The Older Brother lets his inner econ nerd run wild (Part I)…

Greetings, fellow Fat Heads!

Well, I’m guessing Tom is mostly packed for the Low Carb Cruise and is using his last couple of days before departing to practice his speech/celebrity roast a couple of hundred more times.

Seriously. The man has a thing about being prepared. He’s actually been that way since we were kids; but his preparation for, and career as a standup comedian years ago really cemented it into his personality. I went to Chicago a couple of times back in the day when he was getting started to see him at “open mike” nights. He’d spent months preparing material, worked the door in a couple of clubs for awhile so he could get paid to observe and learn, and would always get to the open mikes early to see who else was in the lineup, check out the crowd, make sure he didn’t get stuck performing right after a damned folk singer, etc. (Nobody laughs right after ten minutes of hearing how we’re killing all the whales. Off key.).

Of course, he always did pretty good, but as fun as it was to watch him work, I had to stop going to them. There was invariably an excruciating five minutes or so starring someone you could tell must’ve been the “comedian” of their social circle. The one people always tell “oh, you’re so funny – you should do standup!” So they’d assume all you had to do was stand up and be funny, and there they’d be at the open mike, completely unprepared, staring at a bunch of strangers, trying to “be funny.” Watching them suffer through it as their egos melted onstage gave ME flop sweats! You’re like “for the love of God and mercy, bring out the folk singer!” Anyway, the point is, if you want people to think you’re spontaneously funny in front of a crowd, it’s best to practice like hell.

The other point is, you’re officially stuck with me again for the next week or so.

Here’s something that’s been on my mind…

When I talk or blog about “real” food or great low carb eats – fresh eggs, raw milk, pastured meat, fish, dairy, fresh veggies, nuts etc. — there’s invariably a remark or two referring to the cost of eating this way. It sounds great, the thinking goes, but it “costs too much.” This is accurate in a relative sense, but also completely wrong.

Sure, you will likely spend more money if you’re shopping local and spending most of your time at the meat counter and produce aisles at the grocery instead in the central area of the store (i.e., the Carb Zone). So from a “what’s left in the bank” sense, it seems eating LCHF may “cost too much,” but in fact the real problem is that our whole low-fat, hyper-processed, modified, enriched, hearthealthywholegrain-based Standard American Diet (SAD) costs way too little.

It’s a real difference, and it’s important to understand it. Unfortunately, that means I’m going to talk about economics. I know Tom and I both have other blogs dedicated to our libertarian rantings, but this is integral to understanding your food and your health, and I think it’s important for you to consider. If you promise to try to stay awake, I’ll promise to try to make it interesting.

First, we need to digress to the Austrian Business Cycle. You likely haven’t heard of it.

That’s because any economist you read in the mainstream media is going to be a Keynesian economist, who are to economic reality what ADA nutritionists are to healthy eating. That is, they’re both intelligent, highly educated, credentialed shills for the big businesses and government agencies who employ them.

The Keynesian Theory of the Business Cycle then, which is probably the one you heard if you had a high school economics class, is that an economy can be humming along nicely — people buying lots of stuff, low unemployment, rising incomes — when some disconcerting event or circumstance (like a stock market crash) hurts the economy’s self esteem and it all inexplicably goes bad. So consumers stop buying things, so businesses start losing money, so businesses lay people off, so people buy even less and it all starts circling the drain. Everyone. At the exact same time. Stupid businesses. Stupid consumers. This is a recession, or depression, or bubble, or something bad.

The solution then, happily enough for the government and big business, is for the government to jump in and spend money, via government programs and bailouts, to fire things back up and jump-start another happy cycle.

Once our resident geniuses have everything running smoothly again, the Keynesian Theory says the government should then cut back on spending (to avoid inflation) and start saving money. Snork! Sorry — I can never seem to say that and keep a straight face.

To summaraize, the Keynesian view of the role of government is to spur the “animal spirits” of a down economy with high unemployment with spending (gas) and temper the irrational exuberance and potential inflation of a “hot” economy with savings and cutbacks (brakes). It has no explanation for things like “stagflation” as we’re seeing now — high unemployment and rising prices.

The Austrian School, on the other hand, says that the business cycle isn’t the result of “animal spirits” or “consumer confidence” killing off a booming good economy. It asks how could an economy be ostensibly zooming along (boom), when suddenly every business in the country (or world, in the present case) become stupid and all make the exact wrong decision and make too much stuff (houses, car plants, etc) at the exact same time people stop buying stuff (bust)? The Austrian answer is that the only way you can get everyone to make the same wrong decision at the same time is if they all get the exact same wrong information at the same time to make that decision with. And the only way everyone can have the same wrong information at the same time is if the government gives that information to them.

Information like if we told millions of people this, for example:

“To help the economy, we’ll make money so cheap (via low interest rates) and risk free (via government mortgage guarantees), you can buy a $500,000 house with nothing down even though you’re only making $30,000 a year and have $60,000 in credit card debt and a car loan. If you don’t have a car loan, take out a second mortgage and buy one. After all, house prices always go up!”

So millions of people who shouldn’t even buy a $150,000 house go out and “buy” (they’ll never really pay for it) a $500,000 house.

So thousands of builders build millions of homes that aren’t going to be paid for. And hire tens of thousands of construction workers to build homes no one can really afford. Who buy thousands of pickup trucks that they really can’t afford because they’re going to lose their jobs when people stop making their loan payments and banks stop making loans to people who can’t afford them so builders stop building, because now there’s millions of houses built that can’t be sold.

Here’s another kind of bad information:

If you spend $30,000 on solar panels, we’ll give you a $10,000 tax credit.

Same effect, different flavor.

You’re telling a solar panel manufacturer, for instance, that it’s a good idea to hire people and buy materials and invest in equipment if they can do that for a total value of expended assets of, say, $25,000. This appears to be a good decision because by expending $25,000 they receive $30,0000, meaning they’ve created a surplus (profit) of $5,000 of value – a 20% return.

But they’ve really only created $20,000 of value, so they’re really — on net — destroying $5,000 of resources every time they manufacture a new system.

(No, I don’t mean Solyndra — they knew and they’re crooks.)

And so on.

Everyone meant well enough. They just all had bad information. When they heard they could afford the mortgage, or heard someone ask to build them a new home, or heard someone ask them to be a roofer or concrete worker or electrician, or heard someone say they wanted to buy a new truck, or buy equipment for a new truck plant, or make a solar panel, they thought “the market” was telling them people had more money and wanted to buy more stuff, so they built factories and hired people.

But the market wasn’t telling them that. It was the government. The problem is, when that builder is sitting down with that expectant homeowner, or the construction worker is sitting the truck dealer’s office, or the auto manufacturer is talking with the bumper vendor, or the solar panel maker is hiring people, they have no way of knowing whether it’s the market or the government doing the talking, because they both use the same language – the dollar. And that dollar isn’t saying if it came from someone creating value and saving it to spend or invest for other value in return, or if it just came off of a printing press.

Bad information. Bad information always creates an incentive to misdirect and waste assets.

Once this builds up to the point that it can no longer be sustained with more taxing, borrowing, or printing, here comes the “bust.” But understand that it’s really the “boom” that is the disease — the inefficient companies, the factories built to produce goods people can’t really afford, etc. The “bust” is the cure. It’s the only solution that will actually put things right. Via crashed house prices, jobs dislocated, factories closed, all kinds of painful things the government is intent on postponing or trying to shift to others to pay. You can’t heal until the toxins are purged.

Still awake? You’re a trooper. We’ll get back to our grocery bill, and my basic premise, on Monday in Part II.

Have a great weekend — see you in the comments.

Cheers,

The Older Brother


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82 thoughts on “The Older Brother lets his inner econ nerd run wild (Part I)…

  1. Lori

    I’ve always thought of junk food as expensive. In the King Soopers flyer this week, potato chips are $5 a pound, while eggs are $1 a dozen and pork tenderloin is $2.99 a pound. (Not organic, I know, but it’s a better option than the junk from the nutritional dead zones of the inner aisles.)

    A few years ago, when I calculated what I was spending because of my new LC diet, it turned out to be $13 more per month for groceries. But when I also calculated savings on medications and visits to the chiropractor (I didn’t need them anymore) and fewer skin care products, I found I was saving over $900 a year. That didn’t include any savings from not having to buy bigger and bigger clothes.

    I know I’m spending more on food for my dog now, but since I started feeding her real food, I haven’t had to take her to the vet for a health problem. (She used to get frequent infections–poor girl.)

    Some people might end up spending more money on a good diet, but people who are trying to solve some health problems might find that a good diet saves them money.

    You bring up I point I plan on addressing in Part II — cost shifting. You’re recognizing cost savings in your medical spending, but what if you’ve got “free” health insurance as a result of either your employment or government program.

    At that point, strictly based on the dollars you see, you’re getting a market signal that it’s cheaper eat the macaroni and cheese and use “free” insulin than buying the bacon and eggs.

  2. Steve Parker, M.D.

    Keep it up, man. More people need to hear the Austrian message.

