China’s Continuing Credit Expansion is Starting to Worry the IMF

Posted by PITHOCRATES - September 15th, 2013

Week in Review

As the U.S. fiscal year draws to a close the Republicans and Democrats are digging in their heels over the upcoming debt ceiling debate.  The Republicans want to cut spending and taxes to rein in out-of-control spending.  So they don’t have to keep borrowing money.  Running up the national debt.  The Democrats, on the other hand, say, “Who cares about the debt?  We’ll be dead and buried when the nation collapses under the weight of this mammoth debt load.  As long as we get what we want why should we care about future generations?”  At least, that’s what their actions say.

A lot of leading economists on the left, Keynesians economists, see no problem in running up the debt.  Print that money, they say.  Keep that expansion growing.  What could possibly go wrong?  Especially when the federal government has the power to print money?  Just look at what the Japanese did in the Eighties.  And what the Chinese are doing now (see As the West Faltered, China’s Growth Was Fueled by Debt by Christina Larson posted 9/12/2013 on Bloomberg Businessweek).

As demand for Chinese exports diminished in the wake of the financial meltdown, the Chinese economy kept humming at more than 9 percent annual gross domestic product growth each year from 2008 to 2011. The trick? “A huge monetary expansion and lending boom,” says Patrick Chovanec, chief strategist at Silvercrest Asset Management and a former professor at Tsinghua University’s School of Economics and Management in Beijing. With bank lending restrictions loosened in late 2008, “Total debt accelerated from 148 percent to 205 percent of GDP over 2008-12,” according to a May 2013 report from research firm CLSA Asia-Pacific Markets. When Beijing tried to rein in the banks beginning in late 2010, shadow banking—lending outside the formal sector—exploded. Today “China is addicted to debt to fuel growth,” according to the CLSA report, with the economy hampered by “high debt and huge excess capacity with only 60 percent utilization.”

The Beijing-based firm J. Capital Research dubbed 2012 the “Year of the (White) Elephant” in a report detailing some of China’s questionable infrastructure build-out. To take one example, 70 percent of the country’s airports lose money, yet more are being built in small and remote cities. At the shiny new Karamay Airport in far western Xinjiang province, there are four check-in counters serving two flights daily. Local governments have splurged on “new towns” and “special zones,” many of which have already fallen into disrepair. The $5 million Changchun Zhenzhuxi Park, intended as a scenic area, is now a large public garbage dump, as the local landscaping bureau never agreed to provide maintenance. Near the southern city of Hangzhou, a forlorn replica of the Eiffel Tower overlooks a faux Paris—the ersatz arrondissement attracted hardly any residents, and local media have dubbed it a ghost town.

“In China, you often hear people say they’re building for the future,” explains Chovanec. “But if you build something and it’s empty for 20 years, does that make any sense? By that point, it may already be falling apart.”

The classic Keynesian argument for economic stimulus is the one about paying people to dig a ditch.  Then paying them to fill in the ditch they just dug.  The ditch itself having no economic value.  But the people digging it and filling it in do.  For they will take their earnings and spend it in the economy.  But the fallacy of this argument is that money given to the ditch-diggers and the fillers-in could have been spent on something else that does have economic value.  Money that was pulled out of the private sector economy via taxation.  Or money that was borrowed adding to the national debt.  And increasing the interest expense of the nation.  Which negates any stimulus.

If that money was invested to expand a business that was struggling to keep up with demand that money would have created a return on investment.  That would last long after the people who built the expansion spent their wages.  This is why Keynesian stimulus doesn’t work.  It is at best temporary.  While the long-term costs are not.  It’s like getting a 30-year loan to by a new car.  If you finance $35,000 over 5 years at a 4.5% annual interest rate your car payment will be $652.51 and the total interest you’ll pay will be $4,018.95.  That’s $39,018.95 ($35,000 + 4,018.95) of other stuff you won’t be able to buy because of buying this car.  If you extend that loan to 30 years your car payment will fall to $177.34.  But you will be paying that for 30 years.  Perhaps 20-25 years longer than you will actually use that car.  Worse, the total interest expense will be $23,620.24 over those 30 years.  That’s $58,620.24 ($35,000 + 23,620.24) of stuff you won’t be able to buy because of buying this car.  Increasing the total cost of that car by 50.2%.

This is why Keynesian stimulus does not work.  Building stuff just to build stuff even when that stuff isn’t needed will have long-term costs beyond any stimulus it provides.  And when you have a “high debt and huge excess capacity with only 60 percent utilization” bad things will be coming (see IMF WARNS: China Is Taking Ever Greater Risks And Putting The Financial System In Danger by Ambrose Evans-Pritchard, The Telegraph, posted 9/13/2013 on Business Insider).

