If it weren’t for High Labor and Regulatory Costs there would be no need for Currency Manipulation

Posted by PITHOCRATES - October 2nd, 2011

Minimum Wage Earners only become Valuable after Costly on the Job Training

Minimum wage jobs are entry level jobs.  And they’re starting to get that in the UK (see Minimum wage harming job opportunities for young by Richard Tyler and James Kirkup posted 10/2/2011 on The Telegraph).

Firms may be reluctant to create jobs by recruiting inexperienced staff because they are put off by the increased wage bill, the Low Pay Commission has suggested.

The Commission’s intervention comes amid calls from businesses for minsters to freeze or even cut the rate to enable more young people to find work…

Official figures last month showed that almost 1 million of the 2.5 million people officially counted as unemployed in Britain are aged between 16 and 24.

Almost 220,000 have been out of work for more than a year and some economists fear a “lost generation” of young people who never learn the habits of work and face a lifelong struggle ever to find employment…

“The concern is that the current rate is discouraging some employees from taking on young people and giving them a chance to get into the workplace,” he said. “Some companies are finding the rate is a real problem.”

The New England Patriots pay Tom Brady more money than the Detroit Lions pay Mathew Stafford.  Stafford was the number one draft pick.  Brady wasn’t.  But Brady has 3 Super Bowl rings.  Stafford doesn’t have one.  Yet.  He may have one soon, though.  He’s having a very good season.  Undefeated through 4 weeks.  But Brady is better.  Because of his 3 Super Bowl rings.  And his experience.  It’s that experience that makes him worth more.

What’s true for quarterbacks in the NFL is true for workers everywhere.  Experience makes a worker worth more to an employer.  Inexperienced workers are worth less.  So they’re paid less.  Just like in the NFL.

The New England Patriots pay Brady a lot of money.  But they can’t pay everyone that amount of money.  Most players will make less than him.  Just like in the workforce.

Key employees are paid more.  And less critical employees are paid less.  Entry level workers with the least skill and the least experience get paid the least.  These are the minimum wage workers.  Who are just starting their working careers.  Most of who are grateful for the work experience.   Because they know if they show ability they can move up.  Gain more experience.  And earn more as they become more valuable to their employer.  Or to their employer’s competitor.

So of course employers oppose high minimum wages.  Because minimum wage earners only become valuable after costly on the job training.  That’s why they’re paid the least.  They come in with nothing.  And don’t provide any value until the employer gives them value through training.  Mentorship.  And experience.

If you Protect your Markets too much from Imports you will Hurt your own Export Markets

Costs are costs.  And labor costs are some of the more expensive costs.  Because there are a lot of other costs attached to wages.  They add up.  And often are a percentage of an employee’s wages.  The higher the wage, the higher these other costs.  Which makes it harder for a business to be competitive.  And in today’s competitive global economy, nations will help their businesses be competitive any way they can.  To try and make up for all those onerous regulations they impose on their businesses (see One more such victory posted 10/1/2011 on The Economist).

A YEAR ago Brazil’s finance minister, Guido Mantega, declared that the world had entered into a “currency war”. He worried that in a depressed global economy, without enough spending to go around, countries would sally forth and grab a bit of extra demand for themselves by weakening their currencies. The dollar, for example, fell by 11% against Brazil’s real in the year to August 2011, much to the chagrin of Brazil’s manufacturers. Like other emerging economies it fought back by imposing taxes and other restrictions on foreign purchases of local securities…

A cheaper real, zloty and rupee will help emerging economies win a bigger share of global spending. But that is small consolation if global spending declines…

Falling export orders was one of the complaints voiced by Chinese manufacturers in a preliminary survey of purchasing managers published by HSBC last week.

Yes, a cheaper currency gives you an advantage.  So a nation wants it.  But so do other nations.  And what’s more, these other nations don’t want your nation to have a cheap currency.  Because a cheap currency means more exports.

But a currency war is a double edged sword.  If you protect your markets too much from imports you will hurt your own export markets.  Yeah, you may succeed in having a cheap currency but little good that will do if your primary export market slaps a punitive tariff on everything you sell there.

And then there’s the danger of releasing the inflation genie from its bottle.  If you devalue your currency too much your own manufacturing costs will rise.  It’ll take more dollars to buy the stuff you need to manufacture the things you sell.  Which means you’ll have to raise prices.  And anyone who buys from you will have to raise their prices.  And so on until this inflation ends in a recession.  Which will slash overall consumer spending.  Making any win in a currency war a hollow one.

