Post Office, Telegraph, Telephone, Cell Phones, Texting, Technology, Productivity, Savings, Investment, Japan Inc. and Eurozone Crisis

Posted by PITHOCRATES - August 13th, 2013

History 101

(Originally published August 28th, 2012)

Ben Franklin’s Post Office struggles to Stay Relevant in a World where Technology offers a Better Alternative

Once upon a time people stayed in touch with each other by mailing letters to each other.  Benjamin Franklin helped make this possible when he was America’s first Postmaster General of the United States.  And it’s in large part due to his Post Office that the American Revolutionary War became a united stand against Great Britain.  As news of what happened in Massachusetts spread throughout the colonies via Franklin’s Post Office.

In America Samuel Morse created a faster way to communicate.  (While others created this technology independently elsewhere.)  Through ‘dots’ and ‘dashes’ sent over a telegraph wire.  Speeding up communications from days to seconds.  It was fast.  But you needed people who understood Morse code.  Those dots and dashes that represented letters.  At both ends of that telegraph wire.  So the telegraph was a bit too complicated for the family home.  Who still relied on the Post Office to stay in touch

Then along came a guy by the name of Alexander Graham Bell.  Who gave us a telephone in the house.  Which gave people the speed of the telegraph.  But with the simplicity of having a conversation.  Bringing many a teenage girl into the kitchen in the evenings to talk to her friends.  Until she got her own telephone in her bedroom.  Then came cell phones.  Email.  Smartphones.  And Texting.   Communication had become so instantaneous today that no one writes letters anymore.  And Ben Franklin’s Post Office struggles to stay relevant in a world where technology offers a better alternative.

As Keynesian Monetary Policy played a Larger Role in Japan Personal Savings Fell

These technological advances happened because people saved money that allowed entrepreneurs, investors and businesses to borrow it.  They borrowed money and invested it into their businesses.  To bring their ideas to the market place.  And the more they invested the more they advanced technology.  Allowing them to create more incredible things.  And to make them more efficiently.  Thus giving us a variety of new things at low prices.  Thanks to innovation.  Risk-taking entrepreneurs.  And people’s savings.  Which give us an advanced economy.  High productivity.  And growing GDP.

Following World War II Japan rebuilt her industry and became an advanced economy.  As the U.S. auto industry faltered during the Seventies they left the door open for Japan.  Who entered.  In a big way.  They built cars so well that one day they would sell more of them than General Motors.  Which is incredible considering the B-29 bomber.  That laid waste to Japanese industry during World War II.  So how did they recover so fast?  A high savings rate.  During the Seventies the Japanese people saved over 15% of their income with it peaking in the mid-Seventies close to 25%.

This high savings rate provided enormous amounts of investment capital.  Which the Japanese used not only to rebuild their industry but to increase their productivity.  Producing one of the world’s greatest export economies.  The ‘Made in Japan’ label became increasingly common in the United States.  And the world.  Their economic clot grew in the Eighties.  They began buying U.S. properties.  Americans feared they would one day become a wholly owned subsidiary of some Japanese corporation.  Then government intervened.  With their Keynesian economics.  This booming economic juggernaut became Japan Inc.  But as Keynesian monetary policy played a larger role personal savings fell.  During the Eighties they fell below 15%.  And they would continue to fall.  As did her economic activity.  When monetary credit replaced personal savings for investment capital it only created large asset bubbles.  Which popped in the Nineties.  Giving the Japanese their Lost Decade.  A painful deflationary decade as asset prices returned to market prices.

Because the Germans have been so Responsible in their Economic Policies only they can Save the Eurozone

As the world reels from the fallout of the Great Recession the US, UK and Japan share a lot in common.  Depressed economies.  Deficit spending.  High debt.  And a low savings rate.  Two countries in the European Union suffer similar economic problems.  With one notable exception.  They have a higher savings rate.  Those two countries are France and Germany.  Two of the strongest countries in the Eurozone.  And the two that are expected to bail out the Eurozone.

Savings Rate

While the French and the Germans are saving their money the Japanese have lost their way when it comes to saving.  Their savings rate plummeted following their Lost Decade.  As Keynesian economics sat in the driver seat.  Replacing personal savings with cheap state credit.  Much like it has in the US and the UK.  Nations with weak economies and low savings rates.  While the French and the Germans are keeping the Euro alive.  Especially the Germans.  Who are much less Keynesian in their economics.  And prefer a more Benjamin Franklin frugality when it comes to cheap state credit.  As well as state spending.  Who are trying to impose some austerity on the spendthrifts in the Eurozone.  Which the spendthrifts resent.  But they need money.  And the most responsible country in the Eurozone has it.  And there is a reason they have it.  Because their economic policies have been proven to be the best policies.

And others agree.  In fact there are some who want the German taxpayer to save the Euro by taking on the debt of the more irresponsible members in the Eurozone.  Because they have been so responsible in their economic policies they’re the only ones who can.  But if the Germans are the strongest economy shouldn’t others adopt their policies?  Instead of Germany enabling further irresponsible government spending by transferring the debt of the spendthrifts to the German taxpayer?  I think the German taxpayer would agree.  As would Benjamin Franklin.  Who said, “Industry, Perseverance, & Frugality, make Fortune yield.”  Which worked in early America.  In Japan before Japan Inc.  And is currently working in Germany.  It’s only when state spending becomes less frugal that states have sovereign debt crises.  Or subprime mortgage crisis.  Or Lost Decades.

