Say NO! to QE

Janet Yellen took office right after a time where her new job is tremendously public. The chair position has always been public to a degree, but Congress and the Executive Branch have demanded more transparency and explanations for those wizardly ways. Yellen has not shied away from aggressively embracing this transparency and has made the news quite a bit in three months. I remember when she was testifying before Congress and she let slip an answer that convicted Congress for many of the problems we currently face. She pointed out that Congress has shirked its part of the bargain for helping bring employment to the American people and, in doing so,  unintentionally spooked the short term markets with her admission that interest rates and cheap money are only one piece of the total treatment package necessary to fix America's ailing economy. It IS probably upsetting to have a mandate to deal with unemployment when you can't actually hire people. She hoped her statement would lead to an epiphany by Congress that it should begin a works program so the money the Fed is providing so cheaply gets to the people who need work and would also become consumers in the economy. We're still waiting.

Here's irony for you: QE 1 was $100billion/month. QE 2 was $75 billion/month; QE 3 began at $40billion/month and when combined with Operation Twist was $85billion/month. Averaging them all together, the Fed has pumped an average of $83.75 billion per month into the economy. For the same cost, they could have employed 19.7 million people at $4250/month, the American median income. There are about 116 million full time workers in America, and it wouldn't take 19 million more for the economy to hit a huge boom cycle. Hire three million people at $3000/month to build things. The payroll is $108 billion a year. Unskilled or “wrong-skilled” workers get new training in construction and also spend money in their localities which further stimulates the economy.

Businesses need customers. Customers need money. Money comes from jobs. Yellen was making the obvious point that with the amount the Fed has “invested” in the American economy, Congress could have done much more easily with a works program. Three million new workers would be a huge new government program. But it's cheaper than what we're doing; it's transparent stimulus, and it puts money in the hands of average American people rather than private corporations and banks. Even if we also spent $400 billion a year on real estate and materials, we would be spending half of what we're spending now.

The catch is that Fed stimulus doesn't look like spending. I could become a conspiracy theorist and make up stories that this stimulus was the deal with the demon (Dimon?) back in 2008 when Chase stepped in with a whole lot of cash to prop up the GM and therefore the financial system. But I digress. At any rate, the Fed has already done what it's done – the money is printed. We can only hope that it makes its way back into the American economy.We can't unprint that money, so we have to figure out where to go from there.

A brief analogy with concrete, which is a large part of my day job. You make a concrete mix, and it will have a certain strength. Rock, sand, cement, and water mixed in the right proportions become strong enough to support 100,000lb vehicles. Once it's in the mixer though, there's only one thing you can do – add water. You add the water to buy yourself time to get the concrete placed, to keep the mix from setting up before you need it to. But you can't subtract water, and the water weakens the concrete's strength. You buy yourself a little bit of time but you lose strength. Lose enough strength and that concrete will no longer support the loads you need it to, and it will structurally fail. If an engineer comes and tests the concrete's strength and it isn't the strength specified, it will have to be ripped out and begun again.

The Fed has been adding water now for five years. They bought us time to get people employed; time for businesses to regain customers. As that money makes its way into the economy (and QE truly is “trickle down,” supply-side economics), the money will lose value. Eventually, that new money will be spread around to millions of people, and it will become less valuable.

A catch 22. You are supposed to help employment, so you first lower rates to zero. That doesn't work fast enough, so you start to actually print money to put into the economy. This, with the expected eventual inflation, pushes effective interest rates below 0. Still, jobs are created but at a slow pace.

Let's face it:QEwhatevernumberyouwanttoadd is becoming liquidation for American businesses and real estate on foreign markets. We are just BEGGING foreign countries to come in and buy our stuff. But what happens when they actually own it all?! We are going to become indentured servants to foreign investors. What's more, since many of those investors represent sovereign wealth funds, we could end up with a significant number of Americans actually working for foreign countries' governments.

It is imperative that our government and the Federal Reserve Board get a hold of this situation and fast. The government has many weaknesses, but one thing it does have is transparency and public information requirements. Trillions of dollars out on the private market right now do not, and we have no way to know where all of that money is going.

One more even dirtier analogy. QE is an upper for the economy – think crack cocaine. It creates an instant high that immediately begins to taper down. The only thing that gets that high again is more crack. And, far more dangerous than some other drugs, crack is both physically and mentally addictive. Not only does the mind desire the feeling of the high, the body becomes dependent on the chemical. The American economy used to be addicted to the drug of consumer spending. To replace it, we started taking QE. Somehow, some way, we have to get into rehab before the normal course of action for drug addicts takes place for the entire American economy.

