China is Worried about rising Property Prices

Posted by PITHOCRATES - February 23rd, 2013

Week in Review

Housing sales are booming in China.  And prices are soaring.  So much so that the government is taking some action (see China Orders More Cities to Restrict Housing Purchases by Bloomberg News posted 2/21/2013 on Bloomberg).

China told local authorities to “decisively” curb real estate speculation and take steps to rein in the property market after prices rose the most in two years last month…

The government’s almost three-year effort to curb property prices has included raising down-payment and mortgage requirements, increasing construction of low-cost social housing and restricting home purchases in about 40 cities. Authorities also imposed a property tax for the first time in the cities of Shanghai and Chongqing.

Why all the concern of rising property prices?  Because of what happens when they stop rising.  Like they did in the U.S.  When people were paying mortgages that were greater than the market value of their houses some of them walked away.  And let the bank have their house.  As more did more foreclosed houses entered the market.  When interest rates rose on Adjustable Rate Mortgages (ARM) some could no longer pay their mortgage payment.  And they, too, let the banks have their houses.  Putting more foreclosed houses on the market.  With more houses on the market prices fell further.  Putting more people underwater in their mortgages.  And so on.  Until the U.S. eased itself into the Great Recession.  Just as the Japanese eased themselves in their Lost Decade when their asset bubble burst.

This is what the Chinese want to avoid.  That downward spiral of prices.  Deflation.  Sending their economy into a tail spin.  Like the Japanese are still trying to pull themselves out of some two decades later.  Because housing sales are the biggest driver of the domestic economy.  Building houses.  And furnishing houses.  It all adds up to a lot of economic activity.  Which the Chinese want so desperately so they are not wholly dependent on their export economy.  For they really don’t want to end up like the Japanese.  But they probably will.  As the Chinese are trying to manage the economy too much.  Just as the Japanese did.  All that government partnering with business.  It just doesn’t build real economic activity.  Because you have bureaucrats making economic decisions.  Not the market.  And bureaucrats often get things wrong.  Unlike the market.  Especially when it comes to asset bubbles.  When the market creates them they’re not that big and the corrections are not that painful.  But when the government creates one with their excessive interference into the free market economy you get a Lost Decade.  Or a Great Recession.

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Social Security Receipts, Outlays and Surplus 1940-2012

Posted by PITHOCRATES - February 19th, 2013

History 101

Social Security is going Bankrupt because of an Aging Population, Inflation and Untrustworthy Politicians

Social Security introduced the era of Big Government.  When the Roosevelt administration passed it into law it faced fierce opposition.  For it wasn’t the job of the federal government to provide a pension.  If it was the Founding Fathers would have included it in the Constitution.  But they didn’t.  Thanks to the Great Depression, though, a serious crisis FDR didn’t let go to waste, FDR was able to change America.  By taking the federal government beyond the limits of the Constitution.

The fear was that it would grow into a massive program requiring more and more taxes to support it.  Which the FDR administration refuted in a 1936 pamphlet (see The 1936 Government Pamphlet on Social Security).

…beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.

Of course, that wasn’t true.  It was either a lie.  Or a disbelief that anyone would ever decouple the dollar from gold.  Or wishful thinking that we can trust politicians.  Whatever the reason the Social Security tax rate is a long way from that 3% today.  And the maximum earnings amount is a lot higher than $3,000.  But despite the tax rate and the maximum earnings amount soaring from these promised lows it’s still not enough.  For Social Security is struggling to avoid bankruptcy in the near future.  Because it has become a massive program requiring more and more taxes to support it.

Social Security is suffering from three major problems.  The first is an aging population (fewer people entering the work force to pay for the greater number of people leaving the workforce).  The second is inflation.  And the third is that politicians manage it.  Who just can’t control themselves around big piles of money.

The Social Security Surplus increased in the Nineties thanks to the Peace Dividend, Japan’s Lost Decade and the Dot-Com Boom

Social Security is off-budget.  Employers and employees pay into the program to provide for the program’s benefits.  These are dedicated taxes.  They are only to pay for Social Security benefits.  That is why it is off-budget.  They don’t mingle Social Security taxes with all the other taxes the government collects.  To pay for all the things in the federal budget.  Technically, those taxes are supposed to go into a retirement account that grows with interest.  And this big, growing pile of money is supposed to pay the benefits.  But in reality it doesn’t work this way.  The government collects taxes.  From these taxes they pay current benefits.  And anything left over, the Social Security surplus, goes into the Social Security Trust Fund.  We can see this graphically if we plot receipts, outlays and the surplus (see Table 2.1—RECEIPTS BY SOURCE: 1934–2017 and Table 3.1—OUTLAYS BY SUPERFUNCTION AND FUNCTION: 1940–2017 at FISCAL YEAR 2013 HISTORICAL TABLES).

