The Price for China’s Booming Export Market is some of the worst Air Pollution

Posted by PITHOCRATES - January 13th, 2013

Week in Review

The Chinese economy has boomed in the last decade or so.  Liberals in America think it’s because of the Chinese Communists managing the economy.  For they believe brilliant government bureaucrats are smarter in things economic than free market capitalists.  But there’s more to the Chinese economy than those government bureaucrats.  Such as low-paid labor.  And no environmental laws (see Air pollution in Beijing goes off the index by LOUISE WATT, Associated Press, posted 1/13/2012 on Yahoo! News).

People refused to venture outdoors and buildings disappeared into Beijing’s murky skyline on Sunday as the air quality in China’s notoriously polluted capital went off the index…

Air pollution is a major problem in China due to the country’s rapid pace of industrialization, reliance on coal power, explosive growth in car ownership and disregard to environmental laws. It typically gets worse in the winter because of heating needs.

This is how you get a booming economy.  You exploit workers.  And pollute the air.  This is the Chinese secret.

The Chinese can export goods at prices below our costs.  Because they pay next to nothing for labor.  And give them no benefits.  They also don’t burden businesses with costly regulations.  Like environmental regulations.  The Left’s relationship with Big Labor keeps labor costs high.  And excessive regulatory costs make the cost of business high.  China has neither.  Which is why they have a booming export economy.  And why the Americans cannot compete with them.

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Spain is Taking Center Stage in the Eurozone Crisis

Posted by PITHOCRATES - May 5th, 2012

Week in Review

To be a generous welfare state requires one of two things.  Either a population making babies like bunnies.  To keep the base of the pyramid of the welfare state expanding greater than the top.  Or a booming economy that showers money onto the treasury.  If you have neither than you better have good credit (see Spanish borrowing costs to jump at auction, bank buying eyed by Paul Day posted 5/3/2012 on Reuters).

Spain has jumped to the forefront of the euro zone debt crisis due to concern over its public deficit and shrinking economy and pressure is growing for a plan to recapitalize its banks, which are burdened with bad debts from a property market crash…

Spanish banks, virtually cut out of wholesale debt markets after losing billions since a decade-long property bubble burst in 2008, snapped up cash the European Central Bank pumped into the euro zone banking system in December and February, in operations totaling more than a trillion euros.

Recent data from the Bank of Spain suggests that they used a portion of the ECB’s ultra-cheap three-year money to buy up high-yielding sovereign debt.

According to the central bank, Spanish lenders held just over 13 percent of domestic debt in November 2011, but that total soared to almost 30 percent by March. Non-residents held almost 56 percent of all Spanish debt in November, but by March, that proportion had fallen to 38.8 percent.

Spain has neither a population boom nor an economic boom.  Nor is her credit looking all that good.  Which does not bode well for the Eurozone. 

Too many countries look to the housing market as the panacea for all that ills an economy.  Keep money cheap to borrow.  To encourage people to borrow.  So they can borrow.  And buy overvalued houses.  This is the kind of government Keynesian tinkering that never ends well.  And there are so many examples in history you’d think we’d have learned this lesson by now.  Japan, Ireland, Spain and the United States.  And now even China is growing a little housing bubble of their own.  Bubbles are not good.  They are artificial economic growth.  And they always pop.  Just ask our good friends in Japan, Ireland, Spain and the United States.

And when those bubbles pop recessions set in.  To correct all of those overvalued prices.  There’s deflation.  Old debt that becomes impossible to repay.  So banks fail.  Just because government Keynesians had to tinker.  Playing with interest rates.  To keep them below what the market would have them.  It was good on the upside.  Great new government spending and benefits.  Which have to go away on the downside.  Because there isn’t the robust economic activity to pay for it.  Even the interest on the debt becomes difficult to pay.  And because all of this is in play no one wants to buy their sovereign debt anymore.  Which raises the interest they must pay on new debt to retire old debt.  And the vicious cycle just continues.

Trying to fix the debt problem is looking at a system and not the disease.  The disease is the welfare state.  And until they cut that spending the debt problem will never go away.

