The Federal Reserve

 

The Magnificent Seven

Knuckle merchants and your bankers too
Must get up and learn those rules
Weather man and the crazy chief
One says sun and one says sleet

Bankers have rules, even if you don’t understand their rules.

Central banks are supposed to inspire confidence in the economy by keeping inflation low and stable. America’s Federal Reserve has suffered a hair-raising loss of control. 
https://www.economist.com/leaders/2022/04/23/why-the-federal-reserve-has-made-a-historic-mistake-on-inflation

This is true ONLY if you believe that America’s Federal Reserve bank actually HAS the ability to keep inflation low. The Federal Reserve bank is responsible for maintaining a medium of exchange that allows trade in the US economy to take place. Prior to the establishment of central banks, such as the Federal Reserve, individual banks were a place to store currency. However they did not, should not, only store currency. They also lend that currency (i.e. make loans). This creates a problem with liquidity for individual banks. If a bank has loaned currency, that currency can not immediately be returned to its depositors. If depositors demand a return of their currency, it can exceed the amount of deposits, reserves, the bank has on hand. That is what a bank run is all about. And bank runs undermine the confidence in a currency as a medium of exchange. The Federal Reserve Bank serves as a central clearing house such that runs on banks will not happen. It monitors the total amount of money needed by the economy, and lends currency to those individual banks in order to maintain their liquidity and prevent bank runs.

The Federal Reserve does this by making loans to individual banks. Those loans have to repaid by those banks in the future. If there should be a discount rate that is applied to the future then this should be considered in the interest rate. That the future is worth less than the present is popular wisdom,  “A bird in the hand is worth two in the bush,” and Biblical wisdom,  Matthew 25:14-30, the Parable of the Talents. Charging an interest rate effects not only the repayment of the liquidity. If that liquidity is used to increase production (investment) or consumption (borrowing), it can have an effect on the price of goods, inflation. However that is NOT the only way that prices can increase. Consumer preferences can change (e.g. today’s demand for buggy whips is not like that of the 19^th century), or the things unrelated to the interest rate can change the cost of goods (e.g. a ship can get stuck in the Suez Canal, droughts or wildfires can happen, a global pandemic can occur, Russia can invade Ukraine, etc.).

The Federal Reserve can and has maintained a stable domestic currency .  It has not created more currency (money) than is needed for trade, unlike the Weimar republic or other examples of hyperinflation. It cannot prevent ordinary inflation. This is like blaming the weatherman if it rains. Don’t shoot the messenger.

That there has been persistent inflation since the 1970s is not due to the Federal reserve’s failure to responsibly monitor the domestic US economy. It is because when a domestic currency is also used as the unit of international trade, this leads to tension between national and global monetary policy, i.e. the Triffin Dilemma. https://dbeagan.blogspot.com/2018/08/the-happening-riding-high-on-top-of.html The fact that inflation has been manageable is a testament to the Federal Reserve’s success. That it can not prevent all inflation should not be deemed its failure. You don’t have to love banks, to accept that you need banks.

Liberal vs Conservative

 

Love Me, I'm a Liberal

Once I was young and impulsive
I wore every conceivable pin
Even went to the socialist meetings
Learned all the old union hymns
But I've grown older and wiser
And that's why I'm turning you in
So love me, love me, love me, I'm a liberal

Why is being a liberal a slur on both the left and the right?

Later, Trump Jr. responded to a tweet that exclaimed “the best part of lifting the mask mandate is that you can now tell with 100% certainty exactly how many libs are on your flight.”

“99.9% I’ll keep wearing one so I can stay under the radar,” Trump replied.

https://news.yahoo.com/donald-trump-jr-says-hell-064106917.html 

I take statements by  Donald Trump Junior, and Donald Trump, Senior for that matter, personally because they are both graduates of the University of Pennsylvania and I have a Master’s degree from the University of Pennsylvania. If they make stupid statements, then it diminishes the value of my degree. 

