EconomyEinstein

The Road to Hell is Paved with the Good Intentions of Recycling

2009-04-16T05:45:54Z

The modern recycling movement can be traced to two events that happened in the late 1980’s. The first, in 1987, involved a barge named Mobro 4000 that attempted to dock in Morehead City, North Carolina and dump its 3,100 tons of waste that originated in Islip, New York. The garbage was ultimately carried back to Brooklyn, burned and the ashes buried in Islip. The other event, in 1989, was the publication of a paper by Jay Winston Porter, a former Environmental Protection Agency administrator. The paper was titled “The Solid Waste Dilemma: an Agenda for Action.” In the paper Mr. Porter stated that recycling was “absolutely vital”. Local governments took notice and since the late 1980’s, the growth of mandatory recycling programs has reached nearly 10,000 communities in the United States today. Sadly, recycling in America is a colossal waste of money. Recycling proponents point to the assertion that we are running out of landfill space and many times point to Mr. Porter’s paper for support. The problem with this argument is that the EPA report focused on the number of landfills that had closed to that point and did not take into account that the remaining landfills expanded to handle more waste . The reality is it would take a vast amount of waste to create a problem worth being concerned about for the nation as a whole. According to A. Clark Wiseman, an economist at Gonzaga University in Spokane, Washington, if Americans keep generating garbage at current rates for 1,000 years, and if all their garbage is put in a landfill 100 yards deep, by the year 3000 this national garbage heap will fill a square area of land measuring 35 miles on each side. This is a total of 1225 square miles: only one tenth of one percent of the land area in the United States that is still available for grazing. Allies of the recycling movement point out that materials like plastics and polystyrene do not biodegrade in landfills while natural materials like paper and wood do. On the surface this may seem to be true, but landfills create airless anaerobic environments and these materials in fact don’t biodegrade at all without air. William Rathje, an archaeologist at the University of Arizona who specializes in landfills, has discovered that these natural materials, specifically paper bags, can use more landfill space than plastic packaging. Plastic packaging has been evolving into a more efficient mechanism because manufacturers have been developing more sturdy and thinner materials. Twelve plastic grocery bags occupy the same amount of space as one paper bag and juice cartons take up only half the space of the glass bottles that would be used as a “natural” alternative. We need to save the trees! That’s the rallying cry of environmentalists everywhere and they couldn’t be more wrong. The way this argument is presented is that recycling saves virgin forest pulp. That part is indeed true, but there’s no need to save virgin forest pulp. The truth is that the vast majority of virgin pulp that goes into making paper comes from trees grown specifically for the purpose of making paper. We are not running out of wood; in fact, we have three times more forest today than we did in 1920. Trees are a renewable resource and when we use them we grow more trees to replace them. Making the argument that we need to recycle to save the trees makes about as much sense as saying that we’re running out of popcorn because we eat it. If correctly managed, tree farms grown for paper fulfillment needs can guarantee an almost infinite supply of trees. What of reuse? It’s often pointed out that reusing your ceramic coffee cup instead of using a polystyrene one every single time is a much better use of resources. Looking at the two side by side one may be tempted to draw that conclusion, but in order to make a fair comparison the entire life cycle needs to be taken into account. Dr Martin Hocking, in his report Reusable and Disposable Cups: an Energy-Based Evaluation, concluded you'd need to use your ceramic mug 1,006 times for it to break even (in energy terms) with its polystyrene competitor. This is largely because kilns are extraordinarily energy intensive, because using a dishwasher to wash the cup also uses energy, and because cups get broken. Yes, it’s true that if you break your ceramic mug after 950 uses you would have been better off using 950 polystyrene cups. Inherently because cups are re-used and disposables are not means that in restaurants you run a higher risk of coming in contact with germs and bacteria from previous users of that cup, albeit probably small. Another assertion by recycling proponents is that, on the whole, it’s cost effective. There are a couple of facts that point to recycling being a colossal waste of public funds. The first is that the true cost of recycling is hidden by subsidies, which by their inclusion in the process prove that recycling is not an economically feasible undertaking. Subsidies, by definition, are payments that the government makes using public tax dollars to support obsolete or questionable business models. Subsidies to the recycling industry cost Americans eight billion dollars a year. This alone firmly debunks the myth that there is a net refund back to the local government for recycling. The city of New York has reported a net loss every year for the last fifteen years, and Mayor Bloomberg has recently proposed cutting back on recycling as a way to save money. Most damning criticism of the recycling movement is the estimation of one expert that it costs local governments $50-$60 to dispose of a ton of waste and $150 a ton to collect it. Clearly it costs nearly three times more to collect waste for recycling than it does to merely dump it . Who is this expert? It’s none other than Jay Winston Porter, author of the EPA report and a man who has clearly abandoned his own ship.

