Mercantilism, Royal Navy, Napoleon, Pax Britannica, Corn Laws, David Ricardo, Comparative Advantage, European Union and NAFTA

Posted by PITHOCRATES - May 22nd, 2012

History 101

Mercantilism gave Britain the Royal Navy which Ushered in the Pax Britannica

Great Britain had a rough go of it at the end of the 18th century.  They lost their American colonies in the American Revolutionary War.  A war that started over the issue of taxation to pay for the previous Seven Years’ War.  So instead of securing new revenue to pay down old debt they incurred new debt.  The French Revolution closed out the century.  Causing concern for some in Britain that their monarchy may be the next to fall.  It didn’t.  For the constitutional monarchy and representative government in Britain was a long cry from the absolute monarchy that they had in France.  So revolution did not come to Britain.  But war did.  As the French expanded their revolution into a European war.  Pulling the British back into war with their old enemy.

With a large conscripted French Army and the concept of total war France made total war.  Napoleon Bonaparte won a lot of battles.  Conquered much of Europe.  Even marched back and conquered Paris.  Proclaimed himself emperor of France.  And continued waging war.  Including an ill-conceived invasion of Russia.  Which marked the beginning of the end for Napoleon.  And the French Empire.  Weakened from war France saw her old nemesis, Great Britain, rise as the first superpower since the Roman Empire.  And like the Romans’ Pax Romana Britain entered a century of peace.  Pax Britannica.

The reason the British could do this was because of their mercantile past.  They set up colonies and international trade networks.  And they used the proceeds from that lucrative trade to finance the greatest naval power then in the world.  The Royal Navy.  And the Royal Navy would help keep the peace in the Pax Britannica.  She became the world’s policeman.  Making the world safe for trade.  Especially on the high seas.  But then something interesting happened.  She broke from her mercantile past.  Because they saw the shortcomings of mercantilism.  One of which produced wealthy landowners at the expense of a hungry population.

When the British repealed the Corn Laws in 1846 Food Prices fell and the Standard of Living Rose 

The British Corn Laws were a series of laws protecting those who grew cereal crops.  The stuff we grow that has edible grains.  Corn, rice, wheat, barley, etc.  What we call staple crops as they form the basic sustenance of humans everywhere.  We grow these in greater abundance than all other foods.  And when you look at the grain size you come to one realization.  It takes a lot of land to grow these crops.  And who owns large tracts of land?  The landowning aristocracy.  A small group of people with a lot of wealth.  And a lot of political influence.  Hence the Corn Laws. 

The Corn Laws were legislation with one goal.  To prevent the British people from buying less expensive food.  By either forbidding any importation of cheaper grains until the domestic price had reached a certain price level.  Or adding tariffs to the less expensive imports so the landowners could still sell their grains at higher prices.  Thus preserving their wealth.  And they made specious arguments about how lower-priced food was actually bad for the people.  For it was just a way for manufacturers to maximize their profits.  For if food was cheaper they could pay their workers less.  Being the greedy bastards that they were.  So the only fair thing to do was to keep food prices high.  To keep the living wage high.  To force manufacturers to pay their workers more.  You see, the only way to help the poor and middle class was to let the wealthy landowners become even wealthier.  By keeping the price of the food they sold high.

Opposition grew to the Corn Laws.  People studied the works of their fellow countrymen.  Adam Smith and David Hume (both Scottish).  And the Englishman David Ricardo.  All great economists and thinkers.  Who were all proponents of free trade.  Ricardo’s Comparative Advantage basically proved the case of free trade over the protectionism of mercantilism.  Eventually the political power of the landowners could not overcome the economic arguments.  Or a famine in Ireland.  And, in 1846, they repealed the Corn Laws and adopted free trade.  Food prices fell.  Leaving people with more disposable income.  To purchase the goods the Industrial Revolution was making.  Increasing their standard of living.  While small famers had to leave their farms being unable to farm efficiently enough to pay their bills at the prevailing prices.

The Success of NAFTA proves David Ricardo’s Comparative Advantage

Mercantilists and other opponents to free trade like to point at the human costs.  Small farmers losing their farm.  Just so they can preserve some semblance of privilege to protect the high prices in their industry.  But it was becoming more and more difficult to make the argument that the masses were better off paying higher prices.  Because they’re not.  Lower consumer prices increase the standard of living for everyone.  Higher living standards create healthier living conditions.  And reduces child mortality.   For the greatest killer of children in the world is poverty.

The British were both a military and an economic superpower during the 19th century.  But someone was chasing her.  The Untied States.  Who was feeling her economic oats.  Her economy would catch up and surpass the British.  Making it the mightiest economic power of all time.  How did this happen?  Two words.  Free trade.  The United States was the largest free trade zone in the world.  The economic advantages of all those states trading with each other freely across their state borders made Europe stand up and take notice.  And in response created treaties that ultimately led to the European Union and the Eurozone.  To replicate the large free trade zone of the United States.

