Tag: economics

Famous last words

“We have been watching closely the recent volatility in global
financial markets. Our sense is that at this stage these developments do
not pose a substantial risk to the U.S. economic outlook.”
– Jane Yellen, Fed Head

She even sounds like Bernanke back in 2008. And, just in case it wasn’t completely obvious, we have the reassurance that the desperate money pumping will not end until the entire system collapses too.

“The Committee has emphasized that a highly accommodative
policy will remain appropriate for a considerable time after asset
purchases end.”

I’ll bet it has. After all, we’re only looking at a $29 trillion credit demand gap. The thing is, even from a Keynesian perspective, one should be able to discern that we are in a giant economic contraction. Here is the old Econ 101 question: highly accommodative monetary policy is prescribed when the economy is a) growing, or b) contracting?

The dark side of income inequality

Republicans, Libertarians, and Any Rand aficionados like to talk about income inequality as if it is an intrinsically socialist concept. And there is some truth to that. Socialists and other distributionists often appeal to income inequality in order to violate private property rights and rob from Peter in order to pay Paula, DaPaul and Pedro. Income equality can be, and has often been used to justify socialism.

However, superior talent, hard work, and luck combined with a capitalist system are not the only source of income inequality. Income inequality also comes from theft, fraud, government corruption and other evils. And that is the very sort of income inequality that is not only indefensible, but is ever bit as problematic economically as it is morally.  Zerohedge explains the dark side of income inequality:

This brings us to the second undesirable and unjustified source of income inequalities, i.e., the creation of money out of thin air, or legal counterfeiting, by central banks. It should be no surprise the growing gap in income inequalities has coincided with the adoption of fiat currencies worldwide. Every dollar the central bank creates benefits the early recipients of the money—the government and the banking sector — at the expense of the late recipients of the money, the wage earners, and the poor. Since the creation of a fiat currency system in 1971, the dollar has lost 82 percent of its value while the banking sector has gone from 4 percent of GDP to well over 10 percent today.

The central bank does not create anything real; neither resources nor goods and services. When it creates money it causes the price of transactions to increase. The original quantity theory of money clearly related money to the price of anything money can buy, including assets. When the central bank creates money, traders, hedge funds and banks — being first in line — benefit from the increased variability and upward trend in asset prices. Also, future contracts and other derivative products on exchange rates or interest rates were unnecessary prior to 1971, since hedging activity was mostly unnecessary. The central bank is responsible for this added risk, variability, and surge in asset prices unjustified by fundamentals.

The banking sector has been able to significantly increase its profits or claims on goods and services. However, more claims held by one sector, which essentially does not create anything of real value, means less claims on real goods and services for everyone else. This is why counterfeiting is illegal. Hence, the central bank has been playing a central role as a “reverse Robin Hood” by increasing the economic pie going to the rich and by slowly sinking the middle class toward poverty.

One need not be a socialist, or oppose capitalism, to oppose the income equality that is the result of theft. With the assistance of the Federal Reserve and Congress, the banks have financially raped the American economy and the American people through fraud and political corruption. A reckoning is overdue. Everything that has been done in the last five years has been done in order to postpone it. And yet, a reckoning is coming nevertheless, because that which cannot continue will not continue. The rich simply cannot consume enough to substitute for more equitable consumption; how many cars can a man drive? In how many homes can a man dwell?

Amazon vs BEA

So, on the one hand, the BEA is reporting 3.2 percent economic growth. On the other, retail sales are below expectations, both in physical and online terms:

Amazon.com Inc.’s shares fell almost 10 percent a few minutes past 4 p.m., after the company dropped some disappointing earnings news. The title of the company’s news release is cheerily optimistic: “Amazon.com Announces Fourth Quarter Sales up 20% to $25.59 Billion.” And its operating income actually beat estimates — $510 million, compared with $489.9 million. But fourth-quarter sales of $25.6 billion were considerably below estimates of $26.08 billion, and earnings per share were 51 cents instead of the 69 cents that analysts had been expecting.

That’s not just disappointing for Amazon; it’s also not great news for the U.S. economy. When retail foot traffic and sales were disappointing in December, the standard explanation was that people must be moving their purchases online. Obviously, they weren’t — at least, not nearly as much as analysts expected. Given how dominant Amazon is in e-commerce, this should cause most of us to revise our expectations of fourth-quarter retail sales, as well as growth in gross domestic product.

Now, I wonder if perhaps the data being produced by the government bureaucracy might perhaps be less than entirely accurate? No, surely that’s not possible. That’s crazy conspiracy talk!

