Epsilon-delta limit definition 1

WEBVTT
Kind: captions
Language: en

00:00:00.900 --> 00:00:02.810
Let me draw a function
that would be interesting

00:00:02.810 --> 00:00:04.490
to take a limit of.

00:00:04.490 --> 00:00:06.880
And I'll just draw it visually
for now, and we'll do some

00:00:06.880 --> 00:00:08.390
specific examples
a little later.

00:00:08.390 --> 00:00:11.870
So that's my y-axis,
and that's my x-axis.

00:00:11.870 --> 00:00:14.180
And let;s say the function
looks something like--

00:00:14.180 --> 00:00:15.950
I'll make it a fairly
straightforward function

00:00:15.950 --> 00:00:19.760
--let's say it's a line,
for the most part.

00:00:19.760 --> 00:00:23.100
Let's say it looks just
like, accept it has a

00:00:23.100 --> 00:00:27.080
hole at some point.

00:00:27.080 --> 00:00:28.690
x is equal to a, so
it's undefined there.

00:00:28.690 --> 00:00:32.030
Let me black that point
out so you can see that

00:00:32.030 --> 00:00:33.110
it's not defined there.

00:00:33.110 --> 00:00:38.780
And that point there
is x is equal to a.

00:00:38.780 --> 00:00:45.180
This is the x-axis, this is
the y is equal f of x-axis.

00:00:45.180 --> 00:00:47.120
Let's just say
that's the y-axis.

00:00:47.120 --> 00:00:51.030
And let's say that this
is f of x, or this is

00:00:51.030 --> 00:00:53.880
y is equal to f of x.

00:00:53.880 --> 00:00:55.740
Now we've done a bunch
of videos on limits.

00:00:55.740 --> 00:00:57.160
I think you have an
intuition on this.

00:00:57.160 --> 00:00:59.850
If I were to say what is the
limit as x approaches a,

00:00:59.850 --> 00:01:04.020
and let's say that this
point right here is l.

00:01:04.020 --> 00:01:06.480
We know from our previous
videos that-- well first of all

00:01:06.480 --> 00:01:10.940
I could write it down --the
limit as x approaches

00:01:10.940 --> 00:01:13.690
a of f of x.

00:01:13.690 --> 00:01:17.560
What this means intuitively is
as we approach a from either

00:01:17.560 --> 00:01:20.980
side, as we approach it from
that side, what does

00:01:20.980 --> 00:01:22.290
f of x approach?

00:01:22.290 --> 00:01:27.030
So when x is here,
f of x is here.

00:01:27.030 --> 00:01:29.490
When x is here, f
of x is there.

00:01:29.490 --> 00:01:33.080
And we see that it's
approaching this l right there.

00:01:35.950 --> 00:01:40.320
And when we approach a from
that side-- and we've done

00:01:40.320 --> 00:01:42.200
limits where you approach from
only the left or right side,

00:01:42.200 --> 00:01:44.750
but to actually have a limit it
has to approach the same thing

00:01:44.750 --> 00:01:48.670
from the positive direction and
the negative direction --but as

00:01:48.670 --> 00:01:52.380
you go from there, if you pick
this x, then this is f of x.

00:01:52.380 --> 00:01:54.440
f of x is right there.

00:01:54.440 --> 00:01:57.460
If x gets here then it goes
here, and as we get closer and

00:01:57.460 --> 00:02:03.860
closer to a, f of x approaches
this point l, or this value l.

00:02:03.860 --> 00:02:06.600
So we say that the limit
of f of x ax x approaches

00:02:06.600 --> 00:02:07.960
a is equal to l.

00:02:07.960 --> 00:02:09.640
I think we have that intuition.

00:02:09.640 --> 00:02:13.360
But this was not very, it's
actually not rigorous at all

00:02:13.360 --> 00:02:15.480
in terms of being specific
in terms of what we

00:02:15.480 --> 00:02:16.290
mean is a limit.

00:02:16.290 --> 00:02:19.340
All I said so far is as
we get closer, what does

00:02:19.340 --> 00:02:21.440
f of x get closer to?

00:02:21.440 --> 00:02:27.360
So in this video I'll attempt
to explain to you a definition

00:02:27.360 --> 00:02:29.360
of a limit that has a little
bit more, or actually a lot

00:02:29.360 --> 00:02:32.180
more, mathematical rigor than
just saying you know, as x gets

00:02:32.180 --> 00:02:36.990
closer to this value, what
does f of x get closer to?

00:02:36.990 --> 00:02:39.290
And the way I think about it's:
kind of like a little game.

00:02:39.290 --> 00:02:48.640
The definition is, this
statement right here means that

00:02:48.640 --> 00:02:55.150
I can always give you a range
about this point-- and when I

00:02:55.150 --> 00:02:57.190
talk about range I'm not
talking about it in the whole

00:02:57.190 --> 00:03:00.960
domain range aspect, I'm just
talking about a range like you

00:03:00.960 --> 00:03:05.980
know, I can give you a distance
from a as long as I'm no

00:03:05.980 --> 00:03:12.360
further than that, I can
guarantee you that f of x is go

00:03:12.360 --> 00:03:16.160
it not going to be any further
than a given distance from l

00:03:16.160 --> 00:03:18.030
--and the way I think about it
is, it could be viewed

00:03:18.030 --> 00:03:18.490
as a little game.

00:03:18.490 --> 00:03:21.840
Let's say you say, OK Sal,
I don't believe you.

00:03:21.840 --> 00:03:29.900
I want to see you know, whether
f of x can get within 0.5 of l.

00:03:29.900 --> 00:03:37.460
So let's say you give me 0.5
and you say Sal, by this

00:03:37.460 --> 00:03:39.760
definition you should always
be able to give me a range

00:03:39.760 --> 00:03:46.330
around a that will get f of
x within 0.5 of l, right?

00:03:46.330 --> 00:03:49.980
So the values of f of x are
always going to be right in

00:03:49.980 --> 00:03:51.160
this range, right there.

00:03:51.160 --> 00:03:54.300
And as long as I'm in that
range around a, as long as I'm

00:03:54.300 --> 00:03:57.890
the range around you give me, f
of x will always be at least

00:03:57.890 --> 00:04:00.030
that close to our limit point.

00:04:02.820 --> 00:04:07.830
Let me draw it a little bit
bigger, just because I think

00:04:07.830 --> 00:04:10.870
I'm just overriding the same
diagram over and over again.

00:04:10.870 --> 00:04:16.770
So let's say that this is f of
x, this is the hole point.

00:04:16.770 --> 00:04:19.340
There doesn't have to be a hole
there; the limit could equal

00:04:19.340 --> 00:04:21.020
actually a value of the
function, but the limit is more

00:04:21.020 --> 00:04:22.560
interesting when the function
isn't defined there

00:04:22.560 --> 00:04:23.910
but the limit is.

00:04:23.910 --> 00:04:28.770
So this point right here-- that
is, let me draw the axes again.

00:04:31.530 --> 00:04:44.010
So that's x-axis, y-axis x,
y, this is the limit point

00:04:44.010 --> 00:04:47.310
l, this is the point a.

00:04:47.310 --> 00:04:49.630
So the definition of the limit,
and I'll go back to this in

00:04:49.630 --> 00:04:52.690
second because now that it's
bigger I want explain it again.

00:04:52.690 --> 00:04:58.090
It says this means-- and this
is the epsilon delta definition

00:04:58.090 --> 00:05:01.260
of limits, and we'll touch on
epsilon and delta in a second,

00:05:01.260 --> 00:05:05.790
is I can guarantee you that
f of x, you give me any

00:05:05.790 --> 00:05:08.860
distance from l you want.

00:05:08.860 --> 00:05:10.450
And actually let's
call that epsilon.

00:05:10.450 --> 00:05:12.590
And let's just hit on
the definition right

00:05:12.590 --> 00:05:13.050
from the get go.

00:05:13.050 --> 00:05:17.090
So you say I want to be no more
than epsilon away from l.

00:05:17.090 --> 00:05:19.510
And epsilon can just be any
number greater, any real

00:05:19.510 --> 00:05:20.960
number, greater than 0.

00:05:20.960 --> 00:05:24.320
So that would be, this distance
right here is epsilon.

00:05:24.320 --> 00:05:27.810
This distance there is epsilon.

00:05:27.810 --> 00:05:30.480
And for any epsilon you give
me, any real number-- so this

00:05:30.480 --> 00:05:36.810
is, this would be l plus
epsilon right here, this would

00:05:36.810 --> 00:05:43.030
be l minus epsilon right here
--the epsilon delta definition

00:05:43.030 --> 00:05:48.030
of this says that no matter
what epsilon one you give me, I

00:05:48.030 --> 00:05:51.650
can always specify a
distance around a.

00:05:51.650 --> 00:05:54.000
And I'll call that delta.

00:05:54.000 --> 00:05:57.710
I can always specify
a distance around a.

00:05:57.710 --> 00:06:02.320
So let's say this is delta
less than a, and this

00:06:02.320 --> 00:06:04.440
is delta more than a.

00:06:04.440 --> 00:06:05.365
This is the letter delta.

00:06:09.970 --> 00:06:15.680
Where as long as you pick an x
that's within a plus delta and

00:06:15.680 --> 00:06:19.440
a minus delta, as long as the x
is within here, I can guarantee

00:06:19.440 --> 00:06:23.160
you that the f of x, the
corresponding f of x is going

00:06:23.160 --> 00:06:24.350
to be within your range.

00:06:24.350 --> 00:06:26.060
And if you think about it
this makes sense right?

00:06:26.060 --> 00:06:29.630
It's essentially saying, I can
get you as close as you want to

00:06:29.630 --> 00:06:32.980
this limit point just by-- and
when I say as close as you

00:06:32.980 --> 00:06:36.430
want, you define what you want
by giving me an epsilon; on

00:06:36.430 --> 00:06:38.940
it's a little bit of a game
--and I can get you as close as

00:06:38.940 --> 00:06:43.000
you want to that limit point by
giving you a range around the

00:06:43.000 --> 00:06:44.680
point that x is approaching.

00:06:44.680 --> 00:06:49.420
And as long as you pick an x
value that's within this range

00:06:49.420 --> 00:06:52.570
around a, long as you pick an x
value around there, I can

00:06:52.570 --> 00:06:55.440
guarantee you that f of x will
be within the range

00:06:55.440 --> 00:06:57.290
you specify.

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Just make this a little bit
more concrete, let's say you

00:07:01.270 --> 00:07:04.490
say, I want f of x to be within
0.5-- let's just you know, make

00:07:04.490 --> 00:07:05.380
everything concrete numbers.

00:07:05.380 --> 00:07:11.750
Let's say this is the number 2
and let's say this is number 1.

00:07:11.750 --> 00:07:16.575
So we're saying that the limit
as x approaches 1 of f of x-- I

00:07:16.575 --> 00:07:18.880
haven't defined f of x, but it
looks like a line with the hole

00:07:18.880 --> 00:07:21.480
right there, is equal to 2.

00:07:21.480 --> 00:07:23.820
This means that you can
give me any number.

00:07:23.820 --> 00:07:27.380
Let's say you want to try it
out for a couple of examples.

00:07:27.380 --> 00:07:30.220
Let's say you say I want f of x
to be within point-- let me do

00:07:30.220 --> 00:07:35.680
a different color --I want f
of x to be within 0.5 of 2.

00:07:35.680 --> 00:07:39.970
I want f of x to be
between 2.5 and 1.5.

