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An Irish Hitler?

Economist Barry Eichengreen reconsiders the European Union:

It pains me to say this. I’m probably the most pro-euro economist on my side of the Atlantic. Not because I think the euro area is the perfect monetary union, but because I have always thought that a Europe of scores of national currencies would be even less stable. I’m also a believer in the larger European project. But given this abject failure of European and German leadership, I am going to have to rethink my position.

The Irish “program” solves exactly nothing – it simply kicks the can down the road. A public debt that will now top out at around 130 per cent of GDP has not been reduced by a single cent. The interest payments that the Irish sovereign will have to make have not been reduced by a single cent, given the rate of 5.8% on the international loan. After a couple of years, not just interest but also principal is supposed to begin to be repaid. Ireland will be transferring nearly 10 per cent of its national income as reparations to the bondholders, year after painful year.

This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know.

I like Eichengreen’s work, but he is incorrect. The failure of the European Union is not a failure of French and German leadership, it is the structural failure of yet another European experiment in authoritarian, anti-democratic, centralized empire. Now, I tend to doubt that Ireland is going to develop into the 21st century version of National Socialist Germany for numerous reasons, chief among them the fact that it is an island without a navy. But given the harsh burden being imposed on the Irish people by their European and Irish governments for the foreseeable future, one can see where The Economic Consequences of the Peace might make for a timely read right about now.

A Congress of Suckers

In which Washington D.C. is shocked, shocked, to learn that greater part of the money that was so desperately needed to save the American banks that were deemed too big to fail actually went to their European counterparts:

Foreign banks were among the biggest beneficiaries of the $3,300bn in emergency credit provided by the Federal Reserve during the crisis, according to new data on the extraordinary efforts of the US authorities to save the global financial system.

The revelation of the scale of overseas lenders’ borrowing underlines the global nature of the turmoil and the crucial role of the Fed as the lender of last resort for the world’s banking sector. However, news that banks such as Barclays of the UK, Switzerland’s UBS and Dexia of Belgium borrowed billions of dollars at favourable terms from US authorities may further anger critics already enraged about the Fed’s rescue of Wall Street….

Barclays was the biggest cumulative borrower from TAF. The UK bank, which bought the US operations of Lehman Brothers out of bankruptcy in September 2008, borrowed a cumulative $232bn from the TAF through various subsidiaries.

It’s interesting to see that nearly four times more money went to the biggest European bank than to the biggest American bank. But as we’ve seen everywhere from Ireland and Iceland to the USA, this is always how the process of structural corruption plays out in a modern “representative democracy”. The legislature forces through a pig-in-a-poke by any means necessary, threatening everything from widespread cannibalism to tanks in the streets if the legislators don’t ignore the protests of the people and obediently “address the crisis”. Then, a few years after the fact, it is learned that the actual purpose of the law was entirely different than the one that was provided in order to push it through the legislature.

I don’t have much sympathy for the people, however. Because it doesn’t matter how many times this happens, they will fall for it just as readily the moment that another crisis is announced and another solution to avert it is presented.

Dissecting a defense of QE2

The Federal Reserve policy, that is, not the boat:

David Beckworth has offered a thoughtful, but I believe ultimately flawed, “conservative case” for the Federal Reserve’s latest round of quantitative easing. While I wholeheartedly share Professor Beckworth’s desire to see the economy improve, and share his concerns that if it does not we may end up with expanded government spending, it is hard to see QE2 as providing the environment of certainty the private sector needs in order to expand.

Professor Beckworth should be commended for clearly spelling out his assumptions. Public debate would be far more fruitful if others did the same. Let’s start with his core assumption: Because the monetary base has been expanding and there’s been little inflation and little increase in consumption, households must be hoarding money. The logic in this case is sound; I disagree with the facts.

First, the good professor argues that spending is far below trend. That is true enough as it goes, but this trend includes a massive housing bubble, where imaginary wealth fueled spending, aided by massive borrowing from abroad. The objective of our economic policies should not be to get back to the top of the previous bubble. It was this desire to replace the lost wealth of the dot-com crash that contributed to the Fed’s juicing of the housing market. All that said, consumption today is higher than at any time during the recent bubble. The primary problem facing our economy is not a lack of demand.

Like Ben Bernanke, Beckworth believes we have had no inflation. Again like the Fed, he arrives at this conclusion by subtracting out of the inflation numbers all the things that real people spend their money on, such as food and energy.

Articles like this and Beckworth’s underline the importance of definitions. The money supply has been going up considerably. The CPI has been increasing, but not rapidly. Therefore, there is no inflation! (Notice that in practice, they never take production into account for the obvious reason that it is impossible to measure in any way that would be meaningful.) If we are to believe these expert economists, it doesn’t matter what is happening to actual prices or outstanding debt levels, not so long as we squint very carefully at only those metrics that we believe to define the situation.