The International Monetary Fund has warned that China is taking ever greater risks as surging credit endangers the financial system, and called for far-reaching reforms to wean the economy off excess investment…

The country has relied on loan growth to keep the economy firing on all cylinders but the law of diminishing returns has set in, with the each yuan of extra debt yielding just 0.20 yuan of economic growth, compared with 0.85 five years ago. Credit of all types has risen from $9 trillion to $23 trillion in five years, pushing the total to 200pc of GDP, much higher than in emerging market peers…

China’s investment rate is the world’s highest at almost 50pc of GDP, an effect largely caused by the structure of the state behemoths that gobble up credit. This has led to massive over-capacity and wastage.

“Existing distortions direct the flow of credit toward local governments and state-owned enterprises rather to households, perpetuating high investment, misallocation of resources, and low private consumption. A broad package of reforms is needed,” said the IMF.

Just like the miracle of Japan Inc. couldn’t last neither will China Inc. last.  Japan Inc. put Japan into a deflationary spiral in the Nineties that hasn’t quite yet ended.  Chances are that China’s deflationary spiral will be worse.  Which is what happens after every Keynesian credit expansion.  And the greater the credit expansion the more painful the contraction.  And with half of all Chinese spending being government spending financed by printing money the Chinese contraction promises to be a spectacular one.  And with them being a primary holder of US treasury debt their problems will ricochet through the world economy.  Hence the IMF warning.

Bad things are coming thanks to Keynesian economics.  Governments should have learned by now.  As Keynesian economics turned a recession into the Great Depression.  It gave us stagflation and misery in the Seventies.  It gave the Japanese their Lost Decade (though that decade actually was closer 2-3 decades).  It caused Greece’s economic collapse.  The Eurozone crisis.  And gave the U.S. record deficits and debt under President Obama.

The history is replete with examples of Keynesian failures.  But governments refuse to learn these lessons of history.  Why?  Because Keynesian economics empowers the growth of Big Government.  Something free market capitalism just won’t do.  Which is why communists (China), socialists (the European social democracies) and liberal Democrats (in the United States) all embrace Keynesian economics and relentlessly attack free market capitalism as corrupt and unfair.  Despite people enjoying the greatest liberty and economic prosperity under free market capitalism (Great Britain, the United States, Canada, Australia, Hong Kong, Taiwan, South Korea, etc.).  While suffering the most oppression and poverty under communism and socialism (Nazi Germany, the Soviet Union, the communist countries behind the Iron Curtain in Eastern Europe, the People’s Republic of China under Mao, North Korea, Cuba, etc.).


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North Korea Manufactures and Sells Meth to Chinese addicts to bring Hard Currency into the Country

Posted by PITHOCRATES - August 25th, 2013

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.


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Big Brother is Watching You…Pee in China

Posted by PITHOCRATES - August 24th, 2013

Week in Review

The problem with big government bureaucracies is that they’re always looking at ways to create new public sector jobs.  It’s why the U.S. federal government grows with each passing year.  And why the Chinese are considering this (see Miss your mark in the toilet? Pay $16 fine by AFP posted 5/20/2013 on The Times of India).

People with a poor aim are to be fined if they miss their mark when using public toilets in a Chinese city, officials said — [sic] provoking online derision over how the rule will be enforced.

The penalty will apply to those who urinate outside the bowl of facilities in Shenzhen, the southern boom town neighbouring Hong Kong, although draft regulations seen by AFP did not specify a minimum quantity of spillage required to be classed as a violation…

Users of China’s rumbustious weibo social networks poured scorn on the measures, raising the prospect of hordes of toilet inspectors being deployed to inspect performance.

“A number of new civil servant positions will be created. There will be a supervisor behind every urinating person to see whether the pee is straight,” wrote one poster.

Another added: “Very good measures. I expect they can create 20 jobs on average for every public toilet…”

Chinese toilet discipline can be notoriously wayward, with pictures of people defecating in public sometimes appearing on weibo.

No surprise, really.  Dirt-poor peasants who have nothing of the basic comforts of life—such as indoor plumbing and flush toilets—are moving to the big cities into a world they’ve never known.  But the public defecation is not the outrageous part of this story.  That thing about the potty police is.  And I feel sorry for the nervous pee-er who can’t go when someone is watching them.  Waiting to observe his urine stream.  So the potty police can give them a slap on the buttocks and say, “Nice pee pee.”  Or go Sergeant Hartman all over them.  (That’s a reference to the drill sergeant in the movie Full Metal Jacket.  We’d link to a YouTube clip of one of his many R-rated tirades but decided not to.  Those who are familiar with the movie will understand the reference.  And those who aren’t probably won’t enjoy hearing his abusive potty mouth.  On a side note, I met him once at an air show.  Active duty Marines waited in line to have him insult them and make them drop and do pushups.  Just so they could say he did.  People love R. Lee Ermey that much.  He’s a great American.  A Vietnam veteran who served in combat.  And was a real-life drill instructor.  But I digress.)

Can this happen in the United States?  Well, if anyone had said the federal government would force you to buy something against your will a decade ago no one would have believed it.  But here we are with Obamacare.  And the individual mandate.  So, men, enjoy your urinations in public restrooms while you can.  For it may not be long before you have a federal bureaucrat observing your urine stream.  For Big Brother may be watching you…go pee pee.