Back across the Atlantic the Americans, Canadians and the Mexicans took it up a notch.  And created the North American Free Trade Agreement.  NAFTA.  Extending the free trade that existed in each of their countries across their international borders.  The mercantilist fought against this.  Because protectionism, restrictions and tariffs helped the privileged few protect the high prices in their industry.  In America they talked about a great sucking sound as all American jobs went to low-wage Mexico.  Some manufacturers did move to Mexico.  Primarily because like the small farmers in Britain after the repeal of the Corn Laws they could no longer sell at prices to meet all of their costs.  But it was not as the mercantilists predicted.  Yes, imports increased.  In 2010 they were up 235% from pre-NAFTA 1993.  But exports were up, too.  Some 190% for the same period.  Proving Ricardo’s Comparative Advantage.  By focusing on what we do best and trading for everything else all countries do better.

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Comparative Advantage and Free Trade

Posted by PITHOCRATES - May 21st, 2012

Economics 101

Mercantilism benefited only Protected Industries which Profited Handsomely from Higher Consumer Prices  

The Age of Discovery ushered in the era of mercantilism.  An era of trade.  But protected trade.  Tariffs, quotas, protectionism, restrictions, subsidies, etc.  You name it they used it.  To favor their trade position and their domestic industries.  And to restrict that of everyone else.  For mercantilism was a zero-sum game.  You only did well if others did not.  A thought that still has traction today.  Especially in older, inefficient industries.  That cannot compete with international competition that provides better quality at lower prices.  Such as textiles.  Steel.  Automobiles.  The Americans protected these industries in the face of better foreign competition.  Which only hastened their decline.

A protected industry has no incentive to improve.  When protective tariffs raise prices of lower-priced and higher-quality imports consumers buy the inferior domestic goods.  Because the tariffs make the better goods more costly.  So when a business has a captive audience their only focus is in maintaining that protectionism giving them that advantage.  Not improving their quality.  Or improving their productivity to lower their prices.  Why?  Because they don’t have to.  So prices continue to rise to pay for inefficient labor and management.  And quality continues to decline due to the lack of real competition forcing them to continually provide a better product.  By improving designs.  Production methods.  And making capital investments in new machinery and equipment.

This is the cost of protectionism.  Poorer quality and higher prices.  Because of the misguided belief in the zero-sum game of mercantilism.  There was a reason why mercantilism was abandoned for free trade.  Because free trade was better.  For consumers.  Giving them lower prices and higher quality.  Whereas mercantilism benefited only those protected industries which profited handsomely from those higher consumer prices.  And the government officials who granted those favorable protectionist policies.

The Consumer gets Lower Prices AND Higher Quality thanks to the Division of Labor, Specialization and Comparative Advantage

As civilization advanced so did the division of labor.  People began to specialize.  Instead of growing our own food, making our own tools, spinning our own pottery, etc., we did only one thing.  And did it well.  Then we traded the things we made for the things we didn’t make.  This division of labor created a middle class.  And this middle class would take their goods to market to trade with other middle class artisans.  At first bartering with each other.  Trading good for good.  Then they introduced a temporary storage of value into the economy.  Money.  Making those trades easier by reducing search times.  Trading your goods for money.  And your money for goods.  Making life a lot simpler at the market.

Let’s take a closer look at the division of labor.  Let’s consider two artisans.  A toolmaker.   And a potter.  Both are skilled craftspeople.  And can make an assortment of goods.  But each excels at one particular skill.  The toolmaker can make 10 plows a day.  But if he makes 2 pottery bowls he can only make 4 plows in that same day.  The potter can make 12 pottery bowls in a day.  But if he makes 3 plows he can only make 5 pottery bowls in that same day.  Each can make more of their specialty.  But when they try to make other things in addition to their specialty they can’t make as much of their specialty as before.  So there is a cost to the toolmaker to make pottery.  To make 2 bowls cost the toolmaker 6 plows.  And there is a cost to the potter to make tools.  To make 3 plows cost the potter 7 bowls.  So the economy as a whole is better off when the toolmaker and the potter focus all of their energies in their own specialty.  When they do we get 10 plows and 12 bowls in one day.  When they don’t we only get 7 plows and 7 bowls.

We call this economic principle comparative advantage.  Where we look at economic output.  Which is what matters.  The more we bring to market the better it is for consumers.  Because greater quantities mean lower prices.  And when these skilled craftspeople focus on their specialty they improve the overall quality of the goods they bring to market.  So the consumer gets lower prices AND higher quality.  Thanks to the division of labor.  Specialization.  And comparative advantage.