The Senate Bill to Punish China for Currency Manipulation is nothing more than Pandering to a Recession-Weary America

So rational thinking bets against any currency war.  Or antagonizing any trade relationships.  Of course, in an election cycle, rational takes a back seat to winning an election (see Senators court 2012 voters with China currency bill by Doug Palmer posted 10/2/2011 on Reuters).

For lawmakers eyeing their re-election prospects next year, this week provides a chance to show they mean business about cracking down on China’s currency practices and returning jobs to America…

“It is very easy to say that China is the bogeyman,” said Doug Guthrie, dean of business at George Washington University. He said the bill would do little to help U.S. jobs and would raise U.S. import costs, but said it might yet pass…

The Senate bill is the wrong approach because most of the goods the United States imports from China are no longer made by U.S. industry, Frisbie [president of the U.S.-China Business Council] said.

“I’ve always been of the view that, if the Chinese currency were to appreciate, we’re not going to get those jobs back in the U.S. They will migrate to Indonesia or Vietnam or Bangladesh perhaps Sub-Saharan African — the lowest next lowest cost place,” Lardy [a senior fellow at the Peterson Institute for International Economics] said.

So this Senate bill is nothing more than pandering to a recession-weary America.  It won’t help the economy.  And probably will end up making things worse.  By making life that much more expensive for the American consumer.  By replacing those cheap Chinese goods with almost as cheap goods from Indonesia, Vietnam, Bangladesh or Sub-Saharan Africa.  All the while creating zero American jobs.   It will just make life more difficult.  But it may elect a politician or two.  And really, now, isn’t that what’s really important?  I’m jesting, of course.

Why Exactly is the ‘Made in USA’ Stamped Stuff more Expensive?

Perhaps it isn’t the Chinese.  Or the other emerging economies.  Perhaps it isn’t the weak currencies of our trading partners.  Maybe it’s us.  I mean, why do we play with the currency in the first place?  To make our goods cheaper.

So the issue we should be addressing is why are our goods more expensive in the first place.  Why exactly is the ‘Made in USA’ stamped stuff more expensive?  Higher labor and regulatory costs.  Such as the minimum wage.  And the hundreds of other costly regulations American businesses have to comply with.  Remove these and America can be competitive again.  With anyone.  Anywhere.  And in any industry.

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What the Big Planes can teach us about Free Market Capitalism

Posted by PITHOCRATES - June 20th, 2011

The Big Planes are Nimble in the Sky but Clumsy and Dangerous on the Ground

In airplane parlance, the Boeing 747 is a big-ass plane.  And the Airbus A380 is an even bigger-ass plane.  Too big some say.  Like a lot of airport administrators.  With a full-length upper deck, boarding requires a two-story passenger boarding bridge (PBB).  Something no airport had prior to the A380.  The 747 has a smaller upper deck and passengers get there by a set of stairs inside the plane.  Which allows the 747 to fit any wide-body gate.  Not the case with the A380.

The A380 also has something the 747 doesn’t.  The world’s longest wingspan on a commercial passenger jet.  The A380 is big.  And heavy.  It takes for big turbofan jet engines and lots of wing area to heft that incredible bulk into the air.  This causes an even bigger problem than the 2-story PBB.  Because it’s not easy to widen taxiways or runways.  Or move buildings and other infrastructure out of the way.  Which makes them a hazard when taxiing.  Which is when a plane is most vulnerable.  And dangerous.  More accidents happen while taxiing than flying.  Even the greatest aviation disaster of all time occurred on the ground.  When a KLM 747 on its takeoff roll crashed into a taxiing Pan Am 747 at Tenerife.  Killing 583 passengers.

So airport people are nervous about planes driving around their airports.  Especially the big ones.  With long wingspans.  Because things like this can happen (see Not again! World’s biggest airliner loses wingtip after striking building at Paris Air Show – two months after doing the same thing in New York by Daily Mail Reporter posted 6/20/2011 on the Daily Mail).

An Airbus 380 lost its wingtip in a taxiing collision with a building, just two months after another superjumbo was grounded for striking a private jet in New York.

The A380 superjumbo was grounded after the smash at slow-speed at the Le Bourget airport, where the Paris Air Show is taking place.

The collision mirrored an incident at JFK airport earlier this year when a private jet was spun round after it was hit by the wing of an A380.

