Hello everyone,

I hope you had a nice weekend. Hard to believe we’re already into the last month of summer. But lots to look forward to in those great fall months of September and October.

I was a return guest on Piggo’s Trading and Tony and I had another great conversation. I hope you get a chance to listen to it.

Summary

• We look at four different ways of spending money.
  • Government is the worst and continues to grow.
• Uber vs. Lyft update.
  • Lyft still a far better deal.
• A.I. data center, and government infrastructure spending are still booming.
  • And Caterpillar is benefiting from both.
• Conversely, Deere Corporation’s sales growth slows.
  • Farmers are suffering from high input costs and are cutting back on large equipment purchases.
• Financial Ructions:
  • The Fed’s ample reserve system.
    • No, banks do not need ample reserves to grow their loans business.
  • We take another look at imputed rents.
    • And their fictional contribution to Canada’s GDP.
  • The U.S. is increasing its usage of emergency measures to keep bond yields from exploding higher.
    • The pressure will not relent.
• Book Review
  • We cover the next two chapters of Why Socialism Struggles.
    • Money is not evil and a paragraph from my book.
    • A closer look at the difference between Socialism and Capitalism.

News

Spending Money

According to Milton Friedman, there are four ways of spending money.

1. You spend your own hard-earned money on yourself.
   • You are incentivized to:
     • Pay the least amount.
     • Get the most value.
2. You spend your hard-earned money on someone else.
   • You are incentivized to:
     • Pay the least amount.
     • But not necessarily get the most value.
3. You spend someone else’s hard-earned money on yourself.
   • You are incentivized to:
     • Get the most value.
     • But not to get the lowest cost.
4. You spend someone else’s money on someone else.
   • You are not incentivized to do either of:
     • Get the most value.
     • Or economize on cost.

As you might expect, number 4 is government, and the higher the percentage of government spending in an economy, the less wealth that gets generated.

• Governments then raise taxes even more because the economy’s not producing as much as it should be.
  • The increased taxation decreases wealth creation yet further, and so on.

Government spending as a percentage of GDP (source: IMF):

Country	1955	2024
U.S.	23.2%	37.9%
Canada	15.0%	44.7%
U.K.	28.6%	44.0%
France	20.0%	57.2%

Uber vs. Lyft Update

As you know, I’ve started using Lyft a lot more often as their prices tend to be far cheaper than Uber.

• The latest example was our ride from Fort Lauderdale Airport to South Palm Beach:
  • Uber: US$134
  • Lyft: US$78

Caterpillar: In The Right Spot

Caterpillar is the world’s largest construction equipment manufacturer.

• Its history goes back over a hundred years.
• The original steam-driven wheeled tractors were very heavy and used to get stuck in the mud.
• In 1904, the company decided to replace the wheels of its steam-driven tractor with tracks. On seeing it, a photographer said, “If that don’t look like a monster caterpillar.” Thus the company name.
  • Works pretty well for tanks too.

Sales in North America by quarter:

• 1Q/2023: +30%
• 2Q/2023: +32%
• 3Q/2023: +25%
• 4Q/2023: +11%
• 1Q/2024: +7%
• 2Q/2024: +1%
• 3Q/2024: -4%
• 4Q/2024: -5%
• 1Q/2025: -10%
• 2Q/2025: -2%
• 3Q/2025: +13%
• 4Q/2025: +18%
• 1Q/2026: +22%
• 2Q/2026: +24%

• Global sales change by sector:
  • Construction: +35%
  • Resource Industries: +20%
  • Power and Energy: +17%
    • Oil and Gas: +9%
    • Industrial: +9%
    • Power Generation: +29%
    • In large part driven by “data center buildout related to cloud computing and generative AI.”
• Their backlog nearly doubled from last year.
• North America sales change by sector:
  • Construction: +50%
  • Resource Industries: +34%
  • Power and Energy: +30%
    • Some of their customers are placing orders for as far out as 2030.
• Other Regions:
  • Latin America: +10%
  • Europe, Africa, Middle East: +14%
  • Asia: +4%
    • Saw “moderate conditions in their China business but weakness in other parts of Asia.”

• Government spending continues to support sales growth at Caterpillar.
  • Specifically, the Infrastructure Investment and Jobs Act of 2021: $1.2 trillion.
    • Estimates vary, but probably less than half of that has been spent so far.

