TONI'S ONLINE TRADING AND
every 1st and 3rd Thursday of the month at 4:15 ET
in #MainStreet (www.othernet.org)
Manipulations in Modern Economics
February 7, 2008
Good day! For those of
you who could not make
it to the previous classes, the link for the logs are as follows: http://www.tradingfrommainstreet.com/TradingClasses.html
Economics is a social
science that concerns itself with the study of the production,
consumption and distribution of goods and services. Pretty simple
definition, but it will work well for us to start out.
For our purposes today I
want to create an Island Economy. The purpose of this is going to be to
illustrate how an economy free of disturbances and manipulations might
act, and then show how our modern, meddling central bankers and others
create disruptions and manipulations in the economy. Hopefully it will
help you understand how to spot them, and profit from the likely result
of said manipulation.
Our Island Economy is just
going to be called Brandon's Island to inflate my own sense of
importance. Hey, if the bankers and politicians can name bills and
whatnot after themselves, I can name my own fake island Brandon. To
shorten things up though, from now on it'll just be called The Island.
We are going to be sort of like the cast of Lost on this Island, except
we will get along better, won't have monsters coming after us, and all
the assorted things that make for great TV drama.
Ten of you are going to
join me on our little boat as we set off to sea. After a few days we
are overjoyed to finally be out of the sea and back on land. Since I
was your capable captain, you're all very grateful and, as I said, we
name it Brandon's Island. (I just want to make sure we all know where
we are is all :)
When we land on the Island
we have some basic goods with us and we each have $100. The total value
of the Island's Economy thus is $1000. After all, we need to start off
being fair. Everyone should be the same here! At least in the
So, once we assess our
situation, we find that certain things are going to be required. We
need fresh water, food, shelter and the like. We divide ourselves up
into a labor pool and trade amongst ourselves. At no time will the
economy be worth more than $1000, since that's all we have between us.
So, if the price of say water went up, other prices would have to
fall... maybe shelter. That's all well and good until one of our fellow
adventurers (just for fun we will call him Uncle Al) happens to be out
on his daily hike rounding up fruits and seeds and whatnot for us.
Well, slick Uncle Al happens to come across $500 that washed up on
shore. He does not tell us about this though. He just slowly starts to
spend a few dollars more here, a few more there. Pretty soon he has
spent an additional $200 of the new loot. Well, at this point we
realize something is up. Since more dollars are competing for the same
goods and services, prices will go up. The rate of inflation is now
20%, because the sum of everything has gone up $200, or 200/1000. We
now have a $1200 economy.
Obviously we are steaming
hot mad about this and we sit down for a survivor type “Tribal Council”
to get to the bottom of our inflation problem. We try and try to get
someone to admit to being the culprit. Heck, someone even suggests
water boarding our lead suspect, Uncle Al, but one of us used to be a
writer for the NY Times and threatens to expose us all as heathens when
we get back to America if we resort to such dastardly deeds. So, we sit
and try to think of a solution. Even though Uncle Al is our lead
suspect, he is also the most worthless and unproductive person on the
Island, so we decide to create a new job for him. So real economists
reading this don't feel bad we won't call him an Economist, we will
call him...I dunno, let's say the head of the Fed.
Uncle Al, the Fed Head,
sits down and tries to figure out how he can solve his problem. He
decides that what he will do is focus on the price of Coconuts, since
we all use Coconuts as a source of food, water, building and clothing.
We all agree this is a brilliant idea, since we all need to use
coconuts, surely the dastardly bandit who has put this extra money into
our little economy will be caught this way.
But, our old Uncle Al
knows that we are now excessively focused on the price of Coconuts,
which he has decided to call CPI for short. What does Uncle Al Do?
Well, he decides that as he continues to spend his hidden loot, the one
thing he certainly won't be buying is coconuts. He pours another $100
into our economy, so the real inflation rate is going to be another
8.3%, that is $100/$1200. Total economy is now worth $1300, but the
price of coconuts did not go up, so he reports that inflation is under
control and all is well.
Now, the way the U.S. government avoids actually reporting inflation is
even more deceptive thanwhat Uncle Al bamboozled us all with on
Brandon. They will say that well yes, the price of XYZ has gone up, but
its sooooooo much better now, it doesn't really even count. And also,
well, yes, I know something you need to have like... say gasoline and
food... has gone up a lot in the last few years, but the price of Big
Screen TV's and Laptops sure has come down.
Now, assuming we had a
real economy free of uncle Al and his $500 extra dollars that would be
fine, because, as I said, all goods and services can only be worth
$1000. The effect of this inflation though is that everyone's dollar is
worth less and less every day. So, when the Fed talks about increasing
the money supply, they don't even report M3 anymore. What they are
really doing is making you poorer in real terms. Don't believe me? Go
to Europe and see how much your vacation in Europe costs now compared
to what it was even 5 years ago. There are actually tour groups being
set up in Europe for people to come to the U.S. now to shop, because
its so cheap for them to buy stuff at our stores, since the dollar is
worth less and less. The results of inflation have led to the dollar
being worth 5 cents, that's correct, FIVE CENTS in 1913 dollar terms.
If you have $1.00 now, it's about the same as 5 cents in 1913.
If you would like to know
more about the liquidity cycle and how economies work and are effected
by government programs and “interventions” I'd suggest reading Ludwig
von Mises, Frederick Bastiat, or Friedrich Hayek.
NOTE: COPYING AND OR ELECTRONIC TRANSMISSION OF THIS DOCUMENT WITHOUT
AUTHORIZATION FROM TRADING FROM MAIN STREET IS A VIOLATION OF
DISCLAIMER: Trading in commodities and securities may not be suitable
individuals. Consult your broker or other professional to determine
suitability. The discussions provided by Trading From Main Street are
educational purposes only and should not be taken as a recommendation
to buy or
sell the referenced security. Past performance is not indicative of