Tag: economics

The end of comparative advantage

As I have repeatedly pointed out for several years, David Ricardo’s Law of Comparative Advantage has been shown to be based upon false assumptions. Now the mainstream economists are beginning to recognize this:

David Ricardo’s Theory of Comparative Advantage has broken down after 200 years, or so I learned at the Lindau forum of Nobel laureates in Bavaria.

The theory published in 1817 has been a guiding principle of free trade, taken as a given by every student of economics in the modern era. It has served us well, but just as Newton’s theories ran into limits and were overtaken by Einstein’s relativity, comparative advantage no longer explains the world.

Under Ricardo’s model, inequality was supposed to narrow within countries as globalisation accelerated exponentially in the Nineties. Instead it is getting wider….

Ricardo described a world where free trade in goods was opening up, but
labour markets remained largely closed. This is no longer the case.
Globalisation bids up the wages of high-skilled engineers or software
analysts towards international levels wherever they live.

The Nobel laureates at Lindau aren’t willing to give up on globalization yet (although they should), but the cracks in the economic wall are showing as they express their fears that it is “going horribly wrong”. But it’s not going wrong. It’s going the only way it could possibly have gone.

Free trade is incompatible with national sovereignty. International
labor mobility is incompatible with the very existence of nations. And the heterogeneous populations are economically detrimental and a material barrier to the growth of capital and national wealth. I shall repeat my core argument against free trade, which I first articulated in 2012 following a quasi-debate with Gary North:

1. Free trade, in its true, complete, and intellectually coherent
form, is not limited to the free movement of goods, but includes the
free movement of capital and labor as well. (The “invisible judicial line” doesn’t magically become visible when
because human bodies are involved.)

2. The difference between domestic economies and the global
international economy is not trivial, but is substantive, material, and
based on significant genetic, cultural, traditional, and legal
differences between various self-identified peoples.

3. Free trade is totally incompatible with national sovereignty,
democracy, and self-determination, as well as the existence of
independent nation-states with the right and ability to set their own
laws according to the preferences of their residents.

4. Therefore, free trade must be opposed by every sovereign,
democratic, or self-determined people, be they American, Chinese,
German, or Zambian, who wish to preserve themselves as a free and
distinct nation possessed of its own culture, traditions, and laws.

“It’s a greater depression”

Now who could possibly have ever seen this coming five years ago?

Europe hasn’t recovered, because it hasn’t let itself. Too much fiscal austerity and too little monetary stimulus have, instead, put it more than halfway to a lost decade that’s already worse than the 1930s.

It’s a greater depression.

And as the latest GDP numbers show, it’s not getting any less so. Indeed, the eurozone as a whole didn’t grow at all in the second quarter. Neither did France, whose economy has actually been flat for a year now. Germany’s economy fell 0.2 percent from the previous quarter—and that after revisions revealed it had quietly gone through a double-dip recession in early 2013. Though that’s still much better than Italy: Its GDP also fell 0.2 percent, but its triple-dip recession has now wiped out all growth since 2000. The closest thing approximating good news was that Spain’s dead-cat bounce recovery continued with 0.6 percent growth. But it still has 24.5 percent unemployment.

But it’s a little misleading to just call this a depression. It’s worse than that. Europe is turning Japanese. The combination of zombie banks, a rapidly aging population and, most importantly, too-tight money have pushed it into a “lowflationary” trap that makes it hard to grow, and is even harder to escape from.

A greater depression. A Great Depression 2.0, some might say. The same is true of the USA, by the way, the main difference is that the Fed and the Administration are more able to closely collude on statistical shenanigans that disguise the fact that the U.S. economy is in a deeper depression of greater magnitude than the Great Depression of the 1930s.

Using GDP to determine whether the economy is growing or contracting is like attempting to use a map to determine if you have reached your destination without bothering to look outside to see where you are. A map written by a thief who doesn’t want you to get where you are going.

Argentina defaults

So much for the strategy of preventing a foreign sovereign from defaulting through claiming sovereignty over its bonds:

At the stroke of midnight last night, Argentina officially defaulted on $29 billion worth of debt. It was the eighth time in its history, and the second time in 13 years, that Argentina told its foreign creditors it would not pay its bills.

