This is from Alan in the comments about the "The Fed, Inflation, and a Solution..." post. I think it's a good question, so I'll leave it up for all. Alan, my thoughts are in the comments. The question:
What makes a house an appreciable asset? Why would a house be worth more today, than when it was brand spankin' new?
Apart from factors that are largely outside of any one person's control, i.e. you got lucky (or were clear enough in your foresight) that there was a significant amount of development around your house makes the area more attractive than when you bought it, all I can come up with would be that damn inflation...
Wednesday, February 23, 2011
Friday, February 18, 2011
Food for Thought
I received this little nugget today:
WSJ NEWS ALERT: China Central Bank Raises Reserve Requirement
__________________________________
News Alert
from The Wall Street Journal
China's central bank will raise banks' reserve-requirement ratio by half a percentage point, the second such increase this year.
The increase, which takes effect next week, is the latest move by China to curb inflation. The consumer-price index rose 4.9% in January, up from December's 4.6% rise.
China's official reserve-requirement ratio for most banks will be 19.5% after the latest move takes effect, according to the central bank.
http://online.wsj.com/article/SB10001424052748704900004576151783089244032.html?mod=djemalertNEWS
My thoughts about this:
1) Hmmm. China's version of the Fed is raising borrowing rates because inflation is going up too fast there.
2) The US buys a LOT of stuff from China. In 2010 we bought $273 BILLION more worth of stuff from China than they bought from us. (http://www.census.gov/foreign-trade/balance/c5700.html#2010)
3) Is inflation in China a result of easy money made available in the US? I think probably.
4) Is that good or bad for us? Stream of consciousness here -- We buy 273 BUSD more than we get... Now China has 273B. China uses the 273B to invest/buy US Treasury Bonds. US has 273B and owes China 273B plus we pay China interest on these bonds. Thinking about an interesting point Jesse said in his comments on the last post, if inflation outpaces the interest rate, do we come out ahead? Due to inflation, China gets a lot of cash from real US businesses and workers. They lend this money to US gov't. US pays a relatively lower amount than is coming in if rates are lower. Seems like we are transferring the wealth of the US to China. China is not under any obligation to invest in US Treasury bonds. If the value of the dollar starts to go down, they can invest in Swiss Francs for example, or buy real companies. I don't know if I'm on to anything here. Starting to ramble. Brain getting bored with this idea....
5) Does inflation in China cause a delay or even prevent inflation in the US and screw up my last idea? I think no. Real world example:
Carson Rotisseries has grills made in China and sent to the US to sell. To have them made there, the materials needed to make up the grill are bought in China. Inflation is happening there, so costs to make the grill go up. This means Blake, Glenn, and Vogel have to sell them for a higher price in the US to maintain their same profit margin or they start to lose money. Price for a grill goes up, so now I have to pay more for the grill. So I charge more for audits to make up that money, and on and on. Damn it! This inflation has gotten back to me again!
Now it seems like the government of China gets the secret tax that the Fed made up for US Government and US big banks. Ruh roh.
New investment idea: BUY MUTUAL FUNDS IN CHINA
WSJ NEWS ALERT: China Central Bank Raises Reserve Requirement
__________________________________
News Alert
from The Wall Street Journal
China's central bank will raise banks' reserve-requirement ratio by half a percentage point, the second such increase this year.
The increase, which takes effect next week, is the latest move by China to curb inflation. The consumer-price index rose 4.9% in January, up from December's 4.6% rise.
China's official reserve-requirement ratio for most banks will be 19.5% after the latest move takes effect, according to the central bank.
http://online.wsj.com/article/SB10001424052748704900004576151783089244032.html?mod=djemalertNEWS
My thoughts about this:
1) Hmmm. China's version of the Fed is raising borrowing rates because inflation is going up too fast there.
2) The US buys a LOT of stuff from China. In 2010 we bought $273 BILLION more worth of stuff from China than they bought from us. (http://www.census.gov/foreign-trade/balance/c5700.html#2010)
3) Is inflation in China a result of easy money made available in the US? I think probably.
4) Is that good or bad for us? Stream of consciousness here -- We buy 273 BUSD more than we get... Now China has 273B. China uses the 273B to invest/buy US Treasury Bonds. US has 273B and owes China 273B plus we pay China interest on these bonds. Thinking about an interesting point Jesse said in his comments on the last post, if inflation outpaces the interest rate, do we come out ahead? Due to inflation, China gets a lot of cash from real US businesses and workers. They lend this money to US gov't. US pays a relatively lower amount than is coming in if rates are lower. Seems like we are transferring the wealth of the US to China. China is not under any obligation to invest in US Treasury bonds. If the value of the dollar starts to go down, they can invest in Swiss Francs for example, or buy real companies. I don't know if I'm on to anything here. Starting to ramble. Brain getting bored with this idea....