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Deficits, Debt and Inflation Concern Everyone in the World but the Obama Administration

Posted by PITHOCRATES - March 7th, 2011

Chicago Cuts their Public Sector Budget

Scott Walker in Wisconsin is taking a lot of heat for trying to cut the costs of the public sector.  But he’s not alone.  Even Chicago is trying to cut the cost of its public sector.  By buying bigger, high-tech, trash cans for the central business district (see Chicago trash cans go solar-powered posted 3/7/2011 on UPI).  They’re going to spend $2.5 million for this capital investment to reduce their operating costs (i.e., the cost of people). 

If you use some of the numbers bandied about for public sector pay and benefits in the news today, that $2.5 million could pay for some 25 public sector workers (or more) per year (including health care and pensions).  Now here’s the punch line.  Chicago will uses some federal stimulus funds for this investment.  In other words, money sent to Chicago by Washington to create jobs is being used to cut jobs.  Funny, isn’t it?

This is what you do during bad economic times.  Replace people with technology.  Because people are so expensive.  It’s because of people, after all, that all these states and cities are facing budget crises due to the crushing costs of their public sector health care and pension benefits.  So when times are bad, you make capital investments to increase productivity.  You don’t hire more people.  Even Chicago understands this.

India has a Booming Economy, high Inflation and plans to Increase Social Spending

Once again prosperity leads a nation into dangerous economic waters (see Calling on the gods posted 3/3/2011 on The Economist).

It is tempting to expect the gods to keep smiling. Only China, among big economies, has pipped India’s 8.6% growth in the past year. Mr Mukherjee foresees a rosy period of easing inflation, reviving foreign investment and robust public finances. He may be in for a shock.

Inflation is still a pressing problem. High food prices hurt the urban poor. In December street protests over the price of onions led the government to ban their export. Onion prices have since collapsed, but other causes of inflation remain.

First there’s robust economic growth.  Then inflation.  Then the food riots.  It’s what triggered the French Revolution.  As well as the recent uprisings in the Middle East.  Economic growth is like a drug.  And it’s a good high.  While it lasts.  People are working.  The government is collecting lots of money.  And they can spend it on social programs.  Keeps everyone happy.  And voting for those in power.  Again, for awhile.  It’s when things become rights the trouble starts.  Because people don’t give up their ‘rights’ easily.  Even when the state can’t afford them anymore.  (Incidentally, a true right has no cost.  Freedom of speech is a right.  And no one has to pay for it.  Fat government benefits aren’t rights.  They’re just ways to make people vote for you).

Social spending is set to leap by 17% next year, as the government attempts to encourage “inclusive” growth. Congress’s chief, Sonia Gandhi, next wants a law embodying a universal “right” to food. How this might work (if at all) is unclear. Again, technocrats favour transfers of cash or vouchers over dishing out food through a vast and corrupt state bureaucracy. Either way, the subsidies mean demand for food will soar.

No matter, says Mr Mukherjee breezily. By spending on agriculture, giving farmers credit, easing transport bottlenecks and getting better cold-storage distribution, supply will rise, too. As for other causes of inflation, seven interest-rate rises by the central bank have removed monetary excess, he says. Little can be done about painful world prices for oil and other commodities, but, barring a big shock, Mr Mukherjee guesses annualised inflation will drift down to about 6% in a year’s time, from nearly 10% today.

Chicago as well as other states and cities may be cutting their social spending (i.e., public sector spending), but not India.  Even with 10% inflation.  That’s pretty gutsy.  Or delusional.  And those painful world oil prices?  I think they’re being a little optimistic about peace returning to the Middle East any time soon.  It may very well get worse before it gets better.  However, India has raised interest rates seven times to rein in inflation.  Other than that increase in social spending, India is doing a lot of the right things.  And her economic growth shows it.

China trying to curb Inflation to keep their Economy Booming

Even the IMF think the rise in oil prices is only temporary (see IMF: Signs of overheating in emerging markets by Lesley Wroughton and Chrystia Freeland posted 3/7/2011 on Reuters).

After the global economic slump of 2008 and 2009, the recovery took divergent paths, with emerging markets powering ahead while advanced economies merely trudged along. With growth and interest rates remaining unusually low across the developed world, investors have flocked to emerging markets, bringing much-needed capital but also a risk of inflation.

