The European Central Bank taking Steps to make the Eurozone Crisis Worse

Posted by PITHOCRATES - September 22nd, 2012

Week in Review

To increase the money supply central banks can do a few different things.  To stimulate economic activity.  They can lower reserve requirements to stimulate money creation via fractional reserve banking.  They can print money.  And they can buy bonds with money they create that they inject into the economy with their bond purchases.  These actions will put more money into the economy.  In hopes people will use it to generate economic activity.  Of course there is a tradeoff.  Increasing the money supply can also create inflation.  And often does.  Unless the economy is so far into the toilet that no one spends any money even with all of this new money in the economy (see ECB in ‘panic’, say former chief economist Juergen Stark posted 9/22/2002 on The Telegraph).

“The break came in 2010. Until then everything went well,” Juergen Stark, the German who resigned from the ECB in late 2011 after criticising its earlier round of buying up of sovereign debt, told Austrian daily Die Presse in an interview.

“Then the ECB began to take on a new role, to fall into panic. It gave in to outside pressure … pressure from outside Europe.”

Mr Stark said the ECB’s new plan to buy up unlimited amounts of eurozone states’ bonds, announced on September 6, on the secondary market to bring down their borrowing rates was misguided.

“Together with other central banks, the ECB is flooding the market, posing the question not only about how the ECB will get its money back, but also how the excess liquidity created can be absorbed globally,” Mr Stark said.

“It can’t be solved by pressing a button. If the global economy stabilises, the potential for inflation has grown enormously.”

The European Central Bank (ECB) wasn’t trying to stimulate economic activity with these bond purchases.  What they were trying to do was throw a lifeline to those nations in the Eurozone about to go belly up because no one will buy their bonds.  Because the chances of them ever repaying their enormous debts are slim to none.  Because of this these indebted countries have to offer very high interest rates to entice anyone to take a chance buying their risky bonds.  These high interest rates, though, were hurting these countries.  Increasing their financial woes.  And pushing them ever closer to bankruptcy.  So the ECB caved.  And bought their worthless bonds.  By doing something only a central bank can do.  Create money out of thin air.

These additional Euros thrown into the money supply could very well end up depreciating the Euro.  And sparking off inflation.  Which monetary expansion ultimately does.  Unless an economy is so far into the toilet that no one will spend this additional money.  And it just sits in the bank.  But if the economy does turn around there will be a lot more money available to borrow.  At exceptionally low interest rates.  So low that some will borrow it because of those low interest rates.  Which could spark off inflation.  Helping the Eurozone to settle back into recession.

This is not going to help anyone in the Eurozone.  Especially those staring down bankruptcy.  Because this won’t cut spending.  This won’t reduce any deficits.  And this won’t lower any debt.  All of the old problems that caused their problems will still be there.  Along with a new problem.  Inflation.  Guaranteeing that things will get worse in the Eurozone before they get better.

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Four Trillion Yuan of Keynesian Stimulus Spending provided an Economic Recovery in China that lasted about 2 Years

Posted by PITHOCRATES - September 22nd, 2012

Week in Review

Before the early 20th century we looked at economics differently.  We looked at it correctly.  We understand the importance of savings to capital formation.  And we understood the stages of production.  How economic recovery didn’t happen until it reached the higher stages.  Those stages the farthest away from retail sales.  The raw material industry.  The manufacturing industry.  Who make the components the assembly plants use to build consumer goods.  When these higher stages businesses recover then there is an economic recovery.  Because it takes time for those higher stages goods to make it down to the retail level.  So they don’t invest until they know there is a real economic recovery.

This is why Keynesian stimulus spending doesn’t work.  When central banks increase the monetary base it can create a surge of economic activity.  But it also depreciates the currency.  And raises prices.  Higher prices lead to an economic slowdown.  It’s just a matter of time.  Which is why the higher stages of production don’t respond to economic stimulus because by the time their new goods reach the retail level the higher prices will already be slowing down economic activity.  Meaning there will be no demand for their expanded production.  So they will have to lay off employees and shutter facilities.  Resulting in another recession.  Or just a resumption of the previous one.  Only worse.  Because the depreciated currency leaves consumers with less purchasing power.  So they can’t buy as much as they once did.  Creating further excess capacity.  Further layoffs.  And a worsening of the recession they tried to end with that Keynesian stimulus spending.

