Week in Review
Money is a temporary storage of value. We created money to make trade easier. We once bartered. We looked for people to trade with. But trying to find someone with something you wanted (say, a bottle of wine) that wanted what you had (say olive oil) could take a lot of time. Time that could be better spent making wine or olive oil. So the longer it took to search to find someone to trade with the more it cost in lost wine and olive oil production. Which is why we call this looking for people to trade goods with ‘search costs’.
Money changed that. Winemakers could sell their wine for money. And take that money to the supermarket and buy olive oil. And the olive oil maker could do likewise. Greatly increasing the efficiency of the market. There is a very important point here. Money facilitated trade between people who created value. Creating something of value is key. Because if people were just given money without producing anything of value they couldn’t trade that money for anything. For if people didn’t create things of value to buy what good was that money?
Today, thanks to Keynesian economics, governments everywhere believe they can create economic activity with money. And use their monetary powers to try and manipulate things in the economy to favor them. And one of their favorite things to do is to devalue their money. Make it worth less. So governments that borrow a lot of money can repay that money later with devalued money. Money that is worth less. So they are in effect paying back less than they borrowed. And governments love doing that. Of course, people who loan money are none too keen with this. Because they are getting less back than they loaned out originally. And there is another reason why governments love to devalue their money. Especially if they have a large export economy.
Before anyone can buy from another country they have to exchange their money first. And the more money they get in exchange the more they can buy from the exporting country. This is the same reason why you can enjoy a five-star vacation in a tropical resort in some foreign country for about $25. I’m exaggerating here but the point is that if you vacation in a country with a very devalued currency your money will buy a lot there. But the problem with making your exports cheap by devaluing your currency is that it has a down side. For a country to buy imports they, too, first have to exchange their currency. And when they exchange it for a much stronger currency it takes a lot more of it to buy those imports. Which is why when you devalue your currency you raise prices. Because it takes more of a devalued currency to buy things that a stronger currency can buy. Something the good people in Japan are currently experiencing under Abenomics (see Japan Risks Public Souring on Abenomics as Prices Surge by Toru Fujioka and Masahiro Hidaka posted 4/14/2014 on Bloomberg).
Prime Minister Shinzo Abe’s bid to vault Japan out of 15 years of deflation risks losing public support by spurring too much inflation too quickly as companies add extra price increases to this month’s sales-tax bump.
Businesses from Suntory Beverage and Food Ltd. to beef bowl chain Yoshinoya Holdings Co. have raised costs more than the 3 percentage point levy increase. This month’s inflation rate could be 3.5 percent, the fastest since 1982, according to Yoshiki Shinke, the most accurate forecaster of Japan’s economy for two years running in data compiled by Bloomberg…
“Households are already seeing their real incomes eroding and it will get worse with faster inflation,” said Taro Saito, director of economic research at NLI Research Institute, who says he’s seen prices of Chinese food and coffee rising more than the sales levy. “Consumer spending will weaken and a rebound in the economy will lack strength, putting Abe in a difficult position…”
Abe’s attack on deflation — spearheaded by unprecedented easing by the central bank — has helped weaken the yen by 23 percent against the dollar over the past year and a half, boosting the cost of imported goods and energy for Japanese companies.
Japan is an island nation with few raw materials. They have to import a lot. Including much of their energy. Especially since shutting down their nuclear reactors. Japan has a lot of manufacturing. But that manufacturing needs raw materials. And energy. Which are more costly with a devalued yen. Increasing their costs. Which they, of course, have to pay for when they sell their products. So their higher costs increase the prices their customers pay. Leaving the people of Japan with less money to buy their other household goods that are also rising in price. Which is why economies with high rates of inflation go into recession. As the recession will correct those high prices. With, of course, deflation.
Keynesians all think they can manipulate the market place to their favor by playing with monetary policy. But they are losing sight of a fundamental concept in a free market economy. Money doesn’t have value. It only holds value temporarily. It’s the things the factories produce that have value. And whenever you make it more difficult (i.e., raise their costs by devaluing the currency) for them to create value they will create less value. And the economy as a whole will suffer.
Tags: Abenomics, barter, currency, deflation, devalue, devalue their money, devaluing, devaluing your currency, energy, export, imports, inflation, Japan, Keynesian, market, money, prices, raise prices, raw materials, recession, search, search costs, temporary storage of value, trade, value
Week in Review
Inflation is bad according to Rep. Chris Van Hollen. And, therefore, we need baseline budgeting (taking last years’ spending and automatically adding more to it to arrive at the budget for the following year) to overcome the corrosive effect of inflation on government spending. And he illustrated this by showing how inflation has increased the price of a Big Mac over the years (see Members of Congress debate budget with Big Macs by Eric Pfeiffer posted 4/8/2014 on Yahoo! News).
