The "Low Unemployment Causes Inflation" Fallacy

NAIRU stands for Non-Accelarating Inflation Rate of Unemployment. This is the "theoretical ideal" inflation rate. It is low enough that there aren't too many idle workers. It is high enough that workers don't have much bargaining power with their employers.

According to phony (Keynesian) economics, low unemployment means that workers can demand higher salaries, causing inflation. This is false. Inflation is *ENTIRELY* caused by more money being printed. Blaming workers, who don't have the power to print money, is pointless. Low unemployment is *CORRELATED* with inflation, but not *CAUSED* by inflation. During a boom phase, there is a lot of extra money in the hands of the wealthy. They use this money to hire workers, expanding their businesses. The Federal Reserve then jacks up inflation, causing a crash. Low unemployment is not the *CAUSE* of a future recession. Low unemployment is *CORRELATED* with a coming recession, because low unemployment happens during economic booms.

The blame for price inflation is always deflected from the true cause. The Federal Reserve and a corrupt monetary system are *NEVER* blamed. Usually, the greed of some other group is blamed. Greedy workers are demanding higher wages. Greedy executives are demanding higher profits. Greedy speculators are borrowing and pushing up prices. The true cause, a corrupt monetary system, is *NEVER* blamed for inflation.

The Velocity of Money

I was browsing the mises.org forums and saw a flamewar about what velocity of money means. The velocity of money is the speed with which people spend money after receiving it. If people start losing confidence in a currency, then they will rush to spend it. This increases the velocity of money and increases price inflation. If people have confidence in a currency, then they will be willing to save it. This decreases the velocity of money and decreases price inflation.

The CPI understates the true inflation rate. The average person doesn't realize how much his purchasing power is eroded by inflation. The average person thinks that money in their checking account is safe, while its value is being eroded at a rate of 0.5%-3% per month, depending on what measure of inflation you use. If people realized how bad inflation actually is, they would rush to spend their dollars immediately after acquiring them, which would cause even more inflation. During a hyperinflationary collapse, the people who spend their dollars first receive the most benefit.

Suppose that people started panicking that the rate of inflation for the US dollar was too high. Suppose stores started noticeably raising their prices by 5%-10% or more per week. At this point, people would start losing confidence in the dollar. Immediately after getting paid, they would rush to the store to convert their salary into tangible goods. This would cause even more price inflation. Pretty soon, everyone would be spending their dollars immediately after acquiring them, and hyperinflation would spiral out of control.

In 1932-1933, people were concerned that the US government and Federal Reserve would default on the dollar. The number of outstanding Federal Reserve Notes was far greater than the amount of gold in the US Treasury. Anticipating a default, people started hoarding gold. This was not greed; it was their rational self-interest, defending themselves against a default on the dollar. People were hoarding gold and spending their Federal Reserve Notes. The velocity of gold dropped to practically zero, and the velocity of Federal Reserve Notes was skyrocketing. President Roosevelt frustrated this prudent behavior by illegally seizing all gold in 1933. If you held gold in a bank safe deposit box, bank management was required to seize the contents of the box.

Instead of seizing all the gold, President Roosevelt should have forced the Federal Reserve into bankruptcy; the holders of Federal Reserve Notes would have been creditors for the remaining gold in bankruptcy court. This would have screwed over the owners of large financial institutions and benefited individuals who had prudently hoarded gold. Instead, Present Roosevelt screwed over individuals and bailed out owners of large banks. Individuals lost their savings via inflation, and the proceeds went to the owners of large financial institutions. This pattern continues in the present; individuals lose purchasing power to inflation, and owners/management of large banks are the beneficiaries of money supply inflation.

In the present, gold is not legally recognized as money. Hoarding gold is a prudent way to protect your savings. If you invest in gold, your inflation-adjusted return will be 0% minus expenses, but that may really be the best investment out there! The Federal Reserve credit monopoly distorts the lending market. It isn't practical to make a gold-denominated loan, because it's cheaper to borrow from the Federal Reserve via a bank; real interest rates are negative. It isn't practical to operate a gold warehouse receipt bank, because taxes and regulations make such a business unprofitable.

There is no evidence that the velocity of money in the USA is increasing or decreasing. There is no official government report for velocity of money, so I don't know how a valid comparison should be made. When I do inflation calculations, I assume the velocity of money is constant; if it were increasing or decreasing, that would affect price inflation. If the velocity of money is constant and the size of the economy is constant, then money supply inflation and price inflation should occur at the same rate. If foreign countries become reluctant to hold dollar reserves, that would increase the velocity of dollars.

Does anybody know what the "velocity of money" in the USA is right now? It can't be calculated from any of the publicly available government statistics. The velocity of money is the average time that a person holds onto a dollar before spending it. For example, suppose my salary were $60k/year and I keep an average of $5k in my checking account. The velocity of my money is 1 month. Using FIFO accounting (first-in first-out), money stays in my checking account for an average of 1 month. During hyperinflation, the velocity of my money would drop to 1 day or less, causing 30x more price inflation. During hyperinflation, I would be reluctant to keep any money in my checking account at all. In the present, I keep money in my checking account to meet my short-term spending needs; I accept the loss to inflation as a necessary expense. I keep the bulk of my savings in inflation-hedged investments.

If I invest in gold, I'd be holding it as a long-term investment. The velocity of my gold would be practically zero, unless I sold some for some short-term needs, or I found some trading partners that accepted payment in gold. In a free market, the velocity of gold would be greater than zero. Interest payments are a disincentive against gold hoarding. If I trust my trading partner, I'd make a gold-denominated loan. In the present, you would be foolish to borrow a gold-denominated loan, because of the Federal Reserve credit monopoly; a negative real interest rate Federal Reserve Point-denominated loan would be cheaper than a gold-denominated loan. The price of gold is rising at a rate of 20%-30% per year, so a gold-denominated loan has an implied interest rate of 20%-30%. I can't profitably loan/invest gold savings while the Federal Reserve has its credit monopoly, because the Federal Reserve and financial industry can lend/invest much cheaper than me.