But this time was different, and rather bizarre. When Argentina last defaulted, in 2001, it had roughly $80 billion worth of debt it couldn’t pay back. It was, at the time, the biggest sovereign-debt default ever. This time, Argentina—Latin America’s third- or fourth-largest economy, depending on who you’re asking—had the money on hand to pay a $539-million bill due by close of business on Wednesday. It didn’t make the payment, and as a result has now technically defaulted on the entire $29 billion it owes international creditors.

The defaults are still pretty small. But a fair amount of new credit will have to be issued to make up for that $29 billion contraction.

Why home buyers aren’t buying

Back in June 2009, I introduced a concept I called the Limits of Demand, which pointed out that the Austrian Business Cycle did not revolve around a shift in capital vs consumer goods, but rather the “finite limit to the maximum consumable quantity of every consumer good available”. I stated: “Once the artificially enhanced demand limits are reached, or even worse,
consumers cannot afford to service their debt on the goods they
previously purchased, the boom will come to a hard and fast end.” As Neil Cavuto’s lamentation for the housing market suggests, we appear to have finally reached those demand limits, as the six-year stagnation in L1 also indicates:

You can now nab a 30-year fixed mortgage for under 4%. That’s the second week in a row, by the way, that rates have been so low. As of this writing, the numbers tick slightly, but the range remains remarkably low – 3.96% to 4.08%. In either extreme, extremely weird, and stunning when you consider we are supposedly in the latter stage of a recovery.

Usually at this point in an economic turnaround, things are rocking, and interest rates are jumping. But we all know the economy isn’t rocking. And as a result, interest rates are not jumping. What’s weird is those rates are dropping, which usually presages something bad happening.

Then again, this hasn’t been your father’s recovery, has it? Even with absurdly-low interest rates for what’s been years now, it’s hard to make the case they’ve triggered any kind of housing boom. Sales of new single-family homes fell 4.9% through the first six months of the year. They were down 8.1% in June. So let’s just say the trend is not the housing industry’s friend.

Economists and real estate experts offer a variety of reasons for this mortgage malaise. Some argue it’s still pretty tough to qualify for a loan, and bankers aren’t making it any easier, demanding more upfront money from borrowers to avoid any of the problems they encountered post-meltdown.

But it’s been more than six years now, and some very sharp numbers crunchers are getting worried. Even bankers who are lending tell me they aren’t seeing a lot of customers lining up. “Caution is the word,” said one. “They just seem very tentative, even skeptical.”

Cavuto says that history “suggests one of two things eventually happens during such periods: either the prices come down or the demand picks up.” This chart I made to explain the Limits of Demand shows that prices will not only come down, but come down further than the experts are presently anticipating.

The credit-driven demand for housing has pushed up prices along the S curve, far beyond where the homebuyers’ natural demand (based upon what they could afford without the credit expansion) intersected it. When the credit contraction begins, unless the supply somehow contracts, the demand for housing can be expected to fall from the point where the Dcredit curve intersects the S curve to the point on the original D curve. Where that is in practical terms, I do not know, but a rough guess would be a two-thirds collapse in home prices. And it is this collapse that will spur the economy-wide deflation that I have been predicting for the last six years.

Remember, while we haven’t seen deflation, we also haven’t seen the predicted inflation, let alone hyperinflation, either. That is because the Fed’s desperate attempts to hold up the housing market to protect the banks has led to a six-year period of credit disinflation and the subsequent six-year “mortgage malaise”.

That is the core problem with credit money. Central banks can print more paper, but they cannot print more credit-worthy borrowers. And with the median net wealth of Americans down by one-third in the last decade, few Americans can afford to borrow the money required to pay the credit-inflated housing prices even at these historically low interest rates. This should be patently obvious, especially in light of how “35.1 percent of people with credit records had been reported to collections for debt that averaged $5,178.”

When even cheery, optimistic cheerleaders such as Cavuto start using phrases like “we are supposedly in the latter stage of a recovery”, it should be readily apparent that there has been no recovery at all. As I have been pointing out for more than five years now, this is an economic contraction at least one order of magnitude bigger than the Great Depression. Focusing on GDP and CPI and U3 statistics is rather like trying to measure the precise size of the waves on the beach as a tsunami looms offshore.

