The third desire

There are three things we need each day to survive: food, sleep and... information.

While the way we consume the first two hasn't changed much over time, our way of receiving the latter has been revolutionised.

Unlike food or sleep, there is an insatiable appetite for information.

With each passing day our demand for information grows. We just can't seem to get enough of it.

Luckily, people are being more generous with information of their own (personal web-sites, blogs, online chatting, online dating, free newspapers, reports etc.)

You give a little, you get a lot.

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Together with a surge in the supply of information has come the call for greater transparency.

We don't just want to have more information, we want to know information we weren't allowed to know before.

While there is no limit to the information we want, there will always be a limit to the information we are given.

This disparity has shrunk over the past quarter of a century, mainly due to the spread of the internet.

But the more things have changed, the more they have stayed the same.

Much like other freedoms we haven't done anything to earn, it's not immediately clear exactly how we should use this new information.

It's like telling a farmer in the 19th century about the internet. He wouldn't neither be able, nor know how best, to use it.

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When I read about a leaked government memo or the minutes of a central bank meeting there is information contained in those reports that would never have been made available to the public 50 years ago.

It is easy to forget that the actions of our not-so-distant past generations have had such a profound effect on the way we live our lives today

It is difficult for someone who is 20 years old to understand why they are able to read something their parents' generation never had the right to do and more importantly how best to use this additional information.

The cost of free healthcare

British people are proud of their National Health Service, and so they should be.

Having free health care at the point of entry is something envied by people around the world. (Others would need to see it to believe it!)

When you consider that almost 50 million people in the US (equivalent to almost the entire British population) don't have the necessary health insurance required to pay for medical treatment, you realise how lucky people in the UK really are.

Not surprisingly however, the NHS is constantly underfunded.

Of course by definition, if you provide a service for free, the potential demand will be infinite!

Clearly the NHS will always be underfunded.

The question will always remain, by how much and where should any additional funding be coming from?

The answer goes to the very heart of the issue of how the political system currently works.

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As a way to move the NHS forwards, the British government has recently imposed a series of 'targets' to help ensure an improving service is being provided to all patients.

The result has been enormous pressure being placed on staff and management to achieve these targets in order to 'stay in business'.

Overall, there have been improvements but even though targets are a good idea, what the NHS really needs now is more money.

The problems of more expensive technology, an ageing population and higher expectations are not going to be solved by setting targets alone. Someone has to pay for this and that someone is...

... You!

But at the moment no political party has the incentive to raise taxes to pay for improved public services. Why?

Because people don't want to pay higher taxes for improved public services.

Consider that statement for a moment...

People... don't want... to pay... higher taxes... for improved public services.

First, ask yourself if you agree with the premise of this argument? Second, are you one of those people?

I believe your answers to each of these questions are most likely to be 'yes' and 'probably not'.

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The current state of British (and any other) politics is to essentially offer the choice of either higher or lower taxes.

This puts the voter in a conveniently awkward situation: they can vote for lower taxes, knowing they will be better off, at the expense of others.

What's worse, the decreasing voter turnout in British elections means that 40% of the British popualation (myself included) never get their voices heard.

Is it really fair for 30% of the population to be represented by people offering the false hope of a 'low tax' economy, when this leads to the situation of a increasingly underfunded NHS?

Once the 40% silent minority becomes 51%, it will signal a time for change in British politics. Maybe this could usher in a new generation of politics that stands for what people truly want.

Economists have learnt to subtract

There is one subject that economists love to talk about: growth.

Growth in home prices, growth in consumer spending, growth in the economy etc.

The basic question they are paid to answer is: "how are we doing compared to last year?"

But isn't looking at growth of data like GDP going to miss the damaging effects of global warming and the depletion of natural resources?

Not really. Unless there's likely to be a major change in the rate of depletion over the next 12 months (the economist's usual time horizon).

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As highlighted in the movie An Inconvenient Truth, the monthly average carbon dioxide concentration has been steadily rising for over half a century.

Note the level of CO2 has been rising steadily, not at an increasing rate.


Going up

If we use this chart as a some kind of benchmark for the destruction of natural resources, we might conclude that until now, this destruction has occured at a constant rate.

