LESSONS LEARNED #87: “In a democracy you hold the keys to the treasury. So be careful of what you ask for.” -Old Pithy

Posted by PITHOCRATES - October 13th, 2011

Keynesian Spending gave us Double Digit Interests Rates, Double Digit Inflation Rates and Stagflation

LBJ was going to end poverty.  He declared war on it.  His soldiers?  Dollars.  Lots of them.  His battle plan?  The Great Society.  Tactics?  Just throw lots of money at a problem.  Hope that some of it actually hit its target.  And further hope that some of the money that did hit its target actually did something beneficial.  Just hope for the best.

And thus grew the welfare state.  The recipients liked it.  Because they were the recipients.  Government liked it.  Because the recipients liked it.  Who voted for them out of gratitude.  And dependency.  And the Keynesian economists liked it.  Because government spending was stimulus.  And they love stimulus.  These Keynesian economists.  So everybody kept asking for more.  As no one saw the harm in printing money to make people feel good.

The Keynesian said this was proof that a manageable amount of continuous inflation (printing money) would do away with the business cycle.  The boom and bust that had recurring good times.  And recurring recessions.  They said let’s just have a continuous boom.  When real demand fell just create artificial demand by having the government step in.  Let the government stimulate demand by printing money to spend.  And they did.  GDP went up.  Thus proving their theory.  Or so they thought.  Until they realized printing all that money had so weakened the dollar that interests rates soared.  To double digits.  As did prices.  Giving us double digit inflation rates.  And stagflation.  That’s why the economy sucked in the Seventies.  And why Jimmy Carter was a one term president.

Bad Monetary Policy gave us Cheap Money, the Housing Bubble and the Subprime Mortgage Crisis

After the dot-com bubble burst the economy went into recession.  So the government went to their patented recession cure-all.  Monetary policy.  Playing with interest rates.  I.e., printing money.  Because housing sales have always been the key to a growing economy.  Because building a house generates a lot of economic activity.  And furnishing a house generates even more economic activity.  So the best way to kick-start the economy was to get more people into houses.  The more the better.  Whether they could afford to or not.  Because no matter what happens, people always pay their mortgage.

So the government kept interest rates low.  Artificially low.  To encourage people to borrow money.  To buy housees.  And they did.  But not enough of them did.  Poor people weren’t buying.  Mortgage bankers were turning them down.  Because they couldn’t qualify for a mortgage.  So the government pressured them to approve people even if they didn’t qualify.  Fannie Mae and Freddie Mac guaranteed these risky mortgages.  Then bought them.  It worked.  Thanks to ARMs and no-doc mortgages, anyone could walk in off the street and get a cheap mortgage with little down.  The people liked it.  And asked for more.  Thus began the housing boom.

People were buying and selling houses like there was no tomorrow.  Investors were flipping homes.  People were moving up into McMansions.  Bidding the price of houses into the stratosphere.  Paying whatever the price was.  Because the money was so cheap to borrow.  Artificially low.  Which really inflated the price of these houses.  To unsustainable levels.  Until the bubble burst.  And these prices began to correct to reflect reality.  The Fed, waking up the next morning in a stupor, saw what they had done.  And desperately tried to fix things.  To limit the damage.  They raised interest rates.  ARMs reset.  And the great Subprime Mortgage Crisis began.  And thanks to Fannie and Freddie buying those risky mortgages, the contagion spread around the world.  To everyone who bought what they thought were safe investments backed by safe mortgages.  Because people always paid their mortgages.   But were, in fact, backed by the riskiest of all investments.  Defaulting subprime mortgages.

The Social Democracies’ Spending gave European Countries Staggering Debt and a Sovereign Debt Crisis

Karl Marx was a German.  But his theories quickly swept across the Rhine.  Soon there were communists everywhere in the West.    After World II, when communism became the new enemy, Western Europe favored something called social democracies.  Communism-light.  The social welfare state.  Cradle to the grave nanny state.  With generous state benefits.  National health care.  Pensions.  You name it.  And the state gave it.

