2/17/12  Dime Stores are Here

      Officially there's no such thing as a penny in American currency. According to the U.S. Treasury that small copper coin is a one-cent piece. Calling it a penny started way back when because it resembled the English and Colonial penny people were familiar with. We've been calling it a penny ever since. Everyone but the U.S. Treasury, anyway. I'll not buck the trend and call it a penny, too.

      There's talk these days of changing the penny and the nickel because they cost more to make than they're worth. A penny costs 2.4 cents and a nickel 11.2 cents. This is a money-losing proposition, though money-losing propositions are what governments are good at. Only 1.1 cents of a penny is for it's metal content. Which means even if it were made of something much cheaper it'd still cost more than it's worth.

      Some people have suggested we do away with pennies altogether. Others think we might as well lose the nickel to boot. Everything would be rounded to the nearest ten cents. Which would mean they'd have to eliminate the quarter. After all, if you bought a ten-cent item with a quarter you couldn't get 15 cents in change without pennies or nickels.

      So they'd have to go with only dimes and fifty-cent pieces. Which leaves two unused coin compartments in the standard cash register. Meaning they might as well have dollar and five-dollar coins. This opens up two money tray slots for paper money, fifties and hundreds. Then cashiers wouldn't have to slip them under the tray any more. Or maybe they could use one slot for checks. Whatever.

      Axing pennies and nickles would effectively "re-decimalize" American money. Since the smallest amount of currency is ten cents, a dime becomes like a penny and a dollar becomes like a dime. Price signs would no longer need the second decimal. Something for two dollars and fifty cents, $2.50, would be written as $2.5 instead. Dollar stores would be like dime stores. Which they already are if you remember what dime stores were.

      This re-decimalization would pretty much agree with how prices have inflated since I was a boy. We used to get an order of fries from the local burger joint for ten cents, now it costs a buck. A can of Coke was ten cents, now it's a dollar. A burger could be had for twelve cents, now they're a dollar. It doesn't work for everything, but it's fairly close.

      Which only goes to show, a little inflation year after year adds up to a lot over time. That's because it compounds, like savings interest. From ten cents to a dollar, that's 1,000% inflation. And in those 45 years or so inflation was never over 20%. A quarter ain't worth a dime anymore.

1/7/12  More Than Numbers

      They tell me replacing my old windows with more efficient units will save me 20% on my heating bill. I did a little back of the envelope calculation. My gas bill runs about $600 a year. Besides the furnace, my dryer, water heater and stove also use gas. Let's knock off $100 for those. So heating is $500 a year, 20% of that means new windows will save me $100 a year. Sounds OK.

      Though to get the savings I first have to spend some money, get the new windows. Estimates from window companies say it would cost around $3,500 to upgrade my windows. Making back the $3,500 up-front expense with savings of $100 a year would take 35 years. Hm-m-m, not so OK.

      Thing is, if I don't get new windows the money doesn't vanish. I have $3,500 to spend on something else. Let's say instead of buying windows I invested that $3,500 at a 1% annual return, that's $35 a year. Which means replacing the windows saves $100 a year but costs a possible $35 a year in lost earnings. Under this scenario my net saving is $65 a year so it would take just over 53 years to pay off the windows. A 3% return would be $105 a year so new windows would never pay off.

      What I'm getting at is this, we don't buy anything and everything we want because we know our funds are limited. When we spend money on one thing we don't have that money to spend on something else. They call this opportunity costs. Buying windows means I lose the opportunity to invest the money.

      Of course, people who decide not to buy something don't necessarily invest the money instead. Nor do they leave it in the bank to collect interest or in a shoe box to collect dust. (About the same thing nowadays.) Usually they spend it on something else.

      Then the question is not would I be better off with new windows or not, but would I be better off spending the money on new windows or something else. Like a motorcycle. Since I can only spend the money once, how do I compare what I get out of a motorcycle to what I get out of new windows? There's no math for that.

