Christmas and Keynesian Stimulus

Posted by PITHOCRATES - December 23rd, 2013

Economics 101

(Originally published December 24th, 2012)

Christians may not like the Crass Commercialization of Christmas but the Left Loves It

The Left does not have a war on Christmas per se.  For they love the consumer spending part of Christmas.  Which is pure Keynesian.  People go into debt to spend more money at retailers.  They love that part of Christmas.  What they don’t like is the religious stuff.  Especially Jesus.

They don’t like Jesus because He is the God the Christians worship.  Their Lord and Savior.  It’s these Christians that bother the Left.  Because of their opposition to birth control (mostly Catholics), abortion and having fun in general.  The kind of fun adults enjoy.  The kind of things Christians frown on.  Premarital sex.  Gay love.  Drinking and using drugs.  Coarse language and sexual situations on television shows and in the movies.  Things they champion on the Left.  Which makes the Left hate Christianity.  Which they see as nothing but a great killjoy.

It’s the moralizing the Left does not like.  But the one thing Christians don’t like about Christmas, its crass commercialization, they do like.  So the Left will try to band images of Christ from Christmas displays wherever they can.  Despite Christmas being the celebration of Christ’s birth.  But they will gather in Rockefeller Center to party when they light the Christmas tree.  Though they would prefer that we call it the holiday tree.

Retailers often become Profitable for the Year only because of this Temporary Spending Surge at Christmas

So there are two Christmases.  The one where Christians celebrate the birth of Christ.  Wish for peace on earth.  And good will towards man.  And the other Christmas.  The one marked by the orgy of consumer spending.  Much of it funded by one-time Christmas bonuses.  A celebration of demand-side Keynesian economics.  Where people spend their hard earned money instead of saving it.  And when their money runs out they spend even more using their credit cards.

Keynesians have a bunch of charts and graphs showing how great a stimulus this Christmas spending is to the economy.  And mathematical formulas.  They can tell you about the velocity of money. How fast money travels through the economy when it goes from consumer to seller.  The seller then becomes consumer.  And spends the money they just received.  Then the person who receives this money in a sales transaction goes out and spends it as a consumer.  And on and on it goes.  Flying through though the economy at breakneck speed.  Generating a whole lot of economic activity.

Retailers often become profitable for the year only because of this spending surge at Christmas.  In fact, to handle this surge in business they hire a lot of people at Christmas time.  Part-time people.  Proving again that pumping money into the economy creates jobs.  The main tenet of Keynesian monetary policy.  Pump cash into the economy and people will spend it.  Something the Keynesians have been doing since Richard Nixon decoupled the dollar from gold in 1971.  Ending any semblance of responsible monetary policy.  And recessions forever.  At least, that was the plan.

Keynesian Stimulus is nothing more than an Orgy of Temporary Consumer Spending just like at Christmas Time

When the economy slows down and people stop buying stuff businesses have to lay off workers.  So they won’t build stuff that no one will buy.  Laid off workers no longer have money to buy things.  Which causes other business to lay off workers.  So THEY won’t build stuff that no one will buy.  It’s a vicious cycle.  In fact, we call it the business cycle.  The boom-bust cycle.  From expansion to contraction.  From an economy hiring people to an economy laying off people.

Keynesian economics was supposed to remove the contraction side of the business cycle.  By picking up the spending slack.  When consumers stopped spending money the government would step in and replace their spending.  We call it stimulus spending.  Often spending money the government doesn’t have.  So they run a deficit (i.e., borrow money).  Or simply print money.  Which they did a lot of in the Seventies.  Unfortunately, as it turns out, you just can’t do that.  For when you print money you devalue it.  Which raises prices.  As it takes more of these devalued dollars to buy what they once did.

And this is why Keynesian economics doesn’t work.  Because a Keynesian stimulus is nothing more than an orgy of consumer spending.  Just like at Christmas time.  Which happens only for a limited time.  Businesses hire temporary part-time workers at Christmas because this spending does not last.  As it does not last during a Keynesian stimulus.  It doesn’t create any full-time jobs.  Because employers know it is only temporary.  And they know that higher prices will soon follow.  As they do after Christmas when the discounting ends.  Which will reduce future economic activity.  As it does after Christmas.  Once the deals end so too ends the orgy of consumer spending.  Leaving people to deal with the aftermath.  Depleted bank accounts.  A lot of credit card debt.  And a little buyer’s remorse.