And this is why I pay attention to indicators beyond those that I personally believe to be significant, because unlike the Keynesians, I am more interested in knowing what is actually taking place than I am in manipulating the publicbolstering animal spirits. If I am incorrect and we are headed for hyperinflation rather than debt-deflation, I would certainly like to know as soon as possible. The speed and complexity of economic events means that every economist is going to be proven wrong on a regular basis. Therefore, it behooves anyone with an interest in economics to refuse to be unduly wedded to any specific understanding or definition. This does should not be confused with some sort of conceptual relativism, it is merely a recognition of the inability of even the best economic models to reflect observable reality.

In any event, Calabria is correct. There is no rational defense of quantitative easing, regardless of the way in which one chooses to define inflation. QE2 is not an economic policy, it is the bank rape of the global economy. And by the way, there is an easier way to blow apart Beckworth’s case than Calabria does.

“Because the monetary base has been increasing so rapidly and there has been very little inflation, it must be the case that demand for the money must be increasing even more.”

Very well. Where is that “significant portion of the money supply” upon which the dread hoarders are supposedly sitting? Have bank deposits increased significantly? Beckworth also makes a classic Keynesian blunder in saying: “It fails to recognize that for every debtor there must be a creditor.” (Keynesians absolutely love this macro equivalence nonsense.) Of course, what happens when the debtor defaults….

The brothel or the burqah

The predicted consequences of post-Christian society are already presenting themselves in Britain:

What Alibhai-Brown exposes here is not merely a sexual double-standard, but also an ethnic or religious double-standard, where Muslim men have one standard for “our girls” and another standard for white girls, who are categorically presumed to be immoral.

If Alibhai-Brown has been willing to address the vicious attitudes among (some) British Muslim men that helped foster the environment in which the Derbyshire rape-gang flourished, wouldn’t it behoove someone to examine the problems among British whites that contributed to this horror?

The pimps in Bradford who talked to Alibhai-Brown about “cheap” white girls from “the estates” — British vernacular for government low-income housing, what we Americans would call “the projects” — weren’t just making up a stereotype out of thin air. In 2008, 45% of British births were to unmarried women and, in some low-income areas, the illegitimacy rate was as high as 68%. Such figures certainly indicate that a casual attitude toward pre-marital sex is commonplace in the U.K.

All of the airy secular notions about multicultural societies, sexual equality, universal suffrage, and premarital sex are finally running into the hard brick wall of historical reality. The various hypothetical coulds and shoulds are rapidly transforming into can’ts and don’ts. Now that Christian morality has been abandoned in favor of empty moral relevance, there isn’t any means of rationally arguing with the immigrant pimps who are cheefully turning out Albion’s sluttish daughters while guarding their own with all the primitive paternalism of a dragon guarding his treasure.

Now, set aside your instinctive emotional reactions for a moment and think about which of the two cultures a) truly values its daughters more, and b) is likely to demographically outperform the other. Is it the one that forcibly protects young women from their own behavior or the one that aborts them, deprives them of fathers, and generally abandons them to their momentary impulses? And is there any evidence that the positive aspects of the liberation of Western women, to use the rhetorical phrase, outweigh the negative aspects when viewed from a historical perspective?

As for one common argument to which those who admit the reality of the demographic problem often resort, the idea that the West’s scientific lead will somehow allow it to win any long-term intercultural struggle doesn’t hold water; intelligence agencies wouldn’t be assassinating Iranian scientists if sufficient military science didn’t translate across cultures and the same cultural forces that prevent Western fathers from controlling access to their daughters prevent Western universities from controlling access to their scientific technologies.

Let’s try this again

I think it’s better this time. I’m getting more familiar with Camtasia, which tends to help, and the volume is significantly louder. I also managed to utilize the full screen this time instead of inadvertantly leaving a black rectangle around the perimeter. I also introduced minor errors into two of the graphs; the CPI recalculated for the 0.6% annual error only shows a line including a recalculation for the last ten years and the labels for the dollar devaluation chart were cut off, but I’ve decided to leave it as is so that I can move on to the next one. I found a better font to use for the pop-up notes as well, or “call-outs” as Camtasia calls them.

As before, suggestions for improvement would be welcome. The next video will address why inflation has to include outstanding debt; after that I plan to do videos examining the two conventional definitions of inflation. If you’re interested in being notified when new videos are uploaded, you can subscribe to the Voxiversity Channel.

