The Gold Exchange Standard provided Stability for International Trade
Congress created the Federal Reserve System (the Fed) with the passage of the Federal Reserve Act in 1913. They created the Fed because of some recent bad depressions and financial panics. Which they were going to make a thing of the past with the Fed. It had three basic responsibilities. Maximize employment. Stabilize prices. And optimize interest rates. With the government managing these things depressions and financial panics weren’t going to happen on the Fed’s watch.
The worst depression and financial panic of all time happened on the Fed’s watch. The Great Depression. From 1930. Until World War II. A lost decade. A period that saw the worst banking crises. And the greatest monetary contraction in U.S. history. And this after passing the Federal Reserve Act to prevent any such things from happening. So why did this happen? Why did a normal recession turn into the Great Depression? Because of government intervention into the economy. Such as the Smoot-Hawley Tariff Act that triggered the great selloff and stock market crash. And some really poor monetary policy. As well as bad fiscal policy.
At the time the U.S. was on a gold exchange standard. Paper currency backed by gold. And exchangeable for gold. The amount of currency in circulation depended upon the amount of gold on deposit. The Federal Reserve Act required a gold reserve for notes in circulation similar to fractional reserve banking. Only instead of keeping paper bills in your vault you had to keep gold. Which provided stability for international trade. But left the domestic money supply, and interest rates, at the whim of the economy. For the only way to lower interest rates to encourage borrowing was to increase the amount of gold on deposit. For with more gold on hand you can increase the money supply. Which lowered interest rates. That encouraged people to borrow money to expand their businesses and buy things. Thus creating economic activity. At least in theory.
The Fed contracted the Money Supply even while there was a Positive Gold Flow into the Country
The gold standard worked well for a century or so. Especially in the era of free trade. Because it moved trade deficits and trade surpluses towards zero. Giving no nation a long-term advantage in trade. Consider two trading partners. One has increasing exports. The other increasing imports. Why? Because the exporter has lower prices than the importer. As goods flow to the importer gold flows to the exporter to pay for those exports. The expansion of the local money supply inflates the local currency and raises prices in the exporter country. Back in the importer country the money supply contracts and lowers prices. So people start buying more from the once importing nation. Thus reversing the flow of goods and gold. These flows reverse over and over keeping the trade deficit (or surplus) trending towards zero. Automatically. With no outside intervention required.
Banknotes in circulation, though, required outside intervention. Because gold isn’t in circulation. So central bankers have to follow some rules to make this function as a gold standard. As gold flows into their country (from having a trade surplus) they have to expand their money supply by putting more bills into circulation. To do what gold did automatically. Increase prices. By maintaining the reserve requirement (by increasing the money supply by the amount the gold deposits increased) they also maintain the fixed exchange rate. An inflow of gold inflates your currency and an outflow of gold deflates your currency. When central banks maintain this mechanism with their monetary policy currencies remain relatively constant in value. Giving no price advantage to any one nation. Thus keeping trade fair.
After the stock market crash in 1929 and the failure of the Bank of the United States in New York failed in 1930 the great monetary contraction began. As more banks failed the money they created via fractional reserve banking disappeared. And the money supply shrank. And what did the Fed do? Increased interest rates. Making it harder than ever to borrow money. And harder than ever for banks to stay in business as businesses couldn’t refinance their loans and defaulted. The Fed did this because it was their professional opinion that sufficient credit was available and that adding liquidity then would only make it harder to do when the markets really needed additional credit. So they contracted the money supply. Even while there was a positive gold flow into the country.
The Gold Standard works Great when all of your Trading Partners use it and they Follow the Rules
Those in the New York Federal Reserve Bank wanted to increase the money supply. The Federal Reserve Board in Washington disagreed. Saying again that sufficient credit was available in the market. Meanwhile people lost faith in the banking system. Rushed to get their money out of their bank before it, too, failed. Causing bank runs. And more bank failures. With these banks went the money they created via fractional reserve banking. Further deflating the money supply. And lowering prices. Which was the wrong thing to happen with a rising gold supply.
