I’m really not a Fed basher

There seems to be a general consensus out there that QE2 was the US Federal Reserve “printing money” to buy T-bills.

I wondered about that.

So I looked at what the Fed has to say in their FAQ entry for “Is the Federal Reserve printing money in order to buy Treasury securities?” at http://www.federalreserve.gov/faqs/money_12853.htm.

Well, the first word there is very clear: “No.”

But then they say that:

The term “printing money” often refers to a situation in which the central bank is effectively financing the deficit of the federal government on a permanent basis by issuing large amounts of currency.

Ah. Well, “printing money” may “often refer” to whatever straw man one wishes. But that doesn’t answer the question. Furthermore, when they explain what they actually do, they go vague and, one can’t help but think, purposely obfuscatorial.

Suspicions, after all, can’t help be be raised when the amount of QE2 pretty closely matched the US government’s deficit.

So, here’s the way I read their FAQ entry:

We don’t print money. We just give our computers bigger numbers. That’s not “printing.”

And, if it is, we are really not printing the money, we’re buying T-bills, which other people can buy, albeit at higher prices. And, since we’re buying T-bills, we’ll eventually get our money back, so we didn’t “print money.” We only loaned money we didn’t have until we made it by magic. And we expect to get it back and then throw that money away. So the money wasn’t permanently “printed”. So it wasn’t printed.

Well, I don’t believe they ever will throw that money away. But let’s examine the situation if they do:

I print some Ben Franklins.

I loan them to you.

In a few years you pay me back.

I burn the bills you pay me back with.

Did I “print money?”

Why, “No!” says the Fed.

But all this isn’t particularly interesting.

What’s interesting is this FAQ entry is from the world’s premier central bank. This blundering lie is the state of the financial industry’s art!

Now, the “industrial” world has recently been going through a great transition. Despite what a recent spate of political axe grinding says, there has been and continues to be a tremendous broadening of ownership of stored wealth, Statistics on percentages of US people who own stocks are telling. 50 years ago no one owned stocks. Now most people own stock – if largely indirectly.

And, the financial industry is still run as if it’s 50 years ago.

Because they can.

Consider how many people in the US have interests in funds that have a house rake of over 1%. … Per year.

But why would people pay that kind of rake? Almost anyone can make their own mutual fund – an index fund – for nearly 0% overhead. Simply buy 20 or 30 stocks and hold them. Heck, just buy the Dow Industrials if picking a random 20 or 30 stocks is too hard.

As it is, though, there are billions of dollars being paid for slick brochures and a few peoples’ high salaries.

This is a field begging for disruption.

What I notice is something made newly illegal

With Google Books it’s easier than ever to read old stuff. Old magazine and newspaper writings give a fascinating perspective on modern times. Just translate the words in to modern syntax and such-like. Viola! You can find the same thing written a hundreds years apart.


The year 1789 was one of stagnation and financial embarrassment in France. The nation had a heavy debt and a serious deficit, and there was scarcity of money and a want of confidence. This was a time of trial and a test of statesmanship. There were those who saw that the evil could only be remedied by patience, careful management, and the strict adherence to established financial principles. But others, as Dr. White says, were “looking about for some short road to prosperity, and ere long the idea was set afloat that the great want of the country was more of the circulating medium; and this was speedily followed by calls for an issue of paper – money.” There was then a struggle. The dangers of such a course were vividly depicted on the one band, and on the other it was maintained that it would be the salvation of France. On the 19th of April, 1790. the finance committee of the French Assembly reported that “the people demand a new circulating medium;” that “the circulation of paper is the best of operations;” that “it is the most free, because it reposes on the will of the people;” that “it will bind the interests of the citizen to the public good.”

The Government had appropriated the vast property of the French Church, amounting in value to about four thousand million francs, and this was to be the security of the paper. Accordingly, in April, 1790, the “Government issued four hundred million francs in assignats — paper – money secured by a pledge of productive real estate, and bearing interest to the holder at three per cent” What could be more secure? It was maintained that such a currency would immediately prove itself better than coin.

“The first result of this issue was apparently all that the most sanguine could desire; the Treasury was at once greatly relieved; a portion of the public debt was paid; creditors were encouraged; credit revived; ordinary expenses were met, and the paper-money having thus been passed from the Government into the midst of the people, trade was revived, and all difficulties seemed past.”