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Study finds Coal cuts Lives by 5 Years for some who wouldn’t have Survived Childhood if it weren’t for Coal

Posted by PITHOCRATES - July 13th, 2013

Week in Review

Early man did not have a long life expectancy.  Thanks to infectious disease and poor (or nonexistent) medical care people who got sick or injured often died.  Unhygienic living spread communicable diseases which killed large numbers in the community.  The lack of fuel to heat your home or cook your food exposed people to the elements and food-borne bacteria.  Causing illnesses that went untreated and added to the death toll.  And a high infant mortality rates brought down the average lifespan further.

There were a lot of old people in their 70s throughout history.  But go back a couple of centuries so many children didn’t survive their childhood that the average lifespan was in the 30s.  But thanks to the modern world of energy and medicine our life expectancies have never been higher.  Even though coal is taking some years off the additional years it gave some (see Burning Heating Coal Cuts Lives by 5 Years in China, Study Finds by Daryl Loo posted 7/9/2013 on Bloomberg).

People in northern China may be dying five years sooner than expected because of diseases caused by air pollution, an unintended result of a decades-old policy providing free coal for heat, a study found.

Coal burning leading to heart disease, stroke, lung cancer and respiratory illnesses may cause the 500 million Chinese living north of the Huai River — a rough line dividing the country’s north and south — to lose an aggregate 2.5 billion years of life expectancy, according to the research published in the Proceedings of the National Academy of Sciences today.

The government gave free heating coal for people living north of the Huai River over a period of central planning from 1950 to 1980, and such indoor systems remain common today, the study showed. Burning coal in boilers is linked to the release of particulate matter that can be extremely harmful to humans, raising health costs and suggesting a move away from using fossil fuels would be attractive, according to Michael Greenstone, one of four authors of the study.

If the government took away fuel to heat and cook with how would that impact their life expectancies?

Yes, it’s sad that breathing particulate matter can remove 5 years of your life.  But how many more years did these people live because of coal?  They had to stay warm somehow.  And they needed to cook their food with something.  If they didn’t have coal these people would have been collecting firewood year round and burning that inside of their homes.  Releasing particulate matter into their homes anyway.  Only with a rise in lost appendages from swinging an axe.  More infected wounds from axe slips.  And they’d have rodents living in their wood piles.  Bringing disease into their homes.  Carried by the fleas on these rodents.

Coal may be taking 5 years away these people.  But they may be taking these years from a person who might not have survived his or her childhood if it weren’t for coal making their home a better place to live in.  It’s time we stop seeing only the bad that coal does.  And start recognizing the good that coal does.  For when it comes to human existence the good of coal far outweighs the bad.  For look where coal has taken us.  To the highest life expectancies in our history.  And it is still making our world a better and healthier place by creating electric power.  The essential ingredient in making the best medical care possible.  Thank you, coal.  Some of us appreciate the good that you do.


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Aging Populations and Replacement Birthrate

Posted by PITHOCRATES - July 8th, 2013

Economics 101

Trying to follow a Baby Boom with a Baby Bust creates Problems in Advanced Economies with Large Welfare States

In the late 1960s began a movement for zero population growth.  It called for women to have only enough babies to replace the current population.  Not to have too many babies that would increase the population.  Nor have too few babies that the population declines.  Something that women could easily do because of birth control.  And, later, abortion.  The drive behind this was to save the planet.  By keeping large populations becoming like a plague of locusts that devour the earth’s resources and food until the planet can no longer sustain life.

China did these zero population growth people better.  By promoting a negative population growth rate.  Limiting parents to one child.  They did this because during the days of Mao’s China the country set some world records for famine.  Their communist state simply couldn’t provide for her people.  So to help their communist system avoid future famines they tried to limit the number of mouths they had to feed.  Of course, trying to follow a baby boom with a baby bust creates other problems.  Especially in advanced economies with large welfare states.

China’s one-child policy and the preference for boys have led to a shortage of women to marry.  Some Chinese men are even looking at ‘mail-order’ brides from surrounding countries.  But China is going to have an even greater problem caring for her elderly.  Just like Japan.  Japanese couples are having less than 1.5 babies per couple.  Meaning that each successive generation will be smaller than the preceding generation.  As couples aren’t even having enough children to replace themselves when they die.  Leaving the eldest generation the largest percentage of the overall population.  Being paid and cared for by the smallest percentage of the overall population.  The younger generation.

States with Aging Populations are Suffering Debt Crises because they Spend More than their Tax Revenue can Cover

As nations develop advanced economies people develop careers.  Moving from one well-paid job to another.  As they advance in their career.  Creating a lot of income to tax.  Allowing a large welfare state.  Which is similar to a Ponzi scheme.  Or pyramid scheme.  As long as more people are entering the workforce than leaving it their income taxes can pay for the small group at the top of the pyramid that leaves the workforce and begins consuming pension and health care benefits in their retirement.  And there is but one requirement of a successful pyramid scheme.  The base of the pyramid must expand greater than the tip of the pyramid.  The wider the base is relative to the top the more successive the pyramid scheme.  As we can see here.

