Understanding The Fed Discount Rate

If you have been following the news on TV, then you know that the Fed increased the Fed discount rate by about 0.25% recently, but it appears that they are going to hold at this level for a while.  I bet that 99% of voters have no idea what all this means and I would also bet that most people who have taken University economics don't either.  That is the point of this blog.

It is accepted by, so called, economists that if you reduce the discount rate that the Fed charges banks that it will stimulate the economy.  This is like the holy grail of modern economics, but how many of the believers ever really thought thru the idea themselves?  My guess is zero!

Think of it this way.  The discount rate is like the steering wheel on a car.  You can turn it to the right or the left, but you can't just turn it one way if you ever expect to do anything but turn in a circle.  If you turn it one way, sooner or later you are going to have to turn it back the other way.

Years ago, I administered a multimillion dollar capital budget for a major corporation.  We had a lot of money to invest, but it was not unlimited.  For that reason, it was my job to see that only the "best" projects were funded.  Believe it or not, but it was not that difficult to do.  These capital projects were actually simple investments.  I started by giving the OK to those that had the highest rate of return and then went down the list to those with lower rates of return until I was out of money.  Simple right?

Here is how the Fed thing works.  When the discount rate is high, the banks have to charge more for a loan.  When the rate is low, they charge less interest.  With me so far?  Lets say that we have been in a period where the discount rate and the bank interest rates were high. If you were to look around at where the money was being invested, it would be in  high quality projects that yielded a good pay back.  If we get personal, if the interest rates were high, you would buy a cheaper car or home, but if the interest rates were low, you would be more inclined to buy a more expensive car or home.  Are you following that?

Now, if the Fed wants you to buy more and more expensive homes, what do you think they would do?  They would lower interest rates!  The problem is that some day, the interest rate have to get back to normal and how do they do that and what impact will that have.  It is a little like riding your bike down hill.  Going down is great, but getting back up the hill is hell.  Why is it that you never hear an economist explaining how they are going to get interest rates back up to normal?

Here is what happens.  When interest rates were  going down, we added all kind of poor or worthless projects which people thought were great, but on the way back up with interest rates, these project had to be scrapped or bankrupt.  Isn't this exactly what happened with the big economic bust 10 years ago?  The government bailed out businesses who made bad investments when money was cheap and when money got more expensive, these investments failed.  What else would you have expected.

The lesson here is, "if you chose to dig a hole, you had better think about how you are going to get out of that hole".  It is a lot harder to go up hill than it is to go down.  Think about it!

PS---There are at least two basic kinds of businesses.  First, ones that are limited by capital and ones that is limited by intellect or skill.  An example of the first is a Frosty Stand.  The cheaper the Frosty equipment the easier it is to get into the business and make money selling frostys.  As interest rates approach zero, the cost of the Frosty machine also approaches zero.  The other side is that the more expensive the Frosty machine is the fewer people there are who will be able to enter the Frosty business.  In the intellect or skill category, singing a song would be a good example.  You don't need any money to write or sing a great song, but you do need the intellect or skill "which are limited " by Darwin.  Our problem is that we have run out of business that just need funding.  Now, most new businesses are based on intellect or skill and that is limited and to get more of those kinds of businesses, we have to pay more.  That is why ;people with intellect and skill are earning much more than people who run Frosty stands.

What Happened To Our Citizen Politicians?

Do you remember your history lessons about the USA and the "citizen politicians" who formed this USA?  I did not think so.  That is the point of this blog.

What was George Washington's profession?  Well, it was not a lawyer.  George was a farmer and business man.  For that matter, all were farmers are business men.  How about Thomas Jefferson?  He was a farmer too.  What all the founders of the USA have in common was that they were "not" politicians before they wrote the Declaration of Independence or the Constitution.  Before they entered the government of the USA they were farmers and businessmen and after they left government, they went back to being farmers and businessmen.  That has all changed today and I think that is much of our problem. 

If you check the facts, you will find that most of our current professional politicians are lawyers.  The government of the USA is more like a big business than it is like a court room.  Do you really think that people who are lawyers are better prepared to manage this big thing we call the USA government better than a farmer or businessman who has had to run and manage some big organization.  It has been my experience that the main thing that lawyers run is their mouths.  I could go even further.

