Will Blog for Food

Suppose the US Treasury Gave a Debt Auction and No One Came!

Ever so often the US Congress goes through the exercise of raising the debt limit "allowing" the government to borrow more money. Right now US debt is approaching $10 trillion thanks to President Bush having spent the US into more debt than all the preceding presidents combined, a distinction held heretofore only by Ronald Reagan. It's not hard to see why: endless wars and tax cuts for the rich. But the US may be reaching the point where Congressional raising of the debt limit is akin to pushing on a rope. What if nobody wants to buy any more US debt? Currency traders are dumping US dollars so fast that the dollar has already been overtaken by the euro and the Canadian "loonie," and it is soon to bow to other major currencies such as the Aussie dollar.

Ever so astute and perceptive, Alan Greenspan has made the following comments regarding the US debt ceiling which instead of being set by Congress may be approaching the point where it is set for the US by international market forces:

Former Federal Reserve Chairman Alan Greenspan said the dollar's depreciation may reflect growing unwillingness among foreigners to buy U.S. debt. "Obviously there is a limit to the extent that obligations to foreigners can reach,'' Greenspan said in a speech in Washington today. The dollar's decline to its lowest since 1997 may be "an indication America is approaching this limit.'' Greenspan's warning came after the U.S. Treasury reported last week that international investors sold a record amount of U.S. financial assets in August. Total holdings of equities, notes and bonds fell a net $69.3 billion after an increase of $19.2 billion in July. The dollar has declined about 8 percent against the euro this year and 4 percent against the yen.

China, the US' largest creditor,  has recently threatened to dump US dollars, a move that would precipitate a meltdown of the international monetary system. However, the eventual devastation caused by a gradual sell-off of US dollars would be just as bad for the US, at least, if not for the rest of the world. Just at  a time when there is pressure on the Treasury to lower interest rates to stave off a subprime mortgage induced recession, there is pressure to raise interest rates to attract more capital to assuage the US' voracious appetite for borrowed money. Just as the American people are charging up a storm on their credit cards, the US government is charging everything on its credit card with the willing compliance of China, Japan, Saudi Arabia and other enablers. But as the dollar falls in value, dollar denominated commodities, such as oil, will inevitably rise in price. This is because the purchasing power of oil producing countries based on their income in dollars is declining once those dollars are converted into their native currencies. This pushes up the price of oil for the American people, but not necesssarily for the rest of the world whose currencies are appreciatting vis a vis the dollar and who, therefore, can purchasse dollars, in order to buy oil, at relatively discounted prices.

And the enablers are getting less sanguine about buying US debt:

However, the big foreign buyers of US debt aren't buying this debt like they use to. According to information from the Treasury Department, the five largest holders of US debt (Japan, China, UK, Oil Exporters and Brazil) owned a combined total of $1.224 trillion in August 2006 and $1.459 trillion in August 2007. That's an increase of $235 billion. And over that same time, the really big purchases came from the UK ($189.4 billion) and Brazil ($63.6 billion.) China only increased their holdings by $13 billion and Japan decreased their holdings by $37.9 billion. In other words, Asian Central Banks -- who use to be reliable purchasers of US debt just aren't that interested in buying any more right now.

When push comes to shove and the Treasury is faced with the choice of lowering interest rates and, therefore, disccouraging foreign acquisition of US debt or raising interest rates and, therefore, plunging the US into recession, which will it be? The US government must meet its obligations, including large interest payments on its debt, so it must either borrow money or raise taxes or cut spending or a combination of all three. Therefore, it will raise interest rates to attract capital and to hell with the American people who will have to pay higher taxes and suffer through an interminable recesssion. Additionally, the American people will have to get used to the fact that social  programs to help the poor and middle class will be cut back because war has a higher priority and a more powerful lobby. The  Republicans would like nothing better than to have an excuse for doing away with social security and medicare altogether, two programs devised by Franklin D Roosevelt, their Democrat nemesis. As Rush Limbaugh said "We're working on that too" or words to that effect.

How about inflation? Couldn't the US just print dollars and inflate its way out of its debt.  Inflation would only hasten the decline of the US dollar making it even less  attractive to foreign investors. US government  obligations could be met this way but the dollar would spiral downward, the price of oil would spiral upward, and there is no guarantee that wages would keep pace. As the cost of living for American citizens continues to rise, the lack of unionization and other factors are keeping American wages down while CEOs pocket excess profits. Thus the prospect for the American people in general isn't that bright. American corporations will continue to do well because they sell into a global market, not just into the American market. If American demand for their goods and services declines, foreign demand will only increase due to the devaluing dollar and the relative prosperity of the rest of the developed and developing  world which is spending on infrastructure and commercial industry and not on war.