Q2E1 - Qualitative Easing

“Qualitative easing.” WTF does that mean. To me it sounds like sizing pants at 6:00pm Thanksgiving Day. OK, so my waist size says 42. But that's not normally what it is. This was an UNUSUALLY large meal. I don't eat like that every day.

Yes, that's true. But you're treating the future as if it's just a flat line from the past. And while it's probably true for Thanksgiving-sized meals, it's not the case for the economy.

Zoom out. Our money is issued by the Federal Reserve Bank. That bank has two missions. One is to encourage employment in the U.S., and the other is to keep inflation low. Great! I can get behind those ideas. But what happens when the two priorities conflict with one another. Well, we know what happens in the business world. One position must be resigned or at least made less important. The Federal Reserve board must then make one a priority and pay less attention to the other. They have been doing that for 6 years now - making employment their main priority will far less concern for inflation.

Quantitative easing began in 2008, was restarted in 2010, and then put into cruise control in 2012. If 1% of Americans know what quantitative easing means, then I will buy you pizza (NO! I did not dump toxic chemicals in your neighborhood!). Think briefly of the Fed as the world's largest bank. It has assets just like any other, and in 6 years, the fed has tripled it's holdings of U.S. Treasury Bonds. Where did the Fed get the money to buy those bonds? Well, they printed it. They created new dollars and then gave the U.S. government those new dollars in exchange for long term bonds.

I don't know the Fed's total holdings. I've never even thought about it. I doubt .1% of Americans have. It's just the national bank. But if you have American dollars in your wallet, checking account, or life savings, you own stock in the Fed. The reputation of the U.S. dollar dictates your purchasing power.

We want to think of our money as a rock. Prudential. Fidelity. Even the insurance industry recognizes the branding there: stable. This is why the Fed has a mandate about inflation. If inflation were at a crazy rate, like 20%, you would see prices jumping every other month. Businesses would be racing ahead of one another to charge each other more, and eventually the entire system of exchanging paper for goods would halt. No one would trust the prices they set today would be worth something tomorrow, and nothing would get done (or eaten, for that matter...). And no one would save ANY money. So 20% is bad. How bad is 10%? Well, probably about half as bad as 20%. idk. At a certain point, you've slowed inflation to a point where people just don't freak out about it. They just understand that as time passes things will cost more. We just shrug our shoulders and say “It is what it is.”

The U.S. having an amount of inflation that gives stability to the economy is no accident. It is carefully controlled by the Federal Reserve. They have come to the agreement that the inflation target year to year is 2.5%. Why that amount? Well, people don't freak out when inflation is at that rate. And yes, they came up with something more verbose which you can read here.
But apparently, a half of a point higher is appropriate now where it was not two years ago. The Wall Street Journal notices the inconsistency of the Fed's action - read about it.

But the fed also has a mandate to advocate for jobs in the United States. There used to not be published targets about this particular aspect of its mandate, but when the stock market went in the shitter in 2008, unemployment jumped drastically. Politicians then demanded action from the Fed. The Fed, knowing the only action that it could take would conflict with its other mandate, set a benchmark on unemployment at 6.5%. Arbitrary? Maybe. Compared to what was considered “full” employment before, 2 more people out of every 100 would not have a job. This likely just means longer unemployment lines, more public assistance, and less mobility for the lower class. But this is a big deal if any of those conditions affects you or those around you. Also, those 2 people out of every 100 still have to eat. They just might be getting their food from their family, friends, or from public assistance.

Should the dollar itself should be staked on employment? The economy moves in cycles, always has, always will. Even the Bible discusses economic cycles. Seven years of plenty, seven years of famine. The Fed has attempted to smooth the rough edges of those cycles. They control inflation by raising interest rates, and they TRY to impact employment by lowering them. Then they lowered them to de facto below zero. Interbank interest right now is lower than inflation. Therefore, loaning money to another bank loses money for the original bank.

The economically transitional period we are currently in has little to do with interest rates. Technology has finally hit professions and “inside” jobs, and productivity has soared with time and cost cutting computer applications. We as a society should be proud – we have created a system where not everybody has to be working for us to make enough food and goods for everyone to live. We still have very high per capita income, and as far as basic needs go, we are a net exporter to the world.