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Currencies, Exchange Rates and the Gold Standard

Posted by PITHOCRATES - June 17th, 2013

Economics 101

Money is a Temporary Storage of Value that has no Intrinsic Value

Giant container ships ply the world’s oceans bringing us a lot of neat stuff.  Big televisions.  Smartphones.  Laptop computers.  Tablet computers.  The hardware for our cable and satellite TVs.  Toasters.  Toaster ovens.  Mixers and blenders.  And everything else we have in our homes and in our lives.  Things that make our lives better.  And make it more enjoyable.  These things have value.  We give them value.  Some have more value to one than another.  But these are things that have value to us.  And because they have value to us they have value to the people that made them.  Who used their human capital to create things that other people wanted.  And would trade for them.

When we first started trading we bartered with others.  Trading things for other things.  But as the economy grew more complex it took a lot of time to find someone who had what you wanted AND you had what they wanted.  So we developed money.  A temporary storage of value.  So we could trade the valuable things we created for money.  That money held the value of what we created temporarily while we looked for something that we wanted.  Then we exchanged the money we got earlier for something someone had.  It was just like trading our thing for someone else’s thing.  Only instead of spending weeks, months even years meeting hundreds of thousands of people trying to find that perfect match we only needed to meet two people.  One that exchanges money for the thing we have that they want.  And another who has what we want that they will exchange for our money.  Then that person would do the same with the money they got from us.  As did everyone else who brought things to market.  And those who came to market with money to buy what others brought.

Money is a temporary storage of value.  Money itself doesn’t have any intrinsic value.  Consider that container ship full of those wonderful items.  Now, which would you rather have as permanent fixtures in your house?  Those wonderful things?  Or boxes of money that just sit in your house?  You’d want the wonderful things.  And if you had a box of money you would exchange it (i.e., go out shopping) for those wonderful things.  Because boxes of money aren’t any fun.  It’s what you can exchange that money for that can be a lot of fun.

Devaluing your Currency boosts Exports by making those Goods less Expensive to the Outside World

So there is a lot of value on one of those container ships.  Let’s take all of that value out of the ship and place it on a balancing scale.  Figuratively, of course.  Now the owner of that stuff wants to trade it for other stuff.  But how much value does this stuff really have?  Well, let’s assume the owner is willing to exchange it all for one metric ton of gold.  Because gold is pretty valuable, too.  People will trade other things for gold.  So if we put 1 metric ton of gold on the other side of the balancing scale (figuratively, of course) the scale will balance.  Because to the owner all of that stuff and one metric ton has the same value.  Of course moving a metric ton of gold is not easy.  And it’s very risky.  So, instead of gold what else can we put on that scale?  Well, we can move dollars electronically via computer networks.  That would be a lot easier than moving gold.  So let’s put dollars on the other side of that scale.  Figuratively, of course.  How many will we need?  Well, today gold is worth approximately $1,380/troy ounce.  So after some dimensional analysis we can convert that metric ton into 32,150 troy ounces.  And at $1,380/troy ounce that metric ton of gold comes to approximately $44.4 million.  So that container ship full of wonderful stuff will balance on a scale with $44.4 million on the other side.  Or 1 metric ton of gold.  In the eyes of the owner they all have the same value.

Moving money electronically is the easiest and quickest manner of exchanging money for ships full of goods.  These ships go to many countries.  And not all of them use American dollars.  But we can calculate what amounts of foreign currency will balance the value of that ship.  Or one metric ton of gold.  By using foreign exchange rates.  Which tell us the value of one currency in another currency.  Something that comes in pretty handy.  For when, say, an American manufacturer sells their goods they want American dollars.  Not British pounds.  Danish kroner.  Or Russian rubles.  For American manufacturers are in the United States of America.  They buy their materials in American dollars.  They pay their employees in American dollars.  Who pay their bills in American dollars.  Go shopping with American dollars.  Etc.  For everyday American transactions the British pound, for example, would be un-useable.  What these American manufacturers want, then, are American dollars.  So before a foreigner can buy these American exports they must first exchange their foreign currencies for American dollars.  We can get an idea of this by considering that container ship full of valuable stuff.  By showing what it would cost other nations.  The following table shows a sampling of foreign exchange rates and the exchanged foreign currency for that $44.4 million.

foreign currencies and exchange rates

If we take the US dollars and the Exchanged Currency for each row and place them on either side of a balancing scale the scale will balance.  Figuratively, of course.  Meaning these currencies have the same value.  And we can exchange either side of that scale for that container ship full of valuable stuff.  Or for that metric ton of gold.  Why are there such large differences in some of these exchange rates?  Primarily because of a nation’s monetary policy.  Many nations manipulate their currency for various reasons.  Some nations give their people a lot of government benefits they pay for by printing money.  Which devalues their currency.  Some nations purposely devalue their currency to boost their export sector.  As the more currency you get in exchange for your currency the more of these exports you can buy.  Most of China’s great economic growth came from their export sector.  Which they helped along by devaluing their currency.  This boosted exports by making those goods less expensive to the outside world.  But the weakened yuan made domestic goods more expensive.  Because it took more of them to buy the same things they once did.  Raising the cost of living for the ordinary Chinese.

The Gold Standard made Free Trade Fair Trade

Some economists, Keynesians, approve of printing a lot of money to lower interest rates.  And for the government to spend.  They think this will increase economic activity.  Well, keeping interest rates artificially low will encourage more people to buy homes.  But because they are devaluing the currency to keep those interest rates artificially low housing prices rise.  Because when you devalue your currency you cause price inflation.  But it’s just not house prices that rise.  Prices throughout the economy rise.  The greater the inflation rate (i.e., the rate at which you increase the money supply) the higher prices rise.  And the less your money will buy.  While the currencies at the top of this table will have exchange rates that don’t vary much those at the bottom of the table may.  Especially countries that like to print money.  Like Argentina.  Where the inflation is so bad at times that Argentineans try to exchange their currency for foreign currencies that hold their value longer.  Or try to spend their Argentine pesos as quickly as possible.  Buying things that will hold their value longer than the Argentine peso.

