Yip yip yip yip yip yip yip yip/Mum mum mum mum mum mum/Get a job

February 7, 2010

The Silhouettes broke up in 1968. Color photography was still many years away

Meet us back here on Election Day 2012, and tell us that “the college crisis” didn’t become an issue in the 33 months since this post appeared.

We’ve already heard how the domestic automotive industry is the unseverable spinal cord of the American economy, and that it’s our duty to our fellow man (if he’s a UAW member) to spend $50 billion propping up this radiant pulsar of American commerce.

In 2008, you had to go all the way down to the presidential candidate with the 5th-most votes (the Constitution Party’s Chuck Baldwin) before finding one who didn’t spout off some variation on how crucial it was to “keep Americans in their homes”, even if those Americans borrowed too much money and assumed that a steady increase in their homes’ values was a cosmological constant.

And as we heard from a prior presidential administration, doling out 700 billion taxpayer dollars (that’s $233 for each of us) was necessary to keep some of the nation’s largest investment banks in the business of lending money, otherwise “the whole system would collapse”, which presumably means we’d be reduced to collecting animal pelts in exchange for our mp3s and bedroom linens. “I’ve abandoned free-market principles to save the free market” was the quote. To paraphrase a ‘60s-era t-shirt and bumper sticker, that’s like (having sex) for virginity.

Meet the next bubble – post-secondary education.

The problem is this: despite the recession, our society has gotten so absurdly rich that today, young adults loaded with potential can postpone any worthwhile work and ring up debts in the process, all in the name of getting an education. How “education” became more important than “productivity” or “fulfillment” or “not being a drain on society” is unclear.

Yes, we’ve all seen the studies say that college graduates make more money than high school graduates – somewhere around $15,000 annually. This is a mantra people take to heart without examining in any detail. It sounds logical, as many jobs require applicants to have college degrees. But like many bromides that attempt to persuade you of a fact in as pithy a fashion as possible, the $15,000 allegation tells only a minute part of the story.

The median salary for petroleum engineers is around $108,000. For a physician who’s been out of school for a couple of years, it’s reasonable to assume he’ll make anywhere from $170,000 or so for a pediatrician to more than $500,000 for a neurosurgeon.

What about philosophy graduates? English majors? People who think a sociology degree is worth anything? We don’t have figures for them, because the Bureau of Labor Statistics doesn’t list “barista” and “street musician” as employment categories. Sure, the average college graduate makes a better salary than the average high school graduate. But the average college graduate is part doctor and part engineer. The students who major in the hard sciences are dragging the political science and journalism majors up with them.

This statistic puts the cart before the horse, and puts passivity ahead of activity. For many college graduates who inherently know, just know, that the last 4 or 5 years were worth it, they assume that that diploma is the negotiable equivalent of a $15,000 annuity. God forbid they actually go to the trouble of applying it.

The University of Hawai’i’s spring semester enrollment is up 9.4% over last year. Instead of working harder than ever to find jobs in a weak economy, people are willfully deferring life – and paying money they don’t have for the privilege. And it’s not like UH is creating more engineers and scientists. A college vice president says “They tend to be all over the place. We have graduate students seeking their master’s, students in areas where there’s a shortage, such as teaching, nursing and social work, and business is popular, but so is psychology.”

And parents, don’t leave the room. We’re not done with you, either. The following is your financial obligation to your kids: food, clothing and shelter until they reach the age of majority. That’s it. No one owes anybody a college education, just like no one owes anyone a house or regular doctor visits. Your kid is far better off becoming a welding technician straight out of high school than wasting four years earning a degree in gender & women’s studies and beginning the income-earning years tens of thousands of dollars in debt. Economically speaking it’s better yet that he become a neurosurgeon, of course, but the world still needs welding technicians.

On the macro level, everyone from your neighbor to the president is talking up post-secondary education. The neighbor does it because he doesn’t know any better, the president for the same reason any elected official advocates anything.* The talking points are familiar: the next generation of Americans needs to be prepared in an ever more competitive world, education is a fundamental right, do you really want America to be a nation of blathering idiots, etc., etc.
This obscures the truth by shrouding it in catchphrases. This may be indelicate, but that doesn’t make it false: things cost money.

An investment, even in one’s own education, is a deferment of resources for an expected return. The majority of college kids don’t know a damn thing about what they’ll do when they get out of college. Therefore for them college isn’t an investment, it’s an expense.

