Friday, June 17, 2011

Lemonade Stand

I just finished reading a completely aggravating news article about a kid's lemonade stand being shut down by officials for not having a licence. And they fined the parents $500. As if this wasn't irritating enough, the children were trying to raise money for cancer research.

There is so much wrong here I barely know where to begin. But one aspect of this story reinforced something I've been thinking about for a while, which is how our society has become rigidly attached to the concept of the full-time job, at the expense of entrepreneurship and self-employment. Things are even worse in the US compared to Canada, since people will cling to horrible jobs for no other reason than health benefits. I think Americans completely underestimate what a big deal this is, to be able to leave a job and not have to worry about medical bankruptcy. We also put a lot of importance on having a good job at a big company, while those who work for themselves are not thought of as highly (I have some personal experience with this as a newly self-employed worker trying to qualify for a mortgage).

We hear often that small business creates the most jobs in the economy, which feels true enough although I can't recall ever seeing any hard numbers on this. On the other hand, when the economy tanks I'm sure lots of small businesses go under but you always hear about the big corporations laying off tens of thousands of employees at a time. Think of big and small businesses as trees: the entrepreneurs are the tiny shoots and saplings, while the corporations are the gigantic douglas firs. There are some advantages to the tall trees - they're stronger and usually more stable - but they also don't adapt well to change. The seedlings may or may not survive past their first year or two, but if there are enough of them then many should grow and thrive. In a changing environment, I would rather have a thousand saplings than a few giant oaks.

But it seems like we're chopping down the little shoots to benefit the big trees. There are enormous barriers to start a small business, mainly in the form of regulations. Some of this has to do with our nanny-state mentality (citizens should not eat that street vendor's hot dog until the government has declared it safe). Some of it is simple bureaucracy, which over time naturally tends to get bigger and more complicated. And some of it is corporations trying to stay ahead of the game: they can lobby for advantages, they can spend a comparatively little amount of their budget complying with government taxes and regulations, and they can employ experts to find loopholes. General Electric made a profit but paid no tax last year - how many profitable small businesses (without an army of tax lawyers) do you think got to do that?

I for one would be just fine if the lemonade stand down the block didn't need anyone's permission to do business in the driveway, or need a health inspector to validate that the lemonade was made in a sterile kitchen. While I believe we should be giving small businesses a leg up to encourage entrepreneurs, a flat business tax with no loopholes would at least level the playing field. Think of how vibrant, responsive and resilient our economy would be if we had thousands upon thousands of people with new ideas starting small businesses constantly. And the unemployed would not be forced into weeks or months of printing resumes and hoping someone will give them a job; they would have the option and a reasonable opportunity to create a job for themselves.

Instead, we now have a couple more children who tried to take some initiative to make the world a better place, and learned that you're not allowed to do that.

Friday, April 1, 2011


So the way I currently understand it, if gold is an interesting investment alternative, then silver is utterly fascinating. Gold and silver have often been used in tandem as units of money, silver being the "poor man's gold" mainly due to it being more abundant. Silver shares all the same properties of money as gold. If gold is worth something as a store of wealth, how do you value silver?

Throughout most of history, the gold-silver ratio has been around 15. This would imply that there is about 15 times more silver than gold. Apparently, silver is about 16 times more abundant in the earth's crust, so I guess the historical ratio is pretty close. If we know approximately how much gold and how much silver there is in the world, we should be able to do a rough calculation to see if this makes sense. I think it's important to know how much of each metal has been mined and is lying around somewhere on earth, and how much is being added to that cumulative total each year. And how much is being used up.

Most commodities have a somewhat predictable relationship of supply to price, although the time lags can be several years. For example, if people decide they need more zinc, demand goes up, meaning the price will go up, which now makes it more profitable to open a new zinc mine, which (eventually, after all the environmental assessments, permits, geology, building infrastructure, etc.) will result in more zinc on the market, and prices will adjust down. But silver, unlike most other metals, is usually mined as a byproduct of another mine like gold or lead; there aren't too many primary silver mines in the world. Which means it's that much harder for silver to respond to the supply-demand laws of economics. If the demand for silver goes way up, the price will rise but it will be very difficult for the market to create new supply as there just aren't the massive silver deposits sitting in the ground waiting to be mined. So the price of silver might stay high.

