It was just over one year ago that WND Books published “The Return of the Great Depression.” In that book, I articulated six possible scenarios and explained which scenario I considered to be most likely. I also made a number of predictions, some of which can now be profitably analyzed to see how accurate they were. Keep in mind that at the time the book was published, the end of October 2009, the scenario which most of the mainstream economists were declaring to be in effect was the Green Shoots scenario.
One year later
Time preferences
This should serve as a cautionary tale to those who still believe that giving money to the impoverished is a rational solution to poverty. And yet, we can be confident that it won’t.
A short drive away, Hamon Matipe, the septuagenarian chief of Kili, confirmed that he had received that sum [$120,000] four months earlier. In details corroborated by the local authorities, Mr. Matipe explained that the provincial government had paid him for village land alongside the Southern Highlands’ one major road, where the government planned to build a police barracks.
His face adorned with red and white paint, a pair of industrial safety glasses perched incongruously on a head ornament from which large leaves stuck out, Mr. Matipe said he had given most of the money to his 10 wives. But he had used about $20,000 to buy 48 pigs, which he used as a dowry to obtain a 15-year-old bride from a faraway village, paying well above the going rate of 30 pigs. He and some 30 village men then celebrated by buying 15 cases of beer, costing about $800.
“All the money is now gone,” Mr. Matipe said. “But I’m very happy about the company, ExxonMobil. Before, I had nothing. But because of the money, I was able to buy pigs and get married again.”
Now, not everyone is capable of blowing $120,000 in only four months and winding up with nothing but another notch on the old bedpost. But this sort of behavior is seen all the time, from professional athletes to lottery winners. So long as an individual’s time preference is limited to the short term, he will never amass any wealth because he will immediately spend any amount of money that is given to him or earned by him.
This is why societies that insist on transferring wealth from those with long-term time preferences to short-term preferences are ultimately doomed. One can always eat a heartier meal if one does not save the pigs for breeding and the grain for planting, but there won’t be anything left to eat come the winter. And unfortunately, one cannot instill time preferences though education due to the human talent for rationalization.
Stay on target
Remember this January 1st prediction for December 2010? “The national median existing-home price will not rise 4% from $172,600 to $179,500 as predicted by NAR’s lead economist Lawrence Yun, but will fall below 165k instead.”
From yesterday’s September NAR report: “The national median existing-home price for all housing types was $171,700 in September, which is 2.4 percent below a year ago.”
Considering that the impact from the Great Mortgage Fraud hasn’t begun to appear yet in the housing statistics, I’m not the least bit concerned about this one panning out. And on that note, MSNBC’s Dylan Ratigan is doing an excellent job covering what the so-called conservative media won’t. The Bill Black segment starting at 6:20 is particularly informative, although the nurse that precedes him is fantastic in her observation that virtually none of the politicians, including the Tea Party all-stars, are talking about holding the bankers responsible for their crimes. Black draws a very clear picture pointing directly at the mortgage banks as being the sole causal factor of the fraud, with the Federal Reserve becoming subsequently complicit in the coverup through its purchase of $1.5 trillion in fraudulent loans. He also explains how the “deadbeat” borrowers cannot have been responsible for committing any fraud due to their ignorance of the loan ratios and various formulas involved in framing their “liars loans” to allow their categorization as AAA-rated loans.
Black is entirely correct to say that the Federal Reserve cannot be trusted in its belated “investigation” that Bernanke announced yesterday. And it is obvious that the Treasury cannot be trusted either.
“The United States Treasury concealed $40 billion in likely taxpayer losses on the bailout of the American International Group earlier this month, when it abandoned its usual method for valuing investments, according to a report by the special inspector general for the Troubled Asset Relief Program.”
In which Heimdall takes a deep breath
This news may help explain why the pension funds are so desperate to force the mortgage security push-backs though sooner rather than later… as if the thought of being able to legitimately reclaim billions of dollars in investment losses wasn’t enough incentive in its own right.
On Nov. 1, the Financial Accounting Standards Board (FASB) ceases to take public comment on a new rule requiring that companies more accurately report liabilities they have from participation in multiemployer pension plans. Unless FASB is persuaded otherwise, the rule takes effect Dec. 15.
