Friday, July 31, 2015

More Bad News for the Average American

This morning the Labor Department announced the lowest average wage rate increase since they began collecting the data.  Another outcome of the Obama-Clinton-Warren assault on the middle class.

Maybe someday these folks will figure out why no one wants to hire anyone anymore and why no one wants to offer higher wages.  A small amount of time spent in the private sector would do the trick, but don't expect anything like that from the Krugmans and Obamas of the world.

Head in the Sand Analysis

Once more, the NY Times amazes.  Noam Scheiber's article, penned on July 12th but still available online, muses aloud, quoting Clinton surrogates and supporters, as to why the US economy no longer seems to produce good jobs. The decline of the economic position of the middle class is front and center in this article.

Guess what reasons Scheiber and close Clinton pals cite as reasons for America's economic malaise.  Dig this: "investors and management gurus," "outsourcing," "Uber," etc.  Easy targets for the left.

Scheiber, I suppose, has failed to notice the sweeping government intervention in the US economy that has pared economic growth to barely a pulse.  The health care sector, banking sector, coal, etc., have all been taken over or demolished by the Obama/Clinton crew.  The national debt has doubled over the past seven years, while economic growth is moribund.  We are now Europe, whose economic stagnation is a fixture of the modern world.

Ignoring what ails you means you will not recover.  Maybe Scheiber should try the private sector for a week or two and quickly discover the problem -- strangling regulation and strangling taxation.  Until these things are rolled back, the US is doomed to economic stagnation, while the Obamas and Clintons glide effortlessly from resorts to limousines to fancy jet planes to resorts once more, never noticing the destruction that they have wrought on average Americans.

Wednesday, July 29, 2015

More Nonsense on the Minimum Wage

City after city in the US is in the process of passing laws to keep the poor in the modern big government prison.  Forcing the minimum wage to $ 15 will effectively eliminate any ladder of escape for millions of Americans currently trapped in poverty.  Those pushing this are probably pleased to have an increased constituency for all the welfare programs that they have foisted on the country. 

After all, if there weren't an increasing number of poor people, it would weaken the big government rationale.  Steadily increasing the minimum wage and indexing it will guarantee an ever growing number of poor Americans, denied by law the ability to gain the skills needed to escape poverty.  I guess the Clintons, Obamas and Warrens of the world see this as a good thing as they move from their limousines to their jet planes and back decrying their personal concern for the unseen poor.

Even more embarassing are the economists who argue that increasing the minimum wage has no or little effect on employment.  I suppose they think that raising a price has no effect on demand.  Is this what they teach in the classroom?  Are demand curves flat, after all, and unrelated to price?  Is this what modern academic economics has to to offer?

These are the same folks who argue that sciences are settled.  That no further discussion is required.  We know all we will ever know about things such as climate change.  Don't debate it.  Down with "deniers."  I suppose pretty soon we will hear that increasing the minimum wage's lack of impact on employment is a settled issue as well.  End the debate.

More and more academics have joined the political left in trying to silence discussion on matters that are really matters open to rational discourse and empiricism.  But, if you have already made up your mind, not to be confused by facts, then I guess you can get to the point where endless increases in a price has no effect on demand.  Great thinking.

Tuesday, July 28, 2015

Is It Really the Fed?

The constant focus on the Fed is misleading.  The broad course of interest rates are not determined by the Fed, but instead by supply and demand.  The Fed controls only its own lending rate.  It can supplement that control with open markets purchases and sales, but, even there, the power of the Fed is limited.  By purchasing government debt, the Fed is simply printing money digitally, a process which could either raise or lower medium term to long term rates.

Constantly increasing money growth through open market purchases in the 1970s actually raised rates -- to record post-war levels, while economic growth stagnated.  Thus was born the term "stagflation."

One very clear piece of evidence that the Fed does not move rates -- at least the rates that matter -- is the lack of correlation between the Fed's lending rate (which is a repo rate, not, as popularly believed, the federal funds rate) and the two year, ten year and thirty year treasury rates.

The Fed is a follower, not a leader, in the rate business, as was often noted by Paul Volcker, probably the greatest Fed Chairman in history.  Where the Fed can get in trouble is expanding its balance sheet.  The Fed is in serious trouble now, because of an over-bloated balance sheet.

So why all the focus on the Fed?  It is always easier to believe the wizard behind the screen is determining everything and the wizard is relatively easy to keep tabs on.  Hard analysis forecasting future supply and demand is a much harder endeavor and not subject to simple sound bites.

The Fed's balance sheet tells you all you need to know.  If the economy ever shows any real sign of life -- not simply life propped up by the tech and energy sectors -- then dramatic increases in the price level will push rates far higher than the bureaucrats occupying seats at the Fed ever anticipated.