Possibly, if the Government could have stopped with these temporary advantages, no great harm would have been done. But the difficulty about money is, that there is never thought to be enough of it. The benefit of real money (coin) is to set a stubborn limit to this universal want-it cannot be got without earning it or giving equivalent property for it. The curse of pseudo-money (irredeemable paper) is, that it panders to the universal greed because any amount of it can be manufactured and set afloat at any time. And so, of course, the French, after the first taste, wanted more. The further issue was stoutly resisted by the ablest men, but the current set so strong, and the demagogues were so plausible, that the measure was carried, and in September the Government issued eight hundred million assignats, “solemnly declaring that in no case should the entire amount put in circulation exceed twelve hundred millions.”

Great were the rejoicings on every side. Gold was to lose all value, as it was a superfluity, and the nation was committed to the policy of inflation. But the old cry of the “lack of a circulating medium” soon broke forth again. A hundred millions were issued under the plea of a want of small notes. On June 19, 1791, less than nine months after the former great issue, six hundred millions more were put in circulation. Next came depreciation of the currency, a loss of its purchasing power, and a rise in prices. Some said that this was due to ignorance in the rural districts, and the remedy proposed was “education of the people.” M. Prndhomtne’s newspaper, however, declared that “coin will keep rising until the people have hung a broker.” People naturally began to be alarmed, and to convert the paper into coin and hoard it up. This was regarded as criminal, and Marat asserted that death was the proper penalty for persons who then hid their money.

But, after the first stimulus of these issues, business soon became depressed, trade stagnated, the manufactories were closed, and thousands of workmen were discharged. Uncertainty and fluctuation of values followed, speculation set in, and, in the language of Louis Blanc, “commerce was dead; betting took its place.” “In the cities now arose a luxury and license which is a greater evil than the plundering which ministers to it. In the country the gambling spirit spread more and more; nor was this reckless and corrupt spirit confined to business-men; it began to break out in official circles; and public men who, a few years before, had been pure in motive, and above all probability of taint, became luxurious, reckless, cynical, and finally corrupt. . . . “Even worse than this was the breaking down of morals in the country at large, resulting from the sudden building up of ostentations wealth in a few large cities, and the gambling, speculative spirit fostered in the small towns and rural districts.”

There was no stopping now. The artificial quickening had gradually run into a feverish activity, followed by intoxication, which had grown into a regular national debauch. Every issue of paper – money had made matters worse. But so deep was the infatuation that multitudes of people insisted that if there were only enough paper – money all would be well. On December 17, 1791, a new issue was ordered of three hundred millions more, and on April 80, 1792, still another three hundred millions were thrown out. The currency was now depreciated thirty per cent, and in July of the same year another three hundred millions were emitted.” Issue after issue followed at intervals of a few months until, on December 14, 1792, we have an official statement that thirty-four hundred millions had been put forth, of which six hundred millions had been burned, leaving in circulation twenty-eight hundred millions.”

As articles of common consumption grew enormously dear, their holders became unwilling to sell them for the worthless currency with which France was flooded, and there then arose a demand that those who refused to make such exchanges should be punished with death. Laws were passed making the sales of goods compulsory at fixed prices in paper-money, which were, of course, inoperative. In 1793 there was an enactment forbidding the sale or exchange of specie for more than its nominal value in paper, under a penalty of six years’ imprisonment in irons; and then twelve hundred millions more of the inflated currency was thrown out. “Toward the end of 1794 seven thousand million assignats were in circulation. By the end of May, 1795, the circulation was increased to ten thousand millions; at the end of June, to fourteen thousand millions; at the end of July, to sixteen thousand millions; and the value of one hundred francs in paper fell steadily first to four francs in gold, then to three, then to two and a half.” The issues continued until, at the beginning of 1796, they amounted to over forty-five thousand million francs. One franc in gold was worth two hundred and eighty eight francs in paper-money; sugar was five hundred francs a pound, and carriage-hire six thousand francs a day in the legal currency. Debts were, of course, now easily paid.

