What is Money? – Part II

10/22/2010 Portland, Oregon – Pop in your mints…

click here to see previous episodes in this series:
What is Money? - Part I

We left off yesterday leaving the comfortable place of thinking that we knew what money was to having to define something that we took for granted.  I do not blame you, dear reader, if you are content with the answer that you had slept comfortably at night knowing all of your life.  To grapple with this question is to question many things that we take for granted.  It can be an unsettling experience.

I was first unsettled by this same question in a class on Monetary Policy at the Universitat de Barcelona in the Spring of 2004.  The professor held up a small jar full of shredded green paper and asked us if we knew what it was?  The answer, it turns out, is that the jar was full of $50,000 worth of US Dollars that had been removed from circulation and destroyed.  Simple enough, right?  Dollar bills wear out, you have to replace them.  However, her (the professor’s) point was that what we use as money does not exist in a real, tangible sense.  It is an invention created to meet the policy demands of the fiscal and monetary authorities.  It is an invention that can be created and destroyed at whim.

Shredded Dollars!

I was taken aback, trying to catch my breath!  She went on to  explain that Corporations, businesses, etc. are simply “money machines” which strive to minimize money inputs and maximize money outputs.  The difference between the inputs and outputs is what we call profit.  This is obvious enough and it was logical that she would share this insight with our MBA class which was being trained to manage said Corporations.

Something in my mind short circuited in trying to reconcile the logic of a Corporations’ reason for existence being to create money and then seeing that same money end up shredded and destroyed in rather large quantities.  The motor of my mind was so seized up that I managed to miss nearly every question that day on a pop quiz that tested our knowledge on “What is the proper reaction, in terms of monetary policy, to various economic data points?  Should you move to increase or decrease the money supply?”  The questions I did answer correctly were likely due to my misunderstanding the question (I was still learning Spanish and Catalan) rather than any grasp of accepted policy remedies.

In retrospect this day was the day that completely changed the way in which I viewed US Dollars, Euros, and all other paper currencies of the world.  You see, I was answering all of the questions about monetary policy using the assumption that the monetary authorities wanted to maintain the value of the currency that they were managing.  I was dead wrong.  So if they are not trying to maintain the value of these currencies, what are they trying to do?  What does it all mean?  Why do I have to wait until next week to know what money is?  I can't believe you are leaving us hanging like this!

Relax and enjoy the weekend.  This is a long journey!

Stay Fresh!

David Mint

Key Indicators for Friday, October 22, 2010

Copper Price per Lb: $3.78
Oil Price per Barrel:  $81.77
10 Yr US Treasury Bond:  2.53%
FED Target Rate :  0.19%
Gold Price per Oz:  $1,327
Unemployment Rate:  9.6%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,147
M1 Monetary Base:  $1,460,900,000,000
M2 Monetary Base:  $7,960,300,000,000

What is Money? - Part I

10/21/2010 Portland, Oregon – Pop in your mints…

We were reading today what a wonderful success TARP has been for you and I, fellow taxpayer!  According to Bloomberg, the government has “earned” $25.2 billion which translates into an 8.2% return on our investment over two years .  Thank goodness!  I was afraid the government was just throwing our money away.  Apparently the only better investment over the past two years would have been the S&P 500 and real money, Gold.

Does this mean that you and I, fellow taxpayers, should expect a dividend check in the mail in the near future?  Alas, that is not how the government operates.  According to Bloomberg this windfall is

“enough money to fund the Securities and Exchange Commission for the next two decades.”

Do you see how things operate, fellow taxpayer?  If the government cannot use the gains to do something productive, which by virtue of being the government it cannot, a rational logic would suggest that the returns on investment be distributed in the form of dividends to the “investors” (or in this case the reluctant taxpayer).  But the government takes the absurdity of TARP and it’s aftermath a step further and, as the article suggests, it takes its good fortune and continues to fund an inept agency (the SEC) which has essentially failed to protect the interests of the average taxpayer throughout this financial crisis.  It would assure two more decades of clumsy games and busy work that pass as “market oversight.”

Ah, the wonder of it all!  Meanwhile they are still rioting in France to retain their right to retire at age 60.  I pity the French government for directly fighting the masses on this issue when there is an easier way out, at least for the current government officials.  The truth is that this is the end game of all government entitlement programs when there is nothing left to pay them with.  Neither the masses nor the government should be in this sad situation to begin with.

But we must carry on.  Today we are going to begin to ponder the eternally important question that few people bother to ask and even fewer arrive at a satisfying answer.  What is money?  Today, most persons in would answer that money is a nation’s local currency.  In our case, the US Dollar which today is a Federal Reserve Note backed only by people’s faith that it will be accepted in exchange for goods and services and to cancel debts.