The Global Economic Collapse Part 3: Questionable Derivatives

2009-03-26T03:27:31Z

Leave it to Wall Street to make money in new and imaginative ways. Most people, when they think of Wall Street, think about the usual way of making money: buy low, sell high. That relies on a very simple and understandable concept: buy something real like stock, which is a real percentage of ownership in a real company, and when the value goes up, sell out. Derivatives are trickier. Aaa
Obligations rated Aaa are judged to be of the highest quality, with the "smallest degree of risk".

Aa1, Aa2, Aa3
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk, but "their susceptibility to long-term risks appears somewhat greater".

A1, A2, A3
Obligations rated A are considered upper-medium grade and are subject to low credit risk, but that have elements "present that suggest a susceptibility to impairment over the long term".

Baa1, Baa2, Baa3
Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such "protective elements may be lacking or may be characteristically unreliable". The levels above are termed as "investment grade". The next level down is "speculative grade", better known as high yield or junk. The key to selling CDOs was to get the ratings agencies to rate CDOs as "AAA". This complicit role was one that the rating agencies were happy to play. This was a clear betrayal of what the ratings agencies were originally set up to do. Ratings agencies are responsible for advising pension funds, non profits and other big institutional investors on what securities to invest in. By mandate, most institutional investors are required to trust only investment grade securities. Big investors now had no honest advocate in the ratings agencies. Harsh assessment? No, not at all considering that ratings agencies were now being paid by banks to rate these investments as investment grade instruments. Also, by not rating these instruments as investment grade, the ratings agencies risked losing the opportunity of doing business with these banks later. Ratings agencies stocks went up and cash came rolling in. What exactly are CDOs? Individual mortages are pooled together to create a mortgage backed security. Banks then take selected parts of those MBSs, package them together and you have a CDO. Housing prices were going up, up, up and these securities were little pieces of those mortgages. A terrifically bad mortgage system was now terrifically securitized and this was only the beginning. Now these securities had to be sold. ]]>

Who does the U.S. owe anyway?

2009-03-26T00:08:40Z

When we talk about who the United States owes, who are we talking about exactly? Here's the list of the 15 holders of U.S. debt.

15. Luxembourg - $87.2 billion

14. Depository Institutions - $107 billion (US banks, savings and loans, etc)

13. Russia - $119 billion (up from $35 billion in January 2008)

12. United Kingdom - $124 billion

11. Insurance companies - $126.4 billion

10. Brazil - $133 billion

9. Caribbean Banking Centers (Cayman Islands, etc) - $176.6 billion

8. Oil Exporters - $186 billion (Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria)

7. Other Investors - $413 billion (bank personal trusts and estates, corporate and non-corporate businesses, etc)

6. Pension Funds - $456.4 billion

5. State and local governments - $517 billion (at the low end)

4. Japan - $634.8 billion

3. China - $739.6 billion ($811.3 billion if you count what we owe Chinese owned Hong Kong)

2. Mutual Funds - $769.1 billion

1. Federal Reserve and the Intragovernmental agencies - $4.806 trillion. You read correctly, the biggest holder of U.S. debt is the U.S. government itself. Only a decade ago this figure was only $2 billion. Julian Cook/March 25 Source:Source: US Treasury, US Federal Reserve & US Office of Debt Management]]>

