The Big Economies are Increasing their Debt and Heating up the Competition for Buyers

Posted by PITHOCRATES - January 7th, 2012

Week in Review

Keynesian economists don’t see a problem for governments to run deficits.  They’ll look at the current bond rates, do some calculations and note that the additional interest expense for the government is negligible in the grand scheme of things.  But interest costs are not the only problem governments will have.  They also have to first find someone to buy their debt (see Biggest Economies Face $7.6 Trillion Bond Tab by Keith Jenkins and Anchalee Worrachate posted 1/3/2012 on Bloomberg).

Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.

Led by Japan’s $3 trillion and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg…

Investors may demand higher compensation to lend to countries that struggle to finance increasing debt burdens as the global economy slows, surveys show…

The amount needing to be refinanced rises to more than $8 trillion when interest payments are included. Coming after a year in which Standard & Poor’s cut the U.S.’s rating to AA+ from AAA and put 15 European nations on notice for possible downgrades, the competition to find buyers is heating up.

So even in the Keynesian world there is a limit on deficit financing.  When there is more debt than buyers some debt will go un-purchased.  And to make sure that isn’t your debt you’ll have to entice those few buyers to buy your debt.  By the only way you can.  With higher interest rates.  Which makes your original problem worse.  By increasing your overall debt.

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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 Deepwater Horizon Accident Destroyed the American Oil Industry, but not the Gulf of Mexico

Posted by PITHOCRATES - April 20th, 2011

Still no American Offshore Oil Production in the Gulf of Mexico

This is the anniversary of the Deepwater Horizon rig explosion in the Gulf of Mexico.  The beginning of the world’s greatest environmental catastrophe.  And the ‘day the music died’ for American oil exploration. 

But was it really that bad?  Sure, it was.  There was loss of life.  Eleven men died on that platform.  Brave men working the hard and lonely life of offshore oil production.  Their families no doubt suffering the greatest loss from this catastrophe.  So, in their honor, and everyone working the oil fields, let’s take a glimpse into that life.  And see what it was like in the beginning.  When we first went offshore oil in the Gulf of Mexico.  In the Jimmy Stewart movie Thunder Bay.   

That was then.  That movie had a happy ending.  The shrimpers, fishermen and oil men all lived happily ever after.  Together.  Today, the government itself is after the oil men.  And I doubt even a great American like Jimmy Stewart could stop what’s happening.

The Ecosystem doing just Fine in the Gulf of Mexico

They predicted the end of the world for the Gulf waters.  The oil spewing from Deepwater Horizon was going to kill everything in that ecosystem.  So they predicted.  But the dire predictions of doom and gloom, as usual, have proven more hysteria than fact (see BP Oil Spill: How Bad Is Damage to Gulf One Year Later? by Bryan Walsh, Time, posted 4/19/2011 on Yahoo! News).

Yet nearly a year after the spill began, it seems clear that the worst-case scenario never came true. It’s not that the oil spill had no lasting effects – far from it – but the ecological doomsday many predicted clearly hasn’t taken place. There is recovery where once there was only fear. ” A lot of questions remain, but where we are now is ahead of where people thought we’d be,” Safina says. “Most people expected it would be much worse.”

Good news indeed.  And there’s more.

Yet the damage does seem so far to have been less than feared. Take the oil itself: scientists with the National Oceanic and Atmospheric Administration estimated last August that much of the oil had remained in the Gulf, where it had dispersed or dissolved. Many environmentalists attacked the report for underplaying the threat of large underwater oil plumes still active in the Gulf, yet later independent scientific studies indeed found that oil had largely disappeared from the water. Turns out we can thank bacteria. Scientists from Lawrence Berkeley National Laboratory; University of California, Santa Barbara; and Texas A&M University traveled to the site of the blown well and found that microbes had digested much of the oil and methane that remained in the water. By autumn, the levels were back to normal. “It’s very surprising it happened so fast,” John Kessler, an oceanographer with Texas A&M, told me earlier this year. “It looks like natural systems can handle an event like this somewhat on their own.”