Social Security Receipts Outlays Surplus 1940-2012

For the first 30 years or so of this program it hardly made a dent in our lives.  Small amounts were going in.  Small amounts were going out.  And small amounts were going into the trust fund.  Then a lot of people started retiring.  Just as birth control and abortion changed the family size.  And President Nixon decoupled the dollar from gold.  Allowing them to print money like never before.  Which, of course, depreciated the dollar.  This is why receipts and outlays started trending up after 1971 (when Nixon decoupled the dollar from gold).  To get a better look let’s zoom in and look at the years from 1970-2012.

Social Security Receipts Outlays Surplus 1970-2012

The Seventies were a horrible time economically.  As the government went all in with Keynesian economics.  Which resulted with high inflation and high unemployment.  And stagnant economic growth.  Stagflation.  And Social Security was in trouble.  Receipts were greater than outlays.  But not by very much.  Receipts and outlays may have been trending up but the surplus was pretty flat.  Until President Reagan and the Democrat Congress fixed Social Security to avoid bankruptcy.  After 1983 receipts trended up greater than outlays.  Which caused the surplus to trend up.  Thus saving Social Security.  For awhile.  Now let’s zoom in further to the years 1990-2012 to see what happened in the last two decades.

Social Security Receipts Outlays Surplus 1990-2012

President Reagan won the Cold War by spending more on defense than the Soviets could ever match.  At least not without starving her people to death.  And the Strategic Defense Initiative (aka Star Wars) was the straw that broke the camel’s back.  In 1991 the Soviet Union was no more.  Creating a huge peace dividend for President Clinton.  Which coincided with the dot-com boom.  And Japan’s Lost Decade (Japan’s economic woes were America’s prosperity).  Making the Nineties a very good time economically.  And that healthy economic activity translated into a nice uptrend in the Social Security surplus.  However, low interest rates and irrational exuberance fed the dot-com boom.  It was not real economic growth.  It was a bubble.  And when it burst it gave George W. Bush one painful recession at the start of his presidency.  Which was compounded by the tragedy of 9/11.  Causing a fall in economic activity.  Which caused Social Security receipts to fall.  While outlays continued to grow.  Causing a decline in the Social Security surplus.  Once again cuts in tax rates restored economic activity.  And the Social Security surplus.  Which continued until another bubble burst.  This one was a housing bubble.  Caused by President Clinton with his Policy Statement on Discrimination in Lending.  Where his justice department pressured lenders to qualify the unqualified.  And when the housing bubble burst into the Subprime Mortgage Crisis giving us the Great Recession receipts fell while outlays increased.  Sending the surplus into a freefall.

Social Security is Doomed to Fail because you just can’t Trust Politicians around Great Big Piles of Money

There is both a Social Security tax rate.  And a maximum amount of income to tax.  Both of which they have had to increase to keep up with inflation.  To make up for that aging population.  And to offset the corrupting influence of politicians around big piles of money.  And contrary to that 1936 pamphlet those tax rates started rising early.  And often (see Historical Social Security Tax Rates).

Social Security Surplus and Tax Rate

The Social Security tax rate rose as high as 12.4%.  Which is a 313% increase from the maximum amount guaranteed in that 1936 pamphlet.  And this great upward trend began in the Fifties.  Continuing through the Sixties.  In fact most of the increases came before Nixon decoupled the dollar from gold.  Showing what a horrible job the government actuaries did in crunching the numbers for this program.  As it turned into exactly what the opponents said it would.  A massive program requiring more and more taxes to support it.  And President Obama reducing the tax rate from 12.4% to 10.4% didn’t help the surplus any.  Or the solvency of Social Security.

Social Security Surplus and Maximum Earnings

While the tax rate began rising in the Fifties the maximum taxable earnings amount didn’t.  This amount was pretty flat and able to produce a surplus until 1971.  When President Nixon unleashed the inflation monster by decoupling the dollar from gold.  And the only way to produce a surplus after that was by continuously increasing the maximum earnings amount.  Further proving what a horrible job the government actuaries did in crunching the numbers for this program.  But why are they projecting Social Security will go bankrupt after raising both the tax rate and the maximum taxable earnings amount?  For despite all of the ups and downs there has been a surplus throughout the life of the program.  Some seventy years of a surplus and the miracle of compound interest should have built up quite a nest egg in the Social Security Trust Fund.  But it hasn’t.  Why?  Well, we can see what it could have been.  If we take each year’s surplus (starting in 1940) and add it to an account earning interest compounded annually at an interest rate of 3% through 1971 and 6% after 1971 (to account for inflation) it would look something like this.

Social Security Surplus Earning Compound Interest

Note that these amounts are in millions of dollars.  So at the end of 2012 the ending balance in the trust fund would be $16.5 trillion.  Which is large enough to wipe out the entire federal debt.  From 1980 through 2008 the surplus grew on average 8% each year.  If we assume this growth through 2050 that would take the trust fund to $184.5 trillion.  In 2075 it would be $960.9 trillion.  In 2076 it would be $1.03 quadrillion.  Or $1,027.3 trillion.  With this phenomenal growth based on a realistic 6% interest rate why is Social Security going bankrupt?

