Category Archives: Finance

Shadow boxing the NIMBYs again: luxury vs low income apartments

Warning, this post is longer than usual.

NIMBYs will give any excuse to block housing. There’s two examples of this I’d like to discuss, one is the “luxury vs low income” false dichotomy. The other is when NIMBYs try to change the subject and ban corporations or foreigners from owning housing.

Let’s get one thing clear: affordable market-rate housing is just housing that has been on the market for a while. Houses built in the 80s are affordable now, even if they weren’t affordable when they were built in the 80s. Houses built this year generally aren’t affordable, but will be in 40 years. In economics you’d generally assume that products will be built for every level of customer. For rich customers, expensive products with expensive material are built. And for poor customers, cheap products with cheap material. Housing doesn’t follow this because of a few reasons.

The first reason is that for the past 50 years, much of the cost of building a house comes simply from getting permission to do so. There is a huge barrier to making housing whether you’re trying to make cheap or expensive housing. Cheap products can usually make up the different by being mass produced, but these barriers to housing (aka zoning etc) excise most of the benefits of mass production. That means there’s no point trying to mass produce houses anymore and make up in quantity, you can only produce quality houses and make up the difference using high prices.

The other reason that housing doesn’t follow the pattern is because it’s a good that lasts so long. Food is gone very quickly, whether it’s expensive or cheap. But an expensive or cheap house can last a hell of a long time with regular repair. Of course it slowly degrades, but that just means an expensive house slowly becomes a cheap house as its value on the market declines (or this is what you’d expect to happen, but if housing supply is constricted, price remains elevated). So again, a developer isn’t incentivized to mass produce cheap housing because anything built more than a decade ago has already become cheap housing, a developer of cheap housing is thus competing with the entire city’s housing stock.

For those two reasons, developers like to build “luxury” housing, including condos and apartments. Whenever these things are built, certain NIMBYs come out of the woodwork to protest the housing using vaguely left-of-center vocabulary. They’ll say things like “these expensive apartments are only for rich people! That won’t help the housing crisis for poor people!” Then they try to stop development with their economic illiteracy.

Those NIMBY arguments are just plain wrong. ANY increase in housing supply will lower the cost of housing in the market, even if it’s luxury housing being built. If this luxury housing isn’t built, then the rich people are forced to compete with the middle class people for the middle-income housing. The rich can afford to spend more, and so they drive up the cost of middle-income housing. If instead the luxury housing gets built, then the rich are spending their money on that, so there’s less demand for middle-income housing. Now more middle class people can afford middle-income housing, so they don’t have to compete with poor people for cheap housing. All this means lower prices for the middle class and the poor as less people are competing for the same amount of housing, and it happened because the rich were able to move in to those new luxury units.

So stop protesting luxury apartments, they lower the cost of housing just as much as cheap affordable apartments. And in 40 years those luxury apartments will have worn down a bit and will now become affordable so anyone can move into them.

The other thing I’d like to hit out against is people trying to ban foreigners and corporations from owning homes. Canada recently enacted a ban on foreign home buyers, and I have two problems with this. One: it will not do anything for affordability, foreigners make up a tiny percentage of Canadian home buyers. Number 2 ties into the ban on corporations, so let me discuss that.

There’s a knee jerk reaction by some that corporations and investors are at fault for driving up the price of houses. But corporations don’t live in houses, people do. A corporation only buys a house because they think they can make back their money by selling or renting it to another person. This implicitly requires that corporations think the value of houses will continue to go up, and monumentally so, otherwise they’d lose money on this transaction. So are you angry at corporations buying houses? Then the solution is to build more houses so the market is flooded and the corporations lose out on their investment.

The second part of this knee-jerk is an economically illiterate idea that corporations are just vampires sucking value out of the economy. If only we banned corporations, then all the prices would go down due to less competition and there’d be no downsides whatsoever. But if you think about it economically you’d realize that corporations are providing a form of service by being in the housing market: they are providing liquidity to the housing market.

Liquidity is most well-studied in places like the stock market. A lack of liquidity can lead to wild swings in prices, both up and down, and is generally regarded as a bad thing for the market as it hurts both buyers and sellers. When you want to buy shares of stock, you don’t need to match yourself to a single individual who wants to sell the same number of shares you want to buy, at the same price you want to buy them at. Instead, market makers create the liquidity by buying and selling lots of stocks. The market makers don’t want to hold any stocks for long, they just want to buy and sell them.

When I buy a stock, the market maker is immediately able to get it for me, as much as I want, and at the market price. When I sell a stock, the market maker immediately takes it, and again they take as much as I give them, at the market price. I don’t have to find an individual buyer and seller, everything can happen through a single market maker who is interacting with not only me but every other buyer and seller in the market. This is actually much more efficient than if every buyer and seller had to go out and find someone to trade with, we all just go to a single person, the market maker, and get the market price from them.

