China adopts Keynesian Policies and Wastes Capital on a lot of Hayekian Malinvestments

Posted by PITHOCRATES - January 22nd, 2012

Week in Review

Keynesians love Big Government.  And state capitalism.  Where the state actively intervenes in the private sector.  So you know the Keynesians love China.  As the Chinese leadership loves Keynes (see Keynes v Hayek in China posted 11/17/2011 on The Economist).

The present leadership of the Chinese Communist Party, Hu Jintao and Wen Jiabao, have embraced Keynesian prescriptions with great determination. In response to the financial crisis of 2008 they approved an audacious stimulus package, unbalancing the government’s books and spurring the country’s banks to lend. That helped defend their peculiar brand of capitalism from a crushing slowdown…

Whereas Keynes worried about inadequate investment—too little entrepreneurial spending to keep everyone gainfully employed—Hayek worried about bad investment. If credit were too easy, he argued, entrepreneurs would embark on overambitious projects that take too long to reach fruition and make insupportable claims on society’s resources.

It is not hard to find overambitious projects in China: think of the country’s “ghost cities”, such as Ordos in Inner Mongolia, which is being built by government fiat long before people are ready to live in it…

Spurred on by the government, China’s banks increased their lending by almost 9.6 trillion yuan ($1.5 trillion) in 2009. That is roughly twice the size of the Indian banking system, as Bank Credit Analyst, a research company, has pointed out. In other words, China’s lenders added two Indias to their loanbooks in the space of a year…

China’s authorities now admit what was always obvious: many of these projects will fail to raise enough revenue to repay their creditors. Defaults have already surfaced in Yunnan province and elsewhere. Some of these projects will be abandoned halfway. They are what Hayek would call “malinvestments”, investments in capacity that no one is willing to pay for or wait for.

It is clear that China’s Keynesian policies have produced exactly what Hayek said they would.  A whole bunch of malinvestments.  A great misallocation of productive capital.  Building things that no one wants.  Such as empty apartment buildings in ‘ghost’ cities.  Capitalists could have used that capital to build who knows what.  But we’ll never know.  Because the free market didn’t allocate that capital to where capitalists would have used it to produce things people wanted.  Pretty much anything but empty apartment buildings in ‘ghost’ cities.

If those empty apartment buildings have to demolished a Keynesian would be okay with that.  Because those demolition crews would be paid.  And they would then take those wages and buy stuff.  Thus generating more economic activity.  Just as a Keynesian would be okay with you buying 4 identical flat-screen televisions only to throw 3 away.  Because the purchase of 4 flat-screens generates more economic activity than the purchase of only one.  So if you’re a fan of Keynesian economics and state capitalism you can do your part.  Whenever you buy anything by an extra 3 so you can throw them away.  And see how Keynesian economics makes you, the capital provider, feel.

I’m guessing it may convert you from a Keynesian to a Hayekian.  When you learn how terrible it is to waste good capital, a.k.a. your paycheck.


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People don’t want Costly, Inefficient and Noisy Wind-Generated Power forced on them in Ontario

Posted by PITHOCRATES - January 22nd, 2012

Week in Review

Ontario is putting up wind farms in rural communities.  And the people in those communities are very unhappy about it (see Ontario farm group urges halt to wind power development by Richard Blackwell posted 1/20/2012 on The Globe and Mail).

Ontario’s largest farm organization has called for a moratorium on wind power development in the province, saying there are too many unanswered questions about its value, and that the debate over turbines is polarizing rural communities.

The Ontario Federation of Agriculture, which represents more than 38,000 farmers in the province, said Friday that no more wind turbines should be built until a number of issues are dealt with.

First, some of the planning for wind farms should be returned to municipalities, the OFA said. Under the province’s Green Energy Act, municipalities have very little say in the decisions where turbines will be built.

Health and noise complaints also need to be addressed, the OFA said, and more study has to be done to ensure that the current minimum 550 metre “setback” from houses is sufficient.

People living close to these turbines complain about the noise and vibrations.  Can’t sleep.  Some even getting sick.  And when they sell their houses they have to disclose these health problems lest they be sued by the new owners.  When they can sell, that is.  It’s so good to be green.  People feel good about going green.  That they’re doing their part for the environment.  As long as they do their part in someone else’s backyard.  Because the people who are unlucky enough to live by these turbines are seeing their property values plummet.  Because people don’t want to live by these windmills.  Because they’re big and noisy.  And won’t let you sleep.

There needs to be more work done to allow the electricity generated from turbines to be stored, the federation said, because the power is currently often sold at a loss on export markets when it is not being generated at times of peak usage…

Ontario has installed about 2,000 megawatts of wind power capacity, by far the most of any Canadian province. Development has been accelerated by the Green Energy Act, under which the province pays premium rates for electricity produced by renewable power projects.

