Monopoly Money

The other day, frequent contributer J-Lo posted a link on our Facebook page to an article her friend had sent her regarding one person's explanation of economic problems and potential fixes from a point of view of someone on the left.  (Said friend has commented here, and I hope you're still reading).  I later got a chance to read it fairly closely, and came to the conclusion that the whole thing is nonsense on stilts.  The whole thing is full of weasel words (many, much, hardly any, etc.) that don't mean anything concrete, and sometimes even mean different things in different contexts.  My favorite "weasel" is when 20-34% in one context is "only a fraction," whereas in another, 20-30% of the same figure is "much of the money."  And, as an added bonus, the whole thing is steeped rather heavily in Marxist class rhetoric, with a few "Uber-Rich"es thrown in for good measure.  If you want a fun exercise for your evening, click on over, print a copy, and black out every weasel word and gratuitous mention of class, wealth, and status.  It'll end up looking like a FOIA request about Area 51. 

Stylistic criticism aside, the whole thing is also full of contradiction and fallacy, but if you want a point-by-point rundown, I'd be happy to give one later.  But for now, I'll keep this narrow, because it's going somewhere eventually, and I'd like to still have an audience by the end.  In the article, the author makes the following assertion:

Whenever The Fed buys securities in the open market, it pays for them with money that it creates out of thin air with a keystroke.  It does not draw the money from some reserve account that is limited in size.  It is "new money" that did not exist prior to the keystroke that created it.  With any of its purchases of securities, the Fed provides loanable funds to banks that were not saved by any saver.

From a certain point of view, this is technically correct.  The cash did not exist prior to the purchase.  But cash and money are not the same thing.  Cash is just a measure of the value that money has in an economy.  But the Fed's creation of cash out of thin air did not add to the overall value of wealth in the economy.  It just changed the relative value of the ratio between cash and money.  Look at it this way:

Courtesy Hasbro

Say you're playing Monopoly on a table, with a real game set.  I know, I know, it takes so long, and everyone always fights, and there are better things to do.  It's sort of like life in that way.  But say there's a blizzard, and the TV's out, and you've worn the spots off of all the decks of cards in your house, so you're left with playing Monopoly.  After a while, the banker gets crazy, and decides to add an extra zero to some of the money.  For a while, making change might get a little tricky, but you'll keep playing.  Then say the banker adds some more, and some more, and some more, until every bill in the set has an extra zero on it.  The banker has undeniably created more cash out of thin air.  But the amount of wealth has not changed.  There are still the same number of bills, same number of cards, and same amount of property.  After a while, the game will get pretty dumb, and even staying at a hotel on Boardwalk won't hurt.  Eventually, everyone will either tire of the game, or just add an extra zero to all the bills to restore balance between cash and wealth.  What was gained by this magical creation of cash?  Not a darned thing, but a few extra hours of frustration, and damaging the resale value of the set. 

Courtesy Hasbro

Now, say you could change the game and actually affect how it plays.  What sort of rule changes could you make that would actually increase the wealth available?  First, you could tinker with the "zoning code" of the game.  You could add more houses and hotels to the available set.  You could even increase the number that can be put on a property, and correspondingly increase the amount you can charge.  Second, your mini Atlantic City could "annex" more property, increasing the size of the board and the available property to buy and charge rent on.  But perhaps the simplest hack, one that doesn't require printing a whole new board or figuring out how to build more little plastic houses, also happens to be my favorite "house rule:"  Put all of the tax money collected in the game in the middle, and whomever lands on Free Parking gets a tax refund.  What good does putting your $150 income tax in the bank do for anyone, if it can't come back to someone who can turn it around into putting houses on Connecticut and Oriental? 

Read this book.

Not that the idea of fixing the economy by toying with the value of money is a new one.  According to Amity Shlaes in The Forgotten Man, during the Great Depression, Secretary of the Treasury Henry Morgenthau, Jr. related the story of President Roosevelt deciding to increase the price of gold by 21 cents, because, in the President's words, "It's a lucky number, because it's three times seven."  Another time of economic trial, before depressions were called "depressions," was the Panic of 1893.  The Panic happened, as they often do, as a result of the bursting of a bubble, in this case a bubble that developed in overbuilding railroads.  Another major contributing factor was a long period of low inflation, and even deflation, of the currency.  The panic, combined with monetary issues, gave rise to a populist movement, of which a major goal was "Free Silver." 

