The Obstacle is the Way- Ryan Holiday

July 17th, 2014

Ryan Holiday

Ryan Holiday is a media strategist for notorious clients like Tucker Max and Dov Charney. After dropping out of college at 19 to apprentice under the strategist Robert Greene, he went on to advise many bestselling authors and multi-platinum musicians. He is the Director of Marketing at American Apparel, where his work in advertising was internationally known. His strategies are used as case studies by Twitter, YouTube and Google and have been written about in AdAge, the New York Times, Gawker and Fast Company. His first book, Trust Me I’m Lying: Confessions of a Media Manipulator, was a Wall Street Journal bestseller. He currently lives in Austin, TX with his rebellious puppy, Hanno and pet goats.

Join me this week on Your Financial Editor!  Your Financial Editor airs Saturday mornings at 8am EST on AM930 WFMD. You can listen live from anywhere by clicking here: and clicking the listen live button! Can’t tune in? Don’t worry, our shows are recorded and you can listen to them here you can listen them here.


The book from the view of Mr. Holiday: The book is The Obstacle Is The Way: The Timeless Art of Turning Trials Into Triumphs. As all of you know, I’ve always been a student of Stoicism, a practical philosophy favored by influential Greek and Roman statesman and thinkers. I’ve long written about these things on my blog but never in a book. That changes now. This book isn’t about Stoicism, though. It’s a book about using the best parts of Stoicism to solve the actual problems that ambitious, hardworking people face. The premise of the book is based on a simple maxim by Marcus Aurelius:

“The impediment to action advances action.
What stands in the way becomes the way.”

From this maxim I’ve created a manual for overcoming obstacles and turning them into opportunities—illustrated with dozens of stories (many of which we read here first) from John D. Rockefeller to Amelia Earhart to Ulysses S. Grant to Steve Jobs to George Clooney to Barack Obama to Laura Ingalls Wilder to Arthur Ashe to Demosthenes to Abraham Lincoln to Thomas Edison. It is a book that will become more valuable to you as you revisit it, using it when faced with the challenges we all face in life.


Persistent Unemployment and Policy Uncertainty

June 19th, 2014

Join me this week on Your Financial Editor!  Your Financial Editor airs Saturday mornings at 8am EST on AM930 WFMD. You can listen live from anywhere by clicking here: and clicking the listen live button! Can’t tune in? Don’t worry, our shows are recorded and you can listen to them here you can listen them here.

Patrick Anderson

Mr. Anderson’s received the Edmund A. Mennis award from the National Association for Business Economic for his work on his paper titled, “Persistent Unemployment and Policy Uncertainty: Numerical Evidence from a New Approach.”


In the recovery from the deep recession that formally ended in 2009, unemployment has proven resistant to both aggressive fiscal policy and expansionary monetary policy. The persistence of high unemployment, fully four years after the trough of the recession and despite aggressive policies to combat it, raises a critical question about the ability of standard macroeconomics models to grasp fundamental business decisions facing private firms, including hiring and investment decisions.

One competing argument to those regularly made in fiscal and monetary policy debates is the policy uncertainty hypothesis. This holds that managers of private firms have been rationally avoiding hiring workers, due to the risk of higher future costs imposed by government policies. However, such a hypothesis cannot be directly testes in standard models of firm behaviors that rely on the presumption that firms maximize profits in each time period.  The probabilities of transitioning from one policy regime to another, the consequences of such transitions to the value of the firm, are not inputs to these models.

To formally test the policy uncertainty hypothesis, we used a novel “value functional” or “recursive” model of firm behavior, in which managers maximize the value of the business rather than its profits. This model allows for managers to explicitly consider policy uncertainty, and the consequences of future business decisions they might make if the conditions change. We create a data set that includes income statement information for firms in a selected U.S. industry in the relevant time period, parameters that reflect policy-related costs if employing workers in the industry, and probabilities of changes policies in the future.

Using this approach and these data, we demonstrate that policy uncertainty affects rational hiring decisions of firms. We show that business managers can make rational decisions to maximize the value of their businesses that forego available current-periods profits, due solely to uncertainty about future policy- related costs. Tests for robustness indicate that this effect is not dependent on particularly onerous assumptions, that the response to policy uncertainty is higher in some industries than others, and that the scale of the firm also affects its sensitivity to policy risk.

Finally, we conclude that this approach has potentially broad application within business economics, particularly in evaluating investment and hiring decisions; real options; and other aspects of uncertainty, fixed costs, and managerial flexibility.

©2013 Anderson Economic Group, LLC

About the Author

Mr. Anderson founded Anderson Economic Group in 1996, and serves as a Principal and Chief Executive Officer in the company.