And someone caught that JFK accident and posted it to YouTube.

The big planes soar majestically through the skies.  But they’re clumsy as an ox on the ground.  And dangerous.  But they’re also something else.  Profitable.  Because the more people you can put into a plane the lower your per-passenger costs are and the greater your profits can be.

Big Dollars and thin Margins

‘Can’ being the operative word.  Because it takes a lot of money to make money in the airline business.  Because airplanes are very expensive.  And the business is ultra sensitive to oil prices and recessions (see Aircraft Makers Not Put Off by Excess Capacity by Daniel Solon posted 6/20/2011 on The New York Times).

The carriers are being squeezed between high oil prices — expected to average $110 per barrel this year, against $96 in 2010 — and an overly rapid expansion of capacity relative to demand. Global airline capacity this year is slated to rise by 5.8 percent, while demand is expected to expand by only 4.7 percent.

“But with a dismal 0.7 percent margin, there is little buffer left against further shocks,” I.A.T.A.’s director general, Giovanni Bisignani, said at the annual meeting, referring to the $4 billion profit on projected revenue of $598 billion.

Despite these paper-thin margins some still have confidence in the air transportation industry.  And they’re making big bets.  Some 33,500 in all.

Looking ahead over the next 20 years, Mr. [James] Albaugh [chief executive of Boeing’s commercial airplane unit] forecast global demand for 33,500 new commercial aircraft, worth nearly $4 trillion, of which $1.7 trillion worth would be in the 100- to 200-passenger 737/A320 size range.

That’s a lot of money.  $4 trillion dollars.  It’s bigger than the annual GDP of Germany, France and the UK.  And every other country except the U.S., Japan and China.  It’s more than the sum total of all economic activity in most countries.  But for Boeing it’s just a sales projection.  Incredible.  How do they do it?  How do they do business in a world with such large numbers and such large risks?  Do they get special help from the government?  No.  They have a simpler business model.  They try to deliver what their customers want better than their competitors do.

Airline mergers — like United with Continental, Delta with Northwest, Air France with KLM and British Airways with Iberia — mean that fewer decision makers will be controlling larger purchases as the combined fleets are renewed or expanded. This has major potential consequences for both the large manufacturers in cases where the existing fleets include both Boeing (Continental, British Airways) and Airbus (United, Northwest and Iberia) planes.

Near-term, this may offer Airbus an edge in orders for its A320 New Engine Option, or A320neo, which could cut average fuel consumption immediately while allowing airline managers more time to evaluate the eventual Boeing response. At mid-June, A320 new orders totaled 362, with Airbus’s sales and marketing chief John Leahy targeting 500 by the end of the air show.

On the sidelines of a recent meeting of the chief executives of Star Alliance airlines, Harry Hohmeister, chairman and director general of Swiss, said the flexibility of engine choice offered by Airbus, between Pratt & Whitney’s 1100B and CFM International’s Leap-X, made it easier for him to opt for the A320 neo.

It’s a very complex industry.  Each part of it has its own concerns.  But no one is managing the overall industry.  The market is.  Airlines want to buy planes that cut operating costs.  So they can sell tickets at prices passengers can afford.  Manufacturers want to sell planes.  So they try to make planes that cut operating costs.  Each does their own part.  In response to market forces.  This is Adam Smith‘s invisible hand.  Everybody working independently to maximize their own interests.  And this benefits everyone in the aggregate.  Because planes with low operating costs are brought to market so airlines can buy them in turn allowing them to sell tickets that passengers can afford.

Surely, you ask, wouldn’t it be more efficient if one entity did all this coordinating?  Wouldn’t it improve market efficiencies?  Reduce redundancies?  Make sure we use resources to maximize their value?  To have someone tell the manufactures what to build.  Someone to tell the airlines what to buy?  So the passengers get the lowest possible price?  Actually, it’s been tried. 

The Soviet Economy Collapsed because of too much Government

And it doesn’t work.  And never has worked.  Nor will it ever work.  Because one person or entity cannot be smarter than the millions of decision makers working to maximize their own interests.  Because a business prospers when it sells.  But to sell someone must buy.  Hence a business does best when it best pleases a buyer.  And that’s something a bureaucrat just can’t do.  For if he or she could, the Soviet Union would still be here.  And her GDP would be greater than the U.S., Japan, China, Germany, the U.K., France and every other nation on the planet. 

