Entrepreneurship and the Small Business is going to be the Saving Grace of the US Economy

Big business at this point is waiting for the world economy to pick up, which is in turn waiting for the US economy to pick up. Bad news is, the growth trajectory is low slow and gradual for at least the next three-to-five.  No new growth means no new jobs, no new jobs means no demand. Big business lives and dies on new demand.

In the meantime people still have to get shit done. Every day, day after day, people still have to get shit done. Good news, you're in America.

How Immigration Can Make You More Money

I'm watching my USD/JPY trades and thinking about the last 15 years of Japan's economic history. The Japanese went through a similar issue to what we experienced here in the US in 2008, back in the early 90s. Their crash was followed by what is affectionately know as the lost decade. Interest rates were pushed as low as they could go, and still no growth (as measured by inflation). After years of little to no price increases, prices started falling as consumers put-off spending and deflation set in leaving Japan in a Keynesian liquidity trap.

We're not there yet, but we could actually see the economic situation in the US go a similar route but for one thing. Foreign migrants and non-restrictive immigration policies can be the catalyst that can jump-start real long-term economic growth. Japan didn't think so, and restricted migrant access to the country and made it very difficult for them to get jobs. As a result, there was no outside stimulus to population growth coupled with one of the lowest birthrates in the world, Japan went from second largest economy in the world to a far third behind China and being forced to competitively devalue its currency just to spur exports. It only has to do this because there isn't much new internal demands from the quickly retiring Japanese workforce.

Who's Concerned?

As posted on the Federal Reserve Bank of Chicago website, in 1977, Congress amended The Federal Reserve Act, stating the monetary policy objectives of the Federal Reserve as:

"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."

Fast forward to 2013, and the Fed has explicitly linked the timing of future interest rate increases to the rate of unemployment, and more recently, has expressed concern about the effects that early increases to interest rates could have on the Federal Government’s budget deficit targets. I’m concerned that the Fed isn’t concerned about price inflation.

Before the Fed started truly intervening in the financial economy in late 2008, their balance sheet and by extent the amount of “money” in the economy was around $800 billion, at the end of 2012 after four years of quantitative easing and special lending programs the Fed’s balance sheet was close to $3 trillion. Of all that new money, $1.5 trillion are bank reserves just sitting.

My finance background has exposed me to the idea the money does not like to sit still for very long. When the financial economy shifts from de-leveraging to investing, that money is going to be put in motion, and when it is, upward price-pressure will be exerted on the economy.

Inflation is not yet a concern, but I think that by the time it is, the horse would have already left the barn and closing the door would be fruitless pursuit.

What is my Right to Privacy?

How clearly defined is the right to privacy as a private citizen from government?


Nowhere in the Constitution is a Right to Privacy explicitly awarded, but yet, we all in one way or another feel entitled to some degree of privacy.

Since the instinctive draw to Privacy seems to be universal, we can look at Privacy as a natural [or in some circles, God-given] right.

To add to the ambiguity; government tends to acknowledge our privacy up to a pre-described point. A point past which we would be subject to the swift and all-encompassing fury of the government.

Boundaries exist but are not clearly defined, so what good are they to the citizens that are supposed to be corralled? How can we know if and when our privacy is being violated by government if the boundaries of our privacy is not clearly outlined?

Forex Trades to End the Year With...

I'm looking at the EUR/USD currently at 1.2970, and in the past 12 days or so I've watched it pull back from about 1.2700. Now I believe it is poised for a short to about 1.2550 that should play out as the year comes to a close.

I'm looking at the GBP/USD currently at 1.6030, and in the past 10 days or so I've watched it pull back from about 1.5840. Now I believe it is poised for a short to about 1.5780 that should play out as the year comes to a close.

I'm looking at the AUD/USD currently at 1.0455, and in the past 50 days or so I've watched it pull back from about 1.0180. Now I believe it is poised for a short to about 1.0145 that should play out as the year comes to a close.