5) Does inflation in China cause a delay or even prevent inflation in the US and screw up my last idea? I think no. Real world example:
Carson Rotisseries has grills made in China and sent to the US to sell. To have them made there, the materials needed to make up the grill are bought in China. Inflation is happening there, so costs to make the grill go up. This means Blake, Glenn, and Vogel have to sell them for a higher price in the US to maintain their same profit margin or they start to lose money. Price for a grill goes up, so now I have to pay more for the grill. So I charge more for audits to make up that money, and on and on. Damn it! This inflation has gotten back to me again!
Now it seems like the government of China gets the secret tax that the Fed made up for US Government and US big banks. Ruh roh.
New investment idea: BUY MUTUAL FUNDS IN CHINA
Wednesday, February 16, 2011
The Fed, Inflation, and a Solution...
Let's kick it then...
The Federal Reserve (http://en.wikipedia.org/wiki/The_Federal_Reserve) is a bit of a mystery to me. What do they do? From what I can gather, they are basically a bank for banks. They lend money to banks like Bank of America who lend money to companies and people like me. My question is where does the Federal Reserve get this money to lend to big banks? I think the answer is: they make it out of thin air. This seems crazy to me. Is this true economics PhD's?
That's pretty bad-ass if true. I wish I could just decide that I have a billion dollars and lend it to people and charge them interest. But let's take it a step further. If you can just make money out of thin air [side note: google "the Gold Standard" which we are NOT on], what's the point in charging interest to the banks you lend this made up money to? Those banks then charge interest to companies and people like me. So I'm paying interest for money that was basically free to someone else? Enter an interesting fact: "The U.S. Government receives all of the [Fed's] annual profits, after a statutory dividend of 6% on member banks' capital investment is paid, and an account surplus is maintained. The Federal Reserve transferred $78.4 billion to the U.S. Treasury in 2010" (source: Wikipedia).
So--
Winners - 1) US Government, 2) "member banks." Who are the member banks? Not so clear to me, but it seems like they are private banks like Bank of America.
Losers - me, US businesses borrowing money, and everyone else borrowing money
So you hear about the Fed having power over interest rates, raising them, lowering them etc. This is to control the economy in a way. If they lend money (which they have created out of thin air) to big banks without charging much interest, the big banks will lend that money to us at a low interest rate, and we'll use that money to buy shit. Bam, economy stimulated. If they raise the rates on the money they lend to big banks, the banks raise the rates for loans to us, and we stop buying shit. Pow, economy cooled down.
Right now the rates are really low. So what does that mean? The Fed is making lots of money out of thin air and lending it to banks to lend to us to spend. That's all sounds great, but making a ton of money out of thin air and just giving it away doesn't make us any better off. Remember my first post? Money has no value in and of itself. Creating a ton of money doesn't do anything but make the prices of real stuff like houses, food, etc. to go up (i.e. causes inflation). You and I have no power to stop this inflation because the decision to create all this money is not in our hands. Seems to me like if I'm the US Government or big banks, and I want some money for _____________ (project I don't want to raise taxes for / saving my bank from collapse), a great option is to make this money out of thin air. The catch is, you and I actually have to WORK (create something that actually has value) for our money to pay back these loans. We do not have the luxury of just deciding we have a billion dollars. So, does this inflation = secret tax? Sure would be convenient if you are a US Government politician. You get more money based on people who created real value to pay you the money, but you didn't raise taxes. Inflation happened. You don't control that. Do you???
Does this make sense? Could it be true or am I just a conspiracy theorist? I hope I'm wrong! Please tell me where I'm wrong.
So knowing this, can we somehow save ourselves? My idea: if we know the Fed is making money now, we know this WILL lead to inflation. If they are doing this at an unprecedented rate, we should expect really high inflation. So right now, stuff is cheap because we are basically in a recession, and money is being lent at low rates. In the future, if my assumptions are right, stuff is going to get more and more expensive quickly. So what should we do? Buy big ticket items NOW that are relatively expensive and will grow in value over time. BUY HOUSES. Am I right?
Please enlighten me homies.
The Federal Reserve (http://en.wikipedia.org/wiki/The_Federal_Reserve) is a bit of a mystery to me. What do they do? From what I can gather, they are basically a bank for banks. They lend money to banks like Bank of America who lend money to companies and people like me. My question is where does the Federal Reserve get this money to lend to big banks? I think the answer is: they make it out of thin air. This seems crazy to me. Is this true economics PhD's?
That's pretty bad-ass if true. I wish I could just decide that I have a billion dollars and lend it to people and charge them interest. But let's take it a step further. If you can just make money out of thin air [side note: google "the Gold Standard" which we are NOT on], what's the point in charging interest to the banks you lend this made up money to? Those banks then charge interest to companies and people like me. So I'm paying interest for money that was basically free to someone else? Enter an interesting fact: "The U.S. Government receives all of the [Fed's] annual profits, after a statutory dividend of 6% on member banks' capital investment is paid, and an account surplus is maintained. The Federal Reserve transferred $78.4 billion to the U.S. Treasury in 2010" (source: Wikipedia).