But is that a satisfactory answer?  On the surface, it is.  What is troubling is that there is a circular reasoning involved that goes like this.  “Why is this piece of paper money?  Because everybody says it is.”  But what happens when everyone decides that it is NOT money?  More tomorrow…

Stay Fresh!

David Mint

Key Indicators for Thursday, October 21, 2010

Copper Price per Lb: $3.74
Oil Price per Barrel:  $81.77
10 Yr US Treasury Bond:  2.47%
FED Target Rate :  0.19%
Gold Price per Oz:  $1,341
Unemployment Rate:  9.6%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,108
M1 Monetary Base:  $1,460,900,000,000

Key Statistics: Dr. Copper or Why are Copper Prices So Important?

10/20/2010 Portland, Oregon – Pop in your mints…

Today, we will ponder what the heck this guy is doing and why is it an important indication of where mankind is generally headed…

To hell in a hand basket?

No, this man is not stoking the fires of eternal punishment, he is merely smelting copper, the topic of today's Mint.

Copper is not simply something that pennies used to be made of (they are now mostly zinc and will probably be nothing more than colored steel in the near future).  Rather, the movements in its prices are considered by many to be better at predicting the trend of future economic activity than all of the predictions that the world’s leading economists can muster.  Hence its nickname, “Dr. Copper.”

Why is this?  To answer this, we need a basic understanding of man’s relationship to copper.  Since it burst on the investment scene approximately 7,500 years ago, people have found a myriad of uses for this element known as Cu on the periodic table of the elements.  It has been used in weaponry, tools, decorative objects, cooking and eating utensils, and money.  Its central useful attributes are that it is durable yet easily malleable, it binds well to other metals, and it is an efficient conductor of heat and electricity.

Given man’s longstanding relationship and experience with copper, taken together with it’s obvious utility and relative abundance, we can draw two conclusions which tell us why the relative price of copper is a great predictor of the trend of future economic activity.  First, nearly every society on earth knows what copper is and has found a use for it.  Second, copper is a basic raw material need for anyone undertaking a large scale modern construction project.  And just why would someone undertake a large scale modern construction project?  Today the answer may be because they are receiving a boatload of stimulus money to do so!  However, under normal conditions, it would be because they anticipate future demand for whatever wealth generating activity that construction project will be used for will be large enough to justify the expense.  Since copper is traded globally, we can infer that a rising relative copper price is indicative that a growing number of persons are undertaking large scale modern construction projects in anticipation of large scale future demand in many places on the globe.  Simple, right?

In layman's terms, demand for copper is the first signal that massive things will be constructed, things will be produced in large quantities, and hoards of people will buy and/or live in them.  Or what we define today, for better or worse, as economic growth.

Could all of these people purchasing and investing in copper be wrong about the scale of anticipated future demand?  Of course they could be.  If you pause and soberly reflect on life, speculation is implicit in all human action.  However, people investing their own money, especially a large amount of it on large scale modern construction projects, want as close to a sure thing as they can get.  They have done their homework and generally abort their plans quickly (i.e. before making a large copper purchase) if they reasonably see them as not likely to pan out.  Their decision to purchase copper is usually a large bet that things are going to get better.

To learn more about Dr. Copper, I suggest consulting the Wikipedia.  To see the latest news on the modern copper industry, I suggest the Kitco.com base metals site.

Copper, it’s not just pocket change anymore!

Stay Fresh!

David Mint

Key Indicators for Wednesday, October 20, 2010

Copper Price per Lb: $3.73
Oil Price per Barrel:  $80.11
10 Yr US Treasury Bond:  2.48%
FED Target Rate :  0.19%
Gold Price per Oz:  $1,337
Unemployment Rate:  9.6%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  10,979
M1 Monetary Base:  $1,460,900,000,000

Forclosure-Gate vs. Private Property: The Bedrock of Modern Civilization

10/19/2010 Portland, Oregon – Pop in your mints…

We ran across this today at The Big Picture by Barry Riholtz.  Foreclosure Fraud: “Systemic, Industrywide, Pervasive.”  Mr. Riholtz cites a Washington Post article which describes how the foreclosure process has now become an automated machine that is a nightmare for anyone who wants to legitimately contest a foreclosure filing.  Essentially law firms, hired by financial institutions, have hired what are affectionately called “robo-signers” to sign and process large volumes of documents without reviewing them.  This, undoubtedly, has led to errors in these very important filings.
The mind boggles at what the mere existence of “robo-signers” says about the present day financial and legal systems.  As if homeowner weren't in enough peril already.

Noah?

 What is more disturbing are reports that in an effort to speed up the process, persons have been thrown out of their homes without due process or access to the remedies that would be available to them.   Financial institutions and the law firms that represent them are driven by financial incentives to deny the troubled homeowner even the courtesy of a call back when trying to work out their situation.  Now certainly, these banks are overworked throwing families on to the streets and cannot be stopped to answer petty questions from the masses.