The madness continued, but its form was diversified. In 1796 “it was decreed that no more assignats be issued ; instead of them it was decreed that a new paper-money, ‘fully secured and as good as gold’ be issued, under the name of ‘mandats.'” Choice public real estate was set apart to secure this money, but it speedily depreciated ninety-five per cent. It was decreed that those who refused to take it should be fined and sent to prison, and that those who even spoke against it should incur the same penalties. But the end at last came. On July 16, 1796, “it was decreed that all paper, mandats and assignats, should be taken at its real value, and that bargains might be made in whatever currency the people chose. The reign of paper-money in France was over. The twenty-five hundred million mandats went into the common heap of refuse with the previous thirty-six billion assignats. The whole vast issue was repudiated. The collapse had come at last; the whole nation was plunged into financial distress and debauchery from one end to the other.”

Letter to senators

Please vote against the auto bailout.

Here is why I believe that you should vote against making these loans:

  1. You have no safe, viable, honest source for this money.

    Government loans must come from:

    • Taxes – From whom? Higher taxes in down times are not a good idea.
    • Borrowing – We are already too far in hock. And shouldering aside private borrowers by undercutting them is not a recipe for good times.
    • Plunder – Americans do not plunder others.
    • Inflation – Stealing from the fiscally prudent has never been a clever move.
    • Replacing de-leveraged money (that is, printing money without causing inflation) – This is dangerous skirting with real disaster – not the minor stuff we have seen so far. Available financial knowledge (relative lack of transparency) does not allow gross manipulations to be done from a central control point, as has been demonstrated by the current crisis.

  2. Buy the companies!?

    The market caps of these companies is below the loan amount. It’s cheaper to buy the companies. If that doesn’t make sense – and it certainly does not – then how can these loans make sense?
  3. Have you personally loaned money to these companies?

    If not, why not? How can you ethically loan other peoples money on terms you would not take, yourself?
  4. Loans should not be made available to only particular companies.

    Why not make cheap loans available to all of the auto companies? Or all companies? What is special about these companies that they should get a special deal? Even if there is nothing unethical about the deal, there is a clear appearance of corruption of public officials in this bailout. Appearances count.
  5. These loans set a bad example for other countries.

    America has provided leadership to the world. There is no reason we should stop doing so.

    Do transnational companies headquartered in our country deserve a special boost? What do they need to pay to government officials for such special treatment? Does such behavior sound like something we should be doing, as Americans? Can we be surprised or upset if other countries follow the same path?

    If we want to go to economic war with other countries, then we have an easy, crushing win by simply slashing corporate income taxes and opening up H1B and green cards to higher-end foreigners. Do what has worked for every single successful economic unit in post-industrial history: make it easy to start and run a profitable business.

  6. Taxpayers should not be in the auto business.

    There is no reason to expect that either the American citizen at large, taxpayers, or Congress-people have the expertise, time, inclination, or ability to be car builders. I might be highly skilled at my vocation. You might be highly skilled at yours. But that makes neither of us highly skilled at designing, building and selling cars. Let’s not fool ourselves into arrogantly thinking otherwise.

    When we make a loan we had better trust the person we loan to. And we need to verify that they are not frittering away the money. But, we have no business doing their job or calling the shots for them. If the loan requires that we do so, let’s find another place to loan the money.

If there are legal reasons – able to be reversed by congress – that make it impossible for these particular companies to get loans from people who are loaning their own money, then please fix that problem. Please do not try to fix that problem by making another problem.

Let’s address various arguments that could be made for these loans:

  1. These loans will keep a huge number of people employed.

    How? Can these people build a competitive car? If not, then why, exactly do we need to buy their product? If so, then why, exactly, do they need to be treated specially? They can, after all, support themselves by building and selling cars!

  2. These loans keep a key manufacturing capability inside the country.

    How do sweetheart loans to particular multi-national companies do this? Can Americans (or more accurately, American robots) not manufacture competitive cars? And, why is this particular industry so specially needed? We are not currently on schedule to fight WWII again. Why take money that could be spent on beefing up strategic American strengths in cyber-tech or bio-tech (for instance, if we insist on going in hock to bet on particular industries) and fritter it away on the last war’s weapons?