Moody's Deadpool

2009-03-10T13:20:29Z

Moody's plans to publish "Bottom Rung" today which is the list of companies it says has a high likelihood of defaulting on debt. The 30 biggest companies can be accessed here. Take it with a grain of salt, Moody's also rated CDOs as AAA investments too.

The Global Economic Collapse Part 2: The Money Chain

2009-03-09T21:47:55Z

It was uncharted territory: Fannie Mae and Freddie Mac (GSEs) used to be the only game in town for mortgage originators and their strict guidelines limited the number of people able to get mortgages. After the GSEs' accounting scandals, suddenly mortgage originators both new and old found someone to replace the GSEs deep pockets: Wall Street. If you're a mortgage originator you obviously want to make more loans and now it was easier than ever. Combining an unregulated Wall Street with a bunch of new money begat a new and experimental wave of securitization. The greed stretched from unqualified borrowers all the way to the international finance arena. The beginnings of the Global Economic Collapse was the result of a perfect storm of events. More money than ever was pouring into Wall Street because of mortgage originators making more loans and rising economic stars like China, India and the Middle East who were flush with cash and looking for good returns for that money. Wall Street had exactly what they countries were needing: securities backed by the American homeowner. Investment banks on Wall Street were being fed loans by mortgage originators and mortgage originators, started obtaining more of these loans to feed the investment banks by questionable methodologies. It was not unusual for the mortgage originators to inflate the income of prospective borrowers by triple and quadruple amounts sometimes without the applicant's knowledge. Previously the strict guidelines that allowed responsible home loans via the GSEs were being replaced by the honor system. Incomes weren't verified, and home loans that would take a few months were now being done in a couple of days. It was to everyone's benefit that these loans were made: previously unqualified people were being placed into homes, mortgage originators were producing a hefty revenue stream and the investment banks were bringing in tremendous revenues for new securitization instruments being sold to the international community. Greedy mortgage originators were seeking new and unique ways to get more people into more homes to make more loans. A whole new crop of loan programs sprang up to enable sub prime borrowers to enter the ranks of home ownership. The loans were vastly different than the traditional 20% down mortgages. People who had bad credit and could not come up with a down payment could now get a home. They did not need to verify their income or even prove that they had assets of any kind. Investment banks saw the tremendous value in this. If mortgage originators could generate ridiculous numbers of loans, it worked to the investment banks' advantage. Why did so many investment banks turn a blind eye? Competitiveness. Seeing the tremendous amounts of money being pushed around made all the investment banks realize that there was big money to be made and not participating was the equivalent of sitting on their hands. They had to be competitive with each other, even if it meant undertaking questionable business practices. There were a dizzying number of ways that people could get a mortgage. Mortgage originators began to push loan programs like Adjustable Rate Mortgages (ARMs). This program would offer extremely low interest rates for the first couple of years and then reset to a higher rate that dramatically increased the monthly mortgage. Even though it was a ticking time bomb on the surface, people would agree to these loans with the intention of refinancing before the rates went up. It was assumed that house prices were going to continue to appreciate dramatically. In some cases mortgage brokers were saddling borrowers with two loans: one for the down payment and an ARM for the balance. As if this wasn't precarious enough homeowners, who were unqualified to begin with, were taking loans out for equity in their homes when they refinanced. Sometimes these homeowners would be in their homes for only a year before refinancing and taking out equity loans that were used for improvements or for other things like college, new cars, paying off credit cards, etc. All of this spending stimulated the economy in the area of consumer spending. The Fed's insistence of keeping interest rates low, in the interest of growing the economy post 9/11, only served to heighten the frenzy. Everyone wanted a home, everyone could have a home and people were afraid of missing the boat as home prices continued to increase and there was money to be made if you were a loan officer. The ranks of mortgage brokers began to swell. People from all walks of life became loan officers. Kids who worked in fast food could become loan officers. There were incentives to these officers to keep making more loans and refinancing. There was no oversight or regulation of any kind. It became an issue of how many loans could be made no matter what it took to make them. It's the refinancing aspect of the housing boom that brought the crisis to a new level and greed fed upon greed. All of the new unstable loans served to drive home prices up. People not wanting to miss the boom created more demand which drove prices up even more. As home prices went up to unprecedented levels, people were refinancing and taking out loans against what was, unbeknownst to them, artificially inflated equity. Every new and refinanced loan led to the same place: Wall Street investment banks. Julian Cook/March 9