Other notes:

• They recorded a record backlog of $72 billion.
  • Up 92%!
• It was the first time they had over $20 billion in sales in one quarter.
• Adjusted operating profit was up 36%.

Caterpillar share price:

• 1yr: +104%
• 5yrs: +324%

Deere Corporation

Deere is a global leader in agricultural, forestry and construction equipment.

Quarterly sales growth for Deere:

Quarter	Production and Agriculture	Small Ag & Turf	Construction and Forestry	Total
4Q-2022	+59%	+26%	+20%	+37%
1Q-2023	+55%	+14%	+26%	+32%
2Q-2023	+53%	+16%	+23%	+30%
3Q-2023	+12%	+3%	+14%	+12%
4Q-2023	-6%	-13%	+11%	-1%
1Q-2024	-7%	-19%	0%	-4%
2Q-2024	-16%	-23%	-7%	-12%
3Q-2024	-25%	-18%	-13%	-17%
4Q-2024	-38%	-25%	-29%	-28%
1Q-2025	-37%	-28%	-38%	-30%
2Q-2025	-21%	-6%	-23%	-16%
3Q-2025	-16%	-1%	-5%	-9%
4Q-2025	+10%	+7%	+27%	+11%
1Q-2026	+3%	+24%	+34%	+13%
2Q-2026	-14%	+16%	+29%	+5%

Some notes:

• Ongoing challenges in the global agricultural markets.
  • Large agricultural equipment sales in the U.S. and Canada are expected to fall 15-20% this year.
    • Farmers’ margins are being pressured by high fuel and fertilizer costs.
      • The company also said high interest rates are deterring large equipment purchases.
        • But as you know, today’s interest rates are normal, not high.
• In Construction, strong infrastructure spending is offsetting weak residential construction.

Sales:

• 2Q/2019: $11.3 billion
• 2Q/2026: $13.4 billion

Period	Annual Sales Growth	Annual Share Price Growth
1984 to 2019	4.9%	10.7%
2019 to 2026	2.4%	19.9%

Deere share price:

• 1yr: +21.4%
• 5yrs: +68.9%

Financial Ructions

Note: “Financial Ructions” is optional-to-read for those who are interested in taking a bit of a deeper dive.

Ample Reserves

You’ll hear some people these days saying that the U.S. banking system needs significantly more reserves than it did in the past in order to make loans.

• This is not correct.
• Reserves are not a binding constraint on loan growth.
• Remember that pre-GFC, the total reserves in the banking system were only around $45 billion, and it was more than enough to fund loan growth.
  • Reserves are used and reused to settle account balances within the banking system.
  • And there were reserve requirements of 10% on demand deposits above certain thresholds.
    • Today, there are no reserve requirements, and so theoretically loan growth can continue with a static number of reserves.
    • This contrasted with the 10% reserve ratio regime. If the central bank refused to create new reserves on demand, then the total amount of loans that could be created on new reserves would be 10x the reserves.
    • For instance, if the Fed created $1 billion of reserves for Bank A by purchasing $1 billion in Treasuries from that bank, then Bank A could create deposits (loans) of $900 million.
    • Bank A’s customers spend that money, which ends up in other banks.
    • Those other banks can create loans worth 90% of the $900 million in deposits they received, i.e. $810 million of new loans.
    • And so on, until there are $10 billion of new deposits created as a result of the Fed’s new $1 billion in reserves.
• So why does the system need ample reserves?
  • It’s to maintain high asset prices and keep 10-Year Treasury yields lower than they would otherwise be.
  • Of course, there are all sorts of monetary plumbing issues that now need addressing because of those very ample reserves.
    • In short, the Fed created a monetary Frankenstein monster that they can’t get back into the cage.
      • They sacrificed the real economy on the altar of higher asset prices.
• So, in my opinion, here was the path.
  • The Fed starts tanking rates in 2001 to create a fake housing wealth effect to offset the negative wealth effect of the imploding dot-com bubble.
    • This was as recommended by Paul Krugman and Paul McCully.
  • They blow the whole financial system up with the help of Wall Street.
  • But rather than admit any role in the calamity, they double and triple down on their distortion of the price discovery mechanism in housing and capital markets by creating trillions of dollars to buy government bonds and mortgage-backed securities.
  • As QE ends, stock markets start to roll over, so they initiate QE2 and then QE3.
  • They now realize that they can’t shrink their balance sheet without tanking markets, so they abandon any hope of selling their assets and start calling it an ample reserve system, as if that were part of the plan all along.
    • No, it wasn’t part of the plan.
      • Driving asset prices higher was the plan.