Anderson Economic Group is one of the most recognized boutique consulting firms in the United States, and has been a consultant for states such as Michigan, Kentucky, North Carolina, Wisconsin and Ohio; the Province of Ontario; manufacturers such as General Motors, Ford, DaimlerChrysler, Honda; retailers such as Meijer’s and Kmart; telecommunications companies such as SBC and AT&T; utilities like ITC;  the University of Michigan, University of Chicago, and other colleges; and the franchisees of Anheuser-Busch, Molson, Coors, Miller, Harley-Davidson, Mercedes-Benz, Suzuki, Cadillac, Chevrolet, Ford, Lincoln, and Avis products.

Mr. Anderson has written over 100 published works, including the just-released Economics of Business Valuation from Stanford University Press. Three of his articles, “Pocketbook Issues and the Presidency”, “The Value of Private Businesses in the United States”, and “Policy Uncertainty and Persistent Unemployment” have each been awarded for outstanding writing from the National Association of Business Economics. Anderson’s views on the economy are often cited by national news media including The Wall Street Journal, New York Times, National Public Radio, and Fox Business News.

Mr. Anderson has taken a leading role in several major public policy initiatives in his home state. He was the author of the 1992 Term Limit Amendment to the Michigan Constitution, and the 2006 initiated law that repealed the state’s 4-decade-old Single Business Tax. His firm’s work resulted in a wage increase for Home Help workers in 2006, the creation of a Michigan EITC in 2008, and the repeal of the item pricing law in 2011. Before founding Anderson Economic Group, Mr. Anderson was the deputy budget director for the State of Michigan under Governor John Engler, and Chief of Staff for the Michigan Department of State.

Anderson is a graduate of the University of Michigan, where he earned a Master of Public Policy degree and a Bachelor of Arts degree in political science. He is a member of the National Association for Business Economics and the National Association of Forensic Economists. The Michigan Chamber of Commerce awarded Mr. Anderson its 2006 Leadership Michigan Distinguished Alumni award for his civic and professional accomplishments.


Big Bang Disruption: Strategy in the Age of Devastating Innovation

June 5th, 2014

big bang

It used to take years or even decades for disruptive innovations to dethrone dominant products and services. But now any business can be devastated virtually overnight by something better and cheaper. How can executives protect themselves and harness the power of Big Bang Disruption?

Just a few years ago, drivers happily spent more than $200 for a GPS unit. But as smartphones exploded in popularity, free navigation apps exceeded the performance of stand-alone devices. Eighteen months after the debut of the navigation apps, leading GPS manufacturers had lost 85 percent of their market value.

Consumer electronics and computer makers have long struggled in a world of exponential technology improvements and short product life spans. But until recently, hotels, taxi services, doctors, and energy companies had little to fear from the information revolution.

Those days are gone forever. Software-based products are replacing physical goods. And every service provider must compete with cloud-based tools that offer customers a better way to interact.

Today, start-ups with minimal experience and no capital can unravel your strategy before you even begin to grasp what’s happening. Never mind the “innovator’s dilemma”—this is the innovator’s disaster. And it’s happening in nearly every industry.

Worse, Big Bang Disruptors may not even see you as competition. They don’t share your approach to customer service, and they’re not sizing up your product line to offer better prices. You may simply be collateral damage in their efforts to win completely different markets.

The good news is that any business can master the strategy of the start-ups. Larry Downes and Paul Nunes analyze the origins, economics, and anatomy of Big Bang Disruption. They identify four key stages of the new innovation life cycle, helping you spot potential disruptors in time. And they offer twelve rules for defending your markets, launching disruptors of your own, and getting out while there’s still time.

Based on extensive research by the Accenture Institute for High Performance and in-depth interviews with entrepreneurs, investors, and executives from more than thirty industries, Big Bang Disruption will arm you with strategies and insights to thrive in this brave new world.

Joining me this week on Your Financial Editor is the author of Big Bang Disruption, Larry Downes. Your Financial Editor airs Saturday mornings at 8am EST on AM930 WFMD. You can listen live from anywhere by clicking here: and clicking the listen live button! Can’t tune in? Don’t worry, our shows are recorded and you can listen to them here you can listen them here.

larry downes

Larry Downes is an Internet industry analyst and speaker on developing business strategies in an age of constant technological disruption.

Downes is the author of the Business Week and New York Times business bestseller, “Unleashing the Killer App: Digital Strategies for Market Dominance” (Harvard Business School Press, 1998), which has sold nearly 200,000 copies and was named by the Wall Street Journal as one of the five most important books ever published on business and technology.


He has written for a variety of publications, including USA TodayHarvard Business Review, Inc.,WiredStrategy & LeadershipCIOThe American Scholar and the Harvard Journal of Law and Technology.

He writes regularly for The Harvard Business ReviewForbesCNET, and The Washington Post, covering the intersection of technology, politics and business.