On Tuesday, two members of Congress got into a detailed discussion over inflation, with Rep. Chris Van Hollen using pictures of hamburgers to argue that inflation estimates are necessary to undercut future budgets.
Holding up a chart that showed the average cost of a McDonald’s Big Mac in 2004 ($2.71) compared with its cost today ($4.62), Maryland Democrat Van Hollen argued that not adjusting budget numbers for inflation equates to a net cut.
But while arguing that we need baseline budgeting to counter rampant inflation we have someone whose job is to keep inflation from rearing its ugly head in the economy saying quite another thing (see Fed’s Evans ‘exasperated’ by inflation warnings by Greg Robb posted 4/9/2014 on MarketWatch).
Many people who argue that inflation is just around the corner have been repeating the same warning for the past five years, said Charles Evans, the president of the Chicago Federal Reserve Bank, on Wednesday. “I confess that I am somewhat exasperated by these repeated warnings given our current environment of very low inflation,” Evan said in a speech at an economic policy conference in Washington D.C. Evans said he still sees the economic environment pointing to below-target inflation “for several years.” Evans debunked current arguments that inflation is just over the horizon. He said that there is “substantial room” for stronger wage growth without inflation pressures building and added the Fed’s large balance sheet is not a “classic warning sign” of inflation. Commodity prices also seem to be an unlikely propellent of inflation at the moment, he said.
So while Rep. Chris Van Hollen is wringing his hands over the rampant inflation everywhere that we can only counter with baseline budgeting the president of the Chicago Federal Reserve Bank gets exasperated by people like Rep. Chris Van Hollen. Because there is no inflation that he can see. And it’s his job to find inflation. So he can stop it. So who’s right? They can’t both be right. Of course, the price of the Big Mac has gone up through the years. But there is only one problem with Rep. Chris Van Hollen presentation in Congress (see the Yahoo! News article linked to previously).
Regardless of which side of the debate you fall on, there was one falsehood on display at the House committee hearing on Tuesday. As The Washington Post noted, those hamburgers used in Van Hollen’s charts weren’t actually Big Macs.
That’s right. With all the resources our representatives have at their disposal they could not even take the time to get a picture of the right hamburger. Perhaps because the only beef our representatives eat is the tenderloin and wouldn’t be caught dead ‘slumming’ it at a McDonald’s. Food the vast majority of Americans find delicious. But then again, we’re not a bunch of pompous, arrogant, condescending prima donnas like our representatives, are we?
Tags: baseline, baseline budgeting, Big Mac, Chris Van Hollen, Federal Reserve, inflation
Week in Review
The Greek crisis happened because there was a currency union without a political union. The Eurozone set some pretty strict limits on deficits and debt to join. Why? Because people in the Eurozone would all be using the same Euro. So they didn’t want one country running up deficits or their debt. Because if they did they wouldn’t just be messing with their economy. They would be messing with the entire Eurozone economy.
Well, that’s what Greece did. They were spending so much money that they had large deficits that added to a large debt. A euro-denominated debt. Which meant a default would raise borrowing costs for other euro-denominated debt. Raising the borrowing costs for the Eurozone. So to avoid that required other Eurozone nations to help Greece with their debt. Requiring higher taxes in the more responsible countries of the Eurozone to pay for the irresponsible spending of Greece. Neither option (default or rescue package) being a popular option. Especially for the Greek people. For the rescue package came with strings. And the big one was austerity. They had to stop spending so much. Which meant a lot of people lost some of their government benefits. Making them very unhappy. Leading to some rioting in the streets.
Had there been a political union this would not have happened. For there would have been only one entity borrowing and spending Euros. One entity taxing the Eurozone nations. And one entity printing money. Much like the federal government in the United States. And London in the United Kingdom (see Scotland’s referendum: Salmond says independence will benefit whole UK posted 3/4/2014 on BBC News Scotland Politics).
An independent Scotland with a strong economy would benefit the whole of the UK, First Minister Alex Salmond has told a gathering in London…
“I believe George Osborne’s speech on sterling three weeks ago – his ‘sermon on the pound’ – will come to be seen as a monumental error.
“It encapsulates the diktats from on high which are not the strength of the Westminster elite, but rather their fundamental weakness.
“In contrast, we will seek to engage with the people of England on the case for progressive reform.”