Friday, July 24, 2015

Clinton Proposes More Government, Lower Returns for Investors

Somehow Wall Street is the enemy, if you listen to Hillary Clinton.  Therefore, let's substitute a partisan bureaucracy and government mandates for free markets and free people.  That is what Clinton proposed this week in South Carolina, pushing for new rules on stock buybacks, executive compensation, corporate governance rules, and for higher taxes.

I guess 10 percent per year returns over the past century is a bad idea.  Why not let Clinton force that return down to 3 percent or zero with a new set of crushing regulations and taxes?

The stock market is the sole avenue for average citizens to get high, unlevered returns with almost no long term risk (there is plenty of short term risk).  Home ownership generates wealth only when levered.  Unlevered home ownership is only rarely a big winner. 

So, Clinton, once more, intends to crush the hopes of American savers and investors.  She and Warren Buffett can play the foundation games and other devices available only to rich people, but the average Joe should take a hike, implies Clinton. 

Is there any avenue for self improvement and improved economic status for the average American that the Clintons and their ilk don't intend to destroy by over-reaching government?  Perhaps, if Clinton departed from her limousines and fancy jets long enough to see how the average American lives, she might not be so determined to destroy their future.

Wednesday, July 22, 2015

Uber and DeBlasio

Welcome to the 21st century.  The forces of reaction, led by DeBlasio and other left wing "reactionaries" are battling to roll back the dramatic changes that the internet is bringing.  Front and center is the "ride-sharing" business called Uber that is revolutionizing the way ordinary citizens are moving around.

The taxicab monopolies, worldwide, are fighting back.  Especially in New York City, where, not long ago a taxi medallion cost over $ 1 million. Now with Uber in play, medallions -- which are licenses to monopolize -- have fallen in price to $ 700 K and headed lower.  Once again, those riding on top of the stagecoach -- NYC taxidrivers -- are asking government to pass punitive regulations to prevent ordinary citizens including citizens in the bottom twenty percentile of income and wealth in NYC from improving their economic condition.

Uber, in a free market environment, is a win-win for everyone except a handful of taxi drivers, currently benefitting from a government-granted monopoly.  In order to keep that monopoly, taxi-drivers have donated large amounts of cash to DeBlasio's campaign coffers.

This is liberalism at its best -- thwarting the prospects of low income and middle income Americans in order to protect a government-granted monopoly to the more affluent.

Saturday, July 18, 2015

Punishments and Rewards

If someone comes to America illegally, they are increasingly provided with various government benefits.  These benefits, in many cases, are substantially better than those provided to ordinary American citizens.  Meanwhile, someone who wishes to come to America legally pays a substantial penalty to do so.  In fact, most who would like to come to America legally are denied that opportunity while money and benefits are showered on those who come illegally.

This strategy is in keeping with that used by US fiscal policy which rewards those who make little or no productive effort in society and heavily penalizes those who work hard, save and try to provide for their families.

Incentives matter.

If you want increased illegal immigration, then follow the current policies.  Many of those coming to the US illegally are coming for the sole purpose of blowing up Americans and blowing up American institutions.  Current policies guarantee that there will be many, many more of these folks and fewer and fewer of those with education, values of hard work and thrift and a desire to do things legally as opposed to illegally.

Similarly, as fiscal policy rewards those who don't make mortgage payments and penalizes those who do, there will be increased numbers of Americans who see no reason to make mortgage payments, pay off student loan debt or otherwise live up to obligations incurred when taking other people's money.

Similarly, those who do pay off mortgages and student debt will be penalized by higher tax rates and much more severe regulation -- as well as personal villification for arriving at "one-percenter" status.  It's perfectly okay to arrive at one-percenter status by selling political influence funded unknowingly by American taxpayers, as the Clintons and Gores have done, but it borders on criminal to produce a product or a service that benefits millions of Americans for which Americans are voluntarily willing to pay. Wallmart comes to mind.

Incentives matter and gradually the age-old incentive structure that produced economic prosperity is being dismantled plank by plank.  This process has been going on in Europe since early in the twentieth century.  In America, this process came later.  The Nixon, Clinton, Obama presidencies have dramatically accelerated the process of eliminating incentives that produce prosperity and replacing them with incentives to stop producing and start complaining.

Some wonder why economic growth has vanished in the western economies and why the middle class is losing ground.  There are a lot of reasons, but likely the most important are policies that encourage everyone to participate in a decline in economic prosperity by directing the incentives in ways that discourage innovation, work effort and thrift and encourage victim mentalities and litigation.  