That’s not to say that finishing high school is all you need to do to enter the workforce with a minimum of debt. There’s still a thing called motivation. Completing school, at whatever level, shows that you had the diligence to sit quietly and take some tests. There are a million ways to earn a respectable living out of high school – carpentry apprentice, garbageman, junior lab technician – but taking a random selection of undemanding college courses is not one of them.

Yet the government, true to its misguided principles, subsidizes education. President Obama proposes, in public and behind a live microphone, that no college graduate should have to fork over more than 10% of his income in student loan payments. This is what commerce has come to in 2010 – the terms of an agreement are dictated by future occurrences. Of course no one wants to pay 10% of his income on debt obligations, or on anything else for that matter. Not that 10% is an insurmountable number, but if the government mandates that it’s too high, pretty soon people will agree that it is too high, and that no $40,000-a-year junior account executive should suffer the inconvenience of paying more than $333 a month toward her student loans.

It gets better. (Or worse, if this kind of thing bothers you, which it should.) The president adds that student loans should be forgiven after 20 years – 10 if the borrower “enters into a life of public service.”

His definition of public service goes beyond Green Berets and SEALs. Say you want to take your forestry degree and be a National Park Service ranger, which offers room and board and pays $35,000 annually. Thanks to the time value of money, you’d be getting close to a complimentary education while doing nothing that makes a measurable impact on America’s gross national product.

But after the 10 (or 20) years, the unpaid part of your education doesn’t suddenly become “free”. Services were still rendered, the college still paid its professors and maintained its classrooms and grounds. Who makes up the difference? (Hint: the same generous soul who already bailed out Chrysler, GM, AIG, Lehman, your deadbeat neighbor who didn’t know how to sign a loan document, etc.)

People respond to incentives. If the government declares that the price you pay for your education will be arbitrarily lowered, more people will go to college. And earn useless degrees. And take their sweet time paying them back, if at all. But at least our elected officials can brag that a higher percentage of Americans go to college than do the Irish or the Icelandic.

*To get elected. (And in this particular case, to distract attention from more pressing matters, such as the ever-closer destruction of Social Security.)

**This article is an Editor’s Pick at The Best of the Best in Money and Personal Finance #12**


Filed Under: Education Tagged With: , , , , ,

#79 in the periodic table, #1 in our hearts

October 17, 2009

Makes it harder for people to bum change off you, too.

Every news story that contains a dollar figure is a product of its time, because inflation taints everything. That’s a recurring theme in the book version of Control Your Cash, soon to be released by a major publisher if certain contingencies break the right way.

Inflation, in one paragraph: with rare exceptions, the value of money always decreases. Slowly, but consistently. Right now a dollar is worth about 2% less than it was a year ago. That 2% is fairly consistent throughout the last century. It’d take a few more paragraphs to explain why. Better yet, a future post.

When the dollar amounts get big enough, and a federal government that lost its financial moorings a long time ago starts throwing out 12- and 13- and even 14-digit numbers, you can lose perspective. It’s hard to conceive of a million of anything, let alone a billion or a trillion. Especially when those numbers get bigger every year, thanks in part to inflation.

In the late 1940s, the U.S. dollar replaced the pound sterling as the world’s reserve currency – the default that international transactions are measured in when using another currency would be impractical or confusing. Americans today still benefit from that. Just by virtue of living here, we don’t have to worry about our currency becoming gradually worthless – and our life savings evaporating.

The dollar became the reserve currency largely due to the size of the American economy and the dollar’s relative stability. (It then self-perpetuated: the more stable the dollar, the more firmly entrenched it became as the reserve currency.) But that doesn’t mean it’ll be this way forever. Just this past week, China and several Middle Eastern countries proposed inventing a new currency to supplant the weakening dollar as the denomination in which oil and other commodities should be traded. This new currency would be nothing formal and tradable, just an amalgamation of existing world currencies that aren’t the dollar. That people are taking this seriously shows the dollar is assailable.

The U.S. dollar has enjoyed a 60-year-and-counting (however tenuously) reign as a powerful medium of exchange. As impressive as that is, gold has served as a store of value for about 100 times longer.

When the government creates too much currency, that currency weakens. Inflates. Becomes less valuable. It’s not hard for this to happen: the government just needs to fire up the presses. When a government owes a lot of money, like the United States’ does, this is an easy way of giving its creditors less than what they really deserve. But, by punishing its creditors, the government also punishes anyone else who does business in dollars. Which would be all Americans.