Well, the Soviet Union is no more.  Many probably don’t even remember the Cold War or the war between capitalism and communism.  (For those of you who don’t, capitalism won.)  Boris Yeltsin‘s right-hand man recounts the events of August 1991, the beginning of the end of the Soviet Union in Foreign Policy.  Key to her collapse was the state-managed economy (see Meltdown by Gennady Burbulis and Michele A. Berdy posted 6/20/2011 on Foreign Policy).

For months we had half-expected something like this. By the summer of 1991, the Soviet Union was falling apart at the seams. The economy was imploding, the deficit was ballooning, hard currency and gold reserves had been decimated, and Gorbachev’s stopgap reforms had only exacerbated the crisis…

…Yeltsin and the other democratic candidates had been elected to the Russian parliament in 1990 with the goal of securing more legally protected rights and freedoms, as well as a market economy, and Yeltsin had been elected president of Russia in June 1991 with almost 60 percent of the vote. But while we were secure in our popular mandate, we were utterly powerless to deal with the greatest threat to Russia: economic collapse. More than 93 percent of the economy, by our estimation, was controlled by the Soviet government. Yeltsin and those of us in his circle of closest associates soon came to believe that unless we were to content ourselves with being nothing more than a ceremonial body, we had to change the legal and economic bases of the union itself.

The government controlled 93% of the economy.  And it was falling apart at the seams.  Because bureaucrats are bad businessmen.  As demonstrated in the Soviet Union.  However, bureaucrats are good at something.  Being a bureaucrat.  And maintaining power.  The Soviet communists resisted the market reforms.  In fact, that August, the old hard-line communists effected a coup d’état.  To resist the Westernization of their country.  To hold on to their power.  At the expense of a suffering citizenry.  But Boris Yeltsin prevailed.  And the Soviet Union is no more.

Of course, it was not an easy road.  The rule of law did not quite catch up to the market reforms.  So there was a lot of corruption.  And crony capitalism.  Which is something that China saw.  And they are being very careful with their market reforms to avoid a similar fate.  But China, too, is rife with corruption and crony capitalism.  But these two nations are shaking off their communist lethargy and are becoming serious competitors in the global economy.  And China will soon be building commercial aircraft to compete against Boeing and Airbus.

Free Market Capitalism provides the Path to Success

Aircraft manufacturers are doing big and bold things.  Because they can.  By providing what the market wants.  It can do this despite the huge dollars involved.  And they don’t need any help from the government telling them what they need to build.  Or buy.

Government is full of bureaucrats who don’t know the first thing about business.  In fact, their involvement only hurts business.  Case in point:  the Soviet Union.  But that doesn’t stop bureaucrats from sticking their nose in where it doesn’t belong.  Especially in the aviation industry.  They see all that money.  And they want a piece of it to bail out their budget deficits.  The latest scheme by the Europeans is to tax carbon emissions in an Emissions Trading Scheme.  Not only are they going to tax themselves, but they’re going to tax any airline flying into the EU for their carbon emissions.  Some are concerned that this may result in a trade war.  Probably because it will.  But that’s government.  They want the money first.  Then they’ll consider the economic damage their policies cause.

One has to marvel when looking at a 747 or an A380.  Incredible examples of what private enterprise can do.  One can only imagine what other great things people could do if they didn’t have to spend so much time and money fighting their governments.  And we can only scratch our heads when we see emerging economies move towards capitalism (to emulate the success of others) while established economies with bloated bureaucracies move away from capitalism (to emulate the failures of others).

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Libya Burns, Saudi Arabia Worries, Prosperous China Maintains Power and Prosperous Turkey offers way for Egypt

Posted by PITHOCRATES - February 21st, 2011

Turkey Provides a Democratic Model for Egypt

Can democracy work in the Middle East?  Well, it’s working in a nation with a predominately Muslim population.  That nation on the BosporusTurkey (see A Muslim democracy in action posted 2/17/2011 on The Economist).

In his eight years in power, Mr Erdogan has done more than any of his secular predecessors to move Turkey closer to its coveted goal of full membership of the European Union. Reforms that he rammed through during AK’s first term in office persuaded the EU to open membership negotiations with Turkey in 2005…

Turkey’s economy has survived the global financial crisis relatively unscathed. It is expected to grow by 5% this year, putting it only just behind China and India. Unemployment is down and the budget has begun the year with a surplus…

On the Arab street, Mr Erdogan’s salvoes against Israel over the Palestinians have made him a hero. Turkey’s high-profile diplomacy, its successful economy and its drive for new markets have made it the envy of many Arab leaders. It is little wonder that so many pundits have taken to talking up a “Turkish model” as a way forward for Egypt. It is also no surprise that Mr Erdogan is brimming with confidence.