Friday, July 17, 2015

The Deal That No One Likes

Greek Prime Minister Alexis Tsipras and German Finance Minister Wolfgang Schauble are now in agreement.  They both think the recent "deal" is a bad one. Said Schauble yesterday, "Perhaps it [a temporary Euro exit] would be the better path for Greece."  On Wednesday, Tsipras described the deal to the Greek Parliament "as a difficult and bad agreement."

A Wall Street Journal story today by Stephen Fidler reported "that the likelihood that the prospective three-year deal will fail -- possibly even before it starts, let alone is completed -- is now estimated at higher than 50% by some senior officials in Europe."

Meanwhile, the IMF, Jack Lew, Greece, and Francois Hollande are all arguing that Greek debt needs a major haircut in order to be "sustainable."  Interesting.

Suppose you give Greek debt a 25 percent haircut.  That would approximately offset the $ 82 billion new money provided in the deal.  So you give Greece $ 82 billion and then reduce their debt by a similar amount.  Net, net.  You just gave Greece $ 82 billion that they are, from day one, not obligated to pay back.

Maybe that's the plan.  Give Greece $ 82 billion, without requiring repayment, every three years. Of course, that number would rise over time.  Perhaps this is the beginning of a plan to make Greece a vassal state -- a state that becomes a permanent welfare recipient.  What remains of any incentive for Greece to reform?

The right answer has been there all along.  Let Greece default and stay in the Eurzone.  This simple solution is the only solution that has any hope of: 1) limiting Germany's exposure; 2) improving the Greek economy; 3) providing Greece with incentives to enact economic reforms on its own.

Instead, a deal that no one likes and few think will survive has been the answer by the politicians.

Thursday, July 16, 2015

A Liberal's View of a "Tight Budget"

Today's Washington Post features a story of a couple on a "tight budget," who, nonetheless are able to go green -- putting solar panels in their home and living up to the liberal dream of a green, though, inexpensive life.

The article, by Christine McDonald, is entitled "D.C. Couple on a Tight Budget tries for net-zero power on fixer-upper home."

So, what do you think this couple paid for this "fixer-upper?"  How about $ 505,000!  This is the Washington Post's idea of a couple on a tight budget.

True to the modern ethos, this couple is not married but they are living the liberal dream life.  They both began their careers working, on "climate change" for the United Nations in DC. These were, no doubt, very well paid first jobs. Now the soon-to-be husband is director of government relations at NEMA  -- a lobbyist, in other words.  What does she do?  She just finished her master's degree at Georgetown and "hopes to soon work on climate change mitigation in the developing world."

What do you suppose the combined income of these two "tight-budgeters" is?  To get a mortgage on a $ 505,000 home, what do you suppose their combined income must be?  The article is remarkably silent on the wealth and income of these tight-budgeters, but the overall picture of their situation is pretty obvious.  Even in Washington DC, $ 505,000 is a very expensive first home.

These two are starting married life as one-percenters on a "tight budget."  The article doesn't probe further, but given their educational history, these two likely began life as one-percenters as well.

This is what liberals think is a tight budget family.  Gone is any recognition that anyone remotely in the middle class is likely commanding a family income about one-fourth as large as the family income of this couple.

It's no wonder they can afford the unaffordable -- adopting expensive, climate friendly, additions to a $ 505,000 fixer upper, while promoting a climate change agenda that mostly focuses on raising the utility costs of the average American.

This is the ultimate reverse-Robin Hood story.  Children of the affluent, working at taxpayer expense to impose regulations and rules on average Americans, who cannot come close to affording $ 505,000 for a first home.  Take from the middle class and give to the affluent.  That is the liberal dream come true.


Wednesday, July 15, 2015

The Fiscal Union Myth

"You can't have a monetary union without a fiscal union."  This is the constant drumbeat of those who, indirectly, have been championing Eurozone bailouts since 2010.  When economists point to the US as an example of a common currency area without bailouts (think Detroit, Puerto Rico), the "fiscal union" crowd says:  "But in the US the wealthy states make transfers to the less wealthy states."

But, in the US, it is not true that the wealthy states make transfers to the less wealthy states.  In fact, the opposite is true.  The less wealthy states subsidize the more wealthy states in the US.  I suspect that is not the kind of fiscal union that the Eurozone "fiscal union" crowd has in mind.

No one needs to subsidize anyone for a monetary union to work.  In fact a monetary union can work only if no one subsidizes anyone else.  If one state subsidized another in the US, then the monetary union in the US would not work.

The idea that you need either fiscal transfers or currency devaluation to recover from economic recessions is an example of modern-day poor economic thinking.  Where were these transfers or currency devaluations in 19th century America, when, for practical purposes there was no national fiscal transfers of any kind?  The income tax did not exist in the US until 1913 and fiscal transfers were essentially non-existent until the 1930s, yet US economic growth was far, far higher in the decades that preceded these events than in the decades that followed them.

