Why is gas so expensive?

Jeremy asked me this question yesterday, and though my first response was "summer driving season," about five minutes later I realized its actually because our dollar's value is plunging.

I haven't written about economic stuff in a while, mostly because I was sick of sounding like Debbie Downer. But this is kinda interesting, and since I don't know how many people out there are aware of it, I figured, why not.

Here's the basics of it: Our government has decided that its a great idea to put America even further into debt, in order to stem the financial losses that have happened so far. Basically, our economy is fueled by spending and debt, and when we the consumers stopped borrowing and spending, the Treasury decided to pick up the slack. (yes, its more complicated than that, but we're keeping it simple here)

I have mixed feelings about this, especially since some of that spending has gone to support social services I like. But its a bad idea. Just like an individual, no one can borrow and spend indefinitely. Eventually you hit your credit limit.

The same thing happens to governments, but its a different process. Instead of borrowing from one place, the US Treasury sells bonds and Treasury bills(IOUs) to multiple investors. Many countries also buy these bonds, and in fact more than half of these bonds and T-bills are owned by foreign countries, mostly China.

Now, as the global economic crisis continues, and our personal economy falters, its getting harder to find people who want to invest in America's IOUs. And of course the issue is not simply that people don't have the money, its that they wonder how sound of an investment it is. Now, no one thinks America is going to default on its debt. But they wonder about the value of the dollar.

Put it this way: your friend in Bilderia needs money, so you lend him $10. He says he will pay you in a year with $22 Bilderbucks, $20 Bilderbucks being the equivalent of $10USB plus $2 Bilderbucks in interest. A year goes by, and because Bilderia had some economic issues the value of the Bilderbuck has dropped. Now, the $22 Bilderbucks he pays you is only worth $9.50 US. Not only did you not make any interest, but you lost 50 cents.

That's what investors are worried about. Treasury bonds and bills work the same way. You get paid back in US dollars, and it is a specific number of US dollars. Exchange rate doesn't matter. So if the dollar sinks too low, these foreign investors lose money. The dollar's value sinks for many reasons, but us borrowing so much is a big one. Cause its not too hard to find someone to lend you $500, but its harder if you need $50,000. The same thing is happening. We are borrowing so much that there jsut aren't enough people who want to lend it.

So the Treasury raises the interest that is promises to pay, trying to lure more investors to lend to us. And guess what that does....it lowers the value of the dollar. Which then makes the investors skittish, and thus the cycle continues. The higher this rate goes, the worse the dollar will do, and the more imported goods like gas will cost. Which, unfortunately, means higher prices for you and me.

This is highly oversimplified, but hopefully you get the gist of it.

Following in Japan's footsteps?

Great article in the Wall Street Journal today comparing our crisis to the crisis Japan had in the 90's, referred to as Japan's lost decade. They had a paired crash of both their real estate and stock market, and a decade of recession as a result. During that time, Japan's government made stimulus payment and bailout after bailout. Lots of public works. They didn't make a dent, and ended up putting Japan $1.35 trillion further into debt.

In fact, despite multiple examples in history and around the world showing otherwise, we are still convinced that the government can borrow, tax and print more money, and pay enough to stop any sort of economic crisis. Sorry, but no. Its never worked. Ever.

"Not to spoil the party, but this is not a new idea. Keynesian "pump-priming" in a recession has often been tried, and as an economic stimulus it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment." - Barack Obama-san, WSJ

Honestly, we are seeing a "cleaning out" of our markets bad and inflated investments. Unfortunately, we're also seeing some deflation happening, which, if it catches momentum, could spell real trouble for us long term, economically.

As individuals, its pretty great. The ratio of debt to income in America has lowered for the first time in 52 years!! (We've been borrowing more and more and more for 52 years....and now we're surprised to get the check. We have been so spoiled) The amount of dollars saved per person actually raised and is close to being a positive number. (That's right, we've borrowed so much that even when every person's savings in America is added all together, we're still in the red!)And with deflation, it means things are more affordable, and cash savings are easier to hold onto.