The Chinese are all Keynesians when it comes to economic policy.  So when their economic activity slowed they went to the go-to Keynesian solution.  Expand the monetary base (see China Slowdown Seen Longer Than 2009 by Government Researcher by Bloomberg News posted 9/20/2012 on Bloomberg).

With the 2008 crisis, China enacted a 4 trillion yuan ($586 billion at the time) stimulus and opened up bank lending to revive expansion. Year-over-year growth, after decelerating for seven quarters, bottomed at 6.2 percent in the first quarter of 2009 and accelerated to 11.9 percent a year later…

Chinese Premier Wen Jiabao, who pledged last week to employ monetary and fiscal policies to spur growth, has accelerated infrastructure-project approvals while refraining from introducing a stimulus package on the scale of the one during the financial crisis.

There was a burst of economic activity following the stimulus.  Something all Keynesians in the United States point to.  Saying the reason why the American stimulus didn’t work was because it wasn’t big enough.  Like it was in China.  (They say this even though the Chinese spent less than the Americans.)  Where it worked so well that they need to spur growth with new monetary and fiscal policies this year.  After the new economic growth that began about 2 years ago fizzled out.  Which was far better than the American stimulus that provided no economic growth.  Even though they spent more.  Proving that Keynesian stimulus policies don’t end recessions.  They just offer false hope.

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President Obama’s Green Energy Investment into Electric Cars is a Failure According to CB0

Posted by PITHOCRATES - September 22nd, 2012

Week in Review

Saving the planet with electric cars is a costly endeavor.  Part of the problem is that no one wants these cars.  Even with fat government subsidies.  Because people would rather have big SUVs, trucks and full-size sedans.  Vehicles that are useful.  Safe.  And have big gasoline engines in them that will always get you home.  Which is why the government’s green energy investment into the electric car industry will never deliver any of its promises (see U.S. electric car policy to cost $7.5 billion by 2019: CBO by Bernie Woodall and Deepa Seetharaman posted 9/20/2012 on Reuters).

U.S. federal policies to promote electric vehicles will cost $7.5 billion through 2019 and have “little to no impact” on overall national gasoline consumption over the next several years, the Congressional Budget Office said in a report issued on Thursday.

Consumer tax credits for buying electric vehicles, which can run as high as $7,500 per vehicle, will account for about 25 percent of the $7.5 billion cost, the CBO said.

The rest of the cost comprises of $2.4 billion in grants to battery makers and projects to promote electric vehicles as well as $3.1 billion in loans to auto companies designed to spur production of fuel-efficient vehicles.

“The more electric and other high-fuel-economy vehicles that are sold because of the tax credits, the more low-fuel-economy vehicles that automakers can sell and still meet the standards,” according to the report.

As a result, tax credits will have “little or no impact on the total gasoline use and greenhouse gas emissions of the nation’s vehicle fleet over the next several years.”

So auto makers are selling electric vehicles for two reasons.  Government subsidies.  And so they can sell more lower-fuel-economy and higher-polluting profitable vehicles.  The kind of vehicles the people want to buy.  And will buy without any government subsidies.  No one wants to buy the electric cars.  And the automakers can’t make any money selling the electric cars.  The only way any sales of electric cars happen is by transferring a large chunk of their cost to the taxpayers.  Against their will.  But, then again, that’s what government is for these days, isn’t it?  Going against the will of their constituents.

While drivers of these electric vehicles use less gasoline and emit less greenhouse gas such as carbon dioxide, the cost to the government can be high, the CBO found. The U.S. government will spend anywhere from $3 to $7 for each gallon of gasoline saved by consumers driving electric vehicles…

The CBO said an average plug-in hybrid vehicle with a battery capacity of 16 kilowatt-hours is eligible for the maximum tax credit of $7,500.