Greece needs to be responsible for its own debts and the rest of the Eurozone should have butted out long ago.  Pretending that the proper policy is for Germany to freely transfer resources to Greece is bad economics and a political delusion.

Tuesday, July 14, 2015

The Beat Goes On

The big story in Europe, after all is said and done, is that the "entitlement state" will continue for a while longer.  No reform on the horizon.  This means economic stagnation, high unemployment and virtually no opportunities available for young labor market entrants.  This will continue until the entitlement state of Europe collapses for lack of other peoples money.

The US is now patterning its own economic policies after those of Europe.  The result: economic stagnation in the US.  Nothing on the horizon will change this.  The desire to battle inequality mainly serves the interests of societies' wealthiest citizens and protected government employees.

The US is becoming a "rentier" society, where the rentiers are those with political power who can use their political power to enhance their own personal wealth.  The Clintons and Gores are the most salient recent examples of using political power to enhance wealth.  Those who produce wealth by creating products and services that consumers want are villified by politicians as greedy villains. Those who use political ends to create their own personal wealth are seen as morally and politically correct heroes.

A sign of change might come some day when and if one of those battling against inequality arrives to the fray in something other than a limousine or their own private jet.

Monday, July 13, 2015

Invest like the Big Guys

California Public Employee Retirement System is the largest defined benefit pension system in the US.  It maintains a huge, well-paid professional investment staff.  So, how is it doing?

CALPERS reports its annual investment results on a July 1 to July 1 basis.  Today, it released its one year results for the 12 month period ending June 30, 2015.  During that same 12 month period, the S&P500 gained 7.42 percent, while the Dow Jones gained 7.21 percent.  So, again the question: how did CALPERS, with all of its investment know-how do when stacked up against the average Joe, who stuck his money in dull Vanguard S&P500 Index fund?

The $ 300 billion fund would have earned $ 22.26 billion, had they simply made the S&P return.  Again, how did they do?

How's 2.4 percent!  That means that CALPERS made all of $ 7.2 billion for the year, while indexing clocked in at $ 22.26 billion, a result that would have required zero professional investment staff and could have been accomplished with a single phone call.

How did other professionally managed large state public pension funds do?  The median result for other large pension funds came in at an estimated 3 percent.

CALPERS was quick to point out that their three year annualized returns were 10.9 percent.   What are the three year annualized returns for the S&P500?   17.31 percent.  (Virginians should note that Virginia's VRS numbers were pitiful as well: 4.6 percent for the most recent year and barely 10 percent per year for the past three years versus 7.4 % and 17.31 % for the S&P500).

So how valuable were the high priced investment staffs at CALPERS and VRS over the past three years?  Simply using index funds, instead of investment professionals, would have enabled CALPERS to gain an extra $ 50 billion over the past three years, while VRS, absent professional input, would have added an extra $ 15 billion. 

Maybe you shouldn't invest like the big guys.

The Versailles Treaty Once More

The overnight Greece-Eurozone "deal" imposes massive costs upon the Greek economy intended to enable Greece to pay off its Eurozone creditors.  Maybe it's time that the world listened to John Maynard Keynes once more.  Keynes began his public career by attending the Versailles Treaty conference that concluded the first World War and wrote: "The Economic Consequences of the Peace." Worth a second read now, with Greece, not Germany, in the crosshairs.

This "deal," which probably will not survive a Greek Parliament vote this week, does two things: 1) it increases Greece's sovereign debt, which had no hope of ever being paid off even before the increases in this "deal;" 2) contains fiscal initiatives (tax increases, pension cuts) that will further devastate an already collapsed Greek economy.  There are no positives for anyone in this deal, which seems designed for the sole purpose of saving Angela Merkel's job as German Chancellor.

The economics underpinning of this deal are ridiculous and totally unrealistic.  World markets are cheering and politicians are slapping themselves on the back.  This is the last gasp of the "extend and pretend" gang.  Realism and elementary economics takes a back seat once again.

Look for this "deal" to come unstuck.

Sunday, July 12, 2015

What is in Greece's Interest

The media, as well as their good friends and associates in the White House, are cheerleading hard for a bailout "deal" that will keep Greece in the Eurozone.  Is that in Greece's interest?

Since the original bailout deal, the Greek economy has done a nosedive.  A deal along the lines presented by Tsipras would prevent any economic recovery in Greece and likely reduce the Greek economy to an empty shell.  (That is why Greece would very likely not live up to any deal).  Greece cannot survive a new deal. 

So, what should Greece do?  What should the Eurozone do?

