Relevant and even prescient commentary on news, politics and the economy.

Adding to Steve’s quest to define “money”. A couple short films.

Via Digby comes a couple short films talking about what is money.   They are part of an effort by a group/site called We The Economy that has 20 short films aimed:

 to drive awareness and establish a better understanding of the U.S. economy. Told through animation, comedy, musical, non-fiction, and scripted films, WE THE ECONOMY seeks to demystify a complicated topic while empowering the public to take control of their own economic futures.

I have to say I am a bit biased toward these two films as they promote the idea that I have presented here in various ways: trust.  It all comes down to trust.  All our wealth, power, security, prosperity and future.  Trust is the money.   And we have been doing our damnedest to destroy it in the quest for ever greater growth (financial or otherwise) via some concept referred to as freedom or more relatedly “free market”.

They are kind of humorous in parts too.

That Film about Money, part 1

The second part of That Film about Money

I’m going to go watch the rest of the films now.

Bank equity but no cash?

Ellen Brown from Web of Debt imagines a scenario close at hand. How accurate is it?

Can They Do That?

Although few depositors realize it, legally the bank owns the depositor’s funds as soon as they are put in the bank. Our money becomes the bank’s, and we become unsecured creditors holding IOUs or promises to pay. (See here and here.) But until now the bank has been obligated to pay the money back on demand in the form of cash. Under the FDIC-BOE plan, our IOUs will be converted into “bank equity.”  The bank will get the money and we will get stock in the bank. With any luck we may be able to sell the stock to someone else, but when and at what price? Most people keep a deposit account so they can have ready cash to pay the bills.
The 15-page FDIC-BOE document is called “Resolving Globally Active, Systemically Important, Financial Institutions.”  It begins by explaining that the 2008 banking crisis has made it clear that some other way besides taxpayer bailouts is needed to maintain “financial stability.” Evidently anticipating that the next financial collapse will be on a grander scale than either the taxpayers or Congress is willing to underwrite, the authors state:

The Opposite of Bankrupt

By Noni Mausa

The Opposite of Bankrupt

Some time ago I wrote about dollars as bizarre IOUs, with no names,
dates or specific obligations. They are free-floating promises, which
can be used to command the efforts of the other people who accept them
as valid.

I give you ten promises, and you give me a sack of potatoes. The ten
promises I give you fragment to a fine dust and disperse backwards in
time to command the efforts of growers, shippers, plastic bag
producers, potato breeders, researchers, and a vast pyramid of all the
people whose efforts, minor or major, permit a sack of potatoes to sit
there waiting for me when I enter the store.

Where did my ten promises come from in the first place?

Generally, I have them because I have spent time, exerted effort, and
focused my attention upon some task. In return, I received
promise-tokens, which I can use to command the fractional efforts of
other people. They may be near or far, known or unknown to me, in the
past or in the future, but these promises are nothing without their
ability to command the efforts of others and especially, to command
that effort anonymously.

Let’s look at bubbles and crashes with that in mind.

Trillions of promises evaporated practically overnight in the wake of
the 2008 real estate, stock market and investment collapses. But real
wealth — in the form of homes, land, crops, buildings, human skills
and knowledge, and the myriad other desirable and necessary goods –
was practically untouched. This created several important effects.

First, and inevitably, the real value of each surviving promise
ballooned – currency deflated drastically and almost instantaneously.

Huh? Isn’t inflation still piddling along at one or two percent? We
are warned about deflation and we have seen some, but not the steep
slither into the abyss that we saw in the 20s and 30s worldwide.

But the math is simple. If 10% of your paper wealth suddenly
vanishes, deflation (fewer dollars for the same goods) must happen,
it’s a definitional truth. But the key is that the dollar was
drastically inflated before the bubble, but the inflated bit was in
storage, not in circulation where it could inflate prices and require
wheelbarrows for trips to the grocery store. It doesn’t matter if
Marty (“The Artist”) Billingham prints up thousands of hundred dollar
bills, if he then buries them or burns them. These promises only
exist in circulation.

