no third solution

Blogging about liberty, anarchy, economics and politics

Comments on Comments #23

August 7th, 2008

Regarding the Zoo millage, which passed overwhelmingly:

“I’m thrilled,” said Liz Kaczmarek, 30, of Clinton Township, who takes her nieces and nephews to the zoo frequently. “I don’t know a person who knows about the zoo millage who said they were going to vote no.”

I didn’t vote at all. But even if I had, Liz, you wouldn’t have given a damn what my opinion was, because there simply aren’t enough of me.

Eric Ogunbase left a comment in response to my original post on the subject, A Zoo is Not a Public Good:

Growing up in San Diego makes one a “Zoo Snob”. However, I’ve been to both zoos (born in Hutzel Hospital many moons ago). I think the tax dollars of those in Wayne, Oakland and Macomb counties could be used for more pressing matters.

The Zoo is not one of them.

I couldn’t agree more. As long as the government is spending money, it should be doing something mildly productive with it. Subsidizing people who want to play with big cats or cute penguins all day doesn’t count.

Meanwhile, Jeff Molby was busy commenting:

I take my son to the zoo regularly and I’m gonna go to the polls specifically to vote against this. BTW, I don’t even own a house.

That’s alright. Property taxes are passed forward to consumers of rental properties, too. But it didn’t matter that Jeff voted against it.

The measure passed by a 2:1 margin, and is expected to raise property taxes about $10/year. Why can’t the 2 who voted for it pay $15/year, and I pay $0/year? That seems fair.

According to the article,

The tax, which is to cost the owner of a $200,000 home about $10 per year, will generate almost $15 million a year toward the zoo’s $26-million annual budget. The rest comes from admissions, concessions and donations.

Does the Detroit Zoo really only take in $2MM in concessions and donations revenues, annually?

Must be some sort of “new” math. If the zoo is $15MM short, that means it only brings in $11MM/year. The zoo boasts over 1 million visitors per year, and an adult admission is $11 with discounted fares available to children, groups, and elderly. I’m going to assume an average fare of something in the neighborhood of $8. That’s about $9MM in revenue, right there.

One commenter at the Free Press forum said,

It is just a shame that they didn’t ask for more money and make it free admittance. Then maybe people would go and utilize it…then sponsors would come…then the zoo would expand and get better…and more people would come…and more sponsors.

Right. Just what we need – even more corporate welfare.

+++

Jeff Molby left a comment on Consumer Price Index (1800-2007)

I’m no fan of the Fed, but I couldn’t find a source for the estimates used in the chart. It’s pretty, but meaningless without a list of the assumptions used.

You could look it up at MeasuringWorth.com (via EH.net). They indicate $51 in 1800 is approximately equivalent to over $800 today.

Robert Evans left a comment, as well:

In general, statistics demonstrating that there has been inflation do not convince anyone that anything is wrong, because public opinion normally holds that a low but constantly positive level of inflation is good for promoting growth. That’s the belief that needs to be changed. Otherwise, you’re just preaching to the choir.

Robert! I think the point of that chart is that a “low but constantly positive level of inflation” is not what we’ve experienced over the last 100 years. This chart should give even the staunchest Friedmanites pause.

+++

Jeff Molby left a comment on Fiat Credit is NOT a Loan, in response to my position that “A credit card is not a loan. Sometimes they are characterized as unsecured loans, or unsecured lines of credit, but in truth they are not loans.”

You’re not suggesting that credit cards themselves are a source of the problem, are you? It seems to me that a credit card could be completely legit in a hard money economy. If the bank pays Best Buy in hard money, the bank is temporarily and conditionally surrendering an asset on my behalf.

Your title implies that we agree on that, but I think you should clarify your third paragraph to make it clear that the underlying fiat system is the problem rather than the practice of supplying credit via a standardized form of identification.

Yes and No. I think that credit cards as we know them are essentially a product of a fiat money system, in that regard the system is the problem and the cards are merely a symptom.