The market makers are in turn taking on a lot of risk, and using a lot of stats and technology to mitigate that risk. When I sell them some Apple stock, they are willing to buy it immediately on the assumption that somewhere out there someone will buy it from them for more. They take a small cut, usually a cent or so per share, which helps hedge against falling prices in the few milliseconds it takes them to find a new buyer. But there’s a risk that if Apple stock falls fast, they’d be left holding my stock which is now worth less than I sold it to them for. But market makers are large and invest in a lot of technology and statistics to be able to take on that risk.

But now imagine there were no market makers, the stock market would have a lot less liquidity. Any time I wanted to sell Apple stock, I’d need to find an individual who was a willing buyer. But if the price of Apple is falling fast, investors will get skittish, they’ll be worried about getting caught out, and most of them won’t have statistics and technology that the current market makers have. Thus they may not be willing to buy from me, thus I’ll have to lower my price even more to find a buyer, but that makes the price of the stock fall even faster, meaning that investors get even more skittish and even less willing to buy…

This is what’s called a liquidity crisis, it can happen to stocks moving both up and down. Lack of liquidity leads to wild swings in prices which hurt both buyers and sellers and generally mean people lose more money from the market than if it were liquid. But these days liquidity is generally smoothed out by the market makers. For all that conspiracy theorists hate them, the market makers are why buying and selling stock is so seamless, easy, and reliable these days. Large price movements are smoothed out by liquidity, and any buyer can find a seller and vice versa so people can enter and exist the market whenever they wish.

Now let’s say for a moment that corporations are prevented from buying any housing. Let’s even take the more radical proposal I’ve seen that says no one should be allowed to own more than 1 house. And let’s see the results this would have on the housing market. Spoiler alert: a lack of liquidity in the housing market would hurt both buyers and sellers.

So when you want to sell a house, you have to find a buyer. In our theoretical “no corporations, 1 house per person” market, you’d need to find someone who actually wanted to live there. Someone who wants to live exactly in your area and in your house. If your house is a fixer-upper, you need to find someone who is willing to buy and fix a house. The need to find someone willing to immediately live in your house, right now severely limits your potential pool of buyers. Maybe people just don’t want to fix a house these days, so even thought the repairs aren’t that bad, you’d now have to either do them yourself or lower your price by a lot in order to find a buyer.

Now when corporations are allowed to buy homes you can find a buyer immediately. The corporations then takes on the risk of finding people to buy the house, they take the cost of showing buyers around, of fixing up the house if need be, of advertising it, etc. Corporations are providing liquidity to the housing market, which prevents giant movements in price. Someone who needs to sell their house in a hurry might otherwise be forced to cut the price 20%, 30%, 50% if they just can’t find a buyer within a month or two. But a corporation can buy the house at its full price and can then afford to sit on it for a few months waiting for a new buyers to come along. So people selling their house get the best price possible because corporations are providing liquidity.

If you want to buy a house, you also have to find a seller. Most houses aren’t for sale at any one time. But it would be a nightmare without corporations because then you would actually have to find someone who is actively moving out of their current house. Very few houses are being built (thanks again, NIMBYs), so any house you want to buy will be pre-owned. And remember we’ve banned corporations and multiple home owners, so that house isn’t being kept empty, it’s lived in. That then means that you have to move in at precisely the time they want to move out, otherwise either you’ll be caught homeless for a time or they’ll run afoul of the law because they’ll own more than 1 house at a time. It would be difficult, maddening even to line up your schedules.

This maddening scenario is exactly what’s going on in Britain right now. The British housing market is extremely illiquid not because there are corporations but just because there is an extreme shortage of houses period. The UK has the largest housing shortage of any member of the G7 or G20, meaning that there’s basically no houses anywhere sitting empty. In America, about 9% of homes aren’t currently lived in. Some are dilapidated, but some are just being held while buyers and sellers find a price. In the UK, that number is around 3%, and again many of those are dilapidated and unlivable.

The lack of empty homes in the UK means that anyone looking to move in must first wait for the owners to move out. Of course no one wants to be left homeless, and no one wants to own two homes at once and be forced to pay taxes on both, so Britain has an insane system found no where else in the world called “chains.” In a chain, every property sale has to execute at exactly the same time so that multiple people can all move into/out of houses at the same time. These chains can have over a dozen links, and so of course you can imaging getting a dozen families to all agree on a move date is a nightmare. This system is basically completely unique to Britain, I haven’t heard of it anywhere else, and it is all due to a lack of liquidity in the market, although here brought on by comical undersupply and not the banning of liquidity-assisting corporations.