    In the coming weeks, perhaps you could give us some advice on saving and investing in this highly unusual climate (mainly out of control government spending, wherein four of every ten dollars the U.S. government spends is borrowed money).

    -Steve

    I have to tread a pretty fine line there, as I’m “in the business.” That is, I work with a group that, in addition to doing financial education and planning for individuals and groups, also sells some financial products (mutual funds, annuities, life insurance, long term care, etc.).

    Your coworker or your brother-in-law or golfing buddy or bartender are free to give you an opinion on what to invest in. But since I have investment and insurance licenses, if I make a specific recommendation to people, they have an actionable right to expect that I know what I’m talking about, unlike with your bartender.

    Not only am I supposed to know what I’m talking about, I’m also under an ethical and legal obligation to know that my advice would meet the risk and investment objectives of the person listening to or reading that advice. It would also be a violation for me to recommend specific stocks, since that’s a separate license.

    So I can talk freely about economics, or the importance of getting out of debt, or avoiding college debt, or building hard assets, but if I say “buy gold” or “sell gold” (and I’m not saying you should do either) or this stock or that stock, I’m dealing into a game I can only lose or break even on if I’m not working with a client.

    Don’t worry, though. I’ve got plenty to talk about on this side of the line!

    Cheers

  3. arlene

    Yes. Exactly. Thanks for the clarification. The economy is so messed up. Bring on the Austrians!

  4. anand srivastava

    Good to know that you believe in Austrian economics. The Keynesians are damaging the world, and will be the first on the wall when the real crisis hits.

    I have gotten interested in the economic crisis that is building since a couple of decades or maybe more.

    Any currencies character (fiat or gold standard) is to lose value over time. While gold’s character is to gain value over time. They should never be married in a gold standard. I think many Austrians think that Gold Standard is the best thing. But I have learnt now that it isn’t. The best is to have both a Fiat currency and gold that is not shackled by any connection to any paper.

    Everything probably started in 1922, when the currencies were over valued, and the Europeans did not want to revalue their currencies (in terms of gold as they were on gold standard). They chose instead to make USD the reserve currency as it was very strong at that time.

    The next world war caused USD to lose value, and created a run on the gold. The government revalued the currency, and to stop further run denied converting USD to gold for citizens.

    By the 60s USD was very over valued, and foreigners where exchanging gold for USDs. USG stopped the conversion for private entities in 1968. Later for governments in 1971, the Nixon shock or Closing of gold window.

    The USD became a pure fiat currency. This caused it to lose value in gold terms. The reserve system came to a crisis in 1980, when gold was shooting very high.

    At that time Europeans decided if the system went down they will go down with it. And started supporting the system.

    System improved, and Europeans started making plans for a replacement currency. This currency became the Euro and started in 2001. Till that time gold was highly manipulated and brought down to production cost levels. After this time the shackles were loosened slightly by the Europeans and also due to the growth of Indians, who have traditionally loved gold above all else.

    The reserve system was ready to be replaced, but along came the Chinese and started buying the USD Treasuries, which kept the system stable till 2005, after which the system has been going down, slowly but surely.

    In 2008 we had a crash. The European crisis started and we are in the middle of it. Euro may survive or not, but countries that leave it will be in worse shape than they would be if they were in it. The debtor countries will default one by one, as Greece has done, and probably none will leave.

    Now we are waiting for more crisises to happen over the next few years. Now the problem is that Euro is not strong enough to take over. Chinese are trying to get in place to provide Yuan in place, but they are still a decade behind.

    It is likely the system will collapse before any currency will be ready. We will probably go back to trading in Gold, because nothing else will work.

    When the system collapses USD will be reduced to nearly nothing. Its value is because of the trust it holds. Without the trust, due to reserve status, all the USD from the world will arrive in US. There will be too much USD, and too little value. Hyperinflation will probably happen within months or weeks. It will be faster than it has happened before. But this will not happen till USD loses its reserve status. BRICS countries are trying to do trade within themselves using local currencies. Iran is selling its oil in other currencies. Other OPEC nations except for the special one (Saudi Arabia) are dealing in Yuan. China is also forging relationship with as many countries as it can. The system has not much long to go.

    Currently Gold is very very undervalued, because of the enormous amount of Paper Gold that exists, and the negative perception that most of the world has about it. There is 22times Paper gold transactions compared to physical gold transactions. All the paper gold is created by banks. These banks are in very bad shape. They are solvent only due to the Money printed by the USG. Once USD loses value almost all American banks (as they don’t have gold) will collapse. Once banks collapse the Paper Gold will become worthless. The Gold prices will rise to fill the void. The perception will change because of this rise. Also when USD collapses all that value will try to move into something, which likely will be only gold and few other commodities or land. With gold and other precious metals, the most easily obtainable assets, they will go up much higher than land.

    Once trade falls back on Gold, the gold will shoot up to the moon. No one again might invest into paper gold.

    Sorry for a very long message. But I had been wanting to share what I have read. What do you think? Does it seem outlandish? Many think calls of hyperinflation in USD are pipe dream :-). But look at the Base Money creation rate, that just has to hit the streets. There are several graphs on the net.

    Also read FOFOA’s blog, for more info.

    I don’t disagree with much of what you present.

    Don’t want to pick nits, but our long slide to a fiat currency began in 1913 with the creation of the Federal Reserve, not 1922; also, FDR grabbed the gold and revalued it before WWII, which of course devalued the dollar. Probably one of the most significant drivers of WWII was the allies’ insistence on Germany making full reparations for the financing of WWI, which was impossible. That led to massive money printing by the Germans, which tanked their economy and led to the overpowering sense of resentment that helped propel a certain mustachioed ego maniacal nutcase to become its leader.

    People tend to think that the world will always use the US dollar as the reserve currency, but the Chinese have recently announce that they will be buying oil with gold, bypassing the dollar. They and other countries have made tentative whispers about developing an alternate basket of currencies, too.

    Our only saving grace so far has been that they’re even worse than us. Look at all of the Euros that are simply being commanded into existence.

    Kind of like the hunter who sits down and starts lacing on a pair of running shoes when an angry bear gets his and his companion’s scent and starts charging from several hundred yards away. When his hunting buddy incredulously asks, “what are you doing, you fool — you’ll never outrun a bear just because you’ve got on running shoes!” he replies, “I don’t have to outrun the damned bear — I just have to outrun YOU.”

    — The Older Brother

  5. Lori

    I’ve always thought of junk food as expensive. In the King Soopers flyer this week, potato chips are $5 a pound, while eggs are $1 a dozen and pork tenderloin is $2.99 a pound. (Not organic, I know, but it’s a better option than the junk from the nutritional dead zones of the inner aisles.)

    A few years ago, when I calculated what I was spending because of my new LC diet, it turned out to be $13 more per month for groceries. But when I also calculated savings on medications and visits to the chiropractor (I didn’t need them anymore) and fewer skin care products, I found I was saving over $900 a year. That didn’t include any savings from not having to buy bigger and bigger clothes.

    I know I’m spending more on food for my dog now, but since I started feeding her real food, I haven’t had to take her to the vet for a health problem. (She used to get frequent infections–poor girl.)

    Some people might end up spending more money on a good diet, but people who are trying to solve some health problems might find that a good diet saves them money.

    You bring up I point I plan on addressing in Part II — cost shifting. You’re recognizing cost savings in your medical spending, but what if you’ve got “free” health insurance as a result of either your employment or government program.

    At that point, strictly based on the dollars you see, you’re getting a market signal that it’s cheaper eat the macaroni and cheese and use “free” insulin than buying the bacon and eggs.

  6. Steve Parker, M.D.

    Keep it up, man. More people need to hear the Austrian message.

    In the coming weeks, perhaps you could give us some advice on saving and investing in this highly unusual climate (mainly out of control government spending, wherein four of every ten dollars the U.S. government spends is borrowed money).

    -Steve

    I have to tread a pretty fine line there, as I’m “in the business.” That is, I work with a group that, in addition to doing financial education and planning for individuals and groups, also sells some financial products (mutual funds, annuities, life insurance, long term care, etc.).

    Your coworker or your brother-in-law or golfing buddy or bartender are free to give you an opinion on what to invest in. But since I have investment and insurance licenses, if I make a specific recommendation to people, they have an actionable right to expect that I know what I’m talking about, unlike with your bartender.

    Not only am I supposed to know what I’m talking about, I’m also under an ethical and legal obligation to know that my advice would meet the risk and investment objectives of the person listening to or reading that advice. It would also be a violation for me to recommend specific stocks, since that’s a separate license.

    So I can talk freely about economics, or the importance of getting out of debt, or avoiding college debt, or building hard assets, but if I say “buy gold” or “sell gold” (and I’m not saying you should do either) or this stock or that stock, I’m dealing into a game I can only lose or break even on if I’m not working with a client.

    Don’t worry, though. I’ve got plenty to talk about on this side of the line!

    Cheers

  7. arlene

    Yes. Exactly. Thanks for the clarification. The economy is so messed up. Bring on the Austrians!