So, when the bubble popped, the potential value of each dollar
grew. If this maneuver had been executed by the Fed, perhaps to
help the federal budget by having to mint fewer coins and bills,
nothing would have changed. Pay would be less, prices would be less,
but proportionality would be preserved.

But no. Proportionality went all to hell, because of whose promises
got liquidated.

The rising tide lifting boats is a lousy metaphor because all boats
sit on the top of the water, at the same level. Imagine instead that
your wealth measures how far offshore you are. When the tide rises,
all boats are lifted, but when it falls some are beached right away,
while others float serenely. Even though the ocean liners technically
have 20 feet less water to float in, the difference is not important.

So when our currency deflated, whose hulls were stove in?

Well, we know that. Property values stayed the same, insofar as value
means “a warm dry place that isn’t a cave,” but ownership skipped from
homeowners to the promise merchants, who can now command the efforts
of new buyers. The equity in those homes is gone, whoever buys them
now has to start over and pay the cost-plus-interest from scratch.
Either the owners, or their heirs, take the hit for that tangle of
broken promises.

Pension plans took a big hit also. Wages and benefits, already
weakened, are still being hacked away at the roots.

In short, the effect of the bubble and crash was not to destroy
wealth, since all that wealth is still present or could be very
quickly rebuilt.

No, the real effect was to further shift the “ability to command the
fractional efforts of people” from the working majority to a
commanding minority. And so long as money is accepted, so long as
currency can be used to command that effort anonymously, the majority
is in a pickle.

Bankruptcy is the loss of liquidity, the loss of abstract leverage to
command the efforts of other people. Generally, this is a voluntary
process in which you confess you will never be able to provide
sufficient effort to compensate for the loans extended to you, and so
shed those obligations. It pushes you off the rocks and, hopefully,
back into a few feet of water where you can begin again.

What do you call the opposite – the ownership of more IOUs than you
could have ever earned, which can be deployed anonymously, which
multiply over time, and which can be created out of thin air if you
know the magic words? Who are you when you’re permanently anchored
over a Mariana Trench of money where no tide, however terrible, can
touch you?

When S != I

As Brad DeLong has noted, Tim Geithner believes it is time for “the economy has now recovered sufficiently for government to begin to make way for private business investment.”  In short, he expects “the private sector” to do the heavy lifting in these joyous times of economic recovery.

Cynics among us—why, yes, that might well include me—would note that the private sector has had to do much of the heavy lifting for the past several quarters, in the face of what is varyingly described as “a precipitous decline in Aggregate Demand” or “a rise in unemployment.” (You say overextended credit, I say bankrupt.)  And that its performance has been, not to put too fine a point on it, exemplary in the face of the constraints presented.

Yes, I’m praising the efforts of the private sector.  Not just because small businesses especially are trying to sustain current levels of production and services in the face of tightened credit and the aforementioned AD decline, but also because they, as LBJ once observed in another context, have been put into the position of trying to run a race when the shackles are just being removed from their ankles.

I blame the banks.

Now you know it’s me.  The problem is, the evidence is on my side.  Recall that the alleged reason we needed to “save” the banks is that they are Financial Intermediaries, taking a slice out of the matching between Investors (Savers, in most economics models) and Capitalists, who borrow to recombine Capital (K) and Labor (L) into a new product that presents a better return than the old one.

Call it “creative destruction.” Call it “capitalism.” Call it “economic growth.”

Let us ignore—though it Abides, like Earth or a steaming pile of elephant dung—that the “intermediaries” were making somewhere between 30 and 40% of the total profits in the U.S. for the past decade. We can (1) pretend that those were all payday lenders, (2) be a “first-best economist” and claim that is the way things should be, or (3) realize it’s a problem and leave addressing it for another time.*

But let us not ignore that capital supply is essential to growth possibilities. With labor abundantly available, the limitation on creating new product is essentially The Big K, and it’s “Main Street” proxy, money.