  3. These loans somehow say that the US refuses to fall in to a depression.

    They say the opposite. That last depression was an artificially drawn-out, final transition out of a farming based economy. Do we need another depression, war, and new generation of people to get us mentally out of a manufacturing-based economy? Our economy is no longer based on employment in manufacturing no matter what sentimental, rosy-eyed reactionaries may think.

    Thank God.

    Those “good jobs” in manufacturing were horrible jobs. Ask those who have worked “on the line.” And, please do not make the mistake of selecting a special-case time period (like the late 40’s and 50’s in the US) as a counter example. Those wonderful days of manufacturing look very, very poor compared to the wonderful days of web-programming of the late 90’s internet bubble. Special cases are easy to come by. But they are not examples of how to handle ourselves in other times.

  4. These loans will somehow give confidence to those whose lack of confidence is an impediment to better economic times.

    Who might those unconfident people be?

    • Investors?

      Investors (and I speak as one on the cusp of “retirement age”) are rightfully worried … worried because with all the normal uncertainties that must be dealt with, we must add the uncertainty of a gigantic government floundering around the financial world, taking our savings, side-tracking the fruits of the labor of those who support kids and old folks, and generally providing theater rather than clarity, honesty, and prudence.
    • Others who might make such loans?

      Others who might make loans are certainly not foolish enough to compete against someone with a multi-billion dollar weapons system budget and who, as de-facto world policeman, gets first divvy when loans go bad.

  5. These loans are a great deal.

    Others who might make these loans are charging way, way too much out of fear?

    Right. And we needn’t worry because we, the taxpayers, will find a greater fool.

    We might safely pay attention to someone with a track record of successes in such things, and who makes this argument shortly before piling their own money on to this particular bet. But this argument is notably not made by such people.

    We can safely assume that we, the taxpayers, are in great danger of conning ourselves when we believe this argument.

  6. If the loans are not made, the taxpayer will pay the automakers’ pensions.

    No they won’t. And, sure, some assert otherwise.

    Both “arguments” are simply assertions.

    The WWII generation had a lot of babies to support them in their old age. The early baby boomers did not. Caring for the old folks will be a problem soon. This is a problem that should not be solved piecemeal by handing out goodies to those who use their power to elbow their way to the front of the line.

  7. These loans are a way to inject money in to a money-starved financial system.

    If true, is targetting money toward particular, politically connected recipients the way to do this? Or should the recipients bid for money on equal terms with everyone else?

    Too, what mechanisms are in place to remove this money when the financial system returns to providing the trust they sell for a living.

  8. If we do not make these loans now, we will do something even worse when the new congress takes office.

    The Democratic “branding” of the new congress might suggest this, but such a reality cannot be counted on.

    There has been enough panic and pass-the-buck behavior as it is. Help put a stop to it. A lot of professional financial people are scrambling to shuck their losses. They are doing rather well at this as they have a supply of rubes to take the bag off their hands. Time is on the rubes’ side here. Time for more sober thought. Let that time pass. And do not do the cynical thing and make a foolish move with the idea of blaming the outgoing administration for everything when the move turns sour.

Managing our resources and money is hard enough to do without needing to write legislators in desperate attempts to escape enforced spending.

Please do your part to stop the irrationality and vote these bailouts down.

Socializing gains, privatizing losses

Soon we’ll see observations that the Wall Street bailout expression “privatize the gains, socialize the losses” has a flip side.

Note that you can’t take more than $3000 in capital losses per year. Long ago, as is now possible with capital losses, you could spread one-time income over years of taxes. Not now. In effect, the current US tax system is one of “socialize the gains, privatize the losses”.

Ah, to be 17 again – outraged and baffled by the world’s inscrutable workings.

Who owns public corporations?

Who are the owners of a public corporation?

Now, that should be clear: the stockholders, right?


Currently, direct stockholders rent companies like we rent cars. That is, the rental can be stopped and started very easily and cheaply.

When you buy a stock, it’s good to think in terms of your being an owner. Certainly, I like to. But the reality is, you’re not. You’re usually using the company as a tool to make a buck, much as I might use a computer or a carpenter might use a hammer.