Well, that didn’t last. France went on the gold standard with a devalued franc. So they, too, began to accumulate gold. For they wanted to become a great banking center like London and New York. But these gold flows weren’t operating per the rules of a gold exchange. Gold was flowing generally in one direction. To those countries hoarding gold. And countries that were accumulating gold weren’t inflating their money supplies to reverse these flows. So nations began to abandon the gold exchange standard. Britain first. Then every other nation but the U.S.
Now the gold standard works great. But only when all of your trading partners are using it. And they follow the rules. Even during the great contraction of the money supply the Fed raised interest rates to support the gold exchange. Which by then was a lost cause. But they tried to make the dollar strong and appealing to hold. So people would hold dollars instead of their gold. This just further damaged the U.S. economy, though. And further weakened the banking system. While only accelerating the outflow of gold. As nations feared the U.S. would devalue their currency they rushed to exchange their dollars for gold. And did so until FDR abandoned the gold exchange standard, too, in 1933. But it didn’t end the Great Depression. Which had about another decade to go.
Tags: bank failures, banking crises, banking system, banknotes, central bankers, credit, depressions, exchange rate, exports, Fed, Federal Reserve Act, Federal Reserve System, financial panics, fractional reserve banking, gold, gold exchange standard, gold standard, Great Depression, great monetary contraction, imports, interest rates, international trade, monetary contraction, money supply, New York, prices, reserve requirement, the Fed, trade deficit, trade surplus
Before we buy a Country’s Exports we have to Exchange our Currency First
What’s the first thing we do when traveling to a foreign country? Exchange our currency. Something we like to do at our own bank. Before leaving home. Where we can get a fair exchange rate. Instead of someplace in-country where they factor the convenience of location into the exchange rate. Places we go to only after we’ve run out of local currency. And need some of it fast. So we’ll pay the premium on the exchange rate. And get less foreign money in exchange for our own currency.
Why are we willing to accept less money in return for our money? Because when we run out of money in a foreign country we have no choice. If you want to eat at a McDonalds in Canada they expect you to pay with Canadian dollars. Which is why the money in the cash drawer is Canadian money. Because the cashier accepts payment and makes change in Canadian money. Just like they do with American money in the United States.
So currency exchange is very important for foreign purchases. Because foreign goods are priced in a foreign currency. And it’s just not people traveling across the border eating at nice restaurants and buying souvenirs to bring home. But people in their local stores buying goods made in other countries. Before we buy them with our American dollars someone else has to buy them first. Japanese manufacturers need yen to run their businesses. Chinese manufacturers need yuan to run their businesses. Indian manufacturers need rupees to run their businesses. So when they ship container ships full of their goods they expect to get yen, yuan and rupees in return. Which means that before anyone buys their exports someone has to exchange their currency first.
Goods flow One Way while Gold flows the Other until Price Inflation Reverses the Flow of Goods and Gold
We made some of our early coins out of gold. Because different nations used gold, too, it was relatively easy to exchange currencies. Based on the weight of gold in those coins. Imagine one nation using a gold coin the size of a quarter as their main unit of currency. And another nation uses a gold coin the size of a nickel. Let’s say the larger coin weighs twice as much as the smaller coin. Or has twice the amount of gold in it. Making the exchange easy. One big coin equals two small coins in gold value. So if I travel to the country of small coins with three large gold coins I exchange them for six of the local coins. And then go shopping.
The same principle follows in trade between these two countries. To buy a nation’s exports you have to first exchange your currency for theirs. This is how. You go to the exporter country with bags of your gold coins. You exchange them for the local currency. You then use this local currency to pay for the goods they will export to you. Then you go back to your country and wait for the ship to arrive with your goods. When it arrives your nation has a net increase in imported goods (i.e., a trade deficit). And a net decrease in gold. While the other nation has a net increase in exported goods (i.e., a trade surplus). And a net increase in gold.
The quantity theory of money tells us that as the amount of money in circulation increases it creates price inflation. Because there’s more of it in circulation it’s easy to get and worth less. Because the money is worth less it takes more of it to buy the same things it once did. So prices rise. As prices rise in a nation with a trade surplus. And fall in a nation with a trade deficit. Because less money in circulation makes it harder to get and worth more. Because the money is worth more it takes less of it to buy the same things it once did. So prices fall. This helps to make trade neutral (no deficit or surplus). As prices rise in the exporter nation people buy less of their more expensive exports. As prices fall in an importer nation people begin buying their less expensive exports. So as goods flow one way gold flows the other way. Until inflation rises in one country and eventually reverses the flow of goods and gold. We call this the price-specie flow mechanism.