Because printing fiat money is easy a lot of nations print it.  A lot of it.  People living in these countries are stuck with a rapidly depreciating currency.  But international traders aren’t.  If a country prints so much money that their exchange rate changes every few minutes international traders aren’t going to want their currency.  Because a country can’t do much with a foreign currency other than buy exports with it from that country.  A sum of highly depreciated foreign currency won’t buy as much this hour as it did last hour.  Which forces an international trader to quickly spend this money before it loses too much of its value.  (Some nations will basically barter.  They will exchange their exports for another country’s exports based on the current exchange rate.  So that they don’t hold onto the devalued foreign currency at all.)  But if the currency is just too volatile they may demand another currency instead.  Like the British pound, the euro or the American dollar.  Because these stronger currencies will hold their value longer.  So they’ll buy this hour what they bought last hour.  Or yesterday.  Or last week.  There is less risk holding on to these stronger currencies because Britain, the European Central Bank and the United States aren’t printing as much of their money as these nations with highly devalued currencies are printing of theirs.

This is the advantage of gold.  Countries can’t print gold.  It takes an enormous expense to bring new gold to the world’s gold supply.  It’s not easy.  So the value of the gold is very stable.  While some nations may devalue their currencies they can’t devalue gold.  A nation printing too much money may suffer from hyperinflation.  Reducing their exchange rate close to zero.  And when you divide by a number approaching zero the resulting amount of currency required for the exchange approaches infinity.  Weimar Germany suffered hyperinflation.  It was so bad that it took so much money to buy firewood that it was easier and less expensive to burn the currency instead.  This is the danger of a government having the ability to print money at will.  But if that same country can come up with a metric ton of gold that person with the container ship full of wonderful stuff would gladly trade it for that gold.  Even though that person will not trade it for that country’s currency.  This was the basis of the gold standard in international trade.  When nations backed their currencies with gold.  And kept them exchangeable for gold.  Forcing nations to maintain stable currencies.  By maintaining an official exchange rate between their currency and gold.  If that nation devalued its currency the market exchange rate will start to move away from the official exchange rate.  For example, say the official rate was $40/troy ounce.  But because they printed so much of their currency they devalued it to where it took $80 to buy a troy ounce on the open market.  So a nation could take $80 dollars of that devalued currency and exchange it for 2 troy ounces of gold from that nation.  The official exchange rate forcing the nation to give away 2 troy ounces of gold for $80 when the real market exchange rate would only have given them 1 troy ounce.  So devaluing your currency would cause gold to flow out of your country.  And the only way to stop it would be to decrease the size of your money supply.  Undoing the previous inflation.  To bring the market exchange rate back to the official exchange rate.  Which is why the gold standard worked so well for international trade.  Nations could not manipulate their currency to get a trade advantage over another nation.  Making free trade fair trade.  Something few say today.  Thanks to currency manipulators like China.

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The Keynesian Fiat Economies are so Bad that the World is Turning back to Gold

Posted by PITHOCRATES - January 19th, 2013

Week in Review

Keynesians hate the gold standard.  They blamed it for the Great Depression.  Which they believed could have been avoided if the government printed more money instead of contracting the money supply.  For a Keynesian’s answer to everything is to expand the money supply.  So the government can spend more money.  This came to a head in the U.S. during the Seventies.  Foreign countries were converting their dollars into gold.  Because the U.S. was devaluating the dollar by printing so much new money.  So these countries took the gold instead.  Because you can’t depreciate gold.

The Seventies were a disaster.  It turned out that the government just couldn’t print money to pay its bills as the destruction they caused on the dollar devastated the economy.  So they backed off.  The Federal Reserve raised interest rates into the double digits to stamp out that destructive inflation.  The world didn’t return to a gold standard, though.  As most countries were still hard-core Keynesians who liked the ability to make money out of nothing so they can keep spending. But now the Eurozone is in a sovereign debt crisis.  The UK is slashing their NHS budget.  Japan is now spending twice their GDP and stuck in an economic slump going on for over two decades.  And as the U.S. is spending about 100% of its GDP they added a whopper of a new entitlement.  Obamacare.  The destruction of the dollar isn’t a question of if but when.  And now we’re seeing a quasi return to the gold standard as nations everywhere are losing faith in the ability of these Keynesian governments to spend responsibly (see A new Gold Standard is being born by Ambrose Evans-Pritchard posted 1/17/2013 on The Telegraph).

The world is moving step by step towards a de facto Gold Standard, without any meetings of G20 leaders to announce the idea or bless the project.

Some readers will already have seen the GFMS Gold Survey for 2012 which reported that central banks around the world bought more bullion last year in terms of tonnage than at any time in almost half a century.

They added a net 536 tonnes in 2012 as they diversified fresh reserves away from the four fiat suspects: dollar, euro, sterling, and yen…

Neither the euro nor the dollar can inspire full confidence, although for different reasons. EMU is a dysfunctional construct, covering two incompatible economies, prone to lurching from crisis to crisis, without a unified treasury to back it up. The dollar stands on a pyramid of debt. We all know that this debt will be inflated away over time – for better or worse. The only real disagreement is over the speed.