I'm looking at the USD/CAD currently at 0.9925, but I have both a long target at 1.0125 and a short target at 0.9800. I'm yet to decipher a directional play with this currency, but some of you options traders out there might be able to structure a position that can benefit from the potential volatility.

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Good Luck

Then What...?

Money is a factor of production; it is the lube that keeps economic engines running smoothly. As of right now we have low output, high unemployment, and low interest rates. The Federal Reserve is trying its hardest to get unemployment down by making lots and lots of money available to be used in production. The disconnect is created by banks however, who borrow money from the Fed but then in turn don’t lend to businesses and investors [who to a certain extent are not borrowing as much either, due to lessened demand from high unemployment]. If we keep along this road, eventually over time (I know that sounds like a long time, and that’s because it is) consumers will slowly start consuming more and more. This new found demand will come from either a small savings that has developed or a better debt-to-income profile that leads to increased access to credit. Either way, Americans will find a way to do what Americans do best, and that is to consume beyond their means.

A key assumption in this drawn out scenario is that money will be easily accessible when consumers can qualify for credit and when businesses and investors start truly demanding more capital investments to meet new consumption demand.

If for any reason however, interest rates have to start rising prematurely, the gradual transition back to growth will be abruptly interrupted. If we start with rising market rates, which represent the costs of borrowing in the secondary [financial] market, we would see businesses and investors start requiring more and more projected growth and return from their capital investments to compensate for the increased cost.

Businesses would have to in turn charge higher prices on their goods and services to be able to recoup to higher costs of production. As one good or service [with a higher price tag] is used in the production of another good or service, the higher price gets passed on and on until it gets to the consumer. We as consumers would start feeling the impact of the higher production costs as we shop and so would experience a cost-of-living increase, which would inspire us to demand higher wages. This further increases the cost of production for businesses as they have to pay their employees more and so they have to raise prices further and so on.

In the time it takes for wages to adjust to the point that producers can charge and receive a higher price for their goods and services in general, they would see a decrease in demand as strata after strata of the socio-economic spectrum is priced out of consuming. This will lead to a slowdown in production output to help match the slowdown in consumer demand. The outcome of which is simply higher unemployment and price inflation due to a general fall in production ahead of the falling demand from consumption.

If the Fed were to get in-front of the rising market rates by increasing the Fed Funds rate [bank borrowing rate], that would slow down and eventually reverse the price increases and stay inflation. It can do this because at it raises the cost for banks to borrow, the banks simply borrow less and lend less, and so the money in the economy starts to dry up. This has the detriment of slowing both inflationary spending and core investments [both usually funded by borrowing], which also means less jobs as businesses don’t have funding to invest in new production capacity and new employees; and in some cases have to start firing.

This will have the benefit of undoing all on the drawn-out, hard earned progress that we have been making since mid-2009, and take us at least one step back for our two forward.

Why This Time its Different (At least we don’t have stagflation)

At the end of the 80s we had a housing market crash [check], at the end of the 80s we had a stock market crash [check], during the 80s we had high unemployment [check], and during the 80s we had high inflation,… ‘well there’s the problem’.

Because of the inflation, things weren’t so good coming out of the 80s and going on into the early 90s, and it actually took a bout of relatively high interest rates to get things ultimately back on track.

The big difference, the only difference, which makes this time different, is that what initially caused the recession. In the 80s we had an oil shock which constrained a key input in just about everything that America does. OPEC cut oil supplies and prices shot up, the amount of stuff produced fell and prices went up, all that led to inflation.

At the same time, as the amount of stuff produced fell, the people that made the stuff lost their jobs and unemployment went up. That was the trifecta of economic woes that resulted in a period of Stagflation.

This time, there were no shocks that affected supply of production inputs. And production fell, this time around because demand from households for consumption fell. House values fell, borrowing against houses fell, and all the business that revolves around household spending falls with it. That gives us high unemployment and low production.

There really is no inflation to speak of, which leaves room for a relatively painless transition for our current economic malaise to some level of sustainable, albeit moderate growth.