Ready for a blast from the past?

You're about to become very familiar with an artifact from the 1930's--a byproduct of the Great Depression come to life again--scrip.

A month or two back I was watching some interviews from the Great Depression and people were talking about buying things with "scrip".  I thought maybe it was slang for money, but it's not.  Scrip is an I.O.U. 

In a deflationary depression such as the Great Depression, or the one we're in now, there simply isn't enough money in existence to pay everyone who needs to be paid.  This leaves cities, states and companies with a decision between not paying their vendors and employees at all, or giving them I.O.U.'s promising to pay at some point in the future when they do have money.

This was a common practice during the Great Depression.  Cities, states, and companies would print up their own I.O.U.'s--scrip--and pay their vendors and employees using that.

Since there wasn't enough money to run the economy, people started using scrip as a medium of exchange.  Companies would sell products in scrip at their own general stores--at huge markups to what they'd cost in dollars--and banks started accepting scrip deposits.  It was of course much less valuable than REAL cash, but banks were simply not manufacturing enough cash to run the economy.

As it always is, history is in the process of repeating itself, and scrip is making a comeback.

In what is sure to be the first of many of these events, California has run out of money and is going to issue its tax refunds in--you guessed it--scrip.  They're calling the I.O.U.'s registered warrants, presumably only because they don't want to mentally invoke the Great Depression.  It's scrip.  If you live in California you are going to start seeing I.O.U.'s in commerce.

States and municipalities are flat broke.  Tax receipt projections were based on a debt bubble that popped over a year ago.  The debt bubble has burst and the amount of money in the world is declining so rapidly that most 2009 budgets are pure fiction at this point.

Politicians just can't wrap their heads around the fact that they have to be frugal--that word is not in their vocabulary.  Instead of cutting back they're increasing taxes and fees on small businesses which is only going to shutter more businesses, lose more jobs, and further decrease tax revenues.  Hi ho.

Once the bottom line goes negative, the only alternative besides outright bankruptcy is to start paying in I.O.U.'s where possible.  Meaning, where people are forced to accept it because they have no recourse.

It'll be interesting to see what happens when people start sending in state taxes paid in scrip, I wasn't able to find any examples of that from the Depression.

This is from a guide for Japanese tourists visiting America.  Too funny not to share.

1. The yen is very strong against the dollar right now. This will make goods in America seem very cheap -- an excellent opportunity for shopping! However, remember to be polite in your use of money -- America is in the middle of economic malaise right now, and Japanese people with wads of money in their hand might be looked on with envy. Besides, if you are obviously wealthy in an American city, you may be robbed.
2. If you go shopping at an American department store, they will ask you if you want to open a credit card account. They are *not* asking whether you want to use a credit card. This may seem strange but it is an American custom to offer customers a credit card, in order to make them spend more money. We suggest politely declining offers of credit cards. You may have to politely decline several times. Don't think of this as rude, the Americans have to do it too.
3. Most Americans will think that a Japanese person standing on the street is an American, unless they are holding a camera. If you are not comfortable speaking English, you might try bringing along a camera to say "I am a tourist, please don't expect me to speak English." Except, don't try this in the big cities -- tourists get mugged in big cities.
4. Americans have a social institution called a "gratuity". Basically, the price on the menu at any place which serves food is not the real price. The real price is 20% higher. You have to calculate 20%, write it under the subtotal, and sum to arrive at the real price. Taxis work the same way. It is considered very rude not to pay the "gratuity".
5. In general, Americans consider it impolite to discuss politics. However, this January Obama will become the new president, and many people are excited! If they ask you what you think of him, a safe answer is [English] "Obama is really cool." or [English] "Obama speaks so well. Not like me. Hehe." Be very careful when pronouncing his name. O BA MA, just like Obama City. 
6. Ladies: if you shop for clothes, ask for where to find [English] "petite". It means normal sized. Ladies who are petite may have difficulty finding clothes which fit in America, except at specialty shops.
7. McDonalds: Has no teriyaki burger in America. Portions are bigger and food is cheaper. Sometimes the person taking the order does not speak English. Please relax! They probably understand the set menu, although it is called [English] "combo", and you can hold up the number with your hands as shown. [Snip of chart for how Americans count on their fingers, which is actually different than how Japanese people count on their fingers, hence the need for a chart.]

This is really funny, regarding #5.  In Japanese Obama means "little beach".  Seriously, I am not kidding.

And don't forget, walking around with wads of money in your hands is a good way to get mugged in American cities!  (Do people do this in Japan?)

Today's news that Steve Jobs would be handing over the reins of Apple was a sad moment for me.  Supposedly it's only until June, but I think pretty much everyone knows that it's for good.

I know a lot of people don't like the man, but I do.  He had a vision, which is rare these days.  Sure he had his rough edges, but most people with a single-minded focus on something do--they have no patience for anything that's going to deter them from their goal.  He was one of the rare people who could force massive change by the sheer force of his will and vision.

Most CEO's drive in a reactionary manner, Jobs led the industry around by the ear.  He had an idea in his head about how things should work, forced Apple into that mold, and shook up multiple industries.

You just don't see that kind of character any more.  The industry will certainly be much less interesting without him.

Sadly, I don't think we'll get to see the culmination of his vision, which I think included things like a much more fleshed-out and ubiquitous Mobile.Me service.  It's too bad, because it will probably be a long time before such a charismatic leader with a dynamic vision emerges again.

Cheers Steve, well done

Sorry about all the problems with comments.  Six Apart routinely decides to change the way my blog works and not tell me about it.  Ha ha!  Those wacky pranksters!

Seriously though, comments are broken and Six Apart support seems to be clueless.  I'm going to have to move my blog, which really pisses me off because I have other projects I'd rather be working on.