In the Era of Floating Exchange Rates Governments don’t have to Act Responsibly Anymore
This made the gold standard an efficient medium of exchange for international trade. Whether we used gold. Or a currency backed by gold. Which added another element to the exchange rate. For trading paper bills backed by gold required a government to maintain their domestic money supply based on their foreign exchange rate. Meaning that they at times had to adjust the number of bills in circulation to maintain their exchange rate. So if a country wanted to lower their interest rates (to encourage borrowing to stimulate their economy) by increasing the money supply they couldn’t. Limiting what governments could do with their monetary policy. Especially in the age of Keynesian economics. Which was the driving force for abandoning the gold standard.
Most nations today use a floating exchange rate. Where countries treat currencies as commodities. With their own supply and demand determining exchange rates. Or a government’s capital controls (restricting the free flow of money) that overrule market forces. Which you can do when you don’t have to be responsible with your monetary policy. You can print money. You can keep foreign currency out of your county. And you can manipulate your official exchange rate to give you an advantage in international trade by keeping your currency weak. So when trading partners exchange their currency with you they get a lot of yours in exchange. Allowing them to buy more of your goods than they can buy from other nations with the same amount of money. Giving you an unfair trade advantage. Trade surpluses. And lots of foreign currency to invest in things like U.S. treasury bonds.
The gold standard gave us a fixed exchange rate and the free flow of capital. But it limited what a government could do with its monetary policy. An active monetary policy will allow the free flow of capital but not a fixed exchange rate. Capital controls prevent the free flow of capital but allows a fixed exchange rate and an active monetary policy. Governments have tried to do all three of these things. But could never do more than two. Which is why we call these three things the impossible trinity. Which has been a source of policy disputes within a nation. And between nations. Because countries wanted to abandoned the gold standard to adopt policies that favored their nation. And then complained about nations doing the same thing because it was unfair to their own nation. Whereas the gold standard made trade fair. By making governments act responsible. Something they never liked. And in the era of floating exchange rates they don’t have to act responsibly anymore.
Tags: capital controls, currency, currency exchange, exchange rate, exported goods, exports, fixed exchange rate, floating exchange rate, foreign currency, foreign goods, gold, gold standard, goods, inflation, international trade, monetary policy, price inflation, prices, trade deficit, trade surplus
Week in Review
We can do a lot to shape our environment to bend it to our will. We can dam a river to produce electricity. We can extract raw materials from our environment and transform them into useful things. We can build a breakwater to block damaging waves from entering a safe harbor. But other than a nuclear explosion there is nothing we can do to compare to the power of a volcanic eruption. For they can cool the planet. And they are erupting all of the time (see Volcano eruption in Kagoshima covers nearby city with ash by Adam Westlake posted 7/27/2012 on The Japan Daily Press).
Sakurajima Volcano has been steadily erupting for the last week, according to the Japan Meteorological Agency, but a larger-than-average eruption on Tuesday has showered nearby Kagoshima City with rocks and ash… Meteorological officials have stated that there have already been more 600 minor eruptions since the beginning of this year alone…
As of Thursday morning, weather agencies reported visible ash clouds still lingering in the air, and with winds primarily coming from the southeast direction, residents have been warned that there may be more ash fall in the days to come. On July 24th, pilots reported seeing ash clouds as high as 8,000 to 12,000 feet, causing the Kagoshima Airport to briefly divert air traffic.
This is why volcanoes can change the weather. By throwing up soot, ash and sulfur dioxide into the atmosphere it blocks the sun’s warming energy from heating the planet. Two days after this tiny little eruption ash clouds were still lingering in the air. Imagine what a large volcanic eruption could do. Or the aggregate of all the volcanic eruptions in the world. And the cooling affect they have on the planet.