“However, that vehicle would require a tax credit of more than $12,000 to have roughly the same lifetime costs as a comparable conventional or traditional hybrid vehicle,” the CBO said.

And, the bigger the battery the greater the cost disadvantage for buyers of plug-in vehicles and conventional vehicles, the CBO said.

What happened to that laser-like focus on creating jobs?  That’s what President Obama said back in 2009.  And here we are in 2012 still suffering in the Great Recession.  Despite their Recovery Summer back in 2010.  The president is spending a lot of money.  Some $500 billion or more to the solar panel maker Solyndra now in bankruptcy.  As well as other green energy investments.  Including the investment into electric cars to wean us off of expensive gasoline.  While the cost of the subsidies for these electric cars will basically double the price of gasoline the rest of us pay (the price of the subsidy costs us as much as what gasoline costs us).

We’d be better off just paying for the expensive gasoline to put into the cars we want to buy.

But it’s worth the price to save the planet.  That’s what they say.  But I can’t help but notice that the planet has never been in worse shape since we started trying to save it.  We know volcanic eruptions can lower the earth’s temperature with the amount of smoke, soot, ash and sulfur dioxide they put into the atmosphere.   Periods of global cooling correlate to active volcanic activity.  So that’s a given.  We know it for a fact.  So is it any coincidence that when we started putting scrubbers onto our coal-fired power plants to remove these same things from our smoke stacks that global temperatures began to rise?

Once upon a time we all burned coal in our houses for heat.  Coal-fired locomotives transported people and freight.  And every factory had a coal-fired steam engine.  We covered our cities in smoke, soot and ash from all the coal we burned.  But there was no global warming then like we have today.  Why?  Can it be that burning coal releases the same stuff volcanoes release when they erupt?  And cool the planet?  Perhaps.  If the global warming alarmists were right then the attack on coal and all the emission controls they mandated on our cars should have made the planet a chilly place.  Shortening our growing seasons.  And given us a famine or two along the way.  But that hasn’t happened.  Because the global warming alarmists have been warning us that the end of the world was only 3 years away for the last 30 years.  How much longer are we to quake in our shoes from their nonsense?

The earth is fine.  We need to stop listening to these people.  Because all they’re doing is transferring enormous sums of money from the private sector to the public sector.  To play their games.  And live comfortably.  While those of us paying the taxes and buying the things they make ever more expensive have to sacrifice our quality of life so these talentless alarmist hacks can live a comfortable elitist life at our expense.  And they’re laughing at us all the way to the bank.

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China has no Pension or Health Care Benefits for their Rapidly Aging Population unlike in the West

Posted by PITHOCRATES - September 22nd, 2012

Week in Review

The Chinese economy is cooling off.  Worse, they have some even more bad news in their future (see Ageing China: Changes and challenges by Damian Grammaticas posted 9/20/2012 on BBC News China).

Life expectancy in China today rivals that in the West – it is one of this country’s impressive advances. Except China has not yet built a social safety net to provide pensions, affordable healthcare or homes for all its elderly.

Yet another reason why the Chinese economy is outpacing those in the West.  While Europe and the United States have suffered from the effects of an aging population China hasn’t.  At least, not yet.  While those in the West keep raising taxes and selling sovereign debt to pay for pensions and health care for the elderly and retired China has been growing their economy and using its proceeds to buy the sovereign debt of those Western nations.

So what is it like living in a nation without a social safety net?

“We don’t get a government pension because I never paid taxes. We don’t have any savings,” he says.

Because he has children and a wife, he does not qualify for a place in a care home – only those without relatives are eligible.

Of Henan’s 8.5 million elderly, just 2% are cared for in nursing homes. So Niu Yubiao and his wife fend for themselves.

The couple have seven grown-up children. But like other young people in the area, they have left home to look for work. Niu Yubiao has no idea where they are.