This is the inevitable result of Keynesian economics.  Reckless spending that destroys currencies.  And right now these countries stand in judgment of the U.S., the Eurozone, Great Britain and Japan.  Their social spending obligations have put them on a path towards currency destruction.  And they don’t want be around when that happens while holding dollars, euros, sterling, or yen.  Because they just won’t be worth the paper they’re printed on.

In Ayn Rand’s Atlas Shrugged American Industrialists went on strike.  Walked away from their companies and disappeared.  Leaving their overregulated and overtaxed businesses to the government to do with them as they pleased.  Refusing to be economic slaves anymore.  They eventually migrated to a place called Galt’s Gulch somewhere in Colorado.  Where they made their own community.  And economy.  Where creators traded with other creators.  Using that one money that stood the test of time.  Gold.  For if you wanted to buy something in Galt’s Gulch you had to have gold.  For no one accepted cash there.  Some have been predicting we’ve been on the brink of something like this actually happening for the last 80 years or so.  And now it’s happening.  Only it’s not American industrialists turning on the U.S. government but the rest of the world.

Is it any wonder that sales of Atlas Shrugged have surged during the Obama administration?  These people are seeing what these countries see.  The decline of the U.S.  And the destruction of the dollar.  Thank you President Obama.

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The European Central Bank taking Steps to make the Eurozone Crisis Worse

Posted by PITHOCRATES - September 22nd, 2012

Week in Review

To increase the money supply central banks can do a few different things.  To stimulate economic activity.  They can lower reserve requirements to stimulate money creation via fractional reserve banking.  They can print money.  And they can buy bonds with money they create that they inject into the economy with their bond purchases.  These actions will put more money into the economy.  In hopes people will use it to generate economic activity.  Of course there is a tradeoff.  Increasing the money supply can also create inflation.  And often does.  Unless the economy is so far into the toilet that no one spends any money even with all of this new money in the economy (see ECB in ‘panic’, say former chief economist Juergen Stark posted 9/22/2002 on The Telegraph).

“The break came in 2010. Until then everything went well,” Juergen Stark, the German who resigned from the ECB in late 2011 after criticising its earlier round of buying up of sovereign debt, told Austrian daily Die Presse in an interview.

“Then the ECB began to take on a new role, to fall into panic. It gave in to outside pressure … pressure from outside Europe.”

Mr Stark said the ECB’s new plan to buy up unlimited amounts of eurozone states’ bonds, announced on September 6, on the secondary market to bring down their borrowing rates was misguided.

“Together with other central banks, the ECB is flooding the market, posing the question not only about how the ECB will get its money back, but also how the excess liquidity created can be absorbed globally,” Mr Stark said.

“It can’t be solved by pressing a button. If the global economy stabilises, the potential for inflation has grown enormously.”

The European Central Bank (ECB) wasn’t trying to stimulate economic activity with these bond purchases.  What they were trying to do was throw a lifeline to those nations in the Eurozone about to go belly up because no one will buy their bonds.  Because the chances of them ever repaying their enormous debts are slim to none.  Because of this these indebted countries have to offer very high interest rates to entice anyone to take a chance buying their risky bonds.  These high interest rates, though, were hurting these countries.  Increasing their financial woes.  And pushing them ever closer to bankruptcy.  So the ECB caved.  And bought their worthless bonds.  By doing something only a central bank can do.  Create money out of thin air.

These additional Euros thrown into the money supply could very well end up depreciating the Euro.  And sparking off inflation.  Which monetary expansion ultimately does.  Unless an economy is so far into the toilet that no one will spend this additional money.  And it just sits in the bank.  But if the economy does turn around there will be a lot more money available to borrow.  At exceptionally low interest rates.  So low that some will borrow it because of those low interest rates.  Which could spark off inflation.  Helping the Eurozone to settle back into recession.

This is not going to help anyone in the Eurozone.  Especially those staring down bankruptcy.  Because this won’t cut spending.  This won’t reduce any deficits.  And this won’t lower any debt.  All of the old problems that caused their problems will still be there.  Along with a new problem.  Inflation.  Guaranteeing that things will get worse in the Eurozone before they get better.

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Post Office, Telegraph, Telephone, Cell Phones, Texting, Technology, Productivity, Savings, Investment, Japan Inc. and Eurozone Crisis

Posted by PITHOCRATES - August 28th, 2012

History 101

Ben Franklin’s Post Office struggles to Stay Relevant in a World where Technology offers a Better Alternative

Once upon a time people stayed in touch with each other by mailing letters to each other.  Benjamin Franklin helped make this possible when he was America’s first Postmaster General of the United States.  And it’s in large part due to his Post Office that the American Revolutionary War became a united stand against Great Britain.  As news of what happened in Massachusetts spread throughout the colonies via Franklin’s Post Office.

In America Samuel Morse created a faster way to communicate.  (While others created this technology independently elsewhere.)  Through ‘dots’ and ‘dashes’ sent over a telegraph wire.  Speeding up communications from days to seconds.  It was fast.  But you needed people who understood Morse code.  Those dots and dashes that represented letters.  At both ends of that telegraph wire.  So the telegraph was a bit too complicated for the family home.  Who still relied on the Post Office to stay in touch

Then along came a guy by the name of Alexander Graham Bell.  Who gave us a telephone in the house.  Which gave people the speed of the telegraph.  But with the simplicity of having a conversation.  Bringing many a teenage girl into the kitchen in the evenings to talk to her friends.  Until she got her own telephone in her bedroom.  Then came cell phones.  Email.  Smartphones.  And Texting.   Communication had become so instantaneous today that no one writes letters anymore.  And Ben Franklin’s Post Office struggles to stay relevant in a world where technology offers a better alternative.