There are some 1,500 multiemployer pension plans in the United States, which are unique to unions. In these plans, multiple companies pay into the pension plan, but each company assumes the total liability. Under “last man standing” accounting rules, if five companies are in a plan and four go bankrupt, the fifth company is responsible for meeting the pension obligations for the employees of the other four companies….
FASB’s new rule could effectively wipe out the paper worth of many companies, especially in the trucking and construction industries. Once banks and creditors are aware of these staggering pension liabilities, it will make it nearly impossible for union businesses to get loans, credit lines or bonding.
Now, obviously I didn’t know that the mortgage fraud would run as deep and wide as it does, nor did I know anything about the way in which this FASB rule is likely to put so much pressure on the pension plans. But I did know that the accounts of every bank, pension, and public corporation were fictitious to some level and would likely be exposed once the pressure of debt-deflation and economic contraction set in. This is why I have resolutely ignored all of the frantic cheerleading of the desperate economists and financial analysts; being cognizant of the true nature of Keynesianism, I recognized it as nothing more than a futile attempt to revive the animal spirits that they, like neolithic cavemen dancing around a bear skull, worship without comprehension.
Moreover, you can be certain there will be more unhappy revelations and “surprises to the downside” ahead.
Mailvox: the global consequences of Ricardianism
S asks a follow-up question of his own:
Thank you for taking the time to answer my questions regarding the Ricardian doctrine of free trade from an Austrian perspective last week, and for answering EJ’s follow-up as well. I do have an additional question to ask on this subject. I agree with you about the problems with the “Ricardian Vice” of freezing all but a few variables in place and then coming to conclusions on the assumption of ceteris paribus. I agree that the doctrine of free trade does not take into account temporal limits on the acting man’s preferences. And I agree that these two problems combined reveal that the logical foundation of free trade is more than a little unstable. The question remains: what can be done about it?
I ask because on most questions about economics, applied praxeology dictates that government attempts to “manage” the economy or allocate resources will lead to inefficient outcomes. Why, then, should the same not apply to trade economics? How is the government to know exactly which industries should be slapped with tariffs and which industries should be left alone? Since Hayek proved that no single individual or government entity can ever have enough information to know everything about the economy at any given time, what then is the “correct” Austrian conclusion regarding trade tariffs?
The first thing to point out is that government-imposed trade restrictions are not synonymous with either “managing the economy” or “allocating resources. For example, a uniform 15% tariff on all imports doesn’t do anything except to provide a competitive advantage to all domestic producers. It doesn’t favor one sector over another, except to the extent that one sector is more dependent upon foreign inputs than another, and it doesn’t involve any government management or allocation of resources at all.
Applying the correct Misean-derived logic regarding the impossibility of socialist calculation, (Hayek only refined the concept first conceived by Ludwig von Mises), we can conclude that government cannot and should not be involved in making decisions regarding which domestic industries should be protected from foreign competition and which should be abandoned to it. However, it is a complete failure of logic to conclude on this basis that domestic industries should not be protected from foreign competition because the impossibility of calculation does not go so far as to preclude a government’s ability to distinguish between foreign and domestic production, let alone a foreigner and a citizen. And to deny that a national government can justly prefer the well-being of its domestic producers and citizens to that of foreign producers and non-citizens is no different than denying a national government’s right, (to say nothing of its responsibility), to defend its borders against military invasion.
It is, of course, no accident that the Ricardian supporters of free trade usually refuse to recognize either the USA’s right to defend its borders from foreign migration or the right of foreign nations to defend their borders from US military attacks. After all, what is the substantive difference between an “invasion” by a sufficient number of foreign soldiers to impose a new government by force and the “immigration” of a sufficient number of foreign civilians to impose a new government by their voting preferences? What is the logical rationale for resisting one and accepting the other?
There is strong empirical and logical support for a uniform protection of domestic industry; the fact that the Ricardian crowd has been reliably dishonest about the historical effects of the Smoot-Hawley tariff, the positive effects of tariffs during the 19th century, and the probable effects of free trade agreements like NAFTA should give serious pause to those who, like me, have tended to assume that free trade was an unmitigated societal positive without stopping to seriously consider all of the logical consequences.
If you stop and carefully think through the matter, it eventually becomes obvious that unfettered globalism is both the underlying conceptual foundation as well as the ultimate consequence of Ricardian free trade. To accept the concept of free trade and its necessary consequences such as open immigration and universal citizenship, it is therefore necessary to reject the U.S. Constitution and the idea of limited government as well as everything that history has taught us about cultural, ethnic, national, and religious differences.