We will always Have Jobs regardless the Size of our Imports for Having a Job is the Only Way to Buy those Imported Goods

If you multiply this over and over again to represent all the individual economic exchanges throughout the world you see why free trade is better than the protectionist policies of mercantilism.  Because it provides consumers with greater economic output at lower prices and higher quality.  This is why nations practicing free trade have the highest standards of living.  Because their people can walk into large department stores and fill their carts with inexpensive, high quality goods on a moderate paycheck.  Which could never happen if the mercantilists had their way.

The old inefficient industries want tariffs to increase the costs of those goods we fill our shopping carts with.  Including the food we eat.  And the cars we drive.  They use lofty arguments about protecting American jobs.  But those protectionist policies destroy jobs by increasing costs for businesses throughout the supply chain.  Raising consumer prices everywhere.  Reducing the amount of things we can buy.  Meaning businesses can’t grow and create new jobs.  Or they have to cut back production and eliminate existing jobs.

There’s also a lot of talk about the balance of payments.  Which actually meant something during the days of the gold standard.  For any trade deficits had to be paid for with gold.  But we don’t have the gold standard anymore.  Governments everywhere abandoned it in favor of irresponsible government spending.  So we don’t have to pay for trade deficits with gold.  Most money today is just electronic entries in a computer.  International capital flows have never been greater.  There are currency markets where people actively trade the world’s currencies.  So trade deficits don’t mean the same thing they once did in the mercantile world.  Then there’s the argument that if all our manufacturing jobs go overseas there will be no jobs for Americans.  If we import everything and export nothing there will be jobs everywhere but here.  Sounds like a problem.  But can that happen?  Not unless we get those imports for free.  So we will always have jobs regardless the size of our imports.  For having a job is the only way to buy the imported goods in those department stores.

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President Obama is not Telling the Truth about our Economic Past

Posted by PITHOCRATES - March 31st, 2012

Week in Review

President Obama attacks rugged individualism.  Entrepreneurialism.  And the American spirit.  What he calls ‘you’re on your own economics’.  Lying about what hasn’t worked in the past.  For he is either lying or he is incredibly uninformed when it comes to American economic history (see Obama: “You’re On Your Own” Economics Doesn’t Work posted 3/30/2012 on Real Clear Politics).

“It’s been tried in our history and it hasn’t worked,” Obama said. “It didn’t work when we tried it in the decade before the Great Depression. It didn’t work when we tried it in the last decade. We just tried this. What they’re peddling has been tried — it did not work!”

When the government left people alone in the Twenties that decade roared.  The ‘leave the people alone’ policies of the Harding (and then the Coolidge) administration gave us the Roaring Twenties.  A remarkable decade of technological growth.  Both in the cities and on the farms.  We mechanized.  We electrified.  We talked to people all over the country on the new telephones.  We went mobile in our new automobiles.  We listened to the radio in our homes.  We used electric appliances in our homes.  We went to theaters to watch the new motion pictures.  People flew in airplanes.  The Roaring Twenties were a seminal time.  It marked the beginning of the modern world we know today.  And it was full of real, solid economic growth.  Until the progressive Herbert Hoover took over.  And after he got rid of ‘you’re on your own economics’ everything went to hell.

The Great Depression was a wholly made government disaster.  Massive interventions into the private sector economy.  Price supports.  A horrendous tariff bill (the Smoot-Hawley Tariff Act).  And the resulting trade war.  And then in the midst of all of this the Federal Reserve System destroyed the banking system.  By NOT being the lender of last resort.  Causing a cascade of bank failures.

The Seventies was Keynesian Economics at its pinnacle.  It was everything President Obama believes in and wants today.  Massive government spending.  Paid for by massive taxes, borrowing and printing.  The polar opposite of ‘you’re on your own economics’.  Which were an abject failure.  Even Keynesian Economists have to qualify the Seventies to explain away the stagflation (high unemployment AND high inflation) their policies gave us.  Ronald Reagan fixed the Keynesian train wreck with exactly ‘you’re on your own economics’.  It was so successful that Keynesians call it the decade of greed.  A moniker no one can place on the Seventies.

So why is the president saying things that aren’t true?  Because they want those failed Keynesian polices back.  They want to tax and spend like there’s no tomorrow.  For they like the power.  The control.  And the ability to buy votes.  Which is the only way they can win elections.  Because no one will willingly vote for their failed policies of the past.

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FT111: “Arrogance and intelligence are not the same thing.” -Old Pithy

Posted by PITHOCRATES - March 30th, 2012

Fundamental Truth

Liberal Control of Pop Culture, the Mainstream Media and the Colleges help push their Minority Views onto the Majority

What do you think the breakdown of people in the United States is?  Politically speaking.  What are the percentages of conservatives, liberals and moderates?  If you watch/listen/read a lot of pop culture you no doubt think conservatives are in the minority.  If you listen to the mainstream media you no doubt think that conservatives are in the minority.  If you’re young and/or are in college you no doubt think that conservatives are in the minority.  Would it surprise you to learn that conservatives are actually in the majority?  Well, then, surprise.