For example, it doesn't pay for me to spend gold to invest in real estate, because I can't get full allodial title to that real estate. Real estate isn't a safe investment, because property tax rates are arbitrary and eminent domain could be used to seize my property. In a free market, people wouldn't hoard gold; they would prefer to invest in income-producing assets like real estate. In the present, gold and silver are the *ONLY* investments where I can get full allodial title!

People hoard gold when they anticipate that the government is going to default on the gold-redeemability of its paper money. People hoard gold when State regulations prevent them from profitably investing/loaning it.

When the velocity of money is increasing, that increases price inflation. When the velocity of money is decreasing, that decreases price inflation. The CPI understates the true inflation rate. By spreading the propaganda "Inflation is low", people can be persuaded to hold onto dollars, keeping the velocity of money low.

Financial Glossary

Someone asked me for a glossary of standard financial terms.

401(k) plan - A 401(k) plan allows employees to save money before taxes, and not pay taxes until they withdraw the money. No tax is paid on the investment returns until the money is withdrawn.

If you assume a life expectancy of 50 years, the tax deduction for a 401(k) or IRA is incredibly valuable. Assume that you make 10%/year on your investments, all of the return is taxable, and your marginal tax rate is 20%. In that case, the 401(k) or IRA allows you to grow your investments at a rate of 10%/year instead of 8%/year.

If your expected tax rate in retirement is lower than your tax rate now, that's a further advantage for the 401(k) plan.

If you expect that the US government may collapse in the next 20-50 years, then a 401(k) seems much less attractive. In that case, you would be better off investing in physical gold. As a hedge, keep some of your savings in a 401(k) and some of your savings in physical gold or silver.

401(k) plans have an interesting history. Corporations started offering deferred-income investment plans to their employees, to help them defer taxes and save for retirement. It was not clear if this practice was legal or not, but it was very common. The law was amended to make 401(k) plans clearly legal.

Recently, the law was changed to allow "Roth 401(k) plans". Similar to a Roth IRA, the contributions are taxable, but the income is not taxable when you withdraw it. You may have a Roth 401(k) only if your employer amends their plan to allow you to do it.

Social Security and Medicare taxes must still be paid on 401(k) contributions.

American-style option - In an American style option, the option holder may exercise his option on or before the expiration date. For stocks that pay a substantial dividend, or a deep in-the-money put, this right can be valuable. As the name suggests, most individual stock options in the USA are American-style. Index options in the USA tend to be European-style cash-settled, but you should read the contract details before trading.

call option - A call option is the right, but not the obligation, to buy something at a specific price at a specific time in the future.

cash-settled option or future - Normally, when you exercise a stock option, you are buying or selling the actual stock when you exercise. Normally, when you hold a futures contract to maturity, you are buying or selling the actual physical commodity. With a cash-settled option or future, you merely exchange money based on the fair market value at expiration. For example, S&P 500 index options in the USA are cash-settled; you pay or collect money based on the price of the S&P 500 index when the option expires.

clearing - The process by which money exchanges hands and actual shares of stock or commodities change hands.

clearing firm - A clearing firm is a big financial institution, typically with a new worth of $10B or more. They assume responsibility for all trades. For example, if you sell 100 shares of stock for $10,000 on the NYSE, your clearing firm guarantees that you will get $10,000, even if the other party to the trade defaults. Clearing firms are responsible for checking the creditworthiness of traders and enforcing margin rules. In practice, clearing firms will receive a Federal Reserve bailout in the event of a serious problem. JP Morgan Chase was Bear Stearns' clearing firm and was responsible for verifying Bear Stearns' creditworthiness; the Federal Reserve bailout meant that JP Morgan Chase suffered no ill effects for giving Bear Stearns too many margin loans. Without a Federal Reserve bailout, JP Morgan Chase would have had to take responsibility for most of Bear Stearns' debts.

clearing firm default - A clearing firm default is one of the biggest financial disasters that could theoretically occur. All big financial firms mutually guarantee each others' trades via the clearing process. If one of them were forced into bankruptcy, it could cause cascading bankruptcies in other big financial firms. Due to derivatives and extensive use of leverage, the notional value of their positions is far greater than their actual market value. In practice, the central bank will always intervene to prevent a clearing firm default. The Federal Reserve will always print new money to prevent a bankruptcy by a large financial institution. The Federal Reserve has an infinite budget, so it can always do this. In a free market, a bankruptcy at one business does not threaten the solvency of its competitors, if they are prudently managed.

closed-end mutual fund - A closed end mutual fund is a mutual fund that does not sell new shares, nor does it redeem shares for the net asset value. The fund shares trade on an exchange. Since shares cannot be redeemed or created, the closed-end mutual fund can trade for a substantial premium or discount to its net asset value.

COMEX - COMEX is the most popular exchange for metal commodities, such as gold or silver. If you buy a gold future on the COMEX, hold it to maturity, and pay the full purchase price, you will get a COMEX warehouse receipt. A COMEX warehouse receipt for gold is a specifically numbered bar of gold that belongs to you. You can exchange your warehouse receipt for actual physical gold, or hold onto it for sale later. The advantage of holding a COMEX warehouse receipt is that it is a very liquid investment, the gold is assayed and of a guaranteed quality, and is stored in a secure location. The disadvantages of holding a COMEX warehouse receipt are that you are charged a storage fee, and any sales are automatically reported to the IRS for taxation. In a SHTF scenario, a COMEX warehouse receipt is probably worthless.

defined-benefit pension plan - A defined-benefit pension plan pays the beneficiary a fixed amount per year. A CPI-based inflation adjustment may or may not be included. Defined-benefit pension plans place a lot of risk on the employer. The liability is uncertain, because you don't know how long someone is going to live, and you don't know what rate of return the employer will make on their pension savings pool.

The formula for a defined-benefit pension plan is typically something like 3% of salary per year of service, multiplied by your last years' salary (or average over the last 3-5 years). This formula means that most of the benefit is accrued in the last years working. An older worker benefits more than a younger worker, because they're closer to retirement. Some employers have "frozen" their pension plans, which means that workers receive the benefit they've earned, but accrue no new benefits. Such a pension freeze really screws over older workers; if you have 20 years of credit, the ability to earn another 5 years of credit plus pay raises would have been very valuable. Defined-benefit pension plans also discriminate against workers who switch jobs frequently, which is the norm in the modern economy.