Aside from any moral judgments, which we should be careful to avoid due to the double minded thinking that they imply, there is a profound implication in standing by and watching this tsunami of foreclosures occur.  That implication is what all of this means to the sacred for the institution or private property, the bedrock of a capitalist society.  To paraphrase Ludwig Von Mises, a famous economist an founding father of the Austrian School of economics, we are not simply faced with a choice between Capitalism and Socialism as a basis for society.  Socialism is an economically untenable basis for society (i.e. there is no data with which to make productive decisions).  Therefore, the choice is between Capitalism (and by extension the institution of private property) or endless wars for scarce resources.  More on this later.

Why is the institution of private property literally the basis for modern (or any) civilization?  Rather than looking for an academic answer to this question, dear reader, simply ask yourself how many times you have thoroughly cleaned a public restroom without being paid to do it?  And how many times have you cleaned (or paid to have cleaned) a bathroom in your home or in a business that you own?  I rest my case.

Stay Fresh!

David Mint

P.S.  Keep your eye on the ball!

Key Indicators for Tuesday, October 19, 2010

Copper Price per Lb: $3.80
Oil Price per Barrel:  $82.63
10 Yr US Treasury Bond:  2.49%
FED Target Rate :  0.18%
Gold Price per Oz:  $1,366
Unemployment Rate:  9.6%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,143
M1 Monetary Base:  $1,460,900,000,000

Key Statistics - Don't Take Your Eye Off The Ball!

10/18/2010 Portland, Oregon - Pop in your mints...

After what seems an insufferable amount of bad news it is refreshing to see that the rescue of the 33 miners in Chile was an overwhelming success!

Photo courtesy of the guardian.co.uk

 You may ask yourself, given how dangerous and seemingly costly mining is, why do it?  Many asked the same questions regarding the extraction of oil after the BP disaster in the Gulf of Mexico this past summer.  While no one can fully answer this question and I believe that the full answer, like that of the reasoning of all human actions, is unknowable in that most who pause to even consider these matters limit the answer to their personal value judgments.

Instead of trying to understand a complete reasoning, I will simply attempt to explain the economic part.  I hope you will see that the men and women who mine, extract oil and other resources are larger heroes to humanity than firefighters or men and women in the world's militaries.  Not to minimize the heroics of public servants and soldiers, but I believe that the miners and oilfield workers do more on a daily basis to add to the day to day comfort that the West now enjoys and that 4 billion persons in the East are striving to, and will, enjoy.

In these chronicles we will look often at a set of data that I call "Key Statistics" as their price and/or percentage, as the data point may be expressed, have an impact of anyone who lives inside the world's financial system (i.e. anyone with a bank account).  These statistics are, at their current reported levels as of this writing:

Key Indicators for Monday, October 18, 2010

Copper Price per Lb:  $3.77
Oil Price per Barrel:  $80.80
10 Yr US Treasury Bond:  2.58%
FED Target Rate:  0.19%
Gold Price per Oz:  $1,358
Unemployment Rate: 9.6%
Inflation Rate (CPI): 0.1%
Dow Jones Industrial Average: 11,062
M1 Monetary Base:  $1,460,900,000,000

Sources for these indicators, if you want to check them regularly, are available by clicking on each to reach its linked source:

Copper Price per Lb:  Kitco
Oil Price per Barrel:  Yahoo Finance
10 Yr US Treasury Bond:  Yahoo Finance
FED Target Rate :  Federal Reserve
Gold Price per Oz:  Kitco
Unemployment Rate: Bureau of Labor Statistics
Inflation Rate (CPI): Bureau of Labor Statistics
Dow Jones Industrial Average: Yahoo Finance
M1 Monetary Base:  Federal Reserve

While we all watch in amazement at the exploits of firefighters and soldiers, the daily toil of the copper miner, until recently, goes largely unnoticed.  However, the copper miner and oilfield worker are in constant physical danger and their work is literally on the front lines of supplying the post-modern world with what it demands.  While the firefighter and soldier would literally be out of work without the support of your friendly taxing authority, the copper miner and oilfield work openly compete to ultimately serve persons and governments literally throughout the globe and are paid, not through compulsion as taxes are, but by willing customers for their services.  Needless to say, without the materials that are in some way, shape or form are supplied by the miner or oilfield worker, the firefighter and soldier would not have the tools necessary to perform their tasks.

Can you see now how copper miners and oilfield workers have a profound impact on society as we know it?  For they not only provide the building blocks for modern life, they also help to determine the price of these building blocks and, by extension, a component of the price of nearly everything purchased on this planet.  Ah, the wonder of it all.  These men and women deserve, if not medals and accolades for their daily sacrifices, at least a healthy amount of respect.  A toast to you, the miners and oilfield workers of the world!  Your contribution to mankind each and every day is subtle, yet awesome!

Stay Fresh!

David Mint