According to Gallup, in 2011 40% of the American people identified themselves as conservative.  While 35% identified themselves as moderate.  And only 21% identified themselves as liberal.  Surprising, huh?  Especially when the ‘appropriate’ behavior appears to be to snicker at and belittle conservatives these days.  Forcing them into the closet.  For one thing you never hear of is a closet-liberal.  No, they can be in your face.  Any time.  Any place.  And it’s okay.  But a conservative has to lower his or her voice and look around first to see if it’s ‘okay’ to express his or her political opinion.  Why is that?

Well, it helps to control the major channels of communication.  Pop culture.  The mainstream media.  And colleges.  It also helps that young adults want to escape the responsible parenting of their parents so they can party and have as much sex that is humanly possible.  Which makes them a very useful pawn for liberals to advance their minority views.  Because liberals aren’t their parents.  But they act and talk like their parents.  When they attack their parents.  With an air of all-knowing condescension.  Exasperation.  And arrogance.  The only difference between kids’ parents and these liberals is that kids’ parents are trying to do what is best for their kids.  While liberals are trying to do what is best to advance their minority views.

Liberals speak with such Arrogant Confidence that it makes Some People Feel that they Must be Right 

Women fall for bad boys.  Even though they are not particularly bright.  Or have great earning potential.  That’s why so many women can never find true happiness in a relationship.  At least based on the high divorce rates.  It’s just the way it is.  Because women aren’t attracted to short, fat, balding guys that have good but boring careers.  No matter how beautiful they are on the inside.  No.  These women are attracted to the men that will ultimately cheat on them.  These men who can’t stand the thought of being in a monogamous relationship.  Because they are bad boys.  Rebels.  Nonconformists.  Alpha males.  Confident and cocky.  Who don’t like having any limits placed on them.  And want to enjoy every moment of life.  Especially since feminists have empowered women.  Giving them all the birth control and access to abortion they need to please these alpha males.  Which lets these men enjoy as many women sexually as is humanly possible.  No, marriage is not for them.  Neither is a monogamous relationship.  For there is just too much passion in their hearts for one woman.

Everyone is attracted to the alpha male.  Women want to be with them.  And men want to be around them.  To be like them.  To enjoy a little of their world.  For arrogance is attractive.  People are attracted to strong people who are sure of themselves.  Who never doubt themselves.  And feel safer whenever they are around.  Like the cowboys in the Old West.  When life was scary.  And nothing made you feel safer than having a manly cowboy around to protect you.  And this is how liberals advance their minority view.  It’s their arrogance that makes people feel that they must be right.  For they speak with such confidence.  Without a shadow of doubt.  And anyone so sure and so full of themselves must know what they are talking about.  Besides, they make the stuff we want to do (like having a lot of sex) seem the right thing enlightened people do.

But arrogance and intelligence are not the same thing.  Pick your favorite celebrity who’s attacked a conservative.  Or conservative policies.  And ask yourself if you think they understand economics.  Do they understand that high inflation is a monetary problem?  That governments cause high prices by printing too much money?  Do they know that stimulus spending fails to stimulate the economy because sellers increase their prices to offset the coming inflation (rational expectations)?  Before anyone spends that stimulus money?  Resulting in no new economic activity.  Only higher prices.  Do they understand that everyone prices oil on the international market in U.S. dollars?  And that government inflation causes gasoline prices to rise (as the oil sellers raise their prices to offset that inflation)?  Do they understand that government regulations are another cost of business that businesses add to their selling prices? Do they understand that jobs in the private sector pay for all government spending including all government jobs?  Do they know that free markets have promoted equality and reduced discrimination (women have a better life in a country with free markets than they do in a country like Iran)?  Do they know that Karl Marx was wrong in his economic thinking (as technology increases in capitalistic countries workers see their wages rise over time, not fall into perpetual poverty)? 

Liberals can push their Minority Views onto the Majority because of the Perception that their Views are the Majority

Of course they don’t know.  They haven’t the foggiest clue about things economic.  And are only liberals so no one picks on them for their obscene wealth and their extravagant lifestyles.  No.  They don’t attack conservatives for economic reasons.  They attack them because they’ve just learned that it’s appropriate to attack conservatives.  To snicker at them.  To belittle them.  Which they learned from their pop culture.  From the mainstream media.  And from our colleges.  They don’t know how to articulate their beliefs.  Because they don’t understand what they criticize.  And mask their ignorance with an air of all-knowing condescension.  Exasperation at those who disagree with them.  And, of course, arrogance.  By attacking and ridiculing conservatives.  But never engaging them in an ideological debate.