Ok, so what happens when the 6.5% target is reached. If the Fed had signed a contract for this, it would mean they would instantly cease quantitative easing and raise the interbank borrowing rate, which would filter down into every consumer interest rate on the market. It would be an electric shock to the economy – we would be stunned, disoriented, confused, and we would lose track of the next small period of time. Along with the uncertainty a new Fed chair brings, the market is concerned about the timing of the withdrawal of quantitative easing. This week's increase on capital requirements for large banks represents what I believe to be the first step of the Federal Reserve ending quantitative easing. They are requiring higher capital reserves in large banks so that those banks can weather the storm the Fed knows will hit soon. They know the American economy can't take another body blow like 2008 again, but they also know that continuing down the path they are on will lead to massive inflation. Tapering began in late 2013, coinciding with the strength and distraction of the Christmas shopping season. I imagine that Bernanke knew his term was almost up and the first two months would not be a big deal and the big players would wait to make moves until Yellen took office. And he wisely started a major policy shift while he still held office in order to soften the blow that change would eventually bring

It's very funny to change the Q in QE. Quantitative and qualitative mean opposite things and this marks a large shift in the stated purpose of the initiative. Basically they are saying we officially will meet our goal but will continue pumping money into the banking system because we know that if we stop, things will grind to a halt. I'm running on here, more of the “why” next week.

Fixed income retirement plans are well on their way out as the norm for most Americans. Pension plans were an incentive to attract workers to manufacturing and public sector jobs 50 years ago. This is not to say they are a bad idea; it's better to say that executives and mutual fund companies have pitched a convincing argument to managers that these plans are a better way for workers to retire. Most new hires these days are put on some sort of 401k or IRA retirement plan in which the worker gradually buys stock in a dollar cost averaging scheme. This has worked out well over the last two generations as the stock market has generally gone up with significant returns. One major advantage is that generally, these plans give gains that outpace inflation so that a worker actually earns money on their investment over time.

However, we in the U.S. are still left with an enormous pension plan – Social Security. We have no choice but be enrolled, and the benefits we ostensibly will receive are based on the money we make during our working life. Furthermore, one reason private retirement plans are seeing success is because of the backstop effect social security has on our retirement mindset. How strong is that backstop though? Is it a net, a fence, a brick wall? Social security faces problems in the coming years – increased life span, longer retirements, and smaller percentage of the country's population working.

As far as increased life span, this column could go over statistic after statistic of how much longer Americans are living than 80 years ago. In 1930, the average age ofdeath was 60; now it is 78. This is nearly a generation longer life span. Better medical care and healthy consistent food supplies account for some of the increase; safer work environments and temperature control contribute greatly as well. The average has leveled off recently and we can probably be safe in saying that 75-80 is a safe guess for the average for many years to come.

Social Security could even be a motivation to live longer for some – you get the money as long as you are alive! What better motivation for a senior who doesn't spend all of the money they earn just by drawing in breath. And it's not as if the money just disappears when the person passes – inheritance is often a significant windfall for those in midlife. Basically, social security combined with private retirement plans earns profit for retirees.

The demographics of the baby boom are really starting to catch up with us though. This column from theWall Street Journal highlights how the recession has magnified problems that we already faced. The Labor Department's “employment to population ratio” has been modified and adjusted so much it no longer means what it should. To rephrase, I mean that what really matters is how many workers it takes to support non-workers. Looking at ages 16-54, we see how it looks like just a 4.7% drop in the working population. 4.7%; not that bad right? Let me show you how big a drop 4.7% really is

Subtract the % of workers from 100 and you get the % of non-workers, right? By dividing the number of non-workers by the workers, we get an actual ratio, which I have dubbed the 'support ratio”. This ratio shows how much of a “worker” it takes to support a non-worker. In 2007, the support ratio was .579. By 2013 it has jumped to .706. Thus, 12.7% more of our work goes to support those who aren't working now as compared to 2007. And the ratio itself has increased by 22% (the difference between .706 and .579, .127; then divided by the original .579) I would argue that the closer this number gets to 1, the greater trouble our retirement scheme of social security faces. At 1, it requires one person working just to support the non-worker. At that rate, savings are virtually gone and we begin facing all sorts of other societal problems.

There's still cause for good news. 76.1% of “prime” working age (25-54) folks have jobs. This is down only 3.9% from 2008. I would attribute these job losses to technological change in addition to the recession. Also, families have considered quality of life issues besides money, and have switched to lifestyles that have a parent at home to save childcare costs. We've found computer programs and statistics to increase productivity and target work where it is needed. However, what I would like to debate is whether 54 is a good age to end someone's “prime” career. Those above 60 are increasingly in good physical shape and health and can have at least a part time job. Why would we discount those who are able to work from statistics on employment? In fact, they are so healthy that I question whether the Fed uses this statistical trickery to make the picture look rosier than it is.

We saw the Department of Labor jobs report yesterday. 113,000 jobs added with an unemployment rate drop to 6.6% The numerator went up by a smaller than expected number, but the denominator went down much more, so the rate drops. This is why I advocate looking at a different number than the diluted and filtered unemployment rate. With such a glut of retirees on the horizon, we have to account for things differently.

