Category Archives: U.S. Dollar

Janet Yellen Interest Rate Strategy Shows Weakness in US Economy

While stock market prices are acting positively after Janet Yellen’s speech stating that the Fed will keep interest rates low, the real story behind the announcement is just how fragile and weak the U.S. economy is. If Yellen were to have come out and state that the Fed will look to raise the interest rates it would be because the economy is healthy and could sustain an increase, and normalcy, of interest rates that would increase savings, investment, and strengthen the dollar. Yellen’s announcement that the Fed will keep interest rates low for a long time point to the complete opposite, revealing that the economy is completely dependent on the printing of US dollars to maintain the illusion of economic strength through rising stock prices and home values.

In addition, liberal economists seem to have forgotten the rhetoric of former Fed Chairman Bernanke who had repeatedly stated that once the unemployment rate fell to 6.5% the Fed would increase interest rates. Bernanke had stated this strategy over the last two years as quantitative easing had grown to the $85 billion per month pace. Three months after Bernanke has been replaced, Yellen’s message that the 6.5% unemployment rate benchmark needs to be updated to modern times has been widely accepted without any questioning as to why that is the case. It seems the liberal economists all agree that the summer of 2013 was ancient times and that an updated policy with regards to the unemployment rate to QE ratio makes sense; of course these people also believe that all forms of money expansion and money printing have only positive effects to the economy with no negative attributes.

New Tech Bubble in Beta Stage

March 22, 2014

Remember the tech bubble that took place in the late 90s and early 2000s? Hard to believe how dumb the sentiment was placing huge valuations on companies that owned a website but made no money. However, in some cases at least, the argument could be made that it was worth the gamble. After all, many of these bubble sites were based on the premise that online shopping would become the norm, and these companies were creating platforms to buy products online in specific industries. Online shopping did take off and continues to grow. The problem for many, such as pets.com looking to corner the pet food and supply market, was not having the foresight of a super mega online retailer where consumers could buy anything which is the case with amazon.com.

The bubble popped and investors were reminded that ultimately a company’s stock value is related to the earnings and eventual dividends it is able to pay. Of course future growth plays a role, but you can never forget that zero multiplied by the highest of numbers is still zero. Surely we learned are lesson and such a tech boom and bust will never happen again.

Just kidding! Welcome to 2014, where ideas are worth billions and profits are “so last century”. This time the bubble focuses on social media and companies who are making mobile apps that often provide a free or inexpensive service in order to attract users in hopes it will spread like a forest fire. Some of these ideas are solid, fun, and even beneficial. Surely you’ve seen some of these companies’ fancy websites with large, easy to read fonts that force the user to keep scrolling down to learn more about this new mysterious, but cool concept, probably in beta mode and not quite yet available to the public. However, as a business model they don’t stand up and are helping to set up the next great tech boom and bust scenario.

Many new public tech companies acquired many smaller businesses prior to filing their IPO in order to make themselves look more attractive. As the initial celebration of going public ended, creating the joy kill of having to create real profits, many executives in these companies eventually left or got pushed out. Looking for work, they have found it in start-ups attempting to deliver good ideas through the growing mobile app market and backed by venture capitalists. In the short run these employees have nice well paying jobs, but eventually profits need to be made for a business to survive. This is why the next tech bubble is around the corner; there just won’t be enough of these tech companies producing real profits.

Fifteen years ago hard working people lost money when a pet food and supply company creating an online shopping platform did not attract enough customers. This time, money will be lost on some mobile app that tells you which pet store in your city has the cheapest prices for a specific dog food. Will there be enough people who are willing to pay for an app that tells them where they can save a buck or two? My guess is no.

The Truth Behind Fed Tapering

September 6, 2013

There has been a lot of talk recently in the media on how the Fed will likely taper back on their asset purchasing program known as QE (quantitative easing) in September. The economic media “experts” have almost all gotten behind the same group think strategy and have decided that, based on Bernanke’s August speech, the taper is right around the corner due to an improved U.S. economy.