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The Minimum Wage Debate

Posted by PITHOCRATES - December 16th, 2013

Economics 101

A Fall in Economic Activity follows a Surge in Keynesian Stimulus Spending

The minimum wage argument is a political argument.  Because it’s a partisan one.  Not one based on sound economics.  Such as the classical school of economics that made America the number one economic power in the world.  Thrift.  Savings. Investment.  Free trade.  And a gold standard.  Then you have the politicized school of economics that replaced it.  The Keynesian school.  Which nations around the world accept as sacrosanct.  Because it is the school of economics that says governments should manage the economy.  Thus sanctioning and enabling Big Government.

Keynesian economics is all about consumption.  Consumer spending.  That’s all that matters to them.  And it’s the only thing they look at.  They completely ignore the higher stages of production.  Above the retail level.  They ignore the wholesale level.  The manufacturing level.  The industrial processing level.  And the raw material extraction level.  Which is why Keynesian stimulus fails.  Just putting more money into consumers’ pockets doesn’t affect them.  For they see the other side of that stimulus.  Inflation.  And recession.  And they’re not going to expand or hire more people just because there is a temporary spike in consumer spending.  Because they know once the consumers run through this money they will revert back to their previous purchasing habits.  Well, almost.

Keynesian stimulus is typically created with an expansion of the money supply.  As more dollars chase the same amount of goods prices rise.  And people lose purchasing power.  So they buy less.  Which means following a surge in Keynesian stimulus spending there follows a fall in economic activity.  Which is why the higher stages of production don’t expand or hire people.  Because they know that for them the economy gets worse—not better—after stimulus spending.

A Stronger Economy would help Minimum Wage Workers more than Raising the Minimum Wage

Increasing the minimum wage shares the Keynesian goal of putting more money into consumers’ pockets.  And many of the arguments for increasing the minimum wage mirror those arguments for Keynesian stimulus.  Even to reverse the consequences of previous Keynesian policies (see Everything You Ever Needed to Know About the Minimum Wage by Jordan Weissmann posted 12/16/2013 on The Atlantic).

The federal minimum wage is $7.25 an hour, which means that depending on the city you’re in, 60 minutes of work will just about buy you a Chipoltle burrito (without guac). By historical standards, it’s fairly low. Thanks to inflation, the minimum wage is worth about $3.26 less, in today’s dollars, than when its real value peaked in 1968.

It’s a Keynesian argument that says putting more money into people’s pockets will increase economic activity.  That’s the rebuttal to the argument that a higher minimum wage will reduce economic activity (by raising prices with higher labor costs).  For they will take those higher wages and spend them in the economy.  More than offsetting the loss in sales due to those higher prices.

The whole concept of Keynesian stimulus is predicated on giving consumers more money to spend.  Like raising the minimum wage.  Either with stimulus money raised by taxes.  From borrowing.  Or printing.  Their favorite.  Which they have done a lot of.  To keep interest rates low to spur housing sales in particular.  But with this monetary expansion comes inflation.  And a loss of purchasing power.  So the Keynesian policies of putting more money into consumers’ pockets to stimulate economic activity has reduced the purchasing power of that money.  Which is why the minimum wage in real dollars keeps falling.

According to the Bureau of Labor Statistics, 1.57 million Americans, or 2.1 percent of the hourly workforce, earned the minimum wage in 2012. More than 60 percent of them either worked in retail or in leisure and hospitality, which is to say hotels and restaurants, including fast-food chains.

…Almost a third of minimum-wage workers are teenagers, according to the Bureau of Labor Statistics.

Some in retail sales get a commission added on to their hourly wage.  Many in the food and leisure industry earn tips in addition to their hourly wage.  So some of those who earn the minimum wage get more than the minimum wage.  Those who don’t are either unskilled entry level workers.  Such as students who are working towards a degree that will get them a higher-paying job.  Those working part-time for an additional paycheck.  Those who work because of the convenience (hours, location, etc.).  Those who have no skills that can get them into a higher-paying job.  Or because these entry-level jobs are the only jobs they can find in a bad economy.

A stronger economy could create better jobs.  And higher wages.  For it is during good economic times that people leave one job for a better job.  And employers pay people more to prevent good employees they’ve already trained from leaving.  So they don’t have to start all over again with a new unskilled worker.  This would be the better approach.  Creating a stronger economy to allow unskilled workers to move up into higher skilled—and higher paying—jobs.  For you can’t have upward mobility if there are no better jobs to move up into.