AIG: Socialized Risk, Private Gain

2009-03-06T14:18:39Z

No doubt if you've been watching the news you've noticed American International Group (AIG). Taxpayers have pumped about 170 billion dollars into AIG, and you probably are wondering why. AIG quite simply wrote too many Credit Default Swaps (CDS). It guaranteed the losses of others with resources it didn't have. This isn't unusual. Banks usually only keep a fraction of the money on hand that they have under management, it's called fractional-reserve banking and it's why bank runs are so bad. Banks however have SOME regulation. The problem was lack of regulation on CDSs. Imagine a tiny insurance company underwriting and guaranteeing all the losses of South Florida and then to have Hurricane Andrew to roll through. That's what's happened in a sense to AIG. Thanks to the 170 billion dollars that the government has pumped into AIG, the taxpayer has now assumed the downside risk for AIG's counter parties. In short it's now a socialized risk for a private gain. Who are the counter parties and what exactly have we bought? This is the greatest mystery.

The Global Economic Collapse Part 1: The Beginning

2009-02-27T00:13:41Z

How did the global economic collapse occur? It built up over a few years and involved a perfect storm of greed, lack of oversight and the creation of new derivatives. Circulation of money is what makes the economy work. That circulation is credit. Post 9/11 we had something of a problem in the US, specifically the economy was in trouble. Alan Greenspan cut interest rates to stimulate growth and ultimately the cost of borrowing money was extremely cheap; cheaper than it had been in decades. Housing prices began to rise faster than incomes creating a grossly overpriced housing market. How then do you get people into new homes? Easy, by loosening lending requirements and extending credit to those people who would become known as sub-prime borrowers (FICO score below 500). This was a wide departure from the way that lending used to be done. Your income had to be fully documented with lenders even going as far as coming to visit you at your workplace. The loan process typically would take a few months. Every detail about you as a borrower was scrutinized. After the bank said yes to your home loan, the path to your loan led to Fannie Mae and Freddie Mac: government sponsored enterprises (GSE) whose job was to buy the loan from your bank, give the money to the bank so the bank can turn around make more loans. The GSEs received a steady and constant monthly income from these loans. The GSEs would then take the money flowing in from these mortgages and place them into a pool and sell shares into the pool. These investments were known as Mortgage Backed Securities. They were big money and they were bought by big entities like pension funds. The GSEs for a very long time dominated the multi-trillion dollar mortgage industry and because of that, the GSEs were able to dictate the terms of the mortgages that they would buy. Obviously they wanted people who were able to pay back their loans and this strict behavior kept lending risk to a minimum. Having strict lending requirements was necessary to insure the integrity of the mortgage backed securities. This policy also kept many people from buying homes because of lousy credit or lack of a down payment. Fannie Mae and Freddie Mac faltered due to accounting scandals and their dominance suffered as a result. This was great news to many mortgage originators. The GSEs insistence on strict guidelines didn't allow mortgage originators to make as many loans as they wished and they searched and got alternatives to the GSEs. Specifically these alternatives were underwriters like Countrywide Financial which in 2006 accounted for 20% of all mortgages that were underwritten in the U.S.. The deep pockets of the GSEs was being replaced by the deep pockets of an unregulated Wall Street. The dynamic had changed. The world itself had lots of cash and had no idea what to do with it. China and India were flush with cash as were countries in the Middle East that produced oil. What were these places going to do with all this cash? Invest it in Wall Street! Wall Street had securities that were backed by the American housing market and by American borrowers. Questionable securities were born. Julian Cook/March 5