But Tory MP Mr Mundell said that Mr Salmond was saying that a choice to leave the UK and become independent “means staying exactly the same as we are now”.
He added: “By definition, that simply cannot happen.
“No one should be under any illusion that voting for independence means getting independence, which means becoming a new country outside the UK.
If the Eurozone sovereign debt crisis has taught us anything it’s that a currency union without a political union is not a good thing. An independent Scotland would eliminate the political union there is now. And the reason why England does not want a currency union with an independent Scotland is because of what happened in the Eurozone. It doesn’t work. At least, it doesn’t work well. Which begs the question why do they want independence but not complete independence (keeping the pound)?
One can only surmise so they can have more autonomy over their taxing, borrowing and, of course, spending. Perhaps to spend more. Creating larger deficits. And a greater pound-denominated debt. Which would be of great concern to other holders of pound-denominated debt. The rest of the United Kingdom.
It is unlikely that independence would lead to a stronger Scottish economy. Or a stronger UK economy. If it did then the whole point of the Eurozone would be a lie. To create a larger economic zone to compete with the large economic zone that is the United States. Because bigger is better. At least in terms of GDP. The British Empire was bigger than the United Kingdom is now. And the United Kingdom is bigger than a United Kingdom without Scotland. And an independent Scotland would be smaller than all of the above. So if you want to maximize GDP you would want to maximize the size of your economy. Not shrink it. Which leads one to believe that the reason for independence is something other than economic. Because the UK is too English? Perhaps. Whatever the reason let’s just hope everything works out for the best. For the United Kingdom did make the world a better place. With great people like Adam Smith from Scotland. And John Locke from England. To name only two of the greats to come from the United Kingdom.
Tags: borrowing costs, British Empire, currency union, debt, deficits, economic zone, England, euro-denominated debt, Eurozone, GDP, Greece, independent Scotland, London, political union, pound, pound-denominated debt, Scotland, spending, taxes, UK, United Kingdom, Westminster
Week in Review
The Eurozone was a grand idea to make an economic zone that could compete against the United States. A United States of Europe, if you will. But the Eurozone has suffered a sovereign debt crisis that was unavoidable. As many analysts have identified the problem causing the Eurozone all its sovereign debt woes. The lack of a political union.
The solution they say is for member states to give up some of their sovereignty and allow a Eurozone government have more control. Like the United States of America has. Which means putting even stricter controls on member states when it comes to their spending. Which, in turn, would limit their deficits. And their borrowing needs. Which brought on the sovereign debt crisis in the first place. Excessive spending beyond their ability to pay for with taxes. Normally not a problem for other countries when another country spends itself into oblivion. Unless, of course, there is a currency union with that country. Which makes their problems your problems. Problems that are impossible to solve without a political union.
The Eurozone sovereign debt crisis illustrates that a currency union without a political union will not work. Which makes the movement for Scottish independence very interesting (see Britain warns Scotland: Forget the pound if you walk away by Belinda Goldsmith, Reuters, posted 2/13/2014 on Yahoo! News).
Britain warned Scotland on Thursday it would have to give up the pound if Scots voted to end the 307-year-old union with England, declaring the currency could not be divided up “as if it were a CD collection” after a messy divorce…
The message was aimed at undermining the economic case for independence and one of the Scottish National Party’s (SNP) key proposals – that an independent Scotland would keep the pound…
The debate has intensified in recent weeks with Bank of England chief Mark Carney cautioning that a currency union would entail a surrender of some sovereignty…
The SNP [Scottish National Party] has indicated that if London prevented a currency union, an independent Scotland could refuse to take on a share of the UK’s 1.2 trillion pounds ($1.99 trillion) of government debt which Britain has promised to honor…
Osborne said the nationalist threat to walk away from its share of UK debt would mean punitively high interest rates for an independent Scotland and was an “empty threat”.
“In that scenario, international lenders would look at Scotland and see a fledgling country whose only credit history was one gigantic default,” Osborne said.
Currently there is a political union between Scotland and England. The United Kingdom (UK). And Scottish independence would go contrary to what some analysts say is needed to save the Eurozone. Political unity. The problem in the Eurozone is that no one nation wants to give up any of their sovereignty and have some distant power tell them what they can and cannot do. The way some in Scotland feel about London. That distant power that governs the United Kingdom.