All in all, yes, its painful, but this is a step in the right direction. Its like when you go on a diet after eating McDonald's for years. The first couple days you are starving and feel really crappy. And here's your Uncle Sam trying to hand you another Big Mac so you don't feel so hungry. Gee thanks.

Thoughts on the economic panic

So, I know the technical definition of what's a recession versus a depression, but I'm starting to get a glimpse of what may be a more usable definition to those of us actually living it. A recession seems to be characterized with the economy contracting and inflation going crazy, while a depression would be the same, but with deflation taking the spotlight. I know economists might disagree with me, but I'm reading all this panicky stuff about how inflation would be bad, but the deflation we're seeing is really bad, cause it'll stretch this recession out much futher. And I'm thinking, so its the deflation that is putting us in danger of a depression then?

Anyway, reading all this stuff has got me even more inspired to do MIY days. I've been googling "Make Your Own XYZ" all over the place. I am now excited to make my own laundry detergent (when we run out), yogurt, ricotta and soft farm cheese, pizza dough, bread, bath salts, shampoo, and who knows what else. :)

I know we'll be saving money with prices deflating, but I also know how bad that is long term for the economy, and want to save as much as I can now, while I can, just in case. It'll also help us pay off our debt anyway, so saving is good.

Actually, I also just have to put this out there: Thank God this is happening. I know its really painful right now, and scary, but check it out. People are actually being responsible with their money! The amount of credit applications and credit purchases has dropped dramatically. Luxury items that people can't afford are not being bought. Even with the holiday season here! Its like our country is finally waking up! Its a great silver lining to this cloud, and I hope people's lifestyles actually change long term, instead of just while things are tight. Its very inspiring, seeing people learn to live sustainably on the money they make, rather than always spending more.

A little statistic to show you what I mean: in 2007 it was estimated that consumers in the US spent $2-$3 TRILLION more than they made. (its just an estimate, and clearly has a wide margin of error, but STILL!) There's no estimate for 2008, but I bet its gonna be way lower. :)

Hello Inflation, how are you?

So, I'm going to blog a bit on the economy, because I feel like I should be sharing some of my insights on what's going on, and I've had more than a couple friends who have asked me what it all means.

The latest news is the raise (again) of 30-fixed mortgage rates (currently 6.48%) AND the bond yield (interest) on Treasury notes(currently approx. 4%, up from 3.7%). Why do I bring up both? Because the are intrinsically related. Basically, when the yield on Treasury bonds or notes go up, so does the interest on your consumer loans (car, mortgage, etc).

"But wait!" you might say. "I thought the government was fixing the credit crunch, giving money to the banks. How can the credit crunch be fixed if credit costs more? I need things to cost LESS not MORE!" I hear you. The missing piece of this puzzle is the federal debt. Where did the money come from for these bailouts? Debt. Where does a lot of our government's money come from? Debt. And who lends the debt? Investors. Specifically investors buying treasury notes and bonds.

To attract more investors, the US has to raise interest (yields) on the loans they take out (Treasury notes and bonds.) What makes things worse is that many investors are selling their Treasury notes, or not buying new ones. Cause no one wants to invest in a country that's struggling until they are sure that country will come out on top.

So, the US Treasury raises yields, to attract money to fund the bailout, and those raised yields raise interest rates that you pay for your mortgage. Worse, high yields typically result in a lower dollar value and inflation, though it may take a few months before we see it. You see, the dollar's value is also tied into the yields on these notes.

On a more common level, the buying power of your dollar is tied to how much you can buy with it, and as living costs raise (by people paying more for cars, mortgages, store front leases, etc), the cost of everything else raises too. So your dollar buys less.


So, for those who are still with me, the point is there is no free lunch. Our government would like you to think that they can create money out of nowhere, or that they have gobs of it to pull out in an emergency. The truth is they don't, and we will be the ones who pay with inflation and further economic recession.

PS. I now return you to my regularly scheduled blogging