Too, for the most part, stockholder “owners” are 1 step removed from stock ownership. Large (e.g. mutual) funds own public corporations. Individual “owners” have shares of funds, diversifying their “ownership” in an effort to avoid responsibility for isolated, horrible events in individual companys’ lives. Yes, the fund managers should be awake at the wheel, but the fact is, for them, it’s Other People’s Money. And, by design, index funds are completely asleep at the wheel.

The odd thing about this rental situation is that it brings to mind an explanation of why voting was often, historically, restricted to landed, property owners.


Because property owners cannot easily leave their homes. They must bear the brunt of bad votes. Non-property owners can hit the road after messing up a place with their bad votes. The objective of property requirements for voting is to balance power and responsibility. If you’re not responsible, why should you have power?

If stockholders are company renters, then should they even have a vote?

Well, what is “ownership”?

Having not been cursed by a too much formal education, I’ve discovered on my own that a private property economic system works miracles for a commendable reason: responsibility and power are balanced. This balance is A Good Thing. In particular (worth noting in a world that emphasizes the powers of ownership), if you know the owner of something, you know who to shoot when the thing does wrong. The “owner” is responsible.

I say that the “owner” is the person with power and responsibility. And their power and responsibility must be well balanced or their ownership is unstable and will not last.

Power and Responsibility in public companies:

Who has the power in public companies (that is, who calls the shots)?

Ordered by concentration of power in individuals, I’d say:

  1. CEO.
  2. Other high level execs.
  3. Board members.
  4. Other employees.
  5. A toss-up between citizens of entities the company pays taxes to and the ultimate, individual stockholders.

That is to say, the CEO has more power than any individual, high level employee, each of whom has more power than each board member, each of whom …

The order of this list varies, of course. There are companies with board members voting large percentages of the company’s stock. The distinction between various employee levels is fuzzy. What decisions are important? Etc.

Who has half the responsibility (that is, who takes the hit when things go wrong)?

  1. Other employees (markedly so in a company-town situation).
  2. Other high level execs.
  3. CEO.
  4. A toss-up between citizens of entities the company pays taxes to and the ultimate, individual stockholders.
  5. Board members.

Who has the other half of the responsibility (that is, who gets the goodies when things go right)?

  1. CEO.
  2. Other high level execs.
  3. A toss-up between citizens of entities the company pays taxes to and the ultimate, individual stockholders.
  4. Other employees (more so in a company-town situation).
  5. Board members.

Note the toss-ups.

One could think of taxable entities as being part owners of companies. After all, if you and your buddy had a store that made $100 every month and your buddy took $70 and you took $30, who owns the store? Looks like a 70/30 split, right?.

Now consider how much of the store’s earnings go to the tax man … which gets interesting when you consider that your partner, the tax man, can raise or lower his cut at any time without your agreement. … Some partner. … But I digress.

That citizens and stockholders are a ranked together as a toss-up emphasizes the rental aspect of stock holdings.


  1. The board members are on the high side of the teeter-totter, with low level employees, shareholders, and the taxman looking up from the other side.
  2. The CEO and other high level executives are the company owners.

It would be nice to put some numbers on these rankings. And calculate the numbers’ changes over time. That is, are these rankings mostly correct, and are they different from, say, 50 years ago?

Maybe these conclusions would be different if I appreciated more the board’s responsibilities.

But, the conclusions are unexpected. … By me, anyway.

What I’ve learned

There are two prices for everything. The two prices are known in the stock market as “bid” and “ask” prices. The “bid” price is the highest price someone is willing to buy. The “ask” price is the lowest someone is willing to sell.


What seems to be true is that the existence of these two prices is the reason for the existence of money. And, the existence of these two prices is the reason why the arithmetic works out so counter-intuitively in Ricardo’s trade calculations.


Well, say you and your friend each have a car. Your tastes and needs run about the same. Your cars are the same. But, for both of you, it’s time to move somewhere over the waters. You live in Metropolis. Your friend lives in Timbuktu. Who gets the better deal for their car?

You do.

Heck, your friend will be lucky to get any price above zero. You have lots of buyers available. You simply take the highest bid.

Now, you and your friend have moved. You moved to Gotham City, and your friend moved to Podunk. You’re both in the market for a car. Who gets the better deal?

You do.