How about who runs our colleges and universities?  Would you believe that most of those on the board of regents are lawyers?   Well, that is true.  I checked out a few boards of regents and found that there are very few Engineers, Doctors, Farmers or Business men on most boards of regents.  If that is the case, it is no wonder that our colleges and universities have deteriorated so much and now have to rely on foreign born students to fill out the seats in the more difficult technical majors.  All this has been happening slowly, like grass growing, so that you did not even notice.

I don't know what you think about Donald Trump, but he is clearly one of these "citizen politicians" that I have been talking about.  I don't know if he will make a good President or not, but I don't know about any of the lawyers who are running for President will make a good president or not either.  What I am concerned about is how this "professional political class" in the Republican party along with the Jew-York media have pounced on Trump spending millions of dollars to keep him from running for President.  If we were to apply standard rules of decision making to the situation and ask how Trump would be doing "with" and "without" the negative spending by the "professional politician class
", what would be the answer?  We know how many people don't want to vote for Trump after millions have been spent to smear him, but we don't know how big his lead would have been had their been a level playing field do we?

How dangerous can a bad President be for the USA and what is the worst thing that he could do?  Ever think about that?  I have and I have some experience on the subject too.  We know that there are all kinds of checks and balances on the power of the President, but that is not enough.  There are still some very bad things that a bad President can do.  For my money, the worst thing that a President can do is to "selectively enforce the laws".  I saw this in Chile with Allende and here in the USA with Obama.  You know what I am talking about.  I could  take a chance on new President if I had confidence that he would equally enforce the laws and I think that Trump has made it clear that he would.  The border and uncontrolled immigration is a perfect example of what Obama is "not" doing and what Trump has built is case on.

Most of the other candidates speak "political correctness" which means that they will do what the people who voted for them think is right rather than just enforcing the laws on the books.  That is my major concern.  There are ways to change the laws, but choosing not to enforce laws that you do not agree with is not one of those ways.

How about taking a chance on a President who is "not" a lawyer and who will enforce the laws?

PS---If you want to run the biggest organization in the world, don't get an MBA from some big university, get an undergraduate degree in Political Science and a Law degree and bone up on political correctness and you will have the best chance of becoming President of the USA.  We have let it become that bad.  What would our founding fathers think about what we have done to their "baby"?

Null Set Economic Principles

What is the "Null Set" and what does it have to do with economics?  Very good question and that is the point of this blog.

Here is a basic definition of the "Null Set".  It is everything else.  That does not have any logic does it?  Well, it does and it is a very powerful tool.  If you were a very smart student and knew how to take a test, you used the "Null Set" principle.  Here is how it worked.  You have a choice between 5 possible answers to the question, but which one is the right one?  If you can eliminate all of those answers in the "Null Set" or "wrong set", you end up with the right answer.  See how it works?

In this blog, I will show that if you want to make some thing "better", rather than just focusing on those things that you think will make things "better", why don't you think about all the things that would make things "worse".  In most cases, the right answer to making things "better" is to do just the opposite of those things that you have determined would make things "worse".  It is kind of like how you found the right answer on the test.

Now how does this apply to economics?  For many people, they just can't get their heads around the whole concept of economics.  I'll be the first to admit that it can get a little complicated and can cause the average person to go off in the wrong direction or be taken in by a politician who is going the wrong direction.  Because thinking in terms of the "Null Set" is so different from normal thinking an average person can often look at a complicated economic problem in a new way without all their prior biased baggage.

Here is a simple example.  How could you make the economy worse?  How about raising the taxes that everyone had to pay?  This would mean that everyone would have less money to spend and it would thus make their quality of life worse.  Further, the more you raised the taxes, the worst it would get.  Does that seem logical?  If it does then what do you think would happen if taxes were lowered?  In most cases, just the opposite would happen.

Here is another.  What if we raised the minimum wage to $15 per hour?  It would help a few, but it would also hurt others who were young and looking for their first job.  If a person does not get that first job, how would you expect that they would get that second higher paying job?  You could think that just $15 per hour would help more than it hurt, but what if the minimum wage was $25 per hour?  At that level, we would all agree that it would hurt the economy and the quality of life of a lot of people.  Doesn't that start to make it clear that lowering the minimum wage would have the opposite affect and help the economy?