As noted above, in most models of economic growth, we treat Savings as being equal to Investment.  This makes sense: even when the Financial Intermediaries were making $3 or $4 of every $10, they were reinvesting in better systems, better technology, better analysis, and better methods.  Low Latency leads to High-Frequency Trading (HFT) which leads to…well, let’s be nice and just say “greater firm profits.”  Even if only 50% of those profits are being directly reinvested, they are being reinvested, while the rest produces at worst greater paper investments and at best a higher velocity of money and/or a multiplier (“trickle-down”) effect from increased spending.**

Put your money in a Mutual Fund, it’s Invested. Buy a stock, it’s invested.  Put it in a Demand Deposit Account (what used to be a “Savings” or “Checking” account), and it’s invested (“swept”) by the Financial Intermediary, who gives you a share of the profits in the form of interest.

Not to sound like a broken record, but Excess Reserves put a spanner in that last one.  Don’t believe me, ask economists Bruce Bartlett or Joe Gagnon.  Or just look at a graphic of M2 and what I’m calling “Intermediary Private Investment” (M2 minus the Excess Reserves maintained by Financial Intermediaries).



As Excess Reserves are not Seasonally Adjusted, I used the NSA version of M2.  As noted in my previous post, up until September of 2008,  the Fed did not pay interest on Excess Reserves (or Reserves, for that matter), so that excess reserves were essentially a rounding error—funds kept because of the asymmetric risk-reward of a miscalculation, or “precautionary savings.”  They tended to total about $1-2 Billion on average, rather minor in the context of $7-8 Trillion.***

But once you hit September of 2008, the growth in M2 is more than negated by the growth in Excess Reserves. Indeed, the horizontal line on the graphic above is the level of Intermediary Private Investment in August of 2008—nine months into the “Great Recession.”—isn’t exactly reaching for the skies.  But it’s also significantly higher than the current I, as opposed to S.

(Note that the NSA trend is also downward since the alleged beginning-of-recovery months of June-July, 2009. That the performance has been as good as it has been in such a context is amazing.)

When Savings=Investment, there is potential for growth. When savings go into mattresses—for good reason, especially in the pre-FDIC days—intermediaries cannot do their job so efficiently as the models presume.

What are we to call it when Intermediary Private Investment is significantly less than Savings—when not the people, but the intermediaries themselves, are stuffing money into their own, interest-bearing mattress?

I would suggest “bad economics,” but that term seems too applicable to more general conceits.

*I would rather lose what is left of my eyesight and hearing than take the second position; others, from Scott Sumner explicitly to Brad DeLong implicitly, have significantly variant mileages, which is why there’s a horserace for describing economic policies in the past decade or so. They are winning, while I received several decent paychecks over the time.

**It is left as an exercise whether the “trickle-down” effect is positive or significant.

***Another sign of improved technology is that the growth in reserves decelerates—funds are used more efficiently by the intermediaries—after ca. 1990/1991; the trend moves slightly upward in the Oughts, though that is both relatively minor and possibly due to complications related to the expansion of products offered.


To send money is not to spend money

Robert Waldmann

Atrios vs Bernanke.

OK so I agreed with Atrios about Greenspan (just below). Now I disagree with him about Bernanke. He equates loans with gifts. He equates worse than optimal with worse than nothing (dealing with free market fanatics can cause one to overlook the difference).

Bernanke could have sent money from the Fed’s magic money machine in all kinds of ways. They could have paid down mortgages. They could have put money in my bank account. They could have given it to state governments. What they did was prop up a failed banking system, and the worst failures of the failed banking system, under the premise that capital misallocating financial intermediaries were necessary for a stable economy.