People liked it.  Asked for more.  And their governments were glad to oblige.  They spent more and more money.  Rather, they spent more and more of the taxpayers’ money.  These social democracies had some of the highest tax rates.  Which was fine with the poor receiving these generous state benefits.  But it explains why anti-capitalists like John Lennon and Bono moved out of the UK.  To escape the high taxes on the wealth they created with free market capitalism.  So there was a capital flight out of these social democracies.  While at the same time their public sectors grew.  More and more people worked for the government.  Received government pay and benefits.  And generous pensions.  The people liked this.  And asked for more.  Except Lennon and Bono, of course.  And the other superrich who fled these social democracies.

As tax rates climb and capital flees, though, economic activity stagnates.  Which forces these countries to borrow.  And borrow some of them did.  Some of the smaller countries in the Eurozone (Greece) are so in debt that they can’t even roll over their existing debt.  They are in such a mess that no one wants to take a chance loaning them money.  Because no one thinks Greece will ever be able to repay whatever they borrow.  Of course, with the common currency (Euro), Greece’s problems are everyone’s problems.  So the richer countries in the Eurozone (Germany) are pouring money into the ECB to try and rescue Greece.  And save the Euro.  What we call the European sovereign debt crisis.  While the world waits with bated breath.  Because if they fail it could very well plunge the world into another severe recession.  Or worse.  Because the world needs the Eurozone.  To buy their exports.  So they can prop up their own sick economies.

Class Warfare pits the Rich against the Poor and Middle Class, the Taxpayers against the Public Sector

Many, if not all, of the great crises countries have…are…going through is because of bad monetary policy.  Using the power of the purse to make happy voters.  Whatever the cost.  For they were always sure they could avoid paying this cost.  That they could always keep pushing this cost off onto a future generation.  But the spending grew too great.  The debt grew too high.  And, before they knew it, that future generation was here.  And it’s us.

The people grew fat and lazy on these generous benefits.  And they never worried about the cost.  Because the cost was always someone else’s problem.  Until now.  Not only are they losing some of these generous benefits.  But they now have to pay for some of them.  The cost being so great that everyone has to pay their ‘fair’ share.  Which was fair when ‘everyone’ didn’t include them.  But it now includes them.  And they don’t like it one bit.  So they’ve taken to the streets throughout Europe.  Rioting here.  Protesting there.  And demanding that the rich (anyone who is not them) pay more in taxes so they can continue to live the good life.  All funded courtesy of the taxpayers.  Who aren’t.  Living the good life.

So class warfare escalates.  Pitting the rich against the poor and middle class.  And the taxpayers against the public sector.  Placing these countries on the brink of anarchy.  All because the people learned that they could vote themselves money.  And did.  They got everything they asked for.  Including something they didn’t bargain for.  The destruction of their countries.

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Economic Recovery Requires less Keynesian Spending and more Cutting the Cost of Employment

Posted by PITHOCRATES - September 26th, 2011

The Structural Defect in Keynesian Economics is that Sustained Inflation Creates Asset Bubbles that Must Burst

More bad news for the housing market.  And the American economy (see New-home sales fell in August for 4th month by Derek Kravitz posted 9/26/2011 on the Associated Press).

Sales of new homes fell to a six-month low in August. The fourth straight monthly decline during the peak buying season suggests the housing market is years away from a recovery…

New-homes sales are on pace for the worst year since the government began keeping records a half century ago…

Last year was also the fifth straight year that sales have fallen. It followed five straight years of record highs, when housing was booming.

The housing market is bad.  There’s no denying that.  And this affects everyone.  Not just homeowners.  Because where the housing market goes the economy follows.

While new homes represent less than one-fifth of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in taxes, according to the National Association of Home Builders.