The chain system is an absolute mess, you can search social media for the horror stories of people losing jobs because move-ins were delayed, or losing money because they had to expedite a move-out. Nothing works the way it is supposed to because the market is so illiquid, and everyone in the British housing market is tangibly worse of because of it. And that’s exactly what we’d get if no one were allowed to own a home they didn’t actively live in.

Corporations and home investors, foreign or native supply liquidity to the housing market, they do not make house prices go up. House prices go up because there is a lack of housing supply. If you’re tired of corporations owning homes and want to force them to lose money, then you should demand your city allow anyone and everyone to build a house on any plot of land that they own. Yes even your neighbor. If your neighbor wants to subdivide his house to build a duplex, let them. If they want to sell to a builder who will demolish the house and build an apartment block, let them. If some developer wants to buy the vacant lot across the street to build condos, let them. If a big developer wants to buy the convenience store down the street and build a 5-over-1, let them. Only by having more housing in everyone’s back yard will the cost of housing go down.

Good idea: financially supporting workers displaced by AI. Bad idea: taxing companies when for displacing workers with AI.

AI is again the topic of the day and people are discussing what to do about the coming “job-pocolypse.” It seems AI can do anything we humans can do better and so 30% or more of jobs will be destroyed and replaced by AI. Leaving aside how accurate that prediction is, if 30% of all jobs will be impacted then it does warrant a public policy response. Everyone’s got their own personal favorite, but one I see come up again and again is that companies should face a hefty tax any time they replace a worker with AI.

To be blunt, taxing companies for replacing workers with AI is a terrible idea. Let’s leave aside the argument of “how do you prove it,” and cut straight to the fact that the government should not be taxing technological progress. Just to start with some history, how many farmers were displaced by tractors? Millions. In 1900 40% of Westerners worked on farms, now it’s less than 5%. Tractors meant that a single farmer could do the labor of tens or hundreds of men, and so they could fire many of their farm hands to be replaced by tractors. But does anyone reading this wish nearly 1/2 of us were still farmers? Should the government have heavily taxes tractors to preserve the idyllic rural farm life?

The argument in favor of taxing companies that replace workers with a machine is that the company is becoming more profitable at the expense of the worker, and they should pay it back. The current hullabaloo is about being replaced by AI, but in the 20th century similar calls were made when factory workers were being replaced by robots. The problem with this argument is that ignores society. The worker and the company are not the only 2 pieces of the equation, society in general benefits when companies become more efficient. Technology is deflationary, and it has allows many products to drop or price or not increase as rapidly as wages in general. Food today costs less as a percent of annual income than at nearly any time in history, and a large part of that is because the cost of food is decoupled from the cost of labor. So farm hands being replaced by tractors helped all of society by giving us cheaper food, and all of society would have been harmed if taxes had been instituted to prevent tractors from becoming commonplace.

Are the workers harmed when their jobs are replaced by AI? Yes of course. But society itself is helped and so all of society should bear the costs of helping the workers. We should of course offer unemployment benefits and job retraining to those affected. We should not let them go by the wayside the way we did to blue collar factory workers in the 20th century.

But neither should we shoot society in the foot by blocking technological progress that will help all of us. AI replacing jobs will mean products will become cheaper relative to wages, just as what happened with food. A lot of people also spread nonsense that unemployment will skyrocket as the displaced workers can’t find other jobs. They misunderstand economics, there will always be demand for more jobs. The price of some goods will decrease thanks to AI, but that means that people can buy more of those goods or buy more of others goods that they put off buying because they were forced to choose and only had so much money. As prices fall, demand will rise, raising demand for labors in other areas, and a new equilibrium will be reached. Those jobs lost due to AI don’t mean the workers will be forever jobless, any more than 35% of the population displaced by tractors meant that unemployment skyrocketed in the 20th century. Time and time and time again technology has replaced the jobs of workers, and the workers have found new jobs. It will happen again with AI.

Fitch Downgrades America’s credit rating

I’ve spoken before about how credit rating agencies are downgrading the debt of nations. Now, Fitch has downgraded America’s credit rating from AAA to AA+. Once again I’m seeing a lot of conspiracy theories about this and I thought I’d take a moment to hit back against them.

The first conspiracy is the common one that the financial system is conspiring against the common man. This sort of conspiracy is no different from the old “evil bankers control the world” trope, but it gets a lot more traction online when it’s framed with a leftist slant. To be blunt, the financial system is competing with itself more than it is conspiring with itself. Fitch is competing with the other credit rating agencies (Moody’s, S&P) and if it downgrades America’s credit for no reason, it would lose trust in the eyes of the financial institutions which pay for its ratings.