The best solution is for Greek to do a debt workout, offering their creditors 20 cents on the dollar in full and complete settlement of their outstanding debt.  That would be about $ 60 to $ 70 billion which could be advanced by the Eurozone to pay off all outstanding Greek sovereign debt.  The Eurozone could forgive that $ 60 to $ 70 billion, leaving Greece completely debt free.  Then the Eurozone could announce that, in the future, the Eurozone will not be responsible for member country sovereign debt -- i.e. no future bailouts will be considered.

If this solution were adopted, leaving Greece in the Eurozone, the Greek economy could, relatively quickly turn around.  It is also very likely that the needed economic reforms would take place, enacted by the Greeks themselves without outside prodding, in order to enable Greece to re-enter the sovereign debt market.

This would be a bitter pill for the Eurozone, but far, far cheaper than the pill that will come later, if the Eurozone does a bailout "deal" that extends and increases Greek debt, and, by implication, leads to increased bailouts for Spain, Italy, and Ireland.

Failure to cut their losses in the Greek debacle, could, in the short run, lead to political upheaval in Greece that could see the end of the Greek democracy as well as the end of Greece's role in NATO, pushing Greece inexorably into Putin's orbit.  Since the fundamentals in Spain, Italy, and Ireland differ only in degree from that in Greece, a Greek "deal" will, in time, lead to political instability in these countries as well.

Both Greece and the Eurozone can benefit from a truthful moment.  Only by a forthright admission that European sovereign debt is unsustainable and an unequivocal statement that the Eurozone will no longer provide a credit backstop for profligate countries can Europe be saved from future economic and political catastrophe.

The Eurozone had a very cheap opportunity to cut their losses in 2010.  Now, they have a second chance to cut their losses.  Doing a debt workout is a win-win for Greece and the Eurozone.

Saturday, July 11, 2015

Endless Profligacy

The numbers have gotten higher.  The new money required to keep the Greek flotilla going is now estimated at $ 82 billion.  This, on top of nearly $ 250 billion that has been advanced to Greece in bailout money since 2010.  If the Eurozone foots this bill, several things will be guaranteed.

First, you can forget about any real reform in Greece. The pressure will be off.  Greece has learned how to evade and deny and the Tsipras government has already shown its ability to flip-flop at will.  So, Greece fiscal behavior will be guaranteed to be worse than ever.  Keep in mind that under the previous two bailouts of nearly $ 250 billion, exactly zero interest is owed over the next five years.  You have to wonder what further "debt forgiveness" means in this context.

Second, you are guaranteed that Spain, Italy, and Ireland will now expect increased bailouts with sweetheart terms.  Simple arithmetic pushes the short term bailout dollars to well over $ 1 trillion and rising.  Also, expect Spain, Italy and Ireland to push back on austerity and reform and to learn the Greek practice of evasion and denial.

Third, France will now expect to not be required to play by the Eurozone fiscal rules.  France is already violating Eurozone rules (as is Germany).  France will begin to lean on the European Central Bank to continue to fund its bloated welfare state.

The real question is how long bond buyers will continue to purchase sovereign debt from the Eurozone.  Absent any fiscal sanity, the sovereign debt numbers are now positioned to explode to ridiculous levels.  Meanwhile, GDP will remain stagnant.  There has been no change in the absurd labor laws, oppressive taxes, and byzantine business regulation that characterizes virtually every European country.

It won't go on forever.  The future for Europe is perpetual economic stagnation leading to an eventual economic collapse.  That will be the legacy of Angela Merkel, Francoise Hollande, Alexis Tsipras, Mario Draghi, etal.  Easily predictable.

Friday, July 10, 2015

Japan's Retirement Fiasco

A story in the Wall Street Journal describes the activities of Hiromichi Mizuno, the current chief investment officer of Japan's public pension fund (social security, if you like).  The fund has $ 1.1 trillion, which sounds like a lot until you realize that there are 67 million Japanese participating in the plan.  Simple arithmetic tells you that the fund is holding little more than $ 16,000 per participant.  Given the aging of Japanese society, this suggests big trouble ahead.

Japan has the highest debt/GDP ratios in the developed world, so there isn't much room for Japan to operate on other people's money.  Additionally, Japan's economy has been stagnant for several decades following the usual pattern of countries who rely heavily on the government to stimulate their economies.

Meanwhile, the WSJ article is about all the interesting things that the well-paid, smooth-talking, Mr. Mizuno plans to do with the pension fund's money.  Does it really matter?  Japan's future retirees would be better off planning not to retire than to depend upon this charade.