I do not question whether we should be providing for seniors – this pension for some is their only income and allows them to pay minimal living expenses and stay independent. Younger families benefit from seniors being taken care of so that the “prime” workers may focus on work and their children. What I do question is the age at which people receive social security payments. When many people are living well past 90 and begin drawing social security at 67½, our society pays for one-fourth of that person's life. Especially because the trustfund has been borrowed against by Congress through inaction and the Treasury by law to pay for other obligations, it is in our best interest to reduce the amount leaving that fund.

Every day we hear talk of the bad economy, the recession, and what are we doing to solve the problem. Meanwhile, every day, workers are retiring with the guarantee for payments for the rest of their lives, regardless of their capability to work. Current workers spend one hour of every day paying for this support. It is only fair that we shore up the system we have in order to make sure that current workers can get the same benefit later in life. It may sound like I'm arguing for generational warfare. I am. Those who are now 67+ had the opportunity to fix these problems years ago. This problem has been acknowledged since the mid 80s; it's about time we fix it.

State of our broken financial system

One could read the previous four posts here and get a sense of what we, collectively, own in the United States. The President spoke during the State of the Union of many strengths our country has, similarly to what I point out here about our assets. We need to look at what our president says not just in understanding his goals and his agenda. We need to hear his speech and realize what is influencing our political dialogue. Both political parties give an ovation to a wounded soldier and generally agree that America is great. Wonderful. I can get behind that. Who can't?

When the two sides talk numbers regarding Veterans Administration budgets, it's a different story. Why is it we can agree that the recovery and presence of one veteran is great but that treatment of all of them is problematic? Indeed, it should be far cheaper to treat those with less severe injuries than Cory Remsburg. Furthermore, it's easy to just throw a blanket over all veterans and just SAY we should take care of them when they leave the service. It's almost unheard of someone proposing tax to PAY for this care. There is somehow a disconnect between our sense of moral obligation and our fiscal duty.

This blog will not advocate for Democrats or Republicans. I am here to talk about our country's finances and not about political squabbles. But recently the two subjects have intersected (collided?) When the arguments over our budget reach a point where our government shuts down non-essential offices for half a month and approaches fiscal default, the process has broken down. It's even more broken down when Congress's only agreement during the shutdown is to pay the people who can't legally go to work even if they want to volunteer. The only person who bore the brunt of the shutdown was the American taxpayer.

This is relevant to the state of the union now: Boeing is applauded and encouraged to stay in Seattle with the help of millions in local, state, and federal spending. But this nets zero to America as a whole. It's really just an issue of whether the jobs are in Seattle or St. Louis. But of course, the people physically building the planes have little say in the matter. Sure, the union has a seat at the table, but this is really a negotiation between Boeing and various levels of government. The union only really has power in the form of their members' votes.

Employee unions harmed themselves when their corruption was revealed. They could still be a legitimate place for workers to organize and have their interests represented politically. But they have lost their battle by being corrupt and being representatives not of greater good but their own cottage industry. The American workforce became more mobile and less likely to stay in a single job for decades; union options did not adapt to the changing work climate, and therefore union membership is on a steep decline. What's more, unions were the check on corporate management interests. Without workers' voices being effectively represented, corporations have achieved a lot of federal benefits subsidized by the American taxpayer.

Life in America has changed since the 1950s, but we have a tax system that still understands people as living in that structure. Rent is not tax deductible; mortgage interest is. Capital gains are taxed at 15%; income is taxed at 20, 25, 30%, even more. Retirement contributions are tax deductible; people who live paycheck to paycheck are then completely dependent on a Social Security system that is in disrepair. Even the tax brackets themselves are narrow because when they were created, the dollar was worth more and those income brackets made sense to that dollar's value. Whether you make $450k or $4,500k a year, you pay the same taxrate.

Herman Cain was onto something. He is not someone who knows a lot about foreign policy, but as far as tax policy goes, he thought outside of this 1040 box that we just keep checking, year after year. Does it make sense to have an income tax “rate” and then have an accountant work games to get you into a lower bracket and make that rate lower? Do we really know that the taxpayer contributing to that “non-profit” is not benefiting from that non-profit's work? Does it make sense to encourage people fresh out of high school to get tax credits for their parents and simultaneously get them to take out student loans that they will be paying back until they are well into their thirties? Does a tax benefit to procreate make logical sense?

I disagree fundamentally with the idea that we should use tax policy to encourage or discourage behavior. We should pay our government's bills, and we should pay them every year. We should all pay them, at an equal percentage of our total income. It's a tax policy that would be shorter than this blog post. Take the annual budget of our government, and add a payment schedule for our national debt: we seem to like 30 year mortgages. Divide that budget by the number of individuals and business entities in the United States (remember, corporations are people my friend). Then we figure out a percentage of everyone's income in which that total is then met. That is everyone's tax rate, and there are no deductions. Income is money that goes into an account in your name that year. Say the number is 22% - then everyone pays 22%.  It's simple. It takes a few minutes and a calculator to figure your taxes. Sorry accountants, I can do this myself.