Free Silver was a movement that sought to include silver in the pricing mechanism of the dollar, which to that point had been based on the price of gold.  At the time, the gold mining industry was slowing down significantly, while silver was so plentiful that many mines lay empty because it cost more to mine than you could sell the silver for.  The ultimate goal of the populist movement, of which the rural farming population was a significant portion, was inflation.  In the big picture, inflation helps debtors, while deflation helps borrowers, and folks who were still paying down land that they had bought in the rapid expansion of the nation in the previous decades definitely didn't mind any help in paying the mortgage, so to speak. 

Going back to our Monopoly example, let's say you're playing the long-form version of the game, and happen to land on Boardwalk, which the bank still owns.  The $400 price tag is a lot of scratch.  What if you could set up the purchase on an installment plan of a $20 every turn for 20 turns?  That would be a much easier decision, wouldn't it?  Three turns after this agreement, though, is when our crazy banker starts putting zeroes on the money.  Then each $20 becomes a $200 bill, and you can pay off the "mortgage" on Boardwalk in a couple turns, and be free and clear 15 turns earlier than the banker was expecting full payment.  Similarly, if the crazy banker scratched out zeroes, causing deflation, those two former-$100 bills you'd have to start paying your mortgage with would run out pretty quickly. 

William Jennings Bryan

So in the 1890s, the people who owed the most money – folks who had purchased property like farmers being a large number of them – wanted a monetary policy that included silver to inflate the currency and be out of debt that much easier.  Of course the evil "Eastern Banking Establishment" would lose a lot of money, so clearly they were behind keeping gold as the only measure of the dollar.  The Populist movement beginning in the Panic of 1893 gave voice to perhaps the most well-known populist in history, William Jennings Bryan of Nebraska.  He was noted for soaring oratory, and was even nominated to be the Democratic Party's candidate for President once in Denver, although that was 15 years after the Panic. 

In a sense, this all sounds kind of familiar, doesn't it?  Of course, nowadays, the biggest debtor in the country isn't landowners (although that's not to be discounted with the bursting of the housing bubble), and a growing global market has helped the farm economy improve with higher prices.  The biggest debtor in the country, as you may have guessed, is the US Government, of course.  So it's no wonder they'd want to tinker with the price of money, is it?  Keep that in mind next time you read about the Fed tinkering with interest rates or buying debt. 

Oh, by the way.  In the year after the Panic of 1893 was the midterm election of 1894.  As Michael Barone was quoted in the Wall Street Journal saying, during that election, the Republican Party gained 130 seats on the Democrat and Populist parties, to take a 151-seat edge in the House of Representatives, or nearly three-quarters of the total seats in the House, making that election the tsunami of all electoral tsunamis. 

Take from that what you will, and please pass the dice.  I think it's my turn to roll.  

Tuesday Roundup

Happy Tuesday, all!  We'll kick off today's roundup with a little international flavor...

The European Union's budget chief, Janusz Lewandowski, has started a bit of a firestorm over comments in preparation for a review of farm subsidies in the EU.  In addition to seeking cuts, he wants to reduce or eliminate rebates to nations that don't receive as much subsidy allocation, such as Britain.  Countries in a united economic bloc, with different geographies and different labor markets, trying to figure out how to agree on agricultural subsidies?  Pass me the popcorn, because this stands to get interesting. 

Flooding that has destroyed this year's crops in Pakistan stands to do the same to next year's wheat crop as well.  According to the AP (via MSNBC), some areas are still underwater, and even if the floods hadn't taken away or destroyed the seed for next year, the ground wouldn't be ready for the fast-approaching Pakistani planting season.  Yes, that's even more troubles for the international wheat market.

