Me and My Cabbie

On a recent business trip to New York, I hailed a taxi at the airport to take me to my mid-town Manhattan hotel. Upon entering the taxi, I gave the driver the address to my hotel and, in a perfunctory fashion, I asked the cabbie, "How's it going?"

In reply, he told me that prices were too high.

Gas prices for his taxi were climbing, he told me.. Food prices were climbing. And they just raised the price at a storage locker facility where he was renting space.

Since I follow prices for a living, I knew of what he spoke. "Yeah," I agreed, "prices are climbing. Most people don't realize it yet, but they are climbing and it is only going to get worse."

"You should buy some gold to protect yourself, if you can," I advised.

He then proceeded to lecture me for the rest of the trip on why he would not buy gold.I didn't say anything. I just let him talk. Gold, he told me, has very little use. It has some use as jewelry but outside of that it has no use, was the gist of his argument.

"You can't even eat gold," he said. He labored on the fact that you couldn't eat gold, for some time. This seemed to prove to him that gold was nearly useless.

As we arrived at my hotel and since I had an unopened Nestle's Crunch bar in my briefcase, I offered to pay my fare with the bar. "Heh, heh," he laughed.

"No," I said "take it. Why would you want paper dollars? You can't eat them,you can't even make jewelry out of them."

He laughed nervously again. "No, no," he said "I don't eat candy."

"But you can't eat any dollars I give you either," I said.

I then decided to give him a short lecture in economics to help bail him out of his predicament.

"You see some things sometimes have value simply because of their exchange value," I said. " You and I both accept dollars in payment for our services because we know we can exchange them for other goods and services we want. When something is widely accepted in exchange, economists call it a medium of exchange. It doesn't necessarily have to to have any other use. Dollars are a medium of exchange. We can't eat them, but we accept them in exchange because once we have them, we can buy
food with the dollars or we can exchange the dollars, as you know, for many, many other things."

"Now the one drawback of dollars is that the government can print more of them any time it wants. By printing more dollars and spending them, it is competing against you for things you want. That's where gold comes in. To increase the gold supply you have to dig it out of the ground.This is hard and expensive work. The government can't print more gold. The government can't produce gold at will. That is why the government has always maintained a propaganda campaign against it. FDR even made it
illegal to own gold. This legislation stayed on the books for decades. But
despite all this, many people still respect gold as the ultimate medium of exchange. And when the government begins to aggressively print more paper dollars, more and more people choose to hold some of their monetary reserves in the form of gold. That is why gold is valuable. No, you can't eat gold, but it's exchange value can't be corrupted by the government either, and exchange value is very important."

"Now again I am going to offer to pay this fare two ways. One with this bar which you can eat, or with these dollars which have no value outside of exchange value. Now if you accept these dollars, you are at least implicitly acknowledging that exchange value exists and I think you are a smart enough man to know that prices are going up because more of these dollars are being printed. Now if you are a real smart man, now that you understand exchange value, you should go and do something smart and hold some of your reserve funds in a medium of exchange that the government can't print at will. That's gold."

"Now, as far as this cab fare, will it be something you can eat or something that only has value in exchange?"

"I understand," he said "I see why dollars have value, and why gold has even more stable value."

I paid him the fare in dollars. As he counted it, he asked, "How many new dollars are they printing?"

"A lot," I said, " an awful lot."

---
Robert Wenzel is Editor & Publisher of EconomicPolicyJournal.com and author of The Fed Flunks: My Speech at the New York Federal Reserve Bank.

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Watching Arnold Pump Legislation

There is a man who lives in Southern California and who is originally from Austria. His sister also now lives in Southern California and owns a restaurant that specializes in Austrian food. Over the years the Austrian-born Arnold Schwarzenegger would occasionally visit the restaurant. The man and Arnold would generally briefly chat when he visited.

After Arnold announced he was running for governor, he visited the restaurant again. The man, who regularly chatted with Arnold in the past, rushed over to talk to Arnold, like in the old days. Arnold shrugged and indicated he couldn't talk to the man. "The bodyguards, the bodyguards. They won't let me," Arnold said.

Who knows what insight this provides into the man that is now governor of California?

The bodyguards wouldn't let him?

Recently, Arnold declared victory in getting a worker's compensation bill passed. The legislative conference committee that approved the bill did not receive it until a Thursday morning at 3:35 a. m. Three minutes later the six-member panel approved the 77-page bill unanimously, with no analysis presented and no copy of the bill given to anyone but the committee chair.

In reporting on the passage of the bill, The Los Angeles Times stated:

"...even some friendly Republican lawmakers were rattled by the governor's
methods...the workers' compensation revamp 'has not been done in an open and transparent manner...' said Assemblyman Keith Richman (R-Northridge)."