Of course, Turkey isn’t a ‘Muslim democracy’ as the Economist wrote in its title.  It’s a secular democracy where nearly all of the people are Muslim.  People practice their religion in their private lives.  But not in government.  For in Turkey there is a wall between church and state.  Or mosque and state, as it were.

Turkey is doing well.  And it can serve as a model for countries where nearly all of their people are Muslim.  If they separate religion and government.  And herein lies the concern.  If the Muslim Brotherhood rises to prominence in Egypt, Islam will play a role in government.  And in nations where this happens there are concerted efforts to move away from Western influences.  Including Western business practices.  And prosperity.  The more extreme cases of this can be seen in Afghanistan.  And Iran.  But Turkey is looking to the West.  And economic prosperity by joining the European Union.  Still there are the critics.

Yet critics claim that Mr Erdogan’s confidence has curdled into the sort of authoritarianism that, if left unchecked, might transform Turkey into another Russia. Such claims are surely overwrought: Turkish elections are free and fair, and the press is largely unfettered. Yet there is also no question that Mr Erdogan is getting bossier and less tolerant by the day.

With a healthy economy, a budget surplus and jobs for the people, there is little reason for the people to rise up.  The political opposition may.  But not the people.  That’s why the democratic movements have been confined to countries with poor economies and high unemployment.  For working people have better things to do.  Such as enjoying life.

Discontent is Easier to Manage when you have a Booming Economy

The collapse of the Soviet Union was not pretty.  In the Soviet Union.  Or the Russian state following.  Crime.  Corruption.  Lawlessness.  And, worse, high unemployment.  People were unable to buy the bare necessities.  These were dark and dangerous times.  And had many pining for the good old days of Soviet Communism.  You may have been poor, oppressed and wanting for the basic necessities of life.  But you could walk the streets at night.  You just had to worry about the state busting down your door at night and taking you away to some Siberian gulag.  But other than that, life was at a leisurely pace.  And had routine.  And routine begets political stability.

China saw this trouble.  And they learned some valuable lessons from their northern neighbor.  Change too fast can be bad change.  Hence their crackdown at Tiananmen Square.  And now (see Discontent, but no revolt in China — yet by Charles Hutzler, Associated Press, posted 2/21/2011 on Salon).

“The current regime structure is very fragile. It’s not right for revolution at the moment, but that doesn’t mean mass political upheaval can’t take place in the future,” said Minxin Pei, a China politics expert at Claremont McKenna College in California.

In the latest test, China’s authoritarian government seems to have dispatched the threat of public protests with great efficiency. In response to an Internet appeal of unknown origin for simultaneous protests in 13 cities Sunday, police detained known activists, disconnected some cell-phone text messaging services and blocked online searches for the phrase “Jasmine Revolution” — the name of both the protest call and the wave of Middle East democracy protests that started in Tunisia.

And the protests for now seem to have petered out.  Why?  Economics.

China is the world’s fastest-growing major economy, with economists predicting another year of better than 9 percent growth for 2011. While unemployment is surely higher than the nearly 5 percent urban joblessness rate, factory wages and conditions are improving for many. University graduates — a crucial group in Egypt’s uprising — are finding jobs in China, though they are poorly paid.

Life isn’t that bad when you have a job.  The protests in the Middle East and Northern Africa started over high unemployment.  The protesters were poor, oppressed and unemployed.  And when you have nothing, you have nothing to lose.  The Chinese have something.  It may not be much.  But it is a lot more than they used to have.  And things aren’t bad enough yet to lose this new life of plenty.

The Asian Economy so Strong they’re Building Bigger Ships for Exports

And things are looking up for the Asian economy.  While the U.S. continues to struggle in the worst recession since the Great Depression, Maersk just received an order to build the world’s biggest container ship.  And guess who’s building those ships.  And what they’re going to carry (see Deal for biggest ever cargo ships sets sail by Tom Clarke posted 2/21/2011 on channel4.com).

A major shipping contract is a good barometer for the global economy – the industry at least seems to think trade between Asia and Europe will remain strong. However the European economy won’t benefit as much as Asia from the deal. All the jobs to build the new ships are in Korea and the vast majority of high value goods the ships will carry will be made in Asia to be sold here.

