Economics & Finance

It’s Called Replacement Pricing, D*mmit!

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This really chaps my hide.

I’m watching news stories about hurricane Ike and the subsequent rise in gas prices in parts of the country far distant from the storms. Reporters and politicians mumbled confusedly about how prices could be going up already.

I’ll say it one more time for those who can’t be bothered to actually ask someone who owns a gas station. Gas stations set prices for the gas they sell today based on the wholesale price of the gas they will have to buy to replace it. Get it? The price you pay for a gallon today is the cost of the gallon the station will have buy to replace the one you just bought.  

Gas stations sell gas at or near cost, so if they did not use replacement pricing any sudden spike in gas prices would shut them down and you couldn’t get any gas. I simply do not know why our public and private talking heads cannot understand and communicate this simple fact.  

[update (9.13.2008.9:55am): More on gas pricing via Instapundit]

An Interesting Gold-Standard Proposal

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At first glance, Congressman Poe’s plan looks pretty good:

These calculations show that Ron Paul’s gold coin standard fails for the same reason that the classic gold standard failed-there isn’t enough gold in the world to prevent it from being wildly deflationary. Because all America has known for almost 70 years is inflation, many people have forgotten that deflation is much, much worse. The Great Depression was caused by deflation. People want stable money, but they aren’t willing to starve to get it.
 
Fortunately, it is possible to stabilize the dollar and create an economic boom at the same time. Judge Poe’s bill, H.R. 6690, would do this. It would require the Federal Reserve to use its Open Market operations to bring the COMEX price of gold down to $500/oz and keep it there. H.R. 6690 would also give the economy a powerful supply-side stimulus in the form of “first year expensing” of all capital investment.
 
H.R. 6690 defines the value of the dollar in terms of the market value of gold, but does not use gold as money. In this way, Judge Poe’s bill would not create a new and potentially unlimited source of demand for a scarce commodity. This is the key difference between H.R. 6690 and both Ron Paul’s approach and the classic gold standard.

As Paul Craig Roberts (and other people, I am sure) pointed out a long time ago, there are no laws preventing Americans from using gold as currency. The fact that almost no one uses gold as currency suggests that there are strong reasons to prefer paper dollars. The US dollar isn’t bad as currency goes, but it could be improved, mainly by being made less-subject to political caprice. Linking the dollar robustly to the market price of gold would be a big step in the right direction. How well HR 6690 would accomplish this is a different question, however. The devil is always in the details and unintended consequences. Congress might find it difficult to avoid post-hoc tinkering with the rule and thereby returning us to dollar uncertainty. And this bill has no chance of being enacted in the current political environment. But, at first glance, it sounds like the best currency-reform proposal yet.

Box of Trouble

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I am blessed in that I live very near (stumbling distance) to the mega-liquor store Binny’s in River North. Binny’s has every variety of wine and beer known to man (except they don’t stock Trumer Pils) and at reasonable prices, too.

For Christmas someone gave me a wine stopper that you can “pump” the air out of the bottle with and it seals the bottle back up so that it keeps indefinitely (well, I don’t know how long indefinitely is because we typically drink it over a few days, but long enough). This isn’t the one I have (mine is plastic, better if you drop it on the ground a lot) but you get the idea. We also have a little 6 bottle wine refrigerator that we received and keep in the kitchen – this way we can keep the wine at a reasonable temperature (around 60 degrees or so) which means that it is cool but not cold.

With all of these technological upgrades, I have been purchasing more upscale wines, to boot (especially now since the red wines keep longer). I have been buying Pinot Noir in the $30 / range, which buys you quite a nice bottle of wine at Binny’s (something that would cost you $70+ at a restaurant).

Just for grins I was going on a trip and I asked the clerk at Binny’s what the “best box wine” was in the house. He took me over and pointed to the “Black Box” series of wines as he grimaced at my question. I selected the Merlot (which I don’t usually drink) for $16 and off I went.

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Russia and Georgia – An Economic Mistake

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Economic Impact of Georgia Invasion

A recent Wall Street Journal article titled “Borrowing Costs Increase Sharply for Russian Firms” lays out the economic toll that Russia will begin to feel from their invasion of Georgia. Per the article:

“the Georgian conflict has sparked prohibitively funding costs… conditions have deteriorated significantly for Russian borrowers, as reflected by sovereign and corporate-credit spreads, which have widened sharply, substantially increasing the cost of borrowing… but even then, an attractive premium may not be enough to entice investors to participate in deals… the majority of investors won’t want to participate right now. They will prefer to wait for signs of improvement, and right now there are no clear signs.”

For Russian companies seeking debt financing, this war comes at a bad time. The world debt markets are already being roiled by a lack of liquidity and losses, making even solid companies with low credit risk scramble for funding. Now add to this the fact that Russia seems to be actively repelling the West, this makes Russian instruments an even bigger risk.

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