00:07:39.970 --> 00:07:45.650
Then I could say, OK, as long
as you pick an x within-- I

00:07:45.650 --> 00:07:48.190
don't know, it could be
arbitrarily close but as long

00:07:48.190 --> 00:07:50.920
as you pick an x that's --let's
say it works for this function

00:07:50.920 --> 00:07:57.790
that's between, I don't
know, 0.9 and 1.1.

00:07:57.790 --> 00:08:02.980
So in this case the delta from
our limit point is only 0.1.

00:08:02.980 --> 00:08:09.320
As long as you pick an x that's
within 0.1 of this point, or 1,

00:08:09.320 --> 00:08:13.640
I can guarantee you that your
f of x is going to

00:08:13.640 --> 00:08:15.740
lie in that range.

00:08:15.740 --> 00:08:17.220
So hopefully you get a little
bit of a sense of that.

00:08:17.220 --> 00:08:19.750
Let me define that with the
actual epsilon delta, and this

00:08:19.750 --> 00:08:22.580
is what you'll actually see in
your mat textbook, and then

00:08:22.580 --> 00:08:24.110
we'll do a couple of examples.

00:08:24.110 --> 00:08:26.730
And just to be clear, that
was just a specific example.

00:08:26.730 --> 00:08:29.870
You gave me one epsilon and I
gave you a delta that worked.

00:08:29.870 --> 00:08:36.270
But by definition if this is
true, or if someone writes

00:08:36.270 --> 00:08:40.290
this, they're saying it doesn't
just work for one specific

00:08:40.290 --> 00:08:42.900
instance, it works for
any number you give me.

00:08:42.900 --> 00:08:48.800
You can say I want to be within
one millionth of, you know, or

00:08:48.800 --> 00:08:52.180
ten to the negative hundredth
power of 2, you know, super

00:08:52.180 --> 00:08:55.590
close to 2, and I can always
give you a range around this

00:08:55.590 --> 00:09:00.270
point where as long as you pick
an x in that range, f of x will

00:09:00.270 --> 00:09:03.540
always be within this range
that you specify, within that

00:09:03.540 --> 00:09:08.240
were you know, one trillionth
of a unit away from

00:09:08.240 --> 00:09:09.470
the limit point.

00:09:09.470 --> 00:09:11.270
And of course, the one thing
I can't guarantee is what

00:09:11.270 --> 00:09:12.760
happens when x is equal to a.

00:09:12.760 --> 00:09:15.580
I'm just saying as long as you
pick an x that's within my

00:09:15.580 --> 00:09:17.950
range but not on a, it'll work.

00:09:17.950 --> 00:09:21.720
Your f of x will show up to be
within the range you specify.

00:09:21.720 --> 00:09:23.680
And just to make the math
clear-- because I've been

00:09:23.680 --> 00:09:26.250
speaking only in words so far
--and this is what we see the

00:09:26.250 --> 00:09:33.460
textbook: it says look, you
give me any epsilon

00:09:33.460 --> 00:09:35.810
greater than 0.

00:09:35.810 --> 00:09:37.390
Anyway, this is a
definition, right?

00:09:37.390 --> 00:09:41.730
If someone writes this they
mean that you can give them any

00:09:41.730 --> 00:09:52.800
epsilon greater than 0, and
then they'll give you a delta--

00:09:52.800 --> 00:09:56.590
remember your epsilon is how
close you want f of x to be

00:09:56.590 --> 00:09:57.760
to your limit point, right?

00:09:57.760 --> 00:10:00.530
It's a range around f of x
--they'll give you a delta

00:10:00.530 --> 00:10:04.860
which is a range
around a, right?

00:10:04.860 --> 00:10:05.520
Let me write this.

00:10:05.520 --> 00:10:11.830
So limit as approaches a
of f of x is equal to l.

00:10:11.830 --> 00:10:15.210
So they'll give you a delta
where as long as x is no more

00:10:15.210 --> 00:10:23.025
than delta-- So the distance
between x and a, so if we pick

00:10:23.025 --> 00:10:27.950
an x here-- let me do another
color --if we pick an x here,

00:10:27.950 --> 00:10:31.340
the distance between that value
and a, as long as one, that's

00:10:31.340 --> 00:10:34.840
greater than 0 so that x
doesn't show up on top of a,

00:10:34.840 --> 00:10:37.980
because its function might be
undefined at that point.

00:10:37.980 --> 00:10:40.750
But as long as the distance
between x and a is greater

00:10:40.750 --> 00:10:45.400
than 0 and less than this x
range that they gave you,

00:10:45.400 --> 00:10:46.450
it's less than delta.

00:10:46.450 --> 00:10:49.930
So as long as you take an x,
you know if I were to zoom the

00:10:49.930 --> 00:10:55.680
x-axis right here-- this is a
and so this distance right here

00:10:55.680 --> 00:10:59.240
would be delta, and this
distance right here would be

00:10:59.240 --> 00:11:03.920
delta --as long as you pick an
x value that falls here-- so as

00:11:03.920 --> 00:11:07.520
long as you pick that x value
or this x value or this x value

00:11:07.520 --> 00:11:10.560
--as long as you pick one of
those x values, I can guarantee

00:11:10.560 --> 00:11:17.010
you that the distance between
your function and the limit

00:11:17.010 --> 00:11:19.670
point, so the distance between
you know, when you take one of

00:11:19.670 --> 00:11:23.460
these x values and you evaluate
f of x at that point, that the

00:11:23.460 --> 00:11:27.170
distance between that f of x
and the limit point is

00:11:27.170 --> 00:11:31.560
going to be less than the
number you gave them.

00:11:31.560 --> 00:11:36.470
And if you think of, it seems
very complicated, and I have

00:11:36.470 --> 00:11:38.690
mixed feelings about where
this is included in most

00:11:38.690 --> 00:11:39.640
calculus curriculums.

00:11:39.640 --> 00:11:42.345
It's included in like the, you
know, the third week before you

00:11:42.345 --> 00:11:44.670
even learn derivatives, and
it's kind of this very mathy

00:11:44.670 --> 00:11:47.560
and rigorous thing to think
about, and you know, it tends

00:11:47.560 --> 00:11:49.720
to derail a lot of students and
a lot of people I don't think

00:11:49.720 --> 00:11:53.010
get a lot of the intuition
behind it, but it is

00:11:53.010 --> 00:11:54.050
mathematically rigorous.

00:11:54.050 --> 00:11:56.910
And I think it is very valuable
once you study you know, more

00:11:56.910 --> 00:11:58.910
advanced calculus or
become a math major.

00:11:58.910 --> 00:12:01.330
But with that said, this
does make a lot of sense

00:12:01.330 --> 00:12:02.160
intuitively, right?

00:12:02.160 --> 00:12:05.550
Because before we were talking
about, look you know, I can get

00:12:05.550 --> 00:12:12.945
you as close as x approaches
this value f of x is going

00:12:12.945 --> 00:12:13.960
to approach this value.

00:12:13.960 --> 00:12:17.620
And the way we mathematically
define it is, you say Sal,

00:12:17.620 --> 00:12:19.970
I want to be super close.

00:12:19.970 --> 00:12:22.180
I want the distance to be
f of x [UNINTELLIGIBLE].

00:12:22.180 --> 00:12:25.640
And I want it to be
0.000000001, then I can always

00:12:25.640 --> 00:12:29.540
give you a distance around x
where this will be true.

00:12:29.540 --> 00:12:31.320
And I'm all out of
time in this video.

00:12:31.320 --> 00:12:34.260
In the next video I'll do some
examples where I prove the

00:12:34.260 --> 00:12:38.120
limits, where I prove some
limit statements using

00:12:38.120 --> 00:12:39.330
this definition.

00:12:39.330 --> 00:12:43.370
And hopefully you know, when we
use some tangible numbers, this

00:12:43.370 --> 00:12:45.440
definition will make a
little bit more sense.

00:12:45.440 --> 00:12:47.270
See you in the next video.


CPI index

WEBVTT
Kind: captions
Language: en

00:00:01.210 --> 00:00:03.730
Everyone's talking about
inflation and deflation these

00:00:03.730 --> 00:00:06.760
days, including myself, and
that's because it's important.

00:00:06.760 --> 00:00:11.060
And in order to really have an
informed view on it, I think

00:00:11.060 --> 00:00:12.670
it's important to actually
look at how

00:00:12.670 --> 00:00:14.170
inflation is defined.

00:00:14.170 --> 00:00:16.510
And right here, I actually
took a screenshot from my

00:00:16.510 --> 00:00:20.420
Bloomberg terminal, of the
basket of goods that makes up

00:00:20.420 --> 00:00:21.800
the Consumer Price Index.

00:00:21.800 --> 00:00:25.365
The index that sets everything
from the coupons on Treasury

00:00:25.365 --> 00:00:27.760
inflation-protected securities--
this is the index

00:00:27.760 --> 00:00:30.470
that dictates what Social
Security payments are, how

00:00:30.470 --> 00:00:31.220
fast they're going to grow.

00:00:31.220 --> 00:00:34.020
I'm sure a bunch of union
agreements and pension

00:00:34.020 --> 00:00:35.290
agreements are dependant
on the CPI.

00:00:35.290 --> 00:00:38.810
So this is the underlying basket
of goods that really

00:00:38.810 --> 00:00:41.080
tells us what inflation is.

00:00:41.080 --> 00:00:44.760
At a first level, it's just fun
to look at, because you

00:00:44.760 --> 00:00:48.490
can compare your own household
to what the government thinks

00:00:48.490 --> 00:00:49.720
is a typical household.

00:00:49.720 --> 00:00:53.400
For example, the government
says that the typical

00:00:53.400 --> 00:00:58.870
household spends 15.7% of their
disposable income on--

00:00:58.870 --> 00:01:00.830
and that's essentially the
income that you take home

00:01:00.830 --> 00:01:02.240
after paying taxes--
that they spend

00:01:02.240 --> 00:01:04.599
15.7% on food and beverages.

00:01:04.599 --> 00:01:05.560
That seems reasonable.

00:01:05.560 --> 00:01:07.910
What's even more interesting
is that they break it down.

00:01:07.910 --> 00:01:09.020
They get very granular.

00:01:09.020 --> 00:01:12.220
They try to figure out how much
do you spend on eggs, and

00:01:12.220 --> 00:01:15.160
fish, and poultry, and
bakery products.

00:01:15.160 --> 00:01:17.810
And that's good because, let's
say, everything else stays

00:01:17.810 --> 00:01:20.180
constant, but the price of eggs
goes through the roof

00:01:20.180 --> 00:01:23.790
because the Atkins diet
becomes popular again.

00:01:23.790 --> 00:01:27.870
Then you can actually make an
informed decision as to why

00:01:27.870 --> 00:01:32.340
inflation is going up or whether
inflation will go up

00:01:32.340 --> 00:01:32.900
going forward.

00:01:32.900 --> 00:01:35.540
So that's just interesting
to look at.

00:01:35.540 --> 00:01:36.740
If you look at the
major categories.

00:01:36.740 --> 00:01:38.540
They have food and beverages,
housing-- And I'm going to

00:01:38.540 --> 00:01:42.020
come back to housing because
this is, in general, just a

00:01:42.020 --> 00:01:45.000
very interesting area to focus
on, because it makes such a

00:01:45.000 --> 00:01:46.920
big portion of the CPI.

00:01:46.920 --> 00:01:49.810
And it's been such a big
portion of the economic

00:01:49.810 --> 00:01:53.600
picture, especially
the last 10 years.