As Keynesian Monetary Policy played a Larger Role in Japan Personal Savings Fell

These technological advances happened because people saved money that allowed entrepreneurs, investors and businesses to borrow it.  They borrowed money and invested it into their businesses.  To bring their ideas to the market place.  And the more they invested the more they advanced technology.  Allowing them to create more incredible things.  And to make them more efficiently.  Thus giving us a variety of new things at low prices.  Thanks to innovation.  Risk-taking entrepreneurs.  And people’s savings.  Which give us an advanced economy.  High productivity.  And growing GDP.

Following World War II Japan rebuilt her industry and became an advanced economy.  As the U.S. auto industry faltered during the Seventies they left the door open for Japan.  Who entered.  In a big way.  They built cars so well that one day they would sell more of them than General Motors.  Which is incredible considering the B-29 bomber.  That laid waste to Japanese industry during World War II.  So how did they recover so fast?  A high savings rate.  During the Seventies the Japanese people saved over 15% of their income with it peaking in the mid-Seventies close to 25%.

This high savings rate provided enormous amounts of investment capital.  Which the Japanese used not only to rebuild their industry but to increase their productivity.  Producing one of the world’s greatest export economies.  The ‘Made in Japan’ label became increasingly common in the United States.  And the world.  Their economic clot grew in the Eighties.  They began buying U.S. properties.  Americans feared they would one day become a wholly owned subsidiary of some Japanese corporation.  Then government intervened.  With their Keynesian economics.  This booming economic juggernaut became Japan Inc.  But as Keynesian monetary policy played a larger role personal savings fell.  During the Eighties they fell below 15%.  And they would continue to fall.  As did her economic activity.  When monetary credit replaced personal savings for investment capital it only created large asset bubbles.  Which popped in the Nineties.  Giving the Japanese their Lost Decade.  A painful deflationary decade as asset prices returned to market prices.

Because the Germans have been so Responsible in their Economic Policies only they can Save the Eurozone

As the world reels from the fallout of the Great Recession the US, UK and Japan share a lot in common.  Depressed economies.  Deficit spending.  High debt.  And a low savings rate.  Two countries in the European Union suffer similar economic problems.  With one notable exception.  They have a higher savings rate.  Those two countries are France and Germany.  Two of the strongest countries in the Eurozone.  And the two that are expected to bail out the Eurozone.

While the French and the Germans are saving their money the Japanese have lost their way when it comes to saving.  Their savings rate plummeted following their Lost Decade.  As Keynesian economics sat in the driver seat.  Replacing personal savings with cheap state credit.  Much like it has in the US and the UK.  Nations with weak economies and low savings rates.  While the French and the Germans are keeping the Euro alive.  Especially the Germans.  Who are much less Keynesian in their economics.  And prefer a more Benjamin Franklin frugality when it comes to cheap state credit.  As well as state spending.  Who are trying to impose some austerity on the spendthrifts in the Eurozone.  Which the spendthrifts resent.  But they need money.  And the most responsible country in the Eurozone has it.  And there is a reason they have it.  Because their economic policies have been proven to be the best policies.

And others agree.  In fact there are some who want the German taxpayer to save the Euro by taking on the debt of the more irresponsible members in the Eurozone.  Because they have been so responsible in their economic policies they’re the only ones who can.  But if the Germans are the strongest economy shouldn’t others adopt their policies?  Instead of Germany enabling further irresponsible government spending by transferring the debt of the spendthrifts to the German taxpayer?  I think the German taxpayer would agree.  As would Benjamin Franklin.  Who said, “Industry, Perseverance, & Frugality, make Fortune yield.”  Which worked in early America.  In Japan before Japan Inc.  And is currently working in Germany.  It’s only when state spending becomes less frugal that states have sovereign debt crises.  Or subprime mortgage crisis.  Or Lost Decades.

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The Ruins of Past Greek Overspending join the Ruins of their Glorious Past

Posted by PITHOCRATES - July 22nd, 2012

Week in Review

Greece is at the heart of the Eurozone crisis.  Or, as some would say, the cause of the Eurozone crisis.  Their deficit spending threatens to bring an end to the Euro itself.  For the only way to save the Euro appears for other Eurozone members to assume Greece’s debt.  And make their taxpayers pay for it.  Something their taxpayers understandably don’t want to do.  But the Keynesians urge such a plan.  Along with some debt forgiveness.  So the Greeks can start spending some more.  To stimulate their economy to recovery.  As if their overspending ways of the past had never happened (see Greek athletes strive for London as Athens legacy fades by Mark Lowen posted 7/22/2012 on BBC News Europe).

Outside lie many of the venues from the Athens games, others dotted around the city. Most are idle, locked up and empty, simply rusting under a baking summer sun.

They mirror the decay now felt across the country – but also stand as monuments to Greece’s mistakes: the massive overspend of the past, without any plan for later use.

They’re seen as representative of the short-term vision that got Greece into its financial mess in the first place. The hoped-for privatisation of many of the sites has been thwarted by a mix of bureaucracy and mismanagement…

They came at the height of Greece’s borrowing boom: three years after the country joined the Euro, Athens was investing in grand infrastructure projects that it simply couldn’t afford: among them, the Olympics.

What the Keynesians fail to explain (at least with a straight face) is how more such spending will not saddle Greece with more debt that they will also not be able to service.  Putting them back exactly where they are now.  Or even in a worse financial position.