If you have a defined-benefit pension and there is inflation, then the value of your pension is substantially eroded.

defined-contribution pension plan - In a defined-contribution pension plan, such as a 401(k) plan, the employer makes a fixed contribution per year. All the investment risk is passed on to the employee. Defined-contribution pension plans favor younger workers and workers who frequently switch jobs.

discount broker - A discount broker is a broker that executes your trades at a cheap price. They do not offer any advice. The Internet allows discount brokers to operate at a very low cost. I use Vanguard as my discount broker for stock trading, and Schwab as my discount broker for option trading.

European-style option - In a European-style option, the option holder may only exercise the option at expiration. The value of a European-style option is always strictly less than the value of an equivalent America-style option. As the name suggests, European-style options are common in Europe.

ex-dividend date - If you buy a stock after the ex-dividend date, you will not get the dividend. The ex-dividend date is typically 3 business days before the record date, due to T+3 settlement. The concept of "ex-dividend date" was invented by brokers to facilitate stock trading. With the ex-dividend date, it's easier to determine who's eligible to receive a dividend.

exchange traded fund - An exchange traded fund is an index fund that lists its shares on a stock market. You may only purchase or redeem shares of a mutual fund once per day. You can trade an exchange traded fund whenever you want; an ETF trades exactly the same as a stock. A natural arbitrage process guarantees that the market value is close to the net asset value. The market makers hedge their position with the stocks held by the ETF. At the end of the day, the market makers purchase/redeem shares of the ETF, exchanging their basket of stocks for shares in the ETF. Recently, actively managed ETFs have started, rather than ETFs that track a specific index. You pay a commission whenever you buy or sell an ETF, but the management fee is typically lower than a comparable index mutual fund. Some mutual funds have both ETF shares and regular mutual fund shares, and fund shareholders may pay a fee and convert one type of share to the other.

exotic option - An exotic option is a derivative contract that has more complicated terms than a call or put. If you can imagine it, you can actually buy it as an option. Exotic options tend to be "level 3 assets", which means that the traders can value the position at whatever price they choose. Typically, both parties to an exotic option trade will claim immediate "mark-to-model" profits on the trade.

failure to deliver - A failure to deliver is when someone short sells but fails to deliver actual shares. See "naked short selling" below for more details. A failure to deliver is like ordering a new sofa, they don't deliver the sofa, but still charge the full price of the sofa to your credit card. In any business other than stock trading, a failure to deliver is treated as a crime. The stock clearing system treats failure to delivers as equivalent to actual shares, making the failure to deliver transparent to customers. A failure to deliver is, literally, counterfeiting.

full service broker - A full service broker doesn't just execute trades; a full service broker also offers investment advice. A full service broker charges much higher fees than a discount broker. A full service broker may manage your account for you, charging a management fee, typically 1%/year. The rise of discount brokers has squeezed full service brokers out of the market. Before the Internet, the only way to trade stock was via a full service broker.

futures contract - A futures contract is an agreement to buy a commodity at a future date at a predetermined price. For example, if you buy a January gold future for $1000/ounce, you are agreeing to buy gold at $1000/ounce in January. Futures contracts typically allow very high leverage, with collateral as little as 5%-10% of the value of the commodity. This allows people to bet on inflation. Futures are risky, because if the price of the commodity goes down, you will be faced with margin calls and may lose your entire investment. In extreme circumstances, your loss may be greater than your initial investment, if your broker can't sell fast enough as the price declines.

futures option - An option to buy a futures contract. Bond and commodity options are typically futures options, rather than an option to outright buy a bond or the commodity. This increases the amount of leverage.

hedge fund - A hedge fund is a loosely regulated investment pool. An investor must be "qualified" and have a sufficiently high net worth. Hedge funds extensively use leverage. They profit from negative real interest rates. Due to their large capital base, hedge funds borrow at slightly more than the Fed Funds Rate, and invest in assets that increase in value in line with the true inflation rate of 15%-30%. Hedge fund managers charge very high fees, typically quoted as 2/20, where "2" is a flat 2% fee of all assets and "20" means 20% of the profit, either the gross profit or profit in excess of a benchmark such as the S&P 500.

Hedge fund managers take their management fee in the form of additional shares of their hedge fund. This allows them to exploit a tax loophole. Their income is treated as capital gains instead of ordinary income. Hedge fund managers are merely exploiting defects in the financial system for their personal benefit; they don't actually produce anything of tangible economic value. Technically, by using extensive leverage, hedge fund managers are printing new money that the rest of the economy uses to trade. Even though tje mainstream media touts hedge fund managers as brilliant risk takers, they really are parasites. Part of the wealth the State steals from you via taxes and inflation winds up in the pockets of hedge fund managers.

incentive stock option - Incentive stock options are a form of compensation that management of large corporations give themselves. Some technology companies give incentive stock options to all employees. An incentive stock option is a call option. The strike equals the market value of the stock when the option is issued. The term is very long, typically 10 years. If the employee changes jobs, the incentive stock option must be immediately exercised or forfeited. There is a vesting period, typically 3-5 years at an equal rate per year.

Recently, there was a regulation passed that corporations must charge their incentive stock options as an expense. However, they are priced on the assumption that the stock price will increase at the risk-free interest rate, whereas stocks typically increase at a rate of 15%+ per year. This causes the expense to be dramatically understated.

If the stock price dramatically tanks after stock options are issued, the management can "re-price" their options. They give up their old options and receive new ones with a lower strike, based on the current market value. In this manner, corporate management benefits from both declines and gains in the stock market.

Most gain in the stock market is due to money supply inflation, rather than a corporation's specific performance. Incentive stock options reward corporate management for inflation, more than the performance of their individual corporation.

index fund - An index fund is a mutual fund that tries to track the performance of a specific index minus its management fee. The S&P 500 is the most popular index for an index fund. The operation of an index fund is nearly 100% transparent. The fund manager makes no decisions, except how to best track the index's performance. Index funds charge very low fees, typically 0.1%-0.5%. Index funds buy and sell shares infrequently, which lowers costs for shareholders and generates less capital gains income.

inflation - Inflation is the process by which unbacked paper money loses its purchasing power. As more paper money is printed, the existing paper loses its value. The CPI is falsely touted as an accurate measure of inflation. I consider M2, M3, or the price of gold to be more accurate measures of inflation.

interest rate swap - Large banks offer their institutional customers interest rate swaps, which let them hedge the risk that interest rates change. For example, you can offer to pay the 1 year Treasury yield + a small fee (0.10%) and collect the Fed Funds Rate. Large banks can then hedge this trade by buying or short-selling the appropriate bond and borrowing/lending at the Fed Funds Rate. For this reason, the 1 year Treasury bond yield is always approximately equal to the expected average Fed Funds Rate over the next year.