The Times went on to report that "The governor said: 'I always did campaign and say, 'Let the sun shine in and let the people be aware of what's going on.' Here though, 'we had to make decisions quickly.'"

The voters of California will most certainly give Arnold a pass on the way he pushed through this legislation. Indeed, the way he pushed through the legislation is probably not on their radar screen of concerns at all.

It appears that Californians are also ready to give Arnold a pass if he breaks another campaign promise, i.e. the campaign promise of not raising taxes.

A recent poll shows that most Californians would not be upset if taxes were raised and they wouldn't be upset with Arnold for breaking this promise.

You see, most Californians seem to like the "can do" governor, even if what he is doing is the opposite of what he promised.

Interestingly enough, it was the Austrian-born, Nobel Prize winning economist, Friedrich Hayek, in his brilliant book, The Road to Serfdom, who warned about such type politicians. He was writing about leaders of nations and of totalitarian regimes, but you have to wonder if some of what he wrote doesn't apply to Arnold.

In a chapter of the book titled, "How the Worst Get On Top," Hayek wrote:

"We must return for a moment to the position which precedes the suppression of democratic institutions... In this stage it is the general demand for a quick and determined government action that is the dominating element in the situation, dissatisfaction with the slow cumbersome course of democratic procedure which makes action for action's sake the goal. It is then the man or party who seems strong and
resolute enough 'to get things done' who exercises the greatest appeal."

That sure sounds like Arnold. Arnold wants to get things done."We had to make decisions quickly," he says.

What he is getting done with this can do action is the question, though.

He prides himself on being a free market oriented governor. But, it has to be asked if he really understands what free markets are about.

A 77-page workers compensation bill may be many things, but it is certainly not a free market product. In a free market, you don't have workers compensation bills at all. You leave it up to individual businesses to offer workers compensation packages, if they feel "the market" demands that they do.

As far as increased taxes are concerned, that is simply an expansion of government. It is taking it from the general public and passing it on to special interest groups of one sort or another.

In upcoming months, Arnold will have to deal with next year's California budget. As things stand now, a 14 billion dollar deficit exists. Arnold can solve the budget problem by standing firm on his no new taxes pledge and by starting to cut back on the bloated California government expenditures. Or, he can take the easy road, use some of his popularity to give a speech, tell all Californians that they must sacrifice "for the good of the special interests, er ah, the great state of California" and wack it to them by raising taxes in a very complex manner so they all think it is the other guy who will be paying most of the new taxes.

How Arnold deals with this budget deficit is going to be a good litmus test as to what kind of character we have here.

If he fights strongly to lower the budget and not raise taxes, then California may truly have a terminator of big government growth. On the other hand, if he does raise taxes, then California has nothing but another lying politician, who is watching which way the wind is blowing.

The whole country needs to keep an eye on how all this develops. Arnold has charisma and the Republican Party knows this. Utah Senator Orrin Hatch has introduced a resolution to amend the Constitution's ban on non-American-born presidents by allowing people who have been U.S. citizens for at least 20 years to be elected to the White House.

The Salt Lake City Tribune quotes Hatch as saying: "If Arnold Schwarzenegger turns out to be the greatest governor of California, which I hope he will, if he turns out to be a tremendous leader and he proves to everybody in this country that he's totally dedicated to this country as an American . . . we would be wrong not to give him that opportunity."

The greatest governor of California, Orrin? Will see about that. Maybe if his
bodyguards let him.

An Open Letter to Alan Greenspan

Dear Chairman Greenspan,

I note in your most recent testimony before the U. S Senate Joint Economic Committee meeting that you are not that concerned about inflation. In fact you said at that hearing:

More broadly, however, although the recent data suggest that the worrisome trend of disinflation presumably has come to an end, still-significant productivity growth and a sizable margin of underutilized resources, to date, have checked any sustained acceleration of the general price level and should continue to do so for a time...As yet, the protracted period of monetary accommodation has not fostered an environment in which broad-based inflation pressures appear to be building.

Chairman Greenspan, I think you need to get out more. You have been Federal Reserve Chairman for nearly 17 years now and it is must be hard to remember what it is like to be a common man. I wonder when was the last time you drove your own car, or pumped gas into one.

In the near 17 years you have been Fed Chairman, you have increased the money supply (as measured by M2) by some 3.4 trillion dollars. Yes, time goes by fast, doesn't it? But when you started to run the show in 1987, M2 money supply stood at only 2.7 trillion dollars, now it is at 6.1 trillion dollars.