So what is the incentive for economists to "factor in" the effects of depleting natural resources if their main concern is the growth rate of the global economy over the next 12 months?

Not very high.


Spot the difference

It's not that economists don't care about the depletion of natural resources. It's just not their job.

Central banks and governments can barely keep their own economies under control for a year, let alone limit the emission of CO2.

Of course, once the depletion of natural resouces starts to have a material effect on major cities (by drowning them), then economists will start to be concerned, but only if it cuts the growth rate of GDP!

Paris: a higher calorie Tokyo

Japanese are famous for taking something and improving on it. They did it with Paris.

And now I know why.

So many details of Paris are replicated in Tokyo, only with a (sometimes not so) slight improvement.

Below are a some examples:

-- Tokyo's underground is designed similarly to Paris, only much more modern; there is no English version for the French announcer, no information about where you can change at the next station;

-- Tokyo's 'Champs Elysees' is smaller, so made to look more exclusive;

-- Japanese people are as proud of their culture, only less arrogant!;

-- Japanese food is just as tasty, only much healthier!

To visit Paris you understand what inspired many of the details you find in Tokyo.

So if you ever decide to visit Tokyo, visit Paris first.

The next generation of bloggers

Are you writing a blog yet?

I say yet because blogs are a growing trend and inevitably you will get tempted.

What will your blog be about? Music? Books? Sex??

Whatever it will be about, apart from a few close friends, very few people are ever likely to read it.

That isn't such a shame, since mankind won't be so worse off for not having ever read it.

What is a great shame, is the potential of blogs that is going untapped every day.

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As I have written before (including below), blogs can be a powerful weapon of democracy.

They give people a voice they never had before. A voice that can be heard anywhere, everywhere, anytime.

But nobody is reading. Why?

Volume.

There has always been too much material on the web for people to know what to read and what not.

As I said, this is a shame and it is also a problem.

But like all problems, it can be solved.

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The chances are that today you will visit at least one of the following websites:

Google;
The New York Times;
Yahoo;
Myspace;
Blogger;
MSN
or Youtube

What is common to each of these websites is that they are all an expression of someone's voice.

And we go to listen.

Unfortunately, there are too many voices to hear.

Fortunately, there are more voices than ever that want to be heard.

All we need to do is listen. But how can we listen to them all?

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This week over 40% of the US population had their voices heard.

As we saw in the newspaper (or in other words, at one of the websites listed above), the election was a "referendum on the war in Iraq".

Was it?

What have people done to change anything about the situation in Iraq? More importantly, what are they going to do about it?

Surely, the election wasn't the only time the people of America had their say about Iraq?

Of course, it wasn't.

People have been standing outside Congress and other government buildings across the country and around the world each day, expressing their disagreement over the war in Iraq.

But nobody was listening.

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Google has changed the way we use the web. How?

It has managed to break down a virtually unlimited amount of information into something that people can use.

Previously, much of what Google can find went unseen and unused.

But times are changing.

People demand more information and they now have a way to get it.

But what are they going to do with all this newfound information?

Hopefully, they will use it to form an opinion.

The next step will be to find some way of expressing this opinion in a way that people can hear.

At the moment, this happens when a polician goes on television or is interviewed by a newspaper. We can all hear what they have to say.

Now it's our turn.

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While electronic voting is still in its infancy, it offers the way forward.

Eventually, everyone will vote electronically. Eventually, everything will be done electronically.

Once we have all entered the electronic age of voting, the opportunity for people to express their opinion about something will be huge.

Consider a substantial issue (e.g. going to war, raising taxes, changes to education policy) about which you have an opinion. You will either agree, disagree or be undecided.

If enough people can express their view about something then the chances of the outcome being alligned with the interests of the country are significantly increased.

It shouldn't have to be much more complicated than this:

Step 1: Read as many blogs that discuss a particular subject
Step 2: Engage in a dialogue with other people to try and find common ground
Step 3: Go to a (government) website and vote.
Step 4: If enough people (i.e. a majority) support the idea, you could vote for an alternative proposition.