IRA (regular) - In a regular IRA, you save money in a special trust and receive a tax deduction. You owe tax on the money when you withdraw it when you retire. A regular IRA is logically equivalent to a 401(k) plan. When you switch jobs, you can and should "roll over" your 401(k) plan to an IRA. If the transaction is processed correctly, it is not taxable. If the transaction is processed incorrectly, you may face mandatory withholding and huge taxes.

An IRA is always held with a trustee. I use Vanguard as my trustee for my IRA.

IRA (Roth) - In a Roth IRA, the contributions are taxable income, but the withdrawals are not taxable. If your marginal income tax rate is the same now as it is when you retire, then a regular IRA and Roth IRA are logically equivalent. There is one advantage of a Roth IRA; your effective contribution is higher. Suppose your marginal tax rate is 35%. If you contribute $1k to an IRA, it's like contributing $650 after taxes. If you contribute $1k to a Roth IRA, it's already post-tax, and it's like contributing $1538 to a regular IRA. The contribution to a Roth IRA is effectively bigger. This matters to me, because the IRA contribution I would like to make is larger than the maximum legal contribution.

level 3 assets - Level 3 assets are bank assets that do not need to be "marked to market". A bank carries level 3 assets on its books at the purchase price or whatever price it chooses. This is a valuable perk, because the level 3 assets can be used as collateral for further borrowing. During an economic bust, a large bank is technically insolvent; if it were forced to sell its level 3 assets at whatever price it could get, it would be unable to pay off its loans from the Federal Reserve. By carrying assets on its books at an arbitrary price, banks exploit flaws in the economic system. Even if a level 3 asset is overvalued, inflation means these assets will be profitable eventually.

long position - A long position is where you own something. This is a bet that its price would increase. If you are unleveraged, your worst-case loss is 100%, if the asset becomes worthless. If you are leveraged, a loss greater than 100% is possible. A leveraged long position is a bet *IN FAVOR* of inflation. This makes leveraged long positions very lucrative. This is the opposite of "short position".

mutual fund - A mutual fund is an investment pool available to small retail customers. Before discount brokers were popular, a mutual fund was the best investment vehicle for small investors. Typically, all the investment options in a 401(k) plan are mutual funds; individual stock investing in a 401(k) is legal, but not typically supported by plans.

Mutual funds are required to pass on their dividends and capital gains to shareholders, so they can pay taxes on them. Mutual funds aren't allowed to use extensive leverage like hedge funds. Mutual funds typically invest only in stocks or bonds, but sometimes they invest in commodities or other things.

With cheap discount brokers, an individual can get better returns picking individual stocks than by investing in an index fund. If you have more than $25k to invest, purchasing individual stocks is superior to a mutual fund or index fund.

naked short position - The "naked short" problem typically is cited in the case of stock trading. Normally, to short sell stock, you need to borrow shares from someone else and sell them. If the person you borrowed them from wants to sell, you must find someone else to borrow from or buy and cover your short sale. Sometimes, a lot of people want to short sell the same stock. This can occur after an IPO when a lot of shares are under "lock-up agreements". This can occur when a lot of people want to short sell a stock, typically due to lack of confidence in management or market conditions.

A naked short can occur accidentally, if there is a miscommunication regarding borrowing shares. Some hedge funds try to game the system by *INTENTIONALLY* naked short selling; this is sometimes called "strategic naked short selling". They short sell, and they never have any intention of borrowing shares. This allows them to avoid paying stock loan fees. If it's difficult or impossible to borrow shares, strategic naked short selling allows traders to circumvent the rules.

The stock clearing system treats a "failure to deliver" (see above) as equivalent to actual shares. If someone naked short sells you shares of stock, you'll see the shares credited to your account as if you actually owned them. There are two differences. Dividends are treated as ordinary income, instead of the preferred 15% taxation rate. If the company holds its annual meeting, you can't vote your shares. There have been occasions where there were so many "failure to delivers" in a stock that they couldn't figure out who actually owned the shares to vote in the meeting!

Via naked short selling, an unscrupulous trader can manipulate a stock price downward. The naked short seller is literally printing new shares of stock and selling them. The corporation that's a victim is unable to raise money. Due to an artificially depressed stock price; they can't raise capital by selling more shares or convertible bonds. Their bond rating could suffer, because stock price is viewed as an indicator of a corporation's health. Seeing a declining stock price, other shareholders may decide to sell. The naked short seller can then cover his short or buy out the corporation at an artificially low price.

According to the SEC, naked short selling is illegal. However, there is no penalty for naked short selling. Further, SEC confidentiality rules prevent them from actually publishing who is naked short selling and how many shares! If the SEC were serious about cracking down on naked short selling, they should publish a list of violators and impose a fine of $1 per share per day. Financial industry insiders are the primary beneficiaries of naked short selling, and they want to make sure the rules are lax! Making a regulation without any penalty for violating it is pointless!

