Mr. Jones

Two months ago, the Freakwenter received what appeared to be a well-personalized bit of spam. If you look back at that post, you may observe that I treated the sender with a unhealthy dose of irreverence, hoping to make the best of a useless situation.

Then a friend convinced me that I wanted a stainless steel canteen, so I went online and filled out the simple form on the spammer's site and forgot about it. Round about Christmas, a box arrived on my doorstep from California. The postage was in excess of $8. The box contained a beautiful stainless steel canteen and a book by one Mr. Van Jones, The Green Collar Economy, $17 on Amazon. Who would waste $25, plus a canteen, on a blogger with a friend-subsidized cumulative ad revenue of just $43, I asked myself.

Mr. Jones says that we can fix the economy and the environment by increasing government investments in green technology. If you are a run-of-the-mill environmental enthusiast, this is a fine book to get you acquainted with some issues and motivate you to become a political activist. But if you, like the Freakwenter, seek careful arguments and deep policy analysis, don't bother with this book. It reads much like I imagine the Book of Mormon or the Koran would read. Granted, I've read neither.

For the benefit of all run-of-the-mill environmental enthusiasts who don't want to read a mediocre book, I recommend simply joining the Pigou club, as I have done. Membership in this club consists of advocating higher carbon taxes, such as gasoline taxes. In one swell swoop, a carbon tax does all of the following:

• Increases federal tax revenue, allowing for a decrease in income taxes and/or federal deficits.
• Prompts consumers and businesses to use less fossil fuels.
• Reduces both the price and quantity of imported oil, hence reducing our dependence on foreign energy.
• By raising the price of energy domestically, allows "green" energy businesses to become competitive, resulting in new green-collar jobs.
• Accomplishes all of the above in the context of a free market, rendering redundant a huge swath of existing and potential environmental regulations (such as vehicle emissions standards) and allowing for a decrease in the size of our bloated government.
  

Ethics Shmethics

The Freakwenter got mail!

Dear Mr. Freakwenter:

I am considering purchasing a foreclosed home at a sheriff's sale. Advice offered to me so far has been mixed.

A contact with foreclosure experience warned me that I may end up with the responsibility of evicting the tenant. A friend at a holiday party advised against it due to the "ethical implications."

Are there ethical implications and should I consider them?

- reader

Dear reader,

Your question goes straight to the heart of capitalism, like a bullet. Is capitalism ethical? But that’s a whole new boatload of worms, so I’ll try to keep the commentary to your exact situation.

You are faced with three options:

1. Don’t buy the house.
2. Buy the house but allow the occupant to stay.
3. Buy the house and evict the occupant.

To evaluate these options from an ethical perspective, I must know what ethics are. Unfortunately, I do not. But I’ll pretend that I do. Ethics are ways of behaving that support people.

In this situation, who are the key people? There is you, your friends, the current occupant of the house, and the mortgage owner (whoever the occupant owes house payments to). Let’s start with you. You have to watch out for yourself. This probably means you don’t want to do option #2. But then the poor occupant is probably going to get evicted by whoever else buys the house. Luckily for you, and thanks to the mysterious phenomenon of empathy, neither your friends nor I will judge you for not choosing #2, even if #2 is the most generous and most ethical option.

We have limited the options to #1 and #3. Now suppose you do #1. Then everybody suffers. The current mortgage owner gets not quite as much as they hoped for on the sale. The occupant gets evicted by whoever else buys the house. You have to settle for the next best housing deal. Your friends suffer because you don’t have such a nice house to invite people over to. So I think it is obvious that #1 is absolutely the worst option, if you want to talk ethics.

However, as you hinted, if you go with option #3, some of your friends might judge you, potentially causing both you and your friends to suffer, depending on how messy or how public the eviction process is. Of course, any such judgment against you would be highly irrational, in light of the above paragraph. Nevertheless, we cannot discount this judgment. Some people are inherently irrational, such that ignoring their irrational side is to disrespect them as human beings, and disrespect is potentially unethical.

In summary, the answer depends on how irrational your friends are. If they cannot forgive you for doing the rational thing (#3), then it is possible that rational is unethical, in which case you might want to go with #1.

Overlappinglish

Introducing newords through a new lingo: Overlapping English. If the end of one word is the same as the beginning of the next, either in spelling or phonetics, they obviously can and should be combined to form a word that is greater than the sum of its parts, uniting two etymologies and connotation sets to produce a multisyllabic treat bursting with meaning.

You've probably already heard of "gi-normous" or "huge-mongous." These are not examples of overlappinglish because the end of the first word does not match the beginning of the second word. Here are few samples of the real thing:

Fabulous + lousy = fabulousy: having the quality of a mixed bag.