00:01:53.600 --> 00:01:57.150
And obviously, it's become a big
problem, has become a big

00:01:57.150 --> 00:01:59.220
factor, in terms of what's
causing the financial

00:01:59.220 --> 00:01:59.910
crisis right now.

00:01:59.910 --> 00:02:03.630
But housing is about 43%
of disposable income.

00:02:03.630 --> 00:02:05.540
Apparel: 3%.

00:02:05.540 --> 00:02:06.910
Transportation: 15%.

00:02:06.910 --> 00:02:11.330
This includes things like
new vehicles, 4%,

00:02:11.330 --> 00:02:12.610
used cars and trucks.

00:02:12.610 --> 00:02:14.740
And I think the way they
calculate this is, they say,

00:02:14.740 --> 00:02:17.940
what percentage of Americans
are driving new vehicles

00:02:17.940 --> 00:02:19.580
versus used vehicles?

00:02:19.580 --> 00:02:20.830
And they put fuel in here.

00:02:23.230 --> 00:02:25.610
A lot of people, when I have
this inflation-deflation

00:02:25.610 --> 00:02:28.040
argument, they make this
argument that China and India

00:02:28.040 --> 00:02:29.480
are going to continue growing.

00:02:29.480 --> 00:02:33.440
And because of that, commodities
like oil and fuel

00:02:33.440 --> 00:02:35.880
will continue to increase.

00:02:35.880 --> 00:02:38.390
Although people were making
that argument more last

00:02:38.390 --> 00:02:40.390
summer, but even now people
are making that argument.

00:02:40.390 --> 00:02:44.640
But in a developed country, you
see that motor fuel, even

00:02:44.640 --> 00:02:47.670
though it hits your pocketbook
on the margin, it isn't that

00:02:47.670 --> 00:02:50.240
big a part of your total
expenditure.

00:02:50.240 --> 00:02:52.970
Especially when you compare
it to things like housing.

00:02:52.970 --> 00:02:58.440
And if you keep going down,
medical care: 6%.

00:02:58.440 --> 00:02:59.220
And then recreation.

00:02:59.220 --> 00:03:00.860
They break it down and you
could look this up.

00:03:00.860 --> 00:03:03.230
I think the Bureau Of Labor
Statistics has this broken

00:03:03.230 --> 00:03:05.090
down as well, although it was
much easier to get it on the

00:03:05.090 --> 00:03:06.850
Bloomberg terminal.

00:03:06.850 --> 00:03:09.250
Education: on average, 3%.

00:03:09.250 --> 00:03:10.990
Obviously, if you're sending
your kids to college that's a

00:03:10.990 --> 00:03:13.170
much higher number, but, on
average, if you take the

00:03:13.170 --> 00:03:14.770
average household.

00:03:14.770 --> 00:03:17.540
And finally, other goods
and services: tobacco,

00:03:17.540 --> 00:03:18.610
et cetera, et cetera.

00:03:18.610 --> 00:03:21.050
So that one is just interesting
to look at.

00:03:21.050 --> 00:03:24.560
So whenever you have a
discussion on the things that

00:03:24.560 --> 00:03:27.050
may or may not drive inflation,
it's important to

00:03:27.050 --> 00:03:30.480
weigh them by these weightings
that the CPI gives them, to

00:03:30.480 --> 00:03:34.600
figure out what the actual
impact on how we measure

00:03:34.600 --> 00:03:37.630
inflation really will be.

00:03:37.630 --> 00:03:41.160
With that said, if you think
about it, really the biggest

00:03:41.160 --> 00:03:45.650
portion of this is the
housing piece.

00:03:45.650 --> 00:03:46.490
I think that's fair.

00:03:46.490 --> 00:03:48.970
Housing is a large percentage
of most people's disposable

00:03:48.970 --> 00:03:51.250
income, especially in
a Western society.

00:03:51.250 --> 00:03:54.190
You can imagine, if you live in
a Third World country, and

00:03:54.190 --> 00:03:56.300
you're barely getting by, food
might be a huge part of your

00:03:56.300 --> 00:04:00.920
expenditure, maybe rivaling
housing if you've just kind of

00:04:00.920 --> 00:04:03.300
built a house someplace.

00:04:03.300 --> 00:04:06.510
But in a developed society,
housing is a huge

00:04:06.510 --> 00:04:08.060
percentage of it.

00:04:08.060 --> 00:04:10.660
And I want to focus on one
thing, and a lot of people

00:04:10.660 --> 00:04:11.380
have talked about this.

00:04:11.380 --> 00:04:15.130
And actually Mish once again,
from Global Economic Analysis,

00:04:15.130 --> 00:04:17.790
he really encouraged me
to highlight this.

00:04:17.790 --> 00:04:19.529
So within housing, obviously
some people

00:04:19.529 --> 00:04:20.899
rent, some people buy.

00:04:20.899 --> 00:04:24.320
And so they give a 6% weighting
of the whole basket

00:04:24.320 --> 00:04:28.770
to rent, and then they give a
roughly 24%, 25% weighting to

00:04:28.770 --> 00:04:31.620
something that they call,
owners' equivalent of rent of

00:04:31.620 --> 00:04:32.890
primary residence.

00:04:32.890 --> 00:04:37.810
So this is essentially their
attempt to measure how much it

00:04:37.810 --> 00:04:40.640
costs to live for people
who own houses.

00:04:40.640 --> 00:04:42.940
What's interesting, and you
probably have caught onto it,

00:04:42.940 --> 00:04:47.980
is they use the words: owners'
equivalent rent.

00:04:47.980 --> 00:04:51.160
So what they do, and this is the
current methodology, they

00:04:51.160 --> 00:04:53.390
don't say, how much
is your mortgage?

00:04:53.390 --> 00:04:57.390
They don't say, how much does
it cost you to buy the house

00:04:57.390 --> 00:05:02.280
and amortize it over the
reasonable life of the house?

00:05:02.280 --> 00:05:04.490
They actually just say, how
much would it cost to rent

00:05:04.490 --> 00:05:04.880
that house?

00:05:04.880 --> 00:05:08.990
And they've kept waffling back
and forth between-- sometimes

00:05:08.990 --> 00:05:11.720
they just look for equivalent
houses, and they say, well,

00:05:11.720 --> 00:05:12.980
how much would that
cost to rent?

00:05:12.980 --> 00:05:14.900
At one point they were actually
surveying people and

00:05:14.900 --> 00:05:16.330
they would ask them, how
much would it cost

00:05:16.330 --> 00:05:17.000
to rent your house?

00:05:17.000 --> 00:05:19.120
Which is probably even
a worse number.

00:05:19.120 --> 00:05:22.050
But the bottom line is, they're
not factoring in

00:05:22.050 --> 00:05:23.310
actual mortgages.

00:05:23.310 --> 00:05:26.300
And you can even see it
on the weighting.

00:05:26.300 --> 00:05:29.220
Right when I looked at these
numbers, I was like, well,

00:05:29.220 --> 00:05:32.080
roughly 66% of people
own houses.

00:05:32.080 --> 00:05:35.530
How come this number isn't
66% relative to

00:05:35.530 --> 00:05:36.260
this number, right?

00:05:36.260 --> 00:05:36.840
It's closer to 80%.

00:05:36.840 --> 00:05:40.220
I was like, oh, I know that's
fair because more people

00:05:40.220 --> 00:05:42.460
actually live in homes.

00:05:42.460 --> 00:05:49.160
You could say that 66% of
overall households own, but,

00:05:49.160 --> 00:05:50.670
in general, homes are bigger,
there might be

00:05:50.670 --> 00:05:51.560
more people in it.

00:05:51.560 --> 00:05:55.365
So you could either think of it
on a person basis or maybe

00:05:55.365 --> 00:05:57.670
on a square footage basis.

00:05:57.670 --> 00:06:01.880
It makes a little bit more sense
to weight houses higher.

00:06:01.880 --> 00:06:04.870
But what's interesting here,
is that this number,

00:06:04.870 --> 00:06:07.790
especially if you add these
two, housing in general is

00:06:07.790 --> 00:06:12.800
about 30% of disposable
income.

00:06:12.800 --> 00:06:19.730
And traditionally that was the
rule that a bank would use to

00:06:19.730 --> 00:06:21.710
decide whether you can
afford a house.

00:06:21.710 --> 00:06:23.910
It shouldn't be more than a
third of your disposal income,

00:06:23.910 --> 00:06:25.070
or at least a mortgage
payment shouldn't

00:06:25.070 --> 00:06:25.960
be more than a third.

00:06:25.960 --> 00:06:29.970
We know, especially over this
last real estate bubble,

00:06:29.970 --> 00:06:34.020
that's become a much, much
larger percentage of people's

00:06:34.020 --> 00:06:35.810
actual disposal income.

00:06:35.810 --> 00:06:39.260
So you wonder, why is this
weighting only 30% of

00:06:39.260 --> 00:06:39.930
disposable income?

00:06:39.930 --> 00:06:42.430
Well, that's because they use
owners' equivalent rent.

00:06:42.430 --> 00:06:43.910
They didn't actually
say what people's

00:06:43.910 --> 00:06:45.190
mortgage payments are.

00:06:45.190 --> 00:06:46.980
So even though mortgage payments
might be going

00:06:46.980 --> 00:06:49.430
through the roof, even though
the price of a house might be

00:06:49.430 --> 00:06:53.780
going through the roof, it does
not get reflected in the

00:06:53.780 --> 00:06:57.190
CPI number as of
the early `80s.

00:06:57.190 --> 00:06:58.750
This is straight from
the Bureau Of

00:06:58.750 --> 00:07:01.250
Labor Statistics website.

00:07:01.250 --> 00:07:03.610
And they wrote-- and they're
actually using doublespeak

00:07:03.610 --> 00:07:05.930
here, I just copied and pasted
it straight from their website

00:07:05.930 --> 00:07:09.830
--"until the early 1980s, the
CPI used what is called the

00:07:09.830 --> 00:07:12.740
asset price method to measure
the change in the cost of

00:07:12.740 --> 00:07:14.400
owner-occupied housing."

00:07:14.400 --> 00:07:16.840
That makes sense and I'm not
sure whether they just looked

00:07:16.840 --> 00:07:20.380
at how much houses cost this
year relative to last year and

00:07:20.380 --> 00:07:23.860
then they put that into the
weighting or they determined

00:07:23.860 --> 00:07:25.960
the weighting based on people's
average mortgage.

00:07:25.960 --> 00:07:28.330
But in general, that's a good
way to measure it, right?

00:07:28.330 --> 00:07:33.480
Either your mortgage payment, or
how much houses cost. They

00:07:33.480 --> 00:07:35.845
said, "the asset price method
treats the purchase of an

00:07:35.845 --> 00:07:37.600
asset, such as a house, as it
does the purchase of any

00:07:37.600 --> 00:07:38.910
consumer good." Fair enough.

00:07:38.910 --> 00:07:41.220
"Because the asset price
method can lead to

00:07:41.220 --> 00:07:44.740
inappropriate results--" And
this is the key line. "Because

00:07:44.740 --> 00:07:49.460
the asset price method can lead
to inappropriate results

00:07:49.460 --> 00:07:52.990
for goods that are purchased
largely for investment

00:07:52.990 --> 00:07:54.990
reasons." I agree with that.

00:07:54.990 --> 00:07:57.930
If something is purchased
largely for investment

00:07:57.930 --> 00:08:01.940
reasons, if I'm purchasing gold,
maybe that shouldn't be

00:08:01.940 --> 00:08:05.710
included in the CPI, because
it's largely for investment

00:08:05.710 --> 00:08:06.980
reasons or for stocks.