Fortunately for you, foreigners have been absorbing a lot of these dollars or we would be having near hyper-inflation by now. China, Japan, Germany, Russia, everyone is seeing their dollar reserves explode. U. S. dollar denominated debt is also being absorbed overseas. Japan, for example, has been buying $20 billion of Treasury debt every month. They now own nearly $600 billon in Treasury debt. China owns about $170 billon. You are one lucky Chairman to have them around. Former Fed Chairman Paul
Volcker calls it the munificence of strangers.

But I think the Europeans and Asians are finally starting to get tired of absorbing all these dollars and, in addition, you are still pumping them out. Since the start of this year you have pumped in another 170 billion dollars. Because of this, inflation is starting to creep up. And one thing we all learned from the inflation of the 1970's is that once prices start to creep up, more and more people become less interested in holding dollars and much more interested in getting rid of them by bidding up assets--any kind of assets.

We are probably in the very early stages of this happening, right now.

In an attempt to put you more in touch with the experiences of the common man, I have put together a list of simple tasks that you might want to complete. I hope you try these. Once these tasks are completed, I would like to know if you still hold the same opinion about inflation as you did before you completed the tasks.

Your first task is to go by a gallon of milk. If you haven't done this in 17 years, it is going to be quite a shocker. Milk prices are high but it looks like they are headed even higher.

According to the Los Angeles Times, milk prices will probably hit record highs of $3. 50 per gallon soon.

Once you have the gallon of milk, make sure you stop to pump some gas into your car. And you guessed,it, gasoline prices are climbing also.

According to Reuters

There is no relief for U.S. consumers at the gasoline pump, as the national price for motor fuel hit a record high for the fourth straight week,
increasing 2.7 cents over the last week to $1.813 a gallon on Monday, the government said.

Now that you have your tanked filled it is time to take a drive out of Washington D.C. Drive over to Maryland and do a little house shopping. Here is what the Washington Post is saying about the current real estate market in Maryland:

[The] market is spinning beyond crazy toward unattainable... [One house
recently] attracted 15 contracts and sold for $100,000 over list price. [A] second house also fetched multiple contracts and sold for $1.1 million, also $100,000 over the asking price.... a builder recently paid $750,000 for a tear-down in Bethesda -- three-quarters of a million dollars for the land alone..."The only people who are selling are people who are dying, getting divorced or moving into nursing homes."

Once you have recovered from the sticker shock of housing prices and head back into Washington D. C., you should grab a meal. Now, don't head over to the Fed where you have your own private dining room. I want you to go out, have a meal, and reach into your wallet and pay for the meal yourself. Head over to Smith and Wollensky's, it is a first class dining spot. And I am sorry to say prices are up there also. Here's what the Washington Times reported about restaurant prices:

Restaurants are raising menu prices, reducing portion sizes and steering customers to less expensive items to offset the high costs of beef...Smith & Wollensky raised prices three times in 2003... "We've had no choice because it's been outrageous,"

Get a good nights sleep tonight because I have one more project for you tomorrow, Chairman Greenspan. Tomorrow, I want you to imagine that you have to fix up your house yourself, or that you are putting on an addition to your house. We are going to head over to Home Depot to do this. Here's what the New York Post is reporting about prices at Home Depot:

Prices have risen tremendously."...building wire prices jumped 25 percent to $500 for a 500-foot roll... I-beams cost $560 per ton versus $300 in April 2003, up 86 percent. Cut plate, the key structural for walls, is $650 vs. $320. Rebar is $420 vs. $300 a year ago...Lumber prices exceed $400 per 1,000 board feet.

And The Post didn't stop with it's reporting at Home Depot. Here is how they finished that story:

Soybeans and soy oil have been the strongest components of the Dow
Jones-AIG Index average. Beans hit a record of $9.52 per 60-pound bushel.

So,it's not only beef buyers that are seeing higher prices. Vegetarians are
feeling the pinch also, The Post continued:

Shoppers pay $4.19 for 5.25 ounces of soy-based vegetarian bacon vs.
$3.29 in July 2003.

So you see Chairman Greenspan, what most people do on a regular basis is something like this: They drink milk, fill their car tanks with gasoline, have an occasional dinner out and head back home. The only problem, Mr. Chairman, is that milk prices, gasoline prices, food prices and home prices are all headed higher. In other words, while your statistics may not indicate that there is much inflation, people that have to live daily normal lives are seeing it everyday.

I have seen reports that you like to go over these statistics (the ones that are leading you to believe there is no inflation) at night while soaking in the tub. Chairman Greenspan, I think it is time you get out of the tub.

Your 17 years of irresponsible money printing ( Paul Volcker calls it:

"Stimulus beyond anything I have ever heard of in history.") is about to make it very difficult for the average person to make ends meet as inflation kicks into high gear.

I know you are in a real bind, because the minute you start fighting inflation you are going to hurt all those people that have been speculating in the real estate bubble that will surely coming crashing down. On the other hand, if you don't start fighting infaltion, you know the inflation will only become worse, hurting pensioners,savers and laborers. You have certainly created a mess.