  8. Dee Miles

    Older Bro,
    I really get this and totally agree. The Boom period always felt “artificial” to me and that the bottom would finally drop out (and that happened, and it felt like the “right” thing to happen). As it relates to food, it seems to be an extended “boom” but the fall will happen. And its not going to be pretty.

    I look foward to your next installment, however, I might have to catch it AFTER the cruise. BUT, I will be in the best company and be having an awesome time. Looking forward to meeting Tom and Chareva tomorrow night.

  9. Bruce

    That was one of the best explinations of Austrian economic theroy I’ve heard in a long time. I wish I could explain it that well.

  10. anand srivastava

    Good to know that you believe in Austrian economics. The Keynesians are damaging the world, and will be the first on the wall when the real crisis hits.

    I have gotten interested in the economic crisis that is building since a couple of decades or maybe more.

    Any currencies character (fiat or gold standard) is to lose value over time. While gold’s character is to gain value over time. They should never be married in a gold standard. I think many Austrians think that Gold Standard is the best thing. But I have learnt now that it isn’t. The best is to have both a Fiat currency and gold that is not shackled by any connection to any paper.

    Everything probably started in 1922, when the currencies were over valued, and the Europeans did not want to revalue their currencies (in terms of gold as they were on gold standard). They chose instead to make USD the reserve currency as it was very strong at that time.

    The next world war caused USD to lose value, and created a run on the gold. The government revalued the currency, and to stop further run denied converting USD to gold for citizens.

    By the 60s USD was very over valued, and foreigners where exchanging gold for USDs. USG stopped the conversion for private entities in 1968. Later for governments in 1971, the Nixon shock or Closing of gold window.

    The USD became a pure fiat currency. This caused it to lose value in gold terms. The reserve system came to a crisis in 1980, when gold was shooting very high.

    At that time Europeans decided if the system went down they will go down with it. And started supporting the system.

    System improved, and Europeans started making plans for a replacement currency. This currency became the Euro and started in 2001. Till that time gold was highly manipulated and brought down to production cost levels. After this time the shackles were loosened slightly by the Europeans and also due to the growth of Indians, who have traditionally loved gold above all else.

    The reserve system was ready to be replaced, but along came the Chinese and started buying the USD Treasuries, which kept the system stable till 2005, after which the system has been going down, slowly but surely.

    In 2008 we had a crash. The European crisis started and we are in the middle of it. Euro may survive or not, but countries that leave it will be in worse shape than they would be if they were in it. The debtor countries will default one by one, as Greece has done, and probably none will leave.

    Now we are waiting for more crisises to happen over the next few years. Now the problem is that Euro is not strong enough to take over. Chinese are trying to get in place to provide Yuan in place, but they are still a decade behind.

    It is likely the system will collapse before any currency will be ready. We will probably go back to trading in Gold, because nothing else will work.

    When the system collapses USD will be reduced to nearly nothing. Its value is because of the trust it holds. Without the trust, due to reserve status, all the USD from the world will arrive in US. There will be too much USD, and too little value. Hyperinflation will probably happen within months or weeks. It will be faster than it has happened before. But this will not happen till USD loses its reserve status. BRICS countries are trying to do trade within themselves using local currencies. Iran is selling its oil in other currencies. Other OPEC nations except for the special one (Saudi Arabia) are dealing in Yuan. China is also forging relationship with as many countries as it can. The system has not much long to go.

    Currently Gold is very very undervalued, because of the enormous amount of Paper Gold that exists, and the negative perception that most of the world has about it. There is 22times Paper gold transactions compared to physical gold transactions. All the paper gold is created by banks. These banks are in very bad shape. They are solvent only due to the Money printed by the USG. Once USD loses value almost all American banks (as they don’t have gold) will collapse. Once banks collapse the Paper Gold will become worthless. The Gold prices will rise to fill the void. The perception will change because of this rise. Also when USD collapses all that value will try to move into something, which likely will be only gold and few other commodities or land. With gold and other precious metals, the most easily obtainable assets, they will go up much higher than land.

    Once trade falls back on Gold, the gold will shoot up to the moon. No one again might invest into paper gold.

    Sorry for a very long message. But I had been wanting to share what I have read. What do you think? Does it seem outlandish? Many think calls of hyperinflation in USD are pipe dream :-). But look at the Base Money creation rate, that just has to hit the streets. There are several graphs on the net.

    Also read FOFOA’s blog, for more info.

    I don’t disagree with much of what you present.

    Don’t want to pick nits, but our long slide to a fiat currency began in 1913 with the creation of the Federal Reserve, not 1922; also, FDR grabbed the gold and revalued it before WWII, which of course devalued the dollar. Probably one of the most significant drivers of WWII was the allies’ insistence on Germany making full reparations for the financing of WWI, which was impossible. That led to massive money printing by the Germans, which tanked their economy and led to the overpowering sense of resentment that helped propel a certain mustachioed ego maniacal nutcase to become its leader.

    People tend to think that the world will always use the US dollar as the reserve currency, but the Chinese have recently announce that they will be buying oil with gold, bypassing the dollar. They and other countries have made tentative whispers about developing an alternate basket of currencies, too.

    Our only saving grace so far has been that they’re even worse than us. Look at all of the Euros that are simply being commanded into existence.

    Kind of like the hunter who sits down and starts lacing on a pair of running shoes when an angry bear gets his and his companion’s scent and starts charging from several hundred yards away. When his hunting buddy incredulously asks, “what are you doing, you fool — you’ll never outrun a bear just because you’ve got on running shoes!” he replies, “I don’t have to outrun the damned bear — I just have to outrun YOU.”

    — The Older Brother

  11. Janet

    Good morning,

    Listen, OB, do you vote? If you do, I bet you vote for Republicans. You libertarians never seem to make the connection on who you vote for makes a hell of a difference in your big bad gov’mint evil but since the GOP liars say what you want to hear, but do exactly the opposite, you slobber to the polls and pull their chains. It’s just the big bad gov’mint in your rants. Well, the government is YOU–you (if you vote) elect them so changing things starts with YOU and your vote. Do you just vote reflexively for the GOP moron? Do you know that Bushy boy instituted a government wide program of putting in his hacks and corporate buddies on a steroid plan and when the new administration came in they refused to leave in many cases, as what generally happens? Who invented the doo doo economic supply side disaster? Saint Ronny Ray-gun. Who raised taxes 11 times? Saint Ronny Ray-gun. You give corporations free reign and what do you get? Bad food, tanked economies, ruined lives, (yes with the help of the government in many cases) but you guys are looking under the wrong freedom rock you pee against during your rants.

    I have spent a decade trying to point out clear differences and I am done. If you don’t vote, like your pal Richard over at Free the Animal, then you get what you deserve. So be it. Unfortunately, I don’t. So I will be eating what I can figure out is good and staying healthy and saving money. Frankly, there is nothing I believe we can do at this point. The ignorance amongst the American people is too great so I am opting out (but still voting and making sure my vote is counting by who I vote for). Getting out while I still can recognize the utter CRAZY talk from current crop of GOP. Would the insanity that comes out of their mouths now have come out of the mouth of GOP Dwight Eisenhower? Hey, I was around the and old enough to know. I figure there will need to be folks who will have to be able to point to the crazy talk someday when too many have been heard too much of this utter hypocrisy from a supposed grown up political party.

    There is a wise person I know who says that all Libertarians want to be able to do is smoke pot and screw liberally. Not much left of brain or time then to really look around and see what is going on, Mr. Keynes or Bozo the Clown notwithstanding.

    See, we are not “free”. We and everything are connected and count. But we can live without a few libertarians that are living in the hills, peeing on the trees and crapping in a hole. Be FREE. But don’t call my ambulance when the bear gets ya. Or my police when another libertarian decides your ham looks like something he would like. You pay you play. A law that has been around for a very long time.

    I am much older than you. I have been around and I have been connecting a few dots for quite a while. I will take the Dems over the current mutation of GOP any day, even with the DEMs major and insufferable flaws because they seem to care for people but yes, get it wrong many times, (but not as plain evil as the GOP). When you rant about the Government, you MUST consider who you are voting for and who gets to fill those positions that affect you. Not voting is the same as voting for what you get.

    I never hear anything about that important step, NEVER on these blogs. So your rant or the others have no credibility or even any solutions for me. Period.

    Part 2? Go for it!

    Well, gosh. At least you’re not bitter.

    My intention with this post is not to pick sides for a political argument, it’s to illustrate a school of economic thought that explains the business cycle generally, and specifically how governments’ attempts to “help” or control economic outcomes — ala Keynesian manipulation of the money supply and government spending — actually distorts information people and businesses need to make decisions that benefit themselves, society and the economy. To the extent that our government has metastasized to the point that so much of our economic life is controlled, regulated, dictated, subsidized, prohibited, or otherwise affected by that government means any economic discussion is unfortunately ripe to degenerate into a political argument.