Ratings agencies rate all kinds of debt, not just sovereign bonds. And financial institutions will pay for those ratings so they know where to invest and where to avoid. Trust is key to this, and without trust, Fitch would die. If financial institutions don’t trust Fitch’s ratings, they simply won’t pay for them and will take their business elsewhere. So Fitch cannot in any way downgrade ratings in a way that the broader financial market would not agree with, otherwise it would destroy trust and tank its business model.

In this, there is a common chicken and egg problem with ratings agencies in that they usually only change their ratings when the broader market is already leaning in a certain direction. IE they are followers, not leaders. But that that just lends more credence to their ratings. The market was already very willing to believe that America needed a downgrade, so Fitch isn’t doing anything out of the ordinary. It’s the politicians who have screwed the people on this one, not the ratings agencies.

The other, similar conspiracy I’ve seen is that the ratings agencies are conspiring to undermine Biden and tank his presidency. Biden has been trying to tout the strong economy, and some liberal commentators have been upset that the public doesn’t always buy it. So of course this must be just another GOP plot to brainwash the voters that the Biden economy isn’t awesome.

I would point out however that American real wages are still below where they were when Biden took office. Note for example that real wages declined 3.6% from June 2021 to June 2022. That’s a big dip, and people notice it. People’s ambivalence about the economy isn’t some nefarious plot, it’s very clear when listening to people’s complaints (inflation) and looking at the data (real wages dropping). It’s also quite understandable that ratings agencies have looked at this very same data, as well as the rising debt amid partisan bickering over how to pay it. From this, they might reasonable downgrade America’s credit rating. Not everything is a conspiracy against one’s favorite politician.

Many people will point to 2008 and the financial crisis about why we can never trust ratings agencies again. But that was over a decade and a half ago and every country added new laws to constrain financial institutions. Saying you can’t trust Fitch because of 2008 is like saying you can’t trust the Labour Party because they were in charge during 2008.

So Fitch has downgraded America’s credit rating, and it seems the financial markets were broadly ready to believe them. Rather that stew in conspiracies, it is better to take these criticisms to heart and find a way to fix them.

Why are conspiracies about the stock market so common?

The obvious answer to the question posed in the title is that the market is complicated, and therefore people who don’t understand it are more likely to fall into conspiracies than to admit their ignorance. But I truly am blown away by how common stock market conspiracies are amongst “retail” investors. I don’t just mean the meme stock traders, many many retail investors I’ve spoken to have conspiracies about how the amorphous Wall Street is driving the market one way or the other in order to “punish” someone. Usually the argument goes that X company is a threat to Wall Street, either because it supports some politics that Wall Street doesn’t or because its technology is highly disruptive to an entrenched industry. Therefore Wall Street “punishes” it by deliberately pushing down its stock price.

Just as an aside, that disruptive tech idea is dumb merely on the face of it. The idea is usually said to me as “Wall Street has too much money invested in Y industry, and X company has a technology that could totally disrupt it. Wall Street is protecting its investment by forcing down X company.” This is dumb on the face of it: Tesla, Amazon, and Apple were all exceptionally disruptive and still grew by leaps and bounds. Just because some investors have their money tied up in Ford doesn’t mean other investors won’t give Tesla a shot. Not every investor on Wall Street is invested in the same things, so the idea that they would act as a collective unit is nonsense.

As another aside, I wrote early about how this was a conspiracy I see a lot when talking about nuclear fusion. The idea is that fusion is such an amazing energy source that all other energy sources can’t compete, so they work together to keep it down. But if they can keep down fusion, why haven’t they kept down every other disruptive tech that upended industries through creative destruction? I never get a good answer.

Anyway I think this widely held believe, that Wall Street “punishes” stocks and causes them to go down, is simply another case of people not understanding that the market is filled with individuals acting in their own selfish interest. The only way Wall Street could act as a collective would be if each and every investor was forced to act the same way no matter what.

Say Company X has stock selling at 20$. Some Wall Street investors think that 20$ is a fair price for that stock. But some Wall Street investors are angry that Company X has technology which will disrupt their investments, so they want to “punish” it and force its price down to 1$. They can try to do this by selling the stock, but if the stock falls to say 15$, then the investors who think 20$ is a fair price will happily snap it up, because if 20$ is a fair price, then 15$ is a deal. Quickly the buying pressure from investors who think it’s undervalued should overwhelm those who want to push it down, and the price would stabilize.