Jobs and taxes.  Both of which the government is having trouble generating these days.  That’s why they are desperately trying to stimulate the housing market with all that easy monetary policy.  Getting interest rates to their lowest in years.  If not of all time.  Because new houses equals jobs.  And tax revenue.  Especially when housing values increase over time.

Home prices have dropped more since the recession started, on a percentage basis, than during the Great Depression of the 1930s. It took 19 years for prices to fully recover after the Depression.

But not so much when they don’t.

Worse than the Great Depression.  Now there’s something you don’t hear every day.

One of the missions of the Federal Reserve was to prevent another Great Depression.  In particular, preventing a devastating deflationary spiral.  Such as we’re seeing in home prices now.  Looks like they’ve failed.  Or rather, Keynesian Economics has failed.

The problem is the dependence on Keynesian Economics.  Which uses monetary policy to maintain economic growth.  By having permanent but ‘sustainable’ inflation.  But the structural defect in this model is that sustained inflation creates asset bubbles.  As people bid up the prices of these assets.  Like houses prior to the subprime mortgage crisis.  And when these bubbles burst these asset prices have to fall back to market levels.  Like house prices are doing right now.  And apparently will do for another 19 years.  Give or take.

It is the High Cost of Labor that is Hurting the Advanced Economies

Manufacturing has been better than the housing market.  But it’s not looking too promising right now (see U.S. manufacturing slowdown: 4 cities at most risk posted 9/26/2011 on CNN Money).

U.S. manufacturing has been one of the rare bright spots in an otherwise annoyingly slow economic recovery…

But expectations of slower growth could threaten the rebound and cities that have gained from it. The ongoing European debt crisis and efforts to curb worries over inflation in China have analysts predicting lower demand for everything from American-made electronics to machinery.

U.S. manufacturing grew 6% during the economic recovery after declining 13% following the financial crisis in 2007. IHS Global Insight economist Tom Runiewicz says the industry has grown 4.5% so far this year. While that’s still robust growth, he expects manufacturing growth to slow to 2.9% next year.

The American consumer may not have been buying but consumers in other countries were.  A good example of American exports is the delivery of the first Boeing 787 to ANA.  And Boeing’s 747-8, too.   Though the largest U.S. exporter, Boeing won’t be able to fix the economy alone.  Especially when they’re competing against Airbus.

It is the high cost of labor that is hurting the advanced economies.  The Europeans subsidize some of their industries to make up for this economic disadvantage.  Boeing charges Airbus with getting subsidies that lets them compete unfairly.  And Airbus, of course, accuses Boeing of the same.   To help gain a competitive edge over Airbus, Boeing wanted to expand production in South Carolina.  A right to work state.  Which the Obama administration has opposed.  In support of their union donors.

The lesson of the Boeing-Airbus rivalry is this.  They’d be able to sell more planes if they could cut their labor costs.

Listening to the Private Sector turned around the German Economy and is why they can Bail Out the Euro

Germany’s high cost of labor was crippling her economy.  BMW and Mercedes-Benz built plants in America to escape their high cost of labor.  But things are different in Germany these days.  In fact, the country is so rich that the hopes of saving the Euro common currency falls on the German economy.  The only European economy rich enough to save the Euro.  So how did they make this turnaround?  Through reforms (see Getting People Back to Work by Matt Mitchell posted 9/26/2011 on Mercatus Center at George Mason University).

Germany’s unemployment rate is only 6.2 percent today. This is pretty remarkable given the severity of the recent recession, the slow growth of Germany’s trade partners (including the U.S.) and the unfolding fiscal crisis in the Eurozone.

NPR’s Caitlin Kenney attributes Germany’s relative success to a number of reforms adopted a decade ago. Kenney reports:

To figure out how Germany got where it is today, you need to go back 10 years. In 2002, Germany looked a lot like the United States does now, they had no economic growth and their unemployment rate was 8.7 percent and climbing. The country needed help, so the top man in Germany at the time, Gerhard Schroder, the German chancellor, made in an emergency call to a trusted friend.