Step 1 has been partly solved by Google Blog Search. Step 2 is already popular among bloggers and non-bloggers alike. Step 3 and 4 are still unavailable.

It's 2006. What are we waiting for?

Down for maintenence

I was going to call this posting Lazy voters get what they vote for, but blogger was unavailable for one hour during routine maintenence, so I couldn't publish until now.

This inspired me to change the title.

There is lots of attention on what will happen in next month's US midterm elections.

Will you be voting?

The chances are you won't.

Luckily (or not) for you, it would't make a difference even if you did.

The fact is, one vote every two years won't lead to something worth voting for.

What we need is for the voting system to go down for maintenence while changes take place that will make a difference.

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Think about something you don't like, for example, fatty foods.

If one day you decide you don't like fatty foods and would prefer a low-fat diet, you will stop eating fatty foods and start eating more fruit and vegetables. What happens to producers of fatty foods?

Either they change or go out of business.

But what if we only decided to change our diet every year or two, or even four?

A lot of companies making fatty foods stay in business and we get fatter and unhappier.

Does this sound familiar? Well not in the real world.

In that world, people vote with their minds and their feet every day and this is the driving force behind much of the social changes we see take shape around us.

The fact that more and more people are eating healthier foods shows what sending messages to food companies can do. What a difference people can make.

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While midterm elections are an opportunity for people to express their frustrations with their elected leaders it is not enough to affect what those elected leaders actually do on a daily basis.

At best, they are a chance for someone else to take their place and cause an equal or perhaps larger number of frustrations among the electorate.

The electorate are just like consumers and if they are not heard every day then what they say or do every two years or more will make absolutely no difference whatsoever.

And making no difference is becoming more risky as the stakes get higher.

Make a difference today and be heard.

Vote for blog!!

India: the land where time stood still but everything changed

Time travel or intergalactic flight has always been the stuff of science fiction.

But in many ways, a machine that transports people across space and time has already been invented. It's called an aeroplane.

When I stepped off a flight to Bangalore, India it felt as though I had landed in both a different world and a different time.

If you ask someone on a street in India what year it is they would respond 2006, but they wouldn't think it was 2006. And neither would you.

When people talk about India, they usually mention its population of over a billion and that many of them now form an integral part of the way companies work around the world.

What people don't describe, or perhaps appreciate, is what it is actually like to live in the country.

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If you consider India from the perspective of an average Indian, your perception of it would change considerably.

The values and way of life of the people don't seem to have changed for over half a century.

While Indian people are still courteous in public, the streets are utterly chaotic. As one local described to me, it must seem like a scene Charles Dickens would have witnessed in late nineteenth century England.

And while much of the British legacy remains it has failed to develop in the way Britain did.

Part of this is because of the late stage India joined in the race for economic development. Because of this, it feels the need to move at the currently hectic pace just to keep up with the rest of the world.

Another hurdle is the lack of effective and organised management of public systems. As mentioned, the streets are in complete dissaray, the air during rush hour in Bangalore is heavy with smog and most of the roads are filled with potholes or in many cases incomplete.

This is not the country or the city you imagine when you are told of an "IT hub" or the "next global superpower".

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While India has much to be proud of it has equally much to be concerned about.

All of the achievements of the past 50, and especially 15, years are what India has to lose if it continues to fail to provide the necessary infrastructure necessary for a country to develop sustainably.

Put bluntly, before another shopping mall or office block goes up, roads and water mains should be put down. Without this, India will forever remain stuck in the past.

Painting by numbers

Many 18-year old students in the UK will today be contemplating their future.

They have found out if they can go to university to study the subject of their choosing.

They may think that this is the most important day of their life.

In fact, the most important day of their life has already passed.

It was the day they made a choice. The consequences of that choice are already being realised.

Whether they can go to university or not is out of their control. Whether they can afford to go and study is also out of their control.

Economists understand this distinction between an action and the consequences of that action.

So, why not choose to study economics?

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Economists have a great job. Let me explain why.

When you ask someone for advice, you usually do this because there is something you want to do but aren't exactly sure what that might be. So you seek the opinion of an expert.

In the case of medicine, the person you will ask has studied biology or chemistry and a number of years of medicine to be in a position to offer a suitable suggestion.

