is adapted from the great Peter Schiff.

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CHAPTER 1: Should we save or spend? What is productivity?

I think most of the confusions of modern day economists come from our usage of paper money. So first, we shall agree on what money is. Money is just a representation of value (remember this!). It facilitates trade. And without it, we will be stuck in the wild days of bartering our goods. No issue here, right? So, let’s take paper money out of the equation. And venture into a world of apples and fish. Forget about paper money, pretend it has never ever existed. Pretend there’re none in your wallet, in the banks, whatever.

For simplicity, let’s say that the world consists only of apples and fish. The western nations are great at foraging for apples. The eastern nations are great at fishing. So each part of the world does what they do best, and then trade apples and fish with each other.

AN APPLE A DAY KEEPS MY STOMACH HAPPY

Suppose that each westerner needs an apple to fill his stomach for a day. Each of them needs to spend hours climbing a tree, and at the end of the day each of them only manages to pluck an apple. So they spend each day going into the forest foraging for their precious food. They have no time for anything else.

One day, Newton decided to go hungry and take a chance to invent a tool to increase his speed of foraging. He invented what later came to be known as the ladder. With this new tool, he was able to increase his productivity, and get 2 apples in a day!

Newton has 3 main options now: 

1.  Save his extra apples and continue to forage almost every day, so that he can keep his apples for a rainy day or vacations later (this is his SAVINGS)
2.  Loan his savings out to someone else, who may invent something to be more productive, and then get repaid with interest (extra apples)
3. Spend that extra apple a day to hire someone to give him a massage. In effect, the massager is exchanging his labour for Newton's labour (apple). When this exchange happens, this is what constitutes "demand", the way that most people today understand the word. Demand comes from exchange of goods/services, and goods and services are productions. You must produce first before you can consume (or demand for other people's production).

Now along comes Einstein. He wants to borrow apples from Newton, so that he can spend some days on his research and build a game-changer. He promises to repay Newton 50% in interest for whatever he borrowed. Einstein spent a week with a boy he hired (and paid for with apples), and together he came up with a chainsaw. Now he is able to chop a tree down and simply pick the apples on the tree! With the help of his employee in creating this new tool, he was able to increase his productivity and get 4 apples in a day!

Along comes Uncle Sam. He borrows apples from Newton and Einstein. And he proceeded to consume those apples. He gobbled up the apples. He paid a dancer an apple a day to entertain him. He paid builders to build a house for him. He hired an artist to carve a statue of him using wood.

Now why is he doing all these? Well, Uncle Sam reasoned that his DEMAND and SPENDING actually boost the economy! Without his voracious appetite for apples, people like Einstein and Newton will have no reason to forage for apples. Without his ability to spend like a mad-cow, these dancers and builders won’t have jobs. He did not realize that his CONSUMPTION could have been used by other people, people like Einstein and Newton, to increase productivity!

MORAL OF THE STORY #1

With increased productivity and savings, entrepreneurs can borrow and set up businesses or projects. Consumption is not the same as economic growth. The nation grows poorer because of consumption. The nation grows wealthier with savings and productivity.

Uncle Sam spends his apples on entertainment and fancy things. Einstein spends his apples to hire a boy to help him in his project. Notice that both use their apples differently. Einstein created productive jobs. Uncle Sam created unproductive jobs.

When you hear the economists say we need more spending to boost the economy, you have to be very careful. After the crisis in 2008, governments around the world spend money to hire workers (clerks, admins, population surveyors, construction workers, etc.) and claim that they are creating jobs. Now we know that these jobs are unproductive, and they only drain the nations’ resources. The private sectors are the ones that can create productive jobs. “But the private sectors are not creating jobs because of a lack of spending”, they would argue. Okay, we will examine this issue later on.

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CHAPTER 2: Inflation is Theft

The Westerners trade with the Asians for their fish with their apples.

Now imagine that the Western government invented a new tool called the apple-machine, and gave it to their central bankers. It can churn out fake apples with a press of a button. Over-time, they create more and more apples out of thin air, increasing the apple supply in circulation. The western population realize that they need more and more apples to do the trading, because they use their bloated supply of fake apples to compete for the limited amount of Asian fish.

