Thursday, October 28, 2010

Countdown to November 3rd, How much is too much?

10/28/2010 Portland, Oregon – Pop in your mints…

How much is too much?  That is the question that the world is waiting for the FED to answer at its meeting on November 3rd.  How many dollars does the world need?  When should they be supplied?

Now that we have at least a baseline understanding of what money is, can you tell me how much money the world economy needs to operate efficiently?  Does it need $15 trillion, the CIA’s estimate of the narrow money supply (M1)?  How about $54 trillion, the CIA’s rough estimate of the global broad money supply (M3)?  How about $70 trillion, the CIA’s rough estimate of world gross domestic product?  Where does the CIA get their numbers, anyway?
The CIA's Economic Data Center!
The economists at the CIA do what any other self respecting economist does, they calculate data based on what just happened and bet it will keep happening, only more, or less, or the maybe same amount if it.  Of course, there is a simple, three word answer to this extremely important question posed above.  That answer is (or should be) WE DON’T KNOW.

Let me pose another question to bring this down to a more personal level, how much bread will you need this year?  How much milk?  Or if you own a car, how much gasoline will you need?  Can you give a precise answer for any of these personal needs?  Now make these estimates for your neighbors, your town/city/country.  Now that you are planning for your neighbors, etc., we need to determine inputs. We ask the now obvious questions, how much grain do we need to plant?  How many cows need to be born?  How much crude oil do we need to drill? 

Do we dare to venture a guess, knowing that the lives of others may depend upon these answers?  In a world of scarce resources, how do you allocate them to cover everyone’s needs for the coming year?  Give up?

The point is that no individual or group of individuals is equipped to give an adequate answer to these or any other questions.  There are simply too many moving parts, unknowns, and variables which are inherent in speculation regarding the needs of the future.  Every government that has attempted central planning on a large scale has only succeeded in one thing, increasing the general misery of their constituents with often disastrous human costs.  But that does not stop them from trying!
After a modest amount of sober thought on the matter, it may be logical that central planning for natural resources will lead to less than optimal utilization.  However, the premise that an individual or group of individuals can determine the right amount of money and credit available is widely accepted as sound economic doctrine on a global scale!  Yikes!!!  Anyone as intelligent as yourself, dear reader, will quickly realize that money is simply another resource, one which possesses certain attributes which we have taken great pains to explain.  The problem is that money is not just any ordinary resource.  Rather, it is the very resource which either directly or indirectly affects the allocation of every other resource on the planet.

Given the documented problems or and disasters caused by attempts at large scale resource allocation, what makes us think that central planning of money would turn out any better?  Given the inherent risk that goes along with nearly every human activity, the money supply, or rather, the relative purchasing power of a unit of money, NEEDS to be stable or reliably predictable.  In order for humans to plan and coordinate their activities in a coherent fashion, the money supply cannot be subject to wild swings, swings which the use of paper and electronic currency virtually guaranty.

Did you ever wonder why there are so many seeming contradictions and things that simply don’t make sense in our modern world?  If we grasp the primary contradiction, which is the notion that the money supply can and should be centrally managed, we can at least hope to make sense of the minor contradictions we observe every day and, in the best case scenario, avoid their damaging effects.

Stay Fresh!

David Mint

Key Indicators for Thursday, October 28, 2010

Copper Price per Lb: $3.78
Oil Price per Barrel:  $82.08
10 Yr US Treasury Bond:  2.71%
FED Target Rate :  0.19%
Gold Price per Oz:  $1,328
Unemployment Rate:  9.6%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,126
M1 Monetary Base:  $1,460,900,000,000
M2 Monetary Base:  $7,960,300,000,000