Extend and Pretend in Greece

The apparent surrender of Greek's Prime Minister Alexis Tsipras on Thursday to the demands of the Eurozone troika is being cheered by financial markets this morning.  The markets should be crying instead.  Piling on more debt and reinforcing austerity just means that Greece will become a poorer nation with much higher future debt levels.  How can that be a good outcome?

If accepted by the troika, this suggests that more and more debt is ahead for the other countries in the Eurozone.  What is now a sovereign debt crisis across the Eurozone will, within five or ten years, become a debt calamity for which there will be no antidote.

What the Eurozone should do is arrange a "controlled" bankruptcy for Greece.  This would involve putting up $ 100 billion, for example, and buying in all of the outstanding Greek debt.  This would amount to about 30 cents on the dollar.  Then telling Greece: "you're still in the Eurozone, but you are now on your own in the sovereign debt market.  We will never bail you out again in the future and we will not bail out any other Eurozone countries either."

This would enable Greece to make its own decisions about how best to return to the sovereign debt market.  If Greece chooses to make reforms, then it will be successful in returning to the sovereign debt market.  If not, then so be it.  Greece will have to finance its welfare state on its own.  Is there anything wrong with that solution?

Meanwhile, of course, that leaves unsettled what will happen with Spain, Italy, and Ireland -- all of which are struggling under a current Eurozone bailout, with political dynamics similar to that of Greece.  It is possible that the Eurozone will have to cough up another 300 to 400 billion euros to buy in the outstanding debt of these countries (obviously at a discount).

In all, the Eurozone (meaning Germany) will have to provide half a trillion to a trillion euros to settle accounts and then force these countries to pay their own way after a controlled bankruptcy.  This is a pretty high price for something that should not have cost more than 50 billion euros in 2010 if Greece had been permitted to do a workout funded by the Eurozone.  But cooler heads did not prevail, so the costs have skyrocketed while the economies have either collapsed or stagnated.

Under a policy of controlled bankruptcies, Germany would end up having to do a restructuring of its own (meaning Germany as well as France would also have to default in part on their own sovereign debt), but that is the price of underwriting other countries' debt.

But, if a deal is reached for Greece to receive an extended bailout, then the future will be very bleak indeed.  Debt levels, now unsustainable, will, within five or ten years become unfixable.  No amount of euros will solve the problems that lie ahead for the eurozone, if bailouts are extended for Greece, Spain, Italy, and Ireland.  After all, the current debt levels in Germany and France, not accounting for the implicit bailout guarantees, are above sustainable levels already.

As the eurozone careens toward financial calamity, economic stagnation will rob the eurozone of the advantages of economic growth as debt/GDP levels rise to absurd levels.  That will be the outcome of a Greek deal to extend the bailout. Far better would be to face reality today and restructure Greek debt and force Greece to pay its own bills, while remaining in the eurozone.

Thursday, July 9, 2015

The Best Trade Policy

If someone were to offer you something that you wanted in exchange for something you didn't want as much, should you turn it down?  Or, ask them what they pay their employees?  Or some other question?  Or would you just take what you wanted from them and give them what you no longer wanted.  A pretty simple question with a pretty obvious answer.

This simple thought experiment reveals what should be the optimum trade policy for the US.  If another country wishes to sell us something that our consumers or businesses want more than they want US dollars, then we should let our consumers and businesses buy it.  Period.

The usual response to this idea of free trade is:  but, what happens to workers and businesses in the US who would not be able to compete?  Following the logic of that response, no one would ever trade or make any exchange with anyone anywhere, because, in every transaction of any kind with a buyer or seller, there will always be winners and losers.  There are no exceptions to this reality.

So months of political effort have been wasted deciding whether or not to give President Obama the power to "negotiate" so-called fast-track trade deals. Why negotiate?  What is there really to negotiate?  Any negotiations will restrict trade and reduce the benefits of trade.  Just trade.  That's all that is needed.  Pandering to special politically motivated interests by placing "negotiated" restrictions on trade simply hurts the US (as well as countries that we trade with) with no offsetting advantages.

Other than national security concerns, the US should be willing to trade anything with anyone at any time without restrictions.  That "giant sucking sound" is the sound of political special interests draining the lifeblood out of the American middle class by placing "negotiated" restrictions on the free movement of goods and services.

Tuesday, July 7, 2015

Contagion is the Wrong Word

You hear the idea that "contagion" fears may take hold in Europe as the woes of Greece are preceived as potentially the woes of Spain, Italy and Ireland.  Contagion is the wrong word.  The Eurozone is not in danger of catching a contagious disease.  The Eurozone is already sick with the same disease that has laid Greece low -- too large entitlement programs, too many economic regulations, out-of-control sovereign debt levels, stagnant economic growth.