Rising oil prices have compounded the inflation problem, but Lipsky [the Fund’s first deputy managing director] said the IMF has not cut its growth forecast because it thinks the oil price spike will prove temporary.

All right, let’s say that peace does indeed break out throughout the Middle East.  Will that keep oil prices down?  Well, it didn’t during the last years of the Bush presidency.  The only reason why they fell was due to the worst recession since the Great Depression.  China and India are building cars.  Cars that run on gasoline.  This is what pushed up gas prices before.  And it will push them up again.  Because more and more people are driving cars in those countries.  Even when there was peace in the Middle East.  And when gas goes up everything goes up.  Even food.  Because food has to be transported.

China has made curbing inflation its top policy priority this year. Its finance minister said earlier on Monday China will ensure that spending on social priorities does not fan inflationary fires.

Separately, Zhu Min, special adviser to the IMF’s managing director, said China’s loan growth was too strong and addressing that was key to safely slowing down the economy…

Brazil and some other emerging markets have increased taxes on foreign investors or raised banks’ reserve requirements to try to slow inflows of investment money and ward off inflationary pressures.

China is worried about inflation.  So is Brazil.  And other emerging markets.  Because there is such a thing as too much of a good thing.  If their economies overheat they will create bubbles.  And when bubbles pop they become recessions.  So they’re concerned.  Besides, they have enough on their minds to worry about.  One of their biggest export markets, the United States, is having their own financial problems.  And if they lose their biggest customer, that bubble will come sooner rather than later.

The United States has no Booming Economy but Spends like it Does

So what’s the problem in America?  Well, right now, it’s social spending.  It is out of control.  And there appears little incentive to do anything about it because, unlike Chicago or the other states and cities with financial crises, the federal government can print money.  But when they do they inflate the money supply.  We call this inflation.  And they’re inflating the hell out of the money supply these days.  To pay for record deficits.

So how bad is it?  Pretty bad.  We’ve set a new record.  The largest monthly deficit in history.  A staggering figure of $223 billion (see U.S. sets $223B deficit record by Stephen Dinan posted 3/7/2011 on The Washington Times).  That’s in one month.   That’s about how much the annual deficits were under Ronald Reagan.  And the Democrats pilloried Reagan for his ‘irresponsible’ deficits.  But now?  $223 billion a month ain’t so bad.  Go figure.

Unlike India and China, America has high unemployment.  But like India and China, America has some inflation concerns.  Well, those outside the current administration do.  The Obama administration and the Federal Reserve aren’t all that worried about inflation.  Because they’re Keynesians.  Rational people, though, are very concerned.  And for good reason.  Because when you add unemployment and inflation together do you know what you get?  Stagflation.  And stagflation sucks.  People have less money and everything costs more.  Stagflation made Jimmy Carter a one-term president.  Yeah, it’s that bad.  So knowing our history we must be doing everything within our power to avoid a repeat of the malaise of the Jimmy Carter years, right?  Well, not exactly.

Have Printing Press will Ease

The Fed is planning to print more money (see Oil Shock=More Fed Shock by Douglas French posted 3/7/2011 on Ludwig von Mises Institute).

Atlanta Fed President Dennis Lockhart told a group at that National Association of Business Economics in Arlington, Va. that if the price of oil keeps climbing, the Fed will need to purchase more assets, or QE3.

Of course the men at the Fed don’t believe all of this new liquidity they are creating has anything to do with the prices of oil or food. Oil over a $100 a barrel is an external shock you see. A bolt of lightening out of nowhere. Those crazy kids in Cairo twittering and whatnot.

Ben Bernanke testified last week that inflation will remain tame. And when pressed about oil and food prices, he said “My sense is that the increases we’ve seen so far — while tough for many people — do not yet pose a significant risk to the overall recovery.”

Quantitative Easing 3.  As if QE 1 and 2 wasn’t bad enough.  Neither has helped.  And the inflation lurks out there.  Building.  Just waiting to explode oil and food prices.