And this is how the 21% pushes their minority views on the majority population.  It’s sort of like real estate.  It’s all about perception.  Because they have pop culture, the mainstream media, the colleges and young adults (who want an alternative to their parents so they can have fun) their views appear to be in the majority.  Not in the minority.  So their views appear to be the ‘right’ views.  Just like that story about a small realtor who has only two signs in town.  One on the road into town.  And one on the road out of town.  Making people driving on that road think, “Wow.  This must be the biggest realtor in town.  I see their signs everywhere.”

And so it is with liberalism.  When people hear their minority views everywhere they feel that these views are the ‘biggest’ views in town.  And don’t question the ideology supporting them.  Or the economics.  Or the history of their failure.

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China and India Economic Performance Still Strong While Europe is Weighed down by their Debt

Posted by PITHOCRATES - January 7th, 2012

Week in Review

Asia is besting Europe in economic performance.  But is the growth real?  Or is somewhat artificial with monetary policy inflating their economies?  Time will tell.  But in the mean time, their manufacturing is showing resilience (see India, China Economies Show Asia Resilient as Europe Falters by Unni Krishnan posted 1/3/2012 on Bloomberg Businessweek).

Manufacturing in India and China improved in December, a sign the world’s fastest-growing major economies are withstanding Europe’s debt crisis…

In another positive sign, a Chinese index for non- manufacturing industries rose today. Europe’s crisis may still cap demand for goods from Asia with an index for Chinese export orders indicating a third month of contraction in December. India’s economic growth will be constrained by higher borrowing costs and global economic weakness, HSBC and Markit said.

High debt is a problem for Europe.  And India.  For they, too, have high borrowing costs.  Something the Chinese don’t have a problem with at the present moment.  But they do share something else with India.

In China, the “festival effects” of western and Chinese New Year celebrations helped to boost the manufacturing PMI, said the logistics federation, which releases the data with the statistics bureau. China has also unwound some tightening measures to spur growth, cutting banks’ reserve requirements in November for the first time since 2008.

The Shanghai Composite Index tumbled 22 percent last year, the most since 2008, on concern that monetary tightening and efforts to rein in property prices in big cities will limit growth.

The Chinese were battling inflation pressures.  Hence the monetary tightening last year.  Now they’re lowered the reserve requirements for their banks.  In the world of fractional reserve banking that means inflationary growth.  By pumping more money into the economy.  By letting the banks lend out more of their deposits.  And now that thing they have in common with India.

India’s benchmark wholesale-price inflation slowed to a one-year low of 9.11 percent in November from 9.73 percent in October.

Inflation.  Nearly double digit at the wholesale level.  So the Indians have economic growth.  But they’re paying a pretty high price for it.  Or will.  Because the way the market fixes high inflation is with nasty recessions.  To adjust prices to reflect real demand.  Not the inflated one created by easy monetary policy.

So China and India are currently outperforming Europe.  But so did Japan once upon a time.  But their bubble burst.  As bubbles are wont to do.  And if China and India are just blowing bubbles, they, too, will burst.  Because that’s what bubbles do.

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The Great Housing Bubble and The Subprime Mortgage Crisis

Posted by PITHOCRATES - December 27th, 2011

History 101

Putting People into Houses trumped Sound Monetary Policy, a Sound Currency and good Lending Practices

Housing has for a long time been the key to economic prosperity.  Because to build a house you need a lot of economic activity.  Industries produce lumber, concrete, sheetrock, brick, shingles, door frames, doors, windows, glass, flooring, plumbing pipes, plumbing fixtures, sump pumps, furnaces, heating ducts, insulation, air conditioners, electrical wiring and fixtures, carpeting, tile, linoleum, etc.  The bigger the house the more of this stuff there is.  Once built people have to buy them (stimulating the mortgage banking industry) and then furnish them.  This triggers a monsoon of economic activity.  Drapes, shades, blinds, paint, washers, dryers, stoves, refrigerators, freezers, microwave ovens, toasters, blenders, food processers, plates, dishes, knives, silverware, ceiling fans, televisions, home theaters, sound systems, computers, cable and internet services, utilities, shelving, furniture, beds, cribs, art, etc.  And, of course, the exterior of the house creates further economic activity.

This is why one of the most important economic indicators is new housing starts.  For each new house we build we create a whirlwind of economic activity.  So much that it boggles the mind trying to think about it.  That’s why governments do whatever they can to stimulate this particular economic activity.  They encourage borrowing by allowing us to deduct the interest we pay on our mortgages.  They use monetary policy to keep interest rates as low as possible.  They’ve created federal programs to help veterans.  To help low income people.  And to remove risk from lenders to encourage more risky lending (as in Fannie Mae and Freddie Mac).  They’ve even used the power of government to force mortgage lenders to qualify the unqualified (Policy Statement on Discrimination in Lending).

You see, putting people into houses trumped everything else.  Sound monetary policy.  A sound currency.  Good lending practices.  Everything.  Because that was the key to a healthy economy.  A happy constituent.  And healthy tax revenue.  Not to mention you can score a lot of points with the poor and minorities by helping them into houses they can’t afford.  So this coordinated effort to put people into houses did two things.  Made money cheap and easy to borrow.  And created a boom in new housing starts.  Which resulted in a third thing.  A housing bubble.