Recently, the SEC made the bizarre announcement that it would be strictly enforcing the naked short sale rules, but only for certain financial stocks. Instead of enforcing the law fairly, the SEC is enforcing the law only for corporations it favors.

net asset value - The net asset value of a mutual fund the fair market value of its assets per share. Mutual funds only invest in liquid assets, so the net asset value can be fairly determined by looking at the market value. Hedge funds invest in illiquid assets, and it can be difficult to determine the net asset value for a hedge fund. Hedge funds limit the times when people can purchase or redeem shares.

notional value - The notional value of a position is the sum of the absolute value of all the amounts involved. For example, suppose you own 100 call options to buy XYZ at $100/share, with the standard 100 shares per contract. This position has a notional value of $100*100*100 = $1M. However, if XYZ's price is near $100, the actual value is probably much less, around $50k-$100k. As another example, suppose you put up $1B to buy $10B of bonds, using 10x leverage. The actual value of your position is $1B, but the notional value is $10B. With extensive use of leverage and derivative contracts, the notional value can be far greater than the actual market value. This is risky, because during an economic bust, prices can rapidly crash. Everyone is using leverage, so everyone is forced to sell during the bust at the exact same time. Large politically-connected banks profit immensely when market crashes occur, because they receive a direct or indirect bailout from the Federal Reserve.

options contract - An options contract is the right, but not the obligation, to buy or sell something at a specific price at a specific time in the future.

payable date - The payable date for a dividend is when the money is actually credited to your account. The payable date is always after the record date.

put option - A put option is the right, but not the obligation, to sell something at a specific price at a specific time in the future.

record date - The record date for a dividend is the date when the corporation determines who is eligible for a dividend. Due to T+3 settlement, the record date is usually 3 business days after the ex-dividend date. Similarly, corporations have a record date for their annual meeting. Only shareholders who owned their shares on the record date are eligible to attend the meeting and vote their shares.

shares held in street name - If you buy stock on an exchange and leave the shares with your broker, the shares are "held in street name". Technically, your broker owns the shares, and they are held in trust for you. This facilitates settlement. Since the shares are already in your broker's name, it is very easy for them to sell the shares for you. Your broker will automatically credit dividends to your account. Your broker will automatically exchange your shares when there is a split or buyout or spinoff. When it is time to vote your shares at an annual meeting, your broker will vote your shares according to your instructions. Most brokers charge a fee if you want physical delivery of your shares.

Theoretically, you are accepting a risk by leaving your shares at your broker. However, in the event of a clearing firm default, there would be a Federal Reserve sponsored bailout. The actual risk is the same as the risk of the US government collapsing.

short position - A short position is where you sold something you don't actually own. A short position is a bet that its price will decrease. For a short position, your potential loss is unlimited, if the price of the thing sold short skyrockets. This is the opposite of "long position". See also - naked short position.

stock spinoff - A stock spinoff is when a corporation splits into two or more pieces. For example, suppose stock XYZ spins off stock UVW at a rate of 0.20 shares of UVW per share of XYZ. If you owned 100 shares of XYZ pre-spinoff, you would own 100 shares of XYZ and 20 shares of UVW post-spinoff. If a corporation has two independent businesses with different growth rates, then shareholders may benefit from a spinoff; the rapidly growing business would be more valuable. If you leave your shares "in street name" at your broker, your broker will automatically process the spinoff for you.

stock split - Corporations like to keep their share price below $100, to facilitate trading in round lots of 100. When a stock price rises too much, there is a split. Splits can occur at various ratios, although 2:1 is most common. In a 2:1 split, if you owned 100 shares pre-split, you own 200 shares post-split. If you leave your shares "in street name" at your broker, your broker will automatically process the split for you.

Sometimes, a corporations' share price tanks below $1. Most big exchanges have a minimum $1/share requirement for listing. In that case, there will be a reverse split to increase the stock price.

T+3 settlement - When you buy or sell stock on an exchange in the USA, you don't actually complete the trade until 3 days later. The stock settlement process takes 3 full days. This is the reason the "ex-dividend date" differs from the "record date". With modern computers and software, the settlement delay could be decreased, but T+3 is still the standard for stock trading. Before modern computers, there were times when financial institutions were unable to keep up with the volume of trading, and settlement was sometimes delayed.

zero coupon bond - A zero coupon bond is a bond that does not make any payments until the bond matures. The interest is factored into the price of the bond. For example, for a $10,000 1 year zero coupon bond paying 5%, you will pay $10,000/1.05 = $9524 now.

This is a long list! Let me know if I missed anything.

Idiots vs. Reality

"I'm Working for Idiots" generated a relatively large number of reader comments (four). Are people more interested in stories relating to my direct personal experience? ("Psychiatry is murder/fraud!", "Rails sucks!", "Working as a software engineer is like being a slave!")

I have an update of what's going on at work.

The new manager/investor clarified his position via outsourcing some of our work. He doesn't want to outsource the entire product, just bits of it. (Or rather, he wants to outsource the whole thing, but can only get away with outsourcing bits and pieces.) A lot of money is going to be wasted on the outsourcing vendor, and they probably won't produce anything. The vendor's product doesn't fit with what my employer is doing.

The new manager/investor is now saying "Rails is awesome!" His line of reasoning appears to be

"FSK thinks/knows I'm an idiot. FSK says that the Rails project is a disaster. Therefore, I should say that the Rails project is successful."

In this manner, my efforts to set things on the right track have completely backfired.

My boss is still delusional. When we first started with Rails three months ago, he said "Rails is a magic productivity enhancer! We'll have a working prototype in a month!" It's been three months, and they have nothing. My boss predicts at least another three months, possibly even longer. My boss denies having said "We'll have a working Rails prototype in a month!"

At this point, 3 months have been invested in Rails. This makes "We spent 3 months. Why not spend 3 more months?" sound attractive. In November, my boss will say "We only need 2 more months. We spent 6 months. Why not invest 2 more?" In January and February, he will say "Only 1 more month!" In this manner, software disasters can be extended indefinitely.

Since it took at least 6 months to do a 1 month project, I don't see how anybody can claim Rails to be a magic productivity enhancer. If DHH were working here, maybe we could use Rails successfully. Was it a mistake to use Rails? Probably, since nobody here has used it before. Has my boss horribly misused Rails? Definitely. They hired a relatively competent Rails consultant, and they have nothing.

Realistically, rewriting their website in another language was a one month project. It's a very simple product. I could probably do it by myself in a month in php or Visual Studio ASP.NET/C#.

The Rails advocate and the new manager have decided to tag-team against my "Rails sucks!" opinion. It is, after all, merely an opinion. In the area of software development and business, there is no objective standard that can be applied, such as "Does your application run and behave as desired?" or "Do you have customers? Are you making a profit?" Their deadline is 3 more months away. Their plans don't include a working prototype until 3 months from now. This is another good rule. If you're managing a software project, make sure there's tangible demonstrable results every month, so you know if it's off track.