The British pound is one of the world’s strongest currencies. A product of the powers in London. Because they have political control across the UK. If they lose their political control over Scotland will it damage the British pound? If the Eurozone is any measure of a currency union without a political union, yes. So it will be interesting to see what happens between these two great nations. Whose people made the world a better place. People like the great Scotsman Adam Smith. And the great Englishman John Locke. To name just two. So whatever happens let’s hope it’s in the best interest of both countries. For countries everywhere enjoying economic freedom and human rights can thank these two countries for their contributions to the British Empire. Which helped spread the best of Western Civilization around the world from the United States to Canada to Australia to Hong Kong. And beyond.
Tags: Britain, British pound, currency, currency union, debt, England, Eurozone, independent Scotland, London, political union, pound, Scotland, Scottish National Party, SNP, sovereign debt crisis, sovereignty, UK, United Kingdom
Week in Review
The Democrats like to talk about income inequality. Which they say isn’t good. So they want to raise the minimum wage. To reduce income inequality. Even President Obama said during the State of the Union address that he wanted to raise the minimum wage. To $10.10. To give them a living wage. Because they can’t make it on the current minimum wage. Of course, there’s a reason for this. And it’s not because of the wage rate. It’s about the depreciation of the dollar (see Hiking wages with worthless dollars by Seth Lipsky posted 1/29/2014 on the New York Post).
The most startling thing about President Obama’s State of the Union message is what he failed to say about the minimum wage. “Today the federal minimum wage is worth about 20 percent less than it was when Ronald Reagan first stood here,” he declared Tuesday night.
But wait, wasn’t the minimum wage $3.35 an hour throughout Reagan’s two terms? Isn’t it now $7.25 an hour? How does that add up to a drop in value by 20 percent? The president glided right past that point. Maybe he thought nobody would notice.
It strikes me that the president owed the country more of an explanation. After all, he spoke exactly on the 100th anniversary of the start of the Federal Reserve System. The central bank is about to begin its second century. Obama made no reference to any of that history.
Yet a century ago Congress refused to agree to a Federal Reserve until there was a promise about the value of the dollar: It insisted on having the Federal Reserve Act state that it would not lead to an end of the convertibility of the dollar into gold.
That legislative promise came to an end in a series of defaults that started in the Great Depression and ended under President Richard Nixon. By the mid-1970s, America had moved to a fiat currency, meaning a dollar that is not redeemable by law in anything of value. Only what one critic calls “irredeemable electronic paper ticket money.”
The minimum-wage crisis is a sign that fiat money is not working. It’s not, after all, that the nominal minimum wage has failed to go up (it’s been raised seven times since Reagan). It’s that the value of the dollar has collapsed. Today it has a value of only a 1,250th of an ounce of gold, a staggering plunge from an 853rd of an ounce on the day Obama took office.
Back in 1907 some people tried to manipulate the stock price of a copper company and long story short the Knickerbocker Trust Company collapsed and caused a panic in the banking system. Enter the Federal Reserve System (the Fed). A central bank that can inject liquidity during a banking crisis. And forever eliminate these banking crises. Or so went the theory. But central banks have a nasty habit of devaluing their currency. Because they can print money. Fiat currency. Well, the deal with the Fed was that they would not succumb to the central bank disease. But, alas, they did. Which is why minimum wage workers have less purchasing power today than they did during the Reagan administration. Even though they are paid more dollars.
Tags: banking crisis, central bank, depreciation, dollar, Federal Reserve, Federal Reserve System, fiat currency, gold, income inequality, living wage, minimum wage, President Obama, State of the Union
Week in Review
The December jobs report was pretty bleak. It showed that the unemployment rate fell to 6.7% and that the economy added 74,000 jobs. Not great but good enough for some who say that President Obama’s policies are finally working after 5 some years of trying. Which is ridiculous. Because that unemployment rate doesn’t tell you how many people lost their jobs. And how many people disappeared from the civilian labor force as they gave up trying to find work that just isn’t there. Which hides the number of people who lost their jobs. Because the Bureau of Labor Statistics doesn’t count anyone as unemployed if they are no longer looking for work. But if you dig down into the jobs report you’ll find this data. And see that for every person that entered the labor force about seven people left it in December (see The BLS Employment Situation Summary for December 2013 posted January 13th, 2014 on PITHOCRATES). Which is anything but an economic recovery.
All during the Obama presidency the Federal Reserve has been stimulating the economy. Right out of the Keynesian handbook. By keeping interest rates near zero to encourage people to borrow money to buy things they don’t need. But few have. No. The only people borrowing that money are rich investors. Who are borrowing this ‘free’ money to spend in the stock market. Helping Wall Street to do very well during the worst economic recovery since that following the Great Depression. While Main Street sees their median family income fall. Still the chairman of the Federal Reserve, Ben Bernanke, thinks he did a heck of a job (see Bernanke Says QE Effective While Posing No Immediate Bubble Risk by Jeff Kearns and Joshua Zumbrun posted 1/16/2014 on Bloomberg).