You feel poorer because you are poorer

This proves that various “recovery packages” which amount to tens of trillions of issued credit and trillions in federal government spending were all predicated on a lie. Just as the money nominally spent to “save” the household sector went directly to the mortgage banks as housing prices continued to plunge, the money that was supposed to “stimulate” the economy stimulated nothing but Wall Street and the bottom lines of the financial institutions. Notice that this supports what both Karl Denninger and I have been saying for years: there has been ZERO REAL ECONOMIC GROWTH in the USA for more than 30 years.

It’s very simple to see. Just compare the increase in real GDP to the increase in credit. Is the ratio above or below 1.0? If the growth in the amount of credit is greater, then there has been no real economic growth. Since GDP is measured in monetary terms, this means the nominal growth is merely the increase in the number of promises to pay in the future chasing each other around.

That’s why the infrastructure is crumbling. That’s why fewer people are working. That’s why you feel stressed. American median wealth has substantially declined even as the amount of debt has skyrocketed. The Samuelsonians claim this doesn’t matter, because Peter still owes Paul. But both common sense as well as the wealth statistics demonstrate otherwise.

Key quote: “a full 25% of American Households have a net worth of just $3,200; and that 5% (1 out of 20) households has a negative net worth of -$27,416!”

As a youth, I never understood the Biblical concept of a 50-year debt jubilee. It sounded so ignorant and prehistoric. Now, as an adult trained in various schools of economics and having witnessed two major boom-bust peaks in Japan and the United States, I tend to regard it as one more example of the divine inspiration of Scripture.

This chart from Steve Sailer might put the matter more starkly to those who prefer numbers to pictures. Note that the 27 million additional immigrants who entered the USA from 2003 to 2013 have not, contrary to the insistence of neo-classical and Samuelsonian economists, enriched the economy or the native population.

Women and the civilizational cycle

The materially deleterious effect of women working on a society is illustrated in a paper entitled “Women Prefer Larger Governments: Growth, Structural Transformation and Government Size”

The increase in income per capita is accompanied, in virtually all
countries, by two changes in the structure of the economy, namely an
increase in the share of government spending in GDP and an increase in
female labour force participation. This paper suggests that these two
changes are causally related. We develop a growth model where the
structure of the economy is endogenous so that participation in market
activities and government size are causally related.

Economic growth and
rising incomes are accompanied by a greater incentive for women to
engage in labour market activities as the opportunity cost of staying at
home increases. We hypothesize that government spending decreases the
cost of performing household chores such as, but not limited to, child
rearing and child care so that couples decide to engage further in the
labour market and chose a higher tax rate to finance more government
spending.

Using a wide cross-section of data for developed and
developing countries, we show that higher participation by women in the
labour market are indeed positively associated with larger governments.
Furthermore, we investigate the causal link between the two variables
using as instrumental variables a unique and novel dataset on the
relative price of home appliances across OECD countries and over time.
We find strong evidence of a causal link between participation in the
labour market and government size: a 10 percent rise in participation in
the labour market leads to a 7 to 8 percent rise in government size.
This effect is robust to the country sample, time period, and a set of
controls in the spirit of Rodrik (1998).

This is also an implicit argument against female suffrage. However, the researchers’ hypothesis is incorrect, as government spending observably does not decrease the cost of child rearing and child care; one reason European families have so few children is that the cost of raising children is exorbitant despite the greater amount of spending by European governments. Free day care and year-long maternity leave doesn’t make up for the fact that food and gasoline cost considerably more than in the USA.

Voting is not freedom. The conflation of voting with freedom is one of the key deceptions upon which feminism rests. And like all ideologies based upon deception, the more powerful feminism becomes, the more likely it is that the polity in which it has become influential will collapse on the basis of the weight of its contradictions.

Great Depression 2.0

Only instead of the Smoot-Hawley tariff, we have the geniuses who permitted the NSA to spy on allied countries:

Germany Instructs Its Companies To Limit Cooperation, Procurement Orders With The US

Update: it just got worse. Moments ago Bloomberg followed up with the second, and expected, part of this story, namely that just like China cut off major US corporations from big procurement contracts leading to a collapse in CSCO and IBM Asian revenues, it is now Germany’s turn. Per Bloomberg, the German Interior Ministry reviewing rules for awarding govt contracts for computer, communications equipment and services as political rift w/ U.S. widens, people familiar with matter told Bloomberg News’ Cornelius Rahn, Amy Thomson.

