Gil’s Musings

Laws of Economic Motion

Back in ninth grade, you probably learned about Newton’s laws of motion. Paraphrasing, this three part physical law basically says that; A) a body at rest wants to stay at rest, and a body in motion wants to stay in motion, B) The weight of a body determines the force it takes to speed it up and slow it down, and C) Two bodies in motion that come in contact tend to exert forces on each other that are relative to their speed and weight. That last one is best known as “For every action there is an equal and opposite reaction”. In many ways these laws hold true in economics also. For every loan there is a borrower, plus interest. Every dollar that gets spent on one thing, it is not available to spend on another, unless you can print your own money. The more you borrow, the less likely you can repay, and the more it costs you next time. Those borrowing days seem numbered.

The relative risks of lending to the US government are rising. Despite Fed policy which has pushed interest rates to unprecedented lows, the likelihood of a US default has never been greater. But this could be said of Greece as well. The US only looks good by comparison. Japan is twice as levered as the US, yet their interest rates are even lower than ours. I’m guessing their societal cohesiveness and strong national pride are viewed as good guarantees that they will eventually make good on their loans. Self-inflicted Hari-Kari is an ever present reminder of how seriously the Japanese take the notion of honor.

Given our over-levered state, what are we to do? Paul Krugman says print more money. That’s one solution I guess. But the value of a dollar is determined by how hard they are to come

by, not the number printed on them. Capitalism is an amazingly balanced system. If you precisely double the money supply overnight and told no one, how long would it take for the prices of everything to double? I think it would be just about long enough for everyone in the country to touch a few of those new dollars just once. This is another example of equal and opposite reactions. What about the price of oil? The sudden rise in pump prices most certainly comes at the cost of other consumption. This is why the Government’s fascination with inflation “ex-food and energy” just floors me. Is this because food and energy don’t count? No, it’s because food and energy are not optional. This is why rising food and energy prices will most certainly affect the consumption of other things. I do feel myself flinching at the pump less than I did when we breached that $4 number when we had $148 oil three years ago. Don’t you find it interesting that we are already at the prior pump price peak, while a barrel of oil is still 30% below that $148? I think that’s why the refining companies deserve a closer look as potential investments, (I personally own TSO and WNR, see also VLO). My lack of flinching also has to do with my heavy overweight in energy stocks. I’m somewhat immunized. It could also be that I have already seen $4 gas before, and it doesn’t surprise me much. Internally, I feel that $5-$6 is my next “consider a Mini Cooper” moment. I don’t know what “the number” is for the average consumer, but I’m guessing it’s something similar.

These balanced effects are also why you can’t simply raise taxes on the rich and surmise that everything will turn out fine. With the wealthiest 1% already picking up the tab for 27% of all government spending, those people can only be pushed so far. They are also the world’s most mobile. The movie, Atlas Shrugged, comes out this weekend. If you haven’t read the book in the 54 years it’s been out, the movie may be a better way to avoid the sometimes tedious 1168 pages. It is basically the story of what happens when society’s most productive members go on strike after they have become villified and taxed incessantly. No wonder it has been a New York Times best seller since the credit crisis.

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