Archive for September 2009
In this week’s discussion I will begin a series on inflation. First, I will provide a brief explanation of what it is and what it isn’t. Then I will discuss ways the Federal Reserve attempts to control inflation by controlling the money supply.
Definition: Inflation is a persistent rise in the overall (or average) level of prices of all goods and services. Not to be confused by an increase in relative prices such as oil or grain. These are known as supply shocks caused an oil embargo or crop failure.
The demand-pull theory of Inflation is accepted by central banks such as the Federal Reserve. It is based on the level of money supply. This is known as “Too much money chasing too few goods” or demand growing faster than the supply. If demand is greater than supply, then prices will rise.
Since the Demand-Pull Theory of inflation is based on the money supply, the key to controlling inflation is to control the money supply. If there is a persistent excess supply of money there will be inflation. The Federal Reserve controls the money supply in 3 ways – all directly impact the interest rate. The Federal Reserve can:
1) buy Government securities (open market operations)
2) change the Federal Discount Rate
3) change the amount of reserve requirement of banks.
When the Fed buys securities on the open market, it causes the price of those securities to rise. (Selling causes the price to decrease) Bond prices and interest rates are inversely related. If bond price goes up interest rates go down and vice versa.
Raising or Lowering the Federal Discount Rate is the same as raising or lowering interest rates since it is the rate it charges banks.
If the Fed changes reserve requirements (cash on hand or on deposit with the Federal Reserve), this will cause banks to have an increase or decrease in the amount of money they can invest. This causes the price of investments such as bonds to rise/fall, so interest rates will change inversely.
According to its web site: “The Fed changes reserve requirements for monetary policy purposes only infrequently. Reserve requirements impose a cost on the banks equal to the foregone interest on the amount by which required reserves exceed the reserves that banks would voluntarily hold in order to conduct their business, and the Fed has been hesitant to make changes that would increase that cost.”
Finally, an alternative definition of Inflation: “when you pay fifteen dollars for the ten dollar haircut you used to get for five dollars when you had hair”.
Humorist, Sam Ewing
For next week’s discussion we will take a look at the rise of commodity prices over the past 5 years with comments made by Fed Chairman Ben Bernanke.
An incident occurred in the NFL on Sunday that is completely within the rules but is completely outside the boundaries of good sportsmanship. It happened in the nationally televised game on Fox between the Giants and Cowboys on the last play of the game. Many of you know what I am talking about. It was the “ice the kicker play” that has become popular in recent years. The strategy is for the coach to stand beside the referee and call a timeout literally at the last second before the ball is snapped. This is supposed to make the field goal kicker think about the kick a little longer in the hope that he will become unnerved and miss the kick. Usually when this is done, the ball is snapped and the kick is attempted before the referee can stop the action.
I absolutely hate this practice and hope it is modified in some way to restore some class to the unofficial national past time that is the NFL. This practice is the equivalent of purposely coughing in someone’s backswing on the golf course. It is childish and it must stop. This is not an attack on the coach in Sunday’s game as most teams have employed this strategy. My wrath is directed at those in charge at the top of the NFL. This is the same league that has a fine for a player not pulling up his socks or having an un-tucked jersey. It is the same league that has a personal conduct policy for players. It seems as though the NFL can’t win as the players are always ahead of the rule makers. There are rules on celebrations, taking off your helmet, and using the football as a prop for goodness sake! How can the league sanction the “ice the kicker” behavior but disallow celebrations?
It seems as though they need to simplify things. Just as we have enacted laws against texting while driving which are unnecessary, the NFL has defined actions which qualify as a penalty. Why add a law for texting while driving when there is already a law against reckless driving and why add a penalty for using the ball as a prop when there is already unsportsmanlike conduct? Why not let the referees make that judgment call – that is what they do. If all behaviors were at risk of drawing a flag perhaps the players would think twice about making a foolish display. I ask you, what has happened to sportsmanship and have we gone beyond the point of no return?
Next week it’s back to business with the first in a series of posts on the topic of Inflation.
Click on the link below to read this week’s topic.
A new feature for Paceline Business Consulting, LLC is this blog. I am going to try and provide content on a weekly basis alternating between business related articles and articles of general interest (sports, observations, food & wine and anything else that might come up).
Let the blogging begin.
Today is the unofficial last day of summer and I for one am a little disappointed. I love the warm weather and outside activities such as gardening and bicycle riding. I also enjoy watching baseball every night as the good guys battle the bad guys to stay above .500. I have the hope of an Indian Summer and a mild Winter and then a warmer Spring which leads back to another glorious Summer.
This sounds rather optimistic and it is. Let me let you in on a secret. I found out something about myself during the economic crisis we have endured this past year. The secret is: I am an optimist. At least as it relates to the American business owner. I am working daily in hand-to-hand combat with these heroes of our great country. I see the optimism they display in what people can achieve. The small business is the backbone of what drives our economy. I salute their success despite the headwinds created by our government in Washington.
So, here’s to our small business owners who will pull us out of this recession and reinvent, innovate and stimulate our economy despite what the experts say.
Are you ready for some football! Bring on the fall and winter season life is good.