Bernanke is seeking to define his legacy before stepping down on Jan. 31. During his eight-year tenure as leader of the Fed he piloted the economy through a financial crisis that led to the longest recession since the 1930s. He has tried to bolster growth by holding the target interest rate near zero and pushing forward with unprecedented bond buying known as QE.
“Those who have been saying for the last five years that we’re just on the brink of hyperinflation, I think I would just point them to this morning’s CPI number and suggest that inflation is not really a significant risk of this policy,” Bernanke said, referring to a Labor Department report showing the consumer price index rose 1.5 percent in the past year. The Fed has set an inflation target of 2 percent…
The Federal Open Market Committee (FDTR) announced plans last month to reduce monthly purchases to $75 billion from $85 billion, citing improvement in the labor market. The jobless rate last month fell to 6.7 percent, a five-year low.
The only reason why we don’t have hyperinflation is that everyone has depreciated their currency so much to boost exports and pay for bloated welfare states that all currencies are losing value. And of all these bad currencies the American currency is the least bad of the lot. Which is why some foreign nationals will pay to park their money in American banks. Because the risk of it losing its value is so much greater in their home country.
But that doesn’t mean inflation hasn’t reared its ugly head in the US economy. Just go to a grocery store and look at a bag of chips. Or a box of cookies. Or any packaged item that didn’t seem to get overly expensive during the Obama recession. A bag of chips may be the same $3-4 it was before the recession. But notice the size of the bag. It’s gotten smaller. So, yes, consumer prices have not shown great inflation. But packaging has gotten smaller. So instead of paying more for the same quantity we are paying the same price for a lesser quantity. Which means we may be buying 4 of something in a month instead of 3 of something. It adds up. Which is why there are so many more people on food stamps. The Bernanke inflation is taking more of our paycheck to buy what it once did.
The economy is horrible. Fewer people are in the labor force with each jobs report. Our grocery packaging is shrinking. And once the Fed stops its bond buying the stock market is going to fall. A lot. For every time rich investors think the economic data will show solid economic activity what do they do? They sell their stocks. Causing a stock market fall. Why? Why would investors leave the stock market when the data say the economy is getting stronger? Which seems to go against common sense? Because they know there’s been only one thing helping them get rich during the Obama presidency. That ‘free’ money. Once that source of cheap money goes away they will sell before those inflated stock prices fall back to earth.
The Obama recovery. Good for Wall Street. Bad for Main Street.
Tags: Ben Bernanke, Bernanke, bond buying, currency, economic recovery, hyperinflation, inflation, interest rate, jobs, jobs report, Keynesian, Main Street, Obama, Obama presidency, Obama recession, recession, unemployment rate, Wall Street
Week in Review
Since the Keynesians took over government we said goodbye to the classical economics that made America the number one economic power in the world. Free market capitalism. Based on a strong banking system. And a sound currency. People saved as much as they could. Banks converted their savings into investment capital. And investors and entrepreneurs built the world’s number one economy. Because people worked hard and saved for their future. While raising their families. In their houses. Without Mommy and Daddy helping them. Unlike people do today (see Young Couples Moving Back Home To Save Money For Baby posted 12/22/2013 on CBS Miami).
“Young couples, when they have a child or when they’re planning to have a child, are moving back in with their parents,” said Carmen Wong Ulrich, BabyCenter Financial expert,. “Ten percent of young women are staying, living at home with their parents to save money to have children. This is a new trend.”
Alexis Kort, her husband Josh and their baby Charlotte moved in with Alexis’ parents when they relocated to their hometown.
“You don’t necessarily think about it before you have a kid and then all of a sudden you’re like ‘Wait a second, how do we make this work financially?’,” said Kort…
This trend extends beyond housing. A survey found that nearly 30 percent of new parents get financial assistance from their parents. Ulrich points out that parents who support their children who have children have less time to save for their retirement.
“Supporting grown children is a strain and it can be a strain on your own financial future,” said Ulrich.
You can blame the Democrats for this. They’re all Keynesians. And believe in printing (and devaluing) money to keep interest rates artificially low. So low that you actually lose money now if you put it into a savings account. So people spend it before it loses its purchasing power.
