Economics Made Easy: Why is inflation a problem?

Here's an example of economics in plain English. Why should you worry about inflation, and why is the Government always worried about it?

Well those of us that are older get it, because they've seen it. However, the less than 35 yr old age group has no idea what the real issue is (unless you are an economics guy.)

I can go into details, but I am a fan of the simple explanation.

Inflation breeds unemployment. And while nobody likes a stock market crash, we can still typically afford to buy groceries. Losing jobs, however, is unbearable for the market.


Look at the graph below. Inflation rises just before Unemployment rises.

Where's the bottom?

The market keeps going down, and everyone is wanting to know where the bottom is...

Well... on an ultrapesimistic point of view. The absolute bottom from an earnings standpoint was when the S&P had a P/E ratio of just short of 5.00

That being said... The S&P has a P/E ratio right now of 13.26 at 906 pts.

Therefore, it could conceivable drop another 63% in a worse case scenario.

YIKES to even think of it. But is it that crazy?

What do you think?

Let's play "GUESS THAT MAP" - NYC

Below is a map of New York City by a demographic that I have not disclosed.
It's segmented by Census Block and Track.
But what are the colors?

Race?
Education?
Income?
Housing Cost?
Marital Status?
Employment?

See the poll on the right. Let us know your answers.

Feel free to comment!

Property Bubble Explained (in one OBVIOUS GRAPH)

Ok... we could go on and on about consumers overspending, or credit markets allowing them to overspend.

But let's look at something in a graph. It will make you laugh how stupid we are.

I devided Median Income by Median Household price from 1968 though 2006.

Pretty steady. You can even point to the little dips. Probably one of the best graphs I've done in how obvious it is. Note since this is devided by current income (income earned in 1968 dollars for 1968, and 2006 dollars for 2006,) it should be a flat graph.

I'd love to get some comments and feedback on this!

Natural Reverse Desertification

Response to a question...
"Anonymous said...
How does nature reverse desertification?

We know that drought, climate change, overgrazing, and deforestation can cause desertification, and we know that certain careful agricultural practices (nitrogen fixation in the soil, introduction of microbial life, planting seeds, irrigation) can reverse it. But if desertification happens naturally on a large scale, as can be witnessed in the Sahara and Gobi Deserts (not all of the current effects can be considered to be anthropogenic), then there must be natural mechanisms to reverse desertification, otherwise after millions of years the entire earth would be desert.

October 7, 2008 2:01 PM"

Here's the answer as best as I can tell... I'll warn my readers that it sounds like I'm oversimplifying a complex topic, but I feel concision is a strength and not a weakness.

So the answer is... Climate and humidity. Deserts are created in the natural sense because of a lack of humidity (or rather, a desert is the lack of humidity). I guess that depends on who you ask. But as for why the earth isn't one big desert, is simple. Just as climate changes can decrease humidity in some regions, it can cause increased humidity in other regions. This increased humidity can come from many different reasons, changes in wind currents, changes in ocean currents, overall climate changes, etc.

It is worth noting that we are not moving in the right direction of climate change to encourage reverse desertification. The largest factor in creating deserts is temperature. Heat causes humidity to rise out of the soil. That being said, we are on a path to more deserts, and less vegetation. This little thing called "global warming" can be blamed for that. However, that's a topic onto it's own.

What Countries Have Nuclear Weapons?

This will ba a very small and quick post. But It's something you should all be aware of...

I put Syria and Iran on the chart at 0. They don't posess Nukes, BUT they are intent on getting them, and it is estimated that they may have them in the NEXT 10 YEARS.

Financial Crisis Explained in concise plain English

To understand the financials crisis that were currently in, you need to understand that it's a perfect storm of 3 things.

1) Commodity Futures Modernization Act of 2000 was enacted Dec 21, 2000
2) Comparitive bonus structures of executives
3) The Uptick Rule was eliminated on July 6, 2007


Basically in plain English, here's what happened.

The Clinton Administration passed CFMA of 2000 introduced by 5 Republicans and 1 Democrat in the House, and 4 Republicans and 2 Democrats in the Senate. This was a minor piece hidden in an overall budget bill. It's intent was to allow corporations to trade risk in derivatives such as Credit Derivatives Obligations and Credit Default Swaps. (A Credit Derivative is at it's base an obligation that is derived on credit risk, A Credit Default Swap is an instrument that insures a CDO of downside risk) However... note: a swap is not insurance, and therefore NOT REGULATED.

Because these were inately dangerous and high risk positions, most conservative funds would opt not to be involved with them. However, fund managers are paid bonuses not on their gains, but on their gains relative to their competitors. (they're usually paid based on money that flows into their fund. the more profitable they are as compared to their rivals... the more money goes into their fun... the more they make) often percentage points can make significant differences in bonuses that are paid. So risky investments are made, because their competitors are making risky invesments. And if their competitors take a dive... so do they.

The most profound issue was the elimination of the uptick rule in July 2007.
The elimination of the Uptick Rule gave short sellers the abililty to force sotcks down uncontrollably, beyond what their true market value should yield. Basically thay could force artificial or leveraged negative market pressure.

So.. here's what happened....
Housing kept going up because lending terms allowed anyone to buy a house. They were able to do so, because the initial underwriters of the mortgages were selling them immediately to an open market of mortgage buyers. These folks repackaged them and sold them to other markets (including foreign markets and banks. The people who sold these were able to do so, because they offered Credit Derivative Swaps (They guaranteed the downside risk for a fee.) They made a fortune in doing this, so it became common pactice for the entire industry. Unforuntately NOBODY actually looked at the abiliity of folks to pay these mortgages.

So the defaults started rolling in.... Well.. AIG, Lehman, and Bear Stearns tried to issue more stock. Immediately the bears saw an opportunity. Because they had no limit on stock crushing (the uptick rule used to handcuff them) they immediately forced these stocks down so fast that they couldn't raise capital through a release of more stock. So therefore they went bankrupt (or nearly).

Greed works. But it needs to be regulated.
The Bush Administration and the republicans should have not been asleep at the wheel.