Cul-de-sac + sacriment = Cul-de-sacriment: a creed which instructs its follower to turn completely around.

Crock pot + pot head = Crock pot head: a druggie who eats or cooks primarily from a crock pot.

Growth and Debt

The Freakwenter got mail!

Dear. Mr. Freakwenter:

A Lancaster Newspapers blogger recently wrote this on the Fed's commitment to employ all available tools to support the credit markets, including the market for mortgages:

...all this would jolt the housing market and reinflate the bubble, people might "feel" richer, as they did during the bubble proper. But are they richer? Or does that mentality lead even further down the bleak path we're on?

I mean, we're hitting the wall here and no one wants to admit it, or even face it. An economy based upon consumers racking up ever-higher levels of debt as incomes stagnate is simply unsustainable. There has to be some mechanism by which consumers actually see an increase in their income. We're talking, across the board. But because we don't have such a mechanism - other than huge tax cuts at a time when we've taken on so many new billions, even trillions in government liabbilities - we're stuck. We. Are. Stuck.

A system predicated upon sustainable growth, at a reasonable just-above-inflation rate, could stay afloat.

The blogger seems to be advocating a form of mercantilism, labeling substantial economic growth unsustainable. Yet even with the Dow's recent dive, its 40-year return is close 1000%, with inflation over the same period hovering near 500%.

Can economic growth be fueled by debt, or will it merely create a "bubble?"

Sincerely,
Anonymous reader

Dear Marvin,

I won't even attempt to answer the question at the bottom of this, how does one spur new (but sustainable) growth and higher real incomes when we are stuck. That's a question for the ages, with lots of extremely complicated and uncertain answers. But I have a couple observations.

Assuming that your numbers are correct, the cumulative percentage growth of the Dow in the last 40 years is only 83%, which means that the real annual percentage growth was only about 1.5%. [1000% growth makes $1 into $11, for a growth factor of 11, and similarly 500% growth corresponds to a growth factor of 6. Correcting for inflation, we get a growth factor of 11/6 = 1.83 over 40 years. Starting with 1 dollar, and multiplying each year by a growth factor of x for 40 years, you see that x must be the 40th root of 1.83. Then x = 1.015, for an annualized groth rate of 1.5%.]

The second observation is on the relationship between growth and debt. The blogger may be correct that too many people have acquired too much debt. But I suspect that it's more of an issue that too many of the wrong people acquired too much debt. It's not clear to me that debt, or an particular level of debt, is intrinsically harmful.

To understand debt better, consider the role of the Federal Reserve. The Fed aims to keep prices constant, or slightly increasing. As the economy grows, the Fed must increase the money supply to prevent deflation. Historically, the main way the Fed increases the money supply is to loan money to the U.S. treasury, which increases the aggregate level of debt and the money supply by the the amount of the loan. So, to say that the Fed controls the "money supply" is, until recently, almost the same thing as saying that the Fed controls the "debt supply."

But things are getting messier now that the Fed is starting to buy private equities as well as bonds. When the Fed buys stocks, it puts money into the economy without creating a corresponding debt. The effects of this are little understood.

House price growth

The Freakwenter got mail!

Dear Mr. Freakwenter:

Since 1983, Lancaster house prices have grown at an average annual rate of 4.9%, according to the US Office of Federal Housing Enterprise Oversight's House Price Index. [Click here for a nifty chart]

Inflation as defined by Wikipedia is "is a rise in the general level of prices of goods and services in an economy over a period of time."

Is it fair to say that the inflation-adjusted annual growth of house prices in Lancaster is close to 1.9% (assuming that the CPI has been averaging 3% per year)?

[real person]

Dear real person,

Subtracting inflation from growth to get real growth isn't exactly right, but it's usually better than nothing.

One source of confusion on this issue is that the averaging of growth rates can be done in two ways. Notice that a 10% growth in year 1 followed by a 20% growth in year 2 results in a cumulative 32% growth (1.1 times 1.2 = 1.32). You might think that this implies an "average annual growth" of 16%. But I'm pretty sure that the standard averaging method is to just average the individual annual growth numbers, for an average of 15% growth. (Investopedia agrees.)

A bizarre feature of this standard definition of "average annual growth rate" is that a given average growth rate does not uniquely determine the cumulative growth. A 0% growth in year 1 followed by a 30% growth in year two results in a cumulative growth of only 30%, despite the fact that the average growth is still 15 percent! (In the previous example, a 15% average growth led to a 32% cumulative growth.) Therefore, to get an exact answer, it is necessary to correct for inflation in each year of growth BEFORE computing the average inflation-adjusted annual growth rate.