And if the health problems and declining property values weren’t enough these windmills are also inefficient.  Producing electricity during off-peak times.  So to make them efficient will require a massive investment in energy storage facilities.  Consisting of electrical rectifiers, batteries and inverters.  To convert the AC generated power to DC so it can be stored in batteries.  And then converted back into AC when sold on the grid during peak demand.

It sure is a lot of trouble for some 2,000 megawatts of wind-generated electricity.  But the wind doesn’t blow all of the time.  And it isn’t constant when it does blow.  Which is why we rate wind-generation with a capacity factor.  A percentage of the nameplate value.  These factors range from 20-40%.  Which means this 2,000 megawatts of wind-generated electricity is more like 400-800 megawatts.  Not a lot, is it?  By contrast the Nanticoke Generating Station in southern Ontario has a rated capacity of 3,964 MW.  And all you need to get that capacity is to turn the plant on and feed it fossil fuels.

The Nanticoke Generating Station is one facility.  Where it can be managed.  And its emissions can be scrubbed.  Wind turbines, on the other hand, come in small sizes.  They can’t be too big because they sit on top of a pole.  The turbines at the 181.5 MW Enbridge Ontario Wind Farm in Bruce County, Ontario, have a nameplate rating of 1,650 kilowatts each.  Which is why they need 110 of them for that 181.5 MW rating.  Which is more like 36-73 megawatts when factoring in the capacity factor.  Again, not a lot for all of the trouble they cause.  Which begs the question are they worth it?  From an economic standpoint the answer couldn’t be more ‘no’.  They’re very bad economics.  And people hate living by them.  So are they worth it?  It sure doesn’t look like it.


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The Young and Healthy don’t buy Health Insurance because they make up only 3% of All Patients

Posted by PITHOCRATES - January 22nd, 2012

Week in Review

A couple of statistics can explain all that is wrong with our health insurance (see Most Health Care Costs Incurred by Few Americans by U.S. Agency for Healthcare Research and Quality Release posted 1/11/2012 on

More than 40 percent of patients were age 65 or older, while those age 18 to 29 made up just 3 percent.

Health insurance is different than, say, car insurance.  Car insurance is expensive.  But it has remained a whole lot more affordable than health care insurance.  Why?  What’s the difference between the two?  Anyone can have their car stolen.  Or have an accident.  But when it comes to patients in our health care system more than 40% are age 65 and older.  While those healthy and young (ages 18-29) are patients only 3% of the time.  Big problem.  Because a lot of people age 18-29 think rationally and say that’s a lot of money for what?  I never go to the doctor.

And herein lies the fatal flaw of health care insurance.  Insurance operates by having everyone contribute a little to pay large claims to those few who suffer an unfortunate event.  That’s how insurance works.  Not everyone suffers an unfortunate event.  So if everyone pays a little the few who do suffer an unfortunate event get help when they need it.  That’s risk management.  Spreading the risk over numerous policy holders for a small fee.  But that’s not happening in health care.  Because it’s not insurance.  It’s a cost transfer.  The industry is set up to transfer the cost of the health care consumers to those not consuming health care services.  And when those who are not consuming health care services opt out of the system that creates a serious funding problem.

This is the problem whenever you have other people pay for you.  And why Obamacare has a mandate for the young and healthy to buy insurance.  So Obamacare can transfer the cost of the health care consumers to those not consuming health care services.  The young and healthy.

This is a broken model.  It won’t work.  And it will only lead to higher costs and rationing.  Because the population is aging.  Which means those consuming health care services are growing at a rate greater than those paying for them.

You can thank FDR for this mess.  And his maximum wage limit during the Great Depression.  His attempt to stimulate the economy by keeping wages low so businesses would hire more people.  Businesses couldn’t attract better workers by offering them more wages.  So they offered them benefits instead.  And the health care crisis was born.


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China’s State Capitalism has the Monetary Policy Firepower for a Soft Landing

Posted by PITHOCRATES - January 22nd, 2012

Week in Review

The Big Government Keynesians love to point to China as how state capitalism should be done (see Analysis: China has multiple choices to avoid hard landing risk by Zhou Xin and Nick Edwards posted 1/18/2012 on Reuters).

China faces what could be its worst year of growth in a decade with policy firepower that developed nations can only dream of.

A record-breaking tax take expected to top 10 trillion yuan ($1.6 trillion) in 2011 gives Beijing fiscal scope to support growth and financial system liquidity, while monetary policy is perfectly poised for easing after a near two-year tightening cycle.

Contrast that with deep deficits across Europe and the United States and the orthodox policies forced upon central banks on both continents in a desperate bid to avoid a slide into economic depression…

Twin bubbles in real estate and local government debt are still being battled by Beijing, and are arguably the only — if significant — policy constraint faced as the world’s second-biggest economy faces another economic slowdown.