A meeting of exceptional minds

If you haven’t read Richard Cantillon’s An Essay on Economic Theory, I highly recommend it. It’s really remarkable for its insights, especially considering when it was written. I have about twenty bookmarks, each of which probably merit their own post, but it was this one little aside on metal ratios that truly blew me away:

It is true that the coinage in England might equally have been adjusted to the market price and ratio by diminishing the nominal value of gold coins. This was the policy adopted by Sir Isaac Newton in his report, and by the Parliament in response to this report. But, as I shall explain, it was the least natural and the most disadvantageous policy…. Newton told me in answer to this objection that according to the fundamental laws of the Kingdom, silver was the true and only monetary standard, and that as such, it could not be altered.

Can you imagine being a party to that conversation? Listening to one of Man’s greatest economic minds in history criticizing the currency policy of what may have been Man’s greatest mind in history would have been an unparalleled privilege. Even if it was only an exchange of letters, it is still amazing to be offered this glimpse into such a fascinating interaction, however brief it may have been.

It also shows how government interventions were having materially deleterious effects on the economy long before Keynes and Marx produced their fallacious justifications for deeper and more pernicious interventions.

And now the punchline. I was reading this in between sets at the gym, and, being understandably overcome by the excitement of the passage, told the story to a junior Swiss diplomat who often works out at the same time I do. He’s a sharp, well-educated guy in impressive condition. He nodded appreciatively, (or so I thought), then said: “so do you know these guys?”

I am 95 percent sure that he thought the conversation took place at Davos….

Wall Street loses Krugman

Wow, I have to admit that I didn’t expect to see this out of the former Enron advisor:

Normal people take it in stride; even if they’re angry and bitter over political setbacks, they don’t cry persecution, compare their critics to Nazis and insist that the world revolves around their hurt feelings. But the rich are different from you and me.

And yes, that’s partly because they have more money, and the power that goes with it. They can and all too often do surround themselves with courtiers who tell them what they want to hear and never, ever, tell them they’re being foolish. They’re accustomed to being treated with deference, not just by the people they hire but by politicians who want their campaign contributions. And so they are shocked to discover that money can’t buy everything, can’t insulate them from all adversity.

I also suspect that today’s Masters of the Universe are insecure about the nature of their success. We’re not talking captains of industry here, men who make stuff. We are, instead, talking about wheeler-dealers, men who push money around and get rich by skimming some off the top as it sloshes by. They may boast that they are job creators, the people who make the economy work, but are they really adding value? Many of us doubt it — and so, I suspect, do some of the wealthy themselves, a form of self-doubt that causes them to lash out even more furiously at their critics.

Nice call-out to F. Scott Fitzgerald there on the part of the quasi-Nobel winner too. But Krugman fails to notice that there is an amount of truth to Perkins’s complaint about the coming Kristallnacht of the so-called One Percent, especially given that a disproportionate amount of the parasitical One Percent are Jewish.

It’s not paranoia when someone really is out to get you. And self-doubt is more than justified when you know damn well that you eminently deserve to have people out to get you. The financial skimmers of Wall Street not only don’t make the economy work, they have destroyed the wealthiest economy history has ever known through the massive malinvestments their massive credit bubble has created. And they have made matters worse by coopting the federal government into making good their losses at the expense of the American people.

When the final crash comes, I expect a considerable portion of the One Percent to be wiped out by an angry and well-armed populace. And no one should shed a tear for them, because they eminently deserve their such bitter desserts. The wolves of Wall Street who preyed upon the helpless for decades will become the hunted.

China: two stories

First, this Forbes report is NOT true: “The People’s Bank of China , the central bank, has just ordered commercial banks to halt cash transfers.” The false report was particularly worrisome in light of the way it appeared to coincide with HSBC’s recent attempt to crack down on all withdrawals of more than 3,000 pounds in the UK. (HSBC appears to have backed down on that following widespread outrage.) However, that does not mean that all is well with the Chinese economy, which you will recall has been engaged in much bigger credit inflation and government spending stimulus programs since 2009 than the USA or the European governments. From Zerohedge two weeks ago:

the big problem in big China remains that of an out-of-control credit creation process that is blowing up. As we previously noted, instead of crushing credit creation, the PBOC’s liquidity rationing has forced distressed companies into high-interest-cost products in the shadow-banking world. Investors on the other side of “troubled shadow banking products” had assumed that ‘someone’ would bail them out but this evening Reuters reports that ICBC has confirmed that it will not rescue holders of the “Credit Equals Gold #1 Collective Trust Product”, due to mature Jan 31st with $492 million outstanding.