The reason why they don’t have any savings is not because they are greedy and materialistic.  It’s because they live in abject poverty.  And barely earn enough to survive.  This is what it’s like in China once you leave the modern cities on the coast.  The economic miracle of China has not reached the impoverished masses in their interior.

Today, there are 180 million Chinese aged over 60, just over 13% of the population. That will double to 360 million in fewer than 20 years, when China will have more retirees than the entire population of the US.

By the middle of the century, their ranks will soar again to 480 million.

China is ageing so fast that a process that took up to a century in the West will happen in the coming 30 years here. And as the ranks of the elderly swells, the working-age population is starting to shrink…

China’s incredible economic growth has been built on its vast, cheap labour supply. But the numbers entering the workforce have started falling. China’s birthrate has collapsed – at its peak in the mid-1980s 25 million babies were born every year. Now there are about 15 million births a year. The dramatic drop is the result of a richer, developing society and of the one-child policy…

Currently, China funds only meagre pensions, and there are six workers paying taxes for each retiree – in 20 years’ time, there will be just two workers for every pensioner.

This is the current problem in the advanced economies in the West.  A declining population growth rate following the post-World War II baby boom is bankrupting their nations.  For those social safety net programs the Chinese don’t have were implemented in these Western countries before the baby boom turned into a baby bust.  Now the elderly generations in these nations grow faster than the younger generations.  More seniors are retiring and consuming government-provided pensions and health care while fewer are entering the workforce to replace them and pay the taxes to fund these programs.  So they have increasing government expenditures at a time of declining government revenue.  Thanks to a lower population growth rate.  Which has overwhelmed governments.  Causing greater budget deficits and soaring levels of debt.

As bad as things are in the Western countries what’s waiting for China is of such a massive scale that one shudders to think what will happen.  For even if China continues to enjoy high economic growth their aging population will bankrupt them.  Either by caring for the elderly.  Or by driving up labor costs and/or labor unrest as their baby bust fails to replace those leaving the workforce.  Bringing that economic juggernaut to a crashing halt.

But the scenario is even bleaker.   For they have driven much of their economy with artificial economic growth.  Fueled by Keynesian policies.  Artificially low interest rates.  And government interference into the private sector.  Much like what gave the U.S. the subprime mortgage crisis and the Great Recession.  And much like what gave the Japanese their asset bubble and their Lost Decade.  For all demand-side stimulative growth (i.e., Keynesian growth) ends in Great Recessions or Lost Decades.  Because this kind of growth is inflationary.  And when you inflate asset values you make asset bubbles.  Which ultimately burst.  And when they do they bring down those inflated values to market prices.  The longer those inflationary policies were in place the higher those asset values soared and the more painful the deflationary fall.  Just ask anyone in Japan.  Or in the U.S. with an underwater mortgage.

So China has some unpleasantness in their future.  Perhaps a deflationary spiral.  Along with an accelerated aging population.  Either one by itself is bad.  But together it could be more than the Chinese economy can handle.  And the fallout of any Chinese crash will ripple through every other nation’s economy.  Where we all will feel it.  And suffer the consequences.  Because we are all Keynesians, too.  At least, the economic policies of our governments are.  And when China can no longer buy U.S. sovereign debt there will be no more deficit spending.  Just massive spending cuts.  Or, if they choose to simply print money, massive post World War I Germany inflation.  Where it will take a wheelbarrow full of money to buy a loaf of bread.  Like in post World War I Germany.

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Filmmakers don’t like the High Cost of Making Movies in California so they Film Elsewhere

Posted by PITHOCRATES - September 22nd, 2012

Week in Review

California provides a good example of what not to do.  That’s because they are a very liberal/progressive state.  Who like to live in a fantasyland of what could be.  Passing active, interventionist policies to try and change the way people think and act.  Unleashing a wave of unintended consequences.  And chasing filmmakers out from the film capital of the world (see California lost $3 billion in film crew wages from 2004 to 2011, report says by Richard Verrier posted 9/18/2012 on the Los Angeles Times).