Because there isn’t a big pile of money in the Social Security Trust Fund earning compound interest.  The money goes in.  And the government takes it out.  Leaving behind treasury securities.  IOUs.  They raid the Social Security trust fund to pay for other on-budget government expenditures.  With the off-budget surplus.  Hiding the true size of the federal deficit.  And putting Social Security on the path to bankruptcy.  Because you can’t loan money to yourself.  You can only take money meant for one thing and spend it on another.  Leaving that first thing unpaid.  This is Social Security.  And why it was doomed to fail from the beginning.  Because you just can’t trust politicians around great big piles of money.

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Japan devalues the Yen and the G2O are Okay with it

Posted by PITHOCRATES - February 17th, 2013

Week in Review

In the Eighties Japan kept interest rates artificially low.  Creating a lot of artificial economic activity.  Businesses borrowed money because it was cheap.  And banks loaned money because there was so much of it to loan.  Unfortunately, this led to a bubble.  A big one.  Asset prices soared.  And when that bubble burst those prices fell back to earth like a rock.  Sending the Japanese economy free falling into a deflationary spiral as it tried to wring out all of that inflation from those low interest rates.  And some 30 years later they’re still suffering from the affects of that deflation (see G20 defuses talk of “currency war”, no accord on debt by Randall Palmer and Lidia Kelly posted 2/16/2013 on Reuters).

Japan’s expansive policies, which have driven down the yen, escaped direct criticism in a statement thrashed out in Moscow by policymakers from the G20, which spans developed and emerging markets and accounts for 90 percent of the world economy.

Analysts said the yen, which has dropped 20 percent as a result of aggressive monetary and fiscal policies to reflate the Japanese economy, may now continue to fall.

“The market will take the G20 statement as an approval for what it has been doing — selling of the yen,” said Neil Mellor, currency strategist at Bank of New York Mellon in London. “No censure of Japan means they will be off to the money printing presses.”

This is how they got into so much trouble in the first place.  This is why they have a Lost Decade in Japan.  Because of those low interest rates that blew up great asset bubbles.  That burst.  Sending prices into a freefall.  A little hair of the dog that bit you MAY alleviate the discomforts of a hangover.  But when that dog is a 150-pound French Mastiff with your throat in its mouth you’d be better off finding another cure for your inflationary hangover.  For nothing good can possibly come from another round of inflation that will only create more asset bubbles.  Their Lost Decade turned into Lost Decades because they kept trying to fix things before the market undid all their previous fixing.  As painful as it may be they need to let the market complete its correction.  Had they let the market do this in the Nineties the pain would be over with.  And they would be enjoying real economic growth today.

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Bad Keynesian Policies cause influx of Romanian and Bulgarian Migration into Germany

Posted by PITHOCRATES - February 10th, 2013

Week in Review

It is interesting that countries that get into trouble using Keynesian economic policies tend to go to countries that relied on Keynesian policies less for help.  States with high government spending and bloated public sectors turn to countries with less government spending and less bloated public sectors for help.  Yet Keynesian economic policies are still the dominant polices of many nations.  Including the US, the UK, China, countries within the Eurozone, Bulgaria and Romania (see German warning over Romanian and Bulgarian migration by Rosa Silverman posted 2/6/2013 on The Telegraph).

German cities have warned that an influx of Romanian and Bulgarian economic migrants will cost them dear and put the “social peace” at risk…

Berlin, Hamburg, Dortmund and Hanover have seen a six-fold increase in economic migration from the two countries since 2006, which they say has left them struggling to cope…

The warning comes amid fears in Britain that tens of thousands more Romanians and Bulgarians will come here each year after formal restrictions on the numbers of low-skilled workers from the two countries end next year.

A report by the campaign group Migration Watch UK warned last month that up to 70,000 migrants could arrive annually from then.

Of course the question that just begs to be asked is why are Romanians and Bulgarians leaving their countries in the first place?  The Cold War is over.  The communists are gone.  These are beautiful countries.  Blessed with farm land.  And natural resources.  With some great people.  And a lot of history.  So why leave?  Because they caught the Keynesian contagion during the Nineties.  Their central banks kept interest rates artificially low to stimulate economic activity.  Which they did.  But a lot of that economic activity was artificial.  A bubble.  Times were good.  They expanded government employment.  And government pay and benefits.  And then the 2007-2008 financial crisis came along.  Bursting that bubble.  Leaving these nations with budget deficits.

Both nations were on track to join the Eurozone.  Working hard to meet the Maastricht criteria.  Conditional for entry into the common currency of the Eurozone.  After the financial collapse meeting the Maastricht criteria became more difficult.  As the fall in economic activity and the rise in the unemployment rates of these countries caused tax revenue to fall.  Creating deficits that approached or exceeded those permitted under the Maastricht criteria.  And the Keynesian cure for a recession, easy credit and more government spending, just made those deficits worse.  And it caused inflation to rise to or above that permissible under the Maastricht criteria.  They had to borrow money to meet their spending obligations.   And a condition of those loans was to bring their spending down to acceptable levels.  Like that to meet the Maastricht criteria.