And the media is right on time

You may recall that in RGD, I wrote that the mainstream media would begin seriously throwing around references to the Great Depression before the end of 2010:

This is starting to throw off more echoes of the Great Depression, where you have a sequence of crises, each touched off by the ones that came before, like dominos falling into some diabolic design. Europe and America thought they’d seen the worst of things by the end of 1930, only to be knocked back down even harder by the contagion of the Creditanstalt crisis. In the US, the crisis ultimately triggered a string of bank failures worse than those sparked by the initial stock market crash, and the worst two years of the Great Depression were 1932-3.

I don’t want to lean too hard on this, as economic commentators (maybe including me) have started seeing Creditanstalt everywhere–in Dubai, in Greece, now in Ireland and maybe Spain. It’s entirely possible that we’ll eventually muddle through without a second major event. But it’s worth remembering that these things take a long time to unfold, and that we are often most vulnerable just when we think we have time for a breather.

The difference, of course, is that the Great Depression 2.0 is going to be much wider, and probably somewhat deeper, than its predecessor. The main reason is that the last time, only the USA attempted to fight it with major government intervention. This time, practically all the governments around the world are doing so. I’m a little off in terms of the timeline since the depression has not been publicly recognized yet, but I have no doubts that we are in it already.

The Fed defends the banksters

This is about as shameless as it gets:

The Truth in Lending Act from 1968 gives borrowers the “right of rescission,” the ability to undo a home refinancing or home equity loan within three years of the closing if the lender did not make proper disclosures — generally of the loan amount, interest rate and repayment terms. The law makes allowances for mere mistakes by the lender, but otherwise requires strict compliance, as well it should: disclosure is the main — often the only — consumer protection in the mortgage market….

The Fed proposal would change all that. Citing concern over banks’ compliance costs, it would require a borrower to pay off the remaining principal before the lender gives up its security interest. That would be clearly impossible for troubled borrowers. So the Fed’s proposal would benefit the creditor who violated the law rather than the borrower, paving the way for foreclosures that otherwise could be avoided.

In other words, the Fed wants to change the law to force a borrower to pay off his mortgage even if the mortgage bank doesn’t hold a legitimate interest in the house. This is sheer insanity. It should be clear from this that the Fed not only knows about the vast extent of the mortgage fraud, but is seeking to further victimize the victims of it. And it is no longer even pretending to be interested in the fate of the homeowning American public anymore.

The opportunity cost of sex

Since Spacebunny mentioned that the previous post was of the sort to cause most people to feign death rather than risk inadvertantly entering into the discussion, I thought I’d post Susan Walsh’s rather different take on the opportunity cost study. I suspect it is much more likely to prove interesting to the non-economists in our midst. Not that pedantic debates over opportunity cost versus net utility calculations aren’t stone cold sexy, you understand.

One of the most valuable key economic concepts is that of opportunity cost. It’s the cost of not choosing something, the benefits left behind on the road not taken, and it’s an important component of any choice you make. Sometimes the tradeoff is obvious – if you choose to date Brad, you’re giving up the opportunity to date Jonathan, for example. Often times, though, opportunity costs can be hidden, which can lead to making irrational decisions….

Women often figure they have nothing to lose by staying in a disappointing arrangement until something better comes along. This is a terrible strategy for three reasons:

It’s not just women who make this mistake. As I’ve told some of my male friends time and time again, women should not be confused with jobs. While the best way to find a new job is to have a job, the best way to find a wife is not to have a wife. If you want to meet women, you are much better off being out, about and unattached than caught up in a half-hearted relationship with a girl that you plan to trade in for someone better on the off-chance that you happen to meet them on one of the nights that you’re not sitting at home watching re-runs of Sex in the City with a woman you don’t even particularly like. It’s not fair to her and it’s not utility maximizing for you.

UPDATE: We’re not talking about pre-selection here. We’re talking about the sort of man who is in a “serious relationship” but doesn’t want to be and is simply waiting around for someone else to come along before he can break it off with her.

An incompetent economist at the NYT

It’s little wonder they can’t figure out that we’re in a depression.

Virtually all economists consider opportunity cost a central concept. Yet a recent study by Paul J. Ferraro and Laura O. Taylor of Georgia State University suggests that most professional economists may not really understand it. At the 2005 annual meetings of the American Economic Association, the researchers asked almost 200 professional economists to answer this question:

“You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton? (a) $0, (b) $10, (c) $40, or (d) $50.”

The opportunity cost of seeing Clapton is the total value of everything you must sacrifice to attend his concert – namely, the value to you of attending the Dylan concert. That value is $10 – the difference between the $50 that seeing his concert would be worth to you and the $40 you would have to pay for a ticket. So the unambiguously correct answer to the question is $10. Yet only 21.6 percent of the professional economists surveyed chose that answer, a smaller percentage than if they had chosen randomly.