An Analysis of Surplus and Deficit

2008-12-21T17:41:17Z

When exports are greater than imports, there is a trade surplus When imports are greater than exports, there is a trade deficit Are trade surpluses better than deficits? We do know that politicians, who aren't economists, tend to pump up rhetoric that deficits are always bad and we're on the road to ruin as a result. If it were only that easy. Here's an example to help you along. Joe has $100 in cash Bill has $100 in cash Joe grows bananas and sells them for $1.00 each. He has 50 bananas Bill grows pomegranates and sells them for $1.00 each. He has 50 pomegranates Joe likes Bill's pomegranates Bill likes Joe's bananas Joe buys 20 pomegranates from Bill for $20.00 Bill buys 30 bananas from Joe for $30.00 What just happened? If Joe and Bill were sovereign nations...... Joe has exported 30 bananas and imported 20 pomegranates. Bill has exported 20 pomegranates and imported 30 bananas Joe is now running a trade surplus of $10.00 and Bill is running a trade deficit of $10.00. So is Bill in a worse position than Joe? Of course not and to suggest that either is poorer because of their non-equal trading is a ridiculous oversimplification. Both men started with $150 of worth in the form of $100.00 in cash and $50.00 worth of product. After their trade, they still have $150 of worth. Their individual ratios of cash and product are different slightly but it's still $150.00 of worth. What they both have more of is happiness. Joe and Bill trade voluntarily and best of all they have happiness. Joe is happy buying Bill's pomegranates and Bill enjoys Joe's bananas. To focus merely on a surplus or deficit number completely misses the point regarding trade. All Joe and Bill did was rearrange their assets.

Deconstructing the GDP - Net Exports

2008-12-21T16:52:39Z

In the equation constructing the GDP ( Y = C + I + G + NX ), the "NX" stands for net exports. When domestically produced products are sold in other countries, those products are classed as exports. When a consumer in the U.S. buys a product produced in another country, those products are classed as imports. To obtain the net export number you merely total up exports, total up imports and subtract your import total from your export total. "NX" is that figure. Consumption). If you want to get the part that is spent only on domestically made items you need to subtract the value of imports (IM) from consumption (C) which is expressed as... C - IM Therefore our GDP equation can be written as follows... Y = C + I + G + EX - IM The advantage of expressing GDP in this manner is that EX - IM quickly shows a country's trade imbalance. When EX - IM > 0 more is being exported than imported. Conversely when EX - IM < 0 more is being imported than exported. ]]>

Deconstructing the GDP - Government

2008-12-14T20:49:07Z

In the equation constructing the GDP ( Y = C + I + G + NX ), the "G" stands for government. A huge amount of GDP is spent by government, even more in Europe! Ever wonder what balanced budget refers to? It's when the government's expenditures equals the tax it takes in. Yes, I'm sure it does exist......sometimes. If tax revenues are greater than expenditures then we have a budget surplus. If expenditures are greater than tax revenues, then the difference is borrowed on the open markets by way of bonds. If the government borrows $100,000 from you and agrees to pay you back the $100,000 at the end of twenty years, and $5,000 at the end of each of those 20 years, you are being paid 5%. The amount of lobbying that goes into how much the government spends each year is gargantuan. The "G" in the equation refers to how much the government actually spends on good and services. If the government taxes me $20.00 and gives it to someone through a social services program, that amount is not figured into the equation.