The Rails idiots are focused on cool Rails tricks and not the business logic of my employer's product. They picked a huge database design before writing any code. They have excessively used joins and polymorphic tables. Instead, they should have added tables one at a time as they needed them.

The founders of the business are all marketing specialists, with no knowledge of software. I see now that was a disaster from the beginning. Starting a software company without a qualified technical person on parity with the founders is a mistake. Whether the marketing owners realize it or not, they have a software startup.

The new manager/investor excels at butt-kissing and buzzword bingo. He does not have any useful technical skills. If he had any talent for managing a software project, his first suggestion would not have been "Fire the programmers! Outsource everything!" The owners are themselves marketing experts, so he's speaking their language (marketing) rather than my language (writing software that works). He is "an expert with 20 years industry experience". Is that 20 years of experience writing software that works and managing software projects? Or, is it 20 years of experience in butt-kissing and bullying people to get your way?

"Outsource our software development" sounds attractive to someone who knows nothing about software. Anybody with a clue about software would say "I'll hire a few qualified people and write it myself."

Apparently, the new manager/investor made a deal that said "I'll invest $X in your company. You will then spend $X on my consulting/outsourcing buddies." The new manager has some sort of connection to this outsourcing vendor. Notice that the investor has bought a chunk of the company for $0. The investor has risked no capital, but he has a call option in case the business succeeds. The outsourcing company can now claim "We have $X in revenue! Our valuation is $10*X or $20*X!" In this manner, valuation bubbles inflate.

Such tactics were common in the .com boom. An investor put up a bunch of money, which was immediately used to purchase consulting services. The company that had money "invested" in it claimed a huge valuation. The consulting company got to claim revenue and a lofty valuation.

The new manager has no incentive to say "Rails sucks! Let's try something else!" He currently has a riskless position. If the Rails project is a disaster, then it's my current boss' fault and not his. If he recommended a different approach, then it would be his fault if it didn't work. Saying "Scrap Rails! Do something else!" requires ability, balls, and a backbone. The new manager clearly lacks all three.

The Rails guy and the new manager cut a deal. The Rails project continues, and some work will be funneled to the outsourcing vendor. It's "win/win" or "cluster****/cluster****", depending on whether you follow idiot reality or real reality.

I have a viable alternative to Rails, which is "I could do the whole thing by myself in a month using Visual Studio." The only loss is my salary for a month, plus a VS license, if I'm wrong. If you compare that to the money wasted on Rails and the outsourcing vendor, that's cheap.

Currently, I'm doing maintenance on the old Java/spring/jsp/beans product. I'm not working unpaid overtime to do a rewrite in Visual Studio or php. I'm better off working on my blog than bailing out their sorry ***es.

I accepted a below-market salary, because I'd been unemployed for awhile and had no bargaining leverage. There were vague promises of options, but no written offer. Verbal offers are worth $0. If I had been given a huge chunk of equity or options, then I'd be motivated to say "**** this! I'll rewrite it myself!" Why should I bother? It's not my money being wasted. It's not my $500M business opportunity being squandered.

At some point, my employer needs a working product to attract customers and get more VC money. The Rails project is vaporware or cluster****ware. My boss did have the balls to insist on using Rails, but he doesn't have the ability to say "Is this project going well? Should we try something else?" At this point, my boss is in too deep to admit he screwed up, and the new manager is more interested in "make FSK feel unwelcome" rather than fixing the project.

This is starting to get into ****edcompany territory. At some point, my employer needs a working product. If they don't get a working product soon, they'll blow through their seed funding and they won't get their next round of VC funding.

This is a prime example of what happens when a bunch of marketing people start a software company without a qualified software engineer as co-founder. If you're a marketing specialist and you hire someone to manage your software, then you'll judge them by their marketing ability and not their technical ability. Marketing ability is uncorrelated or anti-correlated with technical ability. When a marketing specialist hires someone to manage a software project, the odds are that they'll get a professional con artist and butt-kisser rather than someone who knows what they're doing. "20 years of experience" can mean "20 years of quality software delivered" or "20 years of experience butt-kissing and bullying to get your way".

The marketing people have great connections in the financial industry. Even if I could make a better competing product on my own, I could not get my foot in the door with customers. There's a lot of interest in my employer's business, but they don't have a working website.

"FSK should get a new job" may be good advice. Should I be a good wage slave and suck it out and do my best? Should I say "**** this!" and start looking for a new job? Even if I start looking for a new job, it may take months to find something. A new employer would likely be just as clueless.

In this manner, the employment system is biased against individuals. An employer can get 100 resumes just by posting a job request online. It takes an individual months to find a job. I have to jump through the required hoops, just to demonstrate my hoop-jumping ability. "You switched jobs too many times" is a valid criticism, but why should I waste time working for idiots? The defect is in the economic and political system, rather than with me.

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Anonymous has left a new comment on your post "I'm Working for Idiots":

Because, you are selling your time. What should you care if the project going in the right direction or not?

I'm working at a small startup. At some point, my employer needs a working product to raise their next round of VC funding. I'm getting paid a below-market rate. There were vague promises that would be rectified when their next round of VC funding comes in. (It's foolish to believe that, but I'd been unemployed for awhile and had no other offers. I had no bargaining leverage, so I accepted a lousy deal.)

I'm not working for a large mega-corporation. If the product doesn't work, my employer is broke.

Moreover, why do you think your opinion should matter?

If your attitude is "I'm a code monkey dancing for my corporate masters", then why should I care?

My attitude is "I'm a highly skilled professional, with valuable skills, experience, and insight." However, if my experience were marketable, then I'd have a better job than my current one. "Marketable skills" and "useful skills" are uncorrelated or even anti-correlated.

As Dilbert's boss said, "FSK must be an idiot. He is working hard for practically nothing."

I enjoy reading you, don't get me wrong, but just as you, from time to time I catch myself as being pissed at my boss. Then I calm down and ask myself, who asked me what I think and what is the reason I am mad even if I do work for an idiot?

I object to working for idiots, because the rules of the economic system make it hard to start a new business. Most businesses are founded by idiots with connections, rather than by skilled workers.