So--
Winners - 1) US Government, 2) "member banks." Who are the member banks? Not so clear to me, but it seems like they are private banks like Bank of America.
Losers - me, US businesses borrowing money, and everyone else borrowing money
So you hear about the Fed having power over interest rates, raising them, lowering them etc. This is to control the economy in a way. If they lend money (which they have created out of thin air) to big banks without charging much interest, the big banks will lend that money to us at a low interest rate, and we'll use that money to buy shit. Bam, economy stimulated. If they raise the rates on the money they lend to big banks, the banks raise the rates for loans to us, and we stop buying shit. Pow, economy cooled down.
Right now the rates are really low. So what does that mean? The Fed is making lots of money out of thin air and lending it to banks to lend to us to spend. That's all sounds great, but making a ton of money out of thin air and just giving it away doesn't make us any better off. Remember my first post? Money has no value in and of itself. Creating a ton of money doesn't do anything but make the prices of real stuff like houses, food, etc. to go up (i.e. causes inflation). You and I have no power to stop this inflation because the decision to create all this money is not in our hands. Seems to me like if I'm the US Government or big banks, and I want some money for _____________ (project I don't want to raise taxes for / saving my bank from collapse), a great option is to make this money out of thin air. The catch is, you and I actually have to WORK (create something that actually has value) for our money to pay back these loans. We do not have the luxury of just deciding we have a billion dollars. So, does this inflation = secret tax? Sure would be convenient if you are a US Government politician. You get more money based on people who created real value to pay you the money, but you didn't raise taxes. Inflation happened. You don't control that. Do you???
Does this make sense? Could it be true or am I just a conspiracy theorist? I hope I'm wrong! Please tell me where I'm wrong.
So knowing this, can we somehow save ourselves? My idea: if we know the Fed is making money now, we know this WILL lead to inflation. If they are doing this at an unprecedented rate, we should expect really high inflation. So right now, stuff is cheap because we are basically in a recession, and money is being lent at low rates. In the future, if my assumptions are right, stuff is going to get more and more expensive quickly. So what should we do? Buy big ticket items NOW that are relatively expensive and will grow in value over time. BUY HOUSES. Am I right?
Please enlighten me homies.
Understanding Money
Money has little or no intrinsic value. It's a piece of paper or a shiny rock or (more likely) a number on a screen. You can't eat it (at least you shouldn't...), drink it, live in it, etc. So why do we want it? Because it allows us to get all those things. It's a means to an end.
But it's a very important means to an end, because it stores the value of our work so we can buy stuff today, and more importantly, tomorrow! I would like to protect what I have and make it grow if possible. Not in a greedy way, but in a not-stupid way.
I've been thinking a lot about our recent economic meltdown which started freaking people out in 2008 (but really probably started way before then). Maybe it's even continuing now despite apparent improvement in the worldwide stock markets. I want to understand what happened, why it happened, how the hell I can avoid being damaged by one, and maybe how I could even profit from recognizing one. So I've been listening to podcasts, reading books, watching videos, and other such knowledge gathering to see what I can figure out. Undoubtedly, it's complicated, and there's no single answer to why something like that could happen. In the mix are greed, ignorance, fear, and manipulation for sure. Nasty stuff.
Maybe writing down some thoughts on this blog will be interesting and possibly helpful in helping me manage my finances. I have some thoughts coming down the pipe for conversation. I also know I have a lot of smart friends, and I'm interested in their opinions.
So hit me with some knowledge.
IN:
Me
Cool/Smart People
OUT:
Bad guys
Ignorant people
But it's a very important means to an end, because it stores the value of our work so we can buy stuff today, and more importantly, tomorrow! I would like to protect what I have and make it grow if possible. Not in a greedy way, but in a not-stupid way.
I've been thinking a lot about our recent economic meltdown which started freaking people out in 2008 (but really probably started way before then). Maybe it's even continuing now despite apparent improvement in the worldwide stock markets. I want to understand what happened, why it happened, how the hell I can avoid being damaged by one, and maybe how I could even profit from recognizing one. So I've been listening to podcasts, reading books, watching videos, and other such knowledge gathering to see what I can figure out. Undoubtedly, it's complicated, and there's no single answer to why something like that could happen. In the mix are greed, ignorance, fear, and manipulation for sure. Nasty stuff.
Maybe writing down some thoughts on this blog will be interesting and possibly helpful in helping me manage my finances. I have some thoughts coming down the pipe for conversation. I also know I have a lot of smart friends, and I'm interested in their opinions.
So hit me with some knowledge.
IN:
Me
Cool/Smart People
OUT:
Bad guys
Ignorant people
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