On one side of the debate, you mostly have traditionalists who believe that increasing the minimum wage kills some jobs for unskilled workers, like teens…

On the other side, you have researchers who believe that increasing the minimum wage doesn’t kill jobs at all and may even give the economy a boost by channeling more pay to low-income workers who are likely to spend it.

The Automotive industry has long fought for tariff protection.  For the high cost of their union labor made their cars costlier than their imported competition.  The legacy costs of an aging workforce (health care for retirees and pensions) required a government bailout to keep General Motors and Chrysler from going belly-up.  And it was this high cost of union labor that caused the Big Three to lose market share.  Shedding jobs—and employees—as they couldn’t sell the cars they were making.

So higher wages raise prices.  And reduce sales.  Leading to layoffs.  And reduced economic activity.  The unions believe this.  That’s why they fight so hard for legislation to protect themselves from lower-priced competition.  You would have to believe that the economic forces that affect one part of the economy would affect another.  And those economic forces say that higher wages kill jobs.  They don’t increase economic activity.  They just help the lucky few who have those high-paying jobs.  While many of their one-time coworkers found themselves out of a job.

When the minimum wage goes up, the theory says, businesses shape up. Managers find ways to make their employees more productive. Turnover slows down, since people are happier with their paychecks, and the unemployed snap up jobs elsewhere in town. Meanwhile, Burger King and McDonald’s can raise their prices a little bit without scaring off customers.

Managers finding ways to make their employees more productive?  Do you know what that means?  It means how they can get more work out of fewer employees.  No worker wants to hear management talk about productivity gains.  For that usually means someone will lose their job.  As the remaining workers can do more with less because of those productivity gains.  So that’s a horrible argument for a higher minimum wage.  Because fewer people will have those bigger paychecks.  Made possible by reducing costs elsewhere.  As in laying off some of their coworkers.

Based on data from 80s and early 90s, Daniel Aaronson estimated that a 10 percent increase in the minimum wage drove up the price of McDonald’s burgers, KFC chicken, and Pizza Hut’s pizza-like product by as much as 10 percent. Assuming that holds true today, it means that bringing the minimum wage to $10.10 would tack $1.60 onto the cost of your Big Mac.

McDonald’s will never win the award for having the healthiest food.  And that’s fine.  People don’t go there to eat healthy.  They go there for the value.  As it is one of the few places you can take a family of four out for about $25.  Adding another $1.60 per burger could add another $6.40 to that dinner out.  For a family living paycheck to paycheck that may be just too much for the weekly budget.  Especially with inflation raising the cost of groceries and gasoline.  Thanks to those Keynesian economic policies.

Raising the Minimum Wage will not Result in any of the Lofty Goals the Economic Planners Envision

There is a lot of anger at these minimum wage companies paying their employees so little.  Some of their minimum workers have gone on strike recently to protest their low pay.  As they are apparently not working at these companies because they love the work.  So suffice it to say that no one is yearning to work at these companies.  And that some may outright hate these jobs.  So why in the world would we want to punish them by paying them more?  Removing all ambition to leave the jobs they hate?

If you raise the minimum wage what happens to other jobs that pay what becomes the new higher minimum wage?  Putting their earnings on par with unskilled entry-level jobs?  Jobs that require greater skills than entry-level minimum wage jobs?  Will they continue to work harder for the same wage as unskilled workers?  Will they leave their more difficult jobs for an easier entry-level job?  Will they demand a raise from their employer?  Keynesians would say this is a good thing.  As it will drive wages up.  It may.  But to pay these higher labor costs will require cost cuts elsewhere.  Perhaps by shedding an employee or two.

Raising the minimum wage will not result in any of the lofty goals the economic planners envision.  For if putting more money into consumers’ pockets is all we need to create economic activity then we wouldn’t have had the Great Recession.  The stagflation of the Seventies.  Or the Great Depression.  Keynesian stimulus spending didn’t create new economic activity to prevent any of these.  So why would a rise in the minimum wage be any different?

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China’s Continuing Credit Expansion is Starting to Worry the IMF

Posted by PITHOCRATES - September 15th, 2013

Week in Review

As the U.S. fiscal year draws to a close the Republicans and Democrats are digging in their heels over the upcoming debt ceiling debate.  The Republicans want to cut spending and taxes to rein in out-of-control spending.  So they don’t have to keep borrowing money.  Running up the national debt.  The Democrats, on the other hand, say, “Who cares about the debt?  We’ll be dead and buried when the nation collapses under the weight of this mammoth debt load.  As long as we get what we want why should we care about future generations?”  At least, that’s what their actions say.