Long story short the damage these Keynesian policies caused required very painful austerity to fix.  High unemployment and austerity makes people want to leave home for sunnier economic climes.  As Germany has been the bedrock of the Eurozone because of their more responsible governing and restraint in government spending these people went to Germany.  And to the UK.  Who didn’t join the Eurozone.  And aren’t mired in the Eurozone sovereign debt crisis.  Though they are implementing a little austerity of their own to bring down their budget deficits.

High government spending and large deficits cause trouble.  The U.S. has numbers worse than both Bulgaria and Romania.  Which means there is trouble ahead.  But unlike other nations the United States’ population won’t be able to travel to sunnier economic climes.  For no country will be able to absorb that amount of migration.  Not even Germany.  Or the UK.  Combined.

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Clinton Tax Rates, Japan’s Lost Decade, Irrational Exuberance, Dot-Com Bubble, EBT and Job-Creating Capital

Posted by PITHOCRATES - November 14th, 2012

History 101

The Economy of the Nineties boomed because of Japan’s Lost Decade and Irrational Exuberance

President Obama wants to raise taxes on the wealthy.  He wants to go back to the Clinton tax rates.  The economy was booming during the Clinton Nineties.  Better than it is now.  Tax rates were higher in the Nineties than they are now.  While the deficit is greater now than it was in the Nineties.  And the debt is greater than it was in the Nineties.  The conclusion?  Higher tax rates improve economic activity.  Produce smaller deficits.  And grow the debt at a slower rate.  At least, that’s what those who want to raise tax rates say.  The only problem with this is that there are reasons why the economy was booming in the Nineties.  And it didn’t have to do with tax rates.  But, instead, the Japanese.  And irrational exuberance.

The Japanese government partnered with business in the Eighties.  Corporations worked closely together for the good of the export economy.  And the national economy.  This was Japan Inc.  And the economy surged.  Fueled by low interest rates.  People in America worried about the Japanese buying American landmark assets with their fat profits.  An American magazine joked that America would become a wholly owned subsidiary of a Japanese corporation.  A Democrat presidential candidate said America was a fool for not doing what the Japanese were doing.  But the good times didn’t last.  That inflationary monetary policy caused a massive asset bubble.  And when it burst the Japanese suffered a deflationary spiral that last a decade or more.  Their Lost Decade.  This great contraction weakened America’s greatest economic competitor.  Greatly helping the US economy.

Also during the Nineties the Internet was coming of age.  In the Eighties there was the personal computer.  Silicon Valley.  And Microsoft.  A lot of investors were looking for the Microsoft of the Nineties.  No one knew who that was going to be.  But one thing everyone knew was that it was going to be a dot-com.  Investors poured money into dot-coms that didn’t have anything to sell.  Hence the irrational exuberance.  Dot-coms built great office buildings and technology corridors in cities.  New ‘Silicon Valleys’ were appearing across the country.  Kids went to college to learn how to make websites and set up ecommerce.  All these young kids filled these new dot-com buildings.  But when the investment money ran out these companies went bankrupt.  As they had no revenue.  Or anything to sell.  The dot-com bubble burst after Clinton’s Nineties.  Giving George W. Bush a bad recession at the beginning of his first term.  Also, President Clinton pressured lenders to qualify the unqualified for mortgages they couldn’t afford.  Starting a great real estate bubble.  That burst after Clinton’s Nineties.  Causing the subprime mortgage crisis about a decade later.

The Government taxes Small Business Owners as Rich People even though they’re not really Rich People

So there is more to the Nineties than those Clinton tax rates.  The Japanese gave them an able assist.  Then a lot of bad investing creating a lot of artificial economic activity that created a bubble.  That crashed into a recession.  Thanks to a lot of governmental interference in the private sector economy.  They kept interest rates artificially low.  And offered a lot of incentives to get those dot-coms to build in their cities.  Leaving cities with a lot of empty buildings, budget deficits, bloated public sector payrolls and no increase in tax revenue to pay for the additional infrastructure and services.  This is what the Clinton policies gave us.  Not sustained economic activity.  Or a budget surplus.  So going back to the Clinton tax rates is not likely to produce sustained economic activity.  Or a budget surplus.  Especially when President Obama has outspent Clinton over a trillion dollars a year.

So returning to the Clinton tax rates won’t help to reduce the deficit unless they return to the Clinton spending as well.  And that’s not likely to happen.  So what will the increase in tax rates do?  Well, we can get an idea by comparing the Clinton tax rates (1999) to the last tax rates we used (2011).  As they apply to a small business.  The following is an income statement for what could be a typical small business with about $1.8 million in annual sales revenue.