You have plenty of cars to choose from. You go with the guy asking the least for his car. Your friend probably has no cars to choose from. He’ll need to pay for the trip to Gotham City to buy one.

Now, isn’t that interesting. In the big city, both the buyer and the seller got a better deal. How is that possible?

It results from the “spread” ‘tween the bid and ask prices. In the city, that spread is narrower than in the boonies. In the city, the bid price for a jalopy might be $5000 and the ask price might be $5500. In the boonies, the bid price might be $0 and the ask price might be infinite. You lost $500 in your move. Your friend? Well. It’s sad.

The conclusion from this:

The larger the market, the more efficient it is. And by more “efficient”, I mean the narrower the “spread” is.

So, that explains the existence of money. Money is a way to combine in to one big market, many markets, each for a separate thing.

The “larger market is more efficient” principle is the heft behind Ricardo’s observations.

And others things too numerous to remember.

Anyway, that’s the way I look at it.

Things fall apart

Interestingly, “everyone” except the data has been announcing a recession for months now. But, unless the guys with the current, huge stock market short positions get caught with their pants down, the stopped clock will be correct soon.

So, that raises a spector a lot more scary than a few broke house flippers, some failed banks, and a lot of Manhattan know-it-alls pounding the streets.

Specifically, the US government will be in a pickle when tax revenues drop off a cliff. It will be the equivalent of a real war. (Check out the Congressional Budget Office’s data http://www.cbo.gov/budget/data/historical.pdf on income and spending relative to GDP, by the way. Very steady numbers since the reports’ start in the mid-60’s.)

So, I’m curious what will happen in the next few years.

US government shortfalls are covered by some combination the following:

  1. Cutting government expenditures.
  2. Raising tax revenues.
  3. Printing money.
  4. Borrowing money.
  5. Forcing non-government entities to pay off-budget.
  6. Forcing other countries to pay.

The government workers party is now in control of congress. And, people who put there money where their mouths are have picked Obama for many months now. It may take Nixon to go to China, but I believe we can rule out #1.

Economic down times are not the time to raise taxes unless you want to make things worse. And down times don’t cause tax revenues to crank up with “natural” productivity increases. Anyway, history says the US government is on the down-slope side of the Laffer curve. As doing counter-intuitive things is not congresses’ strong suit, the word, “fees” will be heard a lot, soon. But reality rules out #2.

In the ’70’s they printed money to cover Vietnam and the Great Society – and had the “Carter inflation”. (Near the end of which, the same people who now control the airwaves satisfied themselves that stagflation was the normal state of any capitalist economy. Keep that in mind when you watch the 6 o’clock news.) Anyway, the whole world is caught up in the current financial follies. And, there is some indication that people outside the US are walking the safe-dollar path right now. Fire up the printing press and they’s run away like rabbits. #3 doesn’t look good.

In the last 3 decades the US government has replaced printing with borrowing. Borrowing works if someone is willing to loan you money at low interest rates. It works especially well if you’re investing that money in a way that pays off better than the interest rate. One might argue that the US government has been doing just that. But, baby boomers are getting older now, and supporting the old folks is not done as an investment. #4 won’t cover the tab.

That leaves making others pay.

How is this done?

I’m not creative enough to think of many ways.

That “regulation” is the current label given to offloading costs from government budgets is one clue, though. Regulation won’t keep the government lights on, though. But new regulations would be a good excuse for new “fees” to pay the regulators.

It appears a done deal that the social security age of retirement is going up. That’s always been the reasonable and effective “solution” to the social security funding problem, so this is truly a “Nixon/China” situation. A Republican would have zero chance of doing this.

Back in the 1990’s Bill (or was it Hillary?) floated the idea of raiding private pension funds for government use. (This was long before the Internet Bubble shot tax income up to the point of balancing the US budget.) So, congress might require private funds to “contribute” some fraction of their outlays to the “community”.

And, finally, what I predicted in the 60’s would happen when my generation got old: We baby boomers would go out to the world and force others to pay for our entitled retirement. Count on Iraq paying through the nose, for starters.

Odder things have happened.

But this is all if the bottom drops out. Little inherent in the world requires such a thing to happen.


Military cuts?