With legal matters you will ask someone who understands the legal system and how it affects your individual rights.

In both of these cases you seek an objective solution to a problem. There is a right and wrong response. The right response will lead to a healthy or just outcome. The wrong answer will lead to ill health or worse.

When you ask an economist for advice, you are not going to get a right or wrong answer. You will get a logical argument that helps you to understand more about the question you are asking in the first place.

An economist can't tell you how to make money. That's what investors do. However, an economist can give advice to an investor.

If an investor wants to know if the economy will deteriorate next year, an economist can explain why this might happen or why it might not. It is up to the investor to choose which of these arguments are the most convincing to them. After all, everyone sees a painting in a different way.

An economist paints the picture and others observe it.

Painting by numbers. How many other professions let you do that all day long?

Do current account deficits still matter?

Recently I attended a debate in London hosted by Reuters with the above title as the point of contention.

Not that there was much contention.

No direct answer to the question was offered by either participant.

This reflected both an unwillingness to address, and distint lack of understanding of, the issues underlining this misguided question.

It is not the deficits themselves that 'matter'. It's the debts they have spawned, in this case within the US household sector, that will eventually force through an outcome.

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One attempt at a solution was offered: a 40% real reduction in the dollar.

Apparently, in the past few years we have already seen half of this decline and "all we need is for the US current account data to reflect this."

Uh-huh.

So, all we need is for the dollar to weaken and this will make US households spend less and reduce the current account deficit?

If only.

It's not the dollar that has gotten us into this situation and it isn't the dollar that's going to get us out of it.

The answer lies in Asia.

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On the flip side of US profligacy is Asian thrift.

This counterparty to US excessive consumer spending is what has kept the whole party going for the past decade or more.

The party is over.

No longer are Asian central banks providing a free lunch to the US in the form of low interest debt. The bill has arrived. And it's called inflation.

Inflation is what has led interest rates in the US to rise to the level they are now. And it's these interest rates that will push US consumers into a level of indebtedness they haven't seen in years.

Once US consumers stop spending it will slow US growth to such an extent that the US current account deficit falls.

It's not the deficit that matters, but how it corrects.

In fact it won't take long before the US current account could be in surplus. An explanation of how that happens will be for another day.

The final act

Comedy often turns into tragedy, right around the final act of the play.

2006 will bring the last few scenes of the US Federal Reserve's Comedy of Hikes.

Will a new hero step in to save the day or will he arrive too late?

Time's up.

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The bond market is literally bending over backwards to get the Fed's attention.

The yield curve is inverted.

This means that investing in a government bond for 2 years earns you a higher rate of interest than investing for 10 years.

Strange, huh?

Yes.



Not funny

Before the yield curve inverted, the Fed relentlessly increased interest rates at a painfully slow rate. A quarter point here, a quarter point there.

No end was in sight.

But as is becoming commonplace in today's damn the future society, the light at the end of the tunnel was a truck heading straight for us.

It won't be easy to turn around in time and avoid the crash.

As the chart shows, when the yield curve has inverted, the stock market gets edgy.

What's worse, the economy either contracts or slows considerably.

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Either a recession or a slowdown of the US economy now look inevitable. The latter much more than the former.

Of course, if that truck were to be carrying a load of explosives we might be in for even more trouble!

(English translation: the US economy is now more vulnerable to a recession following a terrorist attack than at any time since 2001).

Breaking news

It could have been so beautiful.

24-hour news: there whenever you needed it.

News on Demand.

The concept seems so old now. And tired.

News is broken.

It's time to fix it.

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Humans have an insatiable appetite for news (especially bad news).

We read a newspaper everyday. Why?

To learn more about the world around us.

We want to learn about the world us.

We expect news every day.

Bad news: there isn't news every day!

Hold the presses, please!

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Can you imagine a day when there isn't any news?

How would you know?

You wouldn't.

News can be whatever news companies want it to be.

Whatever sells is news. And we buy it, every single day.

This is wrong. This will stop.

When?

When we stop buying news.

If you are paying for the news you receive it's like adding fuel to the fire.

The more money you pay to receive the news the more money news organisations receive to produce more news!