Where is the mention of tax reform? And are there people serious enough about it to get something done? Not right now, because these politicians have created a system which they benefit from. It's a classic conflict of interest, and the only people who can do something about it are us.

Security in Securities?

Bill Gates has $72 billion. Mark Zuckerberg is worth $9.4 billion. Chase Bank's value is $212 billion. We hear these numbers thrown around the financial media. Is it actual money, as in currency, that those people possess? In theory, yes: they could sell the shares of the company and have that much in cash. However, the act of those two individuals selling their shares would cause the price to go down – perhaps Gates less so now that he is no longer CEO of Microsoft, but Zuckerberg very much still IS Facebook. Gates, by the way, has sold around $2.5 billion worth of Microsoft shares in the last year. Even if he did the same thing every year, he would need 30 years to sell it all.

Securities form a central pillar of America's economy. The corporation may have been born in Britain, but the New York stock exchange brought the idea of sharing corporate wealth with the public. We have gotten closer and closer to the idea of a free and fair market where instead of goods or commodities, companies are bought and sold.

We previously discussed currency, real estate, and intellectual property as being part of America's assets. A great deal of those three asset classes are owned by corporations. We don't want to dive into the deep end of corporate law, but for most purposes, corporations can act just like an individual. It can buy and sell property, physical assets, and patents and hold all forms of currency. One can even sell percentages, or shares, of itself to others that have no involvement with the day to day operation of the company's business.

Sidebar here: the federal government has been very kind to corporations as far as laws regulating them. We have one of the most lenient bankruptcy systems in the world. If a corporation goes bankrupt, the individuals holding shares are not personally liable for those debts outstanding. So, the risk of going out of business is spread outside of the corporation to those who lend to it. At the same time, individuals profiting from corporate dividends or selling a stock at an increased price currently pay a 20% tax rate, well below that of real “income” for most people. Large corporations also receive favorable treatment by state and local governments who want those manufacturing jobs in their area. Washington and Seattle governments continue to woo Boeing to leave its manufacturing facility in the Seattle area while Boeing continues to leverage the power that comes from employing 168,000 workers, many of them well paid skilled engineers and specialized tradesmen. To be fair, those workers spend money in the local economy, so their continued presence in Seattle benefits the entire population there, Furthermore, a recent Supreme Court decision allows corporations to give directly to political campaigns, including through an anonymous scheme through non-profits to SuperPACs, so corporations have a way to influence government regulations that will continue to favor them.

Ok, let's jump back to Facebook. As of Friday, the company's stock is valued in total at $132 billion with a share price of $54.25. Facebook's business model is that of an advertising platform – companies purchase ads or information from Facebook for the purposes of marketing to a specific group. The entire advertising economy, including billboards, radio, print, etc., is estimated to reach $177 billion in 2014, with the internet gobbling up about a fourth at $47 billion. Facebook releases its 2013 numbers soon, but in 2012 they made around $4.5 billion. Somehow, Facebook is worth its annual revenue 24 times over. One might argue that Facebook is a disruptive technology that changes the way we live and work. Indeed, people use the network to communicate with one another. But, unless they start a dramatic fee for service structure (which would likely lead to the mass exodus of their users), they are still only an advertising company. Forecasts show a healthy increase in the online media ad spending from $47 billion to $60 billion by 2017. If Facebook continues to receive around 10% of that total, they will still only be bringing in $6 billion in revenue each year. By comparison, McDonald's corporation is valued at $96 billion on 2012 revenues of $27 billion. Somehow, with revenue less than a fifth of McDonald's, Facebook is worth $20 billion more.

My point here is that there isn't hard data to support why Facebook is valued so highly. They have gotten by with good justifications up to now that the internet is the future of advertising, people want to buy things their friends have, so on and so forth. It's just hype though. People assume that, hey, I have a facebook page, and everyone I know does too. That's gotta be worth something, right? They are now a couple of years old as a public company, and investors will want to see some hard cash. Facebook earned a penny per share in 2012, whereas McDonalds earned $5.36. Considering there are half as many shares of McDonald's out there as Facebook, you have to wonder why I would want to own part of Facebook instead of part of McDonald's. You heard it here first – Facebook's share price will fall, dramatically, and most likely settle in around $20 per share or less. And if they are very successful at what they do, they might continue to serve the role they currently do 10 years from now, maybe 20. This is assuming the next big thing in social media doesn't clobber Facebook and figure out how to monetize this industry. The Internet economy is only one piece of the pie, and strangely it seems that this particular piece is like a lost boys' dessert.