00:08:06.980 --> 00:08:10.060
But then they use this kind of
completely disjointed logic.

00:08:10.060 --> 00:08:12.740
They say, you know, "because
asset price method can lead to

00:08:12.740 --> 00:08:14.520
inappropriate results for
goods that are purchased

00:08:14.520 --> 00:08:17.730
largely for investment reasons,
the CPI implemented

00:08:17.730 --> 00:08:20.140
the rental equivalence approach
to measuring price

00:08:20.140 --> 00:08:24.720
change for owner-occupied
housing." To me,

00:08:24.720 --> 00:08:28.180
that makes no sense.

00:08:28.180 --> 00:08:29.730
Owner-occupied is not purchased

00:08:29.730 --> 00:08:31.490
for investment reasons.

00:08:31.490 --> 00:08:33.270
That's a fair enough argument
if you're doing it for

00:08:33.270 --> 00:08:36.380
rentals, or if you're doing
it for vacation homes.

00:08:36.380 --> 00:08:38.950
But for actual owner-occupied
housing, this

00:08:38.950 --> 00:08:40.919
sentence makes no sense.

00:08:40.919 --> 00:08:43.559
Based on their own rationale,
there's no reason to transfer

00:08:43.559 --> 00:08:47.120
to this rental equivalent
approach.

00:08:47.120 --> 00:08:52.850
The whole reason why I'm going
here is, because in the early

00:08:52.850 --> 00:08:55.860
`80s, I think 1983-- they say
it right here, in January,

00:08:55.860 --> 00:09:00.260
1983-- because they switched
over to this, this kind of

00:09:00.260 --> 00:09:02.350
inflation that we've seen
in the price of houses,

00:09:02.350 --> 00:09:04.770
especially the real estate
bubble we've seen the last 10

00:09:04.770 --> 00:09:07.270
years, in no way got
incorporated into the

00:09:07.270 --> 00:09:08.560
inflation numbers.

00:09:08.560 --> 00:09:10.460
So it essentially understated
them.

00:09:10.460 --> 00:09:13.840
You can see that here.

00:09:13.840 --> 00:09:15.620
Well, two things: not only did
it understate it, but it

00:09:15.620 --> 00:09:17.720
probably understated the
weighting itself.

00:09:17.720 --> 00:09:20.910
And Mish, he's had a couple
of posts about this.

00:09:20.910 --> 00:09:22.460
You really should use
something like the

00:09:22.460 --> 00:09:26.240
Case-Shiller Index on this line
right here, instead of

00:09:26.240 --> 00:09:28.210
doing this for owners'
equivalent.

00:09:28.210 --> 00:09:29.580
But I'd argue one
step further.

00:09:29.580 --> 00:09:30.910
Not only should you use
something like the

00:09:30.910 --> 00:09:34.800
Case-Shiller Index, but to
actually gauge this weighting,

00:09:34.800 --> 00:09:37.100
you should actually survey
people and say, what

00:09:37.100 --> 00:09:40.460
percentage of your disposable
income is dedicated to your

00:09:40.460 --> 00:09:43.430
mortgage and other things
related to owning a house?

00:09:43.430 --> 00:09:46.650
And especially over the last
seven years, I would guess,

00:09:46.650 --> 00:09:49.150
and I'm almost sure about this,
that it would be much

00:09:49.150 --> 00:09:51.350
larger than 30% of your
disposal income.

00:09:51.350 --> 00:09:54.370
So not only was this number
being understated, or the

00:09:54.370 --> 00:09:57.230
growth in that number, because
it didn't incorporate the

00:09:57.230 --> 00:10:00.720
increase in housing prices, but
this weighting itself was

00:10:00.720 --> 00:10:01.870
understated.

00:10:01.870 --> 00:10:04.060
And just to get a sense of
how much, this is the

00:10:04.060 --> 00:10:05.410
Case-Shiller Index.

00:10:05.410 --> 00:10:07.650
And you could look up the
Case-Shiller Index, but, in my

00:10:07.650 --> 00:10:10.400
opinion, it's the best index
for actual increases or

00:10:10.400 --> 00:10:12.140
decreases in the
price of homes.

00:10:12.140 --> 00:10:17.280
You see from 2001 to 2006
roughly, houses were

00:10:17.280 --> 00:10:20.740
increasing by 10%
to 15% a year.

00:10:20.740 --> 00:10:23.630
So if you use that instead of
the rental equivalent, then

00:10:23.630 --> 00:10:26.360
over the same timeframe-- I
don't have a chart for rent,

00:10:26.360 --> 00:10:28.770
but rent was not increasing at
anywhere near this pace.

00:10:28.770 --> 00:10:31.260
If anything, people were leaving
apartments to buy

00:10:31.260 --> 00:10:34.930
houses, so rent was actually
staying pretty stable.

00:10:34.930 --> 00:10:37.870
But 10% to 15%-- this is year
over year growth, this is what

00:10:37.870 --> 00:10:38.560
this chart is.

00:10:38.560 --> 00:10:46.790
So 10% to 15%, if you weight
that at 30% of the CPI basket,

00:10:46.790 --> 00:10:49.370
then really the reported
inflation number was being

00:10:49.370 --> 00:10:52.750
understated by 3%
to 5% a year.

00:10:52.750 --> 00:10:55.990
And I'd argue that this
weighting should have grown

00:10:55.990 --> 00:10:57.860
over that time period because
people were spending more and

00:10:57.860 --> 00:11:00.100
more of their disposable
income on

00:11:00.100 --> 00:11:01.320
their mortgage payments.

00:11:01.320 --> 00:11:03.230
So really it was probably
understanding it by more.

00:11:03.230 --> 00:11:05.760
Then this weighting should've
been more like 40% and you

00:11:05.760 --> 00:11:10.600
could have said you're
understanding it by 4% to 6%.

00:11:10.600 --> 00:11:12.450
And if you look here,
this is the actual

00:11:12.450 --> 00:11:14.170
reported CPI numbers.

00:11:14.170 --> 00:11:16.870
What I'm saying is, over that
timeframe, the real inflation

00:11:16.870 --> 00:11:18.180
number should have
been up here.

00:11:18.180 --> 00:11:21.790
And then, now that we have
actual deflation in home

00:11:21.790 --> 00:11:23.560
prices, this is zero.

00:11:23.560 --> 00:11:26.270
So now, the most recent
Case-Shiller numbers say that

00:11:26.270 --> 00:11:29.890
housing has depreciated
by 20%.

00:11:29.890 --> 00:11:32.650
We're essentially understating
the deflation now.

00:11:32.650 --> 00:11:36.420
So although right now the CPI
has us at kind of the zero

00:11:36.420 --> 00:11:39.080
mark, if you actually
incorporated the real prices

00:11:39.080 --> 00:11:42.705
of homes and you didn't use
rents as a proxy for it, you

00:11:42.705 --> 00:11:44.770
would actually get a much more
negative number here.

00:11:44.770 --> 00:11:46.870
And Mish actually did
that on his blog.

00:11:46.870 --> 00:11:49.870
And if you actually want to read
his blog, which I highly

00:11:49.870 --> 00:11:54.000
recommend, do a Google search
for Mish, M-I-S-H.

00:11:54.000 --> 00:11:55.910
And this is directly from his
blog, so I have to give him

00:11:55.910 --> 00:11:57.430
credit for that.

00:11:57.430 --> 00:12:01.470
And what he did here is, he
actually charted the actual

00:12:01.470 --> 00:12:03.390
inflation numbers that
were reported.

00:12:03.390 --> 00:12:04.600
That's in blue.

00:12:04.600 --> 00:12:07.650
And then on top of that, he
put what he calls the

00:12:07.650 --> 00:12:11.220
Case-Shiller CPI Index
and that's in red.

00:12:11.220 --> 00:12:15.600
And you see here, especially
over the housing boom-- These

00:12:15.600 --> 00:12:19.340
are the inflation numbers we
got from the government.

00:12:19.340 --> 00:12:22.800
They peaked out in the 4% or 5%
range, which isn't low by

00:12:22.800 --> 00:12:24.530
any stretch of the imagination,
and that's

00:12:24.530 --> 00:12:28.100
probably why the Feds started
increasing interest rates

00:12:28.100 --> 00:12:31.690
right around here, arguably at
the worst possible time.

00:12:31.690 --> 00:12:36.940
But if you look at the CS CPI,
or the Case-Shiller CPI, you

00:12:36.940 --> 00:12:42.110
could almost say that the real
inflation actually peaked out

00:12:42.110 --> 00:12:43.940
in the 8% range back here.

00:12:43.940 --> 00:12:46.240
And you could argue that, if
this was the actual number

00:12:46.240 --> 00:12:48.140
that the Fed was using, it would
have actually been a

00:12:48.140 --> 00:12:50.350
much better policy tool, because
they would have seen

00:12:50.350 --> 00:12:53.460
the inflation pop up back
here in January '03.

00:12:53.460 --> 00:12:55.450
And they would have known that
they were keeping their

00:12:55.450 --> 00:12:58.500
monetary policy too loose back
here and they could've avoided

00:12:58.500 --> 00:13:03.030
this whipsawing that they did
and in 2007 and 2008.

00:13:03.030 --> 00:13:05.220
And I'd argue even further
that even this number is

00:13:05.220 --> 00:13:08.080
understanding the reality,
because back here, as a

00:13:08.080 --> 00:13:13.070
percentage of the actual CPI
basket, he just took the CPI

00:13:13.070 --> 00:13:15.410
numbers and replaced the year
over year change essentially

00:13:15.410 --> 00:13:19.010
into the same weighting as
the current CPI numbers.

00:13:19.010 --> 00:13:21.440
But if you actually weighted it
based on the actual amount

00:13:21.440 --> 00:13:23.890
of disposable income people
were spending on their

00:13:23.890 --> 00:13:26.680
mortgages, I would guess that it
would have looked something

00:13:26.680 --> 00:13:28.580
more like this.

00:13:28.580 --> 00:13:32.530
And you would have seen actual
inflation peak out here,

00:13:32.530 --> 00:13:35.420
probably in the 10%
or 11% range.

00:13:35.420 --> 00:13:39.350
There's a lot of social
commentary about this; why

00:13:39.350 --> 00:13:41.210
they do it.

00:13:41.210 --> 00:13:44.310
One argument is, that a lot of
the government's or even

00:13:44.310 --> 00:13:49.510
corporate liabilities are
indexed to inflation.

00:13:49.510 --> 00:13:50.875
You have an inflation index.

00:13:54.030 --> 00:13:57.540
On the other hand, the sale of
homes essentially transfers

00:13:57.540 --> 00:13:59.570
wealth from one generation
to another.

00:13:59.570 --> 00:14:03.250
Especially when you have
a huge increase in

00:14:03.250 --> 00:14:06.950
the price of homes.

00:14:06.950 --> 00:14:09.090
If they did this on purpose,
and I'm guessing that they

00:14:09.090 --> 00:14:13.200
did, it allows housing prices
to increase dramatically.

00:14:13.200 --> 00:14:17.430
And when housing prices increase
dramatically, it

00:14:17.430 --> 00:14:20.900
transfers wealth from the new
buyer generation to the

00:14:20.900 --> 00:14:23.950
retiree generation, so it helps
subsidize the retirees.

