Archive for February, 2009

Politicians are not economists and that is the biggest problem.  If you have time to read one long and boring financial piece, I suggest you choose John Mauldin’s Velocity of Money note.  If you choose to have a life and not be bothered with it, let me summarize a significant point within it.  The velocity of money is one of two variables that goes into determining our GDP, or our level of economic activity. 

The formula is GDP = M * V, which is the amount of money in the system times the number of times it trades hands (that’s the velocity of money).  In the article, he has a graph that charts the velocity of money through time.  It has averaged 1.67x (meaning money trades hands 1.67 times in a year) since 1900.  In the last decade, it was in the 2x range.  Currently, it has dropped to 1.72x.  Why the move up and then move down?  The biggest swing factor is the amount of leverage placed on money (either by banks, corporations, governments, or individuals).  The 1990s and early 2000s were years of increasing amount of leverage (debt).  In the past 18 months, we have seen people and enterprises lower their debt levels, preparing for a bad economy.  This naturally lowers the velocity.

Now, why do I say that the government wants to slow us down?  It comes down to the fact that government money velocity is thought to be lower than private sector activity.  The current administration puts the number at 1.5x.  I have heard others says that that is a best case number.  Whatever the real number, when the government spends money, it has less of an impact on our economy that when the private sector does since our velocity factor is greater than 1.5x (again, that may be putting a positive spin on the actual government influence).  For the government to spend this money, they are needing to take it from some place, and that my friends, is the private sector.  So, when the government spends $1, it has the best case scenario of making $1.5 of economic activity.  When you and I spend a $1, we make $1.7 of economic activity.  It’s just basic math.

With all the negative, fear based headlines and all the scare being thrown around by our government, I thought it would be worthwhile to write something happy.  So, I selected the 9th grade writing subject “What does America mean to you?”  A lot of my beliefs in individual freedom stem from the environment I was raised in.  Not all, mind you, but a lot.  My wife deserves a lot of the credit, too.

I was raised in a very small town in rural Indiana by, what I believe to be fact, the best parents ever (that’s for Mom if she is reading).  Relatively large and close family.  One side’s ancestry is from Northern Europe and came to this land in the early 1700′s.  They were farmers from what I can tell and active in the fight for freedom.  Low key, understated, and hardworking.  The other side’s ancestry came from Italy in the very early 1900′s, 200 years later.  My Italian grandfather came over at the age of 16, leaving his parents back in Italy.  His travel was paid for by his older brother who came to the US a few years before.  He worked hard to provide for his family and succeeded in providing his children a good foundation.  Though differences existed between them (those from Italy are a little more loud and kiss on the lips when they see you), they shared the same desire; the right to pursue a life of independence, succeed based on their actions, and not to be subjected to the whims of the few.
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Remember the saying “what ever got into kids these days?” Well, I think I found the answer… It’s these enlightened children books that we, parents, give them. The one that bothers me the most is called The Rainbow Fish by Marcus Pfister. The book is about a beautiful fish, new to this part of the ocean, that has shiny, colorful scales. Early on in the book, he is approached by a smaller, younger fish who asks for one of his pretty scales.

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A member of CIRCLE should get upset when we have government people (Greenspan, senators, etc) saying that the banking industry was self regulated. Over 10 government agencies overlook the banking system. The problem is that the government, through “regulation”, decided to push uneconomical policies through the system. The banking subcommittees mandated (through the Community Reinvestment Act) that Freddie and Fannie should buy loans from banks and mortgage originators that were way out of wack with what would have normally been done. It was George Bush, Barney Frank, and Maxine Waters that pushed for accelerating the “ownership society”, making people that couldn’t afford homes get into them at stupid rates and no money down. Let me break here to describe the process:

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