Friday Five November 21 2014

It’s been a busy week, so here goes.

A tedious (are not all Fed papers tedious?), but fascinating paper from the Federal Reserve that discusses monetary policy and homeowner balance sheets is worth your read – both as an individual and as a Christian business owner. Houses are usually the largest asset an individual or family owns. As such, they are often the initial source of collateral when a homeowner attempts to access credit. In the last few years, the Feds easy monetary policies (known as “Quantitative Easing” (QE) in which they pumped ~$3.2 trillion new dollars into the economy) drives up asset prices, I think, to artificial levels. Even small fluctuations can cause substantial changes to borrowing capacity. While the paper doesn’t conclude this, I do: Those who make significant purchases out of their home values – such as buying a truck or a boat – may be caught short in the future when the full effects of the end of QE are felt by the grassroots. At some point, the Feds will need to unwind the $3.2 trillion dollars they have pumped into the economy over the last six years. If they leave this money in the economy, then something else must give. Remember, M · V = P · T, where:

M: the total amount of money present in the economy

V: Velocity: how often each dollar (bill) is used over the course of a year. This quantity depends on the saving habits of the people in the economy. If they are keen on saving, the bills will only pass through a few hands each year, thus V is small. The combination of these two quantities is the total spending in the economy. For example: if there are M = $100 billion in the economy and each dollar is spend V = 5 times per year, the total annual spending must be M · V = $500 billion.

P: Price. It tells us the average price of a good in the economy. If there’s inflation, this is the quantity that will increase.

T: Transactions – the total number of goods sold over the entire year. The product of these last two quantities is the total sales revenue in the economy. If the average price of a good is P = $25 and there are T = $200 billion goods sold in a year, the total sales revenue must be P · T = $500 billion. It is no accident that the total sales revenue equals the total spending. Rather, this equality is the (reasonable) foundation of the Equation of Exchange.

Now, back to our discussion. In 2007, the Feds balance sheet showed ~$800B. Today, it is sitting at ~$4T, or an increase of $3.2T. So if M increases by $3.2T, either V must decrease significantly (which occurs when savings increase – which isn’t happening in our country) or P (price must increase) or T (transactions) must increase or both. If the prices increase too much – beyond the 2% target inflation rate the Fed is charged to achieve each year, then they may pull dollars from the economy, resulting in a lower P. Such “pumping” then “extracting” isn’t something we’ve seen before, so monetary policy may (likely will IMHO) viscerally impact housing values and personal wealth in America for years to come. Housing prices might fluctuate more than normal in the coming years. Just because the value of your home goes up doesn’t mean that you’ll have that value in the following years. The Feds monetary policies of the last few years have put us in unchartered territory. We don’t really know what the long-term effects are of the QE we’ve seen over the last six years. So don’t bank (pun intended) on the value of your home always increasing.

On a different topic, an appalling story comes to Bible and Business via Jonathan Turley’s site concerning the rape and enslavement of girls for purposes of converting them to Islam. As many as 7000 girls have been captured and enslaved by the Islamic fighters. The New York Times article is a chilling account of some of those girls. Gallup tells us that some 38.5 million people world-wide are enslaved today. The seven most dangerous countries: Brazil, Ethiopia, Indonesia, Nepal, Nigeria, Pakistan and Russia. Christian women in Egypt are being sold into slavery and forced marriages as a way to convert them to Islam too. Slavery is alive and well on this earth. Think twice before you let your daughters travel to these countries.

The lack of interest in golf by the Millennials is having a negative impact on the sport itself. MarketWatch notes that golf course closings are up and sales are down as Millennials jettison golf for other interests.

The Bureau of Economic Analysis says that income is up 2.0% on average, in 2013. Most counties experienced moderate growth in income.

Finally, one Terry Turnage seems to be a busy man. He has reported fathered 26 children via some 20 women and is behind, as you might expect, on his child support payments. Police continue to seek his whereabouts. Let’s hope he is found before he fathers more children who will probably grow up in poverty.

 

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