Now there are two reasons this mechanism could fail. One is that all investors are forced to act in concert, which again doesn’t make sense at all. Investors compete fiercely with one another, they do not work together for common benefit. And furthermore working together creates a huge prisoners’ dilemma, if even one investor breaks with the group at large, they can reap enormous rewards by buying up stock with a fair value of 20$ for just 1$. Getting to 20x your money for free is a huge incentive to break with the collective, and no greedy investor would pass such an inventive up.

The second reason this mechanism could fail is that there are very few investors who believe the fair value is 20$, and most agree the value is 1$. But that isn’t a conspiracy in action, that’s price discovery in action. The price is an equilibrium between the expectations of the buyers and the sellers. If more and more people think its fair value is higher than at present, its price will go up. If more and more people think its fair value is lower, price will go down.

Trying to “force down” the price of a stock below its fair value is not a profitable way of doing business. No one investor or group of investors control the market, the market is a huge competition between all investors. And so while selling a stock for a price below its fair value can momentarily drop the price, it’s also a great way to lose your own money. Meanwhile if the market is filled with investors who think the fair value is higher, they’ll buy the stock back up to the original point. All you’d succeed in doing with this trick is burning your own money.

The price of your favorite stock went down because more investors thought it was overvalued than thought it was undervalued, not because of some huge Wall Street conspiracy.

The Lunar advantage

This post is gonna be weird and long.

I often have weird thoughts that I wish I could put into a book or story. My thought today is about comparative advantage. Comparative advantage is an economic concept that explains why people and countries can specialize into certain areas of work to become more efficient.

For example, in Iceland the cost of electricity is very low, which is why Iceland has attracted a lot of investment in industries that require lots of electricity, such as aluminum smelting. On the other hand countries like Bangladesh have a low cost of labor, which is why labor intensive activities such as clothing manufacturing invest there. It doesn’t make sense for a company to put an aluminum smelter in places where electricity is expensive, nor does it make sense to put a clothing factory where labor is expensive. Iceland and Bangladesh have their own comparative advantages at this moment in time, and that explains their patterns of industry.

Let’s imagine for a moment that there was a fully autonomous colony on the moon. People lived and worked there without needing to import air, water, or food from Earth. They can trade with Earth, but if Earth were cut off they could still make their own goods, just as if our country were cut off from the world we could still make our own food, drink our own water, breathe our own air. Let’s say they use super-future space technology to extract water and oxygen from moon rocks, and grow crops using moon soil.

If there would be such a moon colony, we would assume there would be trade with Earth. Certainly the cost of moving goods from Earth to the moon and vice versa are enormous. But it was once unbelievably dangerous to cross the oceans, and people still did it because the profits were worth it. We would expect that the moon would have some comparative advantage compared to Earth and vice versa, which would make trade profitable. This comparative advantage is the same reason Iceland sells aluminum products to Bangladesh who in turn sells Iceland clothing.

So with all this in mind, I assert that the moon’s comparative advantage would naturally be in large, heavy goods, but not because of the moon itself but because of the journey.

Let me give another example, suppose there is a factory on Earth making steel and a factory on the Moon making steel. Let’s also say the iron and carbon for the steel can be gotten just as easily on the Moon as on Earth. I assert that the one on the Moon has a comparative advantage because of space travel. Sending goods from the Earth to the Moon means having to spend a lot of energy accelerating out of Earth’s thick atmosphere, then also spending energy to slow yourself down for a moon landing. By contrast it takes much less energy to accelerate off the atmosphere-less surface of the moon, and landing on Earth costs far less energy as you can use the atmosphere itself to brake your fall.

So a moon steel factory can send packages of steel to the Earth at a rather low transport cost compared to vice versa. That gives an advantage to the moon steel factory, as if there are shortages on Earth the moon factory can fill them at a rather low cost, while Earth cannot do the same to fill a need on the moon. The transport costs are not symmetric, and they are in the moon’s favor. I would assert that, all else being equal, investment for steelmaking would flow into the moon and out of the Earth.

Of course the “all else being equal” is the rub. Air, water, and food are hard to come by on the moon. Iron and carbon might be easier but all the mining equipment is already here on Earth. We would have to do a lot of work and build a lot of technology to make a moon-base even possible. But in theory economies of scale and future-technology could make it possible and even economical. And at that point it might enter a virtuous cycle due to these asymmetrical transport costs I mentioned. It will always be cheaper to send goods from the moon to the Earth, than vice versa.

It’s just a random thought I’ve had and I want to put it in a work of fiction. In some sci-fi universe, a moon colony is economically sustained by this comparative advantage compared to Earth. But I’ve never gotten the courage to write this story so until now it’s just been an idle thought in my head.

Understanding the lack of free lunch in the student loans debate

I’d guess my opinion matches most Americans about the Supreme Court’s student loan decision. The online response has been rather mental though. There’s been a number of people hyping up “obvious” solutions that have very very obvious problems that they don’t want to confront. So I’d like to speak about some of those.