Donald Trump, Junior has previously said that increasing the mean wealth increases everyone’s wealth because that is how math works, (Spoiler alert, it does not). Now he seems to be adopting a one-dimensional view of the world as liberal versus conservative ( which does a disservice to conservatives. Let’s just say whatever the heck he is.)  A one-dimensional view is not very enlightened. At the Wharton  School of the University of Pennsylvania,  I learned that economists have a two-dimensional view of the work: goods are rival and exclusive. ( The Trumps must have missed those classes). Particle physicists have adopted a three-dimensional model where particles, such as quarks, come in families of three. The US Post Office ( at least the old US Post Office.  Who knows what Trump appointee Louis DeJoy will do?) measures packages in three-dimensions ( length, width, height). Virtual Reality creates a  three-dimensional world. I have proposed that human behavior is also NOT one dimensional (i.e. liberal versus conservative), but three-dimensional ( Individual vs. Team; Nature vs. Nurture; and Fact vs. Fiction) 

Rather than characterizing the wearing of masks on public transportation one-dimensionally as a liberal versus conservative issue, I would characterize it as a Team versus Individual issue and a Fact versus Fiction issue. If I believe that my individual rights are paramount and that your rights have no value, and if I believe that there is no risk catching  COVID (which I believe is fiction) then this is different than a liberal versus conservative issue. Conservatives who have a team perspective and believe in the facts may indeed wear masks.

I understand the risk of catching COVID on a plane if I am unmasked is small. But I also understand that the risk of being struck by lighting in an open field during a thunderstorm is also small. If seeking shelter during the latter is not odd, then  wearing  masks during the former doesn’t seem so odd, and might even be a conservative, not just a liberal, position.

 

One Percenters?

 

Natural Gift

You don't have to be a genius to find
All the hidden potential deep in your mind
You don't have to know about nuclear physics
Know all the formulas and vital statistics

But if you don’t know statistics, then expect to be taken advantage of by those that do.

Much has been written about the 1%-ers. 3 Sigma or the Mean plus three Standard Deviations, SD, happens to be 99.7%, in other words not  the 1%-ers, but the 0.3%-ers.

If you know the Mean income, and you also know that income will not be below $0, then by reporting the Mean, and saying that the Mean minus 3 SD must be greater than zero, you are stating what the upper bound should be of the Standard Deviation, SD,  that is 0 = Mean – 3 SD,  or SD is equal to Mean /3 .  I can then state what income should be for the 0.3%-ers, it is twice the mean or  99.7% of the income,  the 0.3%-er income, which is Mean plus 3* SD, or 2 * mean.

This indicates that if you know the Mean income, or wealth, then you can compute what the  lower level for the 0.3%-ers should be. (i.e. how much income or wealth or should be needed to be in the 0.3%-ers club)

The 2019 Mean income as reported by the US Census is $98,088. That indicates that an income of $196,176 should put you in the 0.3%-ers club . The US Census reports that the 2019 Mean household wealth, including the value of the home, is  $445,900, and excluding the equity in the home, it is $321,900. That indicates that the entry into the 0.3%-ers club should be a wealth of $891,800 including the equity in your home, or $643,800 not including the equity in the home.

Also the federal is on income, not on people. If 10% of the people have 10% of the income then that 10% of the people can be expected to pay 10% of the income tax. However if 0.3% of the people have 90% of the income, then that 0.3% should be expected to pay 90% of the income tax. They should NOT be expected to pay 0.3% of the income tax.

Why do you think they are coming for our math books? Figures don’t lie, but liars do figure. Maybe the top 0.3% have more income and wealth than they would like us to know and expect.

 

Hasty

 

Zippy Dee Doh Dah

Mister Bluebird's on my shoulder
It's the truth, it's "actch'll"
Everything is "satisfactch'll"

“Bill to Revoke Disney’s Special Tax and Self-Governing Status Passes Florida’s House”

Guys be careful what you are doing.  It might feel good at the moment but…those roads on Disney property might become your state roads.  Those firefighters and police officers in Disney World, they are doing jobs that might become the responsibility of Florida public sector firefighters and police.  The inspections that Disney does on its property might become a government responsibility. The debt that  Disney incurred to build these facilities might become public debt, Etc.

It reminds me of a time when I was a government bureaucrat and my boss angrily wanted to fire one of the mangers who reported to me.  I reminded her that he would then revert to his Civil Service status from which he could not be fired, and his Civil Service status would pay more than his manager's salary. My boss changed her mind, and wanted me to tell him that as punishment she was NOT going to fire him.  I think the appropriate Disney phrase would be “Please don’t throw me in that briar patch, B’rer Fox.”  Act in haste, repent at leisure indeed!

The good news is that Disney is going to lower its ticket prices.  The bad news is that I am going to have to increase your taxes, even if you don't ever go to a Disney Park.  Gee, thanks Florida State House, NOT!

Distribution of Wealth

 

New York, New York

And find that I'm number one
Top of the list
Head of the heap
King of the hill

We’re Number One!