So who did he turn to?  A government bureaucrat?  Or someone from the private sector?

The friend was Peter Hartz, a former HR director whom Schroder knew from his VW days. Schroder put Hartz in charge of a commission, the mission of which was to find a way to make Germany’s labor market more flexible. The Hartz commission made it easier to hire someone for a low-paying, temporary job, a so-called “mini job”:

A mini-job isn’t that great of a deal for workers. In these jobs, they can work as many hours as the employer wants them to, but the maximum they can earn is 400 Euros per month. On the plus side, they get to keep it all. They don’t pay any taxes on the money. And they do still get some government assistance.

He went to the private sector.  To get advice of how to create jobs in the private sector.  And he listened to what they said.  The cost of labor and regulatory costs were crippling job creation.

Generous unemployment insurance and regulations that add to the cost of employment tend to make for a static, unhealthy labor market. Though designed to make life better for workers, these policies may do them more harm than good.

Listening to the private sector turned around the German economy.  Made it the dynamo it is today.  And it is why that the German economy is the only economy that can bail out the Euro.

Economic Recovery Requires New Jobs

The economy still looks like it’s going to get worse before it gets better.  Whereas the Germans are doing so well that they may single-handedly bailout the Eurozone from their sovereign debt crisis.  And a lot of Americans are saying that should be us.  Not the bailing out the Eurozone part.  But having the ability to do that.

And that could have been us.  And should have been.  Like it used to be.  When America led the world in creating jobs.  So what happened?  The same thing that had happened in Germany.  The cost of employment grew.  And as it grew new job creation declined.

Economic recovery requires new jobs.  The Germans understood that.  And they did something about it.  So should we.  And the sooner we do the sooner we will see that economic recovery.

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No FDR Economic Recovery for Obama, Just Continued Recession

Posted by PITHOCRATES - June 3rd, 2011

Double-Dip Recession or just one Long Recession?

The Great Recession ended in July of 2009.  According to the economists.  And the Obama administration.  The U.S. unemployment rate at that time was 9.4%.  After the recession ended, the unemployment rate peaked at 10.1%.  And stayed at about 10% for the rest of the year.  A year later, it tumbled all the way down to 9.4%.  And kept falling.  All the way down to 9%.  Until last month (see U.S. unemployment rate up in May by CBC News posted 6/3/2011 on CBC News).

Employment rose by only 54,000 jobs in May, raising the unemployment rate to 9.1 per cent, the U.S. Bureau of Labour Statistics reported Friday.

The April rate was nine per cent.

The May report said 13.9 million Americans are officially unemployed, and another 8.5 million (sometimes called involuntary part-time workers) are working fewer hours than they want. Those people are working part-time because their hours had been cut back or because they couldn’t find a full-time job.

That’s right, it went back up.  There’s talk about a double-dip recession.  But with these unemployment rates holding so high for so many years?  From before the recession ended, to when the recession ended and to almost 2 years after it ended, I got to tell you.  I don’t think it ever ended.  These are record unemployment rates.  The kind of rates that typically only happen during the worst of recessions.

But it’s worse than this number shows.  There are another 8.5 million underemployed because they can’t find a full time job.  Add them in and the rate jumps to 15.8%.  This is a more accurate number.  It tells us the percentage of people who can’t find a full time job.  It’s bad out there.  Real bad. 

Small Business not Hiring but Cutting Workers

And it gets worse.  The job engine of America, small business, isn’t hiring either.  Worse, they’re planning to let people go (see NFIB: Small Business Hiring Stalls in May by Reuters posted 6/3/2011 on FOX Small Business).

Hiring by small businesses stalled in May and there was a small increase in the number of employers planning to cut their workforces, a survey showed in Thursday, another signal the labor market has lost steam.