This is a very summarized income statement using some typical percentages for cost of sales and overhead.  This also assumes about $350,000 of debt on the company books.  Giving an interest expense of about $28 grand.  When you subtract all of these expenses from revenue you arrive at an earnings before taxes (EBT) of $358,016.73.  For many small business owners this EBT flows to their personal income tax return as personal income.  Which sounds like a lot.  But business owners will leave most of this money in their businesses.  So while the government taxes them as rich people they’re not really rich people.  For what the government doesn’t tax away will become retained earnings.  And reinvested back into their businesses.

Higher Taxes and Higher Regulatory Costs hurt Job Growth by taking away Job-Creating Capital from Businesses

All right, so let’s look at what the government would tax away.  Based on the 1999 tax rates.  And the 2011 tax rates.  Using the tax rates for married filing jointly we get the following income tax for each set of tax rates.

The 1999 tax brackets give an effective tax rate of 31.4%.  In 2011 that fell 4.7 points to 26.7%.  Which increased net profit from 13.7% in 1999 to 14.6%.  An increase of 0.93 points.  Not as big a change as in the income tax rate.  But it’s an additional $16,730.50 the small business would have to reinvest into the business.  Which could pay for a lot (even help pay their interest expense).  Especially over time.  In two years that’s about $33,461.  In five years that’s about $83,650.  In ten years that’s about $167,300.  That’s a lot of ‘free’ money the business could use to grow their business that they didn’t have to pay back.  But if we returned to the Clinton tax rates that’s money these businesses would no longer have to invest into their business.  Forcing them to pay to borrow money.  Adding additional interest expense.  And burdening the business with greater debt.  Which would be a disincentive to add additional costs.  Like creating new jobs and hiring people.

A lot of small business owners don’t pay themselves.  That is, they don’t get a paycheck like everyone else in their business.  Instead they distribute earnings from the business.  People think all business owners are rich.  But here’s something they don’t understand.  Even though they pay income taxes on their total business earnings they may only take a small percentage of their earnings out of the business.  In this example the married couple draws $75,000 a year to live on.  Even though they paid income taxes on $358,016.73.  Netting only $75,000 on these earnings would be like having 79.1% of your earnings withheld in taxes from your paycheck.  While these numbers vary among business owners this generally holds true.  They pay taxes on amounts far greater than what they take out of their business to live on.

If we go back to the Clinton tax rates it will reduce the amount of investment capital owners have to grow their business.  Which new regulations have already reduced by increasing costs.  With the unknowns of Obamacare basically freezing all new hiring.  As small business owners don’t know if the government will leave them enough money to grow their businesses.  Or even enough to maintain their current business operations.  Which is how higher taxes and higher regulatory costs hurt job growth.  By taking away job-creating capital from businesses.

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FT122: “Japan’s Lost Decade helped the Clinton economy by reducing imports while the global slowdown does nothing for the Obama economy.” -Old Pithy

Posted by PITHOCRATES - June 15th, 2012

Fundamental Truth

The Japanese Government made Money Cheap and Plentiful to Borrow creating a Keynesian Dream but an Austrian Nightmare

Once upon a time Americans feared the Japanese.  Their awesome might.  And their relentless advances.  One by one the Japanese added new properties to their international portfolio.  They appeared unstoppable.  Throughout the Eighties everything was made in Japan.  Government partnered with business and formed Japan Inc.  And they dominated the world economy in the Eighties.  A U.S. Democrat nominee for president held up Japan Inc. as the model to follow.  For they had clearly shown how government can make the free market better.  Or so this candidate said.

But it didn’t last.  Why?  Because in the end the Japanese just interfered too much with market forces.  Businesses invested in each other.  Insulating themselves from the capital markets.  Allowing them to make bad investments to sustain bad business planning.  All facilitated with cheap credit.  Government made money cheap and plentiful to borrow.  And they borrowed.  A Keynesian dream.  But an Austrian nightmare.  Because they used that money to make even more bad investments (or ‘malinvestments’ in the vernacular of the Austrian school of economics).  Creating a real estate bubble.  And a stock market bubble.  Bubbles are never good, though.  Because they can’t last.  They must pop.  And when they do it isn’t pretty.

The U.S. just went through real estate bubble that peaked in 2006.  Money was so cheap to borrow that people were buying $300,000+ McMansions.  Anyone could walk in and get a no-documentation loan with nothing down.  People were buying houses and flipping them.  And people who couldn’t qualify for a mortgage could get a subprime mortgage.  Further pushing house prices higher.  Not because of real demand.  But because of this artificial tweaking of the free market by the government.  Making that money so cheap to borrow.  And when all that cheap credit caused inflation elsewhere in the economy the Fed finally tapped the brakes.  And increased interest rates.  Raising monthly payments on all those subprime mortgages.  Leading to a wave of defaults.  The subprime mortgage crisis.  And the Great Recession.

Japan’s Deflationary Spiral gave American Domestic Manufacturers a Huge Advantage

This is basically what happened in Japan during the Nineties.  The government had juiced the economy so much that they grew great big bubbles.  Ran up asset prices to incredible heights.  But then the bubble burst.  And those prices all fell.  They fell for so long and so far that Japan suffered a deflationary spiral.  Throughout the Nineties (and counting).  The Nineties were a painful economic time.  After a decade or so of inflation the market corrected that with a decade of recession.  And deflation.  A decade of economic activity the Japanese just lost.  The Lost Decade.  But it wasn’t all bad.