Back on US soil, estimates on the corn crop are still uncertain, according to AgriNews online, which, coupled with high demand, are causing some unsteadiness in the prices of the commodity.  In the meantime, with the recent egg recalls, egg farms in Connecticut are experiencing increased interest in folks looking to buy their eggs.  Sure, there is a "local food" aspect to this, as the Fairfield Patch notes, but it seems pretty cut-and-dried to me: A reduction in supply, no matter how it's achieved, is going to result in better prices on the remaining supply, provided demand remains the same.  The story mentions increased demand, of course, but it's not the demand that's increasing - it's just moving to a new supply.

Finally, Indiana Biofuels has an interesting video describing the process by which ethanol fuel is made.  It's entertaining AND informative!  (Also, it kind of makes me want to get back to home-brewing beer, for some reason.)

Have a great day, everyone!

If You Can't Beet 'Em...

Photo courtesy commons.wikimedia.org

In my part of the country, sweet corn season is fading into green chile season.  The pickups in the parking lot of the local farmers market are giving way to the roasting drums in front of grocery stores.  Such is the rhythm of late summer in the Rural Republic.  All summer, though, I’ve been struck with amazement with the existence of corn.  It truly is a wonder, and a testament to the ingenuity of mankind.  Ancient American peoples cross-bred grasses that more closely resemble sorghum or wheat into a completely alien crop with multiple ears of seeds along the stalk, rather than the traditional position of the seeds at the top, and then developed methods to process the corn to maximize the amount of nutrition that could be gained from it.  Over time, the crop spread all over the Americas, and was turned from a tropical plant to a reasonably hardy one in the temperate climes.  Modern breeding has only made the crop even more productive and universal.  Similarly, the venerable green chile was developed more recently through careful breeding to perfect the plant into “New Mexico #9,” a chile that’s as much a part of the culture of its eponymous state and Southern Colorado as it is a part of its cuisine. 

Photo courtesy commons.wikimedia.org

These are just two illustrations of the ancient art of developing agricultural crops to feed the world that’s gone on all over the world for nearly 12,000 years.  New crops with new strengths are still being developed in the traditional way to this day.  But in the 21st Century, we’re learning to harness the science of genetics to supplement the art.  It’s quite a controversial subject, for various reasons in various circles, though it doesn’t necessarily need to be that way.  This summer in particular has been a hot one in the war over genetically modified food. 

On August 13th, a district court judge in San Francisco ruled that the Animal and Plant Health Inspection Service (APHIS), a part of the US Department of Agriculture responsible for regulating, among other things, genetically-modified crops, had erred in deregulating Roundup-ready sugar beets without accomplishing a full Environmental Impact Survey (EIS).  As a result, the judge allowed for the crops in the ground to be harvested, but ruled that Roundup-ready beets could not be planted again next year. 

This ruling stands to cause a few issues in the sugar market.  Sugar beets account for 50% of the national sugar supply, and 95% of all sugar beets harvested in the US are genetically modified.  It’s more than a question of where we get the remaining 47.5% of next year’s sugar supply, however.  You see, beets are a biennial crop, meaning they only produce seeds after their second growing year.  As a result, traditional seeds that would have to be planted next year would have to be produced by seed crops of sugar beets that were planted over a year before this decision was made.  Brilliant! 

It gets even better.  I’ll let Blake Hurst, writing in the Journal of the American Enterprise Institute, have the punch line:

Photo courtesy commons.wikimedia.org

Because of the crop’s biennial nature, it’s not clear that this decision makes any sense at all. Sugar beets are harvested in the first year after planting, before they produce pollen, so they can’t contaminate neighboring crops. Oh, not so quick, White says. Sometimes beets undergo a process called bolting, and produce pollen in the first year of growth. And sometimes weed beets grow in fields, shedding pollen as well. Well, yes, but we eat the roots and leaves of table beets and Swiss chard, so even if they have been exposed to pollen from rambunctious bolting beets, it doesn’t affect the roots or foliage of that year’s crop. If we ate the seeds from table beets, we could be exposed to the herbicide-resistant genes, but we don’t. Incidentally, the sugar molecule, sucrose, is identical whether it comes from GM beets, conventional beets, or sugar cane. You can’t find, detect, test, or taste a difference.