In any case, until I'm able to port my blog comments are pretty crippled.  I apologize for the inconvenience.

Moral of the story:  Don't lock yourself into proprietary software.  This qualifies as one of those lessons learned the hard way.

I have an obsession with economics.  My wife says I need a new hobby.

I look at it like a puzzle.  Hidden under all the opinions and theories are facts, the things which REALLY dictate where the economy is headed. I've had an obsession with figuring out this puzzle. 

I think I can trace this obsession to my background as a programmer.  That's because 99% of economics can be boiled down to a few mathematical functions, which are a lot like code.

Money, you see, is a recursive function, and I believe programmers who are familiar with this concept are uniquely equipped to understand money.  The ability to understand recursive functions and a willingness to throw everything you think you know about money into the garbage are all that's required.

Whenever I think about the nature of money I'm reminded of this anecdote:

Recursive functions, if you're not a programmer, are routines which call themselves.  Turtles standing on other turtles.  They're one of the hardest concepts for people to comprehend when you're first learning how to program, but they're also extremely elegant and powerful when used properly.

Recursive functions are the basis for much of physics and nature, such as the fractal patterns which can be found everywhere.  They're also the basis for our entire economy.

Money, you see, is a recursive function.

In our system, as weird as it sounds, money is debt, and debt is money.  Every cent of it is created by a bank in response to somebody taking on debt.  Banks are little money factories, quite literally.

I'm going to get into a little bit of economic geekery here, because I forgot how many people don't realize this fundamental fact.  I hear it from people all the time.  And it's important to understand if you want to have any hope at all of grokking the economy.

The Federal Reserve absolutely, positively, does not set interest rates.

The credit markets do.

In a nutshell, rates go up when perceived risk in the economy is low, and rates go down when the perceived risk in the economy is high.  Guess where rates are now. 

The Federal Reserve is just a noisy spoiled toddler screaming at the top of its lungs that it's running the show.  Like parents that don't realize that they're actually in control, we all stupidly listen to the spoiled brat and do what it wants.  Not because we have to, but because we don't know any better.

Want proof?  Grab a cup of coffee or two and read on.

Responsibility is a rare thing.

Pure, unqualified, unadulturated "I will take care of that" is one of the rarest commodities I know of.

Typically what you get is qualified responsibility.  "I'll take care of that IF blah blah blah" or "I'll take care of that AS LONG AS blah blah blah".  Maybe, possibly, I'll try, blah, blah, blah.

Nobody wants to hear that.  It leaves the matter up in the air.  It's weak.  It makes you look like a wimp.

On the flip side, you have to take the lumps when you screw up.  This is the part everybody is afraid of.  Look at the economic meltdown.  Plenty of people with blame here, yet I don't know of a single person who said "yeah, I messed up" except for Alan Greenspan.  Plenty of Senators helped bring you this mess, yet nobody mans up.  Cowards.  All of them.

Hearing "I'll take care of that, I will own it" is one of the most refreshing things I ever hear.  My respect for the person who says it instantly ramps.  Unfortunately hearing it is far too rare.

I don't know what my most embarrassing moment is, but I think you'd be REALLY hard pressed to find one that could possibly top this, possibly in all of human history:

The Most Embarrassing Moment EVER?

On the plus side, life can only go up from there.

I want to quickly point out one very important thing that most people don't realize:

The Federal Reserve Manages Your Expectations.

They don't set interest rates, the market does that.  The only useful tool they have is psychological.  They manage expectations.  And they are not shy about this fact, if you care to look.

What in the world do they want to manage expectations for?  For the simple fact that if people believe in Deflation, they will hang on to their money because it will be worth far more down the road.  This act of hoarding causes Deflation to kick the market's butt even more quickly.

A perfect example of this True Purpose of the Federal Reserve appeared recently in a statement by the president of the Federal Reserve Bank of St. Louis, James Bullard.  A couple of snippets for you to digest:

Yep.  Sure would.  Anything they can do to take the focus off of Deflation and make people focus on inflation is just peachy.

Do you see that?  Normally they manage expectations by announcing changes to the federal funds target rate, but with rates already at zero they are out of ammo (ammo being ANNOUNCEMENTS about rate cuts, not actual rate cuts).  They have to come up with new ways to get people to focus on inflation.  Anything to take your eye off the ball.

Heaven forbid people expect what they're actually going to get.

The reason I bring this up is because I see an awful lot of people under the impression that the government and/or the Federal Reserve Bank are all-powerful and have the ability to steer markets and the economy.  They're most certainly not.  They are not all-powerful, nor can they change the direction of the markets.  All they can do is attempt to freak you out so that you part with your money.

Just keep this in mind next time you hear Bernanke or anyone else in charge of monetary policy talk.  It's all theater designed to keep you spending.

The sad part is, people and companies who buy into this propaganda are going to get their heads cut off by deflation.  Unfortunately the Fed has no reservation at all about throwing you under the bus to slow the decline a little.

One of the key issues that will drive the speed of economic recovery is what's going to happen to SMB's?

Regardless of what you've been told, large businesses and the government do not employ most of the people in this country.  Roughly 80% of the jobs come from small and medium businesses.

That makes them rather important.

However, the response of budget-strapped cities and states so far has been to increase junk fees and taxes on businesses.  It is, after all, less noticeable to the voters--and many people have a hard time connecting to the dots from higher business taxes to being unemployed.

This is called cutting off your nose to spit your face.

The SMB space is the one remaining shining star of hope in the economy.  It is limping along and still has a little bit of capacity to buy things, particularly economically priced things.

However, the knee-jerk reaction of bureaucracy is to stay bloated at all costs, and this tendency is setting up an epic war between common sense and bloated entitlement mindsets.

Stay tuned...