Of course, we mustn’t forget that China is a manufacturing powerhouse.  And why is that?  They have no unions.  Are the Big Government Keynesians suggesting that the US do away with our unions?  It’s that cheap labor that makes all the difference in China.  It is the only reason why they are the world’s second largest economy.  It’s just not that currency manipulation.  It’s that cheap labor makes their export goods inexpensive.

But can it last?  With not one but two bubbles?  No other nation ever fixed a bubble without a long and painful recession.  Let’s not forget that a real estate bubble started the current US recession.  Which burst.  And became the subprime mortgage crisis.  And the Japanese Lost Decade also started with a real estate bubble.  Bubbles aren’t good.  Because they always burst.  And when they do painful recessions follow.

China will collapse.  As all state-run economies do.  Because any suspension of market forces never ends well.  At least, they haven’t yet.  Other than the latest try.  China.  But they will.  Because they always do.  The countries who allow free market capitalism are the ones that stand the test of time.  Just look at Britain and the US.  They’ve had centuries of success.  While China has only had a decade or two.  The odds are on free market capitalism.  Not state capitalism.  As time will no doubt tell again.


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The Islamists, and Iran, win Big in Egypt, Surprise, Surprise, and will Write their New Constitution

Posted by PITHOCRATES - January 22nd, 2012

Week in Review

Well the Egyptians have voted.  And now begins the winter of their discontent (see Islamists secure top spot in new Egypt parliament by Marwa Awad and Lin Noueihed, Reuters, posted 1/21/2012 on Yahoo! News).

The Muslim Brotherhood won by far the biggest share of seats allocated to party lists in Egypt’s first freely-elected parliament in decades, final results confirmed, giving it a major role in drafting the country’s new constitution.

Banned under former leader Hosni Mubarak and his predecessors, the Brotherhood has emerged as the winner from his overthrow. Islamists of various stripes have taken about two thirds of seats in the assembly, broadly in line with their own forecasts.

The Brotherhood’s Freedom and Justice Party (FJP) has promised all Egyptians will have a voice in the new parliament, but Islamists are now set to wield major influence over a new constitution to be drafted by a 100-strong body parliament will help pick…

The Revolution Continues coalition, dominated by youth groups at the forefront of the protests that toppled Mubarak, attracted less than a million votes and took just seven of the 498 seats up for grabs in the lower house…

Only one woman was among the appointees which is likely to further disappoint feminist groups after women won only a handful of seats in the elections. Mubarak had traditionally used the quota to boost the representation of women and Coptic Christians.

So, only 7 of the youth who overthrew Mubarak in hopes of a better future will have a say in the new government.  And only one of them is a woman.  Kind of like the Iranian Revolution.  When all those college students, men and women, overthrew the Shah.  And how did that turn out for them?  If you were a woman not good.  They lost their freedom.  That same freedom they once enjoyed while protesting the Shah of Iran.  Much like the women who brought down Hosni Mubarak will no doubt lose as well.  Based on the strong Islamist wins.

Who would have thought that all those who protested Mubarak and wanted a brighter future would have voted that very future away from themselves?  For with the Islamists writing the constitution you can bet that the new government will be very Islamist.  And much like Iran.  Which no protester said at the time they wanted.  In fact, the Muslim Brotherhood went out of their way saying that Egypt would not be like Iran.  Despite their own personal desire for it to be like Iran.

Funny how history repeats.


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In the Face of Force and the Willingness to use that Force the Iranians back off the Hostile Rhetoric

Posted by PITHOCRATES - January 22nd, 2012

Week in Review

The Iranians love diplomacy.  Because they see it as a sign of weakness and don’t respect it.  They respect only one thing.  Force.  And the willingness to use it.  Which they’ve seen of late.  And have backed off of their shutting down the world’s oil supply rhetoric (see After threats, Iran plays down U.S. naval moves by Robin Pomeroy and Hashem Kalantari, Reuters, posted 1/21/2012 on Yahoo! News).

Iran’s Revolutionary Guard Corps said on Saturday it considered the likely return of U.S. warships to the Gulf part of routine activity, backing away from previous warnings to Washington not to re-enter the area.

The statement may be seen as an effort to reduce tensions after Washington said it would respond if Iran made good on a threat to block the Strait of Hormuz – the vital shipping lane for oil exports from the Gulf.

The US said say all you want but that carrier will be there.  And it will respond to any hostile acts such as blockading the Strait of Hormuz.  As will their steadfast ally the Brits.  Who sent a serious naval asset to the region.  A Type 45 destroyer.  A single ship that can shoot down anything the Iranians can throw into the air long before hitting any US, UK or other friendly target.  And, of course, with that US carrier and its task force on station as well the response to that failed Iranian attack would have been devastating.  The Iranians would have had their asses handed to them.

They’ll talk until everyone is blue in the face.  To them diplomacy is unmanly and a sign of weakness.  They simply don’t respect it.  But project force and be willing to use that force and they will respect that.  Which is the only thing they will respect.


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