Friday, March 14, 2008


For a long time, pundits have been saying that lower FOMC rates will boost inflation, causing the economic slowdown to become a time of stagflation. The pundits are confusing long term and short term effects. Lower interest rates are part and parcel to lower cost and to an increase in production of goods--more goods is another way of saying more supply, prices are a function of supply and demand. During a slow down or recession, demand falls. If the government makes stupid moves, slower demand can spiral into slower production, fewer supplies and therefore rising prices. By Shays Law, we know that new supply creates its own demand. In other words, put people to work and they will have the money to buy goods and put other people to work.

This morning, the CPI numbers show that inflation is not out of control. The CPI index is lower than where it was two years ago. Furthermore, the posted numbers mislead. Take the grocery shopper who wants to buy some bread as the example. The price of wheat has risen enough to boost the price of wheat bread. If this shopper decides not to buy wheat bread but decides to buy some potato rolls instead, has there been any inflation for this shopper? She has stayed within her grocery budget and bought bread to feed her family.


Over the past several years, the value of the Euro has risen to incredible heights relative to the dollar. In the same way that housing in America soared in value until the bubble burst, the Euro has soared in value and the bubble is like a very tightly stretched balloon. This balloon will soon spring a leak. It may not deflate as hard and fast as housing did but it will deflate. Where is the air going to go? Chances are that the US dollar will catch the outflow.


The public has willingly feasted on a diet of phony numbers for a long time. One of the "big lies" that has been repeated time and again is that the middle class in America has been suffering. The truth is that Americans are able to trade fewer hours of work to buy most things than they have been able to in the past. The emphasis of the nay sayers has been on numbers that distort reality. Instead of using individual numbers, the nay sayers report median family income without adjusting for family size. Obviously, a family of 4 can live well on less than a family of 5. Another old bugaboo is the immigration game. When poor Hispanics come to America, the US poverty rate typically goes up because many of the immigrants work for low wages. These poor Hispanics might be living twice as well in America while also allowing existing Americans to live better though the lower cost of goods. Everyone was a winner, with everyone doing better but the average wage went down and the poverty rate went up.

The results of not understanding reality is that "do gooders" what to make charitable gifts to those in need and they then break their arms to pat themselves on their own backs. I believe in Charity but I also believe in "teaching a man to fish and trading my skills for cheap fish". The most efficient form of aid is to pay people to do work and allow them to send part of their pay to their families back home. In many cases, Charity has served to trap the poor in poverty or it has gone to the rich leaders of corrupt economies. Allowing individuals to earn money that can be sent to poor family members insures that "financial aid" is allocated to those who really are in need.


In the Soviet Union, Christians were declared to be criminals because they engaged in illegal activities. In America, we have suddenly declared people who came to America 60 years ago to pick lettuce to be criminals.

The good news is that this economic and political problem is among the long list of problems that are on the way to being solved. Recent polls show that immigration is 7th on the list of priorities for votes. In the up-coming elections, immigration will once again be a political football to be kicked up and down the field but with the presidential candidates from both parties believing in rational reforms, the issue is on its way to being solved. The resolution of this issue will boost countries growth and prosperity.


Demario James Atwater, 21 years of age, was convicted of felony breaking and entering in 2005 and he was given a suspended sentence. Last year, he was convicted of illegal possession of a firearm. He was given a suspended sentence. During the time that zealots were demagoguing the immigration issue, fusing about people who had moved to America to work, Demario was one of many to commit serious crimes and to receive no justice. Our focus on the wrong ball was a disservice to Demario, to Eva Carson, to the family of Eva Carson, to all North Carolinians and to all Americans. Demario should have been locked up for his own protection. Now he faces a trial for murder.


We have a very long list of reasons to be thankful. Economically, times are good. This world is not nearly a perfect place but in many ways it is not nearly as horrible as it is often made out to be. Americans need to work at discerning what is good and what is bad. We must hope and pray that we can avoid evil. The "big boys" have "talked" a lot of investors into selling at the wrong time. The public has sold billions of dollars worth of stocks and real estate during the last 6 months. The evidence is clear that the "smart money" is buying.

The CPI numbers this morning show that the "wheels have not fallen off the economic wagon". There is room for the FOMC to stop practicing Russian or Chinese style central planning. The FOMC can lower the FED Funds rate to the market rate without causing high inflation. The rates should be down to 2.25 or 2.5% by Wednesday. Such interest rate levels will increase the economic value of assets. Short term calls are always little more than 50/50 propositions but a long list of short-term and long-term market indicators say that now is the time to BUY, BUY, BUY!