Anti-Gouging Laws Hurt the Vulnerable and Increase Suffering

The approaching Hurricane Matthew has led to news reports that governments are warning residents and businesses in Florida about price gouging. It brings up a question related to my recent post on FB about a narrow question of economics. Do anti-gouging laws actually hurt people?  Or is that just a myth of the cultural Marxists to scare people from helping one another and turn instead to benevolent Uncle Sam for rescue?
 
Here’s the very real scenario: people hit the stores to stock up on the essentials: beer, milk, bread, etc. Consequently, the stores run out of those essentials. Entrepreneurs who are beyond the danger zone of Hurricane Matthew see an opportunity, buy up beer, milk and bread, buy coolers and ice, load up their trucks and vans, and drive into the danger zone to sell these supplies.
 
Naturally, they do not sell them at the same price they bought them for. They want to make a profit. First, they add the cost of the ice, the cooler, and the gas, and if they are smart, they add the value of their time for the shopping, loading, driving and working, meals on the road, lodging, and then they set a price above this amount which would represent some hoped-for profit margin. The price could easily be double or triple the normal price.
 
Now, the state would consider this gouging. Many on the Left and Right rage against the practice. And yet, aren’t these entrepreneurs actually doing the consumer a fabulous service? The items would otherwise not be available to them at ANY price, after all, and they are not forced to buy the items to begin with.  If they do, they are demonstrating they desire the currency less than the beer, milk and bread. The currency will not help them survive the crisis or ease their suffering.  You cannot eat or drink currency (at least, not in a way that is pleasing to the senses).
There may even be competition in this niche, perhaps a Mexican who doesn’t assign as high a value to his time or is willing to engage in all this activity for a lower anticipated profit margin, and sells for say, just double the normal while the white man from Alabama sells for triple.
Before you take issue with the items I chose, replace them.  What about bottled water? Or disposable diapers, generators, batteries, gasoline, phone chargers…or anything you can imagine.
 
Do you think this example is price gouging? Do you believe it is immoral? Or is this kind of entrepreneurial activity actually a good and praiseworthy endeavor typical of the kind of conduct that helped to build this nation?
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Why does the economy seem so strong but feel so wrong?

Jim Rickards is the Financial Threat and Asymmetric Warfare Advisor for the DOD and Central Intelligence and he recently reviewed a report by senior intelligence officials that estimated the greatest threats to the United States. At the top of the list was no Muslim terrorism (of any flavor), but instead, imminent economic collapse.

Jim Rickards is the Financial Threat and Asymmetric Warfare Advisor for the DOD and Central Intelligence and he recently reviewed a report by senior intelligence officials that estimated the greatest threats to the United States.  At the top of the list was no Muslim terrorism (of any flavor), but instead, imminent economic collapse.

There are eight slides he used to drive this point home in a recent interview.

The first slide shows the declining impact of $1 of federal spending on the economy:

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A lot could be said about that but the results are obvious. Fifty years ago the Feds could spend a dollar and it would generate $2.41 in economic value, while today, that $1 of spending results in only 3 cents of economic value.  This is because of fraud, waste, abuse and spending money on programs that ensure votes rather than generate growth.

The velocity of money-the rate at which money moves through the economy-is also falling sharply.

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We’re nearing a point not seen since the 1920s!

And the so called misery index, which measures a combination of inflation and unemployment, is worse than it was in the stagflation days of Jimmy Carter.  Not if we rely on the manipulated government data, of course, but on the estimates by economists not on the government payroll.

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These numbers are also worse than the Great Depression!

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The Fed’s debt to capital ratio has gone up nearly 400%, from a pre-2008 high of 22 to 2 to a current ratio of 77 to 1.  This means that for every dollar on hand, the Fed used to have 10 dollars in debt.  In order to finance the recent bailouts and spending, the Fed has had to borrow far more money, which means we now owe $77 for every $1 on hand.
Rickards-Fed-Debt-to-Capital-Leverage-Ratios1-1024x447

The Fed is not the only one who is overextended.  Private banks have grown their debt as well-since they can borrow money essentially free, they are encouraged to do so.  Taking on more debt can be rationalized when you’re growing-not unlike a homeowner borrowing against a house that is rapidly appreciating, but in this case banks are taking on debt 30 times faster than the economy is growing.  This is what precipitated the Great Depression.