How about the Fed and the "Discount Rate"?  We all know that raising the rate hurts the economy and lower it helps, until you get down to "zero".  There is no limit to how high you can raise the rate, but there is a limit to how far you can lower it.  In some cases one control variable crosses over the affects of another variable.  Take the case above where the minimum wage was lowered further and further.  At some point we will run out of workers or at least workers who are willing to work at that rate.  At that point supply and demand will take over and employers will have to raise wages to attract workers.  Little off the basic topic, but I think you get the idea.

How about taxing corporations more and workers less?  A lot of people seem to want to get behind this one.  What would happen to business if we doubled their taxes?  Many would go out of business or move to places where the taxes are less.  If higher taxes made things worse, then lowering them would seem to make things better for businesses.  Look at a different slant.  Would voters want to raise Social Security benefits if it meant a big raise in deductions from their pay checks?  I don't think so!  If that is the case would they vote for more benefits if the amount only the employer had to pay was increase?  You bet!

Next time you are discussing something complicated, ask the others to explain how things could be made worse.  It might open up the discussion to some real logical thinking.

Donald Ttrump And Abortion

I have been watching the spat in the news about Donald Trump saying that if a women brakes the law when they have an abortion that they should be punished.  What is wrong with that?  That is the point of this blog.

I try to think things thru before I state my opinion on some thing and I like to be "consistent" in how I apply my decision principles.  For example, if a person waits in the get away car while his friend robs the bank, did he brake the law?  Of course he did.  He is just as guilty as the person who robbed the bank.  I was on a jury once where a young person helped his friend steal a car by having him push the car with his car to a place where they could get the car started.  We convicted the person who drove the push car.

How about another one?  If it is against the law to buy, sell or use drugs, should the person why buys and uses the drugs be punished?  Of course, but for some reason due to political correctness, we define the person who bought and used the drugs as some kind of victim.  To my way of "consistent" thinking and application of the rules, that is stupid.   Why is it that we only want to punish the person who sold the drugs?  There would not be hundreds of people killed each month in the drug trade if this person had not purchased the drugs.  That seems to me to make the person who purchased the drugs guilty in the killing of hundreds of people.

If a girl got pregnant and was beyond the time period to get a "legal" abortion, but found a doctor who would perform the abortion anyway, should she be punished for violating the law?  According to Donald Trump, he says "yes" and so do I.  I blogged before that Donald Trump is above this business of political correctness and thus forms his decisions and opinions on the facts and does it "consistently".  The problem that most voters have is that they have been the victims of political correctness for so long that they can't understand the thinking of a person like Donald Trump who is above political correctness and tells the truth.  The problem here is not Donald Trump, it is the sad state of our voters.  If one has to tell the voters what they want to hear rather than the truth to get elected, it does not speak very well for our whole elective process.

Obama just released from jail a bunch of people who broke our drug laws, but were not "violent" offenders.  What does "violent offenders" have to do with anything?  These guys broke the law, period, and should stay in jail.  This sounds like the same kind of exception that people want to apply to women who brake the law in someway related to abortion.  Drug purchasers and users are not "victims" and I don't care if they are "violent" or not.  They should still be punished.  It is the same with people who brake our immigration laws.  I don't care if they came here to work or if they came here to sell drugs, they are all still criminals and should be punished.

There is nothing worse in any democracy than to have a situation where the laws are selectively enforced.  You would not like to play baseball or football where one team was allowed to  play by different rules would you?  Think about it?  We need to be "fair" and that means that we all need to play by the same rules.  If we don't like the rules, their are legal methods of changing those rules.  For me, it is a breath of fresh air to see a person like Donald Trump running for President who is honest and understands that to be "fair" we need to enforce "all" the laws "equally" for everyone.  Didn't the Declaration of Independence state that "We are all equal under the law"?  Why else would Lady Justice have a blind fold on?

PS--I blogged in the past how Salvador Allende selectively enforced the laws in Chile and totally changed the country for the worst in a very short time.  Obama is trying to do  the same thing here and you can see what it is doing to our country that my family has tried to build since 1608.