Interestingly volcanoes aren’t the only thing that throws soot, ash and sulfur dioxide into the atmosphere. Coal-fired power plants do, too. Well, at least before we started putting scrubbers on them. Funny how volcanoes can cool the planet while coal-fired power plants warm the planet. Not ‘ha ha’ funny. By the ironic kind of funny. Another interesting fact is that the planet started warming right around the time we started putting scrubbers on these power plants. And did other things to limit the emissions from burning coal. Coincidence? Or have the environmentalists actually caused global warming because of their actions to prevent global warming? Perhaps.
You can see this eruption at Video: Sakurajima Volcano Erupts in Japan, Showers Kagoshima City With Ash. It’s a pretty awesome sight. And it’s just a minor eruption. Showing how much more nature can shape our world than we can.
Tags: ash clouds, coal-fired power plants do, cool the planet, environment, volcanic eruption, volcano, warm the planet
Week in Review
The president of Brazil is Dilma Rousseff. She belongs to the Workers’ Party. A party that enjoys strong support from the labor unions. Because it leans towards socialism. At least in state-ownership of some state assets. In particular those that employ a lot of people. But the great Brazilian economic growth is sputtering. Like an engine no longer firing on all cylinders. Because of her party affiliation one would expect Rousseff to adopt Keynesian policies. To stimulate their economy with some government spending. But no. She’s talking about doing something completely different (see UPDATE 1-Rousseff ‘very worried’ about Brazil economy by Alonso Soto and Brian Winter posted 7/23/2012 on Reuters).
President Dilma Rousseff is pessimistic about Brazil’s chances for a meaningful economic recovery this year and is pushing ahead with new measures aimed at lowering taxes and increasing investment, hoping they might give the economy a lift by 2013, government officials told Reuters.
The measures include a consolidation of some overlapping federal taxes; a new round of concessions that would allow the private sector to manage more of the country’s congested airports and seaports; and a more aggressive effort to reduce electricity costs for manufacturers and others, the officials said on condition of anonymity because they were discussing private policy discussions…
Rousseff, a trained economist, has reacted with several targeted tax cuts and more than half a dozen packages aimed at stimulating consumption and investment. However, many business leaders and foreign investors have complained that her policies have been too ad hoc and narrow in scope, citing forecasts that now see growth as low as 1.5 percent this year…
Some business leaders have called for Rousseff to take even more dramatic measures, such as an omnibus reform package that could substantially reduce or simplify Brazil’s tax load. Rousseff has opted instead to pursue more targeted reforms to help struggling sectors on a case-by-case basis, believing that Congress would block a more ambitious, organized effort.
So Rousseff would have been a more aggressive tax cutter if it weren’t for Congress. So one can hardly blame her for her ad hoc ways. You have to do the best you can with the cards you’re dealt. Especially when your party tends to favor state ownership of industry and higher taxation to pay for the labor in those state-owned industries.
Lowering taxes and electricity costs? Privatization? Other than that part about consumption one would think that Rousseff’s economic training was of the Austrian school variety rather than the Keynesian brand. Whatever her economic roots with policies like these Brazil should rebound well from this momentary interruption in their economic growth.
The move most likely to stir investors, for both practical and symbolic reasons, is the new round of port concessions. Airports and seaports are routinely cited as some of the country’s most crippling bottlenecks, slowing everything from commodities exports to business travel, as public investment failed to keep up with the boom in the economy over the past decade…
The officials declined to say which additional airports Rousseff was considering, but one of the targets could be Rio de Janeiro’s international airport, which needs renovations ahead of the 2014 World Cup and 2016 Olympics. Rio’s governor, Sergio Cabral, described the airport in an interview with Reuters last year as being like “a third-rate bus station…”
The Brazilian economy had been roaring thanks to the private sector. What wasn’t keeping up with the private sector was the public sector. While people were doing remarkable things in the private sector the best the government could do was make Rio de Janeiro’s international airport “a third-rate bus station.” Which just goes to show you that for the best economic activity you have to release the human capital of the people. When you let these people think. When you let them create. When you let them create the things they thought about you get the kind of explosive economic activity that put Brazil in the BRICS emerging economies. While running ‘third-rate bus stations’ just doesn’t quite do it.