Imputed Rent

We talked about this last October and how it’s a joke that it’s included in GDP.

• In Canada (and some other countries) it has become a meaningful part of GDP growth because of skyrocketing home prices.
  • And as discussed earlier, home prices rising does not add to the wealth of society but is rather a wealth transfer within it.
• Better Dwelling had written about the subject, and they have another article here.
  • They call imputed rent a fictional contribution to Canada’s GDP.

We’ll discuss the new article, but first a reprint from my Post 337 in October 2025:

A good article here by Better Dwelling

What are imputed rents?

• If you buy a home, you obviously don’t have to pay any rent.
• But the government says that as your house is providing you with a service, that it’s adding to the wealth of the economy.
  • And so, they estimate what rent you would have to pay to live in your home, and they add that to GDP.
    • PM: You can’t make this stuff up.
• As the article shows, imputed rents in Canada accounted for over 12% of the country’s real growth over the last year.
  • And is 8.5% of total real GDP.
    • As you might expect, this has increased significantly since central banks started driving house prices higher back in 2001.

So, think of it this way. You have a choice of renting an apartment or building a home.

• You decide you don’t want to pay rent, and so you spend the upfront cost of buying your home, i.e. the price of building your home is sort of like the net present value of all of your rental payments if you had decided to rent instead.
• So, building your home adds to GDP because real capital was produced, i.e. you built a home.
  • But the government says that by subsequently living in your home, you’re contributing to GDP through the imputed rent, i.e. the rent you would have to pay if you didn’t own your home.
    • But you do own your home: you decided to pay upfront precisely because you didn’t want to have to pay rent to anyone.
  • The home doesn’t change, you don’t pay any rent (no cash changes hands), yet the government assumes that society is that much better off regardless.
  • And if the government creates a housing bubble like it did since 2001, imputed rents go up with house prices, so GDP is higher than it otherwise would be.
    • But there is no capital created in any way by driving housing prices higher.
      • People are just paying more for the same economic good.
  • It’s the same amount of houses and the same amount of people not paying rent to themselves.
    • Imagine an island with three houses on it priced at $400,000.
    • The island government includes imputed rent in the island GDP.
    • Now the three residents agree to buy their homes from each other at a price of $500,000.
      • Imputed rents would rise and boost the island GDP.
      • Yet, absolutely no capital in any way, shape, or form was created or added to the island economy.

But it gets worse. Some countries actually tax homeowners on the fake rental income that they’re supposedly paying themselves.

• And yes, they’re all in Europe.
  • Next, they’ll be taxing imputed rents for riding your bike.

Notes from the latest article on this from Better Dwelling:

• Almost a quarter of Canada’s 1Q/2026 GDP growth came from imputed rents.
• Contribution to GDP growth:
  • Imputed rents: 23%
  • Oil and gas: 15%
• Over the last twelve months, the contribution to GDP growth in Canada from imputed rents has been 28.1%.
• Canada’s GDP experienced a sharp decline in the 4Q2025, but it would have been even worse if imputed rents hadn’t had one of its biggest increases on record.
  • Better Dwelling refers to this spike in imputed rents as “curious.”
    • PM: I’ll say.
• Imputed rents have grown steadily as a percentage of Canada’s GDP:
  • 4Q/2000: 6.6%
  • 4Q/2007: 7.0%
  • 4Q/2014: 7.8%
  • 4Q/2019: 8.2%
  • 4Q/2025: 8.4%
• And note that booming imputed rents that drive GDP higher do not create any jobs or capital.

Whack A Mole

Japan and the U.S. intervened heavily in the currency market to strengthen the Japanese Yen.