+++

Kip commented on Money From Nothing,

the Fed does not and cannot “monetize the debt.” Only the Treasury can do that. Federal Reserve Notes are not “the national debt,” Treasury securities are. The Treasury redeems them, not the Fed — either with tax revenues, proceeds from new debt or with currency (monetizing).

I consider the Fed and the Treasury to be two sides of the same coin, no pun intended. It doesn’t much matter which party technically monetizes the debt. The broader argument, that inflation is fraud, still holds, regardless of which half of the oligarchy is pulling the levers.

There were a number of comments on this subject, to which I’m still crafting a reply.

+++

On Chrysler Kills the Auto Lease I forgot to mention something.

When determining the lease price for a vehicle, the lessor must know at least two things.

The fair market value of the vehicle at inception
A reasonable approximation of the vehicle’s value at fulfillment

Most of the news reports are citing vehicles’ lower-than-anticipated value at lease termination as reason for killing the lease as a financing alternative. This is only half of the problem, for which their economic model certainly should have accounted. The other half of the equation is always overlooked.

My best guess is that for most of the vehicles leased in the last few years, the value of (1) was ridiculously overstated. Combined with the failure to accurately predict (2), the financing woes for the auto companies was exacerbated. Had they started from a reasonable value, their exposure to macro-economic risks like a recession would’ve been lower.

Of course, it’s a result of over-capacity, brought about (at least in part) by malinvestments encouraged by loose monetary policy.

+++

Kip, Esquire responds to my accusation, that governments are per se illegitimate in Comments # 22

You toss around the word “illegitimate” a little too recklessly. The argument is that “legitimate” is not a discrete quantum, but a continuum. One government can be more or less legitimite (sic) than another, and the metric by which legitimacy is measured is inoffensiveness to competent adults who have a natural right to life, liberty and the pursuit of happiness.

But to summarily dismiss all government as per se “illegitimate” is circular: you’re just assuming the answer.

I granted the idea that there is a continuum:

Conceivably, if and only if a government were to handle everything with kid-gloves, tread lightly and carry no stick, it would be less illegitimate than it currently is.

But this is a continuum of illegitimacy. Since there is no “contract” and can never be any such “contract,” (which would qualify as “legitimate”), the endpoint, “legitimacy” is not within the operative range of this continuum but is instead an unattainable ideal state.

Sure, the less deviation there is from an impossibly hypothetical contract, the better off everyone ought to be, but when examining a legitimate contract, the parties must have had the opportunity to avoid the contract in the first place. This is a binary condition: either the parties had the opportunity to forge a valid, consensual contract, or they had no such opportunity.

Since nobody ever had a choice in the matter, I’m willing to defenestrate any pretense of legitimacy.

I mean, let’s call spades as they are. The fact of the matter is this: You are not allowed to disagree with the non-existent contract without ultimately getting shot.

(Anything wrong with this proposition, from a libertarian perspective? Just asking.)

Any government proclaiming any degree of legitimacy ought to recognize that killing people for mere differences of opinion is an heinous policy to pursue.

+++

One of the greatest black marks on American history was the Civil War. How is it, that every other western nation was able to eradicate chattel slavery without the bloodshed that beseiged the nation during the 1860s, claiming three-quarters of a million able men?

Not being a history scholar, I have no idea how the other nations managed to do it, but Vache Folle offers one solution to the problem in What was so great about slavery?

I don’t really understand why Southern elites hung on to the institution of slavery for so long. They would have had the same cheap labor force to exploit if they had emancipated their slaves and made them free laborers. They would also have gotten more Congressional representation since a freedman would count as an entire person for the purposes of apportionment.

Seems like a no-brainer, to me.

Of course, most people believe that the Civil War was in fact fought over slavery. I believe this was perhaps the popular cause, the rallying cry if you will. In fact, the Civil War was fought to “preserve the Union”, thus invalidating the sovereignty of allegedly free states and people.