Babies per Generation - Constant Replacement Birthrate

Generation 1 is at the top of the pyramid.  It is the oldest generation.  Which we approximate as a period of 20 years.  In our example Generation 1 are people aged 78-98.  They’re retired and collecting pension, health care and other benefits.  Some combination of Social Security, Medicare, Medicaid, food stamps, heating assistance, etc.  All paid for by Generation 2 (58-78), Generation 3 (38-58) and Generation 4 (18-38).  Each generation is assumed to bring 6 children into the world.  So these couples are not only replacing themselves but adding an additional 4 children to further increase the size of the population.  Which really makes running a pyramid scheme easy.  For if we assume each member in Generation 1 on average consumes $35,000 annually in benefits that Generations 2 through 4 pay for that comes to $555.56 per person annually.  Or $46.30 per person monthly.  Or $10.68 per person weekly.  Or $1.53 per person daily.  Amounts so small that Generations 2 through 4 can easily pay for Generation 1’s retirement.  Now let’s look at the impact of a declining birthrate with each successive generation.

Babies per Generation - Declining Replacement Birthrate

When all couples in each generation were having on average 6 children this added 1.9 billion new taxpayers.  Which greatly reduced each taxpayer’s share of Generation 1’s retirement costs.  But thanks to birth control, abortion and the growing cost of living each successive generation has fewer babies.  Generation 2 only has 3 children.  Enough to replace themselves.  And add one new taxpayer.  Generation 3 has only 2 children.  Only enough to replace the parents.  Providing that zero population growth that was all the rage during the late 1960s and the 1970s.  While Generation 4 only has 1 child.  Not even enough to replace the parents when they die.  Causing a negative population growth rate.  Which is a big problem in an advanced economy with a large welfare state.  For instead of adding 1.9 billion new taxpayers they only add 217.5 million new taxpayers.  Greatly increasing each taxpayer’s share of Generation 1’s retirement costs.  Instead of paying $555.56 per taxpayer they each have to pay $5,384.62 annually.  Or $448.72 per taxpayer monthly.  Or $103.55 per taxpayer weekly.  Or $14.79 per taxpayer daily.  Numbers that prove to be unsustainable.  The state simply cannot tax people this much for Generation 1’s retirement.  For if they did this and added it to the rest of government’s spending they’re taxing us to fund it would take away all of our income.  This is why advanced economies with aging populations are suffering debt crises.  Because their spending has grown so far beyond their ability to pay for it with tax revenue that they borrow massive amounts of money to finance it.

If you want a Generous Welfare State you need Parents to have More Children

If you carry this out two more generations so every generation only has one child the per taxpayer amount tops out at $14,736.84 annually.  Or $1,228.07 per taxpayer monthly.  Or $283.40 per taxpayer weekly.  Or $40.49 per taxpayer daily.  Amounts far too great for most taxpayers to pay.  This is what an aging population does in a country with a large welfare state.  It makes the population top-heavy in elderly people who no longer work (i.e., pay taxes) but consume the lion’s share of state benefits.  When couples were having 6 children each across the generations there was a ratio of 84 taxpayers per retiree.  When there was a declining replacement birthrate that ratio fell to 15 taxpayers per retiree.  If we look at this graphically we can see the pyramid shape of this generational population.

Generational Population - Constant Replacement Birthrate

With 84 taxpayers per retiree we can see a nice and wide base to the pyramid.  While the tip of the pyramid is only a small sliver of the base (Generation 4).  Making for a successful Ponzi scheme.  Far more people pay into the scheme.  While only a tiny few take money out of the scheme.  This is why Social Security and Medicare didn’t have any solvency problems until after birth control and abortion.  For these gave us a declining replacement birthrate over time.  Greatly shrinking the base of the pyramid.  Which made the tip no longer a small sliver of the base.  But much closer in size to the base.  That if it was an actual pyramid sitting on the ground it wouldn’t take much to push it over.  Unlike the above pyramid.  That we could never push over.  Which is why the above Ponzi scheme would probably never fail.  While the one below will definitely fail.

Generational Population - Declining Replacement Birthrate

If you want a generous welfare state where the state provides pensions, health care, housing and food allowances, etc., you need parents to have more children.  For the more children they have the more future taxpayers there will be.  Or you at least need a constant replacement birthrate.  But if that rate is below the rate of a prior baby boom the welfare state will be unsustainable UNLESS they slash spending.  The United States has a replacement birthrate below the rate of a prior baby boom.  While the Obama administration has exploded the size of welfare state.  Especially with the addition of Obamacare.  Making our Ponzi scheme more like the second chart.  As we currently have approximately 1.75 taxpayers supporting each social security recipient.  Meaning that it won’t take much pushing to topple our pyramid. We’re at the point where a slight breeze may do the trick.  For it will topple.  It’s just a matter of time.