So forget about contagion. Worry about similarities.  Greece and the Eurozone have very similar economic problems.  Greece is just further down the road.  The idea of contagion suggests the Eurozone does not already have the disease.  That is wrong.

Meanwhile, the Malaise of the Welfare State

As welfare state politicians in the US and Europe dream of more ways to regulate, more ways to tax, more ways to spend, their economies seemed to have entered a stage of permanent stagnation.  The economic opportunities that once defined the US have been drowned in a sea of laws and regulations.

Incentives have been restructured to encourage people to leave the work force and retreat to the various entitlement programs that support a lifestyle without work.  Meanwhile minimum wage laws and the workforce litigation environment all but guarantee that the poor and the minorities have no leg up on the ladder into the middle class. 

Health care is now rationed by an unelected bureaucracy and there is no accountability as health insurance costs soar into the stratosphere.  Increasingly doctors are shuttering their practices or refusing patients from medicare and medicaid.  Health care for the poor and the aged are going to become increasingly inadequate and unavailable.

Assuming that extremist politics does not take over in the US, free markets will eventually find a way around the roadblocks that politicians have erected.  But, the danger, as in modern Europe, is that the failure of the welfare state will lead to ideological dictatorships from the right or left. The politics of modern Greece is instructive.

The issues in the modern welfare state are absurdly simple.  It is simply a question of arithmetic. An economy, like the US, with a GDP under $ 20 trillion cannot reasonably be expected to fund off-balance sheet obligations (in social security, medicare and medicaid) in excess of $ 100 trillion.  The numbers don't add up and a Greek-like ending with economic and political chaos is inevitable, unless some perception of reality sets in.


Monday, July 6, 2015

Apres Moi, Le Deluge

Thanks to Merkel, Sarcozy, and Hollande and their fellow European politicians, a small debt workout that could have easily taken place in 2010 with hardly a ripple, has now turned into a major economic and political disaster -- for Greece and for everyone in the Eurozone.

So, now what happens with Spain, Italy, and Ireland?  Left wing political parties, like that now in power in Greece, are surging in popularity in Spain, Italy, and Ireland.  So, the next chapter will involve these countries.  Avoiding reality in 2010 has consequences.  Unfortunately, avoiding reality in 2010 means a much worse reality in 2015 and beyond.

Most of the debt in the Eurozone is unpayable.....period.  Greece is not an outlier.  Spain, Italy, and Ireland are not the only other profligate nations.  France is in deep, deep trouble as well and will, in time, be forced to restructure (i.e. default) on its own sovereign debt.  Even Germany is not immune from the problem of too much debt.  This is a disease brought on by an unaffordable entitlement policy that afflicts Europe and the US.  Default, in time, is the only ultimate result.

No western nation can afford its current entitlement programs -- not even the US.  Today's Greece is a window into our own future and into the future of entire Eurozone.

Sunday, July 5, 2015

A "No" Vote Was The Only Sensible Outcome

A "yes" vote would have prolonged and made worse the inevitable.  Greece cannot pay its debts.  No facts on the ground would have changed that -- now or ever.  Facing up to the unpayable nature of Greece's sovereign debt is the main result of Sunday's "no" vote.

It is a shame that the survival of the Euro was made, by politicians, contingent upon sovereign fiscal solvency.  Had that same politics prevailed in the US, Detroit would have recently exited the Dollar.

There is no reason why Greek debt problems have anything at all to do with the Euro.  The only reason there is a connection, is that the other European nations made a connection by embarking on bailouts for Greece, Spain, Italy, and Ireland, none of which were necessary.  Each of those countries should have defaulted on their debt and stayed in the Euro.

But, politicians always think they know better than markets, so now catastrophe looms for Greece and likely for most of the other Eurozone countries in  time.

Real Life in Greece

Charles Forelle's article in this morning's Wall Street Journal gives a bleak update on what happens to a country that falls in love with big government schemes to reduce inequality, provide free health care, and guarantee generous old age pensions.  The end game is always the same -- a collapsing economy, grinding the average citizen into hopeless poverty. 

What happened in Venezuela under Hugo Chavez is instructive.  Chavez campaigned for the little guy.  After a decade of Chavez' leadership, the once proud Venezuelan economy and its middle class was in shambles.  No matter that Sean Penn and Jimmy Carter extolled the virtues of Chavez, the country's economy collapsed and today no on is safe on the streets in Maracaibo.  Athens is headed that way.

When people become convinced that they are "entitled" to a high standard of living without working for it, then the end is in sight.  Europeans are convinced and, gradually, most Americans have become convinced.  When health care, housing, old age income maintenance, schools, etc. all become free, it is then a short road to economic collapse.  Europe and the US are headed down that road.