Downes has held faculty appointments at The University of Chicago Booth School of Business, Northwestern University School of Law, and the University of California-Berkeley’s Haas School of Business, where he was Associate Dean of the School of Information. From 2006-2010, he was a nonresident Fellow at the Stanford Law School Center for Internet & Society.

He serves as Project Director at the Georgetown Center for Business and Public Policy’s Evolution of Regulation and Innovation project and as Research Fellow with the Accenture Institute for High Performance.

Get Ready For the Subprime Mortgage Crack-Up 2.0

June 5th, 2014

May 28, 2014

By Edward Pinto via Real Clear Markets

In 1991 community advocate Gail Cincotta, in testimony before the Senate Banking committee stated: “Lenders will respond to the most conservative standards unless [the GSEs] are aggressive and convincing in their efforts to expand historically narrow underwriting.” The next year Congress imposed affordable housing mandates on Fannie Mae and Freddie Mac. Over the next 15 years the Department of Housing and Urban Development (HUD) forced the abandonment of traditional underwriting standards, which led to an accumulation of an unprecedented number of weak and risky non-traditional mortgages. The collapse of housing and mortgage markets, and the ensuing Great Recession, may be directly traced to those events in the early-1990s.

Earlier this month the following headline appeared in the Wall Street Journal: “U.S. Backs Off Tight Mortgage Rules: In Reversal, Administration [HUD/FHA] and Fannie, Freddie Regulator Push to Make More Credit Available to Boost Housing Recovery.” Clearly memories as to the causes of the recent housing market collapse are short.  Indeed, political pressures are once again increasing on the private sector to degrade sound lending practices.

The headline refers to two policy statements made May 13, one by Mel Watt, director of the Federal Housing Finance Agency (FHFA), and the other by Shaun Donovan, secretary of HUD. The FHFA is the regulator of Fannie Mae and Freddie Mac, which along with the Federal Housing Administration (FHA) are responsible for guaranteeing about 75 percent of all mortgage credit in the United States.

Watt announced a course reversal from his predecessor Edward DeMarco. One of his most significant moves was the alignment of FHFA’s policies — with respect to discouraging private sector discretion in adhering to strong underwriting standards — with those of the FHA. Watt warned lenders and private mortgage insurers that “credit overlays result in the rejection of many loans that would otherwise meet [Fannie Mae and Freddie Mac] credit standards.” This echoes FHA Commissioner Carol Galante’s 2013 statement: “[L]ender overlays are damaging the recovery by limiting access to creditworthy borrowers.”

The parallels to Cincotta’s statement are unmistakable: regulators must convince lenders and private mortgage insurers to stop utilizing more conservative standards than allowed by government agencies.

Why do policymakers want to force the private sector to originate easy credit loans? First is the desire to use easy credit to juice an anemic economic recovery. Yet we have already had 6 years of the lowest interest rates in generations, combined with already loose lending standards. The result has been increasing home prices in concert with stagnant incomes, leading to reduced affordability, particularly in places like California.

Second is to expand access to “creditworthy borrowers.” This statement is duplicitous. The real goal is to get the private sector to originate more loans to sub-prime borrowers with credit scores below 660 or pre-tax debt-to-income ratios above 43 percent, and to non-prime loans to borrowers with tiny down payments. This is a continuation of a fifty-plus years housing policy based on using ever greater leverage in a futile attempt to expand homeownership by helping unqualified borrowers buy homes.

This leverage has taken the form of reduced down payments, higher debt ratios, extending loan terms to 30 years, and credit to those with impaired credit histories. This policy failure is evidenced by a stagnant homeownership rate which today stands at 62 percent (excludes owners with seriously delinquent loans), the same rate as in 1960. Yes, the rate did hit 69 percent in 2004, but that was thanks to the loose lending standards resulting from Congress’ following Gail Cincotta’s prescription. Contrast 1940 to 1960, a period during which the home ownership rate rose dramatically for both blacks and whites. Why? Precisely because home lending until 1960 was not highly leveraged, making it low risk to homebuyers and lenders alike.

The cautionary remarks of Watt’s predecessor, Ed DeMarco, also made on May 13, are pertinent: “[d]o not confuse weakening underwriting standards and underpricing risk with helping people or promoting market efficiency. A government effort to assist families with limited resources and poor credit history to take on increased leverage seems a curious public policy.”

American Enterprise Institute (AE) resident fellow Edward Pinto is the co-director of AEI’s International Center on Housing Risk.

BlackRock CEO says leveraged ETFs could “blow up” whole industry

June 5th, 2014

File photo of Blackrock CEO Larry Fink at a business roundtable meeting of company leaders in Washington

BlackRock Inc Chief Executive Officer Larry Fink is pictured at a business roundtable meeting of company leaders and U.S. Republican Presidential candidate Mitt Romney in Washington in this June 13, 2012 file photo.