Gold can’t be injected into the economy as quickly as dollars can. To increase the gold output, you need to find a particularly rich vein, start extracting, put thousands of hours of manpower on the task, refine, purify, separate the dross, and bring it to market. Which is exactly what the world’s gold manufacturers try to do anyway, every day they operate. It’s not easy. That’s why gold, and not cobalt nor nickel, is the historical commodity people have used for money.

Gold isn’t an objective measure of wealth, but it’s as close as we can get in the practical world. Because extra gold is so hard to introduce to the market, gold’s value won’t fluctuate as much as something issued by the Federal Reserve, the Bank of England, or the EU. That’s why financial newscasts, publications and websites prominently display the price of gold. When the price of gold goes “up” (you’ll understand the quotation marks in a minute), that’s supposed to represent something noteworthy about both gold’s scarcity and the general state of the economy.

But gold is pretty scarce no matter what. Here’s a semi-rhetorical question: why do we quote gold prices in terms of dollars, a currency continuously weakened by inflation?

Right now, gold is trading at $1049/ounce, “down” $14.90 from yesterday. The Control Your Cash book recommends again and again that in order to greater appreciate how money works, you should examine every financial transaction you engage in from the other party’s perspective. Commodity prices are no exception. Instead of quoting the price of an ounce of gold in dollars, why not say that a dollar is currently trading at 29.65 milligrams of gold (up .41 milligrams from yesterday)?

We propose our own new unit of currency: the gold milligram, symbol Aumg (prounounced “OMG”).

Here are some current exchange rates:

euro 44.18 Aumg
pound sterling 48.15
yen .33
Swiss franc 29.14
Mexican peso 2.26
renminbi 4.34

With no more than two digits before the decimal point, these numbers are easy to visualize. And because of inflation, the numbers will almost all decrease as time passes, reminding the people who use these currencies of their ever-weakening power.

Here are some more for you:

2005 U.S. dollar 73.32
1998 U.S. dollar 109.46
1968 U.S. dollar 883.49

Puts a modest 2% inflation rate into perspective, doesn’t it?

Why should we assume the dollar (or any other state-issued currency) is the objective and constant measure, and gold is the commodity with the wildly variable price? Shouldn’t it be the other way around?

The short answer to the first question is conditioning. Decades ago the United States switched its currency from one defined in terms of gold to one “backed by the full faith and credit of the United States government”, a remnant from the reliquary of charmingly naïve and obsolete buzzphrases.

It’s natural for Americans to phrase their economic thinking in terms of “dollars”. Natural, and convenient, but damaging and incomplete. When a dollar is only as weak or as strong as the Federal Reserve arbitrarily chooses to make it, then the Federal Reserve has the ability to dictate the terms of (and to a large extent, even the size of) the nation’s economy. It’s hard to find a better example of too much power concentrated in the hands of too few. You know, the issue we fought the Brits over.

By one method, the United States money supply increased 6% from 2006 to 2007. That includes not only all the currency in circulation, but all the money held in checking accounts. If a 6% increase sounds modest, consider that the world gold output increased by 1.5% last year. Which triply overstates things, because 2/3 of the gold mined last year was used for industry, jewelry, etc. The 6% figure for the increase in greenbacks is conservative, too. It doesn’t include money in savings accounts, money market accounts, nor certificates of deposit.

In 2006 the Federal Reserve stopped calculating the increase in the broadest possible definition of money; the definition that includes huge institutional certificates of deposit held by banks. (These are CDs worth several hundred times more than the thousand-dollar ones you might be holding. But because they don’t trade among individuals, the government has an excuse for removing them from the equation.) The Fed argued that the costs to collect the data outweighed any benefits, which is why it would no longer estimate how much money is really circulating through the economy.

Yes, a branch of the 21st century American government willfully stopped crunching numbers. Can you think of any scenario in which a branch of the government would do that, if it had nothing to hide? The ironic thing is that the Fed isn’t even hiding what it’s hiding: paraphrasing, they said “Citizen, this information doesn’t concern you, and you wouldn’t know what to do with it anyway. Nothing to see here.”

If the Fed released those numbers, we’d know how many trillions of dollars they’re diluting the economy with. We’d know how few Aumg it’ll take to buy a dollar next year. We’d know how badly inflation is eroding the nest eggs we’ve each spent a lifetime building.