What Microsoft’s Layoffs Mean for You

Microsoft employs more than 130,000 people and has annual revenue of nearly $100 billion, profit margins of about 20% and their stock is up more than 21% since they named a new CEO in January. And yet, they’re laying off 18,000 people.

Although Microsoft no longer gets the gushing, media-fawning attention that Google, Facebook and some younger, more ‘hip’ tech companies do, it is still a gigantic, hugely profitable industry giant.  Microsoft employs more than 130,000 people and has annual revenue of nearly $100 billion, profit margins of about 20% and their stock is up more than 21% since they named a new CEO in January.  And yet, they’re laying off 18,000 people.

What’s up?

I think the leadership at Microsoft sees trouble on the horizon.  They’re looking back at the last five years and all the money the Federal reserve has pumped into the economy, much of which has gone not to Main Street, but WallStreet, where it has been lent out to big companies (like Microsoft), who’ve used it to go on a mergers and acquisitions spending spree.  Microsoft’s acquisition of Nokia is one such example.

In fact, there has been more than $700 billion dollars of mergers and acquisitions in the United States so far this year.  That’s the most since the high-flying days before the 2008 Great Recession, and likely to set an all-time record by year’s end.  Insiders will even admit that they’re taking advantage of inflated stock prices and virtually ‘free’ money to buy up weaker competitors.

So what’s the problem?

Microsoft’s massive layoffs, (despite great margins, fantastic sales growth and a soaring stock market), suggest management is worried about the future.  They have good cause to worry, because the Fed has already hinted they are going to pulling back on all the money they’ve pumped into the economy since the 2008 crisis.  They know the longer the money sits out there, being leveraged over and over again by banks, the greater the risk of another bubble collapsing or inflation getting out of control (although by my standards it already IS out of control!  Have you seen meat prices lately?!)

In times of monetary expansion, like the last five years, both companies and individuals take advantage of easy money and put leverage to use.  Many of us do this when we buy a home; we borrow money to help us buy an asset we could otherwise not afford.  Whatever you put down on the home-in the old days it was 20%-allows you to control a great deal more value with a loan than you otherwise would.

When you do this with a home, it’s okay, because you’re getting all the benefits of owning a home, plus you expect the home to grow in value, and finally, you get the tax benefits.  But when companies leverage money, the ONLY payoff they can reasonably expect is a financial one.  If your home loses value, as long as you keep paying the mortgage, it doesn’t really matter.  But if a company has leveraged its stock and bank account to buy up other companies, and things go badly…well, it gets ugly really quick.  Think 1929, but worse, because our economy is so much more highly dependent on this kind of financial activity.

Successful companies (and individuals), should create value, through specialized knowledge, skills or processes, and then leverage those assets instead of looking to make money by leveraging financial assets.  Financial assets can be wiped out in a single day or night of chaos, but valuable knowledge, skills and processes remain.  If the SHTF tomorrow, your IRA might be gone, but your lifetime of knowledge would remain, right?

I think Microsoft sees a dramatic turn in the economy coming, and they’re preparing for it.  They acquired all the skills, patents and processes they wanted by buying Nokia, then they laid off alot of those folks, plus many more Microsoft employees.  It’s not simply a case of trimming the redundancies they inherited by buying Nokia.  Microsoft’s management-some of the brightest people in the world-know the good times are coming to an end.  They’re preparing for it by getting rid of the ‘fat’, which in this case was more than 10% of their staff.  Imagine if more than 10% of the people at your job were laid off; it’s significant!

The Fed is expected to begin raising interest rates next year.  The era of easy, almost ‘free’ money is over.  When rates DO start going up, the economy will slow down.  Higher rates mean fewer people refinancing, buying houses and cars, or businesses engaging in mergers and acquisitions.  In other words, it’s time we start paying for the ‘good times’ of the last five years.  I fear it could be painful.