The dollar value of these companies goes up and down on a daily basis. But the shares are only worth something when there's a buyer to purchase them. Let's back the lens off a bit and think back to 2008. This timeline is very helpful to recall the events, and remember that most of the U.S. public wasn't paying attention to this until September 2008. When the public was brought in through the news of Lehman brothers, faith in corporate wealth plummeted, and people issued sell orders essentially regardless of price: show the U.S. the money! The Dow lost about half of its value, and America millions of jobs, in 6 months. The crazy thing is that some companies were trading below the price of their cash on hand – they could just liquidate the company and make more money than their shares were worth! At that point, there was no way to go but up, and for the last 5 years, it basically has.

We come to realize that not only are these corporations important to America, these corporations ARE America. When you read down the list of the Dow 30, these are the brands we recognize, household names. We work for corporations, and we retire based on the money we have put into IRAs which invest in them. You could invest in local, privately owned companies. Then, you are trusting that those people are giving you the right information and an honest return on your investment. The public stock market requires honest information, and there are people whose job it is to check up on the info they provide and make sure it's accurate and the companies are following the law. By “going public”, those companies are opening their accounting books to public auditors who make sure the money is actually there. We trust this system – indeed in 2012 we had $18.7 trillion tied up in it. On first glance, it might worry us that this number is higher than the entire M2 money supply we discussed in week one, but these companies will be around tomorrow. Indeed, they have a good portion of that M2 money themselves. They will probably be around next year, and it's pretty likely a lot of them will be around five years from now. We can put our money to use by investing in those companies – they will take the money and attempt to make more from it. And we don't need all of that money this year – we will gradually sell some shares in companies in exchange for money that we will purchase goods with, which will be sold to us by corporations which then pass that money down the chain to investors.

The stock market is open to more people than ever in history. Gone are the days when you need to work through a middleman to buy and sell stocks. Online brokerage firms allow someone to trade in their pajamas at home. Company 401K's and IRA's allow workers to put a portion of their paycheck into investments to save for future real estate purchases or retirement, tax free. Other than real estate, the stock market and public ownership of corporations is where we put our money. You make 0% interest with money in the mattress, less than 1% (currently) on a savings account, and potentially 5-10% on stocks. Of course, there's significant risk putting money into stocks, but in the long run, they've been a fantastic investment over the previous 80 years, basically since 1933. The big question is how good of an investment are they for the future? Will we continue to see 4-5% average growth in our economy like we did for years? Or will we continue in the stagflationary period of the last 5 years? Which will dominate – fear or greed?

Finally, back to government intervention, we've seen unprecedented government involvement with the stock market since the 2008 crash. Bear Stearns, Fannie and Freddie, AIG, the auto industry, many other smaller scale investments: all of these were enormous government bailouts that have made Wall Street very unpopular with average Joes. The idea of companies that are too big to fail continues to perplex both corporations about where their limits are and regulators about how far they can push companies to follow the law. Politically, the Tea Party hammered politicians over government bailouts, and we haven't seen them since 2009. Instead, beginning in 2010, we've seen instead of direct government investment, the Federal Reserve has provided trillions to banks through quantitative easing. All of those bad loans banks made? They still have them. Except the Fed has been purchasing them, in exchange for newly “printed” money. What do the banks do with the money? They are loaning as much as they can, but since they are allowed to, they invest in the stock market. So, the stock market which has been pushed up by the banks which are pushed up by the Fed has been on a tear ever since. The big question will be how long can this bubble last? Will the rising tide of bank investment bring back millions of investors who fled stocks for safer investments? Tax free contributions are still going in, many times because those contributions are automatic.

If You Build It, You Can Profit From It

We started our exploration of what the United States owns with currency, and then went to the more tangible real estate. This week we're moving towards the far less tangible intellectual property. The laws governing IP enable creative people to “own” their creations and thus profit from their exclusive sale. For example, a composer writes a musical and copyrights it. She then sells the music and the rights to it to a publisher in New York. The show is picked up and produced on Broadway. That music cannot be performed legally, for profit or not, without the consent (read: rental!) from that publisher. And believe it or not, they check – publishers have people scouring music programs for their titles to ensure rogue performances aren't benefiting those who didn't do the difficult work of creating the original music. The punishments are severe enough to end the career of most average musicians, not to mention the stigma of violating the music business sacrosanct.

But no IP attorneys enact vengeance like those of tech giants such as Apple and Samsung. The two Goliaths seem to be in constant legal skirmishes over patent infringements. Of course, this market has been nothing but explosive, with sales nearly quadrupling in the last 5 years. Billions are at stake, and the loser will fork over billions to the winner.