    If you’ve read anything Tom or I’ve written you simply can’t make the case that either of us is pro-Republican. My points are almost always directed at the mendacity of institutions that have the power of legal coercion over people — i.e., government, not one party or the other. Corruption is not a function which party currently holds the keys to the kingdom, it’s a function of size. I have to say though, that it seems that Democrats always seem to be the ones who get cheesed and start assigning us to the other team in their bipartisan duopoly. Odd — Democrats think we’re Republicans, Republican just think we’re weird, but are still polite to us. Guess they value diversity more highly?

    So, you’re opting out, but still voting. How exactly does one do that? I was a thinking maybe you were suggesting throwing darts at your ballot (random chard theory), but then you state that you’re straight Democratic ticket. Actually, speaking of random chards, maybe we can all agree that the best suggestion is to select our representatives by lottery from the phone book. One term only, pay is twice the median income of your district, no pension, and any law passed has to be applied to Congress for a year before the public. You in?

    So, now that Obama’s been in for almost four years after throwing out all of the hacks and corporate interests, how’s that working out for you? If Obama wins this year, will it still be Bush’s fault when we’re still in the crapper four years from now? If Romney wins, will it be Obama’s fault when we’re still in the crapper four years from now, or will Romney own that? Or will it still be Bush’s fault? Wait, I know, it’s Reagan’s fault! That turd. No, maybe it’s FDR’s fault. God, I’m confused.

    Cheers!

  12. Isabel

    I’m sorry but you lost me (and my interest) half way through this long post.

    I’m sorry, too. I knew I was taking a risk with folks who aren’t particularly interested in economics. Hope you tune back in Monday, where I’ll attempt to tie it all together and show how it affects our food and health, individually and nationally.

    Cheers

  13. Elenor

    “The other point is, you’re officially stuck with me again for the next week or so.”
    Yeah but that’s a good thing — cause yo haven’t been writing any blog posts in YOUR blog — you’re in my RSS reader!

    “And that dollar isn’t saying if it came from someone creating value and saving it to spend or invest for other value in return, or if it just came off of a printing press.”

    You left out the biggest part: ALL of our money is **based in debt** (to a privately owned, off-shore, printing press: you DO know the “Federal” Reserve” is NOT federal and has NO reserves, right? Because every single “dollar” (federal reserve “note” — a “note’ is an IOU, a promise to REPAY, not actual money with inherent value) is based in debt, when these manipulated (as you described above) busts come along, and folks (and the govt) tighten their belts, try to save, quit spending, pay down their debts as much as they can, the “money” (those IOUs) goes back to the Fed (via the banks) — and people are loath to borrow, which takes “money” (those notes) OUT of circulation… which makes the notes “worth” more (scarcity, right?) and the Fed keeps its manipulation up — trying to get people to borrow (“OMG! Quick! Drop interest rates so people iwll borrow again!”), so the “money” can get back out into the market… The loss of confidence means the loss of circulating ‘money’ – which is one more screw-up of the economy…

    Go watch the YouTube vid “Money as Debt” to get the picture…

    Glad you’re holding the fort for Tom. Please tell him to make sure to video his speech — and then put it – and last year’s on vid and sell them, so we can inflict them on … er… show them to our friends!

    I keep vowing to myself that I’ll get back to regular venting on my blog, then get overwhelmed by the target rich environment of government stupidity.

    Agree on the Fed, but I’m trying to focus on the main point about government interference distorting the information contained in the price mechanism. I already bored one commenter to death, who at least was kind enough to let me know. No telling how many others are passed out over their monitors or just not saying. Also looks like I p*ssed off at least one other, and I don’t want to lose folks who come here for the nutritional insights over political interpretations.

    Tom’s promised to set up his video equipment to record his presentation. Here’s hoping our luck holds like it did for the last couple of cruises and he gets a good recording to share with us landlubbers.

    — The Older Brother

  14. Dave Sill

    Well done, thanks! Where can I find these libertarian ranting blogs of you and Tom?

    Oddly enough, they’re at tomnaughton.com and jerrynaughton.com! There’s links on the left here to jump to them.

  15. Elisa

    You make really good points. Actually, I had never heard of the Austrian School and had never heard of the idea that government mandates led to the boom and bust cycles. I should probably know this but for the housing market, what exactly were the mandates that led to low interest rates and mortgage guarantees? Great cliffhanger – I look forward to Monday’s post!


    The Federal Reserve, now under Ben Bernanke and previously Alan Greenspan, has certain powers and authorities to manipulate interest rates and the money supply.

    Alan Greenspan, head of the Fed from the late 1980’s until 2006, was hailed as a genius for unprecedented economic growth even as we went through the dot-com collapse, the mid 2000’s market downturn, and the initial stages of the housing collapse. His genius was nothing other than good old fashioned money printing, coupled with rare enigmatic and undecipherable pronouncements over which the markets and Congress would swoon in awe. It turns out it was the same type of genius as keeping people from getting a hangover by constantly giving them more and more booze. He prudently handed it off to his acolyte Ben Bernanke in 2006 just as the fuse was burning down.

    Also, since our government has been spending ungodly amounts of money more than it takes in, it has a very strong vested interest in keeping interest rates it has to pay for the money it borrows low. The Fed, although ostensibly independent from the government (it’s really a private banking cartel), has a vested interest in keeping Congress happy, which has a vested interest in keeping voters happy, who very much like having super low interest rates so they can buy homes they can’t afford.

    Naturally, if you’re a banker, you’re somewhat disinclined to lend money to people unless you’re pretty sure they’re going to pay it back. So the government, keeping said voters in mind, over the course of years (and several different administrations) had created or expanded sundry loan guarantee programs to “help.” You’ve probably at least heard of Freddie Mac and Fannie Mae. These outfits (and others), acting on the premise that banks are too darn stingy, basically set up programs that said “if a mortgage loan meets certain criteria (debt:income ratio, credit score, years working, etc), we’ll either guarantee the loan, or pay the bank a processing fee and buy the loan off their books.”

    So yesterday you were a banker whose primary concern with a loan was if it would be paid. Make a bad loan, you’re in the forclosure and real estate business instead of banking. So you do things like ask for 20% down, excellent credit, etc.

    Today, you make money based on the number of loans you can get approved, because you have no exposure on a bad loan. See how that would kind of affect your attitude?

    Also, there’s way more voters who could maybe come up with a 10% down payment than a 20% down payment, so Freddie and Fannie were put under pressure by Congress (Barney Frank and Chris Dodd are poster children for this and other chunks of the economic fiasco) to lower their underwriting standards and write more loans to help out the poor and downtrodden. don’t feel too bad for Freddie and Fannie — this was akin to putting pressure on a five year old to eat fewer turnips and more ice cream. Ironically, the “executives” (who were almost all politically connected hacks) at Fannie and Freddie were compensated based on how many loans got written and resold. Like hundreds of millions.

    Turns out, there were even MORE voters who could swing a zero percent down payment, and they’d like it even more if, for instance, instead of having to provided a W-2 to prove their income, they could just throw a number out there and Fannie or Freddie would take their word for it. Happy to oblige.

    Meanwhile, all of those mortgages, which had always been pretty solid because of down payments, credit criteria, etc. were easy to bundle up in huge groups as kind of a super bond, then cut into equal pieces representing the underlying loans, and then sell them as very safe bonds that paid a decent interest rate. The rating agencies, like Moody’s and Standard & Poors, had always given these terrific ratings for safety (because it used to be they were), and although there was now all kinds of risk being introduced with zero down, unverified income (the industry term was “liar loans.” Seriously.), the agencies didn’t see any reason not to keep giving them top safety ratings. Ironically, the ratings agencies were paid fees based on how high they scored the safety of the bonds they were rating.

    Finally, all of these “safe” loans, because they had such great safety ratings but paid good interest rates, got snapped up like crazy by banks, insurance companies, credit unions, and other financial institutions that needed high levels of safety along with decent rates. To avoid risk even further, they sometimes purchased insurance on their bonds, or derivatives (we won’t go there).

    Other insurance companies write this insurance (in other words, guarantee that the bond wouldn’t go bad) and buy and sell other derivatives with total exposure in the tens of trillions of dollars, which may sound a little scary if it’s hundreds of times what your entire company is worth, but what could possibly go wrong? I mean, it’s not like the entire housing market could collapse when all those hundreds of thousands of people who’d gotten those adjustable loans at 1% with nothing down and no real income would suddenly start defaulting when their rates went up to maybe 6%. All at the same time.

    Right?

    So you may not think you know much about economics or the housing market or interest rates or how government really works, but I’ll bet you can read all of this and think something doesn’t quite sound right. Maybe you’re thinking what collectively NONE of Congress or Freddie or Fannie or the Fed or AIG or Warren Buffet or Bush or Obama or Clinton or Bear Sterns or Goldman Sachs or any of the CPA Audit Firms or regulators or all kinds of experts thought:

    ka-boom!

    Yes? Turns out, you understand economics better than a lot of people!

    — the Older Brother

  16. Subkilla

    Awesome! Preach it big brother. Your words have undeniable truth in them. Thank you for giving clear structure to something most people can’t see for looking. I’m looking forward to part II.