  • Ministry will probably issue new purchasing guidelines in coming weeks to replace “no-spy-order” dated April 30
  • Details being worked out, may require suppliers of components of bidder’s goods or services to guarantee they don’t hand over confidential data
  • IBM, CSCO, MSFT may be affected by any tightening of procurement procedures: Forrester Research analyst Andrew Rose

It could be for show, but I tend to doubt it. German companies have to be slavering at the notion of having an excellent excuse – nay, reason – to bar their American competitors from government contracts.

The “declining” labor force

Readers here are aware that the reason the unemployment rates are relatively low is because the BLS is playing games with the size of the labor force in order to undercount the number of people who are unemployed. The four-percent decline in the Employment-Population Rate, which is less easily gamed than the Unemployment Rate, demonstrates this clearly. So, the Administration and neo-Keynesian apologists have come up with various reasons for why people are “leaving” the labor force in order to justify their statistical shenanigans.

However, this article on Zerohedge makes it clear that people are not leaving the labor force voluntarily. Quite to the contrary, they are clinging harder to their jobs than ever before; the biggest change between 2005 and 2010 was the decline from 36.5 to 25.9 percent employed among the 16-19 age group. In other words, these young adults, who are now 20-23, never found jobs and never formally entered the labor force.

The same pattern is true all the way up through the 45-54 age group, which indicates people losing their jobs due to a lack of seniority, then being unable to find work again. From age 55+, a higher percentage of people were employed than before. People aren’t “leaving the labor force”, they are merely unable to find any work for extended periods of time. They are unemployed by every definition of the term, except for the BLS’s misleading measure.

Zero native job growth since 2000

The facts are clear. The statistics are undeniable. Immigrants have taken ALL the new jobs created in America since 2000. The Center for Immigration Studies reaches three conclusions in a statistical study based on BLS data:

First, the long-term decline in the employment for natives across age and education levels is a clear in­dication that there is no general labor shortage, which is a primary justification for the large increases in immigration (skilled and unskilled) in the Schumer-Rubio bill and similar House proposals.

Second, the decline in work among the native-born over the last 14 years of high immigration is consis­tent with research showing that immigration reduces employment for natives.

Third, the trends since 2000 challenge the argument that immigration on balance increases job oppor­tunities for natives. Over 17 million immigrants arrived in the country in the last 14 years, yet native employment has deteriorated significantly.

Immigration is good for an undeveloped economy in a sparsely settled country. Immigration is BAD for a developed economy in a settled country. Attempting to justify the latter on the basis of the former is, at best, seriously misguided. The economic argument has long been used to justify all the negative societal costs of immigration, and yet, the net effect of third-wave immigration has observably been a net negative for the economy.

Apparently the “jobs Americans won’t do” is “all of the new jobs created since 2000”. There are fewer native Americans working now than were working 14 years ago, but 5.7 million more employed immigrants. If the millennials want to know why they can’t find jobs after graduation, that is the primary reason why.

Q1 GDP crash

Zerohedge pretends to take the BEA numbers seriously:

Remember when in January 2014, Q1 GDP was expected to rise 2.6%? Well, here comes the final Q1 GDP revision and it’s a doozy: at -2.9%, far below the -1.8% expected and well below the -1.0% second revision, it is an absolute disaster, and is the worst print since Q1 2009. And while a bad GDP print was largely expected, the driver wasn’t: personal consumption expenditures somehow crashed from 3.1% to just 1.0%, far below the 2.4% expected, meaning that all hope of a consumer recovery is dead. Finally, as a reminder, US GDP has never fallen more than 1.5% except during or just before an NBER-defined recession since quarterly GDP records began in 1947.

When I wrote The Return of the Great Depression in 2009, I noted that the average GDP revisions were larger than the delta that distinguished growth from recession. Now the revisions are nearly THREE TIMES larger.

This is the realm of pure fiction. One reason I don’t write as much about economics these days is that there is simply nothing of substance to write about. Taking these increasingly fictitious numbers seriously is akin to attempting to foresee future events by counting the numbers of fairies in your backyard.

All this tells us is that their attempt to maintain “the recovery narrative” is failing. But we knew that already.