By John Horst
Driving through San Diego these days, I am left shaking my head at the tragedy of homelessness. The images are compelling, and we read daily now of politicians scurrying about as they try to look like they are ‘doing something’ about the problem. It is distressing to watch as we tinker around the margins of a problem implicating life and death without addressing — or even understanding — its underlying cause.
Much is being said about increasing the supply of housing. The premise is simple: more supply means lower prices. Unfortunately, the price of housing — and everything else for that matter — is a function of how much money is chasing how much supply. If we increase the supply of housing, but remain ignorant of how the money supply in housing is increasing even faster, we end up where we are today — wondering why the problem gets worse no matter what we do.
‘Monetary policy’ is one of those things that seems distant –- left to the “experts” in Washington. But it touches every single aspect of our lives. We are only now seeing how as we drive through our community and watch the news. The very first conclusion we must draw is this: The “experts” are not who they say they are, and do not know what they claim to know. The human tragedy unfolding around us leaves us no other conclusion. I will attempt to back this up not as an economist (at least in the academic or professional sense), but as one who understands intimately how information technology has transformed the way money moves in the economy.
Two Sides of the Street: Innovation and Entertainment
Imagine we build a factory on one side of the street and a casino on the other. We expect to see innovation in the factory and entertainment in the casino. Innovation in the factory means we are becoming more productive. Increases in productivity mean wages grow. Higher wages mean more consumer demand, which means we need to build another factory….Wash, rinse, repeat.
But then the casino hangs a banner on the wall facing the street: “The Chips are Now Free!”
How long do you think it will be before all of the creativity and energy we normally see in the factory “crosses the street?” Seriously. If the chips are free, who wouldn’t gamble?
The Federal Reserve has become the “window” at the casino, and chips are all but free — and the end result is there for all to see as we drive through our community and shake our heads as tent cities pop up.
Commodities, ‘Big Data’, and Card Counting at the Blackjack Table
Let’s visit the casino. First, we visit the window and are delighted to discover that we can borrow as much as we like — the chips are free, after all! Then we sit down at the table and I break out my smart phone. I have developed an app, and as the cards are played I snap a photo. The app knows which hand is mine, recognizes the cards as they are played, calculates the odds, and tells me what my next move should be. You’d think a burly security type with that earbud thing would be promptly escorting me out, right?
On Wall Street, you’d be wrong.
Take oil as an example. As a data-systems professional I can develop a system which will collect a massive amount of data on the oil market, pull it together into a what we call a data “cube,” and then run “slices” from the cube through a predictive model. My system spits out ‘slices’ representing what is likely to happen to prices in the near future. It is no different than computers predicting the path and intensity of a hurricane into the future. But if I can do this with price activity in a market like oil, I can jump in and place my “bets” (with futures contracts) when my system tells me the price will be going up. I pull my chips off the table when the system tells me the price will be rolling over.
And it’s all perfectly legal.
But why are we here (in the casino) in the first place? Why aren’t we across the street in the factory? Let’s use San Diego’s craft beer industry as an example to help us understand.
In each and every case, our craft beer scene is populated by what were once science projects in somebody’s garage. People started beating a path to the garage, and it became clear the demand could not be satisfied as long as it remained a science project.
So, the guys or gals who are making this great new beer go to Wall Street — this is where that money on the Blackjack table should be going. They get a loan, lease a commercial space, buy plant and equipment, hire a few folks, and scale up the production of their beer to meet demand.
It is crucial to understand what is happening here. Wealth is being created because somebody is taking raw materials and making something from them that people want or need. And they’re doing it better than the competition. The loan makes it possible for the wealth creator (the brew master, not the loan broker) to multiply this creation of wealth.
Or in other words: the wealth is in the beer, not the loan!
But what happens when the money being lent is free? The idea — at least as it is sold to us by the “experts” — is it is easier for businesses to borrow to expand. Too bad this isn’t what is happening in the real world.
The math is simply too compelling. With Big Data I can show how the blackjack table of the commodities markets will provide a better and more certain return than the brewery. And if you can borrow to your heart’s content — “levering up” in Wall Street’s deliberately opaque language — there is simply no way the factory can ever compete with the casino for the same capital.
When you can “get rich” at the blackjack table, why bother ‘creating wealth’ in the factory?
Burning Both Ends of the Candle
This is where we come back to our drive through the neighborhood and the human tragedy unfolding around us. The price of the gasoline I am using spikes because the oil market is being treated like a Blackjack table. Every extra dollar we sink into the gas tank is a dollar not available for things like rent and metered utilities. It gets harder and harder to make ends meet.
And as I pull those chips off the table when my Big Data system tells me to, what do I do with the winnings? I invest in the local real estate market. Because the chips are free, there is no limit to how long I can play and how much I can win… And as such there is no limit to the growth of the money supply in the local housing market.
So rents are soaring while the dollars which could be going to them are sucked into the gas tank by price spikes driven by the blackjack table. The candle has been lit on both ends; it is only a matter of time…
Monetary Policy is Always a Local Issue
Back to basics: Rents will be determined by how much money is chasing how much product. We can add to the product, but if we wrongly assume the same amount of money is in play, we end up no better off.
As we drive through our neighborhoods, what we see must become an object lesson in why monetary policy matters. The decisions are made ‘far away’ but the consequences are staring us in the face, right here in our own communities.
When we come to a stoplight, if we notice smoke billowing up from under the hood, we know something is wrong. The vitriol in our national politics is like that smoke. We should not be surprised by the vitriol; the homelessness tragedy unfolding before us is the local manifestation of the source of our political turmoil; they both arise from the same source. Something is very, very wrong in America right now.
The question is what? My answer is we have left the banks — led by the Federal Reserve — in charge of the money supply, believing them to be “experts” competent to manage it. Their claim to “independence” is now nothing but the curtain in the Wizard of Oz. God forbid we get it behind to discover these people are not who they say they are, and know nothing of what they claim to know.
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