Basically, APHIS performed the required Environmental Assessment, but, given the biological facts of beets and their relatives, determined it would be absurd to go into a long, costly EIS process.  Despite the inability to prove any potential damage whatsoever by GM beet crops, however, the District Judge ruled in favor of the organic farmers and environmental groups who reflexively filed the suit. 

The ruling is even more surprising in light of a ruling in a similar case heard by the Supreme Court earlier this summer.  This case was filed regarding Roundup-ready alfalfa, and had incredibly similar structure, in that the complaint was filed that APHIS failed to complete an EIS after the earlier Environmental Assessment was completed.  From the New York Times:

Photo courtesy commons.wikimedia.org

"In its first ruling on genetically engineered crops, the Supreme Court today overturned a lower court's decision prohibiting Monsanto Co. from selling pesticide-resistant alfalfa seeds until the government completes an environmental impact study."

In this case, Justice Alito, writing in the 7-1 majority, ruled the injunctions against Roundup-ready alfalfa were too restrictive, writing "An injunction is a drastic and extraordinary remedy, which should not be granted as a matter of course."  (The 9th Justice was Stephen Breyer, who recused himself because his brother wrote the initial District ruling on the alfalfa).  

In responding to the alfalfa decision, the Spokane Spokesman-Review brought the issue around to the larger issue of genetic modification:

According to Mike Kahn, associate director of the Agricultural Research Center at Washington State University, most of today’s soybeans grown in the United States have been engineered with a similar protein that allows them to survive the herbicide that kills adjacent weeds. Corn and cotton benefit from similar biotech protection against enemy bugs. The science has been well honed to achieve a specific, intended purpose without unleashing menacing consequences.
Not that critics don’t have valid concerns that wandering bees could spread unwanted pollen from engineered crops to nearby fields, thus tainting neighboring farmers’ organic-certified or export-bound crops. There are tested strategies for addressing those concerns, however.
Private agriculture researcher Alan Schreiber, who also raises both organic and conventional crops in the Tri-Cities area, reacted unequivocally to Monday’s ruling: “It’s a triumph of science and reason and logic over hysteria.”

The basic situation is that the environmental groups and organic farmers, as a matter of course, view all genetically-modified crops as a direct threat and try to use the justice system to prevent their use, while the USDA, as a matter of course, views all genetically-modified crops as plant pests until proven otherwise, and then proves otherwise.  As a result, they’re heavily regulated and controlled until tests sufficiently prove that the crops pose no adverse effects.  Due to all of this testing, APHIS has apparently determined that the EA is all that’s necessary, and the EIS is generally expensive overkill.  While this may or may not have been true regarding alfalfa, it seems that the biology of sugar beets and related crops justified the less-restrictive decision. 

I suspect that, after issuing their earlier decision and having it ignored by the same District Court, the Supreme Court may not be so willing to base their next decision on the question merely on the illegality of the injunction alone, and may indeed deal more directly with the question of approving genetically-modified crops.  Unless there’s a stay of the District ruling, watch for the price of sugar to rise

Drought Sparks Wheat Prices Ablaze

The Colorado wheat harvest is officially over and it is starting to wrap up across the country as well. With most of this year’s bumper crop in the bin there is nothing to do but sit back, watch the price of wheat fall to its cyclical lows and wait for this years harvest to be turned into flour, bread and Smack ‘Ums. But wait, hold the phone! Even with reports of bin busting yields and an estimated harvest of 2 billion bushels -1.95bb were expected- the price of wheat is headed through the roof! My home state of Colorado even reported record breaking production of 103.5 million bushels. So what gives?

Let’s look at the crop itself. Wheat accounts for 20% of the world’s caloric intake. One crop makes up 1/5 of what we eat in the form of cakes, bread, flour, pasta, ect. On average the world produces somewhere around 600 million metric tons. According to the FAO, four countries produce the lion’s share for the world: China, India, Russia and the US. In 2009-2010 these counties produce around 318 million tons. That is approximately 10.6 billion bushels for all the Americans out there. On the flipside, there are countries around the world that do not grow enough wheat to meet their consumption needs. Among these are two already mentioned, India and China. Imports are widely distributed throughout the world; the regions that import the most wheat -about 25% of all imports- are North Africa and Middle East markets.