Is Mother Nature mocking us?  Is she taunting, “Is that the best you can do?”  For it would appear she is.  Here we all were, wrought with worry about oil in the water.  Both of which Mother Nature created.  During our time on this planet.  And long before man began adapting nature for our own needs.  And now, despite all the doom and gloom, the water appears just fine.  As is the stuff that lives in it.

The Gulf’s valuable fisheries also seem to have escaped the worst damage. John W. Tunnell Jr., the associate director of the Harte Research Institute at Texas A&M, estimated in a report that the region’s shrimp fisheries would rebound to normal within two years, while blue-crab populations would be back to normal this year and commercial fish species such as red snapper and grouper largely escaped any negative impact. (Oyster beds, hit hard by the oil, might take up to a decade to recover, however.) It’s possible that the lengthy moratorium on fishing in much of the Gulf during the worst days of the spill – when up to 84,000 sq. mi. (217,600 sq km) were off limits – may have even given some fish species a much needed break from exploitation, allowing them to recover in population.

You know, that’s not bad.  For America’s worst environmental catastrophe.  And the shrimpers and fishermen are going to escape unscathed, too.  A year or two of loss revenue?  The slush fund President Obama shook down BP for will more than cover two years of lost revenue.  And the shrimpers, fishermen and oil men may very well all live happily ever after.  Just like they did in Thunder Bay.

The Environmentalists have Never been Right

You know, this is not surprising.  Because environmentalists are a bunch of fear mongers who haven’t a clue of what they’re talking about.  They’re not scientists.  They’re activists.  Even their ‘scientists’ are activists.  For no matter how wrong they are with their catastrophic forecasts, they just keep shoveling their doom and gloom.   But we should believe them this time.  Because this time, their models are better.  And this time, their ‘science’ is better.  Sure, they may have been a little off before.  But this time they got it right.  This time it’s for real.

So when it comes to forecasting, let’s take a look at some of these oldies but goodies of yesteryear (see Eight Botched Environmental Forecasts by Maxim Lott posted 12/30/2010 on FOX NEWS).

1. Within a few years “children just aren’t going to know what snow is.” Snowfall will be “a very rare and exciting event.” Dr. David Viner, senior research scientist at the climatic research unit (CRU) of the University of East Anglia, interviewed by the UK Independent, March 20, 2000.

2. “[By] 1995, the greenhouse effect would be desolating the heartlands of North America and Eurasia with horrific drought, causing crop failures and food riots…[By 1996] The Platte River of Nebraska would be dry, while a continent-wide black blizzard of prairie topsoil will stop traffic on interstates, strip paint from houses and shut down computers.” Michael Oppenheimer, published in “Dead Heat,” St. Martin’s Press, 1990.

3. “Arctic specialist Bernt Balchen says a general warming trend over the North Pole is melting the polar ice cap and may produce an ice-free Arctic Ocean by the year 2000.” Christian Science Monitor, June 8, 1972.

4. “Using computer models, researchers concluded that global warming would raise average annual temperatures nationwide two degrees by 2010.” Associated Press, May 15, 1989.

5. “By 1985, air pollution will have reduced the amount of sunlight reaching earth by one half.” Life magazine, January 1970.

6. “If present trends continue, the world will be … eleven degrees colder by the year 2000. This is about twice what it would take to put us in an ice age.” Kenneth E.F. Watt, in “Earth Day,” 1970.

7. “By the year 2000 the United Kingdom will be simply a small group of impoverished islands, inhabited by some 70 million hungry people … If I were a gambler, I would take even money that England will not exist in the year 2000.” Ehrlich, Speech at British Institute For Biology, September 1971.

8. “In ten years all important animal life in the sea will be extinct. Large areas of coastline will have to be evacuated because of the stench of dead fish.” Ehrlich, speech during Earth Day, 1970

In case you’re wondering, they were wrong on all of these predictions.  And sea life?  Even America’s worst oil catastrophe couldn’t kill it off.  You’d think the people making these predictions would be a little embarrassed today.  Not so.  FOX asked them.  They’ll admit that they weren’t 100% correct.  But they say they were still pretty damn close.  And their work is still relevant.

