Great Video on Finance

“The most powerful force in the universe is compound interest”. Albert Einstein

After Sandy's Pain, There Will Be Gain?

http://www.businessweek.com/articles/2012-10-31/sandy-after-the-pain-long-term-gain

This article was selected because it shows the prevalent effect of the broken window economic fallacy on the economy of the United States. The broken window fallacy explains why the destruction of property is not a benefit to society even if someone repairs said property. In this article the writer addresses the effects of the Hurricane Sandy stating that it will actually help the economy.

The broken window fallacy basically says that if a boy breaks a window in a town, the town is not better off because this window can be repaired. In fact the town is worst off because the money and materials that would otherwise be used elsewhere are wasted on reaping the broken window. Similarly Hurricane Sandy devastated and destroyed lots of houses. Overall the country is obviously worst off. However people perceive reconstruction as a benefit and ignore the fact that capital has been lost forever. 

This makes one wonder how is the general public is mislead and mistaken on their perception of economic realities. To be perfectly honest, a small part of me dies a little when I read articles like this. This is mass hysteria at its best in my view. 

Spain’s Debt Rating

Spain’s debt rating was lowered from BBB + from BBB- by Standard & Poor’s.  Spain will be face even harder time ahead as its budgetary performance declines and the ambivalence of the euro-zone continues.  This downgrade comes even after the country decided taking several austerity measures and stress tests on banks.

Prime Minister Mario Rajoy is thinking about a enacting a second bailout to prevent the recession to continue but seems reluctant to ask for help from the European Central Bank.

Spain’s economy will probably shrink 1.3 percent next year according to Bloomberg. The IMF said yesterday that Spain can tackle the fiscal crises by themselves and won’t lend to them. Although, the IMF will meet in Tokyo this week and things could change.

Now Spain plans to increase its debt load to 90.5 % of economic output by borrowing 207.2 billion although the current deficit is 7.4 % of gross domestic product and the future does not seem to hold any promise. This state of affairs will make it harder for business to flourish and taking loans. It is really bad time to be businessman in Spain.

In my opinion, this is a perfect example of where governed entitlement programs take you. The answer to economic growth is cutting entitlement programs not more government. Let’s hope the U.S. takes the same approach to its debt crisis.

The Debate

             In the coming presidential election the American public is faced with two choices in order to deal with the current economic ordeal. Either they elect Obama and raise taxes to pay the deficit while broadening the social safety net or they elect Romney who would cut government spending and allow the economy to grow. This decision will define what the U.S. economy will look like in the coming years.

            If Obama gets elected business will be even more restricted by government regulation and will be less likely to thrive. The United States will continue to borrow from China and people can expect to see more easy money to banks and bailouts if things get tough again. On the other hand Romney will allow businesses to fail and allow the principles of the free market to actually take effect. The government will dramatically shrink. Although, bailouts and easy money will probably not be over, it will be less certain to happen.It must be noted though, that Romney did not went in specifics and this diminishes the validity of his arguments.

            Personally I don’t like either very much. I am a Libertarian and would like to have seen Gary Johnson on the debate. My problem with Obama is that he is a socialist that wants to redistribute wealth and risk for the betterment of society. For the same token my problem with Romney is that he thinks that defense spending should increase.  However, I’ll say this, they are both very smart individuals and they are both clearly presidential material.

QE3 triggers currency wars

            The FED has finally decided to start QE3 and currency investors are shying away from the dollar as they expect it to devaluate. Currency investors are moving towards the currency of Russia, India and Mexico given that those countries historically have avoided manipulating the value of their currency. Other countries with central banks that also plan to intervene and devaluate their currency have also scared investors away. 

The currency war has begun with the Czech koruna, the Brazilian real and the Japanese yen retaliating in response to the devaluation of the dollar. The U.S. intends to devaluate their currency enough so that importation becomes very expensive and the domestic industry will flourish and thus unemployment would decrease. However, this harms other countries by increasing their unemployment rate and their retaliation could lead to a harmful decrease on the purchasing power of all this countries if the U.S. continues to devaluate its currency.

            For my money, I think this is all a bad idea. It damages the purchasing power of everyone in the country and unjustly benefits the big bankers. This is because they get the government to deal with the toxic assets they created and should be responsible for. Cutting spending is the right solution not printing more money.