The problem with Bernanke is he studied the Great Depression.  But the only thing he apparently learned from it is how the Fed caused the bank runs by tightening the money supply when they should have been helping the banks to stay solvent.  He does not grasp this fundamental: businesses don’t need to borrow money today.  They’re sitting on piles of it.  Why?  Because no one is buying anything.  So they’re not going to hire people and add capacity.  Even if they can borrow money at 0%.

Jimmy Carter’s Second Term

If you weren’t around for the Jimmy Carter years here’s your chance to live history.  While Chicago, India, China and other emerging markets are being responsible, the Obama administration is finally answering that age-old question.  What would a second term of Jimmy Carter have been like?  The answer?  As bad as the first.  Perhaps even worse.  Because we should know better now.  It’s no secret what happened during his presidency.  So there’s no excuse for repeating his mistakes.  And yet we seem to be hell-bent to do exactly that.  Amazing.

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LESSONS LEARNED #28: “Politicians love failure because no one ever asked government to fix something that was working.” -Old Pithy

Posted by PITHOCRATES - August 26th, 2010

THE TELEVISION SHOW Gomer Pyle, U.S.M.C. aired from 1964-1969.  It was a spinoff from the Andy Griffith Show.  Gomer, a naive country bumpkin who worked at Wally’s filling station, joined the Marines Corps.  And there was much mirth and merriment.  To the chagrin of Sergeant Carter, Pyle’s drill instructor (DI).  Think of Gunny Sergeant R. Lee Ermey’s Sergeant Hartman in the movie Full Metal Jacket only with no profanity or mature subject matter.  Sergeant Carter was a tough DI like Sergeant Hartman.  But more suitable for the family hour on prime time television.

Gunny sergeants are tough as nails.  And good leaders.  They take pride in this.  But sometimes a gunny starts to feel that he’s not himself anymore.  This was the subject of an episode.  And Gomer, seeing that Sergeant Carter was feeling down, wanted to help.  So he stuffed Sergeant Carter’s backpack with hay before a long march.  While the platoon was worn and tired, Sergeant Carter was not.  He was feeling good.  Like his old self.  Until he found out he was not carrying the same load his men were.  He asked Pyle, “why hay?”  He could understand rocks, but hay?  Because if he outlasted his men while carrying a heavier load, he would feel strong.  But knowing he had carried a lighter load only made him feel weak.

This is human nature.  People take pride in their achievements.  They don’t take pride in any achievement attained by an unfair advantage.  Self-esteem matters.  And you can’t feel good about yourself if you need help to do what others can do without help. 

AN OLD CHINESE proverb goes, “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.”  Let’s say I am a fisherman in a small village.  I catch fish to feed my family and sell/trade for other family needs.  There’s a man in my village who asks me for a fish each day so he can eat.  I’m a caring person.  So I give him a fish each day.  So a pattern develops.  Each day he shows up when I come in from my fishing.  He takes the fish and goes away.  It works out well for him.  He doesn’t have to work.  He can live off of my kind charity.  Then I move.  Without me being there to give him a fish each day, he no longer can eat.  And dies.  If I only had taught that man to fish. 

Kindness can lead to dependency.  And once dependent, you become lazy.  Why develop marketable skills to provide for yourself when someone else will provide for you?  The problem is, of course, what happens when that charity ends?  If you’re unable to provide for yourself and there is no longer someone providing for you, what do you do?  Steal?

Dependency and a lack of self-esteem are a dangerous combination.  And they feed off of each other.  This combination can lead to depression.  Behavioral problems.  Resentment.  Bitterness.  Envy.  Or a defeatist attitude.

These are often unintended consequences of government programs.  A failed program, then, has far reaching consequences beyond the initial economic costs of a program.

LIQUIDITY CRISES CAUSE a lot of economic damage.  If capital is not available for businesses to borrow, businesses can’t grow.  Or create jobs.  And we need jobs.  People have to work.  To support themselves.  And to pay taxes to fund the government.  So everyone is in favor of businesses growing to create jobs.  We all would like to see money being easy and cheap to borrow if it creates jobs.