But how can Apple and Samsung even go to court with one another? One is in California, subject to U.S. law, and one is in Korea. Well, the United States has given a portion of its trade sovereignty to the World Trade Organization. I was surprised to find that it began in 1995 – I was under the impression it had been around for much longer. Boil it down, and the WTO represents the solution of an eight year set of talks called the Uruguay Round that require member countries to have free trade policies towards one another. If you're wondering who the members are, check out this helpful map. Notable exceptions: Syria, North Korea, Russia – wonder why we always see them in such a negative light? They are quite willing to steal ideas and inventions and refuse to offer a legal framework for justice for creative people.

I don't want to get too bogged down in international trade policy. Suffice to say that most tariffs on imported goods are gone, and those making things in Vietnam can sell them without additional tariff in Austria or the United States, or in any member nation. The idea is to encourage invention and innovation and to provide the market with the best the world can come up with. The winners make money, and the losers keep trying to stay ahead of the curve. Globalization has nearly reached its peak.

This system has quite a lot of weaknesses. Mainly, the legal costs of challenging an infringement are so high that only large corporations can afford to fully protect their inventions. I once investigated what it would cost to get an IP attorney: $5000 to have them look at your case and investigate if anyone already owns the patent. Thousands more if there is an actual conflict and even then there's no guarantee you would win. Average Joes can't go up against an Apple or Samsung or even Broadway. There is no patent on ideas, only on the creations utilizing them, so one must have a working prototype or completed work in order to get a patent. And even then, if a large company takes your idea, you have to retain counsel to sue them and could be in court for years.

Transportation to get goods to the market uses a tremendous amount of the world's energy; the costs of getting goods to market rivals the costs of producing those goods. For example, trucking companies spend more on fuel than their employees. Even IF global effects of this energy use are in dispute (and for the record I believe this energy use is behind global climate change), a televised sunrise because the real one is blocked by the smog in Beijing shows there at least localized effects. Some day, we will have to pay the piper. We can do it with a little bit of extra currency to pay for solutions, or we can pay by losing a sizable portion of real estate in the tropics and subtropics.

Globalization in general has the potential to cause greater income inequality. It's not as obvious to us because we are currently the benefactors, but imagine a world in which all invention is done by the already super-rich, and then the production done only by the poor. Indeed, the inventors can live in Darien or Los Altos while those who produce the physical goods live in Mexico City or Shanghai tenements. Large companies quash new rival inventions in capital intense legal fights and then buy up the patents once the small company goes bankrupt. That company then uses its new, purchased patent to become even larger. The potential result is one that actually stifles innovation even though the intent of the laws is to promote it.

But, for all of the negatives, the United States is in a pretty good position as far as intellectual property goes. While some decry the education system's poor statistics, we have raised one of the most creative populations in world history. Modern life looks nothing like it did in 1914 – a hundred years ago our grandparents toiled in fields, walked to work, and lived mostly a localized lifestyle. The inventions that make it possible for me to write a blog that could be read the world over began in the U.S., and many of those companies are still producing new goods today. John Deere sold $35 billion worth of equipment in 2013, up from $10 billion in 2001. The world still buys our goods, if those goods are great.

Of course, we cannot take this advantage for granted. We as the public must realize that we are better off bringing money in from the world than sending it away. We shouldn't borrow money from China to buy gas from the Middle East so that we can drive to work for an hour each way;-) We also shouldn't be giving information and knowledge to the rest of the world for free. For example, how many foreigners are attending U.S. colleges on scholarship? This is perhaps needlessly anecdotal, but I was friends with graduate assistants who sent part of their monthly living stipends back to their families in South America and Asia. Now, that's noble of them personally, but is it in our country's best interest to be providing money at public universities for those in other countries to live off of while we educate their children free of charge? Canadian and Chinese colleges certainly aren't paying American students to come there and earn degrees. In my undergraduate computer programming class, we had graduate assistants who helped out in the lab while we wrote programs. Every one of them was from southwest Asia. I'm guessing that was similar at other colleges, and today we have foreign computer hackers breaking into U.S. systems and stealing credit card information from millions of Target shoppers. Yes, there is nobility in education, but there is nothing to insure ethical use of the information we teach people once they go home. Protectionism? Of course it is. But do we just leave our front doors unlocked for anyone to wander in and take what they want? Of course not!

My point here is that even though the WTO has established a legal framework for the entire world, all countries do not enforce those regulations equally. Chinese companies frequently skirt the authority of the WTO, and China and other countries engage in anti-competitive practices in their own markets while insisting on open markets in the U.S. for their exports. Organizations like the U.N. and the WTO are starting to realize that the enforcement of their regulations is perhaps more important than the regulations themselves. We have to all start playing the same game with the same referees before we can decide who wins the game.