And sold in other parts of the world.  Including the United States.  So Asia is doing all right.  China, too.  The fact that they were able to shut down those protests so quickly indicates that the larger population is content.  For now.  Of course, that may change in the future.  The Chinese workers may demand more pay and better benefits.  Perhaps try to unionize.  If they do China may have to meet their demands.  Or risk further unrest.  Either way the economy will more than likely lose steam.  Either through higher labor costs.  Or political unrest.  And that could prod them more towards a Libyan fate.

Libyan Violence Escalates, Oil Supply Interrupted

And how are things going in Libya?  By all measure it appears to be going from bad to worse (see Oil soars on Libya violence, WTI shorts cover posted 2/21/2011 on Reuters).

In Libya, scores were killed in anti-government protests as one of the region’s bloodiest revolts hit Tripoli for the first time, while army units defected to the opposition and Gaddafi’s son vowed to fight to the last man standing.

And it gets worse.  Economically.

The focus was on deadly clashes in Libya, where one oil firm was shutting down some 100,000 barrels per day (bpd) of production and others evacuated staff. The leader of the Al-Zuwayya tribe threatened oil exports to the West would be cut off unless authorities stopped violence.

“The market is on edge about the potential for Middle East and North Africa supply disruptions,” said Mike Wittner, head of commodities research, Americas, at Societe Generale.

When oil prices go up economies go down.  Because oil is the engine of the modern economy.  We’ll probably first notice this supply interruption in higher prices at the gas pump.  Then in a slow but steady price inflation on everything we buy.  Those nations trying to get themselves out of bad recessions will then have to deal with this inflation problem.  And inflations are typically solved by recessions.  Economically, this is not a good outlook.  For if Europe and the United States fall back into deeper recessions, where will all those exports go from China and Turkey?  Nowhere.  And then these prosperous nations will see a rise in their unemployment numbers.  Giving strength to their opposition forces.  And perhaps extending the political unrest from the Middle East and North Africa to China and Turkey.  And beyond.

Things look like they may get worse before they get better.  Especially with what is happening in Bahrain.

A wave of popular unrest in North Africa and the Middle East has already toppled long-time leaders in Tunisia and Egypt, and traders are watching events carefully in other members of the Organization of the Petroleum Exporting Countries (OPEC) for signs of escalating tension.

While protests continued in Bahrain and Yemen, the greater fear was that discontent among majority Shi’ites in Bahrain who are protesting against the Sunni government might spread to Saudi Arabia’s own Shi’ite minority — who mostly live in the eastern province, the source of the kingdom’s oil wealth.

And this is the greatest danger.  That all of this political unrest may transform these revolutions from democratic struggles into theocratic ones.  Many of the countries rife in political unrest are Sunni countries.  Some have oppressed Shiite populations.  Or underrepresented Shiite populations.  And these populations have an organizing force.  The Muslim Brotherhood.  And inserting itself at the top of this Shiite power swell is the region’s largest Shiite population.  Iran.  The mortal enemy of Saudi Arabia.

It’s a Small World after All

Peace in the Middle East is not easy.  It’s mostly Islamic.  And in Islam, the Sunni hates the Shiite and the Shiite hates the Sunni.  Any government trying to rule over these disparate people rules on a powder keg.  They can maintain the peace most times if the people have jobs and can buy what they need.  During bad economic times, though, it’s quite a different story.  The rich kingdoms (often Sunni) will be attacked for being too Western.  And then economic issues become religious issues.

What will happen in Egypt?  Will it follow the Turkish model?  Or will it succumb to the radical elements like what happened in Iran following their 1979 revolution?  And what about Saudi Arabia?  Are they next?  If OPEC oil fails to flow at market prices, economies may crash throughout the world.  Including Turkey.  And China.  Because oil is the engine of a modern economy. 

It’s a small world after all.  What happens in the Middle East matters.  Everywhere.

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The Fed to Buy $600 Billion in Government Bonds

Posted by PITHOCRATES - November 5th, 2010

The Fed’s $600 billion government bond Purchase may Worsen the Recession

The Fed is preparing to buy some $600 billion in government bonds.  They call it quantitative easing (QE).  The goal is to stimulate the economy by making more money available.  The problem is, though, we don’t have a lack of money problem.  We have a lack of jobs problem.  Unemployed people can’t go to the store and buy stuff.  So businesses aren’t looking to make more stuff.  They don’t need more money to borrow.  They need people to go back to work.  And until they do, they’re not going to borrow money to expand production.  No matter how cheap that money is to borrow.