Subprime Mortgages were for those who didn’t have Good Credit or Stable Employment with Reliable Income

Builders couldn’t build enough houses.  People were buying them faster than they built them.  And the houses they bought were getting bigger and bigger.  As they qualified for ever larger mortgages.  Poor people and people with bad credit could walk into a bank and get approved without documenting income.  House flippers could walk in day after day and get loans to buy houses.  Fix them up.  And put them back on the market.  Without using any of their own money. The market was soon flooded with new McMansions.  And refurbished smaller homes that people were moving out of.  Demand for homes was high.  And interest rates were low.  So the supply of homes swelled.  As did home prices.

Interest rates were low.  But they didn’t stay low.  All this coordinated effort to put as many people into homes as possible created a lot of artificial demand.  Heating up the economy.  Increasing prices higher than they had been.  Leading to inflationary worries.  So the Federal Reserve began to raise interest rates.  To temper that inflation.  Which didn’t sit well with those low income house owners.  Who got into their homes with the help of the Policy Statement on Discrimination in Lending.  Which forced lenders to get creative in qualifying the unqualified.  To avoid undo federal attention.  And legal actions against them.  So a lot of poor people had subprime mortgages.  As did all of those house flippers.  People who used little of their own money.  Who put little down.  And had little to lose.

What is a subprime mortgage?  In a word, risky.  It isn’t a 30-year fixed-rate mortgage at a good interest rate.  No, for those you need a good credit score and years of stable employment with reliable income.  And enough money saved up to put close to 20% down.  Subprime mortgages were for those who didn’t have a good credit score.  Years of stable employment with reliable income.  Or any savings.  These people didn’t get the ‘prime’ mortgages.  They got the expensive ones.  The ones with the higher interest rates.  And the higher monthly payments.  Why?  Because risk determined the interest rate.  And the higher the risk the higher the interest rate.

In their Effort to sustain Economic Activity the Government caused the Worst Recession since the Great Depression

But this posed a problem.  Because of the Policy Statement on Discrimination in Lending.  Making loans available to the unqualified was no good if the unqualified couldn’t afford them.  Enter the adjustable rate mortgage (ARM).  These mortgages had lower interest rates.  And lower monthly payments.  How you ask?  By making them adjustable.  A fixed-rate mortgage has to account for inflation.  And adjustable-rate mortgage doesn’t.  Because if there is inflation and the interest rates go up the ARM resets to a higher value.  Which is what happened right about the time housing prices peaked.

When the ARMs reset a lot of people couldn’t make their monthly payments anymore.  Having put little down and having made few monthly payments, these homeowners had little to lose by walking away from their homes.  And a lot of them did.  Including those house flippers.  And that was just the beginning.  With higher interest rates the new home market contracted.  Those artificially high house prices began to fall.  And when the ARMs reset they caused an avalanche of defaults and foreclosures.  The market was correcting.  There were far more houses for sale than there were buyers looking to buy.  Home values began to fall to reflect this real demand.  People who bought the biggest house they could afford because they thought real estate prices always went up soon discovered that wasn’t true.  People were making monthly payments on a mortgage that was greater than the value of their house.  Some walked away.  Some got out with short sales.  Where the lender agreed to eat the loss equity.

The housing market was imploding.  Thanks to a great real estate bubble created by the government.  In their quest to put as many people into houses as possible.  By making mortgages cheap and easy to get.  Relaxing lending standards.  And encouraging risky lending.  None of which would have happened had they left the housing market to market forces.  Where the market sets interest rates.  And housing prices.  The irony of the subprime mortgage crisis is that in their effort to sustain economic activity the government caused the worst recession since the Great Depression.  The Great Recession.

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When China talks about Limits and Constraints over Property Rights we need not fear the Economic Dominance of China

Posted by PITHOCRATES - December 11th, 2011

Week in Review

You know what’s funny?  People oblivious of history giving advice.  You know what’s not funny?  People lying to empower the state so they can oppress the people.  You decide which this is (see Op-Ed: The impoverished ‘Asian century’ by Chandran Nair posted 12/8/2011 on China Daily).

Western leaders concerned about climate change must understand that economic instruments like emissions trading are not a panacea. For Asia, resource management must be at the center of policymaking, which may include Draconian regulations, and even bans. Otherwise, resource shortages will push up commodity prices and create crises in food, water, fisheries, forests, land use, and housing, thereby leading to greater social injustice.

The West must help Asia to challenge the idea that consumption-led growth is the only solution, or even a solution at all. And Asia must adopt three core principles to avert environmental and social crises. First, economic activity must be secondary to maintaining resources. Second, Asian governments must take action to re-price resources and focus on increasing their productivity. Third, Asian states must recast their central role as being to defend our collective welfare by protecting natural capital and the environment.