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President Obama’s Foreign Policy Working no better than George W. Bush’s

Posted by PITHOCRATES - June 23rd, 2013

Week in Review

Candidate Barack Obama called George W. Bush a cowboy.  Whose swaggering foreign policy inflamed our enemies.  And distanced our allies from us.  That was no way to conduct foreign policy, said then candidate Obama.  When he got into office he would engage in diplomacy.  Talk to our allies.  And even to our enemies.  Instead of dictating our policy to them.  By doing this he was going to make the world a safer and friendlier place.  Because it would be a Bush-free world.  But things haven’t been working so well for President Obama as Candidate Obama thought they would (see Analysis: For Obama, a world of Snowden troubles by Warren Strobel and Paul Eckert posted 6/23/2013 on Reuters).

Since his first day in office, President Barack Obama’s foreign policy has rested on outreach: resetting ties with Russia, building a partnership with China and offering a fresh start with antagonistic leaders from Iran to Venezuela.

But the global travels on Sunday of former National Security Agency contractor Edward Snowden highlight the limits of that approach. Leaders Obama has wooed – and met recently – were willing to snub the American president.

The cocky defiance by so-called “non-state actors” – Snowden himself and the anti-secrecy group, WikiLeaks, completes the picture of a world less willing than ever to bend to U.S. prescriptions of right and wrong…

If Russia allows Snowden to continue on his journey toward Ecuador, it could wipe out what is left of Obama’s policy, dating from 2009, of trying to “reset” relations with Moscow after they turned chilly under his predecessor.

Wow.  With friends like Russia and China President Obama doesn’t need any enemies.

So the love-fest didn’t last.  Candidate Obama had traveled the world where people received him as if he was the second coming of Christ.  He read soaring speeches from his teleprompters.  And promised to be nicer to both friend and enemy than George W. Bush.  But all he got from it was learning the meaning of the old adage that nice guys finish last.  Because those who only respect strength don’t respect nice guys.

President Obama finally joined the Europeans in Libya.  And what thanks did he get from the newly freed Libyans?  On the anniversary of 9/11 they killed our ambassador and three other Americans in Benghazi.

Americans continue to die in Afghanistan.  Power in Egypt went to the Muslim Brotherhood.  Who has deep ties to Iran.  Our mortal enemy.  The Arab spring movement President Obama endorsed by throwing our longtime ally Hosni Mubarak under the bus was more of an Israeli-American winter.  The democracy that was spreading in these predominantly Muslim countries was a move towards a very conservative Islam.  Becoming more like Iran.  Who, once again, is our mortal enemy.  And less like the democracy enjoyed in Western countries.

And now this Edward Snowden matter.  Where all of that ‘soft-love’ of the Obama foreign policy not only distanced our friends from us.  But it made them jab their finger in our eye.  To use the words of New York Senator Chuck Schumer.  Something that didn’t happen that often in the Bush presidency.  For he projected strength.  And though our enemies may have hated him for it.  They did respect him.  As did our friends.


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China, Taiwan, Four Asian Tigers and 1997 Asian Financial Crisis

Posted by PITHOCRATES - June 18th, 2013

History 101

Both Mao Zedong and Chiang Kai-shek were rather Brutal to any Political Opposition

Today many of the things we buy are stamped ‘Made in China’.  Because the Chinese can manufacture things cheaply.  For they have a booming export economy.  Which the Chinese built by introducing a little capitalism to the communist state.  And some things that were as un-capitalistic as you can get.  Like artificially low interest rates.  Currency manipulation.  Cheap labor.  And the strong arm of the communist ruling party to keep that labor cheap.  All of this to make their exports about the most inexpensive in the world.  Giving them a huge trade advantage.  Filling stores around the world with products stamped ‘Made in China’.

But before there was ‘Made in China’ there was ‘Made in Taiwan’.  Taiwan.  Officially the Republic of China (ROC).  Not to be confused with the People’s Republic of China (PRC).  AKA mainland China.  Taiwan (or the ROC) is an island in the Pacific Ocean off the China coast with Japan to the northeast and the Philippines to the south.  And is where Chiang Kai-shek and his Chinese Nationalists (Kuomintang or KMT) fled to during the Chinese Civil War when Mao Zedong and his communists conquered mainland China.

Both Mao Zedong and Chiang Kai-shek were rather brutal to any political opposition.  But while the PRC suffered some of the world’s worst famines and abject poverty Taiwan at least modernized into an advanced industrial economy.  Helped in large part by the KMT taking China’s gold reserves.  Their foreign currency reserves.  As well as the intellectual and business elites.  Who typically flee ahead of advancing communists.  As those are the people the communists usually kill or send off to reeducation camps.

International Investment poured into Southeast Asia and Spread the Asian Miracle beyond the Four Asian Tigers

Taiwan is one of the Four Asian Tigers.  Taiwan, South Korea, Singapore and Hong Kong developed advanced economies beginning in the early Sixties.  Thanks in part to laissez-faire economic policies of free trade, open markets, privatization and deregulation.  They also shrunk the size of their public sector.  And had a high savings rate.  Providing the capital for their industrialization.  While keeping personal and public debt levels low.  Because debt matters.  And the more of it you have the more difficult it is to get through a crisis.

