Thursday, August 27, 2015

Give China A Break

The US should stop blaming its problems on China.  China has done more for its own people than any country in the world in the last three decades.  The rest of the world should be taking notes, not assigning blame.

China resorted to free markets and, guess what, it worked.  More people have moved from poverty to the middle class in China in thirty years than has ever happened in the history of the world.  They deserve some credit for this incredible achievement.  (Note that the old Soviet Union never took this tack and Soviet citizens lived in slavery and poverty for four generations.  Note the difference between modern China and modern Russia.  Not even close).

While the government in China is autocratic, in some ways the rule of law is more firmly implanted in China than in the US.  It is easier to start a business, build a factory, hire and fire employees and prosper in China than anywhere in the western world.  While it's true that bribery of public officials is endemic, isn't that true in the US as well but the practice is simply cloaked under the name of proffers, environmental offsets, minority setasides, Davis-Bacon rules, etc.  Bribery is rampant in the US, as every American business well knows because the of the role of special interest groups who demand a slice of the pie any time a business tries to expand.

Autocratic and arbitrary regulations, unsanctioned by voters or their representatives have become a way of life for the American government.  Not true in China, or certainly not as true.

China and the western world are headed down different pathways.  China is moving in the direction of free markets and the rule of law and the US and western Europe are headed in the other direction, closing down free markets wherever possible (Obamacare!) and obliterating the rule of law (EPA regulations, etc.).

China is not to blame for the economic problems in the US.   China does not have a bloated entitlement system, ubiquitous in the western world.  China is autocratic, but that is by design.  That autocratic rule has moved mostly in the direction of free markets in the last thirty years and that strategy has worked.  What has the western world done but squander its heritage, taken on huge unsustainable debt levels and undermined the aspirations of its citizens born into the bottom half of the economic strata.

Both Obama and Donald Trump see China as the big enemy.  Results do matter, contrary to what Obama and Trump think.  In that regard, China deserves our admiration, not our scorn.

Monday, August 24, 2015

What Ails the Markets?

Most financial commentary is beside the point.  The financial turmoil is not, in any way, related to the Federal Reserve and what the Fed may or may not do in the future.  All of that discussion is a complete waste of time.  The truth is that the financial markets have gone about as far as they can go in the face of almost absurd economic policy in the US, in Europe and in China.

In the US, the war on free markets continues unabated by a hostile Obama Administration.  The damage done to the US economy by this administration and by Sarbanes-Oxley and Dodd-Frank is enormous.  The vitality of the technology sector and the energy sector masked this damage for a long time, but now those two sectors are stumbling.  The significance of the decline in oil prices is that energy was one of the few sectors that had survived the Obama bludgeoning and now, with oil prices collapsing, the energy sector can no longer prop up an economy strangling from an overbearing government.

Europe has been brain dead for years and its economy, pulled along by the US, is no longer capable of economic growth.  The ridiculous bailout of Greece is not only disastrous for Greece, but is a game changer for Germany, now saddled with the present and future debts of Greece, Spain, Italy, and France.  Even the might German economy can't push its way past these obstacles.  By implicitly underwriting four economies who have no intention or hope of curbing their profligacy, Germany has now joined them in a sea of debt with no way out.

Meanwhile China, in some ways the healthiest of all of the world's larger economies, is going through the usual bumps and bruises associated with rapid economic growth.  Recall the US in the nineteenth century, when the panic of this and the panic of that were ubiquitous during the most rapid economic progress in the country's history.   The Chinese have yet to learn that market forces can overwhelm even the best intentioned government policy.  Leaving well enough alone was the best policy for China, instead of trying to control the direction of the stock market. But, China will learn.

The truth is that American and European companies are worth less in a regime of over-regulation than in a regime of free markets.  It's a surprise that it has taken so long for the stock markets to face this reality.  Even if markets do not crash, the future for stocks over the next decade or so is not great.  Stocks will have to await the return of free market policies to regain their forward momentum.