Military people don’t vote Democrat, so military cuts are politically safe. But the military doesn’t take much of the US government’s budget (close to zero of state budgets). And, it’s not clear how the headlines about a new arms race among other countries will feel.

Too, a good deal of military expenses goes to the secondary core Democrat group, “grad students”. (… for want of a better label. Though that secondary core group is out of school, they identify with the grad-student mentality.) Cutting academic research would be unthinkable to this group. — And they are the taxpayers paying the bills now. — Count on this money changing to “green” research. No net dollar difference.

Margin call on the roll call

Congress and the Fed seem to be wiggling around, using a day’s worth of stock market activity to tell them how and when to “invest” $700,000,000,000. I guess that the chart broke through a price resistance barrier on the downside and signaled a buy to our duly elected day-traders.

The “bailout,” if done honestly, will use borrowed money. That raises an interesting question: What happens if the market value of the “troubled assets” goes down? Does that mean that Congress will get a margin call?

The Great Oil Crisis of 2008

A couple things seem interesting about the recent oil price spike:

  1. Where is the “Oil Crisis”?
  2. Where is the mention of the trash-by-the-freeway effect?


  • Consider #1. If it were 1973 or 1979 (gas-line years in the States), buckets of ink and hours of heavy-breathing news anchors would have beaten the “oil crisis” in to us. Why not this time? Is it because Nixon and Carter aren’t president? Not literally “because” of them, perhaps (though a silly argument could be made for that), but rather, is the mind-set that yielded Nixon and Carter as presidents no longer with us – even in the media!

    (Just to be clear, a “crisis” is what we have when someone wants to “do something”. If you don’t know what that means, wait a few years and watch the results of a few “do something-ings”. Hint: The guy who wanted to “do something” will never, ever mention it until they have successfully shifted the blame.)

    Or is this “oil crisis” missing to only me simply because I’m not exposed to these media guys. Every few nights, does NightLine lead off with a dramatic graphic mocking The Onion’s “War for the White House”, followed by talking heads wringing their hands and pronouncing this week’s events a turning point in the history of mankind and proof that there is no end to the “crisis”. …Uh. … Ah. … Is NightLine still on TV? … Whatever.

    My bet is that there is a different attitude out there from the one that was prevalent in the ’70s. The air’s simply been cleared. We don’t breath that stench any more.

    Consider what a true and beautiful thing that is, oh you who bemoan today’s world.

  • #2: A queue or flow system flowing near a critical density will crystalize from the occasional, tiny distraction. Think of how a piece of cardboard blowing slightly toward the traffic lane of a packed, fast-flowing freeway can cause a 1 hour traffic jam. You have driven through such a big slowdown but have seen no cause for it.

    The was no “cause”.

    Such slowdowns are a natural characteristic of dense, flowing material in this universe.

    The way I understand the world’s oil system is that it’s a flow of material from underground muck to hot air thousands of miles away. The “oil” changes hands many times. It’s a huge system and highly, highly optimized. There are predictable elements to it – both on the source end and on the sink end. But, it’s so leanly built that the predictability is optimized out of the system. Leaving a classic, saturated, queue/flow system.

    Which leaves us with “This will happen. You can’t predict it.”

    That is not satisfying. … Hence, we have plenty of left-brains ready to supply an explanation for why the coin, this year, came up heads.

    There is actually a reason why I’m guessing that a large part of the oil price spike was simply a traffic jam. I looked all around and found no information that accurately filtered from the “price” of oil the effect of the dollar’s drop against other currencies. Of course, there are calculations out there, but they sure looked like horseshoes and bombing. If the effect of the kahuna of “explanations”, the dollar’s value, is a wild guess then one might suppose that the oil guys who were stuck in the traffic jam simply didn’t know when that jerk right ahead of ’em would get off the d****d phone and move, for Christ’s sake!