And Keynesians believe in government spending. To stimulate the economy. Which they pay for with taxes. Lots of taxes. Between the devaluation of the dollar (which raises prices) and the rising tax bite there’s less money to save. And with the Keynesians pushing for more consumption and less savings (to stimulate the economy) kids aren’t saving. They’re spending. Living in the now. Without a care in the world about tomorrow. Which is why kids today are moving back in with their parents. Because they’d rather pay a cellular bill the size of a car payment than save for their future.
Tags: banking, capital, children, Democrat, Keynesian, parents, save money, savings, spending, taxes, young couples
Week in Review
The Federal Reserve has failed to bring down the unemployment rate. So the Fed will continue to devalue the dollar. In their fervent Keynesian hope that it will actually do good. While it continues to do a whole lot of bad (see STOCKS EXPLODE, RATES COLLAPSE AFTER FED SHOCKER: Here’s What You Need To Know by Sam Ro posted 9/18/2013 on Business Insider).
No taper. The Federal Open Market Committee (FOMC) shocked the markets by announcing that it would continue its monthly purchases of $85 billion worth of Treasury Securities and mortgage bonds. Most economists were looking for a reduction, or tapering, of around $5 to $10 billion dollars…
Markets went nuts. The Dow and S&P 500 surged to new all-time highs. Interest rates collapsed, the dollar tanked, and gold surged.
During the press conference, Bernanke said that the tightening of monetary policy (i.e. raising the Fed’s benchmark rate) may not begin until the unemployment rate is considerably below 6.5%. He also said that an inflation rate floor could be a sensible modification to its forward guidance policy.
The only thing lowering the unemployment rate is people leaving the labor force. The labor force participation rate is at record lows. Which means more and more people who can’t find work have just given up trying. And because they have the labor department doesn’t count them anymore as unemployed. Which brings down the unemployment rate.
So for the Obama economic policies to lower the unemployment rate below 6.5% will require bringing the labor force participation rate lower still. Because the Obama economy is not growing. Obama’s policies, especially Obamacare, are the greatest job killers to ever come down the pike. If the unemployment rate drops below 6.5% in this jobless ‘recovery’ we’ll have Great Depression unemployment. Tens of millions of real people out of a job despite what the official unemployment rate says.
And you know it’s bad when “interest rates collapsed, the dollar tanked, and gold surged.” They’re printing so much money ($85 billion each month) that massive inflationary pressures are building up in the pipeline. There’s so much money out there that there is more than people (other than Wall Street investors) want to borrow. Hence the low interest rates. Because they’re printing so much money each dollar is worth less and less. Which is why the dollar tanked. Because the Fed is going to continue to devalue it. And when inflationary pressures are building and are just waiting to explode people want to protect their assets with gold. So when inflation explodes and our money becomes worthless gold will hold its value. Why? Because you can’t print gold. That’s why Keynesian economists hate it. It forces governments to be responsible. Something anathema to a Keynesian.
The economy under the Obama policies is now just a train wreck waiting to happen. And when it does the fallout will be Great Depression bad. Because of Keynesian economics. The worst and most destructive theories ever to be implemented by government. In fact, everything wrong in government finances today can be traced to Keynesian policies. Expanding the money supply to stimulate the economy has only made recessions worse. And increasing government spending (to replace private spending during recessions) has burdened governments so much that they are flirting with bankruptcy throughout the world. Even a city in the United States. The City of Detroit. A harbinger of what is to come.
Tags: Bernanke, devalue the dollar, dollar, Federal Reserve, gold, Great Depression, inflation, inflationary pressures, interest rates, Keynesian, labor force, labor force participation rate, monetary policy, printing money, tapering, unemployment rate
Week in Review
A sound banking system is a requirement for any advanced economy. Because you need capital to make an advanced economy. And how do you do that? By people responsibly saving for their retirement. Putting away a few dollars of every paycheck. A small amount of money that can’t buy much of anything. But when hundreds of thousands of people save a few dollars from every paycheck those small amounts become capital. Large sums of money banks can lend out to investors who want to build factories. Responsible bankers loaned their customers’ deposits to investors. Investors paid the bankers interest on these loans. And the bankers paid interest to their depositors. The economy grew. And people saved for their retirement. The system worked well. And grew the US economy into the world’s number one economy. But now we’re in danger of dropping from that number one spot. Because the government destroyed our banking system (see Exclusive – JPMorgan to stop making student loans by Reuters posted 9/5/2013 on Yahoo! Finance).
JPMorgan Chase & Co (NYS:JPM) will stop making student loans in October, according to a document reviewed by Reuters on Thursday, after the biggest U.S. bank concluded that competition from federal government programs limits its ability to expand the business.
