Economics and Scrambled Eggs

In chess a fork occurs when a piece moves into a position where it can simultaneously attack two or more opposing pieces.  The knight, which can move in an “L” shaped pattern and four different directions, is the piece most commonly used to execute this type of attack. A fork usually results in the opposing player losing a major piece. High caliber players often take care to avoid moves that could leave an opening for two quality pieces like a Queen and a Bishop to be attacked at the same time.

In his aggression to flood the economy with fiat money and lower key interest rates to zero, Ben Bernanke may have moved his monetary pieces and the economy into a vulnerable position. The Federal Reserve faces two problems. While lower rates did little to boost an economy already flooded in debt, they did help chase money toward the stock market where indices have bounced approximately 60% from the lows made almost a year ago.

A dramatically inflated money supply creates the very real danger of rapid price increases across the economic landscape. At its very worse, inflation can destroy the currency as illustrated historically by the experience of the Weimar Republic. The Producer Price Index, which showed an annualized rise of 16%, sounded an alarm to put the brakes on the monetary printing presses.

The likely result of pulling back on the monetary reins will be much higher interest rates and siphoning money out of the stock market. On the other hand, if the Federal Reserve continues on its present course, then the odds of a currency crisis increase with each passing day.   

It looks like Bernake is sure to lose a piece. He has to be careful not to put the country into “checkmate”.

With the help of five Republicans in the US Senate, it appears the hurdle has been cleared for some form of a “jobs bill” to pass approval in Congress. Perhaps I am mistaken, but Congress already passed and the president signed a $750 billion spending bill to get people back to work. What is different about raiding an empty treasury of billions more this time to create jobs?

Architects of the legislation point to the tax credits available to businesses that increase their headcount. One idea is to give employers a tax-credit up to $5000 for each  additional person hired. At first glance this may seem like a logical incentive. But as my economic students learn, two sides exist to transaction.

The tax credit will only reduce the marginal cost of a new employee for the first year. After the initial year the cost of the new hire will balloon by at least the amount of the tax credit. As any student passing a Principles of Economic realizes, cost is just one factor in the employment equation. The other side of the coin takes into account the revenue benefit that an employee brings to the table. Firms will retain or hire individuals as long as their additional benefit exceeds their additional cost. Without a significant pick up in demand, many firms will pass on expanding their payrolls.

Small business owners point to another flaw of the proposal in that tax-credits are realized at the end of the year. The cost of a new hire drains cash flow in the meantime. As one owner stated, cash flow is at the heart of staying in business. My creditors may not wait for the federal government to reimburse me.

It looks like another lesson in failed Keynesian economics.   

On a recent financial statement, Citibank notified customers that effective April 1, 2010 the institution reserves the right to require seven days notice before permitting withdrawals from all checking accounts.  The bank later clarified that the restriction only applied to residents of Texas.

If I am a Citibank customer, living in Texas or not, then it may prudent to take my money to another institution where the bank is going to let me have access to a checking account. The question being ignored by many reporting on this story is why Citibank has targeted Texas.

It must be remembered that the federal government owns about a third of this mega bank. Furthermore, the folks in Texas and the state legislature have been raising their voices about nullification. Recently, bills have been introduced in the state house questioning the Constitutional authority of the federal government to regulate emissions, healthcare, and gun registration. Some of the largest Tea party gatherings have occurred in the “Lone Star” State.

With the Democrats running full speed ahead to pass nationalized healthcare and the President invoking the power of the EPA to mandate global warming regulation, a good chance exists that Texas may invoke its rights under the Ninth and Tenth Amendments to nullify any such intrusions from Washington D.C.

It only takes one spark to start a raging inferno. Montana and Tennessee have already passed what amounts to nullification legislation concerning gun and ammunition laws. In the last month Virginia legislation stated that the home to Jefferson and Madison would not be part of a healthcare plan that mandated citizens to buy insurance. Virginia also joined Alabama and Texas in filing suit against the EPA. Utah filed suit to reclaim land within its borders now controlled by the US government. Dozens of states are lined up to defy federal laws on marijuana and many more have pending resolutions declaring their Constitutional rights.

Could the Obama administration be using its bank to send the good people of Texas a message to stop making overtures for a fight or risk losing access to their money? I would not bet my checking account on it.