Sunday, August 23, 2015

The Markets Swoon

Stocks seem to be acknowledging the global economic slowdown, dramatically illustrated by the collapse in oil prices.   The debate over the Fed is beside the point.  The Fed is not the issue.  Rates will climb only when either inflation appears or increases in the"real" rate occur.  Neither seems likely now, so forget the Fed for the moment.  Inflation is a serious threat longer term but with western economies doomed to perpetual stagnation, it is hard to see much of an increase in the real interest rate.

Even the technology stocks are beginning to reflect the extremely short shelf life of even the most widely adapted new technologies.  Apple stock is a case in point.  How do you hold on to market share in an ever-innovating world?

[Imagine if schools for low income children could be created by the free market to address the current nightmare that the poor face when making their way into today's public schools.  But, the government, by law, forbids innovation that could improve the lives of poor children whose education seems to be going back in time, instead of forward.  By outlawing free markets in the provision of K-12 education for poor people by forbidding a voucher system, no innovation is possible for the poorest of the poor.  Only the wealthy are permitted to have private schools in the modern liberal dream world.]

Stocks have done about as much as they can in the face of bureaucratic hostility like Sarbanes-Oxley, Dodd-Frank, and arbitrary Obama executive orders.  It's a surprise the rally lasted this long with the main themes of the current administration focused on how to penalize successful entrepreneurs and reward those who have nothing but contempt for capitalism.

It will take long periods of stagnant economic growth (remember the 1970s) before even the bureaucratic elites resort to free markets to restart the economy, as happened in the 1980s.  Free market success breeds guilt syndromes that lead to a war on free markets.  That's what has happened.  Now we have to suffer the indignities of economic stagnation before the future versions of Ronald Reagan and Margaret Thatcher rescue us from this dungeon.

So don't expect much from stocks for years to come.

Thursday, August 20, 2015

The Poor No Longer Matter

The increasing focus on inequality pits the one-percenters against the bureaucratically comfortable.  No one seems to care about poor people anymore.  What about those in poverty?

Condemned to attend public schools that are little more than a breeding ground for crime and violence and forbidden by law to work at jobs that can improve their skill set, the truly poor are forced to depend upon the largesse of big government with various handouts and subsidies.  Instead of real health care, the poor fight their way through the medicaid labyrinth.  Large numbers of poor people never availing themselves of this nightmarish program.  (One-third of the so-called uninsured trumpeted by the Obama Administration in their political drive for Obamacare were already eligible for medicaid, but simply could not figure out how to sign up).

Current US policy seems designed to perpetuate poverty, encourage teenage pregnancy combined with active abortion provision, and keep those in poverty from having any hopes of escape.  Why else fight against vouchers, charter schools, and earned income credits?  Instead the poor are treated to ever-increasing minimum wage legislation that forbids, by law, the poor obtaining the job skills to move out of poverty.  Nearly half of all minimum wage employees are single and under the age of 25, desperately seeking to gain skills.  Increasing the minimum wage is a legislative guarantee that these young folks will have virtually no shot of ever escaping the plight they find themselves in.

Various state and local laws requiring licensing and business permits to operate the simplest of businesses seem purposely designed to damage the future prospects of poor people.  There is simply no reason for these regulations.  In any event, the truly poor have no hope of ever complying with these absurd regulations, which serve only to prop up the monopoly status of the more well-to-do.

No wonder the left has shifted its focus to inequality and no longer cares about the poor.  The poor are of interest as a potential source of votes, so, one supposes, there is no reason for the left to try to reduce their numbers.

Instead, the new strategy is to drive a wedge between the most successful Americans and the middle class.  If this succeeds in taking hold, it should reduce incentives for innovation and entrepreneurship and encourage more monopolistic rent-seeking behavior as Americans fight over shares of a stagnant economic pie.