This is completely wrong and the 27.6 percent of economists who answered (d) $50 were correct. Remember, the question posed states that the opportunity cost is the total value of everything you must sacrifice to attend the Clapton concert. The total value of the Dylan concert to you is $50. In attending the Clapton concert, you do not attend the Dylan concert which you valued at $50. Therefore, the opportunity cost to you is $50 even though not going to see Dylan meant that you didn’t have to pay the $40 you would have otherwise had to pay for a ticket. Opportunity cost is a cost, it is not the net of cost minus implied savings.

In order to incorrectly claiming the correct answer is $10, Robert Frank has to change his definition of opportunity cost from “the total value of everything you must sacrifice” to a nonsensical one that factors in things that you might have otherwise had to sacrifice but didn’t. Based on the example given, it doesn’t matter what the cost of the Dylan ticket is. Whether the Dylan ticket costs $5 or $500, the opportunity cost of going to see Clapton for free is still $50 because that is the value that you place on seeing Dylan and you did not see him. The fact that you didn’t spend $40 on a Dylan ticket is irrelevant; why not throw in $5 for the pizza you didn’t buy and another $150,000 for the Lamborghini you didn’t buy either as well: by Frank’s bizarre reckoning, the opportunity cost of seeing Clapton will leave you with a profit of $150,015!

To put it in terms that even non-economists should be able to understand, let us consider Archie’s Dilemma. When contemplating choosing Veronica (who is on the pill) over Betty (who isn’t), the opportunity cost of nailing the brunette is NOT not banging the blonde less the price of a condom, it is simply not banging the blonde.

Like most Keynesians and monetarists, (and most mainstream economists are one or the other), neither Frank nor the authors of the study understand that value is subjective, not objective, and so they make their usual mistake of running arbitrary numbers through meaningless formulas and ending up with a result that is not so much inaccurate as indefensible and irrelevant. I strongly suspect that a basic mistake was made in formulating the question, since a more meaningful way of structuring the question would be to attach a price to the Clapton ticket.

If, for example, both concert tickets cost $40, then the opportunity cost of going to the Clapton concert would have been $90, $40 for the Clapton ticket and $50 for the sacrificed value of the unattended Dylan concert. Either the study’s authors meant to trick the AEA economists by posing an incredibly simple question or they made a rather stupid mistake. Regardless, Tyler Cowen of Marginal Revolution ends up with the right answer although I don’t think he quite grasped the precise problem with the question and Mr. Frank, the study’s authors, and 21.6 percent of the AEA economists are wrong.

If Paul Krugman had posted this conundrum, the correct answer would have been (e) opportunity cost and the limits of the space-time continuum are barbarous right-wing relics so borrow $40 and attend both concerts.

UPDATE: Since various people are tripping all over their various attempts to define “opportunity cost” instead of paying attention to how it was defined in the question, I will highlight the relevant portion of the question posed by Frank here.

“The opportunity cost of seeing Clapton” is the total value of everything you must sacrifice to attend his concert – namely, the value to you of attending the Dylan concert.”

The value of attending the Dylan concert to you is $50. This means the value of the discount on the ticket is $10. Now, it’s vital to note that Frank assigns TWO distinctly different definitions to “the opportunity cost of seeing Clapton” in his question, thus conclusively proving his point that economists, especially economists writing in the New York Times, don’t understand opportunity cost. Naturally, there are two different answers to the two different questions-in-the-question. The answer to question (A) the “total value of everything you must sacrifice”, is $60 since you’re giving up both the value of the Dylan concert and the value of the discount in order to see Clapton. The answer to question (B) the “value to you of attending the Dylan concert” is $50. However, the four multiple choices provided make it clear that Frank is looking for an answer to question (B) rather than question (A), which is why the correct answer is (d) $50.

Lest Ireland forget

Daniel Hannan’s little photo essay reminds everyone that the Irish government and all the major Irish parties forced the Irish people to vote a second time on the EU ConstitutionLisbon Treaty and sold it to them on the basis of economic recovery, specifically including more “jobs and investment”.  And he asks “Well, guys, here we are a year on. How’s the recovery working out for you?”

One has to wonder about a “bailout” courtesy of governments who are already robbing pension funds in order to continue their maddened spending:

>Asset managers will have the chance to get billions of euros in mandates in the next few months for the €36bn Fonds de Réserve pour les Retraites (FRR), the French reserve pension fund, after the French parliament last week passed a law to use its assets to pay off the debts of France’s welfare system….

The move reflects a willingness by governments to use long-term assets to fill short-term deficits, including Ireland’s announcement last week that it would use the country’s €24bn National Pensions Reserve Fund “to support the exchequer’s funding programme” and Hungary’s bid to claw $15bn of private pension funds back to the state system.

Don’t worry, it’s not as if the US government is heavily indebted or would ever even contemplating the seizure of pensions or tax-free retirement funds….