But some of these countries also implemented non-laissez-faire economic policies.  Such as keeping domestic interest rates artificially low.  Even having special low rates for select export industries.  And there was some crony capitalism.  Government loaning to their crony capitalist friends.  Some of which disappeared thanks to a certain amount of corruption.  While a lot of it was used to make bad investments.  What those in the Austrian school of economics call malinvestments.  Investments not driven by the laws of supply and demand.  But for non-business reasons.  Growing big for the sake of being big.  Expanding just because of cheap interest rates.  Or the government choosing which businesses to expand.  And often choosing wrong.  Because those decisions were based on political reasons.  Or just a poor understanding of business in general.

The Asian Tigers served as a model for other nations.  Who followed their lead.  And got onto the export bandwagon.  Some even attracted foreign capital to build an export economy with high interest rates.  And pegged their currencies to the U.S. dollar.  To further encourage foreign investors to invest in their countries.  And it worked.  International investment capital poured into Southeast Asia.  Spreading the Asian Miracle beyond the Asian Tigers.

The Asian Tigers recovered the quickest thanks to their Laissez-Faire Economic Policies and their High Savings Rate

Then came the 1997 Asian financial crisis.  Starting in Thailand.  A nation that had a lot of foreign investment.  And a currency pegged to the U.S. dollar.  Then came a massive speculative attack on the currency.  Speculators were trying to force a devaluation of the Thai currency (the baht) by selling mass holdings of the baht.  In hopes of profiting by entering into agreements to repay a debt in baht at a later date.  If the baht devalued they could repay that debt with a cheaper baht.  Thus making a profit.  Thailand fought this devaluation, though.  By selling their foreign reserves to buy baht to maintain the peg to the U.S. dollar.  But they eventually ran out of foreign reserves to sell.  And had to let the baht float.  Causing a massive devaluation.  Making all that foreign debt much more expensive to repay.  Leading to defaults.  And bankruptcies.

Worried foreign investors started pulling their money out of Southeast Asia.  As they sold their holdings they flooded the foreign exchange market with these devalued currencies.  Putting additional pressure on exchange rates.  At the same time the United States was raising their interest rates to head off inflation there.  Those nations that pegged their currency to the U.S. dollar had to strengthen their currencies, too.  Raising the price of their exports.  Making them less competitive.  So exports fell.  Those higher U.S. interest rates made investment there more attractive.  Increasing the capital flight from these countries.  To try and stop this capital flight countries raised their interest rates.  Which further hurt their economies.  As it was more difficult and more costly to borrow money.

Before it was all said and done currencies, stock markets and other assets lost a lot of value in countries hit by the crisis.  Including the Asian Tigers.  But thanks to their laissez-faire economic policies and their high savings rate (except for South Korea) they recovered faster from the crisis than the other Southeast Asian countries.  Of the Four Asian Tigers South Korea suffered the most.  Thanks to a high level of foreign investment.  And numerous corporate bankruptcies.  Because of those malinvestments.  The causes of the 1997 Asian financial crisis are still debated today.  However what can’t be disputed is that those who suffered the least were those nations that embraced laissez-faire economic policies the most.  And those who interfered with market forces to stimulate an export economy tended to suffer more.  Something China (PRC) is doing.  Interfering with market forces to stimulate an export economy.  And making a lot of malinvestments.  As they try to bring their economy up to the standard of Taiwan (ROC).  Only without the laissez-faire economic policies the ROC used.  All but guaranteeing another financial crisis in the region.


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China raises the Price of Cotton and Chases the Textile Industry out of China

Posted by PITHOCRATES - June 9th, 2013

Week in Review

Communists think they are smarter than capitalists.  They think they can manage an economy better than market forces.  Despite the failure of the Soviet Union, China (under Mao), North Korea, Cuba, etc., there are many Western nations with activist governments.  Believing like the Chinese that smart bureaucrats can make the economy operate better than those market forces can.  But the problem is they can’t control all market forces.  So when they intervene there are always unintended consequences that usually make things worse after their intervention.  As this example in China shows (see China’s cotton procurement policy hurting textile industry by Staff Reporter posted 6/9/2013 on Want China Times).

China has jacked up the domestic price of cotton to 20,400 yuan (US$3,325) per tonne as of May 13, 4,500 yuan (US$730) higher than the international price, reports Shanghai’s First Financial Daily.

Industry insiders said that the current procurement policy does nothing to benefit cotton farmers and will have a serious effect on the domestic mid-stream textile industry, forcing many firms to move their operations overseas, the paper said…

The government has justified its cotton procurement at prices higher than international levels, by arguing that the policy can protect the interest of farmers and stabilize domestic cotton farm acreage and output, which assures the domestic supply…

The high cost has forced textile firms to abandon orders, with a growing number of firms relocating to Vietnam, Bangladesh, and India. Downstream firms, in dyeing and printing, have also been affected.