Countries prosper when their citizens feel personally responsible for their own economic outcomes.  Once that responsibility is removed, there is no longer a path to prosperity.  Greece is learning that lesson the hard way.  The rest of Europe, including Germany, will learn that lesson in time.

Saturday, July 4, 2015

Iceland and the Real Story

The NY Times has a story in today's edition that purports to explain how Iceland made such a rapid recovery from the financial collapse of 2008.  The real truth is simple enough:  Iceland permitted their banks to go bankrupt.  That did it.  A strong economic recovery began sixteen months later and that was that -- off to the races.

Meanwhile, all the Ivy league economists advising the Bush-Obama Administrations were busy counseling bailouts.  The result -- the slowest economic recovery in US history.

Today's Times articles points to other policies, such as capital controls, that the article claims helped the Icelandic recovery.   That is false.  All the government intervention things cited in the article only made matters worse, as such government meddling always does.

The key policy that enabled Iceland to recover and recover vigorously was that the government stepped aside -- no bailouts.  The banks failed, new banks emerged and it was off to the races.

You wonder why the US and Europe can't see the obvious.  Iceland did the right thing and free markets restored prosperity.

Friday, July 3, 2015

Let Borrowers Accept the Responsibilty

The lesson in Greece is that other countries should not offer bailouts.  Bailouts left the impression with bond buyers that Greece was more credit worthy than it really is.  Thus, Greece was able to dramatically increase its debt load over the past five years, while avoiding politically painful reforms.  This was a big, big mistake.  The losers will be both Greece and bond buyers.

All of this was completely unnecessary and was the result of meddling politicians.  Greece should have faced its bankruptcy alone, as Detroit did in the US.  Had Greece defaulted in 2010 without any comments from Draghi, Lagarde, Merkel or all of the other silly politicians, Greece would now be thriving and would have, by now and on its own, made the numerous economic reforms required to return to the sovereign debt market.  No bailout necessary, plus a good outcome.

Generally, the absence of government yields optimum results, while government intervention creates problems that would have never existed had it not been for the meddling of politicians.  Markets are great disciplinarians.  Markets convince people to do the right thing in order to survive.  Politicians pretend that no discipline is really required.

The Greek outcome is a story that will be repeated numerous times in the future.  In every case, it will come as a shock to the media and to the politicians, although the numbers are completely obvious today and the outcomes ahead are easily predictable.

Thursday, July 2, 2015

Puerto Rico and the Minimum Wage

Today's Wall Street Journal has an article by Nick Timiraos and Ana Campoy that lays out in dismal detail the job killing impact of minimum wage legislation.  Even liberal economists attribute the bulk of Puerto Rico's economic woes to the US federal minimum wage of $ 7.25.   It is clear that the current push for an increased minimum wage by Elizabeth Warren, Hillary Clinton and, of all people, Charles Krauthammer, would plunge Puerto Rico into a further headlong rush into third world status.

For those who want to peer into the future of Los Angeles, a city that recently pushed its minimum wage to double that of the federal level, look no further than Puerto Rico.  The modern liberal form of ethnic cleansing is under way in Los Angeles, as the poor must move away in order to survive the new minimum wage laws.

The liberal war on poor folks continues unabated.

Wednesday, July 1, 2015

Hope Springs Eternal

Markets are rallying this morning.  Commentators are suggesting a deal on Greece may be in the offing.  Really?

The issues are really, really simple.   Will bondholders give money to Greek citizens who show little or no interest in providing for themselves?  Ask yourself.  Are you willing to work hard, pay taxes and delay retirement, so that the average Greek citizen can do just the opposite?  That is the political issue for the average German voter.  The answer is completely obvious.  There will be no Greek bailout deal.  Greece is gone.

Since most of the rest of the western economies have exactly the same problems as Greece, except they are simply at the point where Greece was ten years ago, the Greek fiasco provides a helpful clue as to the future of the rest of Europe and the US.  Bondholders will not indefinitely finance folks who are doing little or nothing to sustain themselves.  It is really just a matter of simple arithmetic.

Whether you have a concern for the poor, or want to battle income inequality, or want to right the various perceived wrongs of society, you will still come to a bad end if no one is willing to work to produce the necessary goods and services to finance this largesse.  That is where Greece is.  It's over.

Fast forward to the future plight of Europe and the US.  Exactly the same fate lies ahead and for exactly the same reasons.  The US is not yet where Europe is today and certainly not where Greece is, but the US is rapidly moving in the direction.  The Obama Administration has dramatically sped the process of obliterating free markets and incentives in the American economy, paving the way along the route to an ultimate Greek-like ending.

Just as in Greece, the American political class thinks bondholders have an unlimited appetite to fund other people.  They don't, as the Greek crisis so clearly demonstrates.