Some estimate that the money supply is really increasing by around 16% annually. Which is more than 30 times faster than the supply of commodity gold is increasing. So which is more stable – the dollar or the Aumg?

The point of this exercise is not to argue that the next time you buy a coffee, you should offer to pay with 40 milligrams of gold. Rather, the point is to put things in perspective when, for instance, Sen. Harry Reid says health care reform will cost 59,301,000,000,000 Aumg. Or 59,301 metric tons of gold. Or 38% of all the gold ever mined.

Filed Under: Economy Tagged With: , , , , ,

Putting the “Lies” in “Centralized”

September 24, 2009

When the republic crumbles, it’ll start here

Answering this question for the first and last time:

Q: Why do you only post once a week?

A: Technology has not compressed the length of time it takes to research, prepare, write and edit a worthwhile post. There are web “columnists” who write a column-length piece every day – and it shows. If you want 40 posts a day, go visit Glenn Reynolds and read about what fascinating brand of mayo he had on his turkey sandwich this afternoon. We’ll be waiting here with timely, worthwhile advice and education.

This week’s post is about a macroeconomic topic, but one that affects you at a personal level. Control Your Cash doesn’t typically review books, but Ron Paul is the exception to a lot of things. The Texas congressman/frequent presidential candidate just released his latest, End the Fed. It’s 207 pages that, although written in a clear and concise language, offer some of the most challenging concepts you’ll ever read.

(If you’re not familiar with Dr. Paul, read the news once in a while. Here’s his two-paragraph bio. A Republican, the 73-year old physician represents suburban Houston. He is perhaps the strictest interpreter of the Constitution ever elected to office, refusing to vote for any bill that will increase government spending or reduce freedom. He’s so unflappable that he refused to take a congressional pension, and forbade his kids from applying for federally guaranteed student loans.

Being principled has little to do with compatriotism, though. Here’s a superlative for you: in the history of the House of Representatives, of all the times a congressman has been alone on one side of a vote, 80% of the time that congressman has been Ron Paul. Even though he’s not an economist by profession, Dr. Paul has a far greater grasp on the financial problems plaguing our society than any of his 434 cohorts do.)

His new book starts with a wonderfully pithy title, and doesn’t stop. End the Fed is an argument for the abolition of the Federal Reserve, the mysterious entity that governs much of American economic behavior and at times appears accountable to no one.

The Fed is responsible for distributing the hundreds of billions of dollars in bailout money authorized by both the current and previous Congresses. It’s also responsible for printing money, which is why the bills in your pocket bear the phrase “Federal Reserve Note”. And in 95 years of existence, the Fed has taken great steps to keep its activities largely secret.

The Fed chairman is Ben Bernanke, who was appointed to a 4-year term by George W. Bush in 2006 and re-appointed by Barack Obama last month. When asked why the Fed wouldn’t disclose who’s receiving bailout money, Bernanke was more than a little evasive:

“It is counterproductive and would destroy the value of the program.”

Dr. Paul then called for (and being a congressman, is drafting) a law (HR1207) mandating the Fed be audited. To which Bernanke responded,

“My concern about the legislation is that if the (General Accounting Office) is auditing not only the operational aspects of the programs and the details of the programs but making judgments about our policy decisions would effectively be a takeover of policy by the Congress and a repudiation of the Federal Reserve would be highly destructive to the stability of the financial system, the dollar and our national economic situation.”

In other words, “I like not having to answer to anyone. The absolute power I wield is pretty nice, too.”

Unfortunately, if there’s no pressure to be candid and transparent, most elected (and appointed) officials won’t. Which is why Dr. Paul wants to start by forcing an audit of the Fed. Then, once the reasons for its almost pathological secrecy are exposed, Paul figures voters will clamor to abolish the Fed.

Most of us have at least a hazy notion that the Fed is responsible for controlling interest rates, which is true. Every fortnight the Fed sets its “discount rate” (currently 0–¼%). Banks across the country then use this as a benchmark, setting their own interest rates a few basis points above the Fed rate in order to turn a profit.

Economics students hear interest rates referred to as the “price of money”, which makes sense if you think about it. If your bank pays you 1% to stash your savings in an account, it’s paying you – the price of money – to help it pool assets to make loans (which are of course, its stock-in-trade) with. If you’re Floyd Mayweather, you pay 16% to a lender (in his case, JP Morgan Chase) for the privilege of borrowing the money to buy an obscenely overpriced car. (Before the IRS lien, the civil case and the repo, that is. Floyd dreams about getting financed at 16% today.)