Lets get back to focusing on how to lift people out of poverty instead of abandoning the fight and putting roadblocks in the way of poor folks who wish to improve their lives.

Friday, August 14, 2015

Eurozone Stagnation Worsens

It is not clear that the Eurozone is even growing.  The latest GDP number reported yesterday was up 0.3 percent -- that's a pulse, but barely and may be revised downward later.  In Europe 0.3 percent translates to 1.2 percent annually.  Given how the date is collected, it is questionable that the Eurozone had any growth at all.

Once again the reported number was barely half the forecast.  The rosy predictions of European (and US Growth) never seem to materialize and forecasts continue to be revised downward.  Stagnation is the story in the Eurozone and nothing is going to change that except a return to free markets.  Bureaucratic control of the economy produces no growth and unending stagnation. 

The US is following the same pattern as the Eurozone for the same reasons.  Once you have decided that free markets are evil, or that bureaucrats know better, then hopes for the middle class and for GDP growth go out the window.

Thursday, August 13, 2015

Minimum Wage Alters Who Gets Hired

Suppose the government passed a law that required that whenever anyone buys a tv set, they must pay at least $ 2,000 for the tv.   Would you still buy a set that, prior to the law, costs $ 500 and pay $ 2,000 for it?  Or, would you say to yourself, "heck, if I have to pay $ 2,000 by law, then I am going to choose a completely different set -- maybe one that already costs $ 2,000 or perhaps even more."

No one would sensibly buy a tv set that previously was sold for less than $ 2,000, if the law required them to pay at least $ 2,000 whenever purchasing a tv set.  Agreed?

Something very similar happens with the imposition of a minimum wage.  The current wave of movements to boost the minimum wage from $ 7.25 to $ 15.00 would dramatically alter who gets hired.  If you have to pay $ 15 per hour anyway, why keep the guy or girl on the payroll who was making $ 7.25 -- time to scale up.  With a $ 15 minimum, you can hire much better talent than you did before.  And that's exactly what businesses do and will do.

Businesses will hire fewer people and they will hire people who already are competing for $ 15 per hour jobs.   As for those currently making $ 7.25, they are quickly going to find that they are out of luck.  At $ 15 per hour, the business can do better than keep them on the payroll.

The exact same argument applies to the "living wage" proposal.  If you succeed in forcing up wage levels to radicals' idea of what a "living wage" amounts to, you will end up employing an entirely different group of people, who would never have worked at the lower wage in any event.

So, overall employment declines, the higher talented folks benefit, and, once again, the folks at the bottom of the economic pile get kicked to the curb.  It is pretty obvious why the union movement likes minimum wage proposals.  The war on the poor continues.

Wednesday, August 12, 2015

Greece -- Postponed

The Greek government appears to have completed a new deal with the troika (IMF, European Union, and European Central Bank) that will further depress the Greek economy, balloon Greek debt, and continue this, apparently, unending catastrophe.

Greece will never pay their debts.  The Greek economy will continue to fall apart.  My own prediction, that Greece would default rather than to put themselves back into the German straight-jacket, was not borne out.  That Greece, once again, has opted for continued depression and economic misery, is certainly surprising.  That Europe has underwritten more Greek profligacy is even more surprising.

At this point, Germany's sovereign balance sheet looks increasingly shaky, if one acknowledges Germany's implicit guarantee of Greek sovereign debt.  In time, not only will Greece default, but Germany will as well.  The differences between the Greek economy and the German economy are differences in degree, but not in kind.

The entire Eurozone, which a mere ten years ago sported a reasonable current balance sheet, now looks extremely perilous.  The debt explosion in Greece is matched by France, Germany, Italy, Spain and the UK and for similar reasons -- large and expensive entitlement programs with a rapidly aging population to support.  Meanwhile, economic growth has ground to a halt.  This can only end badly, as European politicians are taking no current steps to deal with the coming crisis.