• One of the issues with Japan buying its own currency to strengthen it vs. the U.S. dollar is that it has to sell U.S. Treasuries to fund the purchases.
  • This puts upward pressure on U.S. Treasury yields.
• So, instead, Japan is utilizing the Foreign and International Monetary Authorities Repo Facility (FIMA).
  • It was introduced as an emergency measure in March 2020.
  • At the time there was the risk of foreign central banks selling their foreign reserves, mostly made up of U.S. Treasuries.
    • This would have put upward pressure on U.S. Treasury yields.
  • FIMA allows foreign central banks to temporarily exchange their Treasury holdings with the New York Fed for dollars through a repo transaction.
  • Borrowers are charged a penalty rate: currently 3.75%.
    • Note that this is higher than what the BOJ earns on its U.S. Treasuries, as most of them were bought in the Bernanke-inspired low/zero interest rate era.
  • Still, the net cost is peanuts given the numbers involved.
  • The U.S. Treasury is now considering raising the cap on this facility from $60 billion.
    • Just like QE, it’s never enough.
  • What is telling is that yet another emergency measure has been made permanent.
    • The reason being that what caused the emergency in the first place is not only not going away, it’s getting worse.
      • Rising government spending, deficits and debts.
    • There will be more emergency measures.
  • What is also telling is that the U.S. also intervened to strengthen the JPY for the first time since 1998.
    • The New York Fed sold Euro reserves to buy JPY.

JPY/USD:

• Jul 28: 163.8
• Aug 5: 157.5
  • JPY strengthened 4.0%
  • USD weakened by 3.8%

Book Review

Why Socialism Struggles

Dr. Doug Cardell | 2026

Chapter 5: What Is Trade?

DC says that “Tyranny and exploitation require the use of force.”

• And as no corporation can force anyone to buy their product or force anyone to work for them, capitalism has no power in this sense.
  • “Only government can be tyrannical, since only they have the power.”

Marx said that what people want is money, which causes greed and envy.

• Psychologist David McClelland’s Achieving Society identifies three human motivators.
  • Achievement
  • Affiliation
  • Power
• All three are tied to status.
• DC says that Marx’s ideas “ignore and actively undermine these motivators.”
  • Achievement is what leads to successful societies.
    • On the other hand, “Participation trophies in sports are symptoms of the Marxist belief that the reward is what people crave.”
      • That is, a reward for no achievement.

DC notes that religions “hold a great deal of collected wisdom.”

• He says that the Bible is often misquoted when people say that money is the root of all evil.
  • The Bible says that the love of money is the root of all evil.
• PM: Here is how I finish Chapter 4: Fun With Money of my book Capital Offence: Why Some Benefit at Your Expense:

Don’t Blame Money

Money is not evil – it is merely a medium of exchange. Evil is a human/moral trait. There is absolutely nothing wrong with the concept of money itself, but there is a lot wrong with how the money system is abused by some who control it and some who use it. Imagine there is no such thing as money and we are living in a barter system where you can only acquire things by directly exchanging one thing for another. You make bikes, which you use to exchange for the necessities of life and the odd luxury. You start working longer hours producing more bikes because you want to have a bigger house, or a nicer car, or take a trip to Europe. To have the means (i.e. the bikes that you can exchange for these items), it’s necessary to forgo some leisure time, and maybe you don’t get to spend as much time with your family because you’re spending more time in the bike shop. Obviously, making more bikes at the expense of leisure activity or family time is a personal decision. Yes, perhaps your family will suffer because you’re not around as much and perhaps you’re no fun at cocktail parties because all you talk about is bikes. But how does that make bikes evil?

Do not impute to money the faults of human nature.
– John Wesley

DC says that greed is not achievement.

• Greed is wanting more, “coupled with the willingness to do anything to get it, often at the expense of others.”
  • Thus my weekly signoff of Be free and do no harm.

PM: The role of government is primarily:

• Protect us from invasion (army)
• Protect us from each other (police)
• Enforce contract law (courts)

Therefore, DC says that the extent to which some greedy people succeed in society is a reflection of failure of government.

• PM: A free market with appropriate regulations and a sound currency prevents people from benefiting at the expense of others.
  • Our system has been moving further from this over the last 25 years.
    • DC calls it “corrupted capitalism.”

DC: People have a choice of working for themselves and retaining the majority of the benefits of their contributions.

• If one instead decides to work for someone else, it doesn’t mean that they’re being exploited.
  • It means that they’ve decided to trade potential reward for greater certainty.
    • PM: This doesn’t mean that all companies treat their employees well. Corporate cultures start at the top, and companies are run by all sorts of different people.
      • But good corporate cultures that focus on both their customers and employees tend to have a better chance of sustaining their business model over the long term.