Chrysler Kills the Auto Lease

July 29th, 2008

Leasing was the slightly more benevolent version of “planned obsolescence,” which almost ruined the industry in the 1970s.

Throughout the last 20 years or so, it has become increasingly hard for the average person to finance the purchase of a car over a reasonable period of time (less than 3 years) without a significant initial cash outlay. About a quarter of the national market leases cars instead of buying them, because even though they might never have the joy of owning a car free of encumbrance, they’ll also never have the Russian-roullette-like joy of replacing rotors, spark-plug wires, batteries or transmissions. They were content with a more-or-less perpetual payment, in return for always having a new car that was under warranty.

This is why I thought it was a rumor, when I heard that Chrysler (and probably to be followed by others) will discontinue leasing as a financing option starting tomorrow.

Then, an e-mail hit my in-box from Chrysler.

We are contacting you to let you know that recent press announcements about Chrysler and Chrysler Financial no longer offering leasing do not change our commitment to you. We’ll continue to provide our lease customers a superior vehicle ownership and finance experience.

The e-mail directs the reader to a website, predictably dripping with spin:

Effective August 1, Chrysler Financial will discontinue offering new lease products in the United States and is shifting its resources to offer customers new enhanced installment loans. This announcement is based on broader industry and economic trends that have made leasing less favorable for our customers.

Less favorable for your customers?

If leasing were truly less favorable, and financing more favorable, from the customers’ points of view, you wouldn’t have your back to the wall issuing damage-control counter-press-releases at 11pm on a Tuesday.

No, the broader economic trends have made leasing less favorable for the automakers’ financing arms; determined to “make it up in volume,” they have flooded the market with heavily incentivized leases over the past few years. As all those leases expire, the used car lots are flooded with gently used, 2- and 3-year old vehicles with relatively low mileage. The glut of supply over demand caused prices on used cars to decline. And if you haven’t figured it out by now, used cars are a near-substitute for new cars. Sur-fucking-prise: the relative abundance of used cars has put tremendous downward pressure on automakers struggling to sell new cars.

Really? Their economic model couldn’t account for this?

They should have been charging more for leases, in order to accurately account for the depreciation (which is what a lease is designed to do). Of course, that would’ve resulted in moving fewer vehicles off the lot. But their economic model failed to predict that as they dumped millions of cars on the market, the buy-back price of those vehicles two or three years hence whould drop, significantly. To be fair, there are other factors at play here, like the rising cost of gas, a recession, stagnating wages and high unemployment, but I’m not sure how any of these contribute to the favorability of putting 10% down on a rapidly depreciating asset, just to be saddled with $500 monthly payments for the next 3 years.

The market is oversupplied enough to permit relatively destructive competition in the lease market, there’s little reason to believe that traditional financing will not be similarly affected. There are simply too many cars, and too much productive capacity (not to mention, not enough disposable incomes) to tolerate the prices emblazoned on window stickers at car lots across the country.

This was a no-brainer, which should have only become more apparent as the perfect financial SNAFU came to a head over the past 24 months:

Manufacturers have been flooding the market with deeply-discounted trucks, or promo-rates on leases with little or nothing down. When those leases all begin to expire at about the same time, there will be a glut of used trucks in relatively good condition on the market, this glut should tend to force prices downward.

No matter which way you spin it, the prices charged for new vehicles are going to have to fall, and unless the automakers can figure out how to make that work to their advantage (it’s not like they have a captive market in Auto-Financing – every bank and credit union issues new-car loans), killing the lease option isn’t going to be enough to stop the bleeding.

Money From Nothing

July 28th, 2008

1955Design left a comment on Exploiting Ignorance: Money for Nothing,which I feel deserves a stand-alone reply. In response to my assertion that in the event of credit default, “Nobody has lost anything … on the contrary, whosoever he purchased goods from has already received and has likely spent the money that was created out of nothing.”