Real Estate Macroed

Most people understand a lot more about real estate than they do about money. In America, most people's biggest asset is their home. Of course, we take for granted favorable government policies towards home ownership: the mortgage interest deduction, FHA loans for first time buyers, and even the recent refinance options for homeowners due to the financial crisis. But step back from short term events and fluctuations and look at our land from a historical standpoint. The United States of America controls one of the most valuable tracts of land in human history. This value is evident in multiple ways: strategically, agriculturally, economically, and politically.

The United States of America comprises of 3.54 million square miles. Subtract Alaska and Hawaii from the total and the lower 48 have nearly 2.96 million square miles. In perspective, the lower 48 are very near the size of the continent of Australia. A few states in the U.S. are larger than many countries – for example, Texas is larger than France, Oregon is slightly larger than the United Kingdom, and including all 50 states, the United States is only 400,000 square miles smaller than all of Europe. Furthermore, the average population density of the lower 48 is 107 per sq. mile and is actually lower than the world's average of 120. All of this being said, we have room to grow here. Our population is generally moving south and west – away from the original states towards the more undeveloped west.

Tangent – we are not the original owners of this land. We stole it from the Indians shortly after discovery of the continent by Europeans. We can make many arguments for or against this as a benefit to the world, but we still need to acknowledge that we stole the land from those who are native to the land. That doesn't make us unique on this planet – humans have been stealing land from each other for a long time, especially those peoples originating in Europe. I'm also not making recommendations on what, if anything, to do about it. But we as Americans do need to acknowledge this not so proud fact of our history here.

Strategic security is a major benefit of our geography. We split North America with only 2 neighbors, and we occupy the territory between them with the most temperate climate. Our northern border is a frozen tundra in the winter, and our southern border is an inhospitable desert in the summer. Both are defensible with an observation force – a limited number of people can respond quickly to problem spots when necessary. To our east and west, enormous oceans with only a few islands to pay attention to militarily. We have not fought a war on our own soil in 150 years, and even that was an internal conflict and not one with an outside aggressor. Indeed, the last time a foreign power had troops on our soil was during our war with Britain and Canada, 200 years ago.

With our military technology and outlying territory in Hawaii and Alaska, we would have ample warning to prepare for any potential invasion from a foreign power. Combine that with the most armed general public in modern history, there is an extremely low chance that any foreign power could forcibly enter the lower 48 (sorry AK and HI) and take land by force. We really take this for granted, and in my opinion this is an advantage we should guard jealously. Our strategic security has prevented devastating wars that have torn apart economic capabilities on three other continents in the last century. Strong security allows our civilian population to worry about the other strengths our land has.

Our fertile land is perhaps the most valuable on the planet. We have 8 states that border the largest freshwater lakes on the planet, and 31 states in the watershed of the continent's largest river. Other sources of fresh water abound, and we generally do not have to worry about finding and using water. The climate is very conducive to consistent crop yields, and we have settled enough farmland to feed our population twice over. This matters – not only are we safe at home in our beds, our bellies are full and we never thirst. I say this generally of course. And I say it in comparison with not only the rest of the modern world but with the rest of history.

The land is so fertile that we've started to figure out what to do with all of the excess grain. We even made a law requiring the inefficient process of turning corn into fuel for vehicles. We aren't worried about getting a meal, but worried about what that meal will consist of. I recently saw a report that Americans meat of choice is now chicken instead of beef. Would that the rest of the world could be so fortunate to get to choose

On top of that, our land has many valuable things BESIDES farming capability. The United States is abundant with natural resources, and we have become very good at taking them from the earth and using them for economic benefit. We have innovated many new industries in part because we have the ability to get raw materials cheaply and easily. We have a diversified economy with the most productive workforce on the planet.

Our economic strength is related to our politics – we've established the freest large society in human history, and it is possible to flourish economically here. It is possible to buy almost anything that humanity has created in our stores and markets. Our laws, generally, are enforced so people don't steal things from others and get away with it. We have consistent systems of weights and measures to ensure we get what we pay for, and a system of checking consumed goods to make sure we don't get sick from them. Indeed, we enjoy most of the comforts of modern life without giving a second thought to where they come from or where they go when we're through with them.

One could even say we are TOO comfortable. With productivity as high as it is, we don't even require all of our population to work in order to accomplish what we need to meet our basic needs. The last 5 years have brought this problem to the forefront. We have so much efficiency in our economy that we don't need a great deal of manual labor in order to accomplish the work we want to accomplish. This problem will need to be addressed in a way that allows those able bodied adults to be able to find gainful employment and contribute to our society.

This article is meant to highlight the macroeconomic strengths of the real estate of “America.” We continue to be the oldest country on the planet with a consistent government. We should not only be thankful for this fortune but take steps in order to protect its value.