This isn’t hard to understand.  We all get it.  If we lose our job we don’t go out and buy stuff.  Instead, we sit on our money.  For as long as we can.  Spend it very carefully and only on the bare necessities.  To make that money last as long as possible to carry us through this period of unemployment.  And the last thing we’re going to do is borrow money to make a big purchase.  Even if the interest rates are zero.  Because without a job, any new debt will require payments that we can’t afford.  That money we saved for this rainy ‘day’ will disappear quicker the more debt we try to service.  Which is the opposite of what we want during a period of unemployment.

Incidentally, do you know how the Fed will buy those bonds?  Where they’re going to get the $600 billion?  They going to print it.  Make it out of nothing.  They will inflate the money supply.  Which will depreciate our currency.  Prices will go up.  And our money will be worth less.  Put the two together and the people who have jobs won’t be able to buy as much as they did before.  This will only worsen the recession.  So why do they do it?

Quantitative Easing May Ease the Global Economy into a Trade War

A couple of reasons.  First of all, this administration clings to outdated Keynesian economics that says when times are bad the government should spend money.  Print it.  As much as possible.  For the economic stimulus will offset the ‘negligible’ inflation the dollar printing creates.  The only problem with this is that it doesn’t work.  It didn’t work the last time the Obama administration tried quantitative easing.  As it didn’t work for Jimmy Carter.  Of course, when it comes to Big Government policies, when they fail the answer is always to try again.  Their reason?  They say that the government’s actions that failed simply weren’t bold enough.

Another reason is trade.  A cheaper dollar makes our exports cheaper.  When the exchange rates give you bushels full of U.S. dollars for foreign currency, those foreign nations can buy container ships worth of exported goods.  It’s not playing fair, though.  Because every nation wants to sell their exports.  When we devalue the dollar, it hurts the domestic economies of our trading partners.  Which they want to protect as much as we want to protect ours.  So what do they do?  They fight back.  They will use capital controls to increase the cost of those cheap dollars.  This will increase the cost of those imports and dissuade their people from buying them.  They may impose import tariffs.  This is basically a tax added to the price of imported goods.  When a nation turns to these trade barriers, other nations fight back.  They do the same.  As this goes back and forth between nations, international trade declines.  This degenerates into a full-blown trade war.  Sort of like in the late 1920s.  Which was a major factor that caused the worldwide Great Depression.

Will there be a trade war?  Well, the Germans are warning this action may result in a currency war (see Germany Concerned About US Stimulus Moves by Reuters).  The Chinese warn about the ‘unbridle printing’ of money as the biggest risk to the global economy (see U.S. dollar printing is huge risk -China c.bank adviser by Reuters’ Langi Chiang and Simon Rabinovitch).  Even Brazil is looking at defensive measures to protect their economy from this easing (see Backlash against Fed’s $600bn easing by the Financial Times).  The international community is circling the wagons.  This easing may only result in trade wars and inflation.  With nothing to show for it.  Except a worse recession.

Businesses Create Jobs in a Business Friendly Environment

We need jobs.  We need real stimulus.  We need to do what JFK did.  What Reagan did.  Make the U.S. business friendly.  Cut taxes.  Cut regulation.  Cut government.  And get the hell out of the way. 

Rich people are sitting on excess cash.  Make the business environment so enticing to them that they can’t sit on their cash any longer.  If the opportunity is there to make a favorable return on their investment, guess what?  They’ll invest.  They’ll take a risk.  Create jobs.  Even if the return on their investment won’t be in the short term.  If the business environment will reward those willing to take a long-term risk, they will.  And the more investors do this the more jobs will be created.  And the more people are working the more stuff they can buy.  They may even borrow some of that cheap money for a big purchase.  If they feel their job will be there for awhile.  And they will if a lot of investors are risking their money.  Creating jobs.  For transient, make-work government jobs just don’t breed a whole lot of confidence in long term employment.  Which is what Keynesian government-stimulus jobs typically are.

We may argue about which came first, the chicken or the egg.  But here is one thing that is indisputable.  Jobs come before spending.  Always have.  Always will.  And quantitative easing can’t change that.

www.PITHOCRATES.com

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