However, if you take a step back from all of the media talking heads and nonsense, it is easy to see that it is extremely unlikely the Fed will taper back on their asset purchases. Here is the economics translation to the truth behind the tapering, or lack of it:

First, ask yourself this question: What is the purpose of quantitative easing? The shortest of short answers is to keep down interest rates. Free market interest rates are determined by the bond market. If the U.S. government wishes to borrow $100,000 they will attempt to sell ten $10,000 U.S. government bonds. Bonds are simply an IOU that the government gives to the lender, and in return they have to pay the lender interest on the amount they borrow. So the U.S. government announces they will sell ten $10,000 bonds to the public at an interest rate of 2%. If everyone wants one of these bonds and thus the demand is strong, the U.S. government can lower the interest rate and pay less for borrowing the money. In contrast, if no one is willing to buy the bonds at 2% the government would be forced to raise the cost of borrowing (interest rate) until buyers were interested.

Quantitative Easing increases the demand for U.S. bonds, thus keeping interest rates low. If the Fed was not buying 85 billion dollars worth of bonds and mortgage securities a month, then demand would not meet supply at current interest rates and interest rates would need to rise in order for the U.S Treasury to sell enough bonds. Unfortunately the U.S. Treasury needs to sell these bonds in order to run the government by financing the deficit, as well as making interest payments on our current national debt of about $17 trillion.

Here is what I believe is the missing bit of information in the heads of all the people talking about the taper to come in the near future: the government needs to pay interest on our current debt of $17 trillion. The United States borrows money to pay interest on our current debt as the current debt continues to rise. Furthermore, much of the current debt has short term maturity dates due to Bernanke’s genius ploy of ‘Operation Twist’ in which he refinanced the country’s long term debt into short term debt due to historically low interest rates.

In 2011, the government collected about 2.5 trillion in taxes and spent about 3.5 trillion for a deficit around 1 trillion. So what is going to happen if interest rates rise to a number slightly higher than the current historic lows, lets say 5%? At a 5% interest rate, the government would need to pay $850 Billion in interest on the $17 Trillion debt. If by some miracle congress was able to balance the budget so that annual deficits were $0, we would still find ourselves going deeper and deeper into debt each year just by the interest payments. At this point it becomes crystal clear to our biggest buyers of U.S. bonds, such as China and Japan, that the U.S. can never pay back their debts without running the printing press and thus greatly inflating the value of the dollar away. With this realization they will decide to no longer lend money to the United States leaving the country with the single option of money printing to pay off debts and finance the deficit resulting in hyperinflation.

All of this rests on interest rates, which Quantitative Easing has been designed to keep low. I don’t believe the economy is recovering the way the media reports, however it is a different debate and irrelevant to the Fed’s decision to taper. In the end tapering will simply decrease demand for bonds and cause interest rates to rise. While the Fed demand for bonds is artificial and will eventually come back to hurt the country, in the short run Bernanke cannot afford to taper and risk interest rates rising.

Final thought: Despite all of the talks in the media of tapering, I believe we will see an increase in QE before we see a decrease.

Stimulus is the Opposite of Savings

When I was a child I was often told that saving your money was a good thing. I wasn’t an economics whiz kid, but this seemed to make sense; if you save your money and don’t waste it today, you’ll have more to enjoy in the future.

In the big picture of the economy of a country, the total savings of the population leads to future economic growth. When an entrepreneur has a new idea for a company that will produce a product that will be of some benefit to the population they often need to find money to get the company started. This money often comes from either investors or a loan from a bank. In both scenarios the source of the money is derived from savings.

During the 2008-2009 economic collapse, stock and home prices plummeted. This was a correction to a bubble economy based on American citizens consuming too much and not saving enough. For example, the housing bubble was a result of more people becoming home buyers than what would be considered normal. When there were no more people left to buy houses, or not enough to keep up with the normal flow of home sellers, the bubble popped and home prices plummeted. Though for some individuals this was an awful financial event, for the country as a whole this was a necessary correction.