Note the unusual usage “sent money.” This is not a typo. Atrios did not hit the p too gently meaning to type “spent,” because the Fed did not spend money bailing out the banks. It loaned money, guaranteed loans and guaranteed assets. If they put money in Atrios’s bank account, full stop, then they wouldn’t be able to get it back. A loan is not a gift.

The latest estimate I saw of the cost of the bailout to the Fed was Negative $ 125,000,000,000.

I also think our experience with Lehman shows that, in the short run (which means until congress acts) bad banks run by incompetent greed heads are better than no banks. But in any case, even if you think we would be slightly better off if they had all gone bankrupt, $125,000,000,000 is a nice chunk of change.

update. However, I remembered incorrectly. The estimate was a profit of $ 115,000,000,000 via Barry Ritholtz who was not convinced. Close but no cigar. I mean ten billion here ten billion there and soon you’re talking real money.

Total delirium after the jump.

Here I think part of the problem is that, like most Americans, Atrios rejects socialism. If The Fed could make a killing intervening and saving banks, it could make a killing most years. Does that mean that a mostly private financial system is inefficient compared to one where the Federal government bears more risk and pockets the risk premia ? Sure it does. Wouldn’t that be public ownership of the means of production, that is socialism ? Yes. Am I saying that Bernanke and Paulson proved the superiority of a shift towards socialism (not all the way to nationalized popsicle stands). Yes I am.

I think that TARP is one of the best programs ever, and, if we were half rational, would be our first step on a path that leads part way to socialism.

The Drug War Saved the System?

Charlie Stross talks about liquidity:

What we’ve just seen, hidden in the euphemism here, is a confession that drug cartels and other organized criminals have gone on a $352Bn asset-buying spree — and the banks and regulators, world-wide, turned a blind eye to this because the alternative was to allow the banks to collapse. And the corollary is that these investments are now in the system, laundered, whitewashed, and legit. These narcodollars aren’t neatly bundled up inside the mattress any more; they’re in the system, doing their owners’ bidding.

A third of a trillion dollars is a lot of money; it’s enough to fund the US military invading another country halfway around the world, or a manned Mars exploration program. Obviously, there’s no single Mr Big here, no Blofeld investing SPECTREs ill-gotten billions in an ambitious bid to go legit.

But one wonders whether the “organised criminals” have been investing in anything innovative. (Politicians, if they’re smart.) And what the long-term consequences are going to be …

It won’t be Stross’s next novel, but it might be Ben Bernanke’s. Or Larry Summers, whose latest foray into fiction is here.

The Fed called a mulligan

by Rebecca

Ex post, it is obvious that the Fed was way too tight in the second half of 2008. To be sure, the FOMC was actively engaged in its standard easing policies; however, the Fed got the Treasury to aid in its sterilization efforts, and later the Fed fast-tracked the interest on reserves (IOR) program (originally set for an October 1, 2011 start). The Fed was misguided in its sterilization efforts, as aggregate demand was already collapsing.

Something was afoot well before the collapse of Lehman Brothers. David Beckworth at Macro and Other Market Musings backs up Scott Sumner’s (TheMoneyIllusion blog) theories with an intuitive analysis using the equation of exchange (MV = PY):

Below is a table with the results in annualized values (Click to enlarge):

This table confirms what we saw in the levels: a sharp decline in velocity appears to be the main contributor to the collapse in nominal spending in late 2008 and early 2009 as changes in the monetary base and the money multiplier largely offset each other.

… (And a little later)

Unfortunately, though, it appears the Fed was so focused on preventing its credit easing program from destabilizing the money supply that it overlooked, or least underestimated, developments with real money demand (i.e. velocity). As a consequence, nominal spending crashed.

This line research essentially posits that the Fed got it terribly wrong in the second half of 2008. As David shows in the table above, the velocity of money was dropping with households clinging to cash under heightened economic uncertainty.

If this theory is true, then one could view the $300 billion Treasury buyback program (see the NY Fed’s Q&A here) as the Fed’s equivalent of “calling a mulligan” in an attempt to take back its sterilization efforts in 2008.