Now what has the western government done? Have they increased the wealth of their populations? Not quite. What they’ve done is to STEAL their populations’ purchasing power away! Now their citizens can buy less and less stuff with the apples they’ve worked so hard to forage for.

MORAL OF THE STORY #2

Quantitative easing and stimulus packages are just euphemisms for money-printing. And money-printing is THEFT from the population. Well, for those who argued that this magic money will eventually “trickle-down” to the average man, history and statistics are not on their side. Living expenses increases faster than wages. Those who get the magic money get to spend first and bid up prices. The rest of us suffer the loss in purchasing power.

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CHAPTER 3: The boom is the DISEASE

The Western central banks created lots of fake apples, and for a while everyone was happy. With so many (fake) apples in “savings’’, interest rates become very low. People borrowed to set up businesses. People borrowed to speculate in stocks. People borrowed to build houses, thinking that prices will always go up. The society was in a state of euphoria.

Inflation started to pick up. The central banks, in an attempt to tame inflation, decided to stop creating fake apples for the time being. Businesses, investors and other borrowers that depended on the supply of these fake apples began to fight each other for the remaining apples. This sent interest rates soaring. Unable to cope with the higher interest rates, businesses folded.

MORAL OF THE STORY #3

Economic booms throughout history are preceded by easy credit. The people in power created too much money. It became cheap to borrow. And everyone thought that they are rich and they do crazy and unsustainable things.

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CHAPTER 4: The bust is the CURE

Everyone on apple-land was drunk on cheap apples. Apples are being thrown into places where they are just simply being squandered away. Now that interest rates are higher and lots of unsustainable businesses are folding, the bust is finally here. It’s time for the hangover. It’s time to rid your system of the alcohol, and be on your way back to recovery again. It is time to put your precious apple savings to productive use again. It is time to re-allocate resources back to the sectors where they are supposed to be had it not for the fake boom. The bust is the cure!

But wait! The hangover is painful! Jobs would have to be lost temporarily in sectors with excesses. The government does not want people to revolt! The government reasoned that the crash was due to lack of demand and spending. So what do they do? Create more apples to stimulate demand and spending! Not a smart move here!

AND IT’S IMMORAL! This is what bothers me the most. Remember, inflation is theft.

MORAL OF THE STORY #4

In the US, the Fed created lots of paper money out of thin air in the 1990s, and this fueled the dot.com bubble. When it bursts around 2000, the Alan Greenspan came in again and printed even more money. He bailed out companies to prevent a job crisis. The George W. Bush government reasoned that people need to spend more to revive the economy. And Americans, with the printing press and borrowings from overseas, went on the greatest spending binge in history.

The money-printing lowered interest rates to 1% and created lots of mal-investments, especially in the housing market. As inflation starts to rise, Greenspan raised the rates by slowing down his printing presses. This sent interest rates soaring, and the result was the sub-prime crisis in 2008. What do Obama and the incumbent Fed chairman Ben Bernanke do next? You guessed it: more stimuli, more money-printing and more borrowings from overseas. They propped up failing companies to keep the jobs there, but what good is it to prop up unproductive jobs and jobs that the market doesn’t need? The resources could have been used more productively by the private sector, as shown in Chapter 1.

Now you know why central bankers are lying when they say they have exit strategies for their stimulus programs. They can't do that, because once they do it, the very people whom they've bailed out (and more) will fail once again.

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CONCLUSION

Although I used more examples of the US, the situation is similar in all countries. All countries use this flawed Keynesian Economics theory. All countries have a central bank that can print money without restrain. And all countries experience inflation.

When we try to make sense of the economic stuff around us, think in terms of apples and fish (although I prefer cows and fish, I used apples instead for the purpose of this article). Leave the distorting paper money out of the picture because they are just representations of values. The real stuffs with real values are the apples and the fish, not the paper money.

If you think this through, it will become apparent that most of the stuff we get from the media is just nonsense.  If we truly understand this, we will know why deflation is not such a bad thing as espoused by economists, and we will understand why inflation is REALLY bad, economically and morally.

Now that we know the nature of money, and the nature of booms and busts, we will be able to discern the correct news from the wrong news. We will be able to make more informed decisions when trying to protect or grow our hard-earned money. We will be able to pass this basic yet unquestionably critical knowledge down to our future generations.