00:14:23.950 --> 00:14:27.370
And, at the same time, by taking
it out of the actual

00:14:27.370 --> 00:14:30.710
CPI index, it keeps the
government's, and actually a

00:14:30.710 --> 00:14:32.590
lot of other corporate,
liabilities low.

00:14:32.590 --> 00:14:36.120
Because now Social
Security, it's

00:14:36.120 --> 00:14:37.540
indexed to the CPI numbers.

00:14:37.540 --> 00:14:41.740
So if the CPI numbers are not
incorporating, are not raising

00:14:41.740 --> 00:14:43.340
up here, you don't have to
increase people's Social

00:14:43.340 --> 00:14:44.170
Security payments.

00:14:44.170 --> 00:14:47.280
And you kind of get to project
this farce to people.

00:14:47.280 --> 00:14:49.870
You say, oh, in inflation
adjusted terms, you're doing

00:14:49.870 --> 00:14:52.010
better than your parents'
generation did.

00:14:52.010 --> 00:14:55.290
Oh, but, by the way, you can
afford 1/3 the house now.

00:14:55.290 --> 00:14:59.160
And to some degree that's been
propagated-- it's obviously

00:14:59.160 --> 00:15:00.640
all falling apart now.

00:15:00.640 --> 00:15:03.920
But the big takeaway from this,
if I had to give you

00:15:03.920 --> 00:15:07.140
just one, is that the
CPI index is a

00:15:07.140 --> 00:15:09.260
government created tool.

00:15:09.260 --> 00:15:12.550
It's based on a survey and, not
only has it not been the

00:15:12.550 --> 00:15:15.890
same survey, but it's actively
changed over the years.

00:15:15.890 --> 00:15:19.020
And it's changed in ways that
significantly impact the

00:15:19.020 --> 00:15:22.320
actual numbers that are reported
and, to some degree,

00:15:22.320 --> 00:15:24.910
play into what I think
the government

00:15:24.910 --> 00:15:27.130
wants people to believe.

00:15:27.130 --> 00:15:29.270
Anyway see you in
the next video.


Unemployment

WEBVTT
Kind: captions
Language: en

00:00:00.670 --> 00:00:03.695
I've done a bunch of videos now
on inflation and deflation

00:00:03.695 --> 00:00:07.580
and how they can be impacted
by capacity utilization.

00:00:07.580 --> 00:00:10.230
And the traditional notion of
capacity utilization, and this

00:00:10.230 --> 00:00:13.380
is what my brain does when
someone mentions it, is I

00:00:13.380 --> 00:00:15.140
think of industrial capacity
utilization.

00:00:15.140 --> 00:00:16.670
I imagine factories.

00:00:16.670 --> 00:00:19.620
And when people say low
utilization, I imagine idle

00:00:19.620 --> 00:00:21.770
factories, and when high
utilization, I imagine

00:00:21.770 --> 00:00:25.200
factories that are running at
three shifts and things are

00:00:25.200 --> 00:00:26.120
moving feverishly.

00:00:26.120 --> 00:00:29.340
But in a service-based economy
like we have here in the U.S.

00:00:29.340 --> 00:00:32.880
and like we have in a lot of
Western societies, most of our

00:00:32.880 --> 00:00:36.980
real capacity for what we
produce, or our GDP, is

00:00:36.980 --> 00:00:39.030
service based, because we're
a service-based economy.

00:00:39.030 --> 00:00:43.250
And if you think about it,
industrial capacity

00:00:43.250 --> 00:00:45.950
utilization, it matters, but
it matters much more to

00:00:45.950 --> 00:00:47.820
manufacturing-based economy.

00:00:47.820 --> 00:00:49.870
In a service-based economy,
the best measure of

00:00:49.870 --> 00:00:52.860
utilization really
is unemployment.

00:00:52.860 --> 00:00:54.870
And I guess we could say
the best measure of

00:00:54.870 --> 00:00:57.570
underutilization is
unemployment.

00:00:57.570 --> 00:01:00.290
With that said, I think it's
really important to have a

00:01:00.290 --> 00:01:04.200
deeper understanding of how
unemployment is measured and

00:01:04.200 --> 00:01:06.540
how it's thought about from
the Government, and the

00:01:06.540 --> 00:01:09.820
numbers you hear on CNN, what
they really mean in terms of

00:01:09.820 --> 00:01:11.310
the real unemployment picture.

00:01:11.310 --> 00:01:13.230
And most of these charts,
actually all of these charts

00:01:13.230 --> 00:01:16.040
that I have in this video, I
got from Mike Shedlock, who

00:01:16.040 --> 00:01:19.190
runs the Global Economic
Analysis blog.

00:01:19.190 --> 00:01:21.440
And I had a conversation with
him on Friday and he pointed

00:01:21.440 --> 00:01:23.110
out some really interesting
things.

00:01:23.110 --> 00:01:24.760
That's what I really want to
cover, and I think it'll give

00:01:24.760 --> 00:01:29.330
us a good general view of
unemployment and give us some

00:01:29.330 --> 00:01:31.640
clues as to what's going
on right now.

00:01:31.640 --> 00:01:33.330
But I encourage you
to read his blog.

00:01:33.330 --> 00:01:36.450
He goes by Mish, and he tells
people that the best way to

00:01:36.450 --> 00:01:40.020
find his blog is to just do a
search on Google for Mish.

00:01:40.020 --> 00:01:42.750
And he does a lot of this, where
he looks at the economic

00:01:42.750 --> 00:01:45.520
data, but he goes several levels
deeper than anyone

00:01:45.520 --> 00:01:47.660
really would go, especially
on TV.

00:01:47.660 --> 00:01:50.290
But that's what you really have
to do to really discern

00:01:50.290 --> 00:01:52.610
what matters.

00:01:52.610 --> 00:01:55.550
And I want to give him full
credit because he really is

00:01:55.550 --> 00:01:57.810
who pointed out a lot of this
to me, but I think it's very

00:01:57.810 --> 00:02:00.120
instructive to the capacity
utilization and

00:02:00.120 --> 00:02:02.820
inflation-deflation argument
that I've been making.

00:02:02.820 --> 00:02:06.230
So right here I have a
screenshot from the Bureau Of

00:02:06.230 --> 00:02:08.509
Labor Statistics and you
could go there, just do

00:02:08.509 --> 00:02:09.889
a search for them.

00:02:09.889 --> 00:02:12.350
And what most people don't
realize is, just like on the

00:02:12.350 --> 00:02:14.090
money supply, you have different
measures of money

00:02:14.090 --> 00:02:16.430
supply, you also have different
measures of

00:02:16.430 --> 00:02:17.450
unemployment.

00:02:17.450 --> 00:02:21.940
And the number that you hear
reported, at least since 1994,

00:02:21.940 --> 00:02:25.790
is U-3, and that's where
we'll start.

00:02:25.790 --> 00:02:28.400
That's kind of the official
rate of unemployment.

00:02:28.400 --> 00:02:30.570
I know you can't read
this properly.

00:02:30.570 --> 00:02:32.160
My screen capture software
doesn't do

00:02:32.160 --> 00:02:33.390
well with this font.

00:02:33.390 --> 00:02:36.800
But U-3 is total unemployed as
a percent of the civilian

00:02:36.800 --> 00:02:37.340
labor force.

00:02:37.340 --> 00:02:39.750
So it's very important to
realize what they consider

00:02:39.750 --> 00:02:43.410
unemployed and what they
consider the labor force.

00:02:43.410 --> 00:02:47.820
They consider you unemployed
if you don't have a job and

00:02:47.820 --> 00:02:56.790
you have looked for work
in the past four weeks.

00:02:56.790 --> 00:02:58.390
And this is a really
important point.

00:02:58.390 --> 00:03:01.000
It really is important to think
about it relative to

00:03:01.000 --> 00:03:02.550
everything else I'll go
over in this video.

00:03:02.550 --> 00:03:06.820
Because we've probably had times
in our life where we

00:03:06.820 --> 00:03:08.830
considered ourselves unemployed
or we considered

00:03:08.830 --> 00:03:11.380
someone else unemployed, but
they had maybe gotten dejected

00:03:11.380 --> 00:03:13.540
and stopped looking
a little bit or

00:03:13.540 --> 00:03:14.810
decided to take a break.

00:03:14.810 --> 00:03:16.930
It's important to realize, in
the numbers that we hear from

00:03:16.930 --> 00:03:20.930
the Government, they don't count
as part of the civilian

00:03:20.930 --> 00:03:22.180
labor force.

00:03:26.770 --> 00:03:28.270
Well, let's say, you stop
looking for a job for five

00:03:28.270 --> 00:03:31.340
weeks, because you wanted to
take a break and maybe redo

00:03:31.340 --> 00:03:33.170
your resume for awhile, so
you're kind of passively

00:03:33.170 --> 00:03:34.280
looking for a job.

00:03:34.280 --> 00:03:36.790
The Government no longer
considers you part of the

00:03:36.790 --> 00:03:39.730
labor force and you're not
included in that number.

00:03:39.730 --> 00:03:41.860
They do have broader numbers
that do include that.

00:03:41.860 --> 00:03:44.175
And I think that's important,
because we're actually going

00:03:44.175 --> 00:03:46.950
to study the difference between
the different numbers.

00:03:46.950 --> 00:03:48.320
U-4 is total unemployed.

00:03:48.320 --> 00:03:52.300
So it's the number up here, plus
discouraged workers, as a

00:03:52.300 --> 00:03:53.910
percent of the civilian
labor force,

00:03:53.910 --> 00:03:56.420
plus discouraged workers.

00:03:56.420 --> 00:03:57.980
So they're going to add
the discouraged

00:03:57.980 --> 00:03:59.230
workers to the numerator.

00:04:04.020 --> 00:04:05.920
Let me do this in a
different color.

00:04:05.920 --> 00:04:07.590
Before you had-- this
is the standard one.

00:04:07.590 --> 00:04:12.310
You have unemployed over
employed plus unemployed, as

00:04:12.310 --> 00:04:14.280
defined-- and when we say
unemployed, it's someone who

00:04:14.280 --> 00:04:16.620
doesn't have a job, but you've
looked for a job in the last

00:04:16.620 --> 00:04:17.540
four weeks.

00:04:17.540 --> 00:04:20.810
U-4 is now-- let me do it
in a different color.

00:04:24.490 --> 00:04:30.290
It is unemployed plus
discouraged over employed plus

00:04:30.290 --> 00:04:33.730
unemployed plus discouraged
workers.

00:04:33.730 --> 00:04:36.100
And their definition of
discouraged workers-- I just

00:04:36.100 --> 00:04:38.880
talked about people who haven't
looked or actively

00:04:38.880 --> 00:04:41.340
looked for a job in more than
five weeks or actually more

00:04:41.340 --> 00:04:42.390
than four weeks.

00:04:42.390 --> 00:04:46.200
You're considered discouraged if
you give a reason for that,

00:04:46.200 --> 00:04:48.800
and you say, well, I just
haven't looked for it, because

00:04:48.800 --> 00:04:51.900
I'm discouraged, because I don't
think there are jobs for

00:04:51.900 --> 00:04:54.130
what I want to do anymore, so
that's the reason why haven't

00:04:54.130 --> 00:04:54.830
looked for it.

00:04:54.830 --> 00:04:57.540
And that's when you get included
into this bucket.

00:04:57.540 --> 00:05:00.310
And then U-5 is that same thing,
but what they do is

00:05:00.310 --> 00:05:04.890
they add other marginally
attached workers.