So -- why is the US dollar dropping? This is where Greenspan's comments come into play. Currency traders are obviously selling the dollar. While they have had ample reason to sell lately, the US economy wasn't slowing until the first quarter of this year -- hardly a reason to sell. One underlying reason may be a lack of confidence in the US' fiscal outlook and current situation. This would make sense, especially in light of the lack of interest from foreign central banks for US debt. Now -- no one is going to come out and say they have lost confidence in the US' financial situation. Instead they will simple go on quietly selling dollars.

And this may have even more sinister implications for the US than a precipitous crisis. A crisis can be handled by "fixing," an old American custom. But a slow almost imperceptible decline is like the frog in water whose temperature is slowly increasing. Unbeknownst to the frog, while he is relaxing in the warm bath, the temperature gets to the point, by imperceptible degrees, where it's impossible for him to get out and his goose is cooked, to mix a metaphor. This could well happen to the American economy!

The  American penchant for war and weaponry will continue to increase demand and expenditures on products and services for the military-industrial complex, most of which are entirely wasteful and destructive.  Continual expenditures on weapons procurements and the militarization of every aspect of American life will virtually guarantee the impoverishment of the American people not only in the public sphere but also in the private sphere as well, at least for the middle class and below. The rich and super rich will have no problem because, for all intents and purposes, they are global citizens and can live and port their capital anywhere in the world where circumstances are the most propitious.

Outsourcing and Self-Employment

It comes as no surprise to most people that a large number of American jobs are being "outsourced" to workers in other countries who will do the same jobs for less money than American workers. These are mainly high tech jobs that can be done by telecommuting. That is to say via the internet, computers, phones, faxes and emails. Computers and communication technology are such that these jobs don't have to be done in any specific location so Corporations, naturally, always looking to increase the bottom line, will avail themselves of the cheapest possible labor even if and especially if that labor is overseas. For jobs in this country, there is an equivalent solution: let them be done by illegal immigrants who will work more cheaply than American citizens. So you have both the jobs that "Americans don't want to do" and jobs "Americans want to do very much" being done by the cheapest possible labor whether the labor is imported or the jobs are exported.

While it is understandable that Corporations will look for the cheapest labor source in order to minimize expenditures and maximize profits, what is not understandable is why the American people are continually fed a line of bullshit about this situation. Senators and Congressmen are calling for "more science and engineering graduates" lest we fall behind in science and engineering. What difference does it make if "we" fall behind in these fields? Corporations will find these skills elsewhere in the world. Is there some commitment to American college graduates that there will always be jobs available for them? Hardly. Why should American citizens feel it's patriotic to become scientists and engineers in order that "we" don't fall behind? Do Corporations feel a sense of obligation or patriotism to hire Americans. Hardly.

Americans need to put their own interests first just as the Corporations do. That means don't put all your eggs in the basket of the job market. Always have a fall back position of self-employment. After all, they can't outsource your job if you're self-employed! Whatever credentials and licenses you get whether from college or from the state should represent your ability to hang out your own shingle and be in business for yourself. Then if you choose to take a job with a company, it isn't your only choice. You can always tell them to "take this job and shove it" and go into business for yourself. You are not dependent on the job market.

In fact I think that the only way to put yourself on the same footing with an employer is not to be an employee! Be a contract worker instead. Then you aren't subject to the whims of your boss! Your only commitment is to fulfill the terms of a contract that you entered into willingly. Suddenly you have your freedom of speech back. If you want to tell somebody to take a hike, you can as long as you fulfill the terms of your contract. They can't outsource a contract, but they can sure outsource a job. With a job your employer has control. You, as the employee, are powerless. If you're self-employed, you're independent. You're in charge of your own life and that's the way it should be. Why spend umpteen years in the educational system only to find your job outsourced and you still have to pay off a hundred thousand dollars in student loans?

If they want you bad enough, let them come to you. Meanwhile you've got your own business and your own clients or customers. There are certain occupations that lend themselves to self-employment more than others do. Take engineering, for example, a field I know something about having 3 degrees and having worked in the field. If you're a civil engineer, sure it isn't rocket science, but you can always hang out your own shingle and design septic systems for $3000. a pop. Of course the computer is going to do all the work and spit out the plans. On the other hand, if you're an electronics engineer or a computer scientist, what value does your degree grant you as someone who is self-employed. Basically nothing. You could be a computer consultant, but you don't need a degree to do that. The degree per se only grants you the right to put your future welfare into the hands of a corporation as an employee and as a ticket of admission to the field. You could save yourself a lot of money by just learning computers inside and out and starting your own business. If you hung out your shingle as a computer scientist with a BS degree, who would your clients be? In general the higher the tech, the less chances for self-employment. You want something that is stable and has been around for thousands of years.