Actually the United States is Number 3 on  a ranking of the most skewed wealth among the counties in the World. However the first-place county, Brunei, and the second-place country, Bahamas, have only slightly more than 0.01% of the wealth of the United States. It is number one among countries that have at least 0.1% of the wealth of the United States.

The mean wealth is only the first moment of the wealth distribution of the population. The second moment of any distribution, including wealth, is the variance. (During the COVID pandemic the phrase “flatten the curve” became popular. A statistician would state this same concept as “increase the variance”). The third moment of a distribution is the skew. If the skew is zero, then the distribution is characterized as normal. It is only in this case that Donald Trump Junior was correct, increasing the mean will also increase the median. If the distribution is skewed, then this need not be true because THAT is how math works.

In order to know the skew it is necessary to know the Standard Deviation, the square root of the variance. Income or wealth can not be less than zero. (While you can be in debt, someone else owns that debt as an asset therefore you can’t report income or wealth below zero unless you similarly reduce that debt, or the income from that debt,  as an asset of someone else.). Even when the mean and median wealth, or income, is reported, the Standard Deviation is often not reported. Statistics states that 99.97% of a distribution will be within three Standard Deviations of the Mean. This is known as the scientific standard of 3 Sigma. If you know the Mean, and you know that three times the Standard Deviation from the Mean can not be less than zero, you can bound the Standard Deviation. Knowing the bound on the Standard Deviation it is possible to estimate the skew of the distribution.

Top 20 Counties Ranked by Skew of Wealth Distribution

Country	Mean (USD)	Median (USD)	Wealth (USD)	Pearson's Second Coefficient of Skew
Brunei	$39,098	$5,122	$12,081,282,000	7.82
Bahamas	$56,737	$7,507	$15,772,886,000	7.81
United States	$505,421	$79,274	$126,339,581,949,000	7.59
Bahrain	$87,559	$14,520	$115,402,762,000	7.51
United Arab Emirates	$115,476	$21,613	$929,928,228,000	7.31
Brazil	$18,272	$3,469	$2,801,225,504,000	7.29
Ukraine	$13,104	$2,529	$453,909,456,000	7.27
Russia	$27,162	$5,431	$3,037,933,890,000	7.20
Philippines	$15,290	$3,155	$1,023,818,400,000	7.16
Lesotho	$1,226	$264	$1,523,918,000	7.14
Switzerland	$673,962	$146,733	$4,689,427,596,000	7.04
Laos	$7,379	$1,610	$31,641,152,000	7.04
Yemen	$5,581	$1,223	$85,283,261,000	7.03
Kuwait	$129,890	$28,698	$408,633,940,000	7.01
South Africa	$20,308	$4,523	$763,377,720,000	7.00
India	$14,252	$3,194	$12,833,113,636,000	6.98
Zambia	$3,068	$692	$25,559,508,000	6.97
Saudi Arabia	$68,697	$15,495	$1,661,505,642,000	6.97
Nigeria	$6,451	$1,474	$618,850,881,000	6.94
Botswana	$15,598	$3,680	$21,182,084,000	6.88

 Source: Credit Suisse Wealth Databook.

Not only is the United States the wealthiest county on Earth, but it also has one of the, if not the, most skewed distributions of that wealth.

If anyone is interested, the listed country with the least skewed distribution of wealth is Iceland, where virtually everyone is related.  It would make for some very awkward family reunions if you became wealthier at the expense of a family member.

Inflation V

 

Rain

Shine, the weather's fine.
Can you hear me, that when it rains and shines,
(When the sun shines down.)
It's just a state of mind?

Is inflation just a state of mind?

There is a saying “ Everybody task about the weather, but nobody does anything about it.” ( This isn’t quite true. The Native American Tribes should get credit for their beautiful rain dances, even if they don’t always change the weather!)  But there is also the admonition, “First, do no harm”.  If you don’t understand inflation, then you should be cautious about taking an action to combat inflation.

Inflation seems to be defined as the Year Over Year inflation. For example, the Consumer Price Index, CPI, in the one month in 2022 compared to the Consumer Price Index in that same month in 2021. However that assumes that there is nothing strange in the CPI in the previous year.

There seems to be two problems with defining inflation this way. As someone who spent his career analyzing data, first shouldn’t the data be smoothed, and second shouldn't the period defining inflation be more than just a single year. There is a children’s story about Chicken Little (or Henny Penny for our English friends across the pond). Chicken Little says the sky is falling because an acorn has fallen on her head ( i.e. one piece of data for one point in time). Foxy Loxy plays along with her mistake and takes advantage of her.