Ricardianism is a doctrine no less utopian, and no less ultimately destructive to society, than Marxist scientific socialism, feminist equalitarianism, and the pseudo-scientific New Atheism. Note that its primary justification of collective enrichment at the expense of certain individuals is virtually identical to the Marxist justification of socialist distribution and is one of the many theoretical connections between Marx and Ricardo. This will be a hard lesson for many conservatives and libertarians to accept, as the idea that the doctrine of free trade is ultimately and inevitably anti-liberty is somewhat counter-intuitive. But the verdict of the logic is inescapable.
The consequence of female choices
I have frequently written on the way that some women choosing to work has a negative impact on the ability of other women to choose to stay home and raise their children. Despite the fact that the economic logic behind this statement is impeccable and the reality of these consequences are inescapable, many critics, especially women, have nevertheless scoffed at this and insisted that the decision of one woman to work cannot possibly have any effect on subsequent choices available to other women.
Their economically illiterate doubts make the following comments by the author of a new feminist book blaming the lack of female executive achievement on a “culture that undervalues an entire gender” all the more ironic:
The New York Times asks about the impact of women choosing to “flee” the workforce (a loaded question), Feldt explains:
They make it harder for the rest of us to remedy the inequities that remain. We have to make young women aware of how their choices affect other women. It should be acceptable criticism to point out that, although everyone has the right to make their own life decisions, choosing to “opt out” reinforces stereotypes about women’s priorities that we’ve been working for decades to shatter, so just cut it out. And, the “individual choice” women have to become stay-at-home moms becomes precarious when they try to return to the workplace and find their earning power and options reduced. If we could see child-rearing as a necessary task and not an identity, and if we could collectively recognize that facilitating it benefits us all, we would go much further in guaranteeing women’s choices than we do when we are expected to uncritically celebrate every individual’s decisions.
The amusing thing is that while Gloria Feldt asserts “We have to make young women aware of how their choices affect other women”, she is talking about the immaterial and imaginary effect of “reinforcing stereotypes” whereas I am pointing to a material decline in real wages as well as a reduced chance to marry a man who is capable of supporting a wife and children, much less is more successful than the woman interested in him.
Dynamic reality
Static revenue models work about as well as NFL plays that depend upon the 11 defenders remaining exactly where they’re lined up at the moment of the snap.
Columbia University Professor Marc Lamont Hill tells me, “Those who have more should pay more. The rich have always cried wolf like that.”
But the wolf is here. Maryland created a special tax on rich people that was supposed to bring in $106 million. Instead, the state lost $257 million. Former Gov. Robert Ehrlich, who is running again for his old job, says: “It reminds me of Charlie Brown. Charlie Brown was always surprised when Lucy pulled the football away. And they’re always surprised in Washington and state capitals when the dollars never come in.”
Some of Maryland’s rich left the state.
“They’re out of here. These people aren’t stupid,” Ehrlich says.
This Maryland supertax on millionaires was the example I used in RGD in explaining how I first began to notice the mainstream media’s inability to comprehend basic economic behavior. The precise figures weren’t available at the time, though, so it’s fascinating to see that the state government lost more than twice as much tax revenue as they were calculating they would gain.
All your income are belong to us
I imagine the IRS will regard this as a brilliant notion.
The UK’s tax collection agency is putting forth a proposal that all employers send employee paychecks to the government, after which the government would deduct what it deems as the appropriate tax and pay the employees by bank transfer. The proposal by Her Majesty’s Revenue and Customs (HMRC) stresses the need for employers to provide real-time information to the government so that it can monitor all payments and make a better assessment of whether the correct tax is being paid.
This should suffice to guarantee the complete exit of all mobile capital from the UK.
Green shoots!
Good news! The NBER’s business cycle dating committee has determined that the recession is over! Actually, it ended more than one year ago!
The National Bureau of Economic Research, the arbiter of the start and end dates of a recession, determined that the recession that began in December 2007 ended in June 2009.
The business-cycle dating committee met by phone on Sunday and came to the determination. “In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month,” the committee said in a statement.
Strike another nail in the flesh-stripped skull of Keynesian economics. First they’ll have to announce a double-dip. Then, a few years later, they’ll revise their numbers and announce that it was all just one great big depression… long after it is accepted wisdom.