At least, in America.  There was still some Reaganomics in the American economy.  Producing real economic growth.  But there was also a bubble.  In the stock market.  The dot-com bubble.  The Internet was brand new and everybody was hoping to be in on the next big thing.  The next Microsoft.  Or the next Apple.  Also, unable (or unwilling) to learn from the mistakes of the Japanese real estate bubble the Clinton administration was making it very uncomfortable for banks to NOT approve mortgage applications for people who were unqualified.  Putting more people into houses who couldn’t afford them.

So while the Clinton administration was trying to change America (during the first 2 years they tried to nationalize health care against the will of the people) the economy did well.  For awhile.  Irrational exuberance was pushing the stock market to new heights as investors poured money into companies that didn’t have a dime of revenue yet.  And never would.  Clinton had to renege on his promise on the middle class tax cut because things were worse than he thought when he promised to make that middle class tax cut.  (Isn’t it always the way that when it comes to tax cuts some politicians can’t keep their promise because they were too stupid to know how bad things really were?)  Added into this mix was Japan’s Lost Decade.  Their deflationary spiral increased the value of the Yen.  And made their exports more expensive.  Giving the American domestic manufacturers a huge advantage.  The economy boomed during the Nineties.  For a mix of reasons.  They even projected a budget surplus thanks to the economic woe of the Japanese.  But then the dot-com bubble burst.  Giving Bill Clinton’s successor a nasty recession.

When a Recession ails you the Best Medicine has been and always will be Reaganomics

The Left always talks about fair trade.  And about the unfair practice of foreign manufacturers giving Americans inexpensive goods that they want to buy.  So their answer to make these unfair trade practices fair is to slap an import tariff on those inexpensive foreign goods.  To protect the domestic manufacturers.  For they believe it’s that simple.  And plug their ears and sing “la la la” when you discuss David Ricardo’s Comparative Advantage.  Ricardo says countries should specialize in the things they’re good at.  And import the things others are better at.  When everyone does this we use our resources most efficiently.  And the overall wealth in the international economy increases.  Making the world a better place.  And increases our standard of living.  But the rent-seekers disagree with this.  They want high tariffs.  And obstacles for foreign imports.  To protect the domestic businesses that can’t sell as inexpensively or at such high levels of quality.

Some would point to Japan’s Lost Decade as proof.  Where their deflationary spiral removed a lot of foreign competition to American manufacturing.  Allowing them to sell at higher prices and lower quality.  All the while protecting American jobs.  And, yes, Japan’s woes did help the American domestic manufacturers during the Nineties.  But it wasn’t because they could raise prices and lower quality in the face of low foreign competition.  It was because there was still enough Reaganomics in the country to produce some vibrant economic activity.  That encouraged entrepreneurs to take chances and bring new things to market.  Which is a huge difference from the current economic picture.

The Eurozone sovereign debt crisis has plunged Europe into a recessionary freefall.  Much like the Japanese suffered in the Nineties.  Yet the American domestic manufacturers aren’t benefiting from this huge decline in foreign competition.  Why?  Because the Obama administration has excised any remaining vestiges of Reaganomics out of the economy.  Everything the rent-seekers could ever hope for they have.  Only without tariffs.  And yet the Obama economy still lingers in recession.  Because irrational exuberance and barriers to free trade don’t create real economic growth.  And an administration hostile to capitalism doesn’t inspire entrepreneurs to take chances.  No.  What encourages them to take chances are low taxes.  And less costly and less punishing regulations.  For programs like Obamacare just scare businesses from hiring any new employees.  Because they have no idea the ultimate costs of those new employees. 

Now contrast that to the low taxation and relaxed regulatory climate of Reaganomics.  That produced solid economic growth.  And this growth was BEFORE Japan’s Lost Decade.  Which just goes to show you how solid that growth was.  And proved David Ricardo’s Comparative Advantage.  For both Japan and the United States did well during the Eighties.  Unlike Clinton’s economy in the Nineties that only did well because Japan did not.  But the good times only lasted until the irrational exuberance of the dot-com bubble brought on an American recession.  Which George W. Bush pulled us out of with a little Reaganomics.  Tax cuts.  Proving yet again that higher taxes and higher regulations don’t create economic activity. Tax cuts do.  And fewer regulations.  In other words, when a recession ails you the best medicine has been and always will be Reaganomics.

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Japanese Chipmaker Slashing Payroll due to High Supply and Low Demand in Lingering Recession

Posted by PITHOCRATES - May 27th, 2012

Week in Review

You know the recession is bad when electronic chipmakers are slashing their payrolls.  When that happens it means we’re not buying televisions, phones, computers, etc.  Because we don’t have the disposable income.  And don’t expect to have it anytime soon (see Japan’s Renesas eyes 14,000 job cuts, chip plant sale: Nikkei by Maki Shiraki and Taiga Uranaka posted 5/26/2012 on Reuters).