I can go on to write about how we got into this screwed-up system in the first place, but that will take another 5 pages. I can go on to write about how various government policies and regulations (together with the monetary stuff mentioned in this article) distorted the market greatly. Most of these stuff can be found on my informal and simple blog www.silvernjin.blogspot.com

Thanks for reading!

Inflation and the Debt Crisis

Ever wondered why costs in Singapore keep rising? The simple answer is the creation of SGD out of thin air by the central bank and the fractional banking system. Here's some data:

From Sept 2010 to Sept 2011 

M1 money supply rose almost 20%
M2 rose 11.3%

M3 rose 11.3%

From Sept 2008 to Sept 2011, 

M1 rose 69.4%
M2 rose 33.9%

M3 rose 32.6%

Brace yourself, more inflation (theft from the population) is coming!

And for those who think that US doesn't have QE3, technically they are right in the sense that it is not official and there's no program called "QE3" that has been announced by the Fed. I would beg to differ! Ben Bernanke had himself announced that he's gonna keep interest rates at 0% for a substantial period of time. How can he do that? That's right, by printing money. QE3 is just a euphemism for money printing folks! It doesn't matter whether they name it QE3 or not. It has already been going on since the end of QE2 in June 2011. Otherwise, interest rates in the US would have spiked up dramatically. The Fed is there to print money and buy up govt bonds.

Our 40-year old monetary system is a con-job. It allows govts and bankers to grow really big, at the expense of the general population. This system will implode on itself spectacularly, as I have repeatedly said. We are seeing this play out in the form of sovereign debt crisis in Europe right now. People are focusing their attention on the European countries. Pretty soon, attention is going to be turned to the US. We are seeing protests in US right now, and it is only going to get more violent. 

The economic turmoil that is coming will dwarf any of those we've experienced in our lifetime. The world's debt has crossed the world's GDP. The central banking system creates money out of thin air to keep this going. But it will end soon. I am not sure how it will play out exactly in Singapore. But I think interest rates will rise and put a lot of pressure on prices in low-interest-rate-dependent sectors such as the housing and banking sectors.

Till then, I'm steadfastly holding on to my gold and silver. I am going to make my 8th purchase of the year soon, and am looking to accumulate more when the chance arises.

QE3

QE3 is coming in some form or another. No matter, because they are all euphemisms for money-printing. 

Remember a few years back, when the Fed started QE1, and said that they have an exit strategy? Well guess what, we've gone through QE2, and looking at the prospect of QE3. 

Like Peter Schiff said, the US economy is on drugs -- in this case cheap money. For decades, they have been borrowing and printing and consuming, without paying much in return. If this drug of cheap money is taken away, the US will undergo a painful withdrawal period, something which the politicians are trying to avoid. Of course, taking the pain as early as possible would be best. But that's not a politically-expedient thing to do. The politicians are trying to cure drug addicts by shoving more drugs down their throats.

This will ultimately end in a US currency crisis. American standards of living will fall drastically. There will be Greek-like protests on the streets.

I hope that the crisis which is coming will educate the public more about monetary issues, and particularly about Austrian Economics and its teachings of sound money and civil liberty. The world is being robbed blind and stripped of their freedom by the politicians and bankers, and they don't even know it. Even when riots occur, it is more because of desperation on the people's part rather than a true understanding of the principles of sound money and liberty. Although this may send signals to the politicians and bankers that they cannot do anything they want all the time, the underlying problem is still there. The same problems will surface again in the future, just like they have in the past history.

I am hopeful that one day, schools will teach Austrian principles instead of Keynesian ones, which has failed the world in the past few decades. 

Private Roads and Transport System

Tired of road congestions and accidents? I have a suggestion: Privatise the road system. I do not know how this will unfold. The private sector can surprise you in many different ways.

Here are the possible benefits:

- Lower costs (road tax) due to competition

- Lower road casualties (you don't want deaths on your properties, do you?)

- More creative road designs (multiple layers of roads?)

- Better traffic lights co-ordinations (there are absurdly too many unnecessary ones in Singapore)

- Less congestions!

Of course, it comes with problems as well, (such as non-standardized road signs). But I believe these problems can be iron-ed out. If needed, the private sector will create a self-regulatory system to reduce potential problems/conflicts.