(Reuters) – BlackRock Chief Executive Officer Larry Fink said on Wednesday that leveraged exchange-traded funds contain structural problems that could “blow up” the whole industry one day.

Fink runs a company that oversees more than $4 trillion in client assets, including nearly $1 trillion in ETF assets.

“We’d never do one (a leveraged ETF),” Fink said at a Deutsche Bank investment conference in New York. “They have a structural problem that could blow up the whole industry one day.”

Fink spoke during a conversation with Deutsche Bank co-CEO Anshu Jain in a broader discussion about regulating financial companies. ProShares, a leading leveraged ETF firm, disagreed with Fink’s remarks.

“Leveraged ETFs are well regulated, transparent products and there is no credible evidence that they have any harmful effect on the markets or our industry,” said Tucker Hewes, a spokesman for ProShares.

Leveraged ETFs account for 1.2 percent of the $2.5 trillion in global ETF assets under management. At the end of April, there were nearly 270 leveraged ETF funds with $30.3 billion in assets, said Deborah Fuhr, managing partner of ETF research firm ETFGI LLP. A leveraged ETF uses financial derivatives and debt to amplify the returns of an underlying index. Some leveraged ETFs have become more aggressive, ramping up risk and potential returns, as the ETF industry gains popularity with individual and institutional investors.

Leveraged ETFs have attracted $1.8 billion in net new assets during the first four months of 2014, Fuhr said.

They are showing up more as buy-and-hold investments in the portfolios of retail investors, as financial advisers grow more comfortable recommending them, and first gained a foothold among traders who wanted an investment vehicle to make fast and enhanced bets on big index moves or the direction of gold prices, for example

Last year, when the Standard & Poor’s 500 Index rose 32 percent, the $348 million Direxion Daily S&P 500 Bull 3x Shares ETF gained 118.9 percent, or nearly quadruple the S&P 500′s gains.

Last month, Direxion Funds launched two leveraged ETFs with three times exposure to the daily direction of gold prices. Direxion Daily Gold Bull 3X Shares ETF, for example, seeks 300 percent of the daily performance of the Comex Gold Futures benchmark.

The industry’s largest leveraged ETF is the ProShares UltraShort 20+ Year Treasury, which has about $4 billion in assets.

Fink said he believes regulators should focus on the structure of financial products.

“If you want to create a safer and sounder marketplace, it has to be at the product level,” Fink said.

U.S. Securities and Exchange Commission staffers have issued warnings about leveraged ETFs, though no action has been taken to curb their availability. Regulators say individual investors may not realize that the investment products are designed to achieve their performance objectives on a daily basis rather than over the long term.



Thu May 29, 2014 8:23am BST

(Reporting By Tim McLaughlin; Editing by David Gregorio and Tom Brown)

The Physics of Wall Street

May 29th, 2014

This week on Your Financial Editor is James Owen Weatherall to talk about his latest book:

 Physics of Wall Street

After the economic meltdown of 2008, Warren Buffett famously warned, “beware of geeks bearing formulas.” But as James Weatherall demonstrates, not all geeks are created equal. While many of the mathematicians and

software engineers on Wall Street failed when their abstractions turned ugly in practice, a special breed of physicists has a much deeper history of revolutionizing finance. Taking us from fin-de-siècle Paris to Rat Pack-era Las Vegas, from wartime government labs to Yippie communes on the Pacific coast, Weatherall shows how physicists successfully brought their science to bear on some of the thorniest problems in economics, from options pricing to bubbles.

The crisis was partly a failure of mathematical modeling. But even more, it was a failure of some very sophisticated financial institutions to think like physicists. Models—whether in science or finance—have limitations; they break down under certain conditions. And in 2008, sophisticated models fell into the hands of people who didn’t understand their purpose, and didn’t care. It was a catastrophic misuse of science.

The solution, however, is not to give up on models; it’s to make them better. Weatherall reveals the people and ideas on the cusp of a new era in finance. We see a geophysicist use a model designed for earthquakes to predict a massive stock market crash. We discover a physicist-run hedge fund that earned 2,478.6% over the course of the 1990s. And we see how an obscure idea from quantum theory might soon be used to create a far more accurate Consumer Price Index.

Both persuasive and accessible, The Physics of Wall Street is riveting history that will change how we think about our economic future


Listen from anywhere this Saturday morning May 31st@ 8am on AM 930 WFMD by logging onto and clicking the listen live button! Can’t make it? Don’t worry, our shows are recorded and you can listen to them here

About the Author:

James Owen Weatherall

I am a physicist, mathematician, and philosopher. I hold a position as Assistant Professor of Logic and Philosophy of Science at the University of California, Irvine, where I am also a member of the Institute for Mathematical Behavioral Science. I am currently acting as Director of Graduate Studies for the department; I am also the department DECADE mentor.