Particularly fascinating about this wild-ass guessing that they call science is this statement by Dr. Paul Ehrlich, author of “The Population Bomb” and president of Stanford University’s Center for Conservation Biology about the trend of global temperatures (see Item 6 above).

“Present trends didn’t continue,” Ehrlich said of Watt’s prediction. “There was considerable debate in the climatological community in the ’60s about whether there would be cooling or warming … Discoveries in the ’70s and ’80s showed that the warming was going to be the overwhelming force.”

Ehrlich told FoxNews.com that the consequences of future warming could be dire.

So the scientific consensus that chose cooling over warming was wrong.  They should have been warning us about the end of the world due to global warming, not global cooling.  There, I’m glad we cleared that up.  For awhile there, in the Seventies, we were living in fear of the wrong fear.  Boy, is my face red.  From embarrassment.  Not cooling.  Or warming.

The lesson learned?  Don’t take any investment advice from an environmental scientist.  Because their track record proves that they’re not very smart.  And that they’re pretty bad guessers, too.

Global Cooling Elbowing its way past Global Warming in Chicago

Or maybe the dumb environmentalist scientists were right after all (see Temperatures Lowest For Time Of Year Since 1940s posted 4/20/2011 on CBS Chicago).

Not only has Chicago dealt with chilly rain, hail and even snow this week, but temperatures Tuesday were at their lowest for this late spring date since the 1940s…

In the early evening hours, just walking a few blocks along the streets of Chicago felt like going out to sea in an open boat during a rainstorm in northern Canada. Anyone walking against the wind was blasted continuously in the face with cold droplets of rain, and given the strength of the winds, an umbrella was as good as useless.

Score one for the dumb guys in the Seventies.  They were right.  It’s getting cooler.  The glaciers must be on the move in northern Canada, pushing that arctic weather ahead of them.  Gee, I wonder what will happen when this new ice age slams into the global warming front.  I can’t say for sure but I’ll bet it’ll be a pretty windy day.  Probably best not to schedule any golf when that happens.  I don’t play well on windy days.

Bye, Bye, Miss American Pie

The good news is that the Gulf of Mexico is fine.  The bad news is that the Obama administration has killed the American oil industry for no good reason.  All for the insanity that is global warming.  Or Cooling.  Or Change.  Whatever we’re calling the impending climate disaster heading our way these days.  We’ve acted and made horrible energy policy decisions based on a bunch of ramblings from these pseudo scientists.  And it is killing our economy.  For as Jimmy Stewart said in Thunder Bay, “Without oil this country of ours would stop.  And it’d start to die.”

So we’ve stopped drilling.  But China hasn’t.  Brazil hasn’t.  In fact, we’ve invested in the Brazilian oil industry.  While China works with Cuba to drill for oil in our backyard.  The Gulf of Mexico.  So their economies will grow.  While ours continues to limp along in the recession that just never ends.  As gasoline shoots past $4/gallon once again.  This energy shortage will drive inflation.  Making the basics of life more expensive.  Leaving us with less disposable cash to enjoy life.  Lowering our standard of living.  This in the world’s largest economy.  Well, largest for now.

Bye, bye, Miss American Pie.

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LESSONS LEARNED #27: “Yes, it’s the economy, but the economy is not JUST monetary policy, stupid.” -Old Pithy

Posted by PITHOCRATES - August 19th, 2010

WHAT GAVE BIRTH to the Federal Reserve System and our current monetary policy?  The Panic of 1907.  Without going into the details, there was a liquidity crisis.  The Knickerbocker Trust tried to corner the market in copper.  But someone else dumped copper on the market which dropped the price.  The trust failed.  Because of the money involved, a lot of banks, too, failed.  Depositors, scared, created bank runs.  As banks failed, the money supply contracted.  Businesses failed.  The stock market crashed (losing 50% of its value).  And all of this happened during an economic recession.

So, in 1913, Congress passed the Federal Reserve Act, creating the Federal Reserve System (the Fed).  This was, basically, a central bank.  It was to be a bank to the banks.  A lender of last resort.  It would inject liquidity into the economy during a liquidity crisis.  Thus ending forever panics like that in 1907.  And making the business cycle (the boom – bust economic cycles) a thing of the past.