My only advice to you would be to stop playing politics. You are 77 years old, do what is right and end this money madness. Stop printing money. You know this is the right thing to do. You in fact explained the problem very well in 1966:

But the process of cure was misdiagnosed as the disease: if shortage of
bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913....The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices
must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods...The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit
spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

Yes, Chairman Greenspan, "the law of supply and demand is not to be conned." The money explosion you have created is starting to be reflected in prices. Yes, just like you wrote in 1966 "prices must eventually rise."

I hope you do the right thing and stop printing money. But I am not betting on it. I'm putting a good chunk of my money in gold. You see. You had it right in 1966, "Gold stands in the way of this insidious process [An insidious process you are now controlling!]. It stands as the protector of property rights."

Sincerely,

Robert Wenzel

An Ex-Girlfriend, a Construction Worker and My Landlord

If you want to know what an economic bubble looks like as it is occurring, keep an eye on the real estate market.

The landlord that I rent office space from is, I'm guessing, about 50 years old. He was born in Iran and left Iran around the time the Shah was overthrown. For most of the more than twenty years he has been in the United States, he has been in the garment business. Women's dresses, I believe.

It's a tough business, he has told me.

About three years ago, he decided to leave the garment business to enter the real estate market full time. His experiences can attest to the fact that we are certainly in a Bull Market in real estate. About six months ago he bought a building in downtown Los Angeles for $4.2 million. He was just offered $9.6 million for it.

I told him to sell and put some of the money in the bank. "This is a real estate bubble. When interest rates start to climb, the bubble is going to burst," I said to him

He nodded. "I may sell but I have to put it back into real estate, otherwise I will have a huge tax bill," he said.

What a scam, I thought. I know the government for decades has been promoting the real estate market, but here is the icing on the cake. Yeah, you might make some money in the real estate market, if you catch the cycle right, but if you try and take some out, the government is going to take a good chunk of it. Roll it back into real estate and the government won't mess with you for awhile.

An ex-girlfriend of mine called this week. She recently moved to Houston. It sounds like things are tight for her. Instead of renting, she decided to participate in the Great American real estate boom and bought a condo. And it sounds like she has bitten off more than she can chew, as far as the mortgage payment. She doesn't seem to like Houston either. She's a real looker and when she is not falling for the rap of an economist, she tends to date athletes and sports agents.

I guess it is a further sign of the real estate crazy times, but she informs me that she has her eyes set on some Houston real estate developer.

There is real estate talk everywhere. Just yesterday while at a pizza joint, I was eavesdropping on the conversation at the table next to me. There were three construction workers at the table and, surprise, they were talking about their homes and real estate in general.

Apparently one of the construction workers comes from the old school, when he asked one of the others, "How many years before you have your mortgage paid off?"

The other construction worker replied, "Oh no. I am not going to pay it off. I am going to use it as a cash cow. Every few years when the value goes up I am going to take the money out (by borrowing against the increased value)."

I'm looking at these construction workers and thinking to myself, these guys really have no clue as to what is going on.

Alan Greenspan is pumping money into the economy, and especially the real estate market, at double digit rates. He has been doing this, almost non-stop, since he became Fed chairman in 1987. This means he has been doing this roughly 17 years. Pumping money for 17 years is a long time to pump money. At some point in time price-inflation will kick in, regardless of how much more productive the overall economy has become. And that some point in time may be now, given the falling dollar, rising oil prices, rising steel prices, rising rubber prices and the general rise in commodity prices.

The commodity price rise is only likely to get worse. And when things get worse on the price-inflation front, the Fed will slowly start to raise rates and slowdown the flood of easy money. And that's when all hell will break loose.

The construction worker who is using his home as a "cash cow" will get laid off, since the construction industry is all part of the mega real estate industry that Alan Greenspan is now fueling with easy money. He won't be able to find comparable work, he won't be able to make his mortgage payments, the debt on his house will be more than the declining value of his house. He will file bankruptcy and lose his "cash cow," i.e. his house.

My ex-girl friend works in the automotive industry, which is another industry that is always a major beneficiary of an easy money environment. She will lose her job, also file bankruptcy and dump the Houston real estate developer (who will certainly have plenty of financial problems of his own). She will probably end up marrying a .250 hitter from some major league baseball team.

My landlord will come to regret the day he didn't pay the taxes on his gains and put some money aside. If he thinks the garment business was tough, wait until he sees what happens to the real estate market once Alan Greenspan turns off the monetary spigot.

There are many, many sad stories taking shape during this Alan Greenspan inspired Real Estate Bubble, I hope your life won't be caught up in one of them.