Tags: Brazil, Brazilian, Brazilian economy, BRICS, consumption, Dilma Rousseff, economic growth, economic recovery, investment, Keynesian, lowering taxes, private sector, privatization, Rousseff, taxes
Week in Review
Since 2009 we’ve been hearing about the European sovereign debt crisis. Also known as the Eurozone crisis. And here we are in 2012. Despite numerous rescue packages and recovery plans the crisis continues on. Greece can’t borrow money in the credit markets because no one believes Greece will ever be able to pay them back. For Greece has been running some pretty big deficits. Which has accumulated an enormous pile of debt. Resulting from their large spending obligations for public sector wages and pensions. They don’t have the money. They can’t borrow the money. So a massive Greek default is likely. Which because of the common currency will be felt throughout the Eurozone (see Germany’s AAA rating under threat after Moody’s cuts outlook by Jamie Dunkley posted 7/24/2012 on The Telegraph).
Moody’s warned the outlook for the ratings of Germany, Luxembourg and the Netherlands is negative because the threat of a Greek exit from the eurozone and the need for greater financial support for struggling eurozone countries from the strongest members of the bloc.
In a statement, issued after the close of the US markets, it added: “The level of uncertainty about the outlook for the area and the potential impact of plausible scenarios on member states, are no longer consistent with stable outlooks.”
Not some pleasant choices. Have a Greek default damage your credit rating. Or make your taxpayers pay for another nation’s debt. Which begs the obvious question. Or should. How is having other people pay for spending you can’t afford going to solve your problem of spending more than you have? If Greece doesn’t cut their spending nothing will change in the long run. They will need another emergency bailout following this emergency bailout. Because this emergency bailout doesn’t address the source of their trouble. Excessive government spending.
Keynesians encourage excessive government spending because they think it’s stimulative. That it creates economic activity. In fact the Keynesian solution to the Greek crisis is more government spending to stimulate the economy. Which begs the obvious question. Or should. If government spending does all of this why after all of their government spending is Greece on the precipice of bankruptcy? Huh? Answer that one smart Keynesian person.
Tags: Bankruptcy, credit rating, default, Eurozone, Eurozone crisis, excessive government spending, government spending, Greece, Greek, Greek crisis, Keynesians, sovereign debt crisis
Week in Review
The ghost of Fukushima doesn’t appear to be haunting nations in the region. Neither is the ghost of Chernobyl. The China Syndrome is probably not being downloaded much from Netflix either. For the people closest to the worst nuclear accidents aren’t spooked by nuclear power in the least (see Nuclear expansion in Asia on track despite Fukushima – report by Eric Onstad posted 7/26/2012n on Reuters).
Strong expansion of nuclear power as a carbon-free energy source in Asia is expected to press ahead despite the Fukushima accident in Japan that soured sentiment in some countries, a benchmark report said on Thursday…
Nuclear capacity is due to expand in East Asia by 125 percent to 185 percent by 2035, the report said. The strongest growth is expected in China, India, South Korea and Russia.
Despite their proximity to Fukushima, despite Chernobyl being the worst nuclear accident of all time, China, India, South Korea and Russia are proceeding with nuclear power. While the U.S. pursues solar power and wind power. The number two and number three economies in the world, China and India, are pursuing reliable nuclear power. While the world’s number one economy, the United States, is pursuing temperamental renewable energy. So we may see a reshuffling of the world’s top three economic powers. As one starves itself of energy while the other two just gorge themselves on energy. Or in other words, they have a sensible energy policy.
Energy drives the modern economy. Reliable energy. Countries suffering recurring blackouts don’t have strong economies. And what energy source provides reliable energy? Fossil fuel-powered. Including nuclear. We rate power generation by its capacity factor (CF). Which is a measure of actual power produced over a period of time compared to the maximum that could have been produced over that same period. Hydroelectric dams need rain to keep their reservoirs full. If the rains don’t come the water isn’t there to drive their water turbines. Which gives a large hydroelectric dam a CF of about 50%. Or less. Wind power only works for a narrow band of wind speed. Giving it a CF of about 30%. And solar power only works when the sun shines. Giving it a CF of about 15%. The CF of fossil fuel-powered plants? About 90%. Or more. Some nuclear plants can even exceed 100%.