China expanded their cotton production when international cotton prices rose.  Then international prices fell.  Leaving them with a surplus of cotton selling at a price that did not recover the costs of that expanded production.  So these wise bureaucrats decided to raise the price of cotton.  And restrict imports.  Problem solved.  They forced the domestic textile industry to buy the higher priced domestic cotton.  Which, of course, raised the price of the textiles they sold.  Above the prevailing international price.  Pricing them out of the international markets.  So this economic reality forced them to relocate to a country that did not force them to purchase cotton above market prices.  Allowing them to produce textiles and sell them at prices the international markets would pay.

This is the same reason why the U.S. doesn’t have a domestic textile industry anymore.  Only it wasn’t government forcing textile manufacturers to buy cotton at above market prices.  It was the unions forcing them to pay labor at above market prices that increased the price of their textiles.  And priced them out of the international markets.  Because there are always unintended consequences whenever we interfere with market forces.  Always.  And the end result is always worse after the intervention.  Always.


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Hong Kong’s Free Market Capitalism makes Safer Baby Formula than China’s State Capitalism

Posted by PITHOCRATES - May 11th, 2013

Week in Review

Kids coming out of American schools learn that capitalism is unfair.  And that greedy businesses will put their customers at great risk to make a buck.  For capitalism puts profits before people.  Which is why we need a government with expanding regulatory powers.  For government puts people before profits.  Like they do in China.  A favorite of those on the left who urge more government intervention into the private sector economy.  Like they do in China.  Where they have a booming economy thanks to wise government bureaucrats.  And safe and happy people because the government prevents those nasty profit-seeking businesses from ever harming a soul (see China’s Parents Crave Illegally Imported Baby Formula by Liza Lin and Julie Cruz posted 5/2/2013 on Bloomberg Businessweek).

For Hong Kong customs agents, baby formula is the new heroin. On March 1 a law went into effect limiting the amount of powdered milk travelers can carry out of Hong Kong to two 2-pound cans each. Since then, more people have been arrested for smuggling baby formula than were caught all of last year with heroin and cocaine…

Many Chinese parents are desperate to get their hands on foreign-made baby formula after numerous food safety scandals in recent years. In 2008 at least 22 Chinese companies were found to have sold dairy products containing melamine, a toxic chemical that can make diluted milk appear to have a higher protein content. Six babies died as a result. In 2011, China’s largest milk producer, China Mengniu Dairy, said in a statement that moldy cattle feed led to excessive toxin levels in its milk. Last year another large milk producer, Inner Mongolia Yili Industrial Group, recalled formula tainted with mercury. “Chinese consumers are so frightened and so sensitive to safety issues with milk powder that they are willing to pay a higher premium than consumers anywhere else,” says James Roy, a Shanghai-based senior analyst at China Market Research Group.

That willingness to pay has led to baby formula shortages in Hong Kong, where food safety standards are higher. The surge in Chinese demand has even hit foreign markets, where baby formula is often cheaper than in China. Over the past year, stores in Germany, the U.K., and New Zealand have put limits on all bulk purchases of formula, such as Danone’s (BN) Aptamil and Mead Johnson Nutrition’s (MJN) Enfamil.

Hong Kong favors free market capitalism.  While China prefers state capitalism.  Where the state regulates the private sector economy with the heavy hand of the government.  So, in Hong Kong you have the economic system that American schools teach students is bad.  Because they put profits before people.  While China has the economic system that the American schools teach is good.  Because they put people before profits.  And which one is better?  Well, food safety standards are higher in High Kong than in China.  Despite putting profits before people.

Or you could say that food safety standards are higher in High Kong BECAUSE they put profits before people.  Because if babies start dying after drinking a company’s baby formula people will exercise their free choice and buy another company’s baby formula.  A very strong incentive NOT to kill babies.  Because it would be bad for business.  And bad for profits.

Whereas in the ‘people before profits’ state capitalism of China if a company kills babies with its baby formula it’s no big deal.  For the state will just force their people to buy the tainted baby formula by putting import restrictions on safe baby formula.  So there is no incentive NOT to kill babies in China.

So which system is better?  If you base it on which protects their people better you have to go with Hong Kong.  For they’re not killing babies with their baby formula.  While the Chinese are.  Which is a lesson the American schools should be teaching.  Instead of the anti-capitalistic curriculum written by those Sixties’ radicals who actually preferred China the way it was under Chairman Mao.  Before state capitalism.  A time of true communist collectivism.  Where tainted baby formula was the least of their problems.  As they were busy setting famine records with their agricultural policies of forced collectivism.  Where they really put people before profits.  For there were no profits.  So things are better in China today.  For they do allow some profits.  But things aren’t as good as they are in Hong Kong.  Where they allow all the profit you can make.  And by putting profits before people the people come out ahead.  As do their babies.


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New Paper shows Inverse Relationship between Global Warming and Coal-Fired Power Plants

Posted by PITHOCRATES - April 6th, 2013

Week in Review

In the Seventies they were scaring kids about a coming ice age.  And about air pollution so bad that we would one day have to wear gas masks when going outside.  The planet is a lot cleaner now.  And there is no talk about Americans one day having to wear a gas mask when going outside.  And that coming ice age?  Well, they were just wrong about that.  For what they thought was global cooling was actually global warming.  An easy mistake to make.  Because they’re both about temperature.  One just moves in one direction.  While the other moves in the other.  And unless you do something like record temperatures periodically how are you going to know which direction those temperatures are moving?

