Fred Sauer Matrix

How the Few Inflict Inflation on the Many

The “Carter” years gave the American economy one of its worst sicknesses, stagflation.  In this disease, the economy doesn't grow and government spending does grow, and an oil embargo caused a surge in inflation.  In the 1970s, the annualized rate of inflation peaked at about 12% a year.  But, in recent years another source of inflation originating in the private sector has emerged in a very dramatic way.  In a month of dismal economic news, did anyone see this:

U.S. inflation surged in July primarily because of climbing energy and food prices, but those costs are likely to retreat in coming months as prices for oil, grains, and other raw materials fall in a lagging economy...

The consumer price index jumped by a seasonally adjusted 0.5% in July, up 3.6% from a year earlier, the Labor Department said Thursday.  Higher gasoline prices accounted for about half the gains, reflecting high crude oil prices earlier this year...

The more recent acceleration in core inflation—up at a 3.1% annualized rate over the past three months—could limit the Fed's options in bolstering the recovery.  'There's more inflation than the Fed has been expecting,' said UBS economist Drew Matus...

Fed officials do expect inflation to ease in coming months as commodity prices decline and consumer demand is damped by high unemployment and sluggish wages.  Workers' inflation-adjusted weekly earnings fell 0.1% in July from a month earlier and 1% from a year earlier, the Labor Department said in another report.

It is a government dictum that everyone talk about core inflation without food and fuel, when oil and food prices are rising.  Then, when core inflation is taking off, we discover that their story is core inflation will be tamed by “falling oil and food prices.” 

Everyone who opens a credit card or debit card statement (bank statement) is repeatedly irritated at how food and fuel dominate our daily expenses.  This might make you interested in how we as a nation have inflicted inflation on ourselves because of villains and processes that would be incredibly easy to terminate. 

In business and financial news media, almost every day you read about some disruption in the supply of various things that are important in our lives.  They make it sound like our economy is at the mercy of constant supply disruptions or excesses.

Over the 50 year period between 1960 and 2010, corn consump... Continue

The MF Global Collapse Explained (And Why It Is a Crime)

Anybody using the financial services industry puts their faith and trust in a whole lot of people they have never seen or ever will. We all rely on regulators and regulations that are instituted by state and federal governments.  In fact, almost anybody who has any savings probably has them parked in one of our financial institutions. To sharpen your focus on this, remember that about 80% of the balance of your checking account is tied up in loans that some strangers have promised to repay.

As a test of your thinking, how would you like to invest in this, as described in Wikipedia?

...2005 saw Man Financial make its largest deal with the transformative $323 million acquisition of client assets and accounts from entities of Refco, following the U.S. financial-services group's collapse in late 2005. The Refco deal...boosted Man Financial's scale in retail and institutional business.

In June 2007, Man Financial was spun off from Man Group as a separate, public entity, via an IPO, and renamed MF Global.

When a company spins off a subsidiary in an IPO (initial public offering of stock), it usually prefers to have the proceeds of selling it in lieu continuing operating it. In other words, the sale proceeds would exceed ongoing expected profit.

And so MF Global enters our history. Before its first fiscal year was even completed, there were problems. As Wikipedia details:

On February 28, 2008, MF Global announced a bad debt provision in the amount of $141.5 million. The provision was the result of unauthorized trading by a representative in a MF Global branch office, who on February 27, 2008, while trading in the wheat futures market in his personal account, substantially exceeded his authorized trading limit.

MF Global was fined $10,000,000 by the CFTC [Commodity Futures Trading Commission] over the incident and an unrelated natural gas incident from 2003. The CME Group [Chicago Mercantile Exchange] also fined MF Global $495,000 over the wheat incident.

To follow this company a little more closely, we have selected data to bore in on its financial structure:

This is not a background or performance that would inspire confidence. Wikipedia continues,"

...on March 17, 2008, shares of MF Global plummeted on liquidity fears." Most people would just walk away from something like this. There doesn't seem anything attractive to it. Who could see something in it? It would be none other than a former top executive of Goldman Sachs and recently retired Governor of New Jersey, Jon Corzine. Hmmm?? The combination of John Corzine and MF Global would create toxic waste for a lot of unsuspecting people. 

So, how is it going at MF Global? Not very well. On Monday October 31, 2011, MF Global filed for Chapter 11 bankruptcy. From Bloomberg Business Week:

MF Global listed $39.7 billion in debt and $41 billion in assets in its bankruptcy filing, and said it has about $26 million in cash. About $593 million of MF customer funds are unaccounted for, according to a person with knowledge of regulatory probes into the firms collapse."  

Bankruptcy is a fierce legal fight about who gets what from the financial wreckage of bad business, or what, if anything, each creditor gets. As these disputes rage, it is very important to keep in mind how to measure exactly how much of the money the company actually owns or was put up by the owners themselves. This is critical to understanding all the bad information of the financial press. It sounds like a complicated process, but, in fact, it is very straightforward. The amount of owner's money in a company is the sum of the equity contributed plus profits and minus losses.

An alternative calculation that should produce the same value is the same number as total assets minus total liabilities. So, take $41 billion and subtract $39.7 billion and you get $1.3 billion as the amount of money that the owners of MF Global had provided to do what they did, or the ratio of the people's money to owner's money is 30.5:1. Let's look at their profits since the purchase of the company by its new owners in June 2007.

Other than a profit for the partial first year of business, the cumulative loss for the entire four years was $459 million. Needless to say, this was... Continue