I am the organizer of the Southern California Philosophy of Physics Group, which meets several times a quarter in Irvine.  Until recently, I served as managing editor of the journal Philosophy of Science, the official journal of the Philosophy of Science Association.

Most of my recent work has been on the mathematical and conceptual foundations of space-time theories and on issues in general philosophy of science (and epistemology more broadly), with particular interest in questions concerning model building in finance; I also maintain serious interests in category theory and the foundations of mathematics, atomic physics and quantum control, and in the foundations of quantum theory. My book, The Physics of Wall Street, which explains how ideas have moved from physics into financial modeling over the last century, was published by Houghton Mifflin Harcourt in early January, 2013.

Are the U.S. Dollar’s Days Really Numbered?

May 22nd, 2014
The U.S. dollar will remain the world’s reserve currency because no other major currency offers such liquidity, depth of financial markets, and store of value.

By Desmond Lachman- The Americans, the Official Magazine of the American Enterprise Institute

Some years ago, I attended a small luncheon on the outlook for the U.S. dollar. Paul Volcker, the former Federal Reserve chairman, was the guest of honor. In response to a chorus of Cassandras who argued that the U.S. economy’s all too apparent weaknesses would lead to an inevitable dollar collapse, Volcker made a simple observation: For the dollar to depreciate, he said, it would necessarily have to depreciate against another currency. And in Volcker’s view, at that time, the U.S. economy was fundamentally no weaker than that of any competing countries.

Volcker’s logic would seem equally pertinent today in responding to the many critics who believe that the Federal Reserve’s unprecedented quantitative easing policy will lead to the dollar’s imminent demise as a reserve currency. If the dollar is to lose its reserve status, as epitomized by the fact that more than 60 percent of the world’s foreign exchange and more than 85 percent of world trade is still denominated in U.S. dollars, some other currency would need to replace it. A close examination of the world’s other major currencies reveals that a currency is yet to emerge that offers the liquidity, depth of financial markets, and store of value that the U.S. dollar does.

To be sure, when viewed in isolation, there are many reasons not to be complacent about the U.S. dollar’s long-run future. After all, the U.S. economy is only now emerging from its worst economic and financial crisis since the 1930s. At the same time, its dysfunctional political system is yet to come to grips with the country’s long-term budget issues, while the Federal Reserve has more than quadrupled the size of its balance sheet to its present level of around $4 trillion in an effort to get the U.S. economy moving again.

Yet, despite all of its weaknesses, the U.S. economy’s recent performance has been considerably brighter than that of the other major industrialized countries. Not only has the U.S. economy recovered the most strongly from the 2008-2009 Lehman crisis, but its economic outlook for 2014 and 2015 remains the brightest of the industrialized countries, as acknowledged by the IMF’s recently published World Economic Outlook. On the basis of that recovery, the nonpartisan Congressional Budget Office is now forecasting that the U.S. budget deficit will be as low as 2.75 percent of GDP in 2014 and 2015, while by 2024 the U.S. public debt will still be comfortably below 80 percent of GDP.

Despite all of its weaknesses, the U.S. economy’s recent performance has been considerably brighter than that of the other major industrialized countries.

Perhaps most importantly for the U.S. dollar’s future as a reserve currency, there appears to be no sign of any resurgence in U.S. inflation, despite all the dire warnings about the unprecedented expansion in the Federal Reserve’s balance sheet. Indeed, U.S. inflation is currently running at around 1 percent, or half the Federal Reserve’s desired target, while long-term U.S. inflationary expectations appear to be very firmly anchored.

The prospect for the U.S. dollar maintaining its dominant status as a reserve currency becomes all the brighter when one considers the prospects of those currencies that could conceivably challenge that status. This is most evidently the case when one considers the clouded prospects for the euro, which accounts for almost 25 percent of world international reserves and which until very recently has been touted as the currency that could seriously challenge the U.S. dollar’s dominant position.

Despite the market’s current optimism about Europe, the euro’s long-term prospects are fraught with considerable political and economic risk. At the heart of those risks is Europe’s record-high unemployment rate, which presently remains stuck at around 12 percent for the region as a whole and at as high as 27 percent for countries such as Greece and Spain. The European Central Bank itself is currently forecasting that, despite the gradual European recovery that it expects, European unemployment will not decline below 11.5 percent by 2016.

Since the onset of the European sovereign debt crisis in 2010, there has been a disturbing fragmentation of European politics. In France, Marine le Pen of the National Front is now ahead in the polls for the upcoming European parliamentary elections. Together with Geert Wilders of the Dutch far-right Freedom Party, she is campaigning on an anti-European platform. Meanwhile in Greece, the two centrist parties which commanded 70 percent of the vote in 2010 now command barely 30 percent of public support, while in Italy the populist Five-Star movement still polls 25 percent of the vote.