An extension to this is the scrap market. There are a couple of reasons why reusing silver is problematic. First of all, when silver is used industrially it is generally in minute quantities, which makes recovery expensive. How much time and effort does it take to recycle a few milligrams of silver from a circuit board? (It's these tiny amounts that also make silver relatively price-inelastic for industry.) And second, much "scrap" silver is in the form of silverware and other heirlooms that generally aren't for sale. For instance, the amount of silver scrap increased only about 50% in the late 1970s while the price of silver was going up 1000%.

As most people know, silver used to be used mainly in photographic film, and digital cameras have basically become the entire market. However, while photographic use of silver drops to zero, countless other industries are finding that silver is unique and irreplaceable. The main uses of silver these days is in electronics (silver being the single best electrical conductor) and also increasingly as an antibacterial agent. It is used in microscopic quantities, meaning (a) it is hard to recycle, and (b) it is fairly inelastic. A recent Kitco article projects industrial demand for silver to increase by 35% over the next five years. This would bring the demand from industry pretty close to the annual mining supply - which doesn't leave a lot of room for investment demand.

According to the World Gold Council, about 150,000 tonnes of gold have ever been mined, give or take. A few ounces have been lost or buried in dead people's dental work, but basically most of it is still around. (That sort of confirms its constant value over time: gold has never been so worthless that it gets lost.) This works out to a little more than 4 billion ounces, and mining can only increase the supply about 2-3% a year.

Data on silver is for some reason harder to nail down. My best guess for all the silver ever mined in history is a little over 40 billion ounces, or roughly ten times the historical figure for gold. Annual mining produces about 700 million new ounces a year, and like gold this supply does not change much regardless of price or other factors. So at best, there is ten times as much gold as silver, and the supply of both is quite consistent. But: while upwards of 95% of all gold ever mined is still around, a much lower percentage of silver still exists. One estimate is about 50%, meaning the other half has been consumed by industry, or is in landfills. And only a small fraction of this is in bullion form; the rest is jewelry and other artifacts that make is more difficult to obtain for investment.

So these admittedly rough estimates indicate that the ratio of silver to gold (the actual, tangible metals, not their prices) is a high of 10:1, and could be 5:1 or possibly lower.

The gold-silver price ratio has usually been around 15 or so for most of history due to the geologic availability of the two metals. It currently sits at 37.8. If the ratio were simply to revert to the average, the price of silver would go up to around $95 from $38 today (assuming the price of gold does not change). If the ratio hits 10:1 or even 5:1, then silver would be worth $143 or $287 respectively. If the dollar bears are right and gold continues to go up, you can double or triple all these prices.

Even if this whole fiat money/gold thesis is wrong and gold goes down, there's an excellent chance that silver will hold its own, due to the gold-silver ratio correction and to its own unique industrial demand. The only way I can see silver going down (apart from paper manipulation, but that's another story and should be unwinding soon anyway) is if a massive silver deposit was suddenly discovered, far bigger than anything ever found. It would have to be the silver equivalent of three or four new Saudi Arabias flooding the oil market. Apart from that, the downside risks are so low and the upside is so high.

Some very logical and sane people have been calling this a once-in-a-generation opportunity for while now. And it should continue, at least until we get either 1) a gold-backed currency, 2) double-digit interest rates to combat inflation, or 3) your cab driver starts asking you how much silver you own.

Monday, February 7, 2011


For the last few thousand years and without a lot of economists or central bankers needed to officially proclaim it, gold has been the most widely-used form of money. This is because it meets all the criteria: it's easy to divide, hard to create more out of thin air, is the same everywhere you go, lasts forever, and you wouldn't want to eat it. Once gold is generally accepted as money, you know that the gold coin you took in today will be worth about the same when you go to buy something with it later. In fact, the value of gold - what it can be exchanged for - is amazingly consistent over time. Goods like a house or a bushel of wheat cost, in gold, roughly the same now as they did hundreds of years ago. Try that with dollars.