Things are no better in the US, where entitlement programs have been expanded dramatically by each of the last four US presidents.  It is as if a family, whose income has not grown significantly in a decade, has suddenly decided that the solution to their problem is to dramatically increase their spending.  The US, like Europe, has opted for no-growth economic policies and seems determined to snuff out small glimmers of economic expansion that might emerge.  Stagnation of the economy seems to be the current plan of the Obama Administration and they are certainly succeeding beyond their wildest dreams.

The world debt situation is not sustainable.  How and when this unravels is unclear, but that it will unravel is a pretty safe bet.

Tuesday, August 11, 2015

Clinton and Sanders Propose New Entitlements

As if the US wasn't hurdling fast enough down the road to insolvency, Hillary Clinton and Bernie Sanders seem hell-bent on hastening the process.  Both Clinton and Sanders and have proposed major new taxpayer-financed subsidies for America's colleges and universities.  Saddled with absurd monopolistic practices like tenure and rife with some of the most obvious featherbedding practices in the American economy, the colleges and Universities are the last place to provide ever more subsidies.

The government should butt out.  Only a reduction in government involvement provides any hope of reducing the galloping increases in tuition that have swept the country in the last two decades.  What caused the increases?  Is chalk more expensive?  or blackboards?  I thought the internet lowered communication costs.  Apparently not at the modern university, where costs and administrative salaries know no upper bounds.

This is a pure monopoly where the prices can be raised without limit and where real compensation has no upper bound, other than the dwindling non-taxed resources of the average American.

Get the government out of the way of higher education and you will see tuition prices fall and the Club-Med practices of the modern university recede.  Modern universities are like medieval religious institutions.  The middle class can no longer afford any of the elite universities, which increasingly are populated by one-percenters and whatever special interest groups they choose to subsidize at any particular moment in time.  This way the wealthy can pick and choose who gets an elite education and the middle class is left to pick up the tab.

Clinton and Sanders propose to accelerate the continued assault on the American taxpayer to provide more funds to the modern leisure classes.

Yuan Lowered -- Pure Test of Silly Theory

Since John Maynard Keynes proposed the idea in the 1920s, academics and folks in the practical world have latched onto the idea that devaluing your currency is a free ticket to prosperity.  The idea on its face is almost ridiculous.  The logic says that devaluing your currency lowers your prices as compared to the prices of identical goods in other countries.  The demand shifts from the higher price countries that have not devalued their currency to those countries that have.

This notion is often advanced by Krugman and others to argue that Greece, for one, would be better off with its own currency so that it can devalue its currency relative to others.  Would that it were that easy.

Keynes and Krugman should be the first to admit that it may not be possible to lower the value of your currency relative to others.  Markets determine currency values, even in a world of fixed exchange rates. If you believe that markets don't determine currency values, then  if country A can lower it's exchange rate with country B, why can't country B return the favor. It was, after all, Keynes who argued that the real wage may not be able to fall in a depression, because prices might fall even faster than nominal wage rates.  Why doesn't an essentially identical argument apply to relative currency values?  The answer: it does.

But more important is that prices can and do adjust even in single currency zones -- for example, in the US.  Where are the high price areas ? --  New York City, San Francisco, etc.   Where are the low price areas? - Alabama, Mississippi, Louisiana, etc.  Prices, in fact, adjust without the need to have a different currency in different places.  Watch Greece for the next real world example of price adjustment within a single currency zone.  Greek prices will fall relative to the prices of identical products within other countries in the Eurozone.  You don't need a Greek currency to pull this off.

The idea that prosperity can be produced by arbitrarily lowering the value of one's currency is bad economics and potentially disastrous economic policy.  Free markets should dictate currency values, not bureaucrats' mistaken notion that there are easy fixes to sluggish economies.  China's devaluation will not pull China out of its current slowdown and could produce an "announcement effect," that suggests that China's economy may be far weaker than the pundits think.