Deconstructing the GDP - Investment

2008-12-14T16:41:50Z

In the equation constructing the GDP ( Y = C + I + G + NX ), the "I" stands for investment. Capital is extremely important to a country's ability to make output. A country's capital increases as more things are bought. Capital also wears out as it is used. Time takes it's toll. Machinery rusts, things break down to a permanent degree and are replaced and some things are just simply thrown away. Some things simply become obsolete and are replaced. When things are purchased they begin to depreciate. Investments that are greater than depreciation mean a more modern infrastructure and more potential output is capable for people to consume. Interest rates determine to a large degree whether or not companies will buy equipment. If interest rates are too high it makes no sense to purchase items when loan repayment costs are high. If a company has enough cash on hand to buy items, it has to evaluate whether it's actually worth it to buy items (some of which are discretionary) or to use it somewhere else. If interest rates are high, loaning out money makes more sense than high loan repayment costs and a company may choose to forgo capital expenditures. Simply put, if interest rates are high then investment is discouraged.

Deconstructing the GDP - Consumption

2008-12-10T17:10:49Z

In the equation constructing the GDP ( Y = C + I + G + NX ), the "C" stands for consumption. The consumption variable refers to expeditures made by households on goods and services produced both in the U.S. and abroad. D The equation for subtracting taxes from income (and determining disposable income) is this... Y_D = Y - T = Y - t * Y = ( 1 - t ) * Y Consumption is a function of disposable income and a couple of other variables: C_o and c. c refers to marginal propensity to consume or MPC. It ranges from 0 to 1 (never more or less). It indicates the rate you burn through money instead of saving it. For example if c=.8 then 80 cents of every disposable income dollar is consumed and 20 cents is saved. What determines c? It's can be determined by a limitless number of issues and once again that is left to the realm of the microeconomist. What then is C_o? If people have zero disposable income they will still spend. How ? Savings! Our final equation to determine consumption is .... C = C_o c * Y_D ]]>

What is the GDP?

2008-12-09T19:46:40Z

You hear the term GDP but what is it? GDP is an acronym for Gross Domestic Product and it's one measure of a given country's national income and output. View image The key to understanding GDP is below. GDP = consumption + gross investment + government spending + (exports − imports), or, Y = C + I + G + NX We'll tackle GDP components next.]]>

Mistaking Percentages and Dollar Amounts

2008-12-06T15:40:56Z

Let's say that you would drive to the next town to buy groceries. You know from experience that the same items bought every week cost you $200.00 locally, but the superstore in the next town, a 30 minute drive, can give them to you for $180.00. That's a savings of 10%! Now let's say that you need a new washer and dryer. Locally the cheapest deal is $2,000 but an appliance store in another town (also 30 minutes away) has it for $1,900. That's a savings of only 5% percent so you decide that you're just going to buy it locally. Good decision? No, it's a totally incorrect decision. In the first instance you decided that one hour of your time was worth a $20.00 savings but in the second case that your time was not worth $100? Remember that costs and benefits are absolute. Don't make the mistake of thinking in percentages.

What is Sunk Cost and How Does it Affect Decision Making?

2008-12-04T18:25:49Z

If you just paid $10.00 to participate in the all you can eat buffet, how much should you eat? Most people would say $10.00 and that answer is wrong. The correct answer is eat until you are happy. Cost becomes irrelevant since eating one plate of fried chicken or ten plates of friend chicken cost you the same amount of money. (Well there is ONE difference: if you eat ten plates of friend chicken the restaurant may prohibit entry to you in the future). Costs that have already been incurred and are in the past are what economists refer to as sunk costs. You should only be concerned about the future benefits of your chosen option. Unfortunately most people tend to let sunk costs affect their decision making even if it's pointed out that sunk costs are irrelevant. If the new buffet restauarant opens next door to where you are eating and offers you $500 to eat there would you do it or would you wait until you ate your $10.00 worth of food at your current option?