This is why China, India, South Korea and Russia are proceeding with nuclear power. Because it’s reliable power. And as far as they’re concerned it’s safe power. It’s also clean power. So why is the U.S. pursuing wind and solar power? Because they don’t have as sensible an energy policy as China, India, South Korea and Russia have. Well, India is abandoning coal like the U.S. is. But the Indians haven’t abandoned nuclear power like the Americans have. So the Indians have an edge over the Americans in sensibility. Even though their electric generation capacity is busting at the seams. What with a dry rainy season hurting their hydroelectric generation and their move away from coal.
Tags: Asia, CF, Chernobyl, China, Energy Policy, fossil fuel, Fukushima, India, nuclear power, reliable energy, Russia, solar power, South Korea, wind power
Week in Review
Thomas Jefferson did not want the federal government to have money. This is where he parted ways with Alexander Hamilton. Hamilton wanted to give the federal government money to spend to jumpstart American industry. To make it an empire to rival the British Empire. But Jefferson looked at world history and saw nothing but examples of corruption whenever money and government intertwined. This is one reason why Washington D.C. is where it is. Because the big financiers were in New York City. Which in those days was on the other side of the world from Washington D.C. Something he hoped would keep money out of the hands of the federal government. For awhile at least.
Fast forward to today. Where we have a bloated federal government the size of which would have sickened Jefferson. And seeing the amount of money it spent would have killed him. The Department of Energy guaranteeing loans? And a trillion dollar stimulus bill? Had he lived he would have suspected some heinous Hamiltonian plot. For neither would have happened in a Jefferson presidency. For he knew it would only lead to corruption. Like it has (see Solyndra, Cronyism, and Double-Dipping on the Taxpayers’ Dime by Nancy Pfotenhauer posted 7/23/2012 on U.S. News & World Report).
Solyndra became the poster child of spectacularly poor political and policy judgment when it filed for bankruptcy, laid off a thousand employees, and left taxpayers holding the bag on $535 million in loan guarantees. In testimony Thursday before the House Committee on Oversight and Government Reform, the other shoe dropped. Apparently, many of the companies that received loans under the auspices of the same infamous program were well-established entities that essentially double-dipped to grab as many taxpayer dollars as possible…
According to Mercatus scholar Veronique de Rugy’s testimony, approximately 90 percent of the [Department of Energy’s Section] 1705 program loans went to subsidize power plants often backed by big companies with extensive resources…
Now comes the double dip: Companies such as NRG Energy Inc.—closely linked to Senate Majority Leader Harry Reid—not only received $3.8 billion 1705 loans (almost a quarter of the total), but three subentities of the same company received a total of at least 39 grants under the stimulus law…
While happily House Republicans are moving to end the Energy Department’s loan guarantee program, the Export-Import Bank, reauthorized in May in a rush of bipartisan irresponsibility, was part of the double-dipping in a particularly distressing manner. According to de Rugy, First Solar raked in $646 million in 1705 loan guarantees through partner Exelon and landed another $547.7 million of the same from the Ex-IM bank…
…Some of the Ex-Im money went to a Canadian company named St. Clair Solar, which is a wholly owned subsidiary of First Solar. St. Clair Solar received a total of $192.9 million broken into two loans to buy solar panels from First Solar. In other words, the company received a loan to buy solar panels from itself. (emphasis added)
Loaning money to a company so it can buy from itself? That just isn’t right. And $3.8 billion going to a crony of Majority Leader Harry Reid? No wonder the Democrats are all for green energy initiatives and stimulus spending. They get to take care of their friends. Get some of that money in return. And live very well courtesy of the taxpayers who they are stealing from. Of course they will deny this. Saying people (i.e., rich people like them) will eventually spend this money in the economy. That when they and their friends buy expensive cars, private planes, large houses, expensive wines, vacation junkets, etc., they are creating jobs in the economy. Generating economic activity. Which is what a stimulus is supposed to do. And they will say this with righteous indignation. But what they won’t say is how much middle class economic activity their high taxes kill in the private sector. And how much their deficit spending adds to the national debt. Which has already lowered America’s debt rating once. Which is just a sign of the devastation their reckless spending will cause us. And our children.