But there is a downside to easy money.  Inflation.  Too much borrowing can create inflation.  By increasing the money supply (via fractional reserve banking).  More money means higher prices.  Because each additional dollar is worth a little less. This can lead to overvalued assets as prices are ‘bid’ up with less valuable dollars.  And higher prices can inflate business profits.  Looks good on paper.  But too much of this creates a bubble.  Because those high asset values and business profits are not real.  They’re inflated.  Like a bubble.  And just as fragile.  When bubbles burst, asset values and business profits drop.  To real values.  People are no longer ‘bidding’ up prices.  They stop buying until they think prices have sunk to their lowest.  We call this deflation.  A little bit of inflation or deflation is normal.  Too much can be painful economically.  Like in the Panic of 1907.

Without going into details, there was a speculative bubble that burst in 1907.  This led to a liquidity crisis as banks failed.  Defaults on loans left banks owing more money than they had (i.e., they became illiquid).  They tried to borrow money and recall loans to restore their liquidity.  Borrowers grew concerned that their bank may fail.  So they withdrew their money.  This compounded the banks problems.  This caused deflation.  Money was unavailable.  Causing bank runs.  And bank failures.  Business failures.  And unemployment grew. So government passed the Federal Reserve Act of 1913 to prevent a crisis like this from ever happening again.  The government gave the Federal Reserve System (the Fed) great powers to tweak the monetary system.  The smartest people at the time had figured out what had gone wrong in 1907.  And they created a system that made it impossible for it to happen again.

The worst liquidity crisis of all time happened from 1929-1933.  It’s part of what we call the Great Depression.  The 1920s had a booming economy.  Real income was rising.  Until the Fed took action.  Concerned that people were borrowing money for speculative purposes (in paper investments instead of labor, plant and material), they put on the brakes.  Made it harder and more expensive to borrow money.  Then a whole series of things happened along the way that turned a recession into a depression.  When people needed money, they made it harder to get it, causing a deflationary spiral.  The Great Depression was the result of bad decisions made by too few men with too much power.  It made a crisis far worse than the one in 1907.  And the Roosevelt administration made good use of this new crisis.  FDR exploded the size of government to respond to the unprecedented crisis they found themselves in.  The New Deal changed America from a nation of limited government to a country where Big Government reigns supreme.

ONE PROGRAM OF the New Deal was Social Security.  Unemployment in the 1930s ran at or above 14%.  This is for one whole decade.  Never before nor since has this happened.  Older workers generally earn more than younger ones.  Their experience commands a higher pay rate.  Which allows them to buy more things.  Resulting in more bills.  Therefore, the Great Depression hit older workers especially hard.  A decade of unemployment would have eaten through any life savings of even the most prudent savers.  And what does this get you?  A great crisis.

The government took a very atypical moment of history and changed the life of every American.  The government forced people to save for retirement.  In a very poor savings plan.  That paid poorly by comparison to private pensions or annuities.  And gave the government control over vast amounts of money.  It was a pervasive program.  They say FDR quipped, “Let them try to undo this.” 

With government taking care of you in retirement, more people stopped providing for themselves.  When they retired, they scrimped by on their ‘fixed’ incomes.  And because Social Security became law before widespread use of birth control and abortion, the actuaries of the day were very optimistic.  They used the birth rate then throughout their projections.  But with birth control and abortion came a huge baby bust.  The bottom fell out of the birth rate.  A baby bust generation followed a baby boom generation.  Actually, all succeeding generations were of the bust kind.  The trend is growing where fewer and fewer people pay for more and more people collecting benefits.  And these people were living longer.  To stay solvent, the system has to raise taxes on those working and reduce benefits on those who are not.  Or raise the retirement age.  All these factors have made it more difficult on our aged population.  Making them working longer than they planned.  Or by making that fixed income grow smaller.

FDR used a crisis to create Social Security.  Now our elderly people are dependent on that system.  It may suck when they compare it to private pensions or annuities, but it may be all they have.  If so, they’ll quake in their shoes anytime anyone mentions reforming Social Security.  Because of this it has become the 3rd rail of politics.  A politician does not touch it lest he or she wishes to die politically.  But it’s not all bad.  For the politician.  Because government forced the elderly to rely on them for their retirement, it has made the Social Security recipient dependent on government.  In particular, the party of government who favors Big Government.  The Democrats.  And with a declining birth rate and growing aged population, this has turned into a large and loyal voting bloc indeed.  Out of fear.

