Monday, December 29, 2008

A Bet You Won't Forget

I just sent the following to the Letters to the Editor section of the Wall Street Journal. I doubt the editors there have the fortitude, testicular or otherwise, to publish it so I post it here. I am quite serious about the wager. Yes, the national debt is a problem but the notion of the United States dissolving in the next few years I find ludicrous.

Igor Panarin thinks there is a 50 percent chance that the United States will dissolve in 2010 (Wall Street Journal, 29 December 2008, A1). In the spirit of the late Maryland University economist Julian Simon, I'd like to wager an ounce of gold (presumably Mr. Panarin is not daft enough to accept a dollar denominated bet) that the United States will substantially retain its current borders through 2010. Even money of course.

Depending on the odds offered, I might also like to make additional bets that Mr. Panarin's "Texas Republic" and "Central North American Republic" would annex Mexico and Canada, respectively, before falling under their sway.

Sunday, December 21, 2008

Why is the Federal Reserve contemplating issuing bonds?

When I first saw a little news squib that America's current central bank, the Federal Reserve, wanted Congress to grant it the power to issue bonds (long term IOUs), I thought it was a piece from The Onion, the hilarious king of print news satire. Had the story been real, I told myself, it would be plastered on every front page of every self-respecting business periodical in the country and CNN would soon have 15 to 20 talking heads babbling about what the news means for the nation and its teetering economy.

Well, it appears the story is real but hardly anyone noticed it or gave a thought to its implications. The Fed already issues debt, zero-interest debt, in the form of Federal Reserve notes. (You know, the money you used to carry around in your purse or wallet before the September crash.) It also issues deposits called bank reserves, on which it now pays a little interest but completely controls. It puts those liabilities or "sources of funds" to work on the asset side of its balance sheet, which includes interest-bearing Treasury bonds and loans to banks (and now non-banks too), gold, and some other physical assets. It's quite a lucrative business.

If the Fed wants to issue interest-bearing bonds, as the Treasury does, it must think that the demand for dollars (at 0% interest) is weakening or will weaken.* (Why issue debt at > 0% when you can issue at 0%?) But who would want dollars in the future if they don't even want dollars today? As Peter Schiff recently noted: "Perhaps the Fed feels this [paying interest] will make holding its notes more appealing. However, since the interest will be paid in more of its own script, I do not believe this con will work."

So what is going on? One possibility is that the Fed is preparing to issue bonds denominated in one or more foreign currencies. It can/will do so more quietly and privately than the Treasury can and will use its vaunted "independence" to hide the fact as long as possible. Or, perhaps, it will issue bonds that will be denominated in dollars but pay interest in a foreign currency or in gold or some other commodity. Or maybe the bonds will be collateralized by specific sets of its assets. The bonds it wants to issue, in other words, will have to be "sweetened" in some way in order to get people (firms, other nations' central banks) to hold them.

Another possibility is that this is just a ruse to keep the bailout from showing up in the national debt, which by convention includes only the Treasury's bonds. That was why the GSEs were spun off from the government in the late 1960s, btw, to get their debt off the Treasury's books. What I suggest is that we don't fall for the ruse and count any interest bearing bonds issued by any federal agency as part of the national debt.

Needless to say, we've been down this road before. Check out One Nation Under Debt for details.

Happy Holidays! It may be the last normal one for a long time.

*This is not as crazy as it sounds. During the Great Depression, Mexican pesos circulated in the border areas of the United States. Mexican pesos! See Amity Shlaes, The Forgotten Man, 138. Also, in the late 1970s the U.S. Treasury resorted to selling bonds, called Carter bonds, denominated in German marks. See this article for details.

Saturday, December 13, 2008

Save the Economy: End Prohibition

At the end of the First Great Depression (1929-1933), the U.S. federal government ended the so-called Noble Experiment, known by most today as Prohibition. It was a shrewd move. Banning the manufacture, sale, and transportation of alcohol did not end the consumption of alcohol in the United States, not by a long shot, but it did decrease the quality and increase the cost of what alcohol was consumed (after existing stocks were depleted). Worse, the policy was a boon to organized crime and wasted huge amounts of police resources. Ending Prohibition freed up human capital to engage in more productive pursuits and stimulated investment in legal alcohol production and distribution.

Here at the beginning of the Second Great Depression (2007-??) the government ought to end its long, expensive War on Drugs. We simply can't afford to continue the fight, no matter how noble some think it. Like prohibition of alcohol, prohibition of marijuana and other controlled substances has decreased their quality and increased their price without coming close to ending their consumption. Legalization would free up a non-trivial amount of police resources and stimulate investment in the production and distribution of hash, cocaine, and so forth. It might not be enough to save the economy, but at least we can get high safely and legally until it improves.

Thursday, December 11, 2008

Who is the bigger scammer, Extreme Acai Berry or Target National Bank?

The financial system continues to crumble and 4Q 08 GDP may plummet 6 to 8 percent and I have to deal with this bull-oney. My wife, God bless her (because I won't), fell for the Extreme Acai Berry scam. This website sells a trial sized package of acai berry pills for, like, $3.95. It has a little disclaimer that says if you don't cancel within the 14-day trial period it will automatically ship a slightly bigger bottle for $89 and some change. In even smaller type (at least on the day I looked at the site), it said that the trial period began immediately, not upon receipt of the product, which, in our case anyway, was 12 days after purchase! Customers who call the number to cancel are greeted with a message saying that they should call back due to high call volumes. So it is basically impossible to cancel even if you figure out that the "trial period" is not a "trial period" in any meaningful sense of the word.

For additional details, see these sites:

This is what really peeves me, though: the credit card issuer that my wife used to make the purchase, Target National Bank, will not credit us the $89 and is continuing to do business with the scammers! There is no way that the government can police all of cyberspace but it certainly can ensure that Visa, Mastercard, Discover, and other transaction service companies are punished if they co-operate with known scam artists. These companies should regulate themselves before the government does. As soon as people start calling in to complain about the scam, they need to alert the offending firms to make good. If they don't, they need to cut them off. Otherwise, the transaction service companies are enabling the scam artists. They are accomplices, if you will. Suing some fly-by-night isn't worth it but suing Target National Bank could be lucrative. Until it goes bankrupt that is. Any class action lawyers out there who want a piece of the action?

In the meantime, I cannot stand doing business with companies that don't even understand their own interest so I've severed our relationship with Target National Bank and urge everyone else with a target on their credit card to do likewise. You shouldn't be charging much in this environment anyway.