  17. Dee Miles

    Older Bro,
    I really get this and totally agree. The Boom period always felt “artificial” to me and that the bottom would finally drop out (and that happened, and it felt like the “right” thing to happen). As it relates to food, it seems to be an extended “boom” but the fall will happen. And its not going to be pretty.

    I look foward to your next installment, however, I might have to catch it AFTER the cruise. BUT, I will be in the best company and be having an awesome time. Looking forward to meeting Tom and Chareva tomorrow night.

  18. Matt McCandless

    I am glad you brought up this topic. I have always wanted to hear this explained better. Malinvestment definitely explains some portion of recessions and depressions, but what about LM/IS. “Animal Spirits” are not just hypothetical, market perceptions produce real outcomes that effect spending levels. When spending slumps it has consequences for the broader economy, not just the portions where malinvestment should necessitate liquidation. During a recession it is entirely possible for an economy to lose assets (i.e. factories, brands, production models, jobs) that would be viable in any other economic climate. So is it not understandable that a central bank may wish to take fiscal action when monetary policy is at it’s limit and we have reached zero lower bound? There is evidence that inflation is avoidable in these situations.

    Sorry, not getting what the LM/IS references.

    Market perceptions do affect spending. Businesses invest when they “feel” — based on what information they have, experience, risk appetite, etc. — that adding more plants, capacity, employees, or whatever will increase their profits. In a free market, real money conveys real information. Some businesses will decide to expand, others contract. Some will win, some will lose.

    The question of the business cycle is why would everyone start overspending and overbuilding at the same time? Or in other words, why would everyone have the same perception (or market spirit) that it’s a good idea to sink capital into capacity at the same time? Why is everyone in the economy buying more of everything all at once? the most common answer isn’t that everyone suddenly became more productive, harder working, and richer all at once. As Ford began making autos, autoworkers became relatively wealthier, but buggy and whip makers were becoming poorer.

    The Austrian school of economic thought says that this perception is artificially created when the government, as it is wont to do, overshoots with money creation that exceeds the increase in value in the economy. As this extra cash works through the system, people think they’re making more (inflation lags money creation, so the first extra dollars seem like real extra income, not increased prices for the same stuff), but it’s trickling out to everyone. Since everyone thinks they’re making more money — all at the same time– they’re willing or eager to buy more consumer goods, or pay more the ones they were already buying. Manufacturers see sales, prices, and profits climbing — all at the same time — and increase capacity to accommodate this “virtuous cycle.”

    At this point, Keynesians are patting themselves on the back over their ability to keep the economy humming while Austrians are sounding the alarms that a new bubble has been created and will commence growing unto calamity. Because bubbles can’t hold still — they either have to keep inflating or they will collapse. But once you inflate them to their limit, and they all have a limit, they inevitably burst.

    Of course the central bank wants to take action. It’s what they do. The fact that they presume they can spot the “zero lower bound” when they couldn’t avoid creating a boom/bust in the first place doesn’t illustrate their superior capacity, it’s an example of what economist FA Hayek calls “The Fatal Conceit.”

    Cheers

  19. Bruce

    That was one of the best explinations of Austrian economic theroy I’ve heard in a long time. I wish I could explain it that well.

  20. Sally Myles

    I tend to find that this way of eating isn’t as expensive as ‘healthy’ eating. Once I started eating this way I stopped buying tons of fruit. That was about £8- 10 a week gone right there.. I still buy fresh veg, which is expensive, but as I no longer fall for the 5 a day bologna, I’m not buying veg for the sake of meeting a quota.
    I do tend to eat cheaper cuts a lot, like pork belly, lamb ribs (both FULL of lip-smackingly tasty fatty goodness – which is filling as well as being awesomely tasty) Brisket etc.. so even though I’m eating more meat, it’s not all fillet steak (I much prefer rump anyway, it’s tastier)
    And let’s be fair, once your shopping trolley isn’t full of soda and snacks, sweets etc, you are cutting right down on your bills. We don’t need to buy all the peripherals, because we don’t get starving hungry.

    There’s definitely ways to cut the food bill when going paleo/low carb.

  21. Anonymous

    Hey, welcome back big brother! You need to update your blog too every now and then!

    If everyone could visit http://tinyurl.com/86ufrhv and give them a bit of information on proper health advice, it would be much appreciated. I don’t have the time to continually educate an entire campus. Thanks in advance.

  22. Judy B

    I have found that our food bill has gone down because we only eat 2 meals per day and eat less at those…

  23. Janet

    Good morning,

    Listen, OB, do you vote? If you do, I bet you vote for Republicans. You libertarians never seem to make the connection on who you vote for makes a hell of a difference in your big bad gov’mint evil but since the GOP liars say what you want to hear, but do exactly the opposite, you slobber to the polls and pull their chains. It’s just the big bad gov’mint in your rants. Well, the government is YOU–you (if you vote) elect them so changing things starts with YOU and your vote. Do you just vote reflexively for the GOP moron? Do you know that Bushy boy instituted a government wide program of putting in his hacks and corporate buddies on a steroid plan and when the new administration came in they refused to leave in many cases, as what generally happens? Who invented the doo doo economic supply side disaster? Saint Ronny Ray-gun. Who raised taxes 11 times? Saint Ronny Ray-gun. You give corporations free reign and what do you get? Bad food, tanked economies, ruined lives, (yes with the help of the government in many cases) but you guys are looking under the wrong freedom rock you pee against during your rants.

    I have spent a decade trying to point out clear differences and I am done. If you don’t vote, like your pal Richard over at Free the Animal, then you get what you deserve. So be it. Unfortunately, I don’t. So I will be eating what I can figure out is good and staying healthy and saving money. Frankly, there is nothing I believe we can do at this point. The ignorance amongst the American people is too great so I am opting out (but still voting and making sure my vote is counting by who I vote for). Getting out while I still can recognize the utter CRAZY talk from current crop of GOP. Would the insanity that comes out of their mouths now have come out of the mouth of GOP Dwight Eisenhower? Hey, I was around the and old enough to know. I figure there will need to be folks who will have to be able to point to the crazy talk someday when too many have been heard too much of this utter hypocrisy from a supposed grown up political party.

    There is a wise person I know who says that all Libertarians want to be able to do is smoke pot and screw liberally. Not much left of brain or time then to really look around and see what is going on, Mr. Keynes or Bozo the Clown notwithstanding.

    See, we are not “free”. We and everything are connected and count. But we can live without a few libertarians that are living in the hills, peeing on the trees and crapping in a hole. Be FREE. But don’t call my ambulance when the bear gets ya. Or my police when another libertarian decides your ham looks like something he would like. You pay you play. A law that has been around for a very long time.

    I am much older than you. I have been around and I have been connecting a few dots for quite a while. I will take the Dems over the current mutation of GOP any day, even with the DEMs major and insufferable flaws because they seem to care for people but yes, get it wrong many times, (but not as plain evil as the GOP). When you rant about the Government, you MUST consider who you are voting for and who gets to fill those positions that affect you. Not voting is the same as voting for what you get.

    I never hear anything about that important step, NEVER on these blogs. So your rant or the others have no credibility or even any solutions for me. Period.

    Part 2? Go for it!

    Well, gosh. At least you’re not bitter.

    My intention with this post is not to pick sides for a political argument, it’s to illustrate a school of economic thought that explains the business cycle generally, and specifically how governments’ attempts to “help” or control economic outcomes — ala Keynesian manipulation of the money supply and government spending — actually distorts information people and businesses need to make decisions that benefit themselves, society and the economy. To the extent that our government has metastasized to the point that so much of our economic life is controlled, regulated, dictated, subsidized, prohibited, or otherwise affected by that government means any economic discussion is unfortunately ripe to degenerate into a political argument.

    If you’ve read anything Tom or I’ve written you simply can’t make the case that either of us is pro-Republican. My points are almost always directed at the mendacity of institutions that have the power of legal coercion over people — i.e., government, not one party or the other. Corruption is not a function which party currently holds the keys to the kingdom, it’s a function of size. I have to say though, that it seems that Democrats always seem to be the ones who get cheesed and start assigning us to the other team in their bipartisan duopoly. Odd — Democrats think we’re Republicans, Republican just think we’re weird, but are still polite to us. Guess they value diversity more highly?

    So, you’re opting out, but still voting. How exactly does one do that? I was a thinking maybe you were suggesting throwing darts at your ballot (random chard theory), but then you state that you’re straight Democratic ticket. Actually, speaking of random chards, maybe we can all agree that the best suggestion is to select our representatives by lottery from the phone book. One term only, pay is twice the median income of your district, no pension, and any law passed has to be applied to Congress for a year before the public. You in?

    So, now that Obama’s been in for almost four years after throwing out all of the hacks and corporate interests, how’s that working out for you? If Obama wins this year, will it still be Bush’s fault when we’re still in the crapper four years from now? If Romney wins, will it be Obama’s fault when we’re still in the crapper four years from now, or will Romney own that? Or will it still be Bush’s fault? Wait, I know, it’s Reagan’s fault! That turd. No, maybe it’s FDR’s fault. God, I’m confused.