The National Federation of Independent Business said its survey of 733 small businesses found that the average number of net new jobs slipped to 0.01 per firm from 0.04 in April…

“There were fewer increases and more reports of shrinkage in workforces, with 10% increasing employment an average of 3.2 employees per firm and 13% reducing employment an average of 3.1 employees, seasonally adjusted,” the NFIB said.

Of course small business isn’t hiring because they’re small business.  With small budgets.  And small margins.  Inflation hits them hard.  As well as their customers.  Prices go up everywhere.  Customers buy less.  And businesses pay more in costs.  Putting incredible pressures on their margins.  And those lucky enough to have business don’t dare hire anyone.  Because they have no idea what new law or regulation will come out of Washington next. 

The Obamacare legislation is about a thousand pages long.  And confusing as hell.  Business owners do know that it will be costly (evidenced by the request for waivers).  And that’s only for what they already know is in it.  They’re terrified for what they don’t know is in it.  Or what other surprises Washington will drop on them next.  This is not a good time for anyone operating under small margins.  Or a good time to hire people.

Stocks Tumble, Investors Retreat to Bond Market despite Fears about Technical Default

The numbers are so bad that investors are running from the stock market back into the safe haven of bonds (see Stocks fall after weak jobs report by Daniel Wagner, Associated Press, posted 6/3/2011 on USA Today).

Stocks around the globe dropped Friday after a weak report on U.S. employment worsened concerns that the economic recovery is losing steam…

The yield on the 10-year Treasury note fell to 3.00% from 3.03% late Thursday as investors rushed into the safety of government bonds. Yields fall as bond prices rise…

The yield on the 10-year Treasury note, a benchmark for many kinds of business and consumer borrowing, dipped below the psychologically important level of 3% during Wednesday’s broad stock sell-off.

It would appear these investors aren’t all that worried about a technical default if Congress doesn’t raise the debt ceiling.  They have more pressing concerns on their mind.  Such as the horrible unemployment numbers.  And an economy in recession.  For all the doom and gloom about what will happen in a technical default pales next to what is happening in the economy. 

With no Adolf Hitler there will be no FDR Economic Recovery

For those of you too young to know what it was like during the Great Depression, and I’m guessing that’s all of you, here’s your chance to relive some history.  Now, contrary to popular belief, FDR did not end the Great Depression.  All that Keynesian spending did nothing.  All those government make-work New Deal programs did nothing.  No.  One man ended the Great Depression.  And it wasn’t FDR.  It was Adolf Hitler.

Hitler plunged the world into war.  Caught most people with their pants down.  While he built a modern war machine few other nations did.  Other than the Japanese.  So the world had to play catch up.  Build ships, planes, rifles, artillery, ammunition, trucks, jeeps, etc.  And the nations that really needed these things were under attack.  Which left only one economy that was untouched by war.  Which also happened to be the world’s largest economy.  The United States.

The FDR administration told American industry they could do what they do best.  And they would get out of the way.  They let them make a profit.  Whatever they wanted.  As long as they delivered the impossible.  Which they did.  We called it the Arsenal of Democracy.  The war production was incredible.  Factories worked around the clock.  And built so much war material that the Nazis and Japanese didn’t have a chance.  The Allies could easily replace their material losses.  They couldn’t.  And the factories kept humming after the war.  For another decade or so.  Until the war-devastated economies rebuilt themselves.

So Obama and FDR have a lot in common.  Failed economic policies.  And ongoing war.  The only difference is that today’s war is unconventional.  There isn’t an enemy out there with a massive army conquering our friends and allies.  It’s more guerilla war.  Hit and run.  And terrorist attacks.  Which the U.S. is leading the fight against.  And the funding for.  So Obama can’t enjoy an FDR recovery.  Our friends and allies aren’t picking up this war tab.  Which means the economy will continue to limp along.  As it has been.  Since 2008.   A lot like FDR’s Great Depression.  Only without the economic recovery.  Which Hitler gifted FDR.  By giving us World War II.

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