The last 40 years has been the only time in human history where practically all of the world's money has been backed by nothing more than government promises, instead of something real like gold. The currency system we have now is actually a very new experiment and is quite different from the way things have usually been done.

If you want to see the US dollar experiment in numbers, go to and check out the US Official Price and New York Market Price between 1800 and 2009. You'll notice a few interesting things. The first is the official and market price were amazingly similar for most of this period; this is because the dollar was literally convertible into gold, so there was no need to have a premium. For a few years around times of war, there was a slight premium. The official rate jumped once during the great depression as FDR set a new price (basically a one-time cash grab). He also made it illegal for citizens to own gold, so the market price during this time may not be a true indication. But in 1968 things get interesting. After 20 years of Bretton Woods (US dollar backed by gold, every other world currency tied to the USD), the French started getting suspicious that the gold was actually there, and had the nerve to ask for some in exchange for their US dollars. A couple of years later, Nixon decreed that nobody could convert USD into gold - look at the market price of gold after that. All hell breaks loose as the market tries to figure out what a dollar is worth, after about 200 years of the stability of gold.

Not so coincidentally, during the last 40 years the US has increased their money supply by a factor of 20. This is what happens when you go from the discipline of a hard currency, where you have to back up its worth with something tangible, to a fiat currency. ["Fiat" is not an attempt to insult a currency by comparing it to a repair-prone Italian automobile. It is Latin for "let it be" or "let it be done", as in fiat lux - let there be light. The idea is that it is created out of thin air.]

According to the official inflation rate, a dollar in 1971 would be worth about 18 cents today. So this represents about a five-fold drop in the dollar. Why not twenty-fold? Good question - I'm not sure. Part of the answer probably has to do with the "official" inflation statistics. The government has strong incentives to underreport inflation, so that it doesn't have to pay higher cost-of-living adjustments and also so people generally think things are sunnier than they may in fact be. Just why is food not included in the calculation? John Williams at has the best information about this and is a highly recommended read.

It's also possible that the world has spent the last 40 years trying to discover what a dollar is worth, and it's a moving target that we may not have caught up to yet. Maybe there's still another 75% drop in the dollar's purchasing power yet to come. And this is assuming the money supply does not keep increasing, which it almost certainly will. That's what quantitative easing is: creating money - lots of it - out of nothing.

If I had to choose something to bury in a metal box in my backyard that I wouldn't dig up for ten years, it would be gold, not paper currency. Cash has a good chance of declining in value, perhaps by quite a bit. Gold could go up or down, but given it's history over a few millennia it will probably have the same purchasing power ten years from now. In this sense gold isn't really a speculation, it's more of a conservative way to try to safeguard your wealth. The really risky thing to do is to leave a huge amount of cash in the bank. Even if inflation is modest the value of those dollars slowly evaporates; if inflation is not so tame, the decline is not so slow. Just ask anyone who had a bank account in Argentina ten years ago.

Gold is ingrained in many cultures as wealth, and it's unlikely that Chinese or Indians will wake up one day and no longer value gold. Jewelry buying is essentially saving in these countries, just like the primary function of the family silver was not its utility as eating utensils, but as portable wealth. Gold should continue to hold its value while fiat currencies, well, probably won't.

Sunday, February 6, 2011


I've become completely fascinated in trying to figure out what what is going on in the financial world, and trying to understand how money works. I could go on for hours, but in brief here's where I'm at:

1) In a basic economy, we could all be self-sufficient - meaning we would have to grow our own food, build and fix our own equipment, cut our own hair, etc.

2) Being able to specialize is more efficient, at least in the thing you specialize in. If I do nothing but make soap all day, for example, I can make more soap, and probably better and more quickly, than somebody who tries to make soap after plowing the wheat fields, feeding the ostriches and fixing the toaster.

3) If I can trade my soap for someone else's wheat, at a fair ratio, we both come out ahead. This is bartering.

4) Bartering is a pain in the ass. You have a bunch of ostrich meat and want some of my soap, but I don't particularly care for ostrich burgers. Now what?