We should follow Jefferson’s advice. And limit the amount of money government can spend. Defense spending? Yes. Intervening into the private economy? No. Because loan guarantees and stimulus spending don’t help anyone but those spending the money. Our politicians. And their cronies. For Jefferson was right. Nothing but corruption comes from intertwining money and government.
Tags: 1705 loans, 1705 program loans, corruption, Democrat, economic activity, Energy Department, federal government, green energy, Hamilton, Harry Reid, Jefferson, jobs, loan guarantees, money and government, Senate Majority Leader Harry Reid, Solyndra, stimulus spending, taxpayers, Thomas Jefferson, Washington D.C.
Week in Review
Job-creation reduces poverty in Chile. And it goes back to the Seventies. But you wouldn’t know it by reading this (see Poverty indicators decline posted 7/25/2012 on Economist Intelligence Unit).
Improvements in Chile’s poverty indicators in the past two decades are back on track after a setback in 2009. The proportion of the population living in poverty fell from 15.1% in 2009 to 14.4% in 2011, according to the latest Caracterización Socioeconómica Nacional (Casen) household survey. There was also a substantial drop in the proportion of people living in extreme poverty, from 3.7% in 2009 to 2.8% in 2011. The main factor explaining these trends was the strong level of job-creation recorded in Chile in the past two years, but well-targeted government subsidies also played an important role…
Within the IEF programme, the monthly bonuses under the “dignity” component, worth Ps6,000 (US$12.5) per person in the household, plus Ps13,000 per household, are targeted at those in extreme poverty, and will be unconditional. Beyond that, if the children in the household attend their mandatory healthcare check-ups and achieve a school attendance rate of at least 85%, the household will receive a monthly bonus of Ps8,000 per child. This yields Ps53,000 per month to a household with two adults and two children satisfying these conditions, or US$97 per month for one with one adult and two children.
Yes, job-creation was a strong factor. Targeted government subsidies? Not really. First of all, you can’t do targeted subsidies if you don’t have a lot of jobs creating a lot of tax revenue. You can have jobs without subsidies but you can’t have subsidies without jobs. Because jobs pay for subsidies.
Paying people to have children? Where have I heard this before? Oh, yes. LBJ’s Great Society. That gave us AFDC. Aid to Families with Dependent Children. That destroyed poor families by encouraging single mothers to have more babies to collect more benefits. Allowing men to father as many children as they pleased with as many women as they pleased because they don’t have to pay to raise their children. The state became the father to these children (and husband to these women). Raised them in crime-infested housing projects. And sent them to broken, substandard schools. Which these kids dropped out of and joined gangs. Yeah, AFDC worked so well that Bill Clinton, a Democrat, reformed welfare to fix this ill-conceived policy. Because even he knew you can’t fix problems by simply throwing money at them. Jobs were better. And families. Where a child grew up with a mother and a father to nurture and discipline the child. To put them on the right path. Something the state just couldn’t do.
Missing from this piece is any mention of Milton Friedman. The Chicago Boys. El Ladrillo. The economic plan put together by the Chilean economists who studied at the University of Chicago. In the Chicago school of economics. It was so thick they called it The Brick. Or El Ladrillo. Milton Friedman and these great Chilean economists, the Chicago Boys, turned the Chilean economy around. The dictator Augusto Pinochet even invited Milton Friedman down to Chile to help. Friedman went. Gave some advice. And Pinochet followed it. Turning their horrible economy around (see Monetarism, Laissez-Faire Capitalism, Augusto Pinochet, Chile, Hyperinflation, El Ladrillo, Chicago Boys, Milton Friedman and Miracle of Chile).
He ditched the mercantilist policies. Embraced laissez-faire capitalism. Privatized the state industries. Established free trade. Cut government spending. And stopped printing money. Ending the hyperinflation. Replacing it with a strict monetary policy… Friedman’s monetarism turned the Chilean economy around. Creating a prosperous market economy. With a growing middle class. The strong economic growth led to some healthy tax revenue. Which in later years funded antipoverty programs. The Miracle of Chile even replaced the military junta with a democratic government. Chile now has one of the healthiest and freest economies in the world.