All of this implies that Asian governments will need to play a far greater role than officials in Europe or America in managing both the macro-economy and personal consumption choices, which will require very sensitive political choices regarding individual rights, as well as policies that powerful business interests – many of them Western – will resist.

Asian governments will sometimes need to set strict limits on resource use – and have the tools to ensure that society respects these limits. They should begin, for example, by stressing that car ownership is not a human right. The debate about rights must emphasize constraints, not the utopian definitions of Western politicians.

There have been other countries that have talked like this.  In fact, they ruled like this.  The former Soviet Union.  The People’s Republic of China (China before capitalism).  North Korea.  The former communist Eastern Bloc.  All of these countries have enforced Draconian regulations and bans to re-price resources and increase productivity.  And you know what it got them?  Oppressive police states.  Chronic shortages of staple goods.  And famine.  Oh, and anyone trying to escape these socialist utopias were summarily shot.  For those who got away their families suffered.

China still has poverty and famine in the country.  It is only where they allowed capitalism that things are going well.  The eastern cities.  But all is not well there.  There’s unrest.  For these people have tasted a little freedom.  A little too much for the government.  So now they there’s talk about restricting this freedom for the good of the people.  I doubt many are buying this.

With this kind of talk the United States and Europe need not fear the economic dominance of China.  It sounds like the capitalist gravy train may be coming to an end.  For when they champion limits and constraints over property rights that’s usually when workers stop working hard.  Because when you sacrifice your wants and desires for the common good (i.e., the state), that’s when you start doing just enough to escape being punished.  And no country grew or stayed great doing that.

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The UN says there can be no Peace or Security unless we Advance their Global Warming Agenda

Posted by PITHOCRATES - December 3rd, 2011

Week in Review

Yet further evidence that we need to defund the UN (see UN ‘expert’: climate change could lead to war: Attempting to begin the United Nations climate change conference by Joel Gehrke posted 11/28/2011 on The Washington Examiner).

Attempting to begin the United Nations climate change conference with a stirring call to action, one UN official blasted economic markets principles for asphyxiating “time-honored values of humanity” and suggested that failure to act on global warming fears could damage international human rights and destabilize “peace and security.”

Describing the climate change conference as a “make or break moment for humanity,” UN Independent Expert on Human Rights and International Solidarity Virginia Dandan said in a statement that failure to produce anti-greenhouse gas emissions policies “would impact on the three pillars of the UN – namely, peace and security, development and human rights, and pin the world down to ground zero.”

Dandan claimed a morally superior position to economic critics of global warming policy. “There is great need for a radical mindset change in order to bring back to the negotiating table the time-honoured values of humanity that have been forgotten after decades of market and profit-driven orientation,” she said.

Her logic might assume that some economic benefit would result from lowering greenhouse gas emissions, however, as Dandan called for conference attendees “to face the challenges posed by climate change such as . . . the continuing and widening poverty gap, and the series of food, energy, economic and financial global crises.”

If this doesn’t show the true mission of the UN I don’t know what will.  The things she is wringing her hands over – the continuing and widening poverty gap, and the series of food, energy, economic and financial global crises – aren’t happening in free market economies.  They’re happening only in nations the UN is trying to fix with a world government solution.  Not a free market capitalism solution.

The U.S. is doing so well that those living in poverty and ‘struggling’ to put food on their tables also lead the world in obesity.  That doesn’t happen in third world countries where they mock and eschew capitalism.  People starve to death in those countries.  Unless they get food aid from the United States.

Capitalism works.  Socialism doesn’t.  We know this because it’s always the capitalist countries feeding the socialist countries.  North Korea, Cuba, and the former Soviet Union didn’t ship food to the U.S.  The U.S. shipped food to North Korea, Cuba, and the former Soviet Union.  And yet the UN wants to act like a world government.  To emulate the Soviet Union.  To manage the world.  When they have nothing to show but failures.  While America’s poor suffer from obesity.  Because capitalism makes so much food available and inexpensive that the poorest of people eat too much.

You want to prevent war from breaking out?  Feed the world.  By encouraging the system that has successfully fed the world more than any other.  Capitalism.  And forget all of this man-made global warming nonsense.  For the emails of Climategate are all there to read.

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Someone does NOT have to Pay for Wasteful Government Spending

Posted by PITHOCRATES - November 27th, 2011

Week in Review

The Keynesian economists are out again saying that we need to tax the rich more.  Because lower tax rates for the rich don’t have a net economic benefit.  Just as lower tax rates for the poor and middle class don’t have a net economic benefit.  Because if a higher tax rate makes them work one hour less, they get one less hour of pay.  And have one less hour of pay to spend in the market place.  Ergo, it is a wash.  For rich and poor alike.  But the rich can afford it more easily so we should tax them instead of the poor and middle class.