Thanks to all the 24-hour news that's been shoved down our throats over the years we've learnt the difference between information we need to know and news.

In a true "Information Age", we choose what news we want to read. And we don't pay anyone for it. (e.g. Google News).

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When we look back on changes they make sense.

It's even more interesting to look at those changes while they're taking place (hint: this can be a great way to make a lot of money).

The past few years has seen news broken and bridges gapped.

The bridge is between ignorance and knowledge.

Thanks to 24-hour news, we know so much more about the world around us.

This education has been the raison dêtre of 24-hours news. For that we are thankful.

But it's come at a price.

Now that it's served it's purpose, 24-hour news can stop and we, the masses, can move on to the next stage of enlightenment...

Who is the 'US consumer'?

A lot of talk these days focuses around valiant US consumers (USC's).

These non-mythical creatures are supposedly helping to fuel world economic growth.

But who are they? What are they?

They're wealthy.

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You might think you've seen a USC walking around the streets of America.

But a lot of these people look quite poor; surely they aren't the USC's you read about...

They aren't.

They're poor.

The USC's you've heard about are probably doing their shopping from home, on the internet.


Sharing the American pie

The fact is over two-thirds of the US population is doing quite nicely.

They probably have a good job and live in a nice home.

In the past these USC's have caved in to the pressures of standing to lose both.

These days they only have to worry about one of those problems, if at all.

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Unusually low real interest rates in the US over the past few years (see next piece) have put USC's minds at rest.

They can sleep easily in their beds and shop happily on their computers.

The Federal Reserve has been studying these USC's for a while now and knows exactly what they need to do in order to save them from extinction.


Spending begins at home

The chart above shows US home prices over the past 50 years. The shaded ares are recessions.

For the first time over that period home prices have continued to grow while the economy shrank.

Why?

Negative real interest rates.

People have been able to borrow money at such a low rate of interest that makes it look like a sure bet.

While there's no free lunch, the bill doesn't necessarily have to come at the end of the meal.

The cost of buying a home isn't fully realized until it's finally paid off.

This depends on what happens to interest rates.

At the moment interest rates are still low and look likely to remain so.

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Gradually rising interest rates won't hurt USC's.

Rapidly rising rates will.

The Fed knows this.

It will do everything in it's power to prevent it from shooting itself and USC's in the foot.

Go USC!

Follow the money: part 2

15 months ago, I explained why the Japanese economy wasn't worth getting excited about.

For the same reasons, it still isn't.

However, given Japan's recent upturn, it may be tempting to at least start getting excited.

This week, The Economist succumbed to just that temptation.

Just like the magazine, I didn't buy it.

Did you?

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One key piece of economic data that I look to for any sign of confidence in an economy is its money supply (the first column on the left shows the growth rate tending lower in 2005).

This represents the blood flowing through the veins.

If it doesn't circulate well, there's something wrong.

Judging by Japan's money supply, there's still something wrong with their economy.


Really?

It's only when Japanese individuals and companies are ready to use money, intead of putting it away for a rainy day, that brighter days will come.

Unfortunately, this is a self-fulfilling prophecy: the less confidence Japanese have in their economy, the worse it will continue to perform.

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The recent strategy of Japan's central bank has been much like its over-prescribing doctors: pumping the patient (economy) with excessive amounts of drugs (liquidity).

While Japan has been drugged up with money, China has raced ahead and now poses a greater threat than ever.

Japanese firms are right to be cautious about investing their money. Only when that money gets put to use will Japan be ready to take on China, Korea and the rest of the world.

Until then, the light at the end of the tunnel will remain the headlights of China and others heading straight for it.

Why economists shouldn't forecast

Hindsight provides an opportunity to learn from our mistakes.

Ideally, we learn enough about our mistakes never to repeat them again.

Economists who make forecasts disagree: The past is in the past. The future is different and uncertain. It's hard to disagree with that. After all, economists know what they're doing, right?

Not quite.

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Over a year ago I wrote about the assumptions economists need to make. The International Monetary Fund has just published its World Economic Outlook, with it's regular section on assumptions (pdf, p.viii).