There is a real danger that high unemployment will continue to contribute to Europe’s political deterioration, as it has in recent years. And if that were to happen, Europe’s politic commitment to the euro could be sorely tested.

The main economic risk for the euro is that Europe’s high unemployment rate is now raising the real specter of Japanese-style deflation in Europe. Over the past year, Europe’s average inflation rate has already decelerated to 0.5 percent while the countries in the European periphery are now already either experiencing outright deflation or else are on the cusp of deflation. The trouble with deflation is that it not only constitutes a major headwind to the economic recovery but it highly complicates the task of restoring public debt sustainability in the highly indebted countries of the European economic periphery. Sadly, much like the Bank of Japan before it, the European Central Bank behaves as if it was oblivious to the deflation risk.

If the euro is unlikely to pose a serious challenge to the dollar, the Japanese yen is certainly not going to do so. After all, the Japanese government is drowning in debt and running an outsized budget deficit, while the country’s very poor demographics have led to a plunge in the domestic savings rate. There is every prospect that the Bank of Japan will have to step up its already massive quantitative easing program to avert a relapse into deflation, which will lead to a prolonged period of Japanese yen weakness. This is hardly the stuff of which a strong reserve currency is made.

In contrast to the Japanese yen, the Chinese renminbi is a currency that could eventually pose a real threat to the U.S. dollar, particularly if China were to continue to grow at anywhere near its recent rate. However, for that to happen, China would need to engage in serious financial reform aimed at making the currency convertible by lifting capital controls, developing its domestic bond market, cleaning up its shadow banking system, and making the financial system more transparent and more based on the rule of law. Judging by the experience of other countries, it would seem fanciful to think that these reforms could be successfully implemented in less than a decade.

Ever since the collapse of the Bretton Woods system in 1971, there has been no shortage of predictions that the dollar’s days as the world’s dominant reserve currency were numbered. Yet some 40 years on, the dollar’s position is yet to be seriously challenged. This is not so much because of the dollar’s inherent strengths as much as because of its rival currencies’ intrinsic weaknesses. For better or for worse, there is every reason to expect that this state of the world will continue in the decade ahead and that once again the long-run dollar pessimists will be proved wrong.

Desmond Lachman is a resident fellow at the American Enterprise Institute.

How Inflation Picks Your Pocket

May 15th, 2014

by Dan Sanchez on May 15, 2014

[ Editor’s Note: This article is adapted from a talk delivered at the Mises Institute’s seminar “Inflation: Causes, Consequences, and Cure.” ]

In the denouement of the film There Will Be Blood, the antihero Daniel Planview dramatically reveals to his nemesis that he has secretly siphoned away all of the latter’s underground oil.

“Drainage!” he bellows, as only Daniel Day-Lewis can, “Drained dry. I’m so sorry. Here, if you have a milkshake, and I have a milkshake, and I have a straw. There it is, that’s a straw, you see? You watching? And my straw reaches across the room, and starts to drink your milkshake. I… drink… your… milkshake! [sucking sound]”

Through inflation (expanding the money supply), as I will show, the state and its cronies “drink our milkshake” every day. Only, it does so surreptitiously, with nary a sucking sound to be heard.

Understandably, everyone would like to see his own personal money supply increase. That would obviously make the individual better off. But does it make sense to conclude from that, that if a whole society’s money supply increased, that the society would be better off?

To use a favorite example of economist Murray Rothbard’s, say an “Angel Gabriel” magically multiplied everyone’s money supply tenfold overnight. Would all of society wake up richer? If so, then that’s great news, because our “angels” in the government have a similar power. Under fiat money, the quantity of money is whatever the government says it is. So if “more money” makes the whole society wealthier, the government can enrich everybody with a simple government declaration.

Say the government increases the money supply by just having people add zeroes to their bills. Isn’t it regrettable, after all, that not everyone can afford a new computer? Some people only have a dollar to their name. To alleviate this situation, the government could just have everyone add three zeroes to their bills. Now everyone has at least $1,000, and can afford a new computer!

But why stop there? Not everyone can afford a private jet. So why not keep adding zeroes until everyone can? Voilà, our society will then be so rich, that we’ll all be zooming across the country every weekend.

Obviously something is wrong with this line of reasoning. When speaking to student groups, to show them what the problem is, I walk them through the following thought experiment.