A single $492 million default sounds very small compared to the overall size of the shadow banking market, but the problem is that what expands by the multiplication effect will contract even faster. There are many multiples of credit dollars stacked upon each actual dollar, so a default has a domino effect that is one or two orders of magnitude greater than the size of the default itself.

It’s probably not a coincidence that the banks appear to be a little nervous leading up to this default, because it’s not possible to know exactly what the effects of the Friday default will be. I expect next weekend will be a very busy one throughout the financial industry as the markets position for the fallout on Monday; I imagine the central banks’ printing presses will be smoking.

Making matters worse

Mike Shedlock explains how the Troika of the European Union-International Monetary Fund-European Central Bank have made the Greek situation more than six times worse by refusing to take their financial medicine five years ago:

Greece could have defaulted in 2009 with perhaps a €40-50 billion mess
to cleanup. In a foolish attempt to prevent contagion, the nannycrats
turned a relatively small mess into major €325 billion problem,
virtually assuring the contagion they set out to prevent. Expect to see much use of the word “contagion” in the coming months.

One can’t help but notice that Spain, Italy, and, yes, Greece, are collectively responsible for guaranteeing 32.54 percent of the next Greek default. There would be your contagion vector. More debt is never the answer to a debt problem.

Desperately seeking debt

It’s bad enough that the younger generation of Americans is being saddled with massive amounts of useless, permanent student loan debt. But this new concept of a multi-generational home mortage being broached in the UK is truly evil:

Forty-year mortgages that may take two generations to pay off could become the norm, ministers believe. Rising house prices will prompt more homebuyers to abandon traditional 25-year loans and opt for ever longer repayment terms, they say. Cabinet ministers who discussed claims of a new property ‘bubble’ this week believe a cultural shift is under way which means people are increasingly comfortable with extended loans.

They believe that in future householders may choose to pass on a house
with an outstanding mortgage to their children, who will pay off the
rest. ‘In Japan, the 40-year mortgage is the norm,’ said one Government
source. ‘Paying it off is a two-generation job for many families. If
house prices remain high, longer-term mortgages like those will become
more acceptable to people here.’

Imitating Japan, which has been stuck in economic stagnation and the highest proportion of debt-to-GDP, strikes me as an appallingly bad idea. And make no mistake, this is a short-term solution to a problem that is the result of the large-scale immigration into the UK as well as Russians driving up the London property market.

First it took one income to buy a house. Now it takes two incomes. Soon it will take two generations, assuming the system doesn’t collapse first. That which can’t continue indefinitely won’t.

Massive debt and native dispossession is one of the costs of free trade. But at least the indebted masses have the consolation of being able to buy cheap Korean flatscreens and poorly constructed clothes from China.

Lessons of the 1920s

This isn’t a bad basic primer on the cause of the Great Depression and the connection between it and the beginning of the Great Depression 2.0.

The lessons of the 1920s are clear, and they bear directly on the build-up to the present crisis. Developed capitalism without social democracy and strong labor unions leads to productivity increases far outpacing wage growth, extreme inequality, insufficient working-class purchasing power, an unprecedented buildup of household debt and nowhere for profits to go but into capitalist consumption and financial speculation. With financial growth not reflecting comparable health in the productive economy, a bubble formed in stock market speculation and household debt grew faster than household income. By their nature, bubbles break. The popping of the speculative bubble brought about the stock market crash of 1929.

The crash and ensuing Depression afflicted what we have seen was a highly vulnerable economy. Because the economy had by the 1920s become industrially mature, growth no longer depended upon the breakneck expansion of the capital goods sector, but was now, and for the first time, fuelled by the production and consumption of consumer durable goods like refrigerators, radios, vacuum cleaners and, most importantly, automobiles. Consumption replaced investment as the driver of economic growth. (4) Robust growth would now require high wages.

With wages stagnant, working-class households’ ability to sustain the consumer durables boom became dependent, as it would again from the mid-1970s onward, on unsustainable household debt levels. Supplementing income-based purchasing power with credit had been a fact of life since the late nineteenth century, but the debt increments increased especially rapidly during the 1920s. The proportion of total retail sales financed by credit increased from 10 percent in 1910 to 15 percent in 1927 to 50 percent in 1929. When working-class purchasing power and household debt approached their limit by 1926-1927, the rate of growth of consumer purchases began to decline. Key growth markets like autos and construction became saturated and excess productive capacity became conspicuous. Production fell and profits were directed to financial speculation and bubble creation. The stock market and the economy responded accordingly. The Great Depression was at the door.