    Cheers!

  24. Isabel

    I’m sorry but you lost me (and my interest) half way through this long post.

    I’m sorry, too. I knew I was taking a risk with folks who aren’t particularly interested in economics. Hope you tune back in Monday, where I’ll attempt to tie it all together and show how it affects our food and health, individually and nationally.

    Cheers

  25. Elenor

    “The other point is, you’re officially stuck with me again for the next week or so.”
    Yeah but that’s a good thing — cause yo haven’t been writing any blog posts in YOUR blog — you’re in my RSS reader!

    “And that dollar isn’t saying if it came from someone creating value and saving it to spend or invest for other value in return, or if it just came off of a printing press.”

    You left out the biggest part: ALL of our money is **based in debt** (to a privately owned, off-shore, printing press: you DO know the “Federal” Reserve” is NOT federal and has NO reserves, right? Because every single “dollar” (federal reserve “note” — a “note’ is an IOU, a promise to REPAY, not actual money with inherent value) is based in debt, when these manipulated (as you described above) busts come along, and folks (and the govt) tighten their belts, try to save, quit spending, pay down their debts as much as they can, the “money” (those IOUs) goes back to the Fed (via the banks) — and people are loath to borrow, which takes “money” (those notes) OUT of circulation… which makes the notes “worth” more (scarcity, right?) and the Fed keeps its manipulation up — trying to get people to borrow (“OMG! Quick! Drop interest rates so people iwll borrow again!”), so the “money” can get back out into the market… The loss of confidence means the loss of circulating ‘money’ – which is one more screw-up of the economy…

    Go watch the YouTube vid “Money as Debt” to get the picture…

    Glad you’re holding the fort for Tom. Please tell him to make sure to video his speech — and then put it – and last year’s on vid and sell them, so we can inflict them on … er… show them to our friends!

    I keep vowing to myself that I’ll get back to regular venting on my blog, then get overwhelmed by the target rich environment of government stupidity.

    Agree on the Fed, but I’m trying to focus on the main point about government interference distorting the information contained in the price mechanism. I already bored one commenter to death, who at least was kind enough to let me know. No telling how many others are passed out over their monitors or just not saying. Also looks like I p*ssed off at least one other, and I don’t want to lose folks who come here for the nutritional insights over political interpretations.

    Tom’s promised to set up his video equipment to record his presentation. Here’s hoping our luck holds like it did for the last couple of cruises and he gets a good recording to share with us landlubbers.

    — The Older Brother

  26. Dave Sill

    Well done, thanks! Where can I find these libertarian ranting blogs of you and Tom?

    Oddly enough, they’re at tomnaughton.com and jerrynaughton.com! There’s links on the left here to jump to them.

  27. Steve J

    Say it and say it again. The sad thing is that the Keynesian idea really does work, on VERY small scales. A bridge breaks down in a local area, economy suffers, “government” aka people’s confiscated money, comes together, “stimulates” the economy and voila, you have economic growth again. It very definitely fails in something as large, corrupt, and bloated as the U.S. Federal government.

    Thanks for putting this in, look forward to #2, and as an additional point, eating healthy is most definitely less expensive if you do more work to help yourself save money. Eggs out = dollar a piece, Eggs 99c a dozen. (Organic more expensive).


    I’d have to argue that it doesn’t work at any level. What you’re describing is one of the most persistent and deeply help fallacies in economic thought, described by Frederic Bastiat in 1850 as the “parable of the broken window” in terms of a shopkeepers’ window (in place of, your bridge) broken by a careless son. He is upset, but people begin to reason that this is a gain to society because it creates work for the glazier, who can now buy more bread from the baker, who can then buy shoes, etc. These benefits are seen.

    The main fallacy here is about opportunity cost. Although certainly the glazier (or bridgeworker) sees a tangible gain, what people don’t see, but is every bit as real, is the transactions that would’ve occurred instead. The shopkeeper (or taxpayers) no longer has the money for other more highly valued things. Maybe he would’ve bought more candles to light his home. Note that the candle maker will most likely never know that the shopkeeper’s misfortune just cost him a sale, so has no inkling that he is now an injured party.

    Also note that in both instances, bridge or window, resources are consumed merely to to bring things back to the status quo. Barring this direction of funds away from these seen benefits, the funds would likely have been used in a way that added to the existing resources and perceived value of the buyer (the shopkeeper would’ve still had a window PLUS a new light source; maybe a new park or lower assessments for the taxpayers), but this loss in unseen.

    So, while economists (good ones) recognize this as a fallacy and cautionary tale, politicians and their bad pet economists recognize it as golden opportunity. By spending tax dollars visibly, the recipients recognize a direct benefit of government spending programs. The taxpayers are the candlemaker.

    Cheers

  28. Elisa

    You make really good points. Actually, I had never heard of the Austrian School and had never heard of the idea that government mandates led to the boom and bust cycles. I should probably know this but for the housing market, what exactly were the mandates that led to low interest rates and mortgage guarantees? Great cliffhanger – I look forward to Monday’s post!


    The Federal Reserve, now under Ben Bernanke and previously Alan Greenspan, has certain powers and authorities to manipulate interest rates and the money supply.

    Alan Greenspan, head of the Fed from the late 1980’s until 2006, was hailed as a genius for unprecedented economic growth even as we went through the dot-com collapse, the mid 2000’s market downturn, and the initial stages of the housing collapse. His genius was nothing other than good old fashioned money printing, coupled with rare enigmatic and undecipherable pronouncements over which the markets and Congress would swoon in awe. It turns out it was the same type of genius as keeping people from getting a hangover by constantly giving them more and more booze. He prudently handed it off to his acolyte Ben Bernanke in 2006 just as the fuse was burning down.

    Also, since our government has been spending ungodly amounts of money more than it takes in, it has a very strong vested interest in keeping interest rates it has to pay for the money it borrows low. The Fed, although ostensibly independent from the government (it’s really a private banking cartel), has a vested interest in keeping Congress happy, which has a vested interest in keeping voters happy, who very much like having super low interest rates so they can buy homes they can’t afford.

    Naturally, if you’re a banker, you’re somewhat disinclined to lend money to people unless you’re pretty sure they’re going to pay it back. So the government, keeping said voters in mind, over the course of years (and several different administrations) had created or expanded sundry loan guarantee programs to “help.” You’ve probably at least heard of Freddie Mac and Fannie Mae. These outfits (and others), acting on the premise that banks are too darn stingy, basically set up programs that said “if a mortgage loan meets certain criteria (debt:income ratio, credit score, years working, etc), we’ll either guarantee the loan, or pay the bank a processing fee and buy the loan off their books.”

    So yesterday you were a banker whose primary concern with a loan was if it would be paid. Make a bad loan, you’re in the forclosure and real estate business instead of banking. So you do things like ask for 20% down, excellent credit, etc.

    Today, you make money based on the number of loans you can get approved, because you have no exposure on a bad loan. See how that would kind of affect your attitude?

    Also, there’s way more voters who could maybe come up with a 10% down payment than a 20% down payment, so Freddie and Fannie were put under pressure by Congress (Barney Frank and Chris Dodd are poster children for this and other chunks of the economic fiasco) to lower their underwriting standards and write more loans to help out the poor and downtrodden. don’t feel too bad for Freddie and Fannie — this was akin to putting pressure on a five year old to eat fewer turnips and more ice cream. Ironically, the “executives” (who were almost all politically connected hacks) at Fannie and Freddie were compensated based on how many loans got written and resold. Like hundreds of millions.

    Turns out, there were even MORE voters who could swing a zero percent down payment, and they’d like it even more if, for instance, instead of having to provided a W-2 to prove their income, they could just throw a number out there and Fannie or Freddie would take their word for it. Happy to oblige.

    Meanwhile, all of those mortgages, which had always been pretty solid because of down payments, credit criteria, etc. were easy to bundle up in huge groups as kind of a super bond, then cut into equal pieces representing the underlying loans, and then sell them as very safe bonds that paid a decent interest rate. The rating agencies, like Moody’s and Standard & Poors, had always given these terrific ratings for safety (because it used to be they were), and although there was now all kinds of risk being introduced with zero down, unverified income (the industry term was “liar loans.” Seriously.), the agencies didn’t see any reason not to keep giving them top safety ratings. Ironically, the ratings agencies were paid fees based on how high they scored the safety of the bonds they were rating.

    Finally, all of these “safe” loans, because they had such great safety ratings but paid good interest rates, got snapped up like crazy by banks, insurance companies, credit unions, and other financial institutions that needed high levels of safety along with decent rates. To avoid risk even further, they sometimes purchased insurance on their bonds, or derivatives (we won’t go there).