Student loans should be dischargable in bankruptcy. The entire reason that Joe Biden supported student loans not being dischargable was so that poor students with no assets would be able to get the loans. The only reason someone will give you a loan is because they want their money back with interest. If they don’t think you’ll pay them back, they either won’t give you the loan or will demand exorbitant interest rates. The people who will get loans are either rich enough that they can obviously afford to repay, or are using the loan to buy an asset which can be repossessed if they refuse to pay. Poor students don’t fall into those categories, so for a long time they were locked out of student loans.

If student loans become dischargable, then banks will fear that certain students will rack up student loans and then immediately declare bankruptcy upon graduation. The graduate will have no assets to repossess, and so the bank is SoL. Banks will then only give loans to individuals with enough assets to repossess, or who are already wealthy enough to pay it back easily. Making loans dischargable would reduce the number of poor people who can go to college, and thereby increase income inequality. If you think that’s a good trade-off then we can have that debate, but this isn’t a consequence-free solution.

Loans should have no interest. This is the same as saying there should not be any student loans. Again, the reason people give out loans is because they expect to make back their money with interest. Without interest, there is no reason to ever write student loans. And so again, college becomes unreachable for those not already rich.

College should be free, provided by the government. This is a defensible policy, but too many people imagine a world without trade-offs, and those must be considered. People who think college should be free often point to Europe but don’t even understand that college is in fact not always free. In Germany, where college is free, only 1/3 of adults have a post-secondary degree or certificate, compared to around 1/2 of Americans. The exact numbers vary depending on how you count, but there is a clear divide, higher education is more rationed in Germany than it is in America.

The German system means that not everyone is even allowed to try to go to University, and those that do go usually face fewer teachers per student, (meaning they have to teach themselves more) and less assistance overall. I’m sure a lot of people would immediately fire back that this is a good thing, not everyone needs to go to University. But the thing is they’re usually talking about other people. They would never be able to look themselves in the mirror and admit that they be one of the 2/3 of people who just aren’t good enough to be accepted into a German University. Because higher education is not as rationed in America, more people can go.

Then there are the universities that actually do have fees. On paper these are lower than American fees, in practice many Americans qualify for financial aid that makes college free or at least cheaper than European college. In Belgium, tuition fees are about 1000 euros a year. I paid less than that in my undergrad (around 1000 dollars a year) because I received a good scholarship. And I was not an exceptional student at an exceptional university, if I was I might have gotten a full ride.

There are many reasons to despise the ever increasing cost of American universities. Most of the money goes to administrative bloat, almost nothing is spent to improve student lives or increase professor’s pay. Even the most “socially conscious” Universities will still pay millions of dollars to water their perfect lawns rather than pay the staff or grad students a living wage. But the student loan debate comes with trade-offs, and we must confront them if we want to change the system. Cakeism will get us nowhere.

Corporate Greed is over, now comes corporate generosity

If you’ve been to the grocery store recently, you have probably seen an incredible sight. Eggs are now selling for less than they did in 2022. Walmart says they’ll sell me eggs for 1.19$ a dozen, and Target will sell them for 0.99$ with a special discount. Considering that at the beginning of 2023, eggs were selling for as much as 5$ a dozen, this comedown is remarkable.

It gets to the heart of a discussion about the origins of inflation though. The classical definition of inflation is too much money chasing too few goods. That means that when either the money supply is increased or their is a shortage of goods, we should expect to see inflation. This thesis does seem to have played out in 2021-2023. The money supply was increased enormously in 2020 and 2021, while COVID restrictions meant the supply of goods was constrained and could not rise quickly to meet it.

But that isn’t the definition that has been gaining traction. Recently folks have pointed to corporate greed as the primary driver of inflation. Under this thesis, inflation is not driven by the money supply or the goods supply, but by corporate greed in and of itself. If corporations weren’t greedy, they wouldn’t raise prices. But if prices go up because corporations are greedy, doesn’t that mean they go down because corporations are generous?

I’d like to see someone like Bernie Sanders explain the fall in egg prices. Why aren’t Walmart and Target just being greedy like all the other companies? If it’s so easy to raise egg prices by being greedy, then what mechanism could possibly make prices fall? What possible reason could their be for a fundamentally greedy company to willingly lower prices and receive less money?

For that matter, why is Exxon-Mobile being so damn generous? Over the past year, crude oil prices have gone from 100$ to just 70$. Exxon-Mobile was public enemy number 1 when gas prices were high, and was blamed for being too greedy. Have they now become generous instead? Have all the oil companies become generous? Why are the oil companies so much more generous than all the other companies?