Paul argues that the Fed shouldn’t be in the business of setting interest rates any more than some other government arm should be setting the price of furniture or shoes. But his greater worry is the Fed’s unchecked ability to print money.

In 8 short months, the Obama administration has doubled the nation’s already stratospheric debt ceiling. With our federal government borrowing tons of money from China, Japan, the United Kingdom, and plenty of other countries, we’re in grave danger of having to pay a national bill we can’t afford (that’s a bill with your name on it.)

So if the Chinese government owns $600 billion in U.S. government bonds (which our government issued to raise funds for everything from welfare payments to car manufacturer bailouts), and demands $600 billion that we as a nation don’t have, then what?

Well, one solution is to fire up the presses and print at least part of that $600 billion.

But won’t that make each dollar less valuable?

Yes.

 

And won’t that make existing dollars less valuable?

Yes. No one cares whether the dollar bill in your wallet has “2009” or “1978” written on it.

 

Wait. I get paid in dollars.

Now you’re getting it.

So your financial position weakens, even if you’ve spent your life saving, investing and living within your means. By inflating the currency, a profligate government agency is dictating the value of your life’s accomplishments.

The worst part about inflation is that even though it hits everyone, it punishes poor and middle-class people the hardest.

Why?

Because the richer you are, the less of your wealth is held in cash.

Let’s say you make $40,000 a year, carry no consumer debt, and have $10,000 cooling in a savings account. This is fairly impressive: most people who make $40,000 a year don’t have anywhere near a quarter of it stashed away.

Now let’s say you’re Alice Walton, whose fortune increased about $1.4 billion in the past year (that’s the increase, not the total. She’s worth about $18 billion.)

Do you think Alice Walton has a savings account, or even a CD, with $350 million in it?

She doesn’t. She has real estate, she has Wal-Mart stock, she has foreign currency reserves, she has collectible fine art.

A weak, inflated currency hurts all of us. But for the rich and the ultra-rich, who have already made their money and can invest it in hard assets that are difficult to devalue, it’s not so painful. For the people who aspire to be rich, and are looking to move from holding cash to buying hard assets, it’s like running in quicksand. With 45-pound weights around your waist. And a fat woman strapped to your shoulders.

Dr. Paul argues that the potential for American prosperity would be a lot greater if we had a currency based on gold, as opposed to one based on thin air and whimsy. And we did, up until the 1930s. When each unit of our currency represents a certain amount of gold, there’s almost no potential for inflation or debasement.

Gold is scarce, easily divisible, universally recognized, hard to counterfeit, and compact. Because mining gold requires enormous amounts of labor and capital, the price of gold isn’t going to fall dramatically: it’s not like the world aggregation of gold will somehow double in the next year. Gold isn’t a perfect store of value – nothing is – but comes closer than does a purely subjective piece of paper that can be produced in virtually unlimited quantities and is worth whatever the Fed says it is this week. Paul argues that having a currency that’s transferable to gold makes it harder for a federal government to make financial commitments it has neither the desire nor the capacity to honor. As to how convincing his argument is, read the book and understand we burned a weekly post on it for a reason.

Fair or not, lately Republicans have been assailed as everything from reactionary Bible-thumping zealots to thieving robber barons to flaming racists. With his quiet, private faith, noble occupation, and reasoned approach to constitutional questions, Paul is the very antithesis of every stereotype. By virtue of being principled and not beholden to any special interest, the seemingly incorruptible Paul is that rare politician who transcends the political spectrum. Just ask long-haired folkie Arlo Guthrie, who remarks on the back cover of End the Fed that “rarely has a single book not only challenged, but decisively changed my mind.”

The Federal Reserve is technically a private corporation, and not part of the federal government. Also, college athletes are amateurs who are on campus to get an education, and not to enrich their schools’ athletic programs as indentured servants.

As a political appointee, the Fed chairman has interests to please and his own position to preserve. And God knows there are few things as hard to dismantle as a government agency. Still, if you devote an evening or two to reading End the Fed and the arguments therein, you might be a little more inclined to expect the same fiscal responsibility from your government that you should be expecting from yourself.

Filed Under: Economy, Finance Tagged With: , , , , , ,
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