When the government runs a deficit they sell bonds to finance it. Pulling capital out of the private sector. Raising borrowing costs. The government then tries to lower borrowing costs by printing money. Expanding the money supply. And by making more money available to lend interest rates fall. But it also does something else. It encourages bad investments. Malinvestments. People who look at those artificially low interest rates and think they should borrow money when the borrowing is good. Even when they don’t have a good investment opportunity.
They may expand their business now because money is cheap now. Even though they don’t really need the additional capacity now. And then if the government raises interest rates to cool the overheated economy thanks to those artificially low interest rates these same investors see their revenues fall as they took on additional expenses by expanding their business. Just because interest rates were low. Now their costs are higher just when their revenues have fallen. Pushing the business towards bankruptcy. Which would never have happened if the government didn’t encourage them to borrow money they didn’t need by keeping interest rates artificially low.
But getting people to borrow money when they don’t need it is the government’s only economic policy. Which they took to another level in the housing market. With pressure from the Clinton Justice Department on lenders to qualify the unqualified for loans. Exploding the use of risky subprime lending. And then using Fannie Mae and Freddie Mac to buy these risky subprime loans from these lenders. Removing all risks from these lenders and passing them on to the taxpayers. To encourage these lenders to lower their lending standards. So they would keep making risky loans. Which they were more than willing to do if they incurred no risk in making these loans. Which Fannie Mae and Freddie Mac did for them. Thus further destroying the banking system.
And now the government has taken over student loans. Where they will do to student loans what they did to home mortgages. Where lending decisions will be made for political reasons instead of objective lending standards. Guaranteeing more subprime mortgage crises in the future. A further destruction of the banking system. And the destruction of one of the pillars of an advanced economy.
Tags: advanced economy, artificially low interest rates, banking, banking system, borrowing costs, capital, depositors, deposits, Fannie Mae, Freddie Mac, interest, interest rates, investor, saving, student loans, subprime
Week in Review
Keynesian economists, and those on the left, think there is nothing wrong with printing money. Because they don’t understand money. What it truly is. So what is money? It’s a temporary storage of wealth. It is not wealth. Doctors make a lot of money because they have learned great skills. Skills few people have. And doctors are willing to exchange these skills for money. The wealth is a doctor’s skills. The money temporarily holds this wealth until the doctor finds something to trade that money for. From someone else that has wealth. Who created something of value the doctor is willing to trade for.
All money did was make this trading of valuable things easier. So we could trade with anyone even if they don’t want anything we can make or do. A doctor doesn’t have to find someone who wants their gallbladder removed who has a television set if the doctor wants a television set. The doctor can just go to a store and buy one. Because of money. Making the exchange of goods and services far easier than in a barter system.
Those who think money is wealth and that we should just print it and hand it out to the people are missing one very important point. If you did this no one would have to work. Those on the left would applaud that. But if no one worked there would be no valuable things to trade. And if there are no valuable things to trade then your money is worthless. For if there is nothing to buy what good is having money?
North Korea has a lot of money. But their money is worthless. Because they just print it. While their economy contains no valuable things to trade. Not a big problem in a closed economy. And you make your people slaves. But it’s a problem if you want to trade with the outside world for the luxury items the lucky few in the ruling elite enjoy. For if you have no valuable things in your economy then you must trade for valuable things with hard currency. Money that isn’t worthless paper. So North Korea came up with a way to get hard currency (see How North Korea got itself hooked on meth by Max Fisher published 8/21/2013 on The Washington Post).
A new study published in the journal North Korea Review says that parts of North Korea are experiencing a crystal meth “epidemic,” with an “upsurge” of recreational meth use and accompanying addiction in the country’s northern provinces…
So how do people in North Korea, a country where markets are so tightly regulated that even video CDs can be considered dangerous contraband and where social controls are often beyond Orwellian, manage to get hold of meth..?
The problem actually goes back to the 1990s, when North Korea experienced a famine so devastating that virtually the entire world believed the country would collapse at any moment. But it didn’t, in part because Pyongyang finally decided to open up the world’s most closed economy just a small crack, by allowing a degree of black market trade across North Korea’s border with China. The idea was that the black market would bring in food, which it did, preventing North Korea’s implosion.
The black market trade into China has remained that little bit open ever since, either because Pyongyang authorities can’t close it now or because they see some trade as beneficial, probably both. Some provinces along the border have seen their economies liberalize a tiny, tiny bit — most notably North Hamgyung, which is named in the North Korea Review report as particularly blighted by meth addiction.