It gets to the heart of the problem, inflation isn’t driven by corporate greed. Corporate greed is a constant, I’d go so far as to say human greed is a constant. Corporations (on average) demand the highest possible price for their goods that the market will bear. Laborers (again on average) also demand the highest possible price for their labor that the market will bear. No one ever willingly takes a pay cut without good reason, good reason usually being they have no other choice.

If corporations want to raise their prices above what the market will accept, then they’d be like me walking up to my boss and demanding a million dollar salary. They won’t get what they want no matter how hard they try. If Walmart raises the price of eggs, then Target can steal all of their business by keeping its egg prices low. People stop buying eggs at Walmart, they instead buy eggs from Target or from one of the hundreds of small and independent retailers that still dot America. Grocery stores are not a monopoly in our country, they do not have the power to set prices on their own. They are always in competition with each other and prices reflect that competition.

By the same token, if I demand a million dollar salary, my boss just won’t pay it. If I say I’ll quit if I don’t get it, he’ll show me the door. I am competing with hundreds of other workers in my field and so I cannot raise the price of my labor over and above what others are charging or else I’ll get replaced. It is a fact that many people ignore, but there is a market for labor just as their is a market for any other good. And the labor market has sellers (workers) and buyers (employers) just like any other. So when trying to answer questions about (say) the egg market, it’s useful to first think about how it works in the labor market. We are probably all more familiar the labor market with since if you’re reading this blog you’ve likely worked in your life.

So, in the labor market, can the sellers of labor (the workers) raise their prices just by being greedy? No, of course not. Without some decrease in supply or increase in demand, the price (salary) of laborers doesn’t go up, and workers who refuse to work for the market raise simply won’t receive job offers. It’s the same with corporations and it’s the same with goods inflation. Prices of goods aren’t driven by greed. They’re driven by supply shortages and a glut of money, both of which are in part exacerbated by government policies.

The current administration has continued Trump’s protectionist trade policies, which prevent American companies from being forced to compete with overseas companies. And both congressional spending and the Federal Reserve’s balance sheet have expanded considerably, bringing more and more money into the money supply. Too much money chasing too few goods, that is what causes inflation.

It’s official, we’re now being taxed to pay back Peter Thiel

I posted a while ago about how the Biden administration was bailing out SVB without calling it a bailout. Basically Silicon Valley billionaire and hedge fund managers (like Peter Thiel) put all their money in a bank well in excess of the 250,000$ FDIC insurance limit. That limit is a known risk. If the bank you use goes bankrupt, and if you exceed that limit, the FDIC is only obligated to give you back 250,000$. Doesn’t matter if you had 250,001$ or 999,999,999,999$, FDIC is only obligated to give you 250,000$.

But that would be unfair to the billionaires. After all, why should they ever suffer the consequences of their actions? So instead the administration promised that every single depositor would be made fully whole. This was spun as them protecting the little guy, but the little guy was already covered by the 250,000$ insurance. I don’t have more than that in the bank, neither does anyone else I know. If my bank goes bankrupt, I will be fully paid back because my deposit is far less than 250,000$. If you have more than that amount, then you are solidly rich and do not need a government bailout.

But the bailout came anyway. The FDIC handed out money to cover the billionaires and hedge funds. Now that money has to come from somewhere. Biden promised it wouldn’t come from the taxpayers of course, but it still is coming from the little guy. It’s coming from our bank accounts.

Every person who owns a bank account is paying a small amount of tax into the FDIC insurance program. It won’t show up as a line item in your bank statement, but it’s there all the same. But for every bank account held by a bank, they have to pay a little bit into the FDIC. That cost naturally gets passed on to the holder of the bank account, just like every other tax. When the tax on cigarettes rises, the price of cigarettes rises. So too is it with bank accounts. You won’t see the tax as money rushing out of your account, but you will see it as less money going in. The bank will pay you less interest on your deposits because they have to take some off the top to pay for the FDIC insurance. And if there was no FDIC insurance, you’d get more interest.

You can see this exact same scenario if you look at big bank accounts. There are some banks with accounts which hold millions, even billions of dollars. The FDIC is only obligated to pay back 250,000$ in the case of bankruptcy, but a responsible billionaire who does not need a government bailout will pay for deposit insurance which covers more than the 250,000$ FDIC limit. That deposit insurance will decrease the amount of interest paid on the deposit, or even remove the interest entirely to pay the insurance. If you have to pay for insurance, you get less interest.