During the 20th century the European countries became social democracies.  Promising a cradle to the grave welfare state.  And large public sectors.  With large public spending.  All paid for by large tax rates on the taxpayers.  Only one problem.  All of Europe’s population is aging.  People are having fewer children.  Meaning there are fewer people entering the workforce to become new taxpayers.  While a greater number of people are leaving the workforce to go into retirement.  While enjoying their pensions and health care.  Paid for by a shrinking workforce.  Add that to grand infrastructure spending and you get unsustainable government spending obligations.  Ever more government borrowing.  And a Eurozone debt crisis.  Or in other words, Greece.

The Greek government did a great disservice to their people.  They spent so much that cutting back will be incredibly painful for their people.  But it’s the spending that’s the problem.  They have to cut it.  And if they don’t do it now it will only become more painful in the future.

Greece.  Home of Athens.  The cradle of Western Civilization.  Once the greatest place in the civilized world.  The nation that pushed back the mighty Persian Empire.  Now adds new ruins to their landscape among those of their glorious past.  But they can once again restore their glory.  If they just abandon Keynesian economics.

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Tony Blair says it’s up to the Germans to Save the Eurozone and Pay Down that Excessive Debt of Others

Posted by PITHOCRATES - June 24th, 2012

Week in Review

Former British Prime Minister Tony Blair is asking the Germans to pick up the tab for the European sovereign debt crisis.  Even suggested that Britain may still join the currency union.  Once they fix the current problems they’re having (see Blair: To save eurozone, Germany must underwrite debts of struggling members by Associated Press posted 6/24/2012 on The Washington Post).

Former British Prime Minister Tony Blair said Saturday that the euro will only survive if Germany underwrites the debts of the eurozone’s financially struggling members.

He told BBC television that safeguarding the euro would need Berlin to “treat the debts of one as the debts of all,” and debt-wracked nations to carry out reforms which would help restore Europe to competitiveness…

Blair, who is currently envoy to the Quartet of Middle East peacemakers, also insisted that Britain could still choose to join the euro — despite the crisis…

Prime Minister David Cameron, of the rival Conservative Party, has vowed that Britain won’t join the euro during his tenure.

This is the compassionate thing to do.  Except for those getting stuck with the tax bill.  Who have played by the rules and have been responsible.  And their reward for being responsible?  They can now be responsible for other people’s debt.  Somehow that doesn’t sound fair.  Or compassionate.

This doesn’t address the underlying problem in these countries.  Their government spending.  All this will do will give them a reprieve and allow them to borrow more money.  And why wouldn’t they continue their ways?  When they can do just that.  For they have demonstrated they are no fans of austerity.  So it is unlikely that they will cut any spending.  Which means things will only get worse.  Pushing that day of reckoning further down the road.  Making it ever more painful when it finally arrives.  For all the countries instead of just the ones struggling now.

The European social democracies are just getting too costly.  This is the problem.  A lot of this excessive government spending is paying pensions, health care costs and other social benefits.  This is the source of government deficits.  Anything they do to make that debt more manageable won’t matter unless they shrink these deficits.  So they can lower their taxes.  And remove this great burden from the private sector so it can restore Europe to competiveness.

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As the Financial Crisis deepens in Greece the Best and Brightest are choosing to Leave Greece

Posted by PITHOCRATES - June 23rd, 2012

Week in Review

Greece struggles to remain in the Euro.  But it may all be for naught.  For the damage is done.  The best and brightest have been leaving Greece for sunnier pastures (see Greece brain drain ‘wrecking my social life’ by Giorgos Christides posted 6/22/2012 on BBC News Magazine).

According to the latest national polls, more than seven out of 10 young Greeks aged 18 to 24 believe that emigration is the ideal – indeed the only – way out from the crisis. Two out of 10 have already applied for jobs and university places abroad.

For many Greek high school graduates, who are currently sitting for their university entrance examinations, studying in Greece is not a choice but an imperative dictated by their families’ lack of economic means to fund a university education abroad.

Those families who can afford it, don’t give the matter a second thought – they hide their tears and frustration as best they can, and wave their children goodbye, wishing them to go abroad and stay there for good…

Little did we know that a decade later, Greece would be considered an economic wasteland for ambitious young students and graduates, who are now suffering from unemployment rates in excess of 50%.

Workers’ and students’ mobility has been, of course, one of the landmarks and major achievements of European integration. But it is now evolving into a medium-term death sentence for the ageing Greek society and economy.

In an era characterised by intensified global competition for talented, innovative and highly-skilled workers, the brain drain afflicting Greece means the country is losing its best hope of revival.

Rather ironic, isn’t it?  The thing that brought Europe closer together, the Eurozone, may be the thing that makes the Greek tragedy so tragic.  As the politicians massaged the financial numbers to get Greece into the Eurozone, and to keep Greece in the Eurozone, the young people who were to pay for their financial chicanery saw no future and left.  Saying goodbye to that generous social democracy.  Walking away from the welfare state.  And all of that government spending that caused all of this trouble in the first place.  To get a good education.  So they can get a job.  Which they can do relatively easily thanks to the currency union and European integration.

Greece is in a world of hurt.  An unemployment rate of 50% for the young and ambitious is bad.  But it’s better than having the young and ambitious leave.  Because these are the people who get good jobs.  And make a lot of money.  Who pay a large share of the taxes.  These are the tax contributors.  Who barely consume any taxes.  As they leave the tax consumers will be the only ones left.  Which will only make the current financial crisis worse.