In 2004, the IMF made the following assumptions about oil prices:

"... the average price of oil will be $30.00 a barrel in 2004 and $27.00 a barrel in 2005, and remain unchanged in real terms over the medium term." (viii)

These levels were clearly way off course, as were their forecasts for economic growth.

In 2005, they now assume the following for crude oil prices:

"... the average price of oil will be $54.23 a barrel in 2005 and $61.75 a barrel in 2006 (viii)

Naturally, these forecasts are wrong as are their forecasts for economic growth.

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The moral of this story?

(1) Always consider the assumptions behind an economist's forecast;
(2) Never trust an economist's forecast;
(3) Economists shouldn't make forecasts.

and

(4) Your forecast is as good as an economist's!

A real dilemma

If you're one of those people who expects the U.S. Federal Reserve to stop raising interest rates next week then you probably don't look at enough charts.

If you were to look at the charts the Fed looks at then you would understand why to stop raising interest rates now would defeat the purpose of the past 12 months of rate hikes.

One piece of data the Fed takes very seriously is the real interest rate; the interest earned on overnight deposits after taking account of inflation (i.e. higher inflation means lower real interest).


Going up

What the chart shows is that real interest rates are currently zero. Putting $1 in your bank account today will earn no interest in real terms. Your dollar today buys you less tomorrow. That's not going to help anyone, including those who survived the hurricane.

What the Fed is aiming towards is a neutral real interest rate. Judging from the past that means we should expect at least another 2% of interest rate hikes by the Fed (measured, not stirred).

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Nothing can stand in the way of the Fed on a mission, not even a hurricane. When the time is right, interest rates will stop going higher. If history is anything to go by, that usually means they're ready to head in the opposite direction.

Conundrum is Greenspan's legacy

Ben Bernanke sure has his work cut out for him.

Once he replaces Alan Greenspan next year, it's uphill all the way. Or should I say downhill...

Until now the U.S. Federal Reserve has been raising interest rates in an attempt to regain 'neutral' ground.

Near-zero interest rates were a recipe for disaster (i.e. Japan) so there was only one way interest could go.

Unfortunately, they haven't gone there quick enough.

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Under Alan Greenspan's tentative guidance, the Fed looks like a driver lost in the dark. It knows it has somewhere to go, but it doesn't know exactly how to get there. So it takes it one small step at a time.

One problem with this is the ferrari behind (the bond market) is in a hurry to get where it wants to go!

The Fed is supposed to act as the "guiding light" for the bond market, dictating the future trend of interest rates.

Lately, the Fed has been a poor guide; the ferrari is ready to go it alone.

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It's important not to forget how far the Fed has come.

As U.S. politicians continuously remind the public, interest rates are still at a 40-year low. And they got there pretty fast.



The black line indicates the Federal Reserve's overnight interest rate. The red bars are the interest rates on 10-year Treasuries. The Fed sure seemed to know where it was going 2 years ago!

When the Fed set out in a new direction at the end of 2004, the reasons weren't clearly laid out. The only clear fact was that interest rates were too low. The light, it assured the market, was at the end of the tunnel.

The ferrari didn't buy it.

Over the past year the Fed has lost credibility with the public and with the market (something that can only be earned through transparency , a point I made before the Fed started raising interest rates).

The market continues to buy bonds and the public continues to borrow money and purchase homes. The Fed should take a lot of credit for this (no pun intended).

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When Alan Greenspan labelled the continuted fall in bond market yields this year a conundrum, it was like a driver scambling to find his current place on the map.

Unfortunately, it's too late for him to do anything about it, other than just vent.

With Bernanke at the wheel, the Fed may regain some credibility with the market and perhaps start leading the way.

Do you feel safe yet?

It takes a human tragedy to make people realize just how vulnerable they are.

It takes a human tragedy for elected officials to reveal to the public this vulnerability.

New York Mayor, Mike Bloomberg, explained this morning how security measures have been "stepped up" in the subways, on the railways and at the ports in response to the bombings in London.

It doesn't seem the safest way to proceed if, in reaction to an attack that had no warning, that temporary measures are taken, aimed at improving national security. Surely we should have been at this state of preparedness all along?