OK, this is all pretty confusing to me. Hasn’t the credit card company lost in this case? After all, they paid money to Best Buy for that flat screen HD television that you acquired by using your credit card.

The source of this confusion is that most people simply have no idea how money is lent into existence by the Federal Reserve and its member banks. Most people have a very hard time comprehending the fact that most of the money ever lent to you never existed until you signed the note. That’s why I included the Galbraith quote,

The process by which banks create money is so simple that the mind is repelled.

I feel like I have a pretty good handle on the concept, and it often still challenges me.

If I had a printing press in my basement, and could print perfect copies of $100 bills at a cost of zero, you would rightly call me an extortionist if I offered to “loan” you some of that money at 5% per annum. In the event that you accepted the “loan” anyways, and you failed to repay me, would I be any worse for wear? It is preposterous to assume that I would be in any way damaged by your failure to repay me.

The Federal Reserve has a printing press in its basement. It prints perfect copies of $100 bills at a cost of (essentially) zero. Through its member banks and institutions, it offers to “loan” you that money at 5%, 10%, 25% annually. What’s the difference? The government says that it’s OK for the Federal Reserve to create money out of thin air, and to loan it out to you or me, at a profit.

Under these circumstances, any interest rate charged is usurious, because there is no time value, nor is there an opportunity cost for the money allegedly “lent.” Anyone else who wants to loan money must make an immediate sacrifice, and bear real risk, in hopes of earning a modest return on capital lent.

I really like the explanation given in I want the Earth, Plus 5%, but it’s a tad on the lengthy side. In The Compound Interest Paradox, blogger FSK summarizes the flaw in debt-based money:

Money is only created when someone takes out a loan. However, only the principal is created and not the interest payments. For example, suppose a bank borrows $1B from the Federal Reserve at 5% interest for 1 year, either directly at the Discount Rate or via the Federal Reserve “monetizing the debt”. In a year, the bank must repay $1.05B. The $50M required interest was never created or put into circulation. Therefore, there’s a permanent money supply shortfall. Everyone is enslaved under a crushing debt burden.

The key step in the money creation process is when banks borrow from the Federal Reserve to create new reserves. Only the Federal Reserve can create new money, and all the money it creates has debt strings are attached … Total debt is always greater than total money.

You’re not going back far enough if you presume that the credit card is giving money to Best Buy. Where did that money come from? That money likely did not come from some investors’ accumulated savings, ultimately that money was created out of thin air; it is a pure debt obligation which exists only insofar as it is backed by the full force of law. If I loan you money to buy a house, I actually have to part with thousands of dollars of accumulated savings. When a bank extends credit for you to buy a house (or a television, or a car), they are not taking money from a pool of accumulated funds, they are quite literally creating the money with a few keystrokes and bookkeeping entries with the Federal Reserve.

Think about why prices rise. Prices are nominally rising not because the goods are becoming more scarce, but as a rule, because the currency is continually debased.

The important consideration is that goods and services cannot be created out of thin air.

No amount of printed money is capable of creating wealth, and to the extent that the new money “stimulates” investment and productivity, it can only do so with the hidden costs of malinvestment, that is, a falsified price sigal (an interest rate is really an intertemporal price) is sent to the market, inducing entrepreneurs to borrow money when otherwise they would not have, to embark upon productive processes the lengths of which are unsustainable given the existing time preference, the stock of complementary goods or factor inputs, and which also permits them to bid away resources from their most efficient allocations.

The resultant rising prices silently and secretly destroy everyone else’s purchasing power, stealing from everyone else’s savings, bit by bit.

By political favor, banks have become uniquely empowered with the special privilege, a privilege which no individual could claim by rights, and which no man would honor otherwise. This privilege is the permission to loan into existence, money representing wealth which has not yet been created. In doing so, they are effectively mortgaging the borrowers’ productivity, while risking nothing of their own.