00:05:04.890 --> 00:05:06.640
And the difference between a
discouraged worker and a

00:05:06.640 --> 00:05:09.450
marginally attached worker, a
discouraged worker gives the

00:05:09.450 --> 00:05:10.380
economic reason.

00:05:10.380 --> 00:05:13.230
They say I haven't looked for
a job in the past five weeks

00:05:13.230 --> 00:05:15.310
because I just think
it's impossible.

00:05:15.310 --> 00:05:18.090
I want to work but it's just
impossible find a job as an

00:05:18.090 --> 00:05:19.460
accountant or an engineer
anymore.

00:05:19.460 --> 00:05:23.070
While a marginally attached
worker also says I haven't

00:05:23.070 --> 00:05:25.570
looked for a job in the last
five weeks, but they don't say

00:05:25.570 --> 00:05:28.150
it's because they think the
economy is making it

00:05:28.150 --> 00:05:28.800
impossible.

00:05:28.800 --> 00:05:31.570
It could just be that they're--
I don't know--

00:05:31.570 --> 00:05:34.390
depressed generally or they
don't want to-- it could be a

00:05:34.390 --> 00:05:36.180
whole set of reasons.

00:05:36.180 --> 00:05:40.860
The important thing is that on
the survey that the Bureau Of

00:05:40.860 --> 00:05:45.570
Labor Statistics conducts, that
they don't literally give

00:05:45.570 --> 00:05:47.440
that argument that the only
reason that they're not

00:05:47.440 --> 00:05:49.760
looking for it is economic
reasons, and then they'll be

00:05:49.760 --> 00:05:51.300
put into the marginally
attached

00:05:51.300 --> 00:05:52.580
workers and that's U-5.

00:05:52.580 --> 00:05:54.810
And then U-6 is really
interesting because it

00:05:54.810 --> 00:05:57.040
includes all of these
above, but it

00:05:57.040 --> 00:05:59.160
actually shifts some people.

00:05:59.160 --> 00:06:02.160
So in U-5 you would add
marginally attached to the

00:06:02.160 --> 00:06:04.256
denominator there.

00:06:04.256 --> 00:06:07.800
In U-6 what you do is you have
total unemployed plus all

00:06:07.800 --> 00:06:11.510
marginally attached workers plus
total employed part-time

00:06:11.510 --> 00:06:14.570
for economic reasons as a
percent of the civilian labor

00:06:14.570 --> 00:06:16.810
force, plus all marginally
attached workers.

00:06:16.810 --> 00:06:20.970
So the important thing here
is, plus total employed

00:06:20.970 --> 00:06:24.330
part-time for economic
reasons.

00:06:24.330 --> 00:06:27.390
That's key, so the denominator
doesn't change anymore, but

00:06:27.390 --> 00:06:29.750
this unemployed number is
going to get bigger.

00:06:29.750 --> 00:06:33.760
Because there's some part of
the employed population who

00:06:33.760 --> 00:06:35.840
are not working 40 hours a week,
or they're not working

00:06:35.840 --> 00:06:38.230
as much as they want to work,
or they're not maybe working

00:06:38.230 --> 00:06:39.690
in even the field they
want to work.

00:06:39.690 --> 00:06:41.960
Maybe instead of working as an
engineer, they're working 20

00:06:41.960 --> 00:06:44.340
hours a week at the local
bookstore or at Starbuck's,

00:06:44.340 --> 00:06:47.880
and these people are
included in U-6.

00:06:47.880 --> 00:06:49.520
And the reason why I want to
really highlight that, and

00:06:49.520 --> 00:06:53.260
Mish pointed this out to me,
is that this is increasing

00:06:53.260 --> 00:06:54.470
much faster than this.

00:06:54.470 --> 00:06:56.400
And we'll think a little bit
about why that's happening and

00:06:56.400 --> 00:06:57.720
what conclusions we can take.

00:07:00.660 --> 00:07:03.040
These are the numbers straight
from the Bureau Of Labor

00:07:03.040 --> 00:07:05.160
Statistics.

00:07:05.160 --> 00:07:08.890
I know this screen right here is
really hard to see, but if

00:07:08.890 --> 00:07:16.680
you look at March 2008, the U-3
number was 5.2% and the

00:07:16.680 --> 00:07:18.030
U-6 was 9.3%.

00:07:18.030 --> 00:07:22.090
So the difference between
the two is about 4.1%.

00:07:22.090 --> 00:07:25.350
But if you go to the most recent
month, the standard

00:07:25.350 --> 00:07:28.680
unemployment number is 8.5%,
but the U-6, the one that

00:07:28.680 --> 00:07:31.590
includes the discouraged
workers, the marginally

00:07:31.590 --> 00:07:34.160
attached workers and the people
who aren't working full

00:07:34.160 --> 00:07:39.300
time for economic reasons, the
difference is now 7.1%, so

00:07:39.300 --> 00:07:41.370
that spread.

00:07:41.370 --> 00:07:46.260
People who would like to work,
but they've either stopped

00:07:46.260 --> 00:07:49.370
looking because they've gotten
dejected, or they've just

00:07:49.370 --> 00:07:51.840
bitten the bullet and taken
a job that they otherwise

00:07:51.840 --> 00:07:54.140
wouldn't want to take or taken
fewer hours than they

00:07:54.140 --> 00:07:57.630
otherwise wouldn't want to
take, that's growing.

00:07:57.630 --> 00:07:59.160
That really is.

00:07:59.160 --> 00:08:01.440
And the reason why we really
want to focus on that is

00:08:01.440 --> 00:08:04.290
because it tells us that even
though the unemployment rate,

00:08:04.290 --> 00:08:07.500
the official unemployment rate--
that is increasing very

00:08:07.500 --> 00:08:10.560
steeply and I'll show a graph
right here, this is actually

00:08:10.560 --> 00:08:14.430
work Mish did, where he actually
shows that the spread

00:08:14.430 --> 00:08:18.850
between U-6 and U-3 has been
increasing, and it's been

00:08:18.850 --> 00:08:23.210
increasing at an accelerating
rate since last February.

00:08:23.210 --> 00:08:26.870
That's actually shown right
here in this graph.

00:08:26.870 --> 00:08:29.367
And he got this from his
friend Chris Puplava at

00:08:29.367 --> 00:08:32.620
Financial Sense, so I want to
give him credit for it.

00:08:32.620 --> 00:08:34.919
But you see here, U-6, this
is the broad measure of

00:08:34.919 --> 00:08:36.650
unemployment that we talked
about right here.

00:08:36.650 --> 00:08:41.100
That's increasing at an even
faster rate than the standard

00:08:41.100 --> 00:08:42.250
unemployment measure.

00:08:42.250 --> 00:08:44.140
And this green line right here,
this is actually the

00:08:44.140 --> 00:08:46.260
difference between the two.

00:08:46.260 --> 00:08:49.190
What's interesting about that
is this is kind of measuring

00:08:49.190 --> 00:08:52.890
the percentage of the labor pool
that's getting dejected,

00:08:52.890 --> 00:08:54.140
that's getting depressed.

00:08:56.450 --> 00:08:58.210
So they're either getting
depressed or dejected and not

00:08:58.210 --> 00:09:01.670
looking for work, or they're
just saying, you know what?

00:09:01.670 --> 00:09:04.310
I can't get a job 40 hours a
week anymore as an accountant.

00:09:04.310 --> 00:09:07.220
I will now go work part-time at
the local department store

00:09:07.220 --> 00:09:11.470
or do whatever it takes to put
some food on the table for

00:09:11.470 --> 00:09:12.850
their families.

00:09:12.850 --> 00:09:16.400
In general, it shows the
level of desperation.

00:09:16.400 --> 00:09:19.960
And if you look here, and this
is really interesting.

00:09:19.960 --> 00:09:21.420
This is also from
Chris Puplava.

00:09:24.040 --> 00:09:27.605
If you look relative to the
path, the last major recession

00:09:27.605 --> 00:09:29.850
that a lot of people talk about
is the early 80's, the

00:09:29.850 --> 00:09:32.970
double dip recession, and
even though the headline

00:09:32.970 --> 00:09:35.680
unemployment rate-- let me
make sure I get the right

00:09:35.680 --> 00:09:37.590
color-- the headline
unemployment rate here is the

00:09:37.590 --> 00:09:41.530
blue line, that is still
a good bit below.

00:09:41.530 --> 00:09:44.160
We peaked out there, and I
don't know what the exact

00:09:44.160 --> 00:09:47.370
number is, but it looks like
about in the mid 10%.

00:09:47.370 --> 00:09:51.120
Even though we're a lot lower
than that now, we're at 8.2%

00:09:51.120 --> 00:09:56.960
right now, if you look at U-6,
which is the broadest,

00:09:56.960 --> 00:09:58.210
that's spiked up.

00:10:01.080 --> 00:10:02.970
Unfortunately, the data
for U-6 doesn't

00:10:02.970 --> 00:10:04.990
go back before 1994.

00:10:04.990 --> 00:10:07.880
They actually changed how a lot
of things were measured.

00:10:07.880 --> 00:10:10.020
The official headline rate,
instead of calling it U-3, it

00:10:10.020 --> 00:10:12.800
used to be called U-5, but it
was, for the most part, the

00:10:12.800 --> 00:10:14.770
same measure, but that's
changed a little bit.

00:10:14.770 --> 00:10:17.840
But U-6 did not exist before
1994 so, unfortunately, we

00:10:17.840 --> 00:10:19.810
can't measure U-6 back then.

00:10:19.810 --> 00:10:22.910
But a good, I guess,
pseudo-indicator for U-6 that

00:10:22.910 --> 00:10:27.850
we do have more historical
data on is the number of

00:10:27.850 --> 00:10:30.110
unemployed for more
than 15 weeks.

00:10:30.110 --> 00:10:33.830
These are people who have been
looking for work, but 15 weeks

00:10:33.830 --> 00:10:35.750
or more, they still haven't
found a job even though

00:10:35.750 --> 00:10:37.610
they've been actively
looking for work.

00:10:37.610 --> 00:10:40.290
And that, if you look at least
while we have U-6 being

00:10:40.290 --> 00:10:44.390
measured, it has tracked that
broad measure quite well.

00:10:44.390 --> 00:10:48.670
So if we can make the assumption
that U-6 is always

00:10:48.670 --> 00:10:52.150
on that line or above it as it's
graphed here, which it is

00:10:52.150 --> 00:10:59.070
so far, then U-6 in the early
80's was probably right around

00:10:59.070 --> 00:10:59.860
where that line is now.

00:10:59.860 --> 00:11:02.140
Maybe it was a little higher,
maybe it was up here.

00:11:02.140 --> 00:11:06.140
But what this graph really
does convey is that that

00:11:06.140 --> 00:11:09.530
broadest measure of unemployment
is already as bad

00:11:09.530 --> 00:11:11.840
as it probably was in
the early 80's.

00:11:11.840 --> 00:11:13.530
It's just that we don't
have that data there.

00:11:13.530 --> 00:11:16.000
And if anything, those part-time
workers, because

00:11:16.000 --> 00:11:19.430
they are employed, so in the
official unemployment measure,

00:11:19.430 --> 00:11:21.230
they're actually making
the number look

00:11:21.230 --> 00:11:24.130
a little bit better.

00:11:24.130 --> 00:11:26.000
Here you had fewer people.

00:11:26.000 --> 00:11:27.810
You were either employed
or you were unemployed.

00:11:27.810 --> 00:11:29.160
If you're unemployed, you
made the number look

00:11:29.160 --> 00:11:30.180
a little bit bigger.