I tell them to imagine that the room we are in is the whole world; that outside of it is just empty space, and that the entire world economy is contained within this lecture hall. The floorspace is the available land. The objects in front of them are all the capital goods, like tools (pencils) and factories (tables). Other objects are the consumers’ goods, like food (the doughnuts in the back), home electronics (mobile phones), and homes (other tables). And we, the people in the lecture hall, are the economy’s population. All the resources are owned by individuals among us. And each individual owns his own body and can use it for labor.

Each individual also owns money, I tell them. “Let’s say it’s a fiat money system, and that a piece of paper at your table is your computer screen showing the balance of your money stock. And let’s say by coincidence that everyone has exactly a million dollars. So write 1 followed by six zeroes (leave out the commas).”

Now let’s inflate and see what happens, I say. “Everyone go ahead and write a zero at the end of your money balance at the same time on the count of three. One, two, three!”

I tell them to look around the room. Did anything change? Did the floorspace extend; that is to say, is there more or better land for farming, industry, or for living? Are there suddenly more or better pens (tools) or tables (factories and homes)? Are there more or better doughnuts (food) or mobile phones (home electronics)? Are there more of us? Are we smarter or stronger as workers?

Thinking about these questions makes it very clear to the students that increasing the money supply would not make society more prosperous, because it does not increase or improve the consumable and producing “stuff” available to humanity.

Then I point out that, in real life, inflation doesn’t happen that evenly. A few people get the new money first: generally privileged bankers. So I tell the students at one table that they are the privileged bankers. And then I tell only those students to add another zero to their bank balances.

I ask again, is there now more consumable or producing “stuff”? Of course, still, no. Society as a whole isn’t wealthier. But are the people at the

“privileged banker” table wealthier because of the new money? There’s no denying it. They now have ten times more money than anyone else does, as well as ten times more than they themselves would have had otherwise.

But being wealthier, means they can get more actual “stuff.” And if, as we’ve established, the new money didn’t create more total stuff, they can’t get more stuff, unless other people get less stuff. This government inflation (defined as an increase in the money supply), therefore, is necessarily a redistribution of wealth. It’s a zero-sum game: a win-lose situation, unlike events in a free market, which are win-win. A loser is effectively taxed by an act of the government for the sake of the winner.

Who loses, then? Who gets less “stuff”?

At that point in the presentation, I point to a “regular,” non-banker person in the audience, and say, “Let’s say you want to buy a house. You want to buy hishouse,” pointing to another non-banker person. But so does one of the privileged bankers, newly flush with cash. So they competitively bid for the house.

The regular person loves the house, but is only able to pay, at most, $50,000 for it. The banker doesn’t love the house all that much. To him, it would just be an extra house for guests: no big deal. But, he’s got money burning a hole in his pocket, so, what the heck, he’ll bid $60,000 for it, which is far more than he’d pay had he not recently had such a large cash infusion. He outbids the regular person, and gets the house.

Who lost out, due to the inflation? The regular person who didn’t get the house. Who won? The privileged banker who did. It’s as if the government, through its inflationary policy, reached out and redirected the house, that otherwise would have gone to the regular person, to the privileged banker.

Who else won? The house-seller, of course, who got $10,000 more than he would have otherwise. The new money bid up the price of what he was selling, to his benefit. Does that mean, as the new money radiates out into the economy, that the price of what everyone sells will be bid up, and everyone will benefit? That’s impossible, because, remember new money does not increase or improve society’s resources. It’s still a zero-sum game: a win-lose situation. So if people like the house-seller wins, who commensurately loses?

The house-seller benefited because the new money reached him early, before the prices of the things he buys are bid up. For late-receivers of the new money, the prices of the things they sell are bid up (like wages for their labor) only after the prices of the things they buy (like groceries) are bid up even higher. So inflation (now alternatively defined as a general increase in prices) is a redistribution of wealth from late-receivers, who are taxed to support early-receivers.

Of course the government itself is among the earliest receivers, so it is one of the chief beneficiaries of inflation.

Now, what would happen if these redistributions were accomplished the usual way, through taxation and welfare disbursement (whether individual or corporate welfare)? What would happen if each of the above losers (the house auction loser, the worker who received the new money late, and the saver) were instead just sent a tax bill? And what if they all saw headlines about welfare disbursements to the winners (the privileged banker, the house-seller, and the debtor)? The losers would be outraged, and would more likely demand that the redistribution be stopped. This is especially true, because so many of the winners from inflation are already wealthy, and hardly need the welfare. The biggest debtors include, not only the government, but also highly-leveraged investors, who are banking on future inflation.

The IRS, after all, is like a mugger. You see the government demanding the money and taking it (unless, of course, you’re fooled by Milton Friedman’s withholding scheme). You see the mugger’s knife, and so you’re more likely to try to defend yourself from him.

The Federal Reserve (which does the inflating), on the other hand, is more like a pickpocket. Its taxation is far more insidious. Unless you read articles like this one, you don’t even see its hand in your pocket.