    Other insurance companies write this insurance (in other words, guarantee that the bond wouldn’t go bad) and buy and sell other derivatives with total exposure in the tens of trillions of dollars, which may sound a little scary if it’s hundreds of times what your entire company is worth, but what could possibly go wrong? I mean, it’s not like the entire housing market could collapse when all those hundreds of thousands of people who’d gotten those adjustable loans at 1% with nothing down and no real income would suddenly start defaulting when their rates went up to maybe 6%. All at the same time.

    Right?

    So you may not think you know much about economics or the housing market or interest rates or how government really works, but I’ll bet you can read all of this and think something doesn’t quite sound right. Maybe you’re thinking what collectively NONE of Congress or Freddie or Fannie or the Fed or AIG or Warren Buffet or Bush or Obama or Clinton or Bear Sterns or Goldman Sachs or any of the CPA Audit Firms or regulators or all kinds of experts thought:

    ka-boom!

    Yes? Turns out, you understand economics better than a lot of people!

    — the Older Brother

  29. Subkilla

    Awesome! Preach it big brother. Your words have undeniable truth in them. Thank you for giving clear structure to something most people can’t see for looking. I’m looking forward to part II.

  30. Matt McCandless

    I am glad you brought up this topic. I have always wanted to hear this explained better. Malinvestment definitely explains some portion of recessions and depressions, but what about LM/IS. “Animal Spirits” are not just hypothetical, market perceptions produce real outcomes that effect spending levels. When spending slumps it has consequences for the broader economy, not just the portions where malinvestment should necessitate liquidation. During a recession it is entirely possible for an economy to lose assets (i.e. factories, brands, production models, jobs) that would be viable in any other economic climate. So is it not understandable that a central bank may wish to take fiscal action when monetary policy is at it’s limit and we have reached zero lower bound? There is evidence that inflation is avoidable in these situations.

    Sorry, not getting what the LM/IS references.

    Market perceptions do affect spending. Businesses invest when they “feel” — based on what information they have, experience, risk appetite, etc. — that adding more plants, capacity, employees, or whatever will increase their profits. In a free market, real money conveys real information. Some businesses will decide to expand, others contract. Some will win, some will lose.

    The question of the business cycle is why would everyone start overspending and overbuilding at the same time? Or in other words, why would everyone have the same perception (or market spirit) that it’s a good idea to sink capital into capacity at the same time? Why is everyone in the economy buying more of everything all at once? the most common answer isn’t that everyone suddenly became more productive, harder working, and richer all at once. As Ford began making autos, autoworkers became relatively wealthier, but buggy and whip makers were becoming poorer.

    The Austrian school of economic thought says that this perception is artificially created when the government, as it is wont to do, overshoots with money creation that exceeds the increase in value in the economy. As this extra cash works through the system, people think they’re making more (inflation lags money creation, so the first extra dollars seem like real extra income, not increased prices for the same stuff), but it’s trickling out to everyone. Since everyone thinks they’re making more money — all at the same time– they’re willing or eager to buy more consumer goods, or pay more the ones they were already buying. Manufacturers see sales, prices, and profits climbing — all at the same time — and increase capacity to accommodate this “virtuous cycle.”

    At this point, Keynesians are patting themselves on the back over their ability to keep the economy humming while Austrians are sounding the alarms that a new bubble has been created and will commence growing unto calamity. Because bubbles can’t hold still — they either have to keep inflating or they will collapse. But once you inflate them to their limit, and they all have a limit, they inevitably burst.

    Of course the central bank wants to take action. It’s what they do. The fact that they presume they can spot the “zero lower bound” when they couldn’t avoid creating a boom/bust in the first place doesn’t illustrate their superior capacity, it’s an example of what economist FA Hayek calls “The Fatal Conceit.”

    Cheers

  31. Sally Myles

    I tend to find that this way of eating isn’t as expensive as ‘healthy’ eating. Once I started eating this way I stopped buying tons of fruit. That was about £8- 10 a week gone right there.. I still buy fresh veg, which is expensive, but as I no longer fall for the 5 a day bologna, I’m not buying veg for the sake of meeting a quota.
    I do tend to eat cheaper cuts a lot, like pork belly, lamb ribs (both FULL of lip-smackingly tasty fatty goodness – which is filling as well as being awesomely tasty) Brisket etc.. so even though I’m eating more meat, it’s not all fillet steak (I much prefer rump anyway, it’s tastier)
    And let’s be fair, once your shopping trolley isn’t full of soda and snacks, sweets etc, you are cutting right down on your bills. We don’t need to buy all the peripherals, because we don’t get starving hungry.

    There’s definitely ways to cut the food bill when going paleo/low carb.

  32. Anonymous

    Hey, welcome back big brother! You need to update your blog too every now and then!

    If everyone could visit http://tinyurl.com/86ufrhv and give them a bit of information on proper health advice, it would be much appreciated. I don’t have the time to continually educate an entire campus. Thanks in advance.

  33. Judy B

    I have found that our food bill has gone down because we only eat 2 meals per day and eat less at those…

  34. Steve J

    Say it and say it again. The sad thing is that the Keynesian idea really does work, on VERY small scales. A bridge breaks down in a local area, economy suffers, “government” aka people’s confiscated money, comes together, “stimulates” the economy and voila, you have economic growth again. It very definitely fails in something as large, corrupt, and bloated as the U.S. Federal government.

    Thanks for putting this in, look forward to #2, and as an additional point, eating healthy is most definitely less expensive if you do more work to help yourself save money. Eggs out = dollar a piece, Eggs 99c a dozen. (Organic more expensive).


    I’d have to argue that it doesn’t work at any level. What you’re describing is one of the most persistent and deeply help fallacies in economic thought, described by Frederic Bastiat in 1850 as the “parable of the broken window” in terms of a shopkeepers’ window (in place of, your bridge) broken by a careless son. He is upset, but people begin to reason that this is a gain to society because it creates work for the glazier, who can now buy more bread from the baker, who can then buy shoes, etc. These benefits are seen.

    The main fallacy here is about opportunity cost. Although certainly the glazier (or bridgeworker) sees a tangible gain, what people don’t see, but is every bit as real, is the transactions that would’ve occurred instead. The shopkeeper (or taxpayers) no longer has the money for other more highly valued things. Maybe he would’ve bought more candles to light his home. Note that the candle maker will most likely never know that the shopkeeper’s misfortune just cost him a sale, so has no inkling that he is now an injured party.

    Also note that in both instances, bridge or window, resources are consumed merely to to bring things back to the status quo. Barring this direction of funds away from these seen benefits, the funds would likely have been used in a way that added to the existing resources and perceived value of the buyer (the shopkeeper would’ve still had a window PLUS a new light source; maybe a new park or lower assessments for the taxpayers), but this loss in unseen.

    So, while economists (good ones) recognize this as a fallacy and cautionary tale, politicians and their bad pet economists recognize it as golden opportunity. By spending tax dollars visibly, the recipients recognize a direct benefit of government spending programs. The taxpayers are the candlemaker.

    Cheers

  35. Anna, Sweden

    Good point you are making. However, I do have a small comment.

    As I see it, artificially low pricing (with respect to the market price) of renewable and clean energy systems such as solar panel systems makes sense if you take into account the “tragedy of the commons”. All things we value are unfortunately not correctly priced by the market, e.g, clean air and clean water, which is why the market cannot solve all problems, or, as you put it, provide “correct information” about value. Solar energy currently cannot compete economically with oil as energy source, but there are many reasons why we would like to become less dependent on oil.

    I do agree with your argument however when it comes to house prices, and also when it comes to food prices. There are huge costs for SAD hidden as, e.g. future health care.

    On another note, many people switching to low carb find that their food bill surprisingly goes down not up.

    Actually, “tragedy of the commons” refers to the tendency to overuse a resource when there are no costs or defined property rights.

    The classic example of this is the range wars of the old west as open grazing land, which was theoretically “owned by everyone” was destroyed as more animals were brought onto it, and led to open shooting wars between cattle and sheep ranchers. Since it was free, there was no reason not to put as many animals on it as you could herd, and since no one had ownership, there was no reason to manage or protect it sustainably. Absent ownership rights and usage costs, the people who use the resource the most make the highest profits.

    I’m guessing you where going for the concept of “externalities,” meaning costs (or benefits) that don’t carry an economic cost in a transaction. Pollution, as you note, is the commonly cited example, as in “absent government intervention, the cost of electricity only reflects the cost of the coal used to run the generator, but not the cost of the air pollution the process generates.”

    The market answer to this is that the air and water pollution are in fact best addressed through the concept of property rights. You have a right not to have your lungs clotted by smoke, or your water polluted with runoff. Government’s legitimate role, as libertarians propose, is to protect those rights. Today its role is to negotiate those rights away without your consent. (On the other hand, there’s no basis in law or fact to consider some fraction of a part per billion of particulate matter or the fate of some remote snail darter as a reason to prevent development).

    At any rate, artificially low pricing by definition means you’re going to be wasting and misdirecting resources. Forcing market pricing failure into a system you deem undesirable doesn’t create success, it just favors whichever type of failure is more politically popular.
    Cheers

  36. Lori

    “You’re recognizing cost savings in your medical spending, but what if you’ve got ‘free’ health insurance as a result of either your employment or government program.