This is macroeconomics groupthink.  By a bunch of elitist who think they know better than everyone else in the world.  They do understand some economic basics (see Somebody has to pay for government posted 11/23/2011 on The Economist).

If you tax rich people less, you tax regular and poor people more. And when you tax them, they, like rich people, have a certain propensity to work less (“deadweight loss”). Also like rich people, the money they pay in taxes is money they cannot spend, which leads to lower economic activity and lower GDP in the short run.

But make all the wrong conclusions.

Higher taxes mean people have less money to spend.  They got that right.  But all their theory is based on one great fallacy.  And that fallacy is this:  All government spending is necessary.  And therefore must be paid for with taxes.

Contrary to Keynesian belief, all government spending is not necessary.  In fact, most of their spending is not necessary.  And should be cut.  The intent of the Founding Fathers is clear.  The federal government was not to be a nanny state.  Being a nanny state is nowhere enumerated in the Constitution.  This growth of the federal government has only created a privilege class.  And they have risen to rule us by getting as many of us as possible dependent on their ‘generosity’.  Which, ironically, was the point of the Revolution.  To end rule by a privileged class.

So when you look at federal spending in this light the argument of who should pay the taxes is a moot point.  Spending should be cut.  Meaning taxes should be cut.  Not increased.  On anyone.

Arguing not to increase taxes on anyone is a good argument to make.  Because it transfers the argument past the veneer of fairness to what it actually is.  An out of control federal government spending money wastefully and recklessly to buy votes.

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Code of Hammurabi and the Magna Carta

Posted by PITHOCRATES - November 22nd, 2011

History 101

The Code of Hammurabi was a Precursor to a Modern Criminal Justice System

The first civilization was Sumer.  Along the fertile river valleys of the Euphrates and Tigris rivers.  In modern day Iraq.  Prime real estate in the early civilized world.  Good for growing food.  With established city-states throughout.  This land was attractive.  So attractive that many have conquered it.

Here are some who possessed this land.  The Akkadians.  Guitans.  Elamites.  Amorites.  And, of course, the Sumerians.  Who took it back a time or two.  It wasn’t a neat linear transition.  There were many bumps along the way.  And by bumps I mean power changes.  I.e., wars.  But eventually the Amorite Empire founded the city-state of Babylon.  Which brings us to the sixth king of Babylon.  Hammurabi.  And when he expanded his kingdom by conquering other city-states he became the first king of the Babylonian Empire.  And he did something spectacular in 1780 BC.  He gave us the Code of Hammurabi.  One of the first written codes of law in history.   Providing a giant leap forward for the civilized world.

Everyone has heard of “an eye for an eye, a tooth for a tooth.”  That goes back to the Code of Hammurabi.  A precursor to a modern criminal justice system.  Including trials and the presumption of innocence.  It delved into civil law.  And contract law.  Clearly setting the rules of the game for marriage, divorce, inheritance and economic exchange.  It also included rules for the government.  Sort of like a constitution.  And this was all happening in the second millennium BC.

The Magna Carta exploded the Rule of Law, Personal Liberty and Economic Development

Establishing rules for government is rarely easy.  For few welcome restraints on their power.  But there is a problem all despots have who enjoy wielding absolute power.  They are only one person.  They need others.  For food.  And for money.  Because despots like to fight wars.  Which takes a lot of soldiers.  A lot of food.  And a lot of taxes.  All of which the despot has to depend on others to provide.

King John in 13th century England was one such despot.  He fought a lot of costly wars.  Requiring a lot of taxes.  And the people supplying the soldiers and taxes for these wars were the nobility.  His Barons.    And they were getting tired of the King’s behavior as it was proving very costly.  Not to mention that he was pissing off the French who were planning to invade England.  And there were a whole host of oppressive acts against his subjects.   As well as a feud with the Pope.  Suffice it to say something had to be done.  Without having a suitable candidate ready to replace the king, the Barons instead tried to limit the king’s arbitrary power.  In writing.  What history calls the Magna Carta.

The Magna Carta did not make sweeping change at the time.  But it had a profound impact in the English speaking world.  And the development of constitutional law.  It exploded the Rule of Law.  Personal liberty.  And economic development.  It is what allowed the British Empire.  And the Industrial Revolution.  It influenced the United States Constitution.  Under which America became the leader of the free world.  Because the law ruled supreme.  Allowing no man above the law.  Even a king.  Like on the fields of Runnymede.  When King John affixed his Great Seal to the Magna Carta.

The Rule of Law gave us Property Rights and Contract Law which provided Incentive and Security

The British Empire dominated the world in the 18th century.  Her greatness was only surpassed by the United States.  Thanks to the Rule of Law.  Which unleashed human capital.  Allowing people to create great things.  Because there were property rights.  And contract law.  Giving them both incentive.  And security.

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