A PROGRAM THAT straddled the New Deal and LBJ’s Great Society was Aid to Families with Dependent Children (AFDC).  Its original New Deal purpose was to help widows take care of their children.  When program outlays peaked in the 1970s, the majority of recipients were unmarried women and divorced women.  Because this was a program based on need, the more need you had the more you got.  Hence more children meant more money.  It also reduced the importance of marriage as the government could replace the support typically provided by a husband/father.  Noted economist Dr. Thomas Sowell blames AFDC as greatly contributing to the breakdown of the black family (which has the highest incidence of single-parent households).

With the women’s liberation movement, women have come to depend less on men.  Some affluent women conceive and raise children without a husband.  Or they adopt.  And the affluent no doubt can provide all the material needs their children will ever need.  Without a husband.  Or a father for their children.  But is that enough?

The existence of ‘big brother’ programs would appear to prove otherwise.  Troubled children are often the products of broken families.  Mothers search for big brothers to mentor these fatherless sons.  To be role models.  To show an interest in these children’s lives.  To care.  When no such role models are available, some of these troubled children turn to other sources of acceptance and guidance.  Like gangs.

AFDC has compounded this problem by providing the environment that fosters fatherless children.  And another government program compounds that problem.  Public housing.

POOR HOUSING CONDITIONS hurt families.  They especially hurt broken families.  Without a working husband, these families are destined to live in the cheapest housing available.  These are often in the worst of neighborhoods.  This is an unfair advantage to the children raised in those families.  For it wasn’t their fault they were born into those conditions.  So, to solve that problem, government would build good public housing for these poorest of the poor to move into.  Problem solved.

Well, not exactly.  Public housing concentrates these broken families together.  Usually in large apartment buildings.  This, then, concentrates large numbers of troubled children together.  So, instead of having these children dispersed in a community, public housing gathers them together.  Where bad behavior reinforces bad behavior.  It becomes the rule, not the exception.  Making a mother’s job that much more difficult.  And because these children live together, they also go to school together.  And this extends the bad behavior problem to the school.  Is it any wonder that public housing (i.e., the projects) have the worst living conditions?  And some of the highest gang activity? 

Government didn’t plan it this way.  It’s just the unintended consequences of their actions.  And those consequences are devastating.  To the poor in general.  To the black family in particular.  AFDC and public housing enabled irresponsible/bad behavior.  That behavior destroyed families.  As well as a generation or two.  But it wasn’t all bad.  For the politicians.  It made a very large constituency dependent on government.

THERE ARE SO many more examples.  But the story is almost always the same.  Dependency and a lack of self-esteem will beat down a person’s will.  Like an addict, it will make the dependent accept poorer and poorer living standards in exchange for their fix of dependency.  Eventually, the dependency will reach the point where they will not know how to provide for themselves.  The dependency will become permanent.  As will the lack of self-esteem.  Conscious or not of their actions, Big Government benefits from the wretched state they give these constituencies.  With no choice but continued dependence, they vote for the party that promises to give the most.  Which is typically the Democrat Party.

But how can you fault these politicians?  They acted with the best of intentions.  And they can fix these new problems.  They’ll gather the brightest minds.  They’ll study these problems.  And they will produce the best programs to solve these problems.  All it will take is more government spending.  And how can you refuse?  When people are hungry.  Or homeless.  Or have children that they can’t care for.  How can anyone not want to help the children?  How can anyone not have compassion?

Well, compassion is one thing.  When the innocent suffer.  But when government manufactures that suffering, it’s a different story.  Planned or not the result is the same whenever government tries to fix things.  The cost is high.  The solution is typically worse than the original problem.  And the poorest of the poor are pawns.  To be used by Big Government in the name of compassion. 

Of course, if Big Government were successful in fixing these problems, they would fix themselves right out of existence.  So as long as they want to run Big Government programs, they’ll need a stock of wretched, suffering masses that need their help.  And, of course, lots of crises.

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