5) Money, that's what. Instead of you waiting for me to acquire a taste for ostrich delicacies, you can "sell" your meat to someone who does like it, in exchange for a commonly accepted unit of value. Then you can give that "money" to me and I'll give you some soap, because I know I can then give that money to someone else for something I really want (like licorice allsorts).

6) Money only works if everyone agrees to it. If the guy who make the allsorts doesn't accept the money you gave me, I have a problem. And I'm unlikely to take your money next time you need a bar of soap.

7) For money to work, it needs to be easily divisible. If we decided to use bicycles as money, we'd have a hard time buying something for half a bicycle. Well, a unicycle might work, but you can see how this would get tricky.

8) Money should also be consistent (the fancy word is "fungible"). Meaning a unit of money is the same everywhere. If I accept your bicycle for my soap, is this bicycle worth more, less or the same as another bicycle (maybe with a banana seat and tasseled handlebars, or a 24-gear ultralight mountainbike) also being used as money.

9) It's very handy if what we use for money is compact. Firewood might make an acceptable form of money, but if you needed to buy anything of value, you'd need a truckload to pay for it.

10) Most importantly, whatever we use for money should be in limited supply. If we decide to use pineapples as currency, then all you'd need to do is open a pineapple plantation and you'd be rich after a couple of growing seasons.

11) A good choice for money is one that is relatively permanent. Having a vault full of decomposed pineapples wouldn't really be a good store of value. Basically, money is a unit of measure, and it would be nice if the measuring stick didn't change, physically or otherwise.

12) Also, if pineapples were money and I knew you had a plantation, I might charge you two pineapples for a bar of soap today, but five pineapples next year. Because I know there are more pineapples around, especially compared to my limited supply of handcrafted soap. This is inflation, which when you get down to it is nothing more than your basic supply and demand.

13) If I didn't know you were creating pineapples out of thin air, I would continue to think they were in constant supply, and would likely continue to charge only two pineapples for my soap. So, inflation doesn't happen immediately - there is a time lag between the increase in the amount of money and the awareness that this is happening.

14) If you create more pineapples and I don't start charging you more pineapples for my soap, then pretty soon you would be able to buy all my soap and still have pineapples left over to spend elsewhere. In other words you'd grow rich - at my expense - only because you created more units of money. Not because you suddenly became more efficient or better at anything.

15) OK, growing pineapples does have some inherent value added. You can eat them too. It's almost better for a currency to have no other practical use. Using pineapples can get confusing because sometimes you would want a pineapple as a store of value to trade for something else later on, and sometimes you might just be hungry for a pineapple. Or think of copper pennies: if the price of copper were three cents per penny, it would make sense to buy a bunch of pennies and melt them down into plumbing parts for resale. Which also takes them out of circulation and impacts the money supply-demand curve (eventually making it hard to know what a penny is really worth - is it one cent as money, or three cents as a slug of base metal?).

16) Reducing the money supply - taking money out of circulation - is deflation. Eventually, the money that's left is worth more because there's less of it. Or to say it another way, under deflation your money is worth more compared to stuff, so prices go down (eventually). When deflation happens, keeping your money under the mattress is actually a good thing. Because loans and debt are considered part of the money supply, a lot of people think that financial crisis will result in significant defaults - bad debts to be written off - which would shrink the money supply and cause deflation. I'm not so sure I fully understand this, but of the parts I think I do understand I'm not sure I agree. Even if imploding loans are deflationary, it seems to be more than offset by the Fed injecting more money into the system. Ben Bernanke's theory of the great depression is that is was caused by deflation, and now thinks it's better to print money and drop it from helicopters than to risk repeating that deflation. I have no idea if his theory is correct or not, but I am convinced if there's any hint of deflation on Bernanke's watch then the Fed will throw trillions of new dollars at it.

17) If you have a lot of debt and the interest payments are expensive, deflation makes it more expensive while inflation makes it easier to pay in the future. If you promise to pay me two pineapples a year for a bar of my soap, you'll find it harder to pay next year if your pineapple crop is decimated by monkeys. On the other hard, you'll be laughing at how cheap my soap is if you have a bumper crop and are able to grow ten times more pineapples next year. Inflation can be a deliberate strategy for a country which controls its own money supply to lessen its debt burden.