The Fed has three basic monetary tools.  How they use these either increases or decreases the money supply.  And increases or decreases interest rates.

They can change reserve requirements for banks.  The more reserves banks must hold the less they can lend.  The less they need to hold the more they can lend.  When they lend more, they increase the money supply.  When they lend less, they decrease the money supply.  The more they lend the easier it is to get a loan.  This decreases interest rates (i.e., lowers the ‘price’ of money).  The less they lend the harder it is to get a loan.  This increases interest rates (i.e., raises the ‘price’ of money). 

The Fed ‘manages’ the money supply and the interest rates in two other ways.  They buy and sell U.S. Treasury securities.  And they adjust the discount rate they charge member banks to borrow from them.  Each of these actions either increases or decreases the money supply and/or raises or lowers interest rates.  The idea is to make money easier to borrow when the economy is slow.  This is supposed to make it easier for businesses to expand production and hire people.  If the economy is overheating and there is a risk of inflation, they take the opposite action.  They make it more difficult to borrow money.  Which increases the cost of doing business.  Which slows the economy.  Lays people off.  Which avoids inflation.

The problem with this is the invisible hand that Adam Smith talked about.  In a laissez-faire economy, no one person or one group controls anything.  Instead, millions upon millions of people interact with each other.  They make millions upon millions of decisions.  These are informed decisions in a free market.  At the heart of each decision is a buyer and a seller.  And they mutually agree in this decision making process.  The buyer pays at least as much as the seller wants.  The seller sells for at least as little as the buyer wants.  If they didn’t, they would not conclude their sales transaction.  When we multiply this basic transaction by the millions upon millions of people in the market place, we arrive at that invisible hand.  Everyone looking out for their own self-interest guides the economy as a whole.  The bad decisions of a few have no affect on the economy as a whole.

Now replace the invisible hand with government and what do you get?  A managed economy.  And that’s what the Fed does.  It manages the economy.  It takes the power of those millions upon millions of decisions and places them into the hands of a very few.  And, there, a few bad decisions can have a devastating impact upon the economy.

TO PAY FOR World War I, Woodrow Wilson and his Progressives heavily taxed the American people.  The war left America with a huge debt.  And in a recession.  During the 1920 election, the Democrats ran on a platform of continued high taxation to pay down the debt.  Andrew Mellon, though, had done a study of the rich in relation to those high taxes.  He found the higher the tax, the more the rich invested outside the country.  Instead of building factories and employing people, they took their money to places less punishing to capital.

Warren G. Harding won the 1920 election.  And he appointed Andrew Mellon his Treasury secretary.  Never since Alexander Hamilton had a Treasury secretary understood capitalism as well.  The Harding administration cut tax rates and the amount of tax money paid by the ‘rich’ more than doubled.  Economic activity flourished.  Businesses expanded and added jobs.  The nation modernized with the latest technologies (electric power and appliances, radio, cars, aviation, etc.).  One of the best economies ever.  Until the Fed got involved.

The Fed looked at this economic activity and saw speculation.  So they contracted the money supply.  This made it hard for business to expand to meet the growing demand.  When money is less readily available, you begin to stockpile what you have.  You add to that pile by selling liquid securities to build a bigger cash cushion to get you through tight monetary times.

Of course, the economy is NOT just monetary policy.  Those businesses were looking at other things the government was doing.  The Smoot-Hartley tariff was in committee.  Across the board tariff increases and import restrictions create uncertainty.  Business does not like uncertainty.  So they increase their liquidity.  To prepare for the worse.  Then the stock market crashed.  Then it got worse. 

It is at this time that the liquidity crisis became critical.  Depositors lost faith.  Bank runs followed.  But there just was not enough money available.  Banks began to fail.  Time for the Fed to step in and take action.  Per the Federal Reserve Act of 1913.  But they did nothing.  For a long while.  Then they took action.  And made matters worse.  They raised interest rates.  In response to England going off the gold standard (to prop up the dollar).  Exactly the wrong thing to do in a deflationary spiral.  This took a bad recession to the Great Depression.  The 1930s would become a lost decade.