Then again, perhaps there was cooling then.  Before that cooling turned into warming.  For it now appears the reverse is happening.  A move from warming back to cooling.  Thanks to the Chinese and the Indians (see Climate forcing growth rates: doubling down on our Faustian bargain posted on IOP Science).

Remarkably, and we will argue importantly, the airborne fraction has declined since 2000 (figure 3) during a period without any large volcanic eruptions… The airborne fraction is affected by factors other than the efficiency of carbon sinks, most notably by changes in the rate of fossil fuel emissions (Gloor et al 2010). However, it is the dependence of the airborne fraction on fossil fuel emission rate that makes the post-2000 downturn of the airborne fraction particularly striking. The change of emission rate in 2000 from 1.5% yr-1 to 3.1% yr-1 (figure 1), other things being equal, would have caused a sharp increase of the airborne fraction (the simple reason being that a rapid source increase provides less time for carbon to be moved downward out of the ocean’s upper layers).

A decrease in land use emissions during the past decade (Harris et al 2012) could contribute to the decreasing airborne fraction in figure 3, although Malhi (2010) presents evidence that tropical forest deforestation and regrowth are approximately in balance, within uncertainties. Land use change can be only a partial explanation for the decrease of the airborne fraction; something more than land use change seems to be occurring.

We suggest that the huge post-2000 increase of uptake by the carbon sinks implied by figure 3 is related to the simultaneous sharp increase in coal use (figure 1). Increased coal use occurred primarily in China and India… Associated gaseous and particulate emissions increased rapidly after 2000 in China and India (Lu et al 2011, Tian et al 2010). Some decrease of the sulfur component of emissions occurred in China after 2006 as wide application of flue-gas desulfurization began to be initiated (Lu et al 2010), but this was largely offset by continuing emission increases from India (Lu et al 2011).

We suggest that the surge of fossil fuel use, mainly coal, since 2000 is a basic cause of the large increase of carbon uptake by the combined terrestrial and ocean carbon sinks… Sulfate aerosols from coal burning also might increase carbon uptake by increasing the proportion of diffuse insolation, as noted above for Pinatubo aerosols, even though the total solar radiation reaching the surface is reduced…

Reduction of the net human-made climate forcing by aerosols has been described as a ‘Faustian bargain’ (Hansen and Lacis 1990, Hansen 2009), because the aerosols constitute deleterious particulate air pollution. Reduction of the net climate forcing by half will continue only if we allow air pollution to build up to greater and greater amounts.

Let’s review.  The airborne fraction carbon dioxide has fallen since 2000.  And, as a result, global temperatures did not rise as projected.  Even though there were no large volcanic eruptions.  Which cause global cooling.  Tropical forest deforestation and re-growth are balancing each other out.  So that’s not a factor in this decline of airborne carbon dioxide.  Which leaves the sole remaining answer for the decline in airborne carbon dioxide levels as China’s and India’s explosion in new coal-fired power plants.  Yes, the wonderful air pollution from burning coal apparently cools the planet.  Like a volcanic eruption does.

Are you seeing the bigger picture here?  For a hundred years or so the Industrial Revolution belched so much ash, soot, smoke, carbon dioxide and sulfur dioxide into the air that it left black clouds over cities.  And a layer of soot and ash on everything.  This is why we electrified trains in our cities.  To keep coal-fired locomotives and their great black plumes of smoke out of the cities.  Was there a global warming problem then?  No.  That didn’t come into vogue until Al Gore started talking about it in the Nineties.  When the planet was doomed if we didn’t act immediately to reduce greenhouse gas emissions.  Despite only a few years earlier the climate scientists were warning us of the coming ice age.  Probably because of all that global cooling from our coal-fired power plants, steam engines and locomotives.

As oil, gas and electricity replaced coal-fired boilers everywhere (we even used coal in our home furnaces) all that pollution from coal went away.  And then came the Nineties.  And catastrophic global warming.  Just as China and India began to incorporate some capitalism into their economies.  Which they fed with electricity provided by more and more coal-fired power plants.  And as they belched all that wonderful pollution into the air the airborne fraction of carbon dioxide as well as global temperatures fell.  So I ask again, do you see the bigger picture here?

Yes, global warming is man-made.  At least this is what one can conclude from this paper.  And it is the climate scientists who made it.  By telling us to reduce all of the cooling emissions from our coal-fired power plants.  But, thankfully, the Indians and the Chinese still care enough about Mother Earth to pump those cooling emissions into the air.  And gave us a reprieve from the global warming apocalypse.  But if the climate scientists get their way they’ll bring on that apocalypse.  By pressuring China and India to stop putting those cooling emissions into the air.  And for the sake of the planet we can only hope that they don’t succumb to that pressure.


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