A lot of leading economists on the left, Keynesians economists, see no problem in running up the debt.  Print that money, they say.  Keep that expansion growing.  What could possibly go wrong?  Especially when the federal government has the power to print money?  Just look at what the Japanese did in the Eighties.  And what the Chinese are doing now (see As the West Faltered, China’s Growth Was Fueled by Debt by Christina Larson posted 9/12/2013 on Bloomberg Businessweek).

As demand for Chinese exports diminished in the wake of the financial meltdown, the Chinese economy kept humming at more than 9 percent annual gross domestic product growth each year from 2008 to 2011. The trick? “A huge monetary expansion and lending boom,” says Patrick Chovanec, chief strategist at Silvercrest Asset Management and a former professor at Tsinghua University’s School of Economics and Management in Beijing. With bank lending restrictions loosened in late 2008, “Total debt accelerated from 148 percent to 205 percent of GDP over 2008-12,” according to a May 2013 report from research firm CLSA Asia-Pacific Markets. When Beijing tried to rein in the banks beginning in late 2010, shadow banking—lending outside the formal sector—exploded. Today “China is addicted to debt to fuel growth,” according to the CLSA report, with the economy hampered by “high debt and huge excess capacity with only 60 percent utilization.”

The Beijing-based firm J. Capital Research dubbed 2012 the “Year of the (White) Elephant” in a report detailing some of China’s questionable infrastructure build-out. To take one example, 70 percent of the country’s airports lose money, yet more are being built in small and remote cities. At the shiny new Karamay Airport in far western Xinjiang province, there are four check-in counters serving two flights daily. Local governments have splurged on “new towns” and “special zones,” many of which have already fallen into disrepair. The $5 million Changchun Zhenzhuxi Park, intended as a scenic area, is now a large public garbage dump, as the local landscaping bureau never agreed to provide maintenance. Near the southern city of Hangzhou, a forlorn replica of the Eiffel Tower overlooks a faux Paris—the ersatz arrondissement attracted hardly any residents, and local media have dubbed it a ghost town.

“In China, you often hear people say they’re building for the future,” explains Chovanec. “But if you build something and it’s empty for 20 years, does that make any sense? By that point, it may already be falling apart.”

The classic Keynesian argument for economic stimulus is the one about paying people to dig a ditch.  Then paying them to fill in the ditch they just dug.  The ditch itself having no economic value.  But the people digging it and filling it in do.  For they will take their earnings and spend it in the economy.  But the fallacy of this argument is that money given to the ditch-diggers and the fillers-in could have been spent on something else that does have economic value.  Money that was pulled out of the private sector economy via taxation.  Or money that was borrowed adding to the national debt.  And increasing the interest expense of the nation.  Which negates any stimulus.

If that money was invested to expand a business that was struggling to keep up with demand that money would have created a return on investment.  That would last long after the people who built the expansion spent their wages.  This is why Keynesian stimulus doesn’t work.  It is at best temporary.  While the long-term costs are not.  It’s like getting a 30-year loan to by a new car.  If you finance $35,000 over 5 years at a 4.5% annual interest rate your car payment will be $652.51 and the total interest you’ll pay will be $4,018.95.  That’s $39,018.95 ($35,000 + 4,018.95) of other stuff you won’t be able to buy because of buying this car.  If you extend that loan to 30 years your car payment will fall to $177.34.  But you will be paying that for 30 years.  Perhaps 20-25 years longer than you will actually use that car.  Worse, the total interest expense will be $23,620.24 over those 30 years.  That’s $58,620.24 ($35,000 + 23,620.24) of stuff you won’t be able to buy because of buying this car.  Increasing the total cost of that car by 50.2%.

This is why Keynesian stimulus does not work.  Building stuff just to build stuff even when that stuff isn’t needed will have long-term costs beyond any stimulus it provides.  And when you have a “high debt and huge excess capacity with only 60 percent utilization” bad things will be coming (see IMF WARNS: China Is Taking Ever Greater Risks And Putting The Financial System In Danger by Ambrose Evans-Pritchard, The Telegraph, posted 9/13/2013 on Business Insider).