The $300 billion buyback of Treasuries will restock about 75% of the Fed’s Treasury holdings (focused in notes and bonds rather than bills, but there is a contemporaneous objective to pull long rates down) that dwindled previous to the onset of the SFP account. Unfortunately, though, it was already too late.

(The Treasury issued short-term notes and deposited the proceeds with the Fed in order to aid in the Fed’s sterilization efforts – see an old post of mine for a more thorough explanation of the SFP, or the Supplementary Financing Program.)

Another event recently occurred that would support the view that the FOMC is backpedaling: the Treasury’s Supplementary Financing Program (SFP) is going bye bye.

The Treasury started this week to unwind its account with the Fed (the SFP listed on the liabilities side of the Fed balance sheet). This is almost surely going to end up as excess reserve balances in the banking institution, as the Fed is unlikely to sterilize these flows. (Note that one could see if the Fed was sterilizing the flows if its Treasury holdings started to fall again.)

I guess that the real question is: where would we be now if the Fed had pushed harder on the money supply in 2008? I imagine that Angry Bear readers have many thoughts on this.

Rebecca Wilder

A fable: The Guitar Player who sold his gear or, Bruce Henderson vs. Gordon Moore

by divorced one like Bush

Gather all around the camp fire and enjoy your marsh mellow toasting as I tell you the fable of the “The Guitar Player who sold his gear”. Long ago in a far away land of rock and roll there was a young man who played well. Not great, wasn’t going to necessarily be a guitar hero, but who knows? He had the gear, the amp to make your ears ring for days, the gold top Les Paul, couple pedals, cables…all he needed. And he played. Jammed, earned some money on the side. Life was good. But, along came another desire. He needed some money and the playing was becoming less as life with the loved one became more. So, he sold it. All of it. He had maybe $1 thousand in gear. He got $500 for it. It seemed good at the time. He had gotten his use of it all, made some bucks but it really was just money sitting there it seemed.

A few years pass, the kids grow up and the man has some spare time. He has been dabbling on a folk guitar for years, so when he hears that a friend is jamming on Thursday nights, he gets an urge. That potential just sitting there to be tapped, but…no gear. No problem, he’ll just buy some. The only problem is, when he first goes to practice and sees the friends 2 Les Pauls and a jazz box, 2 ear killing amps and bottoms, a full board of pedals worth what he sold his gear for, he wonders how the friend did it and thus how is he going to do it. It was thousands in gear. The friend answers: I never sell any of my music equipment because it is part of my life activities, it makes me who I am, it helps me think and you never know what will come up for an opportunity.

Such a fable is common among those who used to play music.

I have written at AB that my thoughts about when the flash point was for our change to a focus on making money from money was the first Reagan election. I do believe this is the case however, having finished reading Richard J Elkus’ book, Winner Take All, I now have learned of a perspective as to why it flashed and why we are bailing out finance with more money and fewer questions than bailing out the auto industry. I also see just how back ass-ward this bailing out concern is.

You see, the thought that the purpose of business is to make money was not always the winner in the argument. The argument has been back and forth for ages. It is part of the class war. In fact, there was a movie in 1954 with William Holden looking at this issue called Executive Suite.

…McDonald Walling, who oversees the company’s manufacturing plant and is preparing to test a new molding process… process did not go well in his absence. On the way home, he complains to his wife Mary that financial analyst Loren Phineas Shaw focuses on the bottom line at the expense of the company’s creativity…McDonald speaks passionately about the company, condemning Shaw’s short-sighted emphasis on quick profits as “a lack of faith in the future.” After McDonald outlines his vision for restoring the company to its former high standards, the board unanimously elects him president.

We have not always thought that the purpose of business is just to make money.