    Quick argument against this: Where are the traffic jams in food? It’s an old story that “major cities only have 3 days of food; we’re all gonna starve; blah, blah, blah”. The food chain is very evolved and optimized. Where are the (mathematically) catastrophic spikes in the system? Answers I can think of off hand:

    1. Major cities have a lot more food stocked than 3 days’ worth.
    2. There are many alternatives to each type of food. This makes the system robust in the same ways that non-deterministic packet switching systems are robust compared to older systems, and in the same way that traffic flow is more robust through a grid-pattern city than through a more modern, flow-controlled, tributary-to-artery system.
    3. Hey! Remember the toilet paper “crisis”? Well, toilet paper’s kinda like food.
    4. And, panicing lunatics played the OH MY GOD! ALL THE RICE IS GONE FROM COSTCO! card this year.

      So, maybe there are serious traffic jams in the food system.


CEO compensation has been a contentious issue for some years now. Plenty of non-CEOs think it’s too high, or too high relative to “normal” people. And plenty of people think that many CEOs are taking advantage of their positions to, how shall we say it, extract more value from the company and stockholders than is their due. And plenty of people think it’s too high and a symptom of a general out-of-control corporate governance situation in the US.

Between the commsymps on one pole and the “So what? It’s a free market and if it takes big money to find the right guy, who are you to argue?” crowd on the other, there may be a middle ground.

But I don’t care, for the moment.

Instead, it seemed like fun to find out what the correlation is between CEO pay and, oh, let’s just take a random measure of CEO performance: stock appreciation.

Now, there are probably very accurate ways to do this sort of thing, but I chose the quick way:

Snag the CEO pay numbers from the AFL-CIO web site.

Match ’em up with the stock performance for the last 3 years (as told by Yahoo Finance).


OK. There are a lot of things wrong with this. For example:

  • Can you believe that the AFL-CIO site may have an axe to grind? Well, duh. But, I figure that they’ll grind their axe for all of the companies they list in pretty much the same way.
  • What if the CEO has just come on board? That makes the stock history irrelevant. Maybe. But, I figure there won’t be that many new CEOs to fudge the numbers.
  • CEO pay is notoriously jagged. Think entertainer income. One year it’s big, the next, it’s zero. Straight-faced people call this “risky”. But then, staight-faced people confuse stock market “beta” with risk, too. Anyway, yeah, using 1 year of CEO numbers is going to include a lot of noise. But, I figure the noise won’t cancel the signal for over 1300 CEOs.
  • What about dividends? I’m assuming that they, too, don’t have a lot of effect on correlation. With 1300 companies, you gotta figure that dividends will just shift some of the dots in the scatter plots below slightly to the right.

OK, where does all this lead to?

Well, the correlation between CEO pay and stock appreciation for the last 3 years is … the envelope please:



This is about as uncorrelated as you can get. Zero, if you drop the 100ths. And that’s for 1323 CEOs “raking in” anywhere from 1 buck (Steve Job’s phony number) and 131 mill (Ouch. I owned some HD stock.)

Did outliers trash the correlation?

Let’s look at the pictures:

First, here is the scatter plot:

All CEO Pay-to-Stock-Performance

The outliers do make it hard to see the crowd.

Let’s zoom in a bit:

Most CEO Pay-to-Stock-Performance

I don’t see the ramp of dots leading from southwest to northeast that would be seen if the big pay and big return guys were the same guys. From this image, though, you can see that the market has gone up in the last 3 years. The center of the dots eyeball to be about 0.4 in X. That’s another way of saying that stocks have gone up 40%. (The actual calculation here is (current_price – old_price) / current_price.)

Finally, let’s clip out all but the bulk of ’em.

Normal CEO Pay-to-Stock-Performance

What can be said? The 0.03 correlation sums it up very well.

So, does that mean the a company can can their CEO and hire a Magic 8 Ball? Well, sure. They can. But do they want to?

It’s too bad that these numbers don’t answer the question.

Remember that there are no comparisons in these numbers to companies that have a Magic 8 Ball for CEO.

But, certainly these numbers make one wonder about the possibility of automating the CEO’s job. Heck, it’s hard to automate jobs that can be easily measured. Think of how easy it would be to automate a job with no solid feedback.

Finally, let’s open up another curtain.

Remember that if stock prices followed CEO pay, the prices would adjust to make the CEO’s pay uncorrelated to stock performance. Assuming that’s true changes little, tough, because this total lack of correlation between pay and what the stock has already done does lead to one simple question:

What are CEOs paid for?

It’s sure not for stock performance.