The austerity requirements for their financial bailout caused rioting in the street.  And the rioters were primarily tax consumers.  For who else would riot over these spending cuts?  The taxpayers?  Not likely.  The tax consumers are the ones panicking over proposed austerity measures.  Because they are wholly dependent on government spending.  But while they protest the tax contributors, like Elvis, have left the country.  Making the future indeed a dark one.

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Greek Debt Crisis, Social Democracy, Welfare State, Keynesians, Inflation, Tax Evasion, Common Currency and the Eurozone

Posted by PITHOCRATES - June 19th, 2012

History 101

Higher Debt Balances accrue Higher Interest Costs that Reduce Income

The Greek debt crisis has been in the news for a long time.  Which has contributed to the Eurozone sovereign debt crisis.  Most people understand that it’s bad.  But they may not understand how bad.  Or understand what exactly happened.  What caused it.  And why they can’t fix it.  For it’s been a crisis since 2009.  And all we hear is that it’ll be apocalyptic if we don’t bail out Greece and save the Euro.  Which would be bad.  As most apocalypses tend to be.

To get a general understanding we’ll use an analogy.  Let’s say you just got a new job and are now earning $80,000 annually.  Your future is bright.  And you’re very happy.  You buy a big house.  And you run up your credit cards furnishing it with lots of nice stuff.  Because you’re earning $80,000 a year and can easily afford it.  Well, perhaps not easily.  But you can still put food on the table.  And take a nice vacation with your better half.  But then a recession sets in.  They cut your bonus.  And some of your benefits (taking a large health care deduction out of your check).  But that house payment remains the same.  As do your credit card bills.  So you cut out the vacation.  And eat more hamburger and less steak.  To adjust to the lost income.  Then worse comes. 

You lose your job.  Go on unemployment.  Which doesn’t pay your bills.  So you desperately look for a new job.  In the bad economy the best job you can get pays only $50,000.  Which is a lot more than unemployment.  But a far cry from $80,000.  You can keep making your house payment.  But you have to slash nonessential spending.  And cut up your credit cards.  Because those high credit card balances require a payment that’s almost as big as your house payment.  Almost your entire paycheck goes to your creditors.  All because you started spending money you didn’t have because you thought that $80,000 job would never go away.  In fact you spent based on what your income would grow to.  Beyond that $80,000.  This is the Greek debt crisis.  Only without the spending cuts.

A Policy of Constant Inflation Monetizes Old Debt and Bumps People up into Higher Tax Brackets

Like the rest of Europe Greece became a social democracy.  Which is socialism-light.  The people learned they had the keys to the treasury.  All they had to do was to vote for people who liked using that key.  And they did.  Government spending soared beginning in the Seventies.  The public sector grew.  Creating a lot of government jobs.  With some generous pay and benefits.  But the country was also a welfare state.  Which meant everyone got a state pension.  State health care.  And other state social benefits.  You didn’t have to work for the government to enjoy the generosity of the state.  And the state was generous.

And the generous government spending just grew more generous.  Strong economic growth allowed more spending.  And more borrowing.  (From 2000 to 2007 Greece led the Eurozone in economic growth.  Which probably sealed their fate.  Because the increased spending during boom times they could never sustain during bad economic times.  And bad economic times were coming.)  Budget deficits became a part of the Greek government.  For they were also Keynesians.  Who believed in the value of running deficits.  And accruing debt.  They devalued their currency.  Which helped make their exports cheaper.  And it monetized their debt.  A policy of constant ‘but manageable’ inflation made old debt worth less.  And easier to pay off.  Just as inflation made people’s savings accounts worth less over time.  But running budget deficits year after year increased their outstanding debt.  Starting slowly at first.  Then growing greater.   Prior to 1984 Greek debt as a percentage of GDP was below 40%.  By 1998 it was above 60%.  By 1990 it was above 80%.  By 1994 it was above 100%.  By 2010 it was above 140%.  By 2011 it was above 160%. 

The Keynesians don’t see a problem with this.  Because they believe if you keep depreciating the currency the older debt just goes away.  It’s like redeeming a $100 savings bond from 1875.  Back then $100 was a lot of money to the government.  Today it’s the loose change they drop from their pockets that isn’t worth bending down to pick up.  Metaphorically, of course.  In time with steady inflation those old debts simply become chump change.  And there’s something else Keynesians love about inflation.  It’s a hidden tax.  Sometime it’s not possible politically to raise taxes.  So they can use inflation to bump people into higher tax brackets.  Making them pay a higher percentage of their income to the government.  Which brings us to another Greek problem.

At the Heart of the Greek Debt Crisis is the Welfare State

Greece is a welfare state.  Like other welfare states they have to fund that welfare with taxes.  So they have high tax rates.  Because it’s what the people want.  That welfare state.  Which requires those high tax rates.  But they have a problem.  People don’t like paying taxes.  Especially the Greeks.  Who have taken avoiding paying taxes to an art.  Which plays a big problem in the Greek debt crisis.  People demanding all of that government spending.  Yet refusing to pay the taxes to pay for it.  Causing great problems.  Especially when they joined the common currency.  The Euro.

The common currency changed things.  They could no longer depreciate their currency.  Because it wasn’t their currency anymore.  It was the Eurozone’s currency.  Joining the Euro was like giving a bunch of people credit cards and telling them they had to restrict their purchases so that their annual deficit and total debt fell below certain percentages of their income.  And those numbers to join the Euro were as follows.  Their deficit had to be below 3% of GDP.  And their debt had to be below 60% of GDP.  If all the members kept within these limits they would maintain their good credit rating.  And be able to use their ‘credit cards’ responsibly.  And not shock the European Central Bank when they opened the credit card statement at the end of the accounting period.