During this correction it became harder to get a loan to buy a home as banks faced huge losses as previous buyers faulting on their loans. The savings of the country had dried up. So now it was time for citizens to start saving again and to cut back on spending. Just as I had realized when I was a child, this would mean sacrificing in the near term for future wealth and consumption.

Unfortunately the idea of sacrificing today for the future is not a message that most politicians have the courage to promote. Instead, a much easier to propose a stimulus plan that promises to get the economy moving in the “right” direction again. If savings means sacrificing today for the benefit of the future, than it stands to reason that spending today is doing so at the expense of the future; stimulus is the opposite of savings.

This idea that stimulus has consequences is lost on the politicians that approve the funding, the liberal media that covers it, and the people who benefit from it in the near term. The recent stimulus that the government pushed in response to the 2008 collapse was intended to push home and stock prices back up, which it has been successful in doing. However it is important to remember that the prices of stocks and houses decreased for a reason. It wasn’t some type of phenomenon that just happened one day. The decrease in prices was a necessary correction as more sellers were present than buyers. Stimulating the economy to make the prices go back up is simply just pushing off another price decline into the future, except by pushing it off the problem is snowballing into something bigger than what it would be if it happened sooner, or when it should have.

Again, the act of saving is a sacrifice, it is tough. The act of stimulus is easy, it is equivalent to swiping the credit card and worrying about it another day, but eventually that day arrives. The U.S. government has a national debt (credit card bill) of over 17 trillion and deficits that are constantly increasing the overall debt. So where does the stimulus come from? It comes from more borrowing (credit card swiping).

Common sense should tell us that stimulus, the easy way, will have consequences just as an individual racking up credit card debt that he can’t pay back has consequences. This is the point I am attempting to make in this article. When President Obama and other politicians brag how their stimulus programs have saved the country it is important to understand that the day of reckoning is coming.

Why Gold is not a Bubble

With the price of gold recently falling from a high of above $1850 an ounce to just below $1400, many people believe that gold is a bubble that has popped and will unlikely rise again for a very long time. This thinking is wrong and simple common sense will show why.

EconomicsTranslation.com strives to explain things as simply as possible. We do not believe that economics and finance is as difficult as the media, government, and your financial advisor makes it out to be. However if you are not well read on the subject it can often be overwhelming with all the lingo out there trying to explain the volatility across all markets in recent years.

Gold is a good place to start to learn the basic idea of money in economies. Money is a medium of exchange that people use for goods and services. For hundreds of years, gold was chosen by people to be used as money for simple reasons; it could be exchanged easily in bar or coin form, it is easily tested against counterfeit, and most importantly it has intrinsic value. Gold can be used as real things in the form of jewelry because it looks pretty, as well as other real industrial uses.

So we can establish that gold has real value and demand. People claiming a gold bubble will state that the price of gold has increased too much over the last decade to justify the fundamentals. However gold, as a form of money in today’s society, is measured against how much of a specific currency it is worth. Gold has increased from about $350 an ounce in 2003 to its $1400 in June 2013, an 4x increase. During that time the United States money supply, the amount of U.S. dollars in circulation, has increased by more than 5x. Much of this money expansion is the cause of the fed printing money in order to sell bonds so that they can continue to operate despite their annual deficits.

When countries create money out of thin air they create inflation, which devalues the worth of a single unit of currency (1 dollar). In common sense terms this makes sense; if only ten $1 dollar bills existed in the entire world imagine how much would $1 dollar could buy. If you were lucky to have one of these dollar bills you would at the very least be one of the ten richest people in the country. Now if everyone in the country had $1 million dollars, that same dollar bill wouldn’t buy much. These are two extremes, but they show how the value of currency changes based on how much of it there is.

Over the last ten years the supply of U.S dollars has greatly outpaced the supply of gold. This is the reason for the same unit of gold costs four times the amount in 2013 as 2003. The inflation of the U.S. dollar has fundamentally caused the increase in gold prices, not any sort of bubble mania where people are purely buying for the sake of turning around and selling.