00:11:30.180 --> 00:11:32.490
Here you have a lot more
people who are kind of

00:11:32.490 --> 00:11:35.510
in-between, but they
get counted in

00:11:35.510 --> 00:11:36.310
the employed number.

00:11:36.310 --> 00:11:40.440
So they're making the actual
reported official unemployment

00:11:40.440 --> 00:11:43.420
rate a little bit lower
than is actually

00:11:43.420 --> 00:11:44.940
the economic reality.

00:11:44.940 --> 00:11:46.430
I think that's a really
important thing to realize

00:11:46.430 --> 00:11:48.430
that you have this accelerating
rate of

00:11:48.430 --> 00:11:50.880
desperation out there in the
economy and, if anything, it's

00:11:50.880 --> 00:11:53.560
telling us that things are
getting worse, and it's

00:11:53.560 --> 00:11:55.460
telling us that things are
probably as bad as they've

00:11:55.460 --> 00:11:58.140
been in some of the worst
recessions in history and

00:11:58.140 --> 00:11:59.890
they're only getting worse.

00:11:59.890 --> 00:12:02.900
And going back to where we
started this video, in terms

00:12:02.900 --> 00:12:05.660
of capacity utilization and what
that might do to prices,

00:12:05.660 --> 00:12:13.100
this tells us that labor
utilization is

00:12:13.100 --> 00:12:15.130
low and going down.

00:12:15.130 --> 00:12:16.480
What that tells us, is
that the price of

00:12:16.480 --> 00:12:17.280
labor is going down.

00:12:17.280 --> 00:12:20.800
And you've probably read
multiple news reports already

00:12:20.800 --> 00:12:24.120
about how this is the first
time furloughs are big.

00:12:24.120 --> 00:12:27.710
People are actually
taking wage cuts.

00:12:27.710 --> 00:12:32.250
So you're already seeing
deflation in wages.

00:12:32.250 --> 00:12:35.210
And when so much of our economy,
and even the basket

00:12:35.210 --> 00:12:38.920
of goods in the CPI-- and I'll
do another video on that --is

00:12:38.920 --> 00:12:41.780
service based, if you're seeing
deflation in wages,

00:12:41.780 --> 00:12:44.140
that's another data point that
tells you, at least in the

00:12:44.140 --> 00:12:48.340
medium term, we're probably
going to see further deflation

00:12:48.340 --> 00:12:50.280
in prices as a whole.

00:12:50.280 --> 00:12:52.100
See you in the next video.


Geithner plan 3

WEBVTT
Kind: captions
Language: en

00:00:01.620 --> 00:00:04.970
In the second Geithner video,
I lay out a scenario where a

00:00:04.970 --> 00:00:07.400
bank could-- let me draw
its balance sheet.

00:00:07.400 --> 00:00:10.840
Let's say-- oh, that's not
how I wanted to do it.

00:00:10.840 --> 00:00:13.170
Let's say this is a bank.

00:00:13.170 --> 00:00:18.476
It's holding-- let me draw its
assets and liabilities.

00:00:18.476 --> 00:00:23.790
So it's holding some toxic
asset A right here.

00:00:23.790 --> 00:00:26.210
And that could be the bank's
equity, that's its

00:00:26.210 --> 00:00:28.700
liabilities, And this is the
other assets for the bank.

00:00:28.700 --> 00:00:31.270
So it could hold some toxic
asset A, and we lay out a

00:00:31.270 --> 00:00:33.640
scenario where, what the bank
could do, right now it has

00:00:33.640 --> 00:00:35.380
100% exposure to A.

00:00:35.380 --> 00:00:38.310
What it could do is it could
take a little bit of cash,

00:00:38.310 --> 00:00:39.530
lend it to another party.

00:00:39.530 --> 00:00:44.635
Let's say it could lend it to a
hedge fund, so this becomes

00:00:44.635 --> 00:00:47.310
a loan to the hedge fund.

00:00:47.310 --> 00:00:54.190
So now the hedge fund owes this
money to our bank and it

00:00:54.190 --> 00:00:59.430
now has the cash on
its balance sheet.

00:00:59.430 --> 00:01:02.620
So this would now, instead of
being cash, it'll be called

00:01:02.620 --> 00:01:08.470
loan to hedge fund.

00:01:08.470 --> 00:01:10.670
Now this is the hedge fund's
balance sheet.

00:01:10.670 --> 00:01:17.380
Its liability is
loan from bank.

00:01:17.380 --> 00:01:20.740
And now it has this cash, and
then it could use this cash to

00:01:20.740 --> 00:01:25.540
invest in essentially the Legacy
Loans Program, the

00:01:25.540 --> 00:01:28.560
public-private investor Legacy
Loans Program that Geithner

00:01:28.560 --> 00:01:29.480
talks about.

00:01:29.480 --> 00:01:32.070
And if they did this, they could
take this-- let's say

00:01:32.070 --> 00:01:34.900
this was $7.

00:01:34.900 --> 00:01:39.400
They could take this $7,
contribute it to the equity in

00:01:39.400 --> 00:01:40.420
the program.

00:01:40.420 --> 00:01:43.210
The Treasury would contribute
another $7.

00:01:43.210 --> 00:01:48.205
The Fed would contribute $84,
and then they would have $100,

00:01:48.205 --> 00:01:50.150
and I know this is kind of
messy, but they would have

00:01:50.150 --> 00:01:54.600
$100 that they can then use
to go buy these assets.

00:01:54.600 --> 00:01:58.810
And the net effect of this is
that this bank went from

00:01:58.810 --> 00:02:03.570
having 100% exposure to this
toxic asset to having only $7

00:02:03.570 --> 00:02:06.880
exposure through this loan to
this hedge fund, or this

00:02:06.880 --> 00:02:08.770
special-purpose entity, or
whatever you want to call it.

00:02:08.770 --> 00:02:11.820
And I got a couple of emails,
even from some colleagues, to

00:02:11.820 --> 00:02:15.340
say, well, can this
really be done?

00:02:15.340 --> 00:02:19.420
And my kind of knee-jerk
reaction was, well, if this

00:02:19.420 --> 00:02:21.930
can't be done, they'll figure
out a way to do it, because

00:02:21.930 --> 00:02:24.500
there's billions of dollars
at stake, and really, the

00:02:24.500 --> 00:02:27.320
incentive here is structured
to do it.

00:02:27.320 --> 00:02:30.860
And frankly, the Government
probably wants them to do it,

00:02:30.860 --> 00:02:33.300
because on some level, even
though this would be a massive

00:02:33.300 --> 00:02:38.280
transfer of exposure and wealth
from the taxpayers to

00:02:38.280 --> 00:02:41.650
the banks, it would on some
level solve the problem.

00:02:41.650 --> 00:02:43.630
And if people really aren't
aware of it, everyone will be

00:02:43.630 --> 00:02:46.310
happy about it, because all of
these banks, Citibank and Bank

00:02:46.310 --> 00:02:50.420
of America, will just survive,
and they can just kind of say

00:02:50.420 --> 00:02:51.880
that all's well.

00:02:51.880 --> 00:02:54.250
So what I wanted to do, just to
answer those questions, is

00:02:54.250 --> 00:02:56.590
get a little bit particular
about the wording.

00:02:56.590 --> 00:02:58.580
And I got an email.

00:02:58.580 --> 00:03:02.990
Leigh Logan actually emailed
me, and she highlighted one

00:03:02.990 --> 00:03:07.280
clause in the Legacy Loans
term sheet that seems to

00:03:07.280 --> 00:03:11.500
address what I talk about in
that second video there.

00:03:11.500 --> 00:03:14.680
And this is from the Legacy
Loans terms sheet.

00:03:14.680 --> 00:03:17.990
It says: "Private investors
may not participate in any

00:03:17.990 --> 00:03:21.920
PPIF"-- so this is that
Private-Public Investment

00:03:21.920 --> 00:03:26.200
Fund-- "that purchases assets
from sellers that are

00:03:26.200 --> 00:03:32.420
affiliates of such investors or
that represent 10% or more

00:03:32.420 --> 00:03:37.550
of the aggregate private
capital in the PPIF."

00:03:37.550 --> 00:03:39.210
So the question is what's
an affiliate?

00:03:39.210 --> 00:03:41.790
And I looked it up in the
Securities Exchange Act of

00:03:41.790 --> 00:03:43.750
1934, and there are multiple
definitions.

00:03:43.750 --> 00:03:45.050
But this is probably
the best one.

00:03:45.050 --> 00:03:47.110
It says: "The term affiliate
means any company that

00:03:47.110 --> 00:03:51.720
controls, is controlled by, or
is under common control with

00:03:51.720 --> 00:03:55.930
another company." And that's an
area that I just outlined.

00:03:55.930 --> 00:03:58.220
This bank really
doesn't control

00:03:58.220 --> 00:03:59.650
this hedge fund, right?

00:03:59.650 --> 00:04:02.540
They just essentially gave them
a loan with very little

00:04:02.540 --> 00:04:05.220
stipulations on it, and then the
hedge fund can go do it.

00:04:05.220 --> 00:04:06.590
But, you could say, oh, well,
you know, there's nothing that

00:04:06.590 --> 00:04:12.150
this bank could do to force this
hedge fund to buy these

00:04:12.150 --> 00:04:14.190
assets, so maybe this
plan won't work.

00:04:14.190 --> 00:04:16.459
And another thing is what's
the definition

00:04:16.459 --> 00:04:17.700
of the private capital?

00:04:17.700 --> 00:04:20.040
You also can't represent
10% more of the

00:04:20.040 --> 00:04:21.950
aggregate private capital.

00:04:21.950 --> 00:04:25.990
Frankly, when I think of private
capital, I think more

00:04:25.990 --> 00:04:28.440
in terms of equity investments,
but maybe the

00:04:28.440 --> 00:04:30.670
definition of private capital
also includes debt

00:04:30.670 --> 00:04:32.720
investments, although,
I doubt it.

00:04:32.720 --> 00:04:35.500
So in this video I want to
lay out a scenario that,

00:04:35.500 --> 00:04:38.830
essentially, it can do the same
thing economically, and

00:04:38.830 --> 00:04:42.850
in fact, the exact behavior
that they want in other

00:04:42.850 --> 00:04:46.760
parties without being in any
way an affiliate of the

00:04:46.760 --> 00:04:49.670
counterparty and in
no way giving

00:04:49.670 --> 00:04:51.820
capital directly to them.

00:04:51.820 --> 00:04:54.470
So what Bank A could do
instead-- let me redraw it.

00:04:54.470 --> 00:04:55.320
Actually, not Bank A.

00:04:55.320 --> 00:04:59.500
The bank that's holding
toxic asset A.

00:04:59.500 --> 00:05:01.760
And this is what I thought of
after kind of thinking about

00:05:01.760 --> 00:05:04.300
it for about five
or ten minutes.

00:05:04.300 --> 00:05:06.780
You could imagine what the banks
will come up with when

00:05:06.780 --> 00:05:11.130
they have billions of dollars
and careers on the line.

00:05:11.130 --> 00:05:14.260
So if you have a scenario where
you have this toxic

00:05:14.260 --> 00:05:18.510
asset A, and you economically
want to do what I describe,

00:05:18.510 --> 00:05:20.870
but you don't want to be an
affiliate and you don't want

00:05:20.870 --> 00:05:23.990
to give the appearance of
self-dealing, what you do is

00:05:23.990 --> 00:05:27.960
you sell credit defaults on A
that become supercheap, so you

00:05:27.960 --> 00:05:31.420
have essentially $7 exposure
of credit defaults.

