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The problem with modern America

If you follow the news coverage of this election cycle you will think that the most important issue that the voters care about is Donald Trump’s vs Bill Clinton’s affairs and sexual misconduct. In reality, this is all noise that has zero chance of affecting the lives of citizens. We have a legal system where crimes such as sexual assault and rape are supposed to be tried, where people can be convicted by juries of their peers after adversarial trial but the media focus on trying these crimes instead of the courts because they get good ratings and divert people’s attention from the real issue.

The real issue that affects America is the lack of free market in many fields that leaves people victims of monopolies that prey on them. In this post, I will touch on some of these areas and show why the lack of free market is hurting our country.

Trade

Many people on both the left and the right argue that our current trade deficit is caused by our trade agreements and blame the decline in manufacturing jobs on free trade. Trade is not the reason for this decline but it is the factor that exposed the weakness in the American industrial field which is the high cost caused by the taxes, regulations and labor laws that are enforced by the different levels of government. The cost of the government policies prevents the free flow of labor and capital to many industries such as clothing, furniture, and electronics because it is very hard to compete with cheaper imports coming from countries that don’t have the same tax, regulatory and labor burden. There is the wrong way to handle this issue by going into protectionism which will shield our industries from global competition while raising the cost of consumer goods and making all of us poorer. The right way is for the government to realize that it needs to free the American business from these burdens and dramatically reduce taxes and regulations burden and ease the laws protecting labor unions and restricting the flow of labor to the most productive use.

Many Trump supporters point to the foreign governments’ unfair trade practices such as currency manipulation and dumping of cheap products. I think that we should respond to such practices but not before we make sure that our government does everything it can to remove the obstacles facing our industries.Read More »The problem with modern America

Government Spending vs. Revenue

The classical view in democratic countries is that the government taxes the citizens to finance its spending. The Congress on the federal level and the legislature on the state level debate a yearly budget to spend the tax receipts on the different priorities. The government may raise the tax rates if it needs to spend more money that it bring in tax revenue. The reality of democratic politics is far from that classical view. Raising taxes and cutting government spending are both politically unpopular options, so governments use deficit spending.
To finance the deficit the government issues bonds and sell them to creditors. These bonds have different maturity dates, interest rates, and sale prices depending on the creditworthiness of the government, and they add a new item to the government’s budget which is the debt service for paying the interest rate on outstanding bonds and paying the face value of matured bonds. Because of the same political factors that prevent raising taxes and cutting government spending the government ends up having a deficit every year and these deficits accumulate and increase the government debt.
A common way to express the debt is as a percentage of the Gross Domestic Product (GDP), this gives an indication of the size of the debt in comparison to the economy. The debt to GDP ratio might hide the debt increase if the GDP grew at a higher rate than debt for few years, so it is important to look at the absolute value of debt as well. The following chart shows the growth of the federal debt as percent of the GDP:

Read More »Government Spending vs. Revenue

How do banks work?

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Banks play a large role in the economy. This post will shed some light on banks and the role of central banks in the economy and how they could create major economic problems with monetary policy.

First, let’s start with the basics. A bank is a corporation that accepts deposits from customers and uses these funds to give loans. Banks offer interest to account owners and charge interest on loans and the difference between the amount of interest they get from loans and what they pay to account owners will be the bank profit.

Read More »How do banks work?