Japanese chipmaker Renesas Electronics Corp plans to sell off loss-making operations and cut its payroll by at least 12,000, a source close to the matter told Reuters on Saturday, as the company battles high costs and nimbler foreign rivals…

Renesas has posted cumulative net losses of nearly $6 billion over the past seven years as it struggles to keep up with South Korea’s Samsung Electronics and others in an expensive race to build ever smaller and faster chips.

Hobbled by a strong yen and forced to close eight of its factories after natural disasters in Japan and Thailand last year, Renesas has said it would hammer out a restructuring scheme by July…

The plan would trim its payroll by more than a quarter.

The Tsuruoka plant, which makes system chips that combine processing and other functions on a single sliver of silicon and are used in a range of digital electronics, has been a major burden for Renesas as Japanese consumer electronics makers cut production of TVs and other products.

Japan Inc. dominated during the Eighties.  They were manufacturing everything.  America lost its TV business as it couldn’t compete with the powerhouse that was government partnering with business.  Those on the Left in America said that was the way capitalism should work.  Put the government in charge.  Let the brilliant bureaucrats guide the hapless corporation.  For capitalism was chaos.  While government brought order to that chaos.  Which is why Japan Inc. dominated in the Eighties.  And frightened Americans as they used their massive profits to buy up American landmarks.  People worried that America would end up as a wholly owned subsidiary of Japan Inc. 

Of course, that was then.  Before their Lost Decade.  And the deflationary spiral that continues to this day.  For the bureaucrats may be smart.  But they’re not smart like the corporation people.  Who understand that while you can control your domestic markets with state capitalism you can’t control international competition.  And if you build up too much capacity you may just end up expanding supply greater than demand.  Sending prices so low your companies can’t operate at a profit.  And send your nation into a deflationary spiral.

This is typically what happens when the government interferes with the free market.  They create bubbles that eventually pop.  Sending prices into a tailspin.  A recent example in the United States is the subprime mortgage crisis.  Government kept interest rates artificially low creating a housing bubble.  And when that bubble popped it sent housing prices in a tailspin. 

It happens all the time when government interferes.  Yet it never stops government from interfering.  Amazing how we just can’t seem to learn this lesson.

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Big Inflation in Canada hidden by Steep Fall in Natural Gas Prices

Posted by PITHOCRATES - May 20th, 2012

Week in Review

Canada is doing energy right.  They’re pulling it out of tar sands and shale.  And bringing it to market.  To meet real demand.  For energy is the mighty Atlas of the Canadian economy.  Carrying the rest of the economy along on its broad shoulders.  Because it’s solid economic growth.  And the only part of the economy they’re NOT driving with monetary policy (see Inflation increase in April fueled by gas, car prices by Randall Palmer, Reuters, posted 5/18/2012 on The Vancouver Sun).

Inflation in Canada was slightly higher than expected in April, pushed up in part by gasoline prices, providing the Bank of Canada with more reason to launch the interest-rate hike it has hinted at recently.

On an annual basis, the overall inflation rate rose to two per cent in April from 1.9 per cent in March, Statistics Canada said on Friday. The core rate, which excludes volatile items, climbed to 2.1 per cent from 1.9 per cent…

The median forecast in a Reuters survey of analysts had been for both inflation measures to stay at 1.9 per cent. Only five of 24 analysts had expected the overall rate to rise, and none had foreseen a core rate as high as 2.1 per cent.

Interesting.  Only 5 Keynesian economists guessed right.  Which means about 80% were wrong.  Which means the consensus opinion was wrong.  Typical for Keynesian economic projection.  Yet we still turn to them for their ‘expert’ opinion.  But it’s never their fault when they’re wrong.  There’s always something to blame.  And they sound so intelligent when they explain they were actually right.  It was just the market that was wrong.

Though several data points have bolstered the case for the central bank to raise rates, recent economic figures have not all been positive.

The latest reports for manufacturing, jobs, trade, housing and wholesale trade have been strong, while February gross domestic product and retail trade were weak.

In the past month, the bank has said several times it may have to withdraw stimulus from the economy…

A 3.2-per-cent rise in gasoline prices and 1.3 per cent in passenger vehicle prices pushed up the monthly inflation data, but this was tempered by an 8.2-per-cent fall in natural gas prices.

Could they be creating a bubble with those low interest rates?  Are people hopping aboard the Keynesian train and borrowing money at cheap rates to expand production?  And most likely inventories.  For if the consumers aren’t buying this stuff the stimulus is making it must be collecting somewhere.  Just waiting to turn profits into losses.  As the bubble will inevitably burst.  As all bubbles do.  Causing prices to fall because the stimulus created a surplus of unsold goods in the market.  Requiring deep price discounting to clear those bloated inventories.  Kind of like the price of natural gas is falling because there is so much of it on the market.  Thanks to shale gas and hydraulic fracturing.