Everyone with a bank account has to pay for FDIC insurance, we don’t even get a choice. And now we need to pay for even more insurance to refill the FDIC’s account since they emptied it to bail out Peter Thiel

The FDIC plans to hit big banks with a tax to refill its account. This is being spun as a progressive redistribution from the rich to the poor. It’s the opposite. If a tax is levied on Walmart, Walmart just raises its prices, and the Walmart customers pay that tax themselves. The vast majority of Americans have their money in a big bank like Bank of America. So the big banks are going to pass this new tax onto their depositors, just as they pass the FDIC insurance tax onto us. You and I will be receiving less interest on our deposits now, because the FDIC spent all their money on Peter Thiel and co. Take from the poor to give to the rich, socialize loses and privatize profits. It’s 2008 all over again.

I know the amount is small. It’s probably going to be no more than a few dollars in lost interest in my account. But a few dollars times the 100 million or so Americans who bank with big banks makes the few billion dollars needed to bail out Peter Thiel and co. And it shouldn’t be this way, we should not be paying for their mistake.

And I know I keep harping on Peter Thiel, but it’s because a bunch of so-called “progressives” are refusing to even contemplate that this is a bailout taking money from the poor. By ignoring the context you can see SVB and its depositors as “the little guys” and Bank of America as “the rich” so taking money from Bank of America to give to SVB depositors is re-distributive. But it isn’t so. SVB was the bank of billionaires and hedge funds, Bank of America is the overwhelming bank of America’s poor and middle class. Taking from Bank of America to pay back SVB’s depositors is taking from the poor and middle class to pay back the billionaires. And reminding those “progressives” of exactly who is being paid back is just something I feel I should do.

Socialism Betrayed: Racist Great Man theory of history strikes again

There was some mid historian who once said: “The history of modern Europe can be defined by 3 men: Napoleon, Lenin, and Hitler.” This plithy remark sums up much about the “great man” theory of history.

For those who don’t know, the great man theory believes that history is moved not by economic or societal or any large scale forces, but by the actions of individuals, the “great men” (almost never women). This theory opines that it was Napoleon, whose conquests spread republicanism throughout Europe and whose terrorizing of European monarchs lead to the Concert of Europe, it was this Napoleon who defined the course of the 19th century. And in just the same way, Lenin and Hitler in their own ways defined the course of the 20th century, pulling Europe in their directions of communism or fascism, remaking the modern world through their life and death. NATO and the Warsaw pact, whose presence defined Europe for half a century, came about because of Hitler. And Leninist communism, which defined the ideological struggle between East and West, came about obviously due to Lenin.

This great man theory has been attacked by much better historians than I, but I want to focus right now on how it completely invalidates the role of any individual in society except the Great Man himself. Napoleon without an army to command and a state to lead is nothing, and yet his soldiers, his bureaucrats, and the entire nation he inherited are meaningless in the great man theory of history. And the revolutions which toppled the monarchy and allowed Napoleon to begin his rise were not the actions of solitary great men, but a great mass movement of the French people as a whole. It is likely that even if Napoleon had never existed, the conflict between revolutionary republicanism and monarchism which defined much of his legacy would still have happened. And if Lenin had not existed, the conflict between capitalism and communism would likely still have been present.

I’m reading “Socialism Betrayed” by Roger Keeran and Thomas Kenny and it’s startling how in the very first pages of the book, they define their thesis that the great man theory is true and the people of society do not matter.

The collapse of the Soviet Union did not occur because of an internal economic crisis or popular uprising. It occurred because of the reforms initiated at the top by the Communist Party of the Soviet Union (CPSU) and its General Secretary Mikhail Gorbachev

Socialism Betrayed

Really?! It didn’t happen because of nationalist movements among the subjugated peoples of the USSR, like the Estonians, Latvians and Lithuanians? It didn’t happen because of mass movements which defined the collapse of every other Warsaw Pact nation in Europe? It didn’t happen because of the well-documented shortages and flailing USSR economy propped up almost entirely by oil and gas money? How easy it is to do history when you can define your villain and ignore all context!

I can already tell that this book will be dumb. Real dumb. Probably as bad as “The End of Growth” for how much it will ignore the facts to suit and opinion. Why are all the dumbest books I read the anti-capitalist ones?

Don’t put all your money into bonds, a message for SVB

So remember a while ago I wrote a post about how you should diversify your investing, not just put all your money into bonds? I just realized that if SVB had listened to me they wouldn’t have been in this mess. I talked about how rising interest rates make old bonds worth less than you payed for them, and how you’d take a loss if you needed to sell them in a hurry. That’s exactly what caused SVB’s collapse, they were sitting on assets (bonds) that had lost tons of value due to rising interest rates. That triggered fears of insolvency which triggered a bank run.

If anyone knows a dumb bank that needs to hire a smart guy like me to do risk assessment, I’m always looking for a new job. Just email theusernamewhichismine@gmail.com.