We have to admit that govts around the world have failed to solve the road problems. Why not give the private sector a try?

If the govt does not want to give up on the roads, how about a privatised public transport system (as in, really privatised, not majority- or semi-owned by govt)? From my conversation with taxi drivers, I found that there exists such things in the past. It is more efficient, the buses come on scheduled times, and ferry people from one point to one point.

While the Singapore public transport system is efficient compared to other countries, I feel that there is too much wastage, and a lot can be improved. It takes me a painful 1.5 hours to make a 25km journey across the island in a bus.

The bus stop in front of my house services 7 buses. Sometimes they come all at once, sometimes you wait 15 mins before one even appears. Doing some simple calculation, by right I can expect about 25-30 buses per hour at my bus stop. This sounds good, but it's inefficient.  Bus arrival times are irregular and many buses are often empty. And one wonders why transport prices keep increasing. The incumbents are inefficient! There is lack of competition. Many people are against monopolies, but why let the govt monopolize businesses here??

Competition will improve quality and reduce costs. This is very evident in markets where there are very little govt intervention, regulations, and involvement. One prime example is the computer and phone business. In places where govts are involved - such as education, medicine, and public transport - prices keep rising (for sure), and quality keeps dropping/remains stagnant/rises slowly at best.

I hope that more politicians will address this issue and place more faith in the free market. One should not be too quick to blame the private sector for problems (such as the sub-prime crisis). If examined deeper, one will find that the root causes of the problems are the rules and policies set by the govt/central banks.

A response to an article in The Straits Times

I wrote an e-mail to the author of a straits times article:

Dear Hui Yee,

I refer to your article "When Free Markets Fail" on The Straits Times dated May 25, 2011. The article argues that free markets are not fail-safe, and active government intervention can forestall a global economic collapse.

In fact, from the Austrian School of Economics' point of view, it is totally the opposite.

The US hasn't had free markets for decades. How can one call the US a free market when the Federal Reserve is manipulating the interest rates, and the governments intervene whenever they have the chance to do so?

The 2007 sub-prime crisis has its roots in around 2000. Back then, the dot-com bubble has just burst, and President Bush and Greenspan, not wanting a recession which will cure the imbalances, injected tons of paper money into the system. Interest rates were lowered to 1%. The market is flooded with cheap money. The result is that people used this money for speculative purposes, such as the housing market. 

An economy can only be healthy if sound money is being used. And sound money means letting market forces determine the all-so-important interest rate. Sound money does not mean having a central bank and a small group of men trying to set interest rate for the whole economy.

Concurrently, Freddie and Fannie were created. These government organisations backed the mortgages. With these government guarantees, who wouldn't want a piece of the action in the housing market? 

Free market capitalism only works if greed is being balanced by fear. The government removes all these fear with those institutions that they created. Without these institutions, the population wouldn't have allowed such wild speculations to go on! The bankers won't dare to bet so heavily on housing. The depositors won't allow bankers to gamble with their money. But the government created this moral hazard, which effectively removes the natural checks and balances that the market provides. Nowadays, I bet people spend more time researching on the camera that they are buying, instead of the balance sheets of the banks that they are going to put their live savings in. Why? Because government guarantees the deposits. But where do government get their resources from? By printing money, in most cases.

I hope that some of these arguments can dispel the myth that free market has been at work in our world. We haven't have free markets at all - far from it.

Thank you for your time. I would be glad to get a reply from you.

Have a nice day.

Regards,

Jin

Some musings

I started studying monetary history after graduating from NUS (I'm sorry to say this but I wasted 4 yrs of my time and money there learning nonsense). What I learnt is something profound, something distasteful and disgusting.

When I first started, I could see right away the MAIN source of the illnesses in our world today. Smaller and smaller families, dual-income families, rising poverty, rising income-gap, rising education and healthcare costs, rising costs of living, rising housing costs, wars..... And the souce of all these is the Central Banking System. The Fractional Reserve Banking System complements the Central Banking System nicely. They are both good friends to each other.

I couldn't keep this knowledge to myself, hence I started this blog. I knew not many will read it, and I didn't actively promote it, but heck, I just need to vent my thoughts somewhere. Some good friends of mine bothered to read my humble opinions though, and I am grateful for that.