When FDR took office, he tried to fix things with some Keynesian spending.  But nothing worked.  High taxes along with high government spending sucked life out of the private sector.  This unprecedented growth in government filled business with uncertainty.  They had no idea what was coming next.  So they hunkered down.  And prepared to weather more bad times.  It took a world war to end the Great Depression.  And only because the government abandoned much of its controls and let business do what they do best.  Pure, unfettered capitalism.  American industry came to life.  It built the war material to first win World War II.  Then it rebuilt the war torn countries after the war.

DURING THE 1980s, in Japan, government was partnering with business.  It was mercantilism at its best.  Japan Inc.  The economy boomed.  And blew great big bubbles.  The Keynesians in America held up the Japanese model as the new direction for America.  An American presidential candidate said we must partner government with business, too.  For only a fool could not see the success of the Japanese example.  Japan was growing rich.  And buying up American landmarks (including Rockefeller Center in New York).  National Lampoon magazine welcomed us to the 90s with a picture of a Japanese CEO at his desk.  He was the CEO of the United States of America, a wholly owned subsidiary of the Honda Motor Company.  The Japanese were taking over the world.  And we were stupid not to follow their lead.

But there was no invisible hand in Japan.  It was the hand of Japan Inc.  It was Japan Inc. that pursued economic policies that it thought best.  Not the millions upon millions of ordinary Japanese citizens.  Well, Japan Inc. thought wrong. 

There was collusion between Japanese businesses.  And collusion between Japanese businesses and government.  And corruption.  This greatly inflated the Japanese stock market.  And those great big bubbles finally burst.  The powerful Japan Inc. of the 1980s that caused fear and trembling was gone.  Replaced by a Japan in a deflationary spiral in the 1990s.  Or, as the Japanese call it, their lost decade.  This once great Asian Tiger was now an older tiger with a bit of a limp.   And the economy limped along for a decade or two.  It was still number 3 in the world, but it wasn’t what it used to be.  You don’t see magazine covers talking about it owning other nations any more.  (In 2010, China took over that #3 spot.  But China is a managed economy.   Will it suffer Japan’s fate?  Time will tell.)

The Japanese monetary authorities tried to fix the economy.  Interest rates were zero for about a decade.  In other words, if you wanted to borrow, it was easy.  And free.  But it didn’t help.  That huge economic expansion wasn’t real.  Business and government, in collusion, inflated and propped it up.  It gave them inflated capacity.  And prices.  And you don’t solve that problem by making it easier for businesses to borrow money to expand capacity and create jobs.  That’s the last thing they need.  What they need to do is to get out of the business of managing business.  Create a business-friendly climate.  Based on free-market principles.  Not mercantilism.  And let that invisible hand work its wonders.

MONETARY POLICY CAN do a lot of things.  Most of them bad.  Because it concentrates far too much power in too few hands.  The consequences of the mistakes of those making policy can be devastating.  And too tempting to those who want to use those powers for political reasons.  As we can see by Keynesian ‘stimulus’ spending that ends up as pork barrel spending.  The empirical data for that spending has shown that it stimulates only those who are in good standing with the powers that be.  Never the economy.

Sound money is important.  The money supply needs to keep pace with economic expansion.  If it doesn’t, a tight money supply will slow or halt economic activity.  But we have to use monetary policy for that purpose only.  We cannot use it to offset bad fiscal policy that is anti-business.  For if the government creates an anti-business environment, no amount of cheap money will encourage risk takers to take risks in a highly risky and uncertain environment.  Decades were lost trying.

No, you don’t stimulate with monetary policy.  You stimulate with fiscal policy.  There is empirical evidence that this works.  The Mellon tax cuts of the Harding administration created nearly a decade of strong economic growth.  The tax cuts of JFK were on pace to create similar growth until his assassination.  LBJ’s policies were in the opposite direction, thus ending the economic recovery of the JFK administration.  Ronald Reagan’s tax cuts produced economic growth through two decades. 

THE EVIDENCE IS there.  If you look at it.  Of course, a good Keynesian won’t.  Because it’s about political power for them.  Always has been.  Always will be.  And we should never forget this.

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