In a fixed economy, the only way to get ahead is to take more from others: benefit at the expense of others.

• Conversely, in a growing free market capitalist system with sound money, the only way to get ahead is by creating more wealth that others value.
  • Mutual benefit system.

Chapter 6: What Is Marx Madness

DC looks at the evolution of the U.S. economy.

The percentage of the population that lived and worked on a farm:

• 1820: 80%
• 1920: 26%
• PM: 2025: 2%

Over that 100 years, from 1820 to 1920, the U.S. population grew from 9 million to over 100 million.

• This externality had severe economic consequences, such as:
  • New housing couldn’t keep up.
  • Factories were overcrowded as they struggled to keep up with demand.
  • Longer working hours.
  • Cities were polluted.
    • There were 150,000 horses in New York City, translating to a daily amount of:
      • 4.5 million pounds of manure
      • 300,000 gallons of urine
    • Raw sewage.
• However, despite this, people kept arriving from Europe as it still meant an improved quality of life.
  • PM: And remember that though the doors were open, new arrivals were on their own, i.e. there were no state handouts.
  • And over that 100 years, an hour’s labor could buy four times what it could back in 1820.
  • GDP per capita grew 4.5 times.

DC says that although unions claim responsibility for the eight-hour work week, it actually started with the employers.

• In 1817, a Welsh manufacturer, Robert Owen, coined the phrase Eight hours labor, eight hours recreation, eight hours rest.
• And Henry Ford institutionalized a 40-hour work week in 1926.
• Congress followed in 1940.

Cardell is a professor, and he says that in the teaching profession, “belief coercion” is a real problem.

• Pressuring students to act in ways contrary to their beliefs or values.

Capitalism fails when government corrupts the system to advantage some over others.

DC says that there has never been a war between “two or more large, well-established free-market capitalist democracies.”

• He says the only instances of war involve fascist-socialist dictatorships.
  • PM: I’m not sure about this one, but I guess it depends on what you define as a war.
    • Perhaps not between two free-market countries, but free-market countries have certainly started wars with non-free-market countries.

Almost one-third of new businesses in America fail in two years.

• And half in the first five years.
• Two-thirds in the first ten years.

DC defines capitalism as investing in the future.

• He calls it a commitment to hope.

Socialists are envious of the capital accumulated by capitalists.

• But they don’t see the years of sweat and toil and risk and sleepless nights that the capitalist voluntarily endured in order to accumulate that capital.
  • Socialists just see the end result.
    • PM: As I discuss in my book, many are now accumulating capital at the expense of others without having to create it themselves.
      • Central banks are the key enabler here.

Socialists dislike freedom “because it vanquishes their desire for power and control.”

• He says that Socialists have “killed over a hundred million people in their attempts to stifle dissent…”

Another sign is that free-market capitalist countries “police their borders to prevent unauthorized entry, but socialist countries police their borders to prevent citizens from escaping.”

DC talks about the normative economics of those who proffer economic laws as they wish them to be, rather than as they are.

• PM: I’d like to change the law of cheeseburgers so you actually lose weight the more you eat.

Socialism was tried in America in 1607 in Jamestown.

• All assets produced were relinquished, and there was no private property.
• People started to starve and resorted to eating their pets and shoe leather.
  • 80% of the settlers died, while others dug up corpses for food.
• It was only when the settlers were given their own land to produce their own food that things improved.

Free market capitalism is so commonsensical that it’s a marvel it’s not more widespread.

• DC says that one reason it isn’t is because ideology blinds economists.
  • PM: I would add that not allowing a free market system to operate freely denies policymakers the justification to meddle and control.
• The only people who benefit in a Socialist system are the ruling elite.

Patents came into being with the Venetian Act of 1474.

• People were now more incentivized to innovate.
• The United States Patent Office issued its first patent in 1790.
  • The patent process “triggered the most explosive burst of human progress ever seen.”

That’s It

• For Paulitical Economy® Post 379
• Until next time:
  • Be free
  • And do no harm.

Disclaimer

Note that Paulitical Economy® should not be considered investment advice, and I have not verified all of the sources of information. It is meant for general interest purposes only. Please consult an advisor if you plan on putting any of your hard-earned capital to work during these turbulent times.