Mr. Elkus’ (MBA) thesis is that in the 60’s, two laws of economic process were formalized and presented that were the guiding thoughts influencing economic development. Both lines of thinking came from viewing the same show: semiconductors. One is by Mr. Bruce Henderson (engineer and MBA degrees) the other by Mr. Gordon Moore (PhD chemistry). Both addressed the relationship of costs and production. I note the degrees of each just as a curiosity.

Mr. Henderson, watching Texas Instrument, came up with the Experience Curve. In it’s simplest form it states that unit cost goes down over time as experience increases.

But, this was just the bases for a broader concept, a “strategy” for guiding business development: Stars, Cash Cows and Dogs.

As a particular industry matures and its growth slows, all business units become either cash cows or dogs. The natural cycle for most business units is that they start as question marks, then turn into stars. Eventually the market stops growing thus the business unit becomes a cash cow. At the end of the cycle the cash cow turns into a dog.

The overall goal of this ranking was to help corporate analysts decide which of their business units to fund, and how much; and which units to sell.

This was and appears to still be a very big concept. Big as in influential. Via Wiki:

The Economist magazine stated that Henderson did more to change the way business is done in the United States than any other man in American business history. Well known to many now is the famous Growth Share Matrix (‘cash cow’) and the ‘Experience curve’. His books were published in 27 languages.

Huge influence. Taught throughout our business schools according to Mr. Elkus and Wiki. Came about in 1970.

Mr. Moore, being a founder of semiconductor manufacturing businesses, namely Intel, came up with Moore’s Law. In it’s simplest form, it states that there would be “a doubling of computing power per given area of silicon every year at basically the same cost…”
Mr. Elkus’s thesis is that both describe models, ultimately truths regarding making money. Both are used as strategies for basing an economy upon. Only one is truly sustainable and makes all of America’s dreams possible. Japan picked that one.

He comes to this by way of his involvement with Ampex. Ampex owned video recording “…controlling nearly 100 percent of the world’s video recording patents and more than 70 % of the market”. Mr. Elkus literally introduced the first video recorder for home use, September 2, 1970 in NY. In the next few days, Ampex stock climbed 50%. Only one VP attended, no other top/senior management. “It was not a good sign.” His lesson from the event: “The introduction of Instavideo set in motion a long chain of events, resulting not only in the explosion of consumer electronics into nearly every facet of daily life but in a global shift in economic power to Asia.”

In the same year, he saw a presentation of high definition video by Japan’s “primary” broadcasting company, NHK. It is at this point in the story Mr. Elkus relays the concept of convergence of technology. The ability to record video on a consumer level scale represented the ability to store and process massive amounts of data. This ability converging with digital video presentation meant that the entire information economy would be exponentially growing based on Moore’s Law. Mr. Henderson’s potential Star. Moore’s law also meant that as the ability to process ever larger amounts of data on ever smaller media, the cost would be ever greater. Mr. Henderson’s potential Dog. What to do?

Mr. Elkus knew Ampex needed a partner that could take the technology to the consumer. Coming up with the technology, he recognized is only part of the expertise and cost, the other is the ability to manufacture it such that technology, in short, is dummy proof in the hands of the consumer. It is an ability all of it’s own. Mr. Elkus wanted Magnavox or Motorola as partners; keep it in the country. The boss said no, feared competition so went with Toshiba. This gets us to the next part of Mr. Elkus’ thesis: Infrastructure. Which gets to the final cog in the process: investment.

Using his experience with Ampex’s Instavideo, Mr. Elkus presents the counter to Mr. Henderson’s Stars, Cash Cow’s and Dogs: Investment, Convergence and Infrastructure. A relational model that follows the production law of Moore.

What the thesis of Investment, Convergence and Infrastructure means to a nation is presented in the tracing of the loss of our manufacturing base to initially Japan and ultimately to all of Asia. It is the counter to Mr. Henderson’s model which is basically just focusing on the money. It is the movie Executive Suite for real only for us, the story ending is looking different.