      Still, there's a bit of uncertainty in the calculations. Will I be in the house in 35 years? Will the price of gas go up? Will my investment make or lose money? Will I sell the house, and will new windows make the house more valuable or easier to sell? If I wait a few years, can I buy a jetpack? There's no math that can foretell the future, either.

11/28/11  Upside Down and Underwater

      Some people say you're upside down, others say you're underwater. Either way it means you owe more on your mortgage than the house is worth. As bad as that is, it gets worse.

      When people buy a house with a mortgage they might think they've paid the selling price of the house. What they've really paid is the selling price of the money that pays for the house, the mortgage. Depending on the interest rate, a 30 year mortgage on a $200k house might cost $200k in interest over the time it takes to pay off the loan. Which means the buyer will spend $400k in total for the house.

      When the housing bubble burst prices dropped considerably, in some places by half. So, a house sold for $100k, rose to $200k during the bubble, and went back to $100k after the bubble burst. If not for the bubble, the house would have sold for $100k all along, and a 30-year mortgage would have cost $200k. The bubble cost mortgage house buyers an extra $100k in principle and an extra $100k in interest, or $200k total.

      When the value of the house went down by half, so did the value of the mortgage. The bubble inflated $400k mortgage is paying for what a post-bubble $200k mortgage buys, which is a $100k house. So they are paying $400k for a mortgage worth $200k. In effect, they're underwater on both principle and interest.

8/3/11  The Non-Excess Value of Labor

      A business makes a product. The capital costs provided by the owner are $10. The labor costs provided by the workers are $10. The product sells for $30. Where does the extra $10 of value come from?

      According to some, the additional $10 of value came from the labor which transformed the less valuable raw material (capital) into the more valuable finished product. The idea being the capital is only worth $10 until labor increases the value by $20 to the $30 sale price. So the conclusion arrived at, as the owner only paid the worker $10 the $10 profit is excess value stolen from the worker.

      But did you notice anything missing? Only capital and labor adds or creates value in this formula. Let's go back to the original premise, notice it says "the product sells for $30". Well, if the product sells there must be a buyer, a customer. But what of the customer? Did the customer add any value? If not, then we don't need the customer to asses value. What happens to the formula when there is no customer?

      A business makes a product. The capital costs provided by the owner are $10. The labor costs provided by the workers are $10. Nobody buys the product and the owner loses $20. Where did the $20 of value go?

      The entire exercise falls apart without a customer. If the product never sells its value is not the $30 sale price, nor the $20 it cost to make, it is $0. The formula identifies the source of value incorrectly which is neither from capital nor labor. The entire $30 of value came from the customer. If there is no buyer the product has no value no matter what it cost to make.

      The value is not what you put into it, but what you get out of it.

      This is easy to show. It might take the same amount of paint, canvas and labor for me and Picasso to each paint a picture. Yet the Picasso sells for a million dollars and I'd be lucky to get a hundred. If the value came from materials and labor they'd be worth the same. But the value is what is produced, not the labor it took. Picasso produced Picassos, I produce Colons.

      The dollar value of products are determined at the point of sale and not the point of production. In the original premise, the capital is worth $10 because the supplier sold it for $10. The labor is worth $10 because the worker sold it for $10. The finished product is worth $30 because that's what the customer paid for it. And a Picasso is worth a lot more than a Colon because art collectors will pay a lot for a Picasso and very little for a Colon.

      In altogether ignoring the customer, the excess value of labor theory has a gaping hole. Once the hole is filled the excess vanishes.

11/24/10  Economics in Four Pictures

      I don't know that any additional verbiage will help or hurt the pics. They are what they are. You're amused or you're not. That's the bottom line.

8/14/10  Pseudo Paradox

      Below is an old story that makes the rounds from time to time. It's a tale supposedly relating some kind of debt paradox or something. Though no-one seems to actually explain the absurdity as it's supposed to be self-evident, or something. Here's the short version.