It is interesting to note how much higher the inflation would be if it wasn’t for all that cheap natural gas holding it back.  Probably the one thing in the economy they’re producing to meet a real demand.  For consumers can skip the retail stores.  But they can’t live without energy.  Whether it’s the electricity they use (generated from natural gas).  Or the gas that cooks their meals.  Or the gas that heats their homes.  And their hospitals, universities, coffee shops, restaurants, businesses, etc.  Energy moves the modern economy.  And our personal lives.  So energy needs no stimulus.  But to encourage us to move into a bigger house we don’t need?  That takes stimulus.  It’s this inflation that exceeded the deflation in natural gas prices that gives them their overall increase in the inflation rate.  And why 80% of Keynesian economists guessed wrong on inflation.  Because they always do. 

So if you want to know what the best economic policy is for a nation just ask a Keynesian.  And then do the opposite.

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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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Japan’s Future is Bleak thanks to their Welfare State and their Aging Population

Posted by PITHOCRATES - April 28th, 2012

Week in Review

Japan made two great mistakes since World War II.  Establishing a great welfare state.  And interfering into the private sector economy during the Eighties.  Causing a great asset bubble.  And a deflationary spiral lasting a decade or two.  Which has compounded their first mistake (see As Japan strains to care for elderly, sacrifices begin by Chico Harlan posted 4/28/2012 on The Washington Post).

In recent months, Prime Minister Yoshihiko Noda has staked his job and bet his support on a tax increase designed to fund Japan’s soaring social security costs.

And the potential tax hike is only a sneak preview of the burdens to come as Japan grows into the world’s grayest society, a nation where two decades from now seniors will outnumber children 15 and younger by nearly 4 to 1.

Economists and government officials say that Japan, in the coming years, will probably raise the retirement age, again increase taxes and trim spending on everything from education to defense, all to care for its elderly.

Young Japanese — those entering the workforce amid two decades of stagnation — will face the greatest burden: They will earn less in real terms than their parents, pay higher pension premiums, receive fewer social services and, eventually, retire with a less-generous pension package.

Talk about inverting the pyramid.  Which is what social security is.  A pyramid scheme.  Which will work as long as those entering the scheme outnumber those collecting benefits from the scheme.  Because everyone pays a little to support the big consumers at the top.  But what happens when the big consumers at the top outnumber those paying into the system 4 to 1?  You suffer.  And sacrifice.  With a capital ‘s’.  Especially those at the bottom.  Who will pay in more than those at the top ever did.  While only collecting a fraction of their benefits.  If they collect anything at all.

This is the problem an aging population causes a spendthrift government.  You simply can’t spend at a greater rate than the rate your population is growing.  Because all government spending has to be financed by the taxpayers.  Those with jobs.  In the private sector.  So if the population growth rate falls (i.e., the population is aging) the tax contributions from the individual taxpayers must increase.  Basically enslaving the younger generation to the older generation.  The lesson of Japan should be a cautionary tale to governments everywhere.  For it will happen to you if you try to be too generous with your state benefits.

As it rose into an economic power after World War II, Japan created a generous social security net, with a universal health-care system and a universal pension system in which people were covered as employees or via a basic national program. But since the collapse two decades ago of the real estate and stock market bubble, the foundation of that system has started to crack. Tax revenue has dropped amid deflation, forcing Japan, whose debt-to-GDP ratio is highest among developed countries, to fund its social programs with more and more borrowing…

Kakuta [a 20-year-old college student] said he didn’t think the cutbacks to the current system were coming fast enough. And he doubted the ability of Japanese politicians to draft the right policies.

“To me,” he said, “it sounds more and more like we’re passing this on to the younger people. . . . I feel especially bad for the generation after mine. And that certainly doesn’t motivate me to have more children.”

Who would want to burden their children with a life of near-subsistence?  So it is not surprising that the younger generation may not have the same number of children that their parents did.  Which is the worst thing possible for the government.  For there will be fewer people entering the workforce.  While the population of those leaving the workforce will grow ever larger.  Making the burden on the young even greater.  For each individual will have to support more retirees.  The retirees will, in effect, become their children.

The U.S. is following the Japanese.  For we already know Social Security and Medicare are going bankrupt.  And now with Obamacare thrown in the mix the U.S. will run to catch up with Japan.  As the Europeans are trying to do as well.  Perhaps heralding the end of Western Civilization.  As we turn the hands of time back.  To when there was a ruling elite and impoverished masses.  Who will work for no one but the state.  In exchange for their meager state allowance.

Marx and Engels had it all wrong.  You don’t destroy the middle class with a revolution of the working class.  You do it with the welfare state.  And let the middle class destroy themselves.  By demanding ever more from the welfare state.  It may take a little longer.  But it is so much easier to do.  All you have to do is give people lots of free stuff.  And the people will take it from there.  To the European sovereign debt crisis.  Or to something worse.  To something like that lurking in Japan’s future.

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