The relationship of Investment, Convergence and Infrastructure is presented early in the book via Zenith. There was a fight for control of the board as reported by the AP 11/1988. A couple Wall Streeters wanted Zenith to dump the “money-losing television business”. The dog. The article also noted: “for an outsider, jumping into the TV business would be like trying to hop onto a speeding train…” In the end, Zenith a company that “helped establish the standards for high definition television in the US,… contributing significant technology for the potential development of the industry” was gone by 1996 to LG of Korea “for a fraction of what it now costs to build a single display manufacturing facility”. We lost our infrastructure and thus the advantage of economic growth based on convergence and all the knowledge that is the result there of because of our focus on cash flow as the bases for deciding on where to invest.

Using a simpler example:

In 1964, one year before Gordon Moore wrote his prophetic article, semiconductor sales reached $1 billion. Today sales are in excess of $260 billion, it is projected that in a dozen years the number may reach $1 trillion. And growth in revenue has occurred while prices have dropped at an average compound rate of 29 % annually…But that is really chump change when you realize that $260 billion of silicon makes possible a $2 trillion electronic systems industry today…So it is possible to imagine an electronic systems market approaching $4 trillion to $5 trillion in the next twelve to fifteen years—an amount equal to the current GDP of Japan…

The error of US having followed Henderson, which if I understand Elkus properly, I conclude has lead to NAFTA, outsourcing jobs and ultimately the fight over whether to save our auto industry (which I noted is the last “infrastructure” we have that uses “convergence” via “investment”) verses little questioning to save the banks is summarized thusly:

The common denominator driving the world of information and its communications infrastructure was the need to store, process and distribute extraordinary amounts of digital information. [Store = Ampex. Process = Intel. Distribute = Zenith.] If one understands HDTV as the result of learning how to process massive amounts of digital information, as both a convergence and catalyst in the digital revolution, then it should be easy to see that the need to process that information is not limited to the HDTV display and a pretty picture….

It now costs upward of $10 billion to build just one semiconductor manufacturing plant. $3 billion to build a single display fabrication facility. Zenith was sold for $350 million. Based on Measuring Worth, 1996 to 2008 these money minds following Henderson, sold Zenith for 1/6th the cost required to build just one display panel plant in 2008. This number differential is the total fallacy in Henderson. How do you know? How do you know what really is the next big thing? How can you be sure that nothing else will come of what you have? It is the “The Guitar Player”. But worst of all as shown in the example of selling Zenith, is just how short sighted Henderson’s thinking and thus American business thinking is in general. If I may, Henderson’s thinking is analogous to watching your rear view mirror while driving forward as you decide whether to turn or drive straight. Henderson’s thinking is the point of thought that began the money from money economy. It is the thought that lead us to a purposeless existence of no substance because it leaves unanswered the question of why do we want to earn money or create wealth, for what purpose.

Mr. Elkus gave a talk at The Commonwealth Club in California on 9/3/08. It covers a time line of what he is writes in his book. It is one hour long, but well worth the time, especially the question at the end regarding Apple’s business arrangement regarding it’s Iphone as the questioner brings up “competitive advantage” and money from royalties. You know, that information/service economy model that has gotten us to the point that the biggest service sector (finance) took down the economy and the next largest is unaffordable(health care).

The most profound comment by Mr. Elkus during this lecture is: If you don’t have the infrastructure, then you don’t know what’s possible.

How far reaching is this persepctive of Investment, Convergence and Infrastructure? Mr. Elkus suggests that even our education system is influenced by it.

When a nation’s politics and economics fall out of step with its education system, the cost of reengagement is extraordinarily high.

Therefore any attempt to explain the plight of education in America must look first at the country’s current political and economic attitudes. They are directly linked.

Eventually, because of the exponential acceleration in convergence, infrastructure, and investment, there’s a cascading effect, and the loss of one industry begins to threaten the stability of others.

These events are noticed by the educational community, which must provide a measure of career guidance for its student population and thus looks to political, economic, and business leaders for answers.