What happens if we look at smoothing the CPI? First, looking at the unsmoothed CPI it looks like January 2021, February 2021 and March 2021 were well below the expected trend. Thus comparing March 2022 with March 2021 may not be the wisest thing to do. 

Smoothing the data, using a 5-year moving average (i.e.  the moving average of the current year is the average of the current year, the previous 2 years, and the following 2 years) presents a different picture. However before we get too excited about the higher than expected observed unsmoothed CPI in 2022, shouldn’t we wonder about the lower-than-expected reported and  unsmoothed CPI in March of 2020. LOL, was anything like a global pandemic happening in 2020 that was worth noting?

And before we get all excited about the observed and reported high CPI for March 2022, shouldn’t we wonder about the change in CPI that began in the early 1970s? It seems like it is larger and more ominous than the change from last year. I have blogged about my suspicions about what happened in the late 1970s https://dbeagan.blogspot.com/2021/07/money-supply.html and it appears to have a larger and more lasting impact on inflation than the recent changes. 

Before we do something about inflation, shouldn’t we understand more about inflation?

Insurance is Sharing

 

State Farm Jingle

But like a good neighbor,
State Farm is there

Don’t let anyone tell you otherwise. Infinitesimal  is not zero.

Infinitesimal things are very, very small, but there is still something there. Zero is the total ABSENCE of ANYTHING. Humans may round things, and treat them as if they were zero,  but Mother Nature does not round. When there is a risk of something happening, then that risk can be small, but it is not, can not be, zero. If the cost of the risk is large, it is natural to try to pool that risk with others. That is what insurance is all about. If there is a risk that something can happen 1 time out of 1,000 and when it happens, there is a cost of $1,000,000, then the cost of the risk for each individual  is 1/1000 * $1,000,000 =  $1,000. Having to pay $1,000 does not mean the cost of the risk is $1,000, only that the risk has been shared. If 1,000 individuals have contributed $1,000 to a pool, then  $1,000,000 is collected and the unlucky individual gets the entire $1,000,000 to pay for that thing occurring. It is not winning, it is sharing the cost of losing. Yes, the individuals for whom the event did not happen, have paid $1,000, but they also had the peace of mind that if in the event that they were unlucky, then they could pay the cost in full.

That is what insurance is all about. Your insurance premium goes into a risk pool based on the odds of that risk. The payment is made by the manger of that risk pool. In the event that the insurance is public, like Social Security Insurance, the risk pool may not even cover all of the  administrative costs. In the event that the manager of the risk pool is a non-profit, such as Blue Cross, the administrative costs will be paid from that risk pool. In the event that the manager of the risk pool is for profit, e.g. Liberty Mutual,  administrative expenses and a profit may be made first before the risk pool pays the unlucky individual. ( Why do you think that Mutual is in the name. It is all about sharing, i.e. making it Mutual.)

The size of the risk pool should be commensurate with the risk. If the risk is 1 in 1,000 then at least 1,000 persons should be in the risk pool ( actually more than 1,000, but coming up with the exact number is why insurance companies employ statisticians and actuaries). Increasing the size of the risk pool may lower the cost to everyone in the risk pool.

However the cost to everyone in the risk pool can NEVER be zero. If you choose not to join the risk pool, then you may not have the ability to pay for the risk. That is why there is compulsory insurance. If an individual does not have the ability to pay for the risk alone, then someone else has to pay that cost. If society must pay that cost, then  society can also compel that individual to join the risk pool and/or take actions to mitigate the risk.

If you are not infected with COVID, then you can not spread COVID to others, and you will not have to pay for any medical treatments for hospitalization associated with COVID. However the risks of being infected with COVID are NOT zero.

Knowing that the risk is NOT zero also does not guarantee that you can join a risk pool. The ability to join a risk pool, i.e. get insurance,  even if you have a preexisting medical condition had to be guaranteed by the Affordable (health) Care Act, also known as Obamacare.

Risk is never zero. Acting as if risk is zero is the point of Aesop’s Fable of the Ant and the Grasshopper. The working Ant may be boring, but he is prepared when winter, the risk, comes, while the playful Grasshopper is unprepared. Only if there is no future can there be no risk. You may not want to pay the cost of joining a risk pool, but if there are costs,  and if you can not pay them, then what is the alternative? People who think that they will never lose, are the most dangerous losers of all. There is a difference between saying “I don’t like to lose” and “I never lose.”  The first statement may be true. The second statement is impossible.