It appears that Greece massaged their numbers with some creative bookkeeping to meet the requirements to join the Euro.  And to stay within the currency union they may have misreported their economic numbers.  (When the crisis began the Greeks officially reported that their deficit was 5% of GDP.  Which exceeded the allowable 3% but was salvageable.  After some outside audits they revised their 2009 deficit up to 15.6% of GDP.  Making the crisis more of an apocalypse).  Why did they do this?  Because they wanted to keep spending.  But they couldn’t depreciate their currency anymore.  The economy was in recession which higher tax rates wouldn’t help.  Not to mention all of the tax evasion.  So that left borrowing as their only avenue to sustain that excessive government spending.  Sort of like trying to solve the problem of having your credit cards cancelled for nonpayment by getting new credit cards to use to accumulate even more debt that you can’t repay.  They’ve gotten one bailout package already.  And a second one is theirs if they commit to some austerity.  Which the people have rejected.  At least those rioting in the streets.  And considering how generous those benefits had been it’s hard to blame these people.  For life as they knew it is over for them.  Thanks to irresponsible government spending that made them dependent on the government.

So there are a lot of factors that caused the Greek debt crisis.  But at its heart is one thing.  The welfare state.  For if there was no excessive government spending they wouldn’t have had those large deficits.  Debt.  Or debt crisis.

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Greeks must now pay for their own Medications because the National Health Care System is Broke

Posted by PITHOCRATES - June 17th, 2012

Week in Review

As businesses wait with fear and trepidation for Obamacare to go into full effect we should consider what this will mean for the country at large.  More government benefits.  More government spending.  And higher taxation to pay for it.  Then we should look around the world for an example of large government spending and generous benefits.  To see if we can get an idea of how well something like a national health care system will work.  Let’s just pick a country at random.  Like this one (see Greek crisis hits hard at the pharmacy by Michael Birnbaum posted 6/13/2012 on The Washington Post).

From road-builders to priests to military suppliers, most walks of life have been affected by the government’s desperate bid to stanch the drain of euros from its coffers. Now health care is on the line, with pharmacists who are owed millions of euros by the government insurance system demanding in recent weeks that their clients pay the full sticker price for medicine. With unemployment at 22 percent and loans almost nonexistent, many people are doing without their drugs…

Under ordinary circumstances, the state health insurance system paid her pharmacist directly. Now pharmacists, fed up by delayed payments that they worry may never come, have told their customers that they need to pay cash and try their own luck at getting reimbursement from their health insurance.

Nothing is free in life.  Not even free health care.  Because government doesn’t make life-saving drugs.  Pharmaceutical companies who specialize in making life-saving drugs make life-saving drugs.  But even for them they are not free.  For they have to pay employees to make these drugs.  And they have to buy the chemicals to make these drugs.  And their chemical suppliers have their own employees to pay.  All of these costs are passed down the purchasing pipeline.  Right to the pharmacists.  Who must buy these drugs before they can sell them.  And when the government stops paying their bills someone has to pay them.  Or these pharmacists will just go out of business.  Because they’re not independently wealthy.  They run a pharmacy for living.  And simply can’t afford to buy drugs and give them away for free.

But pharmacists say they have little choice. Their suppliers, wary of extending credit in euros only to be repaid in weaker drachmas if the country gets booted out of the currency union, are demanding cash before they make shipments. And, though the pharmacies are receiving some reimbursements from the government, they are owed $188 million by the main government health insurance program, said Konstantinos Lourantos, president of the Pharmaceutical Association of Athens.

Doing anything on credit in Greece is risky business.  Because it’s not that certain if anyone will be able to pay their bills.  What makes this worse in Greece is who is paying most of the bills.

In Greece, where much of the private sector was sustained on public-sector spending, many business owners have found themselves to be unwitting creditors of the government, as payments have languished for months while their own credit has dried up, forcing them to scale back their businesses. That has made Greece’s recession, now in its fifth year, even harder to escape.

Everything has a cost.  Nothing is truly free.  Even when government provides it.  And the more the government provides the higher the taxes it takes to fund this government spending.  Relying on government spending, though, is risky.  Because tax revenue goes up and down with the economy.  During a recession there are fewer people working to pay income and payroll taxes.  And fewer people buying things to pay sales and value-added taxes.  Business revenues are down so businesses pay fewer income taxes.  During a deep recession tax revenue can fall far below the level needed to meet all government spending obligations.  Like reimbursing pharmacies.  And what do governments do during budget short-falls?  They borrow.  And Greece has.

Greece has borrowed so much that they are now a very poor credit risk.  They just owe so much money that a lot of lenders have grown doubtful that they will ever get their money back.  Which drives up borrowing costs.  Increasing the amount of interest they pay on their outstanding debt.  And as the recession lingers on tax revenues keep falling.  While the interest on the debt keeps rising.  Leaving less and less of those borrowed funds available to pay their massive government spending obligations.  And this is where Greece is.  They can’t pay their obligations without borrowing.  But they have borrowed so much that when they take on massive amounts of new debt much of it just goes to paying the interest on the old debt.  Which means they have to borrow ever more.  Increasing their interest payments on the debt ever more.  And leaving less and less for that massive government spending.

This is where debt crises come from.  Governments spending too much.  In fact it is safe to say that no government ever had a debt crisis from spending too little.  We can learn a lot from the Greeks.  In fact, we already have.  Most of Western Civilization goes back to Athens.  But we can also learn what NOT to do from the Greeks.  And a good place to start would be to repeal Obamacare.  For it’s this kind of spending that got Greece into trouble in the first place.

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