Like the law, for example. You can always hang out your own shingle with that credential. All you have to do is pass the bar exam. Abraham Lincoln did it by studying on his own without even going to college. That's the way it should be. College is a waste of money. Information is readily available both on the internet and in libraries. MIT even offers their courses online for free. When are people going to learn that the Big Daddy, paternalistic Corporations that give them "benefits" like health care and pensions aren't like that any more. You can buy your own benefits. You can buy your own health care policy like other self-employed people do. You can buy your own pension like other self-employed people do.

Another thing: if you're self-employed, nobody tells you when you "have to" retire. The decision is entirely up to you. If you enjoy what you're doing and like the money you're making, you can continue working indefinitely. If you're a high tech engineer, you're deadwood by the time you're 35 in the eyes of most Corporations.

Well why, then, do we hear those suppliant cries for more engineers and more scientists lest we fall behind the rest of the world. Because the Corporations want a large labor pool to choose from. The larger the labor pool, by the law of supply and demand, the cheaper will be the wages they have to pay. but this is not quite logical either. They can always find cheaper labor elsewhere in the developing world. The trick is every American should think of themselves as a business and not an employee or a worker. Put yourself first like the Corporations do. Ask yourself not what is good for America, but what is good for your own bottom line. Then you will ask yourself the following question: what lines of work can't be outsourced and can't be done by cheap illegal immigrant labor? Those are the lines of work and credentials to pursue. Then get those credentials in the cheapest possible way. A law degree is a law degree. Why go to Harvard when you can get one over the internet that allows you to hang out the same shingle with your name on it.

The business of America is business as someone once famously said. Treat your work life as a business. Don't think of yourself as an employee. If you become one, have a fall back self-employment position. You are the CEO of your own life!

The Greater the Need, the Higher the Price

The law of supply and demand is much more general than what you might have learned in Econ 101. In fact it applies to just about any transaction between 2 or more human beings. Traditionally, it applies to the buyers and sellers of a product or service as follows. As the price of a product goes up, the demand for it goes down and vice versa. The more sellers there are, the more competition there is for buyers, and we would expect the price to go down and vice versa. If demand is low, the price should fall and, if demand is high, the price should rise. We see this in an extreme situation before or after a natural disaster when supply is low, demand is high and prices go sky high for certain products. This is also known as price gouging although there is no law against it in most states or at the Federal level. It is simply a function of an extreme case of the law of supply and demand.

A Service Example

Let us say I'm a window cleaner, and customers call and ask for an estimate on each job. After obtaining the relevant information, I quote them a price and they either say "Yea" or "Ney." How does the law of supply and demand affect this transaction?

1) Demand is seasonal so as the demand for my services increases during the summer months, my prices go up. Why? Because I can afford to lose some customers and still have plenty of work. Therefore, I select out the highest paying ones since the supply of my time and energy is limited.

2) If I am almost fully booked, I will estimate higher. Why? Again my time and energy is limited. I don't want to overwork. Therefore, after a certain amount of bookings, it's not worth taking an additional job unless I get more money for it. By the same token, if I'm desperate and need the money, I can't afford to have a customer go elsewhere so I will bid low hoping to secure that customer.

3) If I lose too many jobs that I want, I'm going to lower my bids or estimates. If I am getting more work than I need, I'm going to raise my bids or estimates so as to maximize my income based on the work week I want to put in.

Sex and the Law of supply and Demand

Sex is a transaction between 2 human beings. How is it affected by the law of supply and demand? Well, the person who wants it more has to be willing to put more into it than the person who wants it less. This also is known as courtship. It also accounts for prostitution. Young men in general want sex more than young women. So they put more into it in the sense of paying for the wining and dining. The woman views the situation in terms of how much is this guy willing to give and is it worth it to me to do this transaction based on what I'm getting. This is why rich guys tend to get  beautiful women.

With prostitution the financial transaction is obvious. Since there aren't many  women willing to pay for sex, it's obvious that men want sex more than women.

In fact a generalization of the law of supply and demand could be stated as follows: in any transaction between 2 people, the one who wants the transaction less controls the transaction. Since young women want sex less than young men, they are in control of the transaction. Even in an economic transaction, if the seller desperately needs to sell, the buyer is in control. This is known as a buyer's market. And vice versa.

An interesting point is how do dowrys fit into this analysis? The woman's family is paying the man extra in order to get him to take the woman as his bride. Doesn't this contradict the sexual transaction described earlier? Well, no, because this is really a family to family transaction and not strictly a sexual transaction. The bride's family wants their daughter to marry into the groom's family. Presumably the groom will be providing her a living for the rest of her life, and, in order to motivate the groom to take the bride, a dowry is provided. Presumably, the uglier the bride, the bigger the dowry would have to be as an inducement.