We have Intel fortunately, but we don’t have the infrastructure of Zenith which would have been using Intels output to market Ampex’s technology which lead to the Iphone.

Where DID the money go? Part 2

Bloomberg Magazine, in “Unsafe Havens”. (Hat tip to Naked Capitalism.)

reports that money market funds run by Bank of America Corp., Credit Suisse Group, Fidelity Investments and Morgan Stanley owned over $6 billion of CDOs with subprime debt in June.

The reason this is a serious issue is that money market funds have a $1 NAV, meaning “net asset value” rule. The funds are required by the SEC to invest conservatively. In practice, they always to maintain principal value. But as the article explains, this sort of investment puts the funds at risk of breaching the $1 NAV requirement.

What this article tells us, in effect, is that investors weren’t completely nuts to have dumped money market funds for Treasuries in August. Of course, they probably should have called the fund manager first, since most large fund management firms, such as Vanguard, correctly see this sort of paper as in appropriate for a money market fund.

The article is quite long but very much worth reading in its entirety; we’ve excepted the juicy bits. From Bloomberg Magazine:

Unbeknownst to most investors, some of the largest money market funds today are putting part of their cash into one of the riskiest debt investments in the world: collateralized debt obligations backed by subprime mortgage loans….

Money market funds with total assets of $300 billion have invested in subprime debt this year….

Under SEC rules, money market managers must invest in securities with “minimal credit risks.” Joseph Mason, a finance professor at Drexel University in Philadelphia and a former economist at the U.S. Treasury Department, says subprime debt in money market funds is far from safe.

“This creates tremendous risk for today’s money market investors,” says Mason, who wrote an 84-page report on CDOs this year. “Right now, I’m not comfortable investing anything in CDOs.”….

On Aug. 9, BNP Paribas SA, France’s biggest bank by market value, froze withdrawals on three investment funds with assets of 2 billion euros because the bank couldn’t find a way to value its U.S. subprime bonds and other assets. CDOs aren’t bought and sold on exchanges and their trading has little transparency….

Bruce Bent, who in 1970 created the first money market fund, The Reserve Fund, says no money market fund should invest in subprime debt.

“It’s inappropriate,” Bent, 70, says. “It doesn’t have a place in money market funds. When I created the first money market fund, I said you have to have immediate liquidity, safety and a reasonable rate of return. You also have to have a situation where you’re not giving people headline risk.”

Investors have sought safety during the subprime meltdown by moving their holdings to U.S. Treasuries and money market funds. On Aug. 8, just after the Bear Stearns hedge funds filed for bankruptcy protection, U.S. money market fund total assets reached a record high of $2.66 trillion, with investors pouring $49 billion into such funds in one week, according to the ICI.

Reader Jack asked about money disappearing. Some was pure vapor wares in a bidding war for promises on ROI. Other money came from what were safe havens of money markets, municipal bonds, and other financial vehicles that were supposed to be only steady and safe.

Springfield MA sued and won their $14 million from Merryl Lynch based on their agent’s inappropriate behavior by disregarding the town’s mandate of investment vehicles.

Some visual aids to answer how much is it?

This is just a little visual fun. Think about that saying “a billion here, a billion there, soon you’re talking about real money”.

Personally, I think visuals like this need to be circulated more frequently so that people have a better understanding when the government or business speaks dollar amounts. It might help them pause about whether they think something such as a war is really getting them a better life. Or just how much of a relative tax break they are getting.

But for the war, we’re talking trillions so:
Here is some perspective on TRILLION:
Trillion = 1,000,000,000,000.The country has not existed for a trillion seconds.Western civilization has not been around a trillion seconds.One trillion seconds ago – 31,688 years – Neanderthals stalked the plains of Europe.

Here is another one I like: The L Curve

Last but not least is this one that is actually a presentation being made to our legislators concerning our military budget.
The Oreo Cookie