A comparable dynamic was in effect during the period preceding September 2008. From the mid-1970s to the year before the housing bubble began to leak, 2005, the gap between productivity growth and flat wages grew wider and wider. As in the 1920s, national income shifted steadily and increasingly to the top. Inequality approximating that of the 1920s grew. 1928 and 2007 were the highest inequality years since 1900. (Each year, not coincidentally, was followed by a major meltdown.) Workers once again resorted to debt to maintain living standards. The ratio of outstanding consumer debt to disposable income had more than doubled, from 62 percent in 1975 to 127.2 percent in 2005. Since 1995 the debt burden, measured by the percentage of household income pledged to debt service, had become increasingly concentrated in the lower three income quintiles. Financial speculation, which had accelerated since the mid-1970s, took off with a vengeance after 1999. Echoes of the 1920s were loud and clear.

That’s a great piece of data I hadn’t seen before, concerning the increase in the percentage of retail sales “financed by credit” from 1910 to 1929. It clearly shows the same debt parabola that we often observe before a period of credit contraction.

The economics of Christmas

It’s not often that someone else writes a post I genuinely envy. But John Carney has put together a brilliant economic satire of various writers and their competing perspectives through the lens of Christmas: 

The Christmas equivalence theorem

By Robert Barro, Wall Street Journal
While
it’s understandable that young people across America hope that their
lives will be enriched by a sudden influx of toys and sugarplums on
December 25, it is incumbent on grown-ups to realize the truth about
this Keynesian scheme. It
has been demonstrated time and again that Christmas cannot add to the
store of toys of the nation or even a single household. Households
experiencing a surge in gifts on Christmas day compensate by withholding
gifts in the future. That is, gifts that are “spent” on Christmas are
saved during the remainder of the year. So each Christmas gift isn’t
really so much given as borrowed from the future. Sorry kids, Santa isn’t so much bringing you presents as stealing presents you would have received in the future.

Rudolph’s Ruddy Nose (Wonkish)

By Paul Krugman, New York Times
Joe
Weisenthal has a terrific take on the growth of unemployment in the
North Pole. As is well known, reindeer unemployment has surged. Yet the
Very Serious Elves who promised that sleigh austerity would rapidly
bring growth back to the Pole have learned nothing.

But
it’s not just the elves. Even economists, who should know better, go on
insisting that we need to shrink Santa’s route now despite high
reindeer unemployment. Some continue to insist that there just is a
skill mismatch in the Pole economy, so that we have no choice but to
allow the diminutive Rudolph resources go unemployed. This truly is the
dark age of North Pole economics. Imagine
for a moment that the pole suffered from an immense foggy night.
Everyone would agree in that case that we could put Rudolph’s red nose
to good use. I know it drives people crazy when I mention that a crisis
can be good for aggregate demand—but everyone who disagrees with me is
already crazy, so who cares?

The dirty secret of North Pole’s success

By Steve Sailer, isteve.blogspot.com
There
appears to be a silent rule among pundits—all of whom secretly read
me—that we not mention immigration and the North Pole in the same
sentence. The truth is that the success of Santa’s operation up there
demonstrates that the accepted orthodoxy on immigration is 100 percent
wrong. For as long as anyone can remember, there’s been zero immigration
to the North Pole—yet the economy thrives, the elves have a thriving
culture and there is very little social strife. All that is supposed to
be impossible in a monoculture.

But, of course, you’re not supposed to notice these hate-facts.

Open Borders: Why should they stop at Christmas?

By Tyler Cowen, Marginal Revolution
Every
year the American government briefly relaxes its stranglehold on our
borders to permit the entrance of Santa Claus and his team of reindeer.
If this is a good thing on Christmas, imagine how much better it would
be if we made this our year round policy? Have you ever eaten in an
Elven restaurant? The candy canes are sublime.

While
there are some who think that competition with elf workers would
impoverish American workers, there is not a lot of evidence to support
this. In fact, the toy making of the elves would likely be complimentary
to native production. What’s more, the wealth generated by elven labor
would add to economic growth.

Now that is really funny and very well done. It’s a pity he didn’t include McRapey, although I suppose it’s hard to satirize self-satire.

Santa’s Straight, White, Cis-Male Privilege
By John Scalzi, Whatever 
“I’m a jolly old elf. I’m one of those elves who likes to force myself into houses without their owner’s consent or desire. The
details of how I do this are not particularly important at the moment —
although I love when you try to make distinctions about “forced entry”
or “legitimate intrusion” because that gives me all sorts of wiggle room —
but I will tell you one of the details about why I do it: I like to eat pie.