In the western world the prospective bride is really in control since, as an inducement to marry him, the groom offers her a diamond ring. Obviously the man wants the woman more than she wants him or else no financial inducements as in courtship and wedding rings would be necessary.

Since in general men's sexual energy wanes as they get older and women's waxes, the transactional situation changes between older people. Women sometimes take over the courting role especially with younger men. Older men tend to gain control in the relationship as  women want sex more than they do.

So the law of supply and demand is a force of nature applying to any human transaction. Even children make bargains like: I'll let you play with my toy if you do this or that for me. Although the law of supply and demand is natural, we might ask is it ethical? Is it ethical that the person who needs something less is in control of the transaction with a person who needs something more? Shouldn't the neediest person be served rather than the interests of the person who could care less?

That's why institutions exist, supposedly: to mitigate the inherent unfairness and inhumanity of the law of supply and demand.

Brew a Better Coffee and the World Will Beat a Path to your Door

Why are people flocking to Starbucks? They seem to be springing up on every street corner, and they all seem to be successful. Starbucks sensed a void in the market and moved to fill it. Let me explain. A few years ago the world of coffee was populated by the likes of Folgers, Maxwell House etc. A few large companies controlled the whole market and what they supplied was basically caffeinated swill. There are basically 2 kinds of coffee beans: Arabica and Robustico. Robustico is cheap, plentiful and not very good tasting. Arabica is expensive, harder to grow and great tasting. Guess which kind was used by Folgers, Maxwell House et al? The cheap, bad tasting stuff, of course. They were betting that nobody would know the difference since not many people had anything to compare it with. Well, this left a void in the market for someone to come along and supply a "gourmet" coffee experience, and that is exactly what Starbucks did.

It's capitalism of the best sort, pure and simple. A better product, a better tasting coffee and pretty soon no one wanted to drink the swill provided by the large market share companies. But Starbucks didn't stop there. They not only provided a quality product, they provided a quality environment with every detail carefully thought out. The decor is consistently more decorous than competing shops; the service is exceptional. It's a high quality organization all around.

So does this prove that, when there is a void, someone will fill it? Not necessarily. But it does show that if someone has a better idea, they can make a splash in the market and pull market share away from more established companies. It does show that a higher quality product can out-compete a lower quality product with an established market share. It does contradict the dictum that lower quality products appeal to larger segments of the market. However, in the entertainment field, it seems that the opposite is true. A lower quality seems to be correlated with ease of accessibility and that is where the market flocks instead of to higher quality which is more difficult to understand.

Katrina and Price Gouging

I just heard on CNN about the people who can't return to New Orleans because rents have doubled and tripled. The interviewer asked the people seeking to return if they thought this was "price gouging." What country are these people living in? There is no such thing as price gouging in a capitalist economy - only the law of supply and demand. Prices are charged according to what the market will bear. That's the only consideration. It seems like half the population (the tenants) is living in a world that doesn't exist, where concepts like "fair prices" and "price gouging" have some kind of meaning. These concepts are totally inoperable in the US or any capitalist economy and are perpetuated by ignorant people who are living in a fairyland or who are seeking to hide the economic realities and facts of life. The landlords know what they are doing. They are charging what the market will bear. Why? Well the housing stock (supply) is way down because of all the homes or apartments that were damaged or destroyed by the hurricane. Demand exceeds supply. Therefore, the price goes up. It's as simple as that.

It's not a question of whether "price gouging" is legal or illegal. It's just that the concept doesn't exist in a capitalist economy. Why do supposedly knowledgeable people (like CNN) perpetuate this myth? Why doesn't the educational system disabuse people of these notions? Because it serves the purposes of the owners of property (I hate to say the capitalist class) to keep the rest of us in the dark and to perpetuate the myth.

They interviewed a property manager who claimed that he had to raise rents because half his units were out of commission, and he had to make it up with the other half. BS. The market doesn't care if half his units are out of commission. If someone magically quintupled the housing supply overnight, he would have to reduce his rents just to keep the other half of his properties rented. Again it's supply and demand. He said laborers who are repairing damaged properties are charging more than they used to before the flood and that's why he had to raise rents. Again BS. The laborers are charging more because they are in greater demand than they were before the flood and there is a lesser supply of them. Again the law of supply and demand. It also works in labor's favor sometimes.

Property owners and laborers are profiting from the law of supply and demand. It doesn't always work to benefit owners - just most of the time since normally laborers are a dime a dozen.

When are we going to stop deluding ourselves and others about "fair pricing" and "price gouging" which by the way, even if it did exist is not illegal in any state. How could it be ? Capitalism (which is based on the law of supply and demand) and price gouging are oxymorons. I hate to see the perpetuation of this myth that nice people charge "fair prices" and don't "price gouge." Adam Smith would be rolling over in his grave. See the blog on my  website Social Choice and Beyond for more on the law of supply and demand.