18) The economy is a complicated system and nobody has pinpoint control over it or can predict exactly what will happen, or in what time frame. Central bankers are piloting huge supertankers, not little motorboats, and navigation is slow to respond and imprecise. Quantitative easing and other money-creating tricks for the purpose of avoiding deflation, stimulating the economy or whatever reason, can very easily go too far in the other (inflationary) direction. Or could have other unpredicted results.

19) At some point, if you grow so many pineapples that the world is anyone can get as many as they like, then nobody wants pineapples anymore and they become worthless. You'll have to give me something else if you want my soap.

So, basically money is an easy way to convert soap into licorice allsorts, as long as everyone agrees to it and promises to keep doing so into the future. Big changes in the supply of money have a direct impact on what it can be exchanged for and how much.

Wednesday, January 26, 2011

City of Champions

Today Wayne Gretzky turns 50. As you might expect, this is something of a celebration in Edmonton. Among the many entertaining anecdotes I heard today was a nugget from John Short, who is a local sportscasting legend and was involved with the Oilers during the Boys on the Bus years. He said 99 is revered in this town not just because he was a unique talent, but also because he forced Edmonton to "grow up" and realize we can be the best in the world at something. I wasn't here at the time, but my take is Edmonton changed from a modest town to a great city during these years. An attitude shift.

I wonder if Edmonton has lost a bit of that self-confidence. We're constantly comparing our city to Calgary, and the bitching about the Centre of the Universe never ends (although Toronto-bashing seems to be what unites Canadians, outside of Toronto). This is timely since we are in the middle of a debate about a new hockey arena. For some reason the existing one won't cut it anymore. I'm not sure why, exactly, although I can vouch that it is cramped in there. So, we seem to have come to a general consensus that a new arena will happen, and that it will be downtown. The downtown part was not always assured - the usual arguments about lack of parking being the main opposition. But the Katz Group, owners of the Oilers, and mayor Stephen Mandel at least seem to agree that a downtown location could spur a revitalization effort if done properly. I'm all for this - make the city centre more attractive and vital, help curb urban sprawl, get people out of their cars and instead walk or take the LRT to the game, and maybe grab a meal before or a drink after. It's not a magic bullet of new urbanism, but it makes a lot of sense and seems to have been successful in a few other cities as well.

But. The devil is in the details. The proposed "sports and entertainment district" is now bogged down with questions about money. Who pays? Who owns it? Who would run it? As best I can tell so far, Oilers owner Daryl Katz is willing to put up $100 million of the total project cost of $400-$450 million. Some costs could be offset by a ticket tax or Community Revitalization Levy (CRL) over a  couple of decades. Now we're in the middle of figuring out how much if any public money will go into the project. We could be talking the other $350 million here. Councillor Don Iveson has stated he is generally for downtown revitalization, but has been asking the toughest questions on the particulars of the Katz proposal. So nobody's really sure how things will turn out.

I don't want my tax money spent frivolously. But I look at the things we have spent big bucks on recently (the $260 million overpass at 23rd Ave and Gateway, which as far as I can tell helps only the merchants at South Edmonton Common) and wonder if we can't think big for a change. Think about being great again. Yes, we can get caught up in our dreams, and a little dose of reality is a good thing. But like a family on a tight budget, you have to watch your pennies, but still go out and treat yourself to a night out once in a while.

One columnist, Peter Adler, has been opposed to the very concept of a downtown arena from the beginning: "they just don't work" he writes. He goes on to point out that our side streets in Edmonton are covered with snow and need to be plowed. Reminds me of the opponents to the Olympic bids in Toronto and Vancouver: how can we spend big money on something so unnecessary when we still have homeless and poor people?

We can always do better with addressing poverty and homelessness. I wish my street was plowed regularly when it snows. But I want something to feel great about as well. This used to be the City of Champions, because of successes by its football and hockey teams. The pride and positive attitude of its citizens is not something easily calculated in the budget, but it matters. We ought to think about great things again.

Or, another way to look at it is if we're going to blow a few hundred mil as a city, it may as well be on something that makes us look good, and feel good, instead of a cement overpass.

Happy birthday Wayne. Here's to another 49 years.