In the years after the border with China opened that little crack, two other things have happened that led to the current meth crisis. First, medicine ran out and the once-not-terrible health system collapsed — more on this later. Second, North Korea started manufacturing meth in big state-run labs. The country badly needs hard currency and has almost no legitimate international trade. But it was able to exploit the black market trade across the Chinese border by sending state-made meth into China and bringing back the money of Chinese addicts.
This is where things started to spin out of control for North Korea. The state-run meth factories and the cross-border black market trade started to mingle. And some of that meth ended up migrating back across the border and into North Korea, through the black market trade that brings in Chinese rice and DVDs and the like.
This is where the collapse of the North Korean health system becomes relevant. As Isaac Stone Fish reported in a great 2011 Newsweek story, many regular North Koreans started using meth to treat health problems. Real medicine is extremely scarce in the country. But meth is much more common, which means that the prices of medical drugs are artificially inflated, while the price of meth is artificially low. In a culture without much health education and lots of emphasis on traditional remedies, people were ready to believe that meth would do the trick for their medical problems, and many got addicted.
Poor Chinese. First the British got them addicted to opium. Then North Korea got them addicted to meth. It appears the Chinese people are nothing but pawns in the game of international trade.
Back in the days of mercantile Britain trade was all about who collected the most hard currency. Basically gold and silver in those days. The British loved Chinese tea. And were filling ships full of the stuff to bring it back to Britain. The problem was that the Chinese didn’t want anything the British were selling. So Chinese goods were flowing to Britain. But no British goods were flowing to China. And without having exports to offset imports Britain was forced to trade the only thing they had that China wanted. Their hard currency. Their silver. So Chinese goods flowed out of china. And Britain’s hard currency flowed out of Britain. So China was accumulating piles of hard currency while Britain saw their piles diminish. Which was the exact opposite mercantile Britain wanted. So they did something about it. Thanks to India.
India was part of the British Empire. And she grew opium poppies. Something some Chinese did want. So the British used this opium demand to stop the flow of hard currency out of the empire. And traded Indian opium for Chinese tea. This solved the trade deficit problem. But it created a lot of addicts in China. The addiction problem got so bad that it spawned two wars. The Opium Wars. Which did not end well for China. And things did not get better in the century or so that followed. And now here is North Korea. Turning Chinese into addicts to get hard currency out of China (and into North Korea). Just like the British did. Of course, North Korea is nothing like the mighty British Empire. So one would believe that China is allowing this addiction problem to happen. As it is probably a smaller price to pay than the refugee problem should North Korea collapse. And they may like that North Korean buffer between them and South Korea. Japan. And the United States.
North Korea is everything the left would like to have in the United States. Tightly regulated markets. National health care. No rich people accumulating private property. Where they frown on profits. The even put people before profits. Just like liberals want to do. There’s no talk radio. No Rush Limbaugh. No Fox News. No free trade. No low-cost imports to undermine union manufacturing. No obesity. Because there is no junk food. And no 32 ounce sugary beverages. And a government that can do what is right for the people without having to worry about a Tea Party challenger in the next primary election. North Korea is liberal nirvana. Yet life there is horrible and wretched. Because it’s everything liberals want. But nothing the people want.
Liberals want to keep expanding government. To have more government intervention into the free market. But where does it end? How far do they want to take things towards North Korea before they say they have enough? And why anyone should worry about this is because as horrible and wretched life is in North Korea, those in the ruling elite have it pretty darn good. Because the people in charge of these regimes never suffer like the people outside of the ruling elite. So the farther they move towards North Korea the less they have to worry about an election taking away their comfy life. This is why we should worry about a government growing larger. For throughout world history life like that in North Korea has been the norm. While life like that in the United States has been the exception. And the United States has only been around for 225 years (counting from the ratification of the U.S. Constitution). A crazy new fad the entitled ruling elite (i.e., liberals) would like to do away with. So they can rule like they did in the good old days. Much like they do today in North Korea. Where the supreme ruler, Kim Jong-un, has an obesity problem. One of the few in North Korea that isn’t gripped with a gnawing hunger every minute of every day. This is life in a country where the ruling elite hates capitalism. And puts people before profits. This liberal nirvana. Those in power live well. While everyone else suffers.
Tags: addiction, black market, Britain, British Empire, China, Chinese addicts, Chinese tea, hard currency, India, Indian opium, Keynesian, liberal, liberal nirvana, meth, meth addiction, money, North Korea, opium, Pyongyang, ruling elite, silver, trade, wealth
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