California lost $3 billion in wages from 2004 to 2011 because of film and TV production flocking to other states and countries, a new study concludes.

Burbank-based Entertainment Partners, the industry’s largest payroll service company, which specializes in advising companies on how they can take advantage of film tax credits around the world, says its own research has found that California lost 90,000 jobs and saw its share of overall production wages in the U.S. decline 10% during the period as film producers took their business elsewhere.

About half the lost wages went to New York, Louisiana, New Mexico, North Carolina and other U.S. states that offer film tax credits and rebates — states that added 45,000 production jobs during the same period. The other half of the lost $3 billion went to Canada, Britain and other foreign countries, according to the report.

Wow.  They lost 90,000 jobs to states and countries that were more movie-making-friendly than California.  The movie-making capital of the world.  Which has cost the state of California taxes on $3 billion in wages.  No wonder California is going broke.  Their high taxes and high regulatory costs chase their own movie-making people out of their state.  So the very tax rates and regulatory policies that were supposed to increase tax revenue have decreased tax revenue.  Who’d a thunk it?  Well, pretty much everyone but a tax & spend, Keynesian, liberal Democrat.

They call these results unintended consequences despite having the best of intentions.  We simply call it causality.  If you implement anti-business policies you will get less business activity.  And filmmakers will go elsewhere to make their movies.

The findings were recently shared with representatives of the Motion Picture Assn. of America, the state’s finance department and the office of Gov. Jerry Brown, who is weighing whether to approve bills that would extend funding for California’s film program two more years. The state sets aside $100 million annually to qualified productions under a program that is due to expire next year.

Goldstein noted that his company’s research also shows the California tax credit has had some effect in slowing the job losses and migration of film work since it took effect in 2009 and that California would see an increase in employment if the credit was expanded.

“If California does not extend the credit, there will be more lost productions to other states and jurisdictions,” he said.

So some admit that California is not business-friendly.  That if they don’t offer special ways to avoid their punishing taxes and regulatory policies even more film business will leave the state.  Of course, if it’s happening in the film industry it’s happening in other businesses.  Which again explains why California is going bankrupt.  Their anti-business policies are chasing taxpayers (i.e., employees) out of the state.  By chasing business out of the state.

The MPAA, industry groups and labor unions have argued that tax credits should not be judged by short-term revenues alone, and that the state program is necessary to keep California competitive with at least 40 other states that offer incentives.

Vans Stevenson, senior vice president for state legislative affairs for the Motion Picture Assn. of America, said Entertainment Partners’ findings underscored the need for preserving California’s film incentive.

“Entertainment Partners’ data shows definitively that the production tax incentives have helped to stem the flow of jobs and wages out of California, and that the incentives are vital to California’s competitiveness,” he said.

Apparently it’s just not just the high taxes and high cost of regulatory policies chasing business out of the state.  It’s also the high cost of union labor.  For the unions are admitting that they make the state of California uncompetitive in the film industry.  And want tax credits to offset their high costs to bring the film business back.  That is, they want the taxpayers to subsidize that portion of their pay and benefits that chases business out of the state.  So they can keep their jobs.  They want taxpayers to take a pay cut (by paying higher taxes) so they don’t have to.  That’s fair, right?

California is a liberal state.  They like to run and regulate business the way they want to.  Not how business would like.  And when these policies chase business away they want higher taxes to subsidize the high cost of their anti-business policies.  To help business escape their punishing policies.  And bring that business back.  Which further raises taxes.  And chases more business away.  In effect killing the golden goose that pays for their generous public sector pay and benefits.  Which are currently bankrupting the state of California.

We need to learn from California even if California cannot learn from their own mistakes.  Anti-business policies are bad.  And will encourage businesses to leave the state.  Businesses hire people.  Who become taxpayers.  Taxpayers pay all the government’s bills.  Governments need to understand this connection between businesses and paying the bills.  For there is no other way to pay the bills without businesses and their private sector jobs.

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