    “At that point, strictly based on the dollars you see, you’re getting a market signal that it’s cheaper eat the macaroni and cheese and use ‘free’ insulin than buying the bacon and eggs.”

    This drives me bonkers. I don’t want to see poor people do without medications or treatments they truly need, but we need to recognize that these things are free in the sense that walking away from an upside-down loan is free.


    Good — I’m kind of going for bonkers.

    Keep in mind also that it’s the people with the fewest options (poor, undereducated, etc) who are the least able to ignore the economic incentives, no matter how perverse they are. If you’re financially stable, you can tell the government nutritionists to pound sand and eat your bacon. If you’re at the bottom of the economic ladder, you aren’t as free to ignore the free lunch program and pack your kids a real meal, because you’d have to spend the gas money you need to get to work.

    Maybe not bonkers. Maybe a bit of rage.

    Cheers!

  37. Kimji

    Thank you for the economics lesson! I’m not a braniac about any of this, but I appreciate an explanation that I can understand about the crazy world I live in. Looking forward to your next installment.

    Thanks. My goal is to make some basic concepts accessible for folks who don’t normally deep dive through the economics news.

  38. anonymouse

    Great post!

    This is outside the scope of nutrition, but I’d be interested in hearing your thoughts on the higher education bubble (my current source of economic rage). Maybe a post on your own blog?

    Actually, I addressed that in response to a comment/question on my blog. Check the 2nd comment from Janalaim and my reply here:

    http://www.jerrynaughton.com/?p=259

    Short answer for those who’ve already had enough economics for one day and don’t want to read another long post:

    1) Student loans now exceed credit card debt nationally (over $1 trillion)
    2) Easy government loans to unsavvy consumers (college students) means prices get bid up way over true value
    3) More students now leave college due to debt than to academic issues
    4) Colleges lie about graduation rates, placement rates, and earnings of grads
    5) If your major doesn’t involve science or math, you probably have no business borrowing money for it
    6) probably at least a quarter of kids who go to college would be better off in a trade school or just starting a career
    7) the “double the lifetime earning of a non-college grad” is misleading at best, and complete BS for any major that has the word “women,” “social,” “diversity,” “environmental,” “gender,” or “justice” in it.

    So yes, college loans are another major bubble on the horizon that will keep many of today’s youth and their principles as indentured servants for years, which will eventually end as another disaster for taxpayers. Assuming the Mother of All Bubbles — the collapse of the US dollar — doesn’t get us all first.

    See why they call economics “The Dismal Science?” Har! Har!

    (Finally, regardless of any of that, if you’re passionate about a particular field — even any of those in number 7 — you should go for it with everything you’ve got. Just not on credit, okay kids?)

    — The Older Brother

  39. Bob Johnston

    If you were to throw in some global warming skepticism you’d have hit my favorite topics of discussion that pretty much everyone has wrong. Nice post.

    Despite better intentions, I think I’ve irritated enough people as it is!

  40. Dragonmamma/Naomi

    This is the closest I’ve ever come to understanding economics. Thank you!

    Here’s a cool little saying I heard that can be applied to both economics and healthful eating: “Don’t think about the cost of doing something. Think about the cost of doing nothing.”

    Proving that a couple of very simple truths are oftentimes enough to keep you on the right path.

    Cheers

  41. TheFatNurseRN

    FatNurse here,

    So if I use your Austrian Business cycle theory…

    If people start waking up that grains are bad. Cholesterol medication isn’t that effective and etc…We might potentially save lives and reduce costs in the fitness, pharmaceutical, medical and other health and obesity related fields. That sounds good…but wouldn’t that trigger a recession or even depression according to the Austrian Business Cycle theory when applied to credit creation?

    Any savings (in the mentioned fields) would mean a reduction of spending unless everyone spends ALL the money they saved from those medical issues right back into the economy. Considering the cost of medications and medical procedures….that seems unlikely. Circular flow of credit and credit creation would then stop and trigger a recession no?

    If this is true…what a messed up system we have.

    That’s a pretty astute analysis, but it reflects the Keynesian model, particularly the “circular flow” concept

    The free market model says that the money people wouldn’t be spending on health care will take one of two forms:

    The first would be alternate spending. So, instead of heart surgery, maybe I’ll buy a new boat. The reduced employment and profits are real and widespread in the medical field; but this isn’t a real recession, which is defined as a general slowdown across the entire economy. It looks like a recession inside the medical community, but it’s really just a shifting of consumption away from medicine. At the same time, it looks like a boom to the 16-foot yacht industry.

    The other option is to save the money, either through investments, which adds money to the capital markets, or savings, which adds money to the banking/credit market. This money now in the capital markets looking for future earnings adds to the supply of money available, which will drive the price of capital down, sending a market signal to yacht manufacturer that it’s a good time to issue more stock or borrow money to open another plant.

    Either way, the money hasn’t stopped participating in the market, it either shifts between types of spending (consume now) or between consumption and capital (save/invest for future consumption). Also in a free market, these two always are in some level of dynamic balance.

    Circling back to my Austrian business cycle model, the extra money Keynesians assert should be pumped into the economy causes people to increase consumption while at the same time signaling businesses to increase capital investment, in essence trying to spend and save the same dollar at the same time. They’re still seeing signals, but it’s bad information.

    And honestly, wouldn’t it be a better world if most dieticians’ new job title was “swab?”

    Cheers

  42. johnny

    A big source of the problems you described is government’s ability to create “funny money” (money out of thin air).

    History has shown that no civilization that relied on paper money has ever survived.

    We need to end the fed and return to a currency backed by precious metals to stop the funny money business and ensure that we are leaving within our means and growing from creating wealth.

    Honest money would certainly make for more honest government. The issue is how to get a dishonest government to create honest money. As you mention, history has only demonstrated one way for that to happen.

  43. Mark Jacobs

    Thank you so much for the commentary on economics. I believe that this is the one area that the government has fed us, the American people more bologna than the bologna your younger brother pointed out in his movie.

    For anyone interested in learning more, read “Economics In One Lesson” by Henry Hazlitt. Such a great book that helps make econimics easy to understand just as your post did.

    Another great source for learning more about Austrian Econmics is “The Source” go to http://www.mises.org

    Great resources. Hayek’s “Road to Serfdom” is also a favorite of mine.

    Your comment is interesting because I’ve been an aggravated economics nerd for decades, but until Fat Head just always assumed that nutrition and food was one area the government couldn’t screw up too badly. Now, a couple of years post-Fat Head, I’m thinking more and more that the nutritional threat the government represents outweighs the fiscal threat.

    If you’ve watched the Lustig YouTube vidoes Tom linked to in a couple of his previous posts, just think of the money and quality of life we could recapture just by addressing the diseases of metabolic syndrome he lists (diabetes, cardiovascular disease, cancer, bad lipids, polysystic ovarian syndrome, non-alcoholic fatty liver disease, and dementia). Imagine if the rates of all of those were cut in half.

    Cheers

  44. Matt McCandless

    Wow! and congrats on responding personally to all of these comments. I appreciate it.

    Thanks. I have a blast when Tom’s out and let’s me sit in the big chair.

  45. Firebird7478

    Boy did Janet go off the deep end, confusing libertarians with republicans. As libertarian I vote, well libertarian. I vote my moral beliefs. Some people think I am throwing away my vote, but I tend to believe that if you’re voting in the popularity contest that is the democratic/republican choice, that it is people like JANET who throws away THEIR vote. They just want to pick the winner, no matter what the policy is.

    Regarding George Bush, two elections, twice voted against him. If anyone if close to being the egomaniac with the silly mustache, it was Dubya.

    I was hoping to avoid starting a political war. I agree you should vote your principles, and if no one comes close enough I see nothing wrong with abstaining. The “you need to vote someone” idea doesn’t convey anything useful to the ruling turds. All they care about is getting a vote. They get no “market signal” that you detest 45% of what they stand for. A 15% voter turnout might give them pause, or at least spotlight how little moral authority they have.

    My other problem, using reductio ad absurdum, is that how would you justify voting for the least bad if the candidates where Stalin and Hitler? Or, what if there was a little splinter party with some loser named Thomas Jefferson running on a platform of limited government and individual liberty. Would it be wasting your vote to support him since he had no chance of winning?

    I don’t think “W” was particularly worse than any of the rest. Kind of like the national debt, each one leaves with “more than all of the previous ones combined!!!” You’d think maybe people would recognize this as a pattern of big government, instead of ignoring it when their team is in and then then screaming about it when the government underwear periodically gets turned inside out and put back on again. Whatever Bush did, Obama has kept doing, and doubled down. When “W” left office, it wasn’t yet explicitly stated that the president could unilaterally decide you’re a terrorist and have you assassinated. That would be double “O”-bama. And whoever is next will be worse.

    Ah, well. Not going to change any minds on that, and don’t intend to here, which is why I was hoping to keep it just economic concepts.

    Cheers

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