It was these sound economic policies that created the Miracle of Chile in the Eighties. Not targeted subsidies. Real economic growth provides prosperity. People with jobs. Who earn money to spend in the economy. And pay taxes. That’s the way it always works. Jobs first. Then prosperity. And then the tax revenue that funds government spending. It just doesn’t work the other way around. If it did Greece wouldn’t be in the trouble it’s in. The United States wouldn’t still be lingering in the Great Recession. And President Clinton wouldn’t have reformed welfare to end the family killer AFDC. No. Excessive government spending only creates great debt. High inflation. And a permanently impoverished underclass. At least this is what history has shown us.
Tags: AFDC, Chicago Boys, Chile, Chilean economists, Clinton, debt, El Ladrillo, Friedman, government spending, government subsidies, inflation, job creation, jobs, Milton Friedman, Miracle of Chile, Pinochet, poverty, prosperity, subsidies, targeted government subsidies, tax revenue
Week in Review
Singapore is doing very well. It has one of the strongest economies in the world. And has one of the highest per capita wealth. Not surprisingly it was one of the original Four Asian Tigers. Along with Hong Kong. South Korea. And Taiwan. Singapore and the United States have something in common. Besides bustling economies (well, it was once bustling in the United States). They were both once part of the British Empire. And remain on good relations with Britain (see President Tony Tan underlines warmth of longstanding S’pore-UK ties posted 7/28/2012 on Channel News Asia).
President Tony Tan Keng Yam underlined the warmth of longstanding relations between the United Kingdom and Singapore, during a reception at Buckingham Palace hosted by Queen Elizabeth II on Friday.
Just something else to think about as you watch the 2012 Olympics in Great Britain. Just how much Britain gave the world. A lot of people like to pick on Britain. But just look at some of the best places in the world in terms of individual liberty and the standard of living. The United States of America. Canada. Australia. Hong Kong. And, of course, Singapore. To name a few. And what do they have in common? They were all once part of the British Empire. All achieved greatness in large part due to their British heritage. And grew into nations based on the rule of law. Representative government. Free trade. And free market capitalism. Giving us our individual liberty. And our high standards of living. All in all not a bad trade for a little colonial imperialism.
Tags: Britain, British Empire, Great Britain, individual liberty, Singapore, standard of living
Week in Review
The Great Recession lingers on. Because people don’t have jobs. So they can’t spend money. And when people aren’t spending money businesses can’t pay their bills. Or service their debt (see More companies defaulting on their debt: 47 this year alone by Matt Krantz posted 7/24/2012 on USA Today).
This year, 47 global companies have been unable to keep paying the interest on their debt, which is more than double the levels a year ago, says Standard & Poor’s. A majority of those defaults, 25, are by U.S. companies…
This is happening despite record low interest rates that should allow companies to refinance and reduce their interest costs.
A long time ago an auditor once told me that bankruptcies rarely saved businesses. For excessive debt at unattractive interest rates didn’t cause their problems. It’s always insufficient revenue that couldn’t service their debt that caused their problems. For if you have healthy revenue you’ll be able to service enormous amounts of debt at the worst interest rates. Which is typically what happens during booming economic times. Businesses take on debt at high rates. Because they can then. They take on debt based on what they can pay during the good times. Not on what they can pay during the bad times that inevitably follow.
So excessive debt doesn’t cause their problems. But excessive debt ultimately solves their problems. Through bankruptcy. And liquidation. Unfortunately it comes with a rather unpleasant side affect. The demise of the business.
So low interest rates aren’t the panacea the Keynesians think they are. No matter how much faith our governments put into their Keynesian economists. Who are constantly urging the government to lower interest rates. But it doesn’t work. Because borrowing money simply doesn’t increase sales revenue. You need a healthier economy to do that. One that is more business-friendly. One that doesn’t kill economic activity with excessive regulation. And one that doesn’t tax so much wealth out of the private sector. So people can earn money and keep what they earn. So they can spend it in the economy. And businesses need a business-friendly environment with low regulatory costs. So they can sell at prices low enough to encourage consumers to buy their goods and services. This is how you generate real economic activity. And until we have this environment the Great Recession will linger on.
Tags: bankruptcies, Bankruptcy, business friendly, debt, economic activity, excessive debt, Great Recession, interest, interest costs, interest rates, Keynesian, low interest rates, revenue, service their debt
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