This raises the question of just how prepared are we for another terrorist attack.

The answer is, it depends on what our elected officials are doing about it!

Today's tragedy helped to reveal just how vulnerable we are, thanks to the insufficient measures being taken by the people we elected for exactly that purpose!

** Afterthought **

I'm not the only one who lacks faith in the government's ability to prevent another terrorist attack. It's the stock market too. The U.S. stock market, and hence the global stock market, has learnt to live with the fact that another attack is coming and it won't be prevented, just reacted to.

Alan Greenspan raised interest rates today. Did you notice?

Talk is cheap, right?

Not when the chairman of the Federal Reserve is talking.

If he's concerned then financial markets are concerned.

If markets are concerned, then you pay the price.


What did I say?

This morning, Alan Greenspan told congress:

"The federal budget is on an unsustainable path, in which large deficits result in rising interest rates."

So, "unless major deficit-reducing actions are taken" interest rates are more likely to go up than down.

Investors got nervous, thinking this might actually signal higher interest rates (since the person talking sets the target for the overnight interest rate). They sold bonds, pushing yields higher.

As I have discussed before the bond market is what essentially sets mortgage rates. If bond yields go up then your mortgage bill goes higher too.

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It's important to remember that for policymakers, words are just as important as actions. Anything they say can be taken to imply something they may do.

Markets are always thinking about the future.

If you think like the market thinks, you can avoid getting hurt by it every single day.

It's the stupid Economy!

It's very easy to criticize other people.

It's extremely easy to criticize economists.

These dismal scientists are given the thankless task by government to solve problems for which there are a number of different solutions, each with different costs associated with them.

Every solution will come with a cost.

No pain, no gain.

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Some economists including, Friedrich August von Hayek , believe that government is the problem.

This is a very convincing argument given the history of evidence stacked against government policies over the recent past.

It seems as if every time the government tries to fix a problem they create another, larger problem in the process.

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Of course, different views on any subject represent different parts of the political spectrum, so none will provide the kind of balanced judgement that might convince everyone.

In the current political system, it is only the majority of the voting public that needs to be convinced (every 4 years) in order to choose between (usually 2) competing (and often extreme) alternatives.

The dollar's drop cometh

Every day we move a step closer to a dramatic fall in the value of the U.S. dollar.

The pull of gravity is getting stronger by the day.

Until now this pull has been mitigated by a number of forces working in the opposite direction. Unfortunately they cannot hold out for much longer.

There are three major forces waiting to take hold (in increasing order of likelihood):

1. The effects of U.S. statements in favor of a weaker dollar.
2. Reduced dollar holdings by U.S. and international investors.
3. A continually growing U.S. trade deficit.

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A record trade deficit is a symptom of a problem that has no solution.

You won't hear the U.S. government say:

"To cut the trade deficit, we are going to..."

A weaker dollar is supposed to help reduce the U.S. trade deficit by making exports cheaper.

Unfortunately, this doesn't get to the cause of the problem: the U.S. imports more than it exports.

It's understandable why the U.S. imports so much.

I often think to myself, as I wonder through a one-dollar-shop, how this is what it felt like 50 years ago. I can buy clothes and groceries using dollar bills and still have change left for the bus ride home (which now costs 3 dollars...).

Of course every country in the world is under the spell of cheap Chinese imports.

However, only the U.S. represents 250 million consumers that use greenbacks to purchase all these goodies.

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One thing you do hear the U.S. government say is:

"China needs to revalue it's currency."

A stronger Chinese currency would of course make Chinese imports more expensive. However, the U.S won't say that this will help reduce the trade deficit.

A deficit is not caused or solved by the value of a currency.

If anything it's the other way around: a weaker currency is the result of a weaker economy that imports less.

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So, what can you do?

Well, the first thing is insure against a further (and no doubt faster) drop in the dollar.

If you hold dollars, move into something else. You have two realistic options: the Swiss Franc (commonly considered a safe haven) or the British Pound.

Of course, if you live in the U.S., you could stop buying Chinese imports or imports in general. If this doesn't appeal or seems downright impossible then you will understand why the dollar can only go in one direction and you should act accordingly.