While I think gold and silver and commodities are the best protection against the craziness of the world right now, I am by no means advocating it as a get-rich scheme (although you can get rich investing in commodities :D ). Some of my friends thought that I am too free, too conspiracist in my thinking, but I am glad that some of them bothered to do some research, and came to the same conclusions.

We live in this world thinking that things are always the way it is, but it is most certainly not! Do not believe what the economics professors teach in school! The current fiat monetary system is only 40 years old, and I think the end is near. I am not saying the world is DOOMED. Just saying this current monetary system will end somehow.

ANYWAY, here are some nice quotes I have gathered through the course of my study:


"A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank." — Ron Paul, the only politician in the world whom I support

“I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank…You are a den of vipers and thieves. I have determined to rout you out and, by the Eternal, I will rout you out.” - Andrew Jackson,  the first and only President in U.S. history to pay off the National Debt. He fought valiantly to close down the 2nd Central Bank of the USA.

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." - Henry Ford, founder of the Ford Motor Company

“Those few who can understand the system (check book money and credit) will either be so interested in its profits, or so dependent on it favors, that there will be little opposition from that class, while on the other hand, the great body of people mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.” - The Rothschilds of London

"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered." - Thomas Jefferson, third President of the United States, and one of the Founding Fathers of the USA

The Source of Inflation

This is an excellent article, with ample examples and statistics:

http://www.theburningplatform.com/?p=15246

US debt bomb

Poor Ah ma

A few nights ago, I was rushing to the bus stop to catch a bus home. It was around 10.10pm, and I had just finished my last tuition lesson. Missing the bus would be bad, because I would have to wait for 20mins for the next bus. 

I saw the bus approaching, and I was still some distance away from the bus stop when an old lady stopped me. She had been eye-ing me for a few seconds. With a croaking voice, she asked for $1 so that she can buy a bread from a nearby vending machine. Hastily, I reached into my pocket, and could only produce 40 cents. I told her I have no more coins, and rushed off just in time to board the bus. 

I regretted my action. On my way home, this incident dominated my mind. I am angry and disappointed with 2 things. 

The first concerns myself. I am in too much of a hurry to live life, to earn money, to save time. I could have taken out my $10 bill for the lady. It doesn't matter if I missed the bus. I could have chatted with her for 20 mins. But maybe I have been so used to giving donations in coins, and giving in notes just didn't cross my mind at that point in time. 

Secondly, why is she in such a sorry plight? I'm sure there are thousands of people like her living in Singapore right now. People paint such a great picture of this prosperous country, but beneath the surface, a lot of people are struggling. This has got to do with the current monetary system that the world practices. It does nothing but punish the working class and the uninformed. Absolutely nothing but this!

I wish I can change the world. But I do not have the power to do so. All I can do is to help as many people as I can. And at least, try to reach out to people with Austrian Economics. I am interested in setting up a school to teach these kind of stuff. A school which teaches economic freedom, civil liberty, and the limited roles that governments around the world should play in our lives. 

And most certainly, my school will teach that the world will be a much better place without central banks. This central banking system aggregates too much power in the hands of too few people. It is open to abuse and it has been going on for more than a century. People are not outraged because the effects are not that obvious. But slowly and surely, they're creeping up on them. And even if people are outraged and revolt, they often miss the point. This problem will persist if they cannot see the root cause.

No Central banks means less government, less wars, less poverty, and more liberty for everyone.

As I update this blog, silver has hit $33-34. The dip to $27 has been fully bought into. I bought some during the dip but wish I have bought more. Gold is above $1,400. Oil is $108 a barrel. Food inflation is everywhere. The Middle East is in revolt. This is the effect of the unprecedented global money printing in the 2008 economic crisis. This is just the beginning. It is just going to get worse, especially in Western countries.

.

US Debt Ceiling

The Treasury Secretary Timothy Geithner, and many economists were saying that if the US doesn't raise the debt ceiling, they are going to default, and it will be catastrophic for the US and the world. (They have raised it, what, 6 times in 3 years?)

To me, this is an official admission that the US is running a Ponzi Scheme. The world has to loan them money or else they will default. 

The end is near for them. Ponzi Schemes always end!