"Connections trump talent" is a symptom of a defective communist economic system. I would be happier in a free market, but the USA does not have a free market.

You can say "If you don't like it, then switch jobs!", but switching jobs isn't as easy as it seems.

Anonymous has left a new comment on your post "I'm Working for Idiots":

Sometimes the bosses' idiocy is a threat to your livelihood.

FSK is a programmer. The new boss is touting an approach that says "Develop your website without any programmers! Just drag and drop!" In other words, the new boss is saying they don't need FSK on the payroll.

I'm pretty sure the new boss would fire me if he could. There's a PITA bug in the old system I'm having a hard time fixing. The new boss is saying "Look at what a lousy job FSK is doing. He can't fix this bug!" It isn't my code! Maintaining someone else's piece of crap is very difficult.

"Outsource everything!" is a threat in two ways. First, it's stupid advice. It's dangerous because it's costing my employer money. There's still substantial effort required to customize the third-party tool to my employers' needs. Second, "Fire programmers and outsource" is equivalent to saying "Fire FSK!" Of the two, "Outsourcing is stupid!" is the important point.

The new boss is an idiot. A tool which promises to eliminate the need for programming (or other work by creative professionals) will never produce anything but the lowest common denominator result. Certainly not anything which will stand out in the marketplace, because the competitors will have the same tool too.

That's right. I could probably produce a customized equivalent result in a few days of work.

The new boss thinks "I don't like having skilled programmers around. They have an annoying habit of telling me that my ideas are stupid. The highly paid consultant says all my ideas are brilliant!"

Would you see anybody other than a mechanic to fix a car? Would you hire a mechanic directly, or hire someone to hire someone else to hire a mechanic? Similarly, if you want software written, you need programmers. Outsourcing is attractive to people who can't manage programmers themselves.

The new boss is an expert in marketing/hype/butt-kissing. He isn't bringing any actual skills to the table.

I also noticed another idiot intimidation trick.

Idiot: Rails is awesome!
FSK: Rails sucks!
Idiot: You're being narrowminded.

Idiot: Outsourcing is awesome!
FSK: Outsourcing is stupid!
Idiot: You're being narrowminded.

If you dismiss a stupid idea as stupid, you're accused of being narrowminded. That's an aspect of pro-State brainwashing. All opinions are equally valid, including stupid ones. There's no objective standard of truth. Am I being narrowminded, or am I capable of recognizing a stupid idea and saying so?

FSK is right about another thing: such tools are Procrustean beds, which typically fail to address the unique aspects of any non-trivial application.

I hadn't heard of "Procrustean bed" before. Rails is a Procrustean bed. Public schools are Procrustean beds. The current economic and political system is one big Procrustean bed.

Anonymous has left a new comment on your post "I'm Working for Idiots":

>>What should you care if the project going in the right direction or not?

Because doing something you don't care about or can't get behind is soul sucking. I don't consider it "selling my time" either. And I do think my opinion matters. Those are very "wage slave" (to use an FSK term) thoughts:

"I'm just here to do my job, no matter what it is, as long as I get my paycheck. And if I don't like it, I can find another job. But while I'm here, it's pointless of me to complain."

That's the point. I'm a highly skilled professional and I want to produce a high quality product. Maintaining crappy legacy code is wasting my abilities. The Rails disaster is a waste.

Consider the example of a policeman. "The judge told me to arrest FSK. I'm just doing my job and following orders. Why should I care if the law I'm enforcing is wrong?"

Once you accept "I'm doing my job and just following orders", then all sorts of crimes can be justified.

My employer is writing financial software. The financial industry is purely parasitic. In the large scale of the economy, it makes no difference if their product is a smashing success or a total failure. The financial industry will leech the same percentage of the economy either way. However, I do feel bad for the owners. They seem to genuinely be doing the best they can, given the circumstances. A lot of their money is being wasted, and their business opportunity is being squandered.

I do a job because I take pride in my work, find enjoyment in doing something well, and using my mind to create something useful. If an idiot boss is going to get in my way of that because all he is concerned with is not getting railed on by higher-ups, then ya, I think I have every right to take issue with his idiocy. If they decide my comments are not useful, or I decide there is no longer a chance of impact, then I'll move on to a different job.

Doing what the boss said just because the boss said it is silly in my book. Ya, I probably wouldn't last a second in some jobs, but oh well; having an independent thought and being more than just a worker bee is actually important to some employers.

When I first started working here, things were going well. It was fun to do a small php project and getting it to work, but integrating it with the rest of their crusty system was problematic.

That is the big question. Should I hang out here and hope things improve? Is it time to move on? "Wait and hope things improve" is the slave attitude. On the other hand, sending out resumes and interviewing is a PITA.

When you consider that "the guy we hired to revolutionize our development group" turned out to be an unqualified idiot butt-kisser, it may be time for me to move on.

eagledove9 has left a new comment on your post "I'm Working for Idiots":

Everything you've been saying about the Rails disaster reminds me of the time when I worked for a startup company that went bankrupt and shut down, in 2001. You even said yourself that this project was a 'startup killer.'

This definitely looks like a "startup killer" mistake. At some point, they need a working product, and that isn't going to happen based on the current trend.

Hiring the wrong butt-kisser is also a "startup killer" mistake. A marketing specialist cannot help but hire a highly-skilled butt-kisser to manage their software. (I mean someone who excels at butt-kissing, and not someone who excels at actually managing a software project.)

The company I worked for was a recruiter. We used the internet to search for resumes online, and get people hired for technical jobs. Then, as this wasn't as profitable as he wanted it to be, he started making his own website to do it.

The management became delusional when their money losses became so severe, it was obvious the business would never get out of debt and would have to shut down. The owner was going to be stuck with the debt after going bankrupt. During the 'delusional' phase, they desperately tried ANY crazy thing to magically earn huge profits while spending nothing at all. They started trying to automate everything more and more so they wouldn't need to employ anybody - just like your new drag-and-drop website builder that doesn't need programmers.

My boss is definitely in the delusional phase. My boss is saying "Let's hire 10 more Rails programmers and then everything will be all right! That's what the book 'Mythical Man-Month' says you should do!"

