Thursday, September 30, 2010

Watch one of the worlds only professional economist-comedian (no, that is not redundant)

HT: Greg Mankiw

Frederic Bastiat violation!! Attention Broken Window Fallacy fans!!

Destroying perfectly good signs for no good reason. Ok, they cite a reason, but really, is it a good one??...I guess it will "stimulate" the economy by providing jobs for the sign makers, and the crews who will take down and then install the new signs...
""NY Daily News -- New York City will change the lettering on every single street sign - at an estimated cost of about $27.5 million - because the feds don't like the font. Street names will change from all capital letters to a combination of upper and lower case on roads across the country thanks to the pricey federal regulation (see photo above).  By 2018, MADISON AVE. will become Madison Ave. and will be printed in a font called Clearview, the city Department of Transportation says. The Federal Highway Administration says the switch will improve safety because drivers identify the words more quickly when they're displayed that way - and can sooner return their eyes to the road." (Source Carpe Diem)
Perhaps the authorities should  read a little ditty called "The Broken Window" by Frederic Bastiat...
""Now, if James Goodfellow is part of society, we must conclude that society, considering its labors and its enjoyments, has lost the value of the broken window. From which, by generalizing, we arrive at this unexpected conclusion: "Society loses the value of objects unnecessarily destroyed," and at this aphorism, which will make the hair of the protectionists stand on end: "To break, to destroy, to dissipate is not to encourage national employment," or more briefly: "Destruction is not profitable."""

Wednesday, September 29, 2010

A short lesson on how US Treasury's work---It is very "interest"ing...

     The US government (all governments for that matter) finance spending through (1) tax receipts and/or (2) issuing promissory notes, called bonds, securities, Treasury notes, Treasury Bills ("T-Bills"), or some combination thereof.  All these names have significance but for this blog entry I will refer to Treasury Bills (T-Bills) or more simply as "Treasury's". 
     Treasury's are "marketable securities" and are very short-term in length (4weeks, 90 days, 180 days, 365 days).  They are considered debt instruments and are traded in secondary markets world-wide.  As such, they are subjected to the laws of supply and demand and each Treasury has a price attached to it. How is that price determined? Glad you asked. 
     Let's assume the government wants to raise some money from the market-place instead of printing it.  To do this they issue a Treasury Bill (or Note) with a face value of $100.  No one is going to pay $100 for a $100 dollar Treasury so the government has to sell it for something less than $100.  Assume the marketplace has determined the current market price for a $100 face value US Treasury is $90.  See the graph below:

     If I purchase this Treasury for $90 and can redeem it sometime in the future for $100 then I have made $10 on the transaction.  If you convert this gain into a rate of return, or interest rate, we have a percentage gain of 11.11%! ($10 gain divided by my investment of $90 times 100 equals 11.11%).  So my Treasury is priced at $90 and has a potential gain of 11.11%.  Good enough...But we are not done.
     Because Treasury's are traded in secondary markets world-wide, the price of the Treasury is subject to change. Assume there is economic uncertainty in other developed countries and their markets are in turmoil.  Investors look not only for high rates of return, but stability and some level security for there money. THE safest investment is US government debt, i.e. Treasury's and is considered a safe-haven to park financial capital.  The turmoil in foreign markets creates an increase in demand for Treasury's.  See graph below to see the effect on the market for US Treasury's:
     Notice the Price of Treasury's has increased to $95 (I made the new price up) relative to the previous price of $90.  NOW the $100 face-value Treasury is priced at $95.  So now the owner of this Treasury can redeem it for  $100.  His profit would be $5.00.  Converting this into an interest rate, or rate of return, we can see the effective interest rate is now 5.26% ($5.00 divided by $95 times 100 = 5.26%). This is considerably less than the previous effective interest rate of 11.11%. 
     IMPORTANT observation:  As the price of the Treasury INCREASED the Interest Rate earned from it DECREASED!  There is an inverse relationship between the price of a Treasury and the Interest Rate it earns.  Repeat that to yourself---it is important. 
    Currently there is significant demand for US Treasury's because they are seen as a safe-haven investment, and it is driving the price of them up and decreasing the yields (rate of return).  The Federal Government can borrow money at a VERY low interest rate (click HERE for latest rates).
   IF investor confidence improves and stocks and/or other investments become more attractive then the demand for Treasury's will decrease, the price will decrease and the interest rate will increase.  This is a negative for the Federal Government because they will have to offer higher interest rates to attract money to finance deficit spending. This will increase the interest payment outlays in the federal budget.
    Hopefully you learned a little bit of how Federal debt instruments work.  If is understood by the few, but it affects the many...

Tuesday, September 28, 2010

Employing you costs much more than the wage you are paid---find out what the TRUE cost of hiring you is

How Much Does It Cost to Employ You?
I can't import this calculator into the blog, so you will have to visit the site. Insert your wage and other compensation you may receive and get the total price to hire you.  A great way to see how much it ACTUALLY costs an employer to employ you.  Their cost is NOT just the wage they pay you. There are many other costs/taxes associated with hiring you.  Go to the link and you can see them! Very enlightening...

Employer Cost Calculator

Monday, September 27, 2010

Segway company owner dies---after driving a Segway over a cliff---you can make this stuff up and it is NOT an onion creation

This is soooo Paul Blart, Mall Cop sounding and I can't get the visual I have created for myself  out of my mind...

Tycoon who took over Segway firm dies in freak accident after riding one of the machines off hillside and into a river
""The multi-millionaire owner of the Segway company died in a freak accident yesterday when he rode one of the high-tech two-wheel machines off a cliff and into a river.

Former miner Jimi Heselden, 62, plunged into the River Wharfe while riding around his West Yorkshire estate in Boston Spa on a rugged country version of the Segway.

He bought the firm last December and was using one of the machines - which use gyroscopes to remain upright and are controlled by the direction in which the rider leans - to inspect the grounds of his property.""

Sunday, September 26, 2010

Here is the deal--I will borrow a dollar from you and pay you interest. I will then give you the dollar back and borrow it again from you and pay you interest..AGAIN...I am such a dealmaker!!!

    If we ran our households like this a bankruptcy judge or a personal finance counselor would shake their head and we would feel shame...We actually give foreign aid to China! It is only $68 million dollars but...REALLY??  $68 million dollars would give 6,800 students $10,000 each for college scholarships.
""It's almost as if Japan (Or the U.S.) gives aid money to China, but then finances this charity by taking a loan from China, then paying interest to China on the charity it provided... to China. Yes the world is a complex place, but it's just an extremely peculiar arrangement here.""

    If I thought for ONE MINUTE that raising taxes at this time would actually improve our federal budget situation, I would support it...But can anyone who is reflectively in favor of increasing taxes, honestly say with a staight face they believe the extra revenues will be spent in a responsible manner by members of EITHER party?  We cannot operate in a vacuum and only think about increasing revenues. There are two sides to the equation and I don't believe the spending and/or debt side is being addressed in any serious way.  Please read the above excerpt again before answering...I am not anti-government or pro-government--I just want fiscally responsible government that follows basic accounting rules and is transparent.  I am certain we are getting neither...Tell me where I am wrong--I am open to ideas...Extra credit for students for helping me out...
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