Butcher, Baker, Tailor, and Candlestick Maker

      A candlestick maker has a hundred bucks and goes to the butcher shop where we pays off $100 he owes the butcher. The butcher takes the money next door and pays off a $100 outstanding debt to the baker. The baker runs next door and makes right a hundred dollar debt to the tailor. The tailor stops the candlestick maker walking past his shop and gives him the hundred bucks he owes him, with the same money the candlestick maker used to pay off the butcher.

      So, the candlestick maker gets back his hundred bucks and all four have extinguished $100 in debt yet nobody has any more or less money than they began with.

      That's basically the story. I guess what we're supposed to wonder, how can $400 in debts be wiped out with only $100 and where everyone is no richer or poorer? What was accomplished? What's wrong with the scenario?

      From an accounting aspect, nothing. Each person owed and was owed $100 and so were at net zero before and are net zero after the exchanges, except the candlestick maker who was net $100 to the good before and after. All accounts balance, no problem there.

      Still, doesn't the whole thing seem like an exercise in futility? What was accomplished? Well, all the debts were extinguished, everyone's books were cleared of both credits and debits. That's all good. All the same, isn't this just sort-of transferring around debt? Again, what was really accomplished? The entire process seems rather pointless.

      Or does it?

      The real problem is the story didn't begin at the beginning. What we don't know is why the candlestick maker owed the butcher $100 to begin with. The story starts with a series of assumed debts while leaving out how those debts were incurred. To know what was accomplished you need to know what the debts were for. I mean, the debts didn't come from nowhere for nothing.

      For instance, the candlestick maker bought $100 worth of meat from the butcher on credit, the butcher bought $100 worth of baked goods, the baker bought $100 worth of clothes, the tailor bought $100 worth of candlesticks. When you include this in the mix the process becomes entirely sensible, there was an exchange of goods for all.

      What we really have is not some kind of paradox, but a pretty straightforward story of how markets work and money circulates, with credit tossed in. If each person had just paid cash for the goods up front, you get the same result minus the delay in payment. There's no problem at all in either case.

      Thing is, you don't need the amount of money to equal the total value of goods because the money circulates. In fact, you could add a tinker and a blacksmith to our story without adding one more dollar and the economy would still work. Well, as long as the money circulated fast enough.

      On the other hand, if all the debts were just everyone borrowing money from each other with no exchange of goods or services, then the entire story would be a pointless exercise. Now we're talking about credit swaps, which is a whole 'nother can of worms we won't go into.

5/29/10  Do Bears Call Growth Negative Shrinkage?

      When reading articles on economics I frequently run across the phrase 'negative growth.' Huh? What in the world is negative growth? Is that a market signal to unbuy? Does a company make negative profits and then go positively bankrupt? Is the USG running a negative surplus? Do losing poker hands generate negative winnings? Is negative growth somehow related to 'addition by subtraction' or 'less is more'?

      Do they think they're fooling people who are easily spooked by the word shrinkage or what? Let's apply this idea to stock market reports. Don't say 'the Dow was down today' instead say 'the Dow was negatively up today'. That sounds much more bullish, right? Or maybe just sounds like bull.

      We negatively shrink negatively younger and wiser with each passing day.

9/28/09  Econ 001

      Quick Guide to Understanding the Current Financial Situation.

      Do you call it investment and stimulus, make-work and spending, or pork and waste? I imagine your take depends on whether you think you're getting part of the take, on the take, or being taken. There's two sides to every coin. Three if you count the edge. The two sides being the up side and the down side. Though most of the time the down side isn't seen, unless you're financially upside down when you're looking up at the bottom.

      To stimulate the economy the government tweaks supply and demand by spending to supply demand. Later they'll demand the supply back in taxes, demanding back what it supplied even though the taxpayer actually supplied it, only after the fact. It's like getting your own money from the future and if you've ever watched Star Trek you know how tricky time travel can be.

      Future money added to today cuts down on the wait time between paydays increasing what they call the velocity of money. Which means you have to grab it and spend it quickly before it flies out of your pockets. I think that's how it's supposed to work.

      This should clarify all you need to know about the financial situation today, also known as a mixed-up mixed economy. Or a confusing mess, just like everything I just wrote. You can thank me later.