Hiring the butt-kisser new manager was also a big mistake. He now has the owners' ear via his butt-kissing ability. He got what he wanted. Money is being funneled to his outsourcing buddies. Why should he risk anything by making an opinion on the Rails project?

Automating things is a good idea. You still need programmers and employees and a working product. A software startup outsourcing their software development is a totally stupid approach. If you're an MBA who can't manage a software project, then you might as well outsource. If you aren't technical yourself, you'll get conned by a slick marketer rather than hiring someone who can get the job done.

If you have no clue about software, then you have no business starting a software company. If you try to start a software company without any knowledge of software, then you are almost definitely going to get ripped off.

The whole startup was built on borrowed money. Over time, the payoff, the profits, had to get more and more huge to balance out the ever-increasing debt.

The owner did eventually go bankrupt and we all got laid off. He started working out of his home instead of from an office and he re-hired a few people to use the computers in his home. I worked there for a while but eventually left because I had some personal problems going on in my life.

Your situation, everything you've said, sounds SO SIMILAR to all that happened at that job, that if I were you, I would be definitely concerned about the business going bankrupt. It is likely that you will have to look for another job.

I'm not responsible for the debts of the owners. The worst thing that can happen to me is a layoff. I don't know how much personal debt they have risked.

"It's time for FSK to find a new job" appears to be good advice.

If I were managing a startup, I'd go for organic growth via reinvested earnings. That is tricky, because the rules of the economic system require businesses to "Get big fast!" An agorist business does not have "Get big or die!" pressure. An agorist business should be funded via reinvested profits.

And the owners will be stuck with a big debt - I feel bad for them. My boss seemed so sad and confused afterwards - he couldn't understand why the 'irrational exuberance' of the dotcom boom had suddenly disappeared. Everyone had hoped that it was a great opportunity, but it was a terrible disaster.

I hope this turns out okay for you and the company.

The owners aren't just going to be out their own savings. They really do have a $500M-$1B business opportunity. At some point, they need a working product.

If they could get their software actually written, they'd have a terrific business. I even offered "I can outperform all these clowns by myself in a month, using php or Visual Studio." My offer was declined. I did my best.

Is it time for me to move on? I suspect "yes". If my employer doesn't get a working product, then they won't get more VC funding, and I'll have to switch jobs anyway. I'm getting paid a way-below-market rate. My current job isn't anything special. You could argue that if I was that smart, I would be paid a lot more, but the economy is bad right now. I don't have connections or an impressive buzzword-loaded resume.

Sometimes, I wonder if "Disagreeing with FSK" is equivalent to "Disagreeing with reality".

American Eagle Gold Coins Sales Suspended

I liked this article on Apmex's blog. The US government suspended its sale of 1 ounce American Eagle gold coins. There still is a shortage of 1 ounce American Eagle silver coins.

Allegedly, the US government has huge gold reserves somewhere. Why can't they just use those reserves to keep minting coins? Are the gold reserves gone?

Someone mentioned that this stinks of gold market manipulation. The price of gold is cheap, but there's no gold supply for minting coins?

Another rumor is that dealers are refusing to sell their inventory, since prices are so low. This is rational behavior, and is not immoral. If you believe the gold price is artificially low, then you should buy gold and hold onto it.

American Eagle silver coins are minted with metal purchased on the spot market. I thought that American Eagle gold coins were minted with metal in US government reserves?

If you believe that the gold market is manipulated downward, then buy gold! If you use leverage via futures, then you risk margin calls if the price declines. If you have an unleveraged long position and physical possession, then the spot price of gold is irrelevant. You can just hold onto your metal. The real value of an ounce of gold should be mostly constant.

Fluctuations in the spot price of gold are really fluctuations in the value of the dollar and symptoms of gold market manipulation.

That is a symptom of what happens during hyperinflation or in a Communist economy. Prices are cheap, but there's no product available for sale!

I wouldn't bother paying a premium for American Eagle gold coins. You can still buy bullion bars/rounds.

FSK Asks - What's a Good RSS Reader?

I'm annoyed with Google Reader, over one minor defect. Google Reader automatically removes items from your RSS folder after 30 days. I don't always have time to read through my full RSS feed. There are a lot of feeds in my "hitlist" folder, that I'm evaluating but don't have time to search through.

On the Google Reader discussion forum, a bunch of people have been asking "Give us more than 30 days before RSS items expire, or make it a configuration setting!" That was several months ago. This is a minor fix that should take at most a day. It hasn't been implemented, even though quite a few people have asked for it. I'm starting to get concerned that Google is no longer relevant.

I'm on the market for a new RSS reader. Zed Shaw said he wanted a decent RSS reader, but he wanted one with a nice keyboard interface. Why doesn't he write his own? I'm interested in either a mouse or keyboard interface.

The features I want in my RSS reader are:

1. It may be either web-based or a Windows desktop application.
2. It must be able to load my current subscriptions from Google Reader. Google Reader supports "export subscriptions to xml", and any serious reader probably supports this feature.
3. It must support folders or tagging.
4. It must not automatically expire items after a certain period of time.
5. It should be convenient for me to read through my RSS feed, or leave items unread.
6. Google Reader lets me explicitly mark items read/unread, rather than automatically marking them read as they appear onscreen.
   

Does anybody know a good RSS reader? Someone suggested "RSS Bandit", but I looked at it and didn't like the UI.

I'm Working for Idiots

At work, they hired a new manager/investor to shake up the development group. The Rails project is obviously a disaster, to everyone but my boss. My boss maintains his "Rails is awesome! This project is a success!" fantasy.

The new manager is now advocating for a small consulting company that has a tool that lets you "Develop your website without any programmers! Just drag and drop!" My employer's product is sufficiently different from their template to make it useless. The amount of effort required to customize their product would be equal or greater than for us to roll-our-own.

This is an aspect of "nepotism capitalism". The new manager probably has a financial interest in the small consulting company. Therefore, he is advocating for it instead of a correct solution. Due to the Principal-Agent problem, it doesn't matter if he's making the right choice or not.

The owners have merely replaced one snake oil salesman with another snake oil salesman. My current boss fraudulently says "Rails is awesome!" The new manager is fraudulently saying "This small consulting company will solve all our problems!"

Why must I be the meat in an ***hole sandwich?