The house auction loser thinks, “Aw, shucks, I got outbid, and didn’t get the house. Them’s the breaks, I guess,” never imagining it’s the government’s doing.

The late-receiver of new money thinks, “Man, my wages aren’t keeping up with rent and groceries. Times sure are tough,” never imagining it’s the government’s fault (except perhaps to foolishly think the minimum wage should be higher).

The saver who is temporarily out of his contract work with a busted leg thinks, “Wow, I’m burning through my savings a lot faster than I thought I would,” never imagining the government’s role in his predicament.

This is the way the modern state gets away with aggrandizing prodigious amounts of society’s wealth to itself and its cronies, virtually at will. Americans are largely unfazed when subjected to acts of looting of epic proportions, like the 2008 financial bailouts, and the lavish boondoggle of blood that was the Iraq War. Sure, they are somewhat mildly concerned that the government is perhaps wasting wealth it has already gathered from previous taxation. But, since the financing is being affected through money-printing and not regular taxation, the people have no idea how much of the enormous cost is being borne by newmassive deductions from their own wealth.

It is for reasons such as these that Ludwig von Mises said that, “inflationary policy is the most radical revolutionary institution in the world.” Every day it generates new money, the Fed effects an ongoing aristocratic economic revolution, quietly siphoning wealth from the people, like Daniel Plainview with his long milkshake straw, and pumping it into the vats of a privileged elite. Moreover, this makes us all poorer in an indirect fashion as well, by rewarding government beneficiaries at the expense of efficient producers, and by perpetuating the economically destructive business cycle.

Control over money is the state’s back-door key to the storehouse of society.

Ratings Agencies have Learned Little from their Errors

May 15th, 2014


One has to be struck at the markedly changed mood at the sovereign debt rating agencies towards the European periphery in recent months. After several years of steep rating downgrades and hand wringing about the poor sovereign debt dynamics of countries in the European economic periphery, since the start of this year Moody’s, Standard and Poor’s, and the Fitch rating agencies have all begun the clearest of upgrading cycles with respect to those countries. From Cyprus to Slovenia and from Portugal to Spain, Ireland, and Italy, one rating upgrade has followed the other in quick succession for peripheral Europe. And this has occurred despite any clear indication that those countries’ prospects for repaying their sovereign debt has materially improved.

Read the full article from the American Enterprise Institute here

Bitter Brew: The Rise and Fall of Anheuser-Busch and America’s Kings of Beer

May 15th, 2014

Bitter Brew

About the book:

The engrossing, often scandalous saga of one of the wealthiest, longest-lasting, and most colorful family dynasties in the history of American commerce—a cautionary tale about prosperity, profligacy, hubris, and the blessings and dark consequences of success.

From countless bar signs, stadium scoreboards, magazine ads, TV commercials, and roadside billboards, the name Budweiser has been burned into the American consciousness as the “King of Beers.” Over a span of more than a century, the company behind it, Anheuser-Busch, has attained legendary status. A jewel of the American Industrial Revolution, in the hands of its founders—the sometimes reckless and always boisterous Busch family of St. Louis, Missouri—it grew into one of the most fearsome marketing machines in modern times. In Bitter Brew, critically acclaimed journalist Knoedelseder paints a fascinating portrait of immense wealth and power accompanied by a barrelful of scandal, heartbreak, tragedy, and untimely death.

This engrossing, vivid narrative captures the Busch saga through five generations. At the same time, it weaves a broader story of American progress and decline over the past 150 years. It’s a cautionary tale of prosperity, hubris, and loss.

The Wall Street Journal provides an incredible book review here

Listen from anywhere Saturday morning @ 8am on AM 930 WFMD by logging onto and clicking the listen live button! Can’t make it? Don’t worry, our shows are recorded and you can listen to them here.

Bill Knoedelseder

About the Author:

William Knoedelseder obtained a bachelor of arts in English literature from the University of Missouri-St.Louis. He went on to become a long time staff writer reporting on the entertainment industry for the Los Angeles Times.

Knoedelseder wrote a series of articles in the 1980s about corrupt practices in the record business. This formed the basis for the book Stiffed: A True Story of MCA, the Music Business and the Mafia.

Knoedelseder was executive producer of two television documentaries — Something’s Got to Give, a 1990 two-hour special for Fox about Marilyn Monroe and All the Presidents’ Movies, a three-hour special for Bravo in 2003 that described the viewing habits of modern U.S. presidents.

Knoedelseder worked as a television producer and executive creating news programs and documentaries for Fox, Disney, Knight-Ridder, Bravo and USA Broadcasting. As vice president of news at USA, he oversaw the launch of a nightly news program on WAMI-TV in Miami titled “The Times.” Miami New Times named it “Best Newscast in South Florida.”