00:05:31.420 --> 00:05:33.160
Let me do it this way.

00:05:33.160 --> 00:05:35.780
So what you do is you sell
credit default swaps.

00:05:35.780 --> 00:05:38.190
So let's say you sell
$7 of exposure.

00:05:38.190 --> 00:05:44.430
So your liability right here,
is a seven-dollar CDS

00:05:44.430 --> 00:05:46.710
exposure, and I'll go over
the economics of how

00:05:46.710 --> 00:05:48.170
this works in a second.

00:05:48.170 --> 00:05:50.620
And you actually get some
of the income stream.

00:05:50.620 --> 00:05:51.900
It wouldn't even be accounted
this way.

00:05:51.900 --> 00:05:55.490
You normally just have to-- if
you're insuring $7 worth of

00:05:55.490 --> 00:05:58.570
credit default swaps, your
liability isn't $7.

00:05:58.570 --> 00:06:01.260
You do the probability of
default and all that, so your

00:06:01.260 --> 00:06:03.830
liability will probably be-- I
don't know, $1.00, whatever it

00:06:03.830 --> 00:06:06.290
is, and you get some income
stream for it.

00:06:06.290 --> 00:06:14.530
But the general notion is that
you sell credit default swaps

00:06:14.530 --> 00:06:20.710
on this toxic asset, on
A, for really cheap.

00:06:24.060 --> 00:06:25.970
And just so you know what a
credit default swap is, I've

00:06:25.970 --> 00:06:28.400
made a couple of videos on it,
it is essentially an insurance

00:06:28.400 --> 00:06:32.690
policy on a loan or on a
company, and if that company

00:06:32.690 --> 00:06:37.380
or this loan defaults, you say
that you are going to pay up

00:06:37.380 --> 00:06:39.350
essentially the insurance
amount.

00:06:39.350 --> 00:06:45.600
So what you do is you sell $7 of
credit defaults swaps on A.

00:06:45.600 --> 00:06:47.710
And just so you know, most of
these toxic assets that these

00:06:47.710 --> 00:06:51.450
banks hold, these are assets
that they were the originators

00:06:51.450 --> 00:06:55.000
for, and so, they're
very particular to

00:06:55.000 --> 00:06:56.550
the individual banks.

00:06:56.550 --> 00:06:58.870
So a bank can definitely say I'm
selling a credit default

00:06:58.870 --> 00:07:01.930
swap on A, and they know that,
in the end, when I kind of

00:07:01.930 --> 00:07:03.910
outline this whole thing,
they'll be the main

00:07:03.910 --> 00:07:05.670
beneficiary of it.

00:07:05.670 --> 00:07:08.420
So if you sell $7 of credit
defaults swaps on A, what

00:07:08.420 --> 00:07:09.250
would I do?

00:07:09.250 --> 00:07:12.010
Well, I'm a hedge fund.

00:07:12.010 --> 00:07:13.630
What I do is I buy those credit

00:07:13.630 --> 00:07:15.240
defaults for really cheap.

00:07:15.240 --> 00:07:17.090
And then I invest in
the TALF, right?

00:07:17.090 --> 00:07:21.250
So let's say I'm a hedge fund,
and I have two things.

00:07:21.250 --> 00:07:29.760
I have a $7 investment in the
TALF-- sorry, in this Geithner

00:07:29.760 --> 00:07:35.800
Plan, and then I also have this
credit default swap, this

00:07:35.800 --> 00:07:37.590
insurance contract.

00:07:37.590 --> 00:07:41.050
And just so you know, depending
on the price, you

00:07:41.050 --> 00:07:42.920
pay a certain amount
every year.

00:07:42.920 --> 00:07:45.170
But the key here is that this
bank could sell it, if they

00:07:45.170 --> 00:07:47.540
wanted to, for almost free.

00:07:47.540 --> 00:07:49.420
They could essentially
give away these

00:07:49.420 --> 00:07:50.530
credit default swaps.

00:07:50.530 --> 00:07:53.820
So if that bank did it, then the
hedge fund's assets would

00:07:53.820 --> 00:07:57.825
have the $7 investment in this
Geithner program, and then

00:07:57.825 --> 00:08:04.150
it'll have $7 of credit default
swap protection.

00:08:07.340 --> 00:08:09.350
Now what happens to
this hedge fund?

00:08:09.350 --> 00:08:13.670
In the world where asset A is
worth a lot, they get all of

00:08:13.670 --> 00:08:16.410
the upside through their
investment in

00:08:16.410 --> 00:08:17.880
the Geithner Plan.

00:08:17.880 --> 00:08:22.330
That $7 investment gets
levered to $100.

00:08:22.330 --> 00:08:23.710
Let me actually draw
that again.

00:08:23.710 --> 00:08:26.510
So that $7 investment
is here, $7

00:08:26.510 --> 00:08:29.550
capital, $7 from the Treasury.

00:08:29.550 --> 00:08:36.120
You have $86 from the Fed, and
they use this to give the cash

00:08:36.120 --> 00:08:38.820
here, and then that goes
back here, and you're

00:08:38.820 --> 00:08:40.970
holding toxic asset A.

00:08:40.970 --> 00:08:44.380
Now if toxic asset A ends up
being worth a lot of money,

00:08:44.380 --> 00:08:49.140
then this is worth a lot, and
this is worth nothing, And

00:08:49.140 --> 00:08:51.240
that's OK, because the hedge
fund essentially paid nothing

00:08:51.240 --> 00:08:56.110
for it or paid next to nothing
for it, in which case,

00:08:56.110 --> 00:08:58.970
everyone kind of works out
well in that scenario.

00:08:58.970 --> 00:09:02.260
On the other hand, let's say
that this thing is worth zero.

00:09:02.260 --> 00:09:04.820
Let's say that this
thing defaults.

00:09:04.820 --> 00:09:09.380
If that thing defaults, then
this investment is worth zero.

00:09:09.380 --> 00:09:10.060
But guess what?

00:09:10.060 --> 00:09:13.140
The hedge fund had an insurance
policy, where this

00:09:13.140 --> 00:09:14.070
guy was a counterparty.

00:09:14.070 --> 00:09:16.740
So he says, hey, this thing
here defaulted.

00:09:16.740 --> 00:09:19.720
I'm going to claim my insurance
policy, so this

00:09:19.720 --> 00:09:23.720
guy's going to have
to send him $7.

00:09:23.720 --> 00:09:27.850
So it's economically the exact
same thing that I outlined in

00:09:27.850 --> 00:09:31.600
the Geithner Two video, but in
this situation, these guys,

00:09:31.600 --> 00:09:33.560
it's almost an arms-length
transaction.

00:09:33.560 --> 00:09:37.380
But this bank can make that
behavior happen by essentially

00:09:37.380 --> 00:09:39.810
going into the market and
selling credit default swaps

00:09:39.810 --> 00:09:43.020
for this exact asset for
really, really cheap.

00:09:43.020 --> 00:09:44.540
And this is just the first
way I thought about it.

00:09:44.540 --> 00:09:45.620
There's other ways
you could do it.

00:09:45.620 --> 00:09:49.090
If you're just a separate hedge
fund and you own enough

00:09:49.090 --> 00:09:52.000
of the shares in a bank, let's
say you owned all of the

00:09:52.000 --> 00:09:54.580
shares of the bank or a good
percentage of the shares of

00:09:54.580 --> 00:09:57.760
the bank, then you would also
have an incentive to go out

00:09:57.760 --> 00:10:03.260
there and use the Geithner
Plan and lever up and buy

00:10:03.260 --> 00:10:03.790
these assets.

00:10:03.790 --> 00:10:05.760
Another thing is-- I don't want
to get too technical --if

00:10:05.760 --> 00:10:08.450
you kind of hold one of the
fulcrum pieces of debt, the

00:10:08.450 --> 00:10:10.310
pieces of debt that are trading
at a discount, because

00:10:10.310 --> 00:10:12.740
you're afraid that this bank is
going to fail, if you hold

00:10:12.740 --> 00:10:15.350
a bunch of those assets,
you still would want to

00:10:15.350 --> 00:10:18.070
participate in the Geithner Plan
and funnel money and use

00:10:18.070 --> 00:10:21.280
the Government money to
essentially buy this asset A.

00:10:21.280 --> 00:10:25.630
I mean, the general theme here
is, if you have two people, if

00:10:25.630 --> 00:10:29.500
this is the private world and
you have a scenario where

00:10:29.500 --> 00:10:35.360
person A, if a transaction can
make $100 or he gets rid of

00:10:35.360 --> 00:10:40.770
$100 exposure, and person B
essentially has a potential

00:10:40.770 --> 00:10:44.640
loss of minus $7 of exposure,
there's a net transfer of

00:10:44.640 --> 00:10:46.240
wealth here.

00:10:46.240 --> 00:10:52.190
You went from $100 of exposure
to $7 exposure for this guy.

00:10:52.190 --> 00:10:56.110
So someone is offloading the $93
of exposure to this stuff,

00:10:56.110 --> 00:10:57.090
and that's the Government.

00:10:57.090 --> 00:11:00.670
The Government's only taking
the down side.

00:11:00.670 --> 00:11:04.100
So this is a huge subsidy of
exposure, and it depends what

00:11:04.100 --> 00:11:06.860
these are really worth, if this
thing is really worth $30

00:11:06.860 --> 00:11:10.680
and it's a $63 exposure, but
any time you have this, the

00:11:10.680 --> 00:11:15.680
private sector is going to
figure out a way to make this

00:11:15.680 --> 00:11:16.870
subsidy happen.

00:11:16.870 --> 00:11:19.940
And everything I've outlined
so far is if A is the bank

00:11:19.940 --> 00:11:24.450
that has 100% exposure, all they
have to do is, through

00:11:24.450 --> 00:11:28.460
whatever back-door scheme or
financial product or insurance

00:11:28.460 --> 00:11:31.790
or whatever they want to do, or
loans that have very little

00:11:31.790 --> 00:11:35.050
stipulations on it, they just
have to give this guy

00:11:35.050 --> 00:11:40.390
essentially $7 of compensation
somehow that gets around the

00:11:40.390 --> 00:11:43.930
Government rules, and then this
transaction will occur.

00:11:43.930 --> 00:11:46.740
And I hope it doesn't occur,
and it's very possible it

00:11:46.740 --> 00:11:49.400
won't, because maybe I'm missing
something here, but

00:11:49.400 --> 00:11:52.040
I'm just saying that everything
I understand about

00:11:52.040 --> 00:11:55.280
the Geithner Plan is that
there's a huge incentive for

00:11:55.280 --> 00:11:58.090
this to occur, and this is
frankly the only reason why

00:11:58.090 --> 00:11:59.240
the plan would work.

00:11:59.240 --> 00:12:03.000
Because, as I outlined in the
other videos, for a private

00:12:03.000 --> 00:12:05.020
investor who's not incentivized
in this way, the

00:12:05.020 --> 00:12:08.380
put option that the Government
is giving them still is not

00:12:08.380 --> 00:12:12.220
enough of a rationale to go from
paying $30 for an asset

00:12:12.220 --> 00:12:14.510
to going to pay $60 an asset.

00:12:14.510 --> 00:12:16.930
So it won't work if this
behavior doesn't occur.

00:12:16.930 --> 00:12:19.900
The only way that the plan quote
unquote will work and

00:12:19.900 --> 00:12:22.410
people will overpay for the
assets is if you have this

00:12:22.410 --> 00:12:24.650
type of action going on.