The last thing to note is that subtracting the inflation rate from the growth rate gives real growth only approximately. Suppose a price increases by 49% while the CPI increases by 30% in a given period. Then the inflation-adjusted growth factor for that period is 1.49/1.30, or about 1.146, from which you can conclude that the price grew by about 14.6%. Notice this is significantly different than saying 49%-30%=19%. But for small growth rates, in the 0 to 10% range, this error becomes very small.

Fresh Tears

(neighborhood of D)

You left me girl without much fight,
but now you've brought about my final fears,
You were with that friendly guy last night,
and all I have for comfort is fresh tears.

Chorus:
Fresh tears, my laptop's keys are soaked
Fresh tears, enough tears to wash a turkey
Fresh tears, my inner child just croaked
Fresh tears, I'll be lonesome until I'm thirty

I get online to look for new love,
There's lots of them but none like you,
Some are gross, they make me want to hurl
Some are nice, but their just not my girl.

Instrumental

Chorus

Pa says let's get you to a shrink
Ma says my endorphin level has sunk
Brother and Sister say let's think
You might as well become a Monk.

Chorus

An Exploding Federal Reserve

The Wall Street Journal announced recently that the Fed is considering issuing bonds to the public. The story received media attention for about a day. It deserves more.

Here are the key facts: The Fed loaned more than $1.3 trillion of new money into the financial system since august (compare the August sheet to the current one), up from $0.9 trillion. This has caused a unprecedented increase in the monetary base. In normal times, this increase in money would immediately create high inflation. Thanks to a dysfunctional financial system and shrinking economy, the new money so far has had little effect.

However, if or when the crisis passes, the banks will function again and the velocity of money will rise. Then, all this money that the Fed has put out there will suddenly become inflationary. The fed will need a way to take all that money back out of the economy, and fast.

Currently, the Fed owns about half a trillion dollars of US treasury bonds. By selling these, the Fed can pull that much money out of the economy. But the Fed may need to pull out more than twice that much money by the time this is over.

To pull out that much money, one of two things must happen. Either the Fed must start issuing new bonds, which would require congressional approval, or the Treasury would have to issue bonds and loan the money raised to the Fed. But the Treasury is already doing this, and congress allows the Treasury to sell only so many bonds.

In summary, congress will have to expand the powers of the Treasury or the Fed in order to prevent a brewing mess caused by the actions of the Fed thus far. And they should increase the powers of the Fed in this case, rather than the Treasury, for transparency: If the Fed needs to issue new bonds, it seems somewhat convoluted to have the Treasury sell the bonds and then loan the money to the Fed.

Cheap Debt

The U.S. government couldn't care much less these days that it is running a debt of nearly $35k per capita, because the interest rate on short-term government debt is approximately zero. It has been asked, why do investors buy treasury bonds which pay no interest instead of putting their money in savings accounts, which still pay interest of 1% and up?

I see two reasons. First, most interest-bearing savings accounts require some commitment, with fees for early withdrawal. A nice thing about treasuries is that they can be easily sold at any time, so they are more liquid.

Second, supposing liquidity is not the biggest concern, a deeper concern is in the security of bank deposits. Many of the largest purchasers of Treasury bonds are dealing with sums of money far greater than the $200,000 cap on FDIC insurance. One solution to this issue is the CDARS depositing service, which enables customers to deposit up to $50 million in banks across the U.S. so that the entire sum is covered by FDIC insurance. However, I suspect that much of the demand for Treasuries is coming from investors with far more than $50 million. Or, perhaps this service is too young to have gained widespread use at this point. There appears to be no wikipedia page on CDARS as of this writing.

Proposition 9

Prop 9a:
The Federal government neither defines nor regulates "marriage."

Prop 9b:
Individuals over the age of 18 may submit a document to the court declaring hospital visitation rights for whomever they choose.

My Cliche Forttaye

Hi. I'm a blogger and I like to blog. You'd never guess it from looking at me, but I really like to blog. Don't get me wrong. It's not that I have nothing else to do. In fact, after all, when all is said and done, I'll be able to look back on a stellar career and great relationships with all of my 14 children and all of their children. Let's see, I don't remember how many there are now, but I think one of them is the president. Come to think of it, at least one of them is in prison too. What can I say? You win some, you loose some. Anyway, as I was saying, I like to blog. Let me tell you how much I like to blog. Never mind that I spend more time writing this thing than everyone put together spend reading it. Nevermind that the money I earn writing this thing wouldn't be enough to cover half the food required to nourish my pinkie fingernail during the time it takes me to earn it. Brace yourself for the bottom line, OK? You guessed it! Congratulations.