The International Monetary Fund has warned that China is taking ever greater risks as surging credit endangers the financial system, and called for far-reaching reforms to wean the economy off excess investment…

The country has relied on loan growth to keep the economy firing on all cylinders but the law of diminishing returns has set in, with the each yuan of extra debt yielding just 0.20 yuan of economic growth, compared with 0.85 five years ago. Credit of all types has risen from $9 trillion to $23 trillion in five years, pushing the total to 200pc of GDP, much higher than in emerging market peers…

China’s investment rate is the world’s highest at almost 50pc of GDP, an effect largely caused by the structure of the state behemoths that gobble up credit. This has led to massive over-capacity and wastage.

“Existing distortions direct the flow of credit toward local governments and state-owned enterprises rather to households, perpetuating high investment, misallocation of resources, and low private consumption. A broad package of reforms is needed,” said the IMF.

Just like the miracle of Japan Inc. couldn’t last neither will China Inc. last.  Japan Inc. put Japan into a deflationary spiral in the Nineties that hasn’t quite yet ended.  Chances are that China’s deflationary spiral will be worse.  Which is what happens after every Keynesian credit expansion.  And the greater the credit expansion the more painful the contraction.  And with half of all Chinese spending being government spending financed by printing money the Chinese contraction promises to be a spectacular one.  And with them being a primary holder of US treasury debt their problems will ricochet through the world economy.  Hence the IMF warning.

Bad things are coming thanks to Keynesian economics.  Governments should have learned by now.  As Keynesian economics turned a recession into the Great Depression.  It gave us stagflation and misery in the Seventies.  It gave the Japanese their Lost Decade (though that decade actually was closer 2-3 decades).  It caused Greece’s economic collapse.  The Eurozone crisis.  And gave the U.S. record deficits and debt under President Obama.

The history is replete with examples of Keynesian failures.  But governments refuse to learn these lessons of history.  Why?  Because Keynesian economics empowers the growth of Big Government.  Something free market capitalism just won’t do.  Which is why communists (China), socialists (the European social democracies) and liberal Democrats (in the United States) all embrace Keynesian economics and relentlessly attack free market capitalism as corrupt and unfair.  Despite people enjoying the greatest liberty and economic prosperity under free market capitalism (Great Britain, the United States, Canada, Australia, Hong Kong, Taiwan, South Korea, etc.).  While suffering the most oppression and poverty under communism and socialism (Nazi Germany, the Soviet Union, the communist countries behind the Iron Curtain in Eastern Europe, the People’s Republic of China under Mao, North Korea, Cuba, etc.).

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The Poor and Middle Class see their Incomes Still Falling in the Obama Recovery

Posted by PITHOCRATES - March 3rd, 2013

Week in Review

If you listen to the president, his press secretary, the mainstream media and just about anyone on the political left the economy is doing super.  Sure, we can make improvements.  But over all everything is just swell.  If you’re rich, that is. People with money are doing very well in the Obama recovery.  Those who aren’t as rich aren’t.  No.  All they see is high unemployment, rising prices and falling incomes (see Americans see biggest monthly income drop in 20 years by Annalyn Kurtz posted 3/1/2013 on CNNMoney).

Personal income decreased by $505.5 billion in January, or 3.6%, compared to December (on a seasonally adjusted and annualized basis). That’s the most dramatic decline since January 1993, according to the Commerce Department.

It’s something of a combination of one-time events, though.

Monthly income was unusually high in December because companies paid out early dividends to avoid upcoming tax hikes.

Further proof that people change their behavior when the government increases taxes.  The surge in December that made January look so bad was due to one-time distributions of profits to avoid higher taxes.  So December wasn’t that good, either.  Just an aberration as people tried to avoid the higher taxes coming their way.

The payroll tax cut’s expiration also played a role in January’s drop, because most workers have to pay 2 percentage points more in taxes this year…

Meanwhile, economists are closely watching consumer spending, which accounts for about two-thirds of the U.S. economy…

Economists think that rising gas prices in February could cut into consumer spending temporarily. Gas prices rose 10% in February, according to AAA, but are expected to fall in coming weeks…

The Social Security tax break helped consumers at the 2012 election.  Allowing them more disposable income in the year before the election.  And helping them feel things weren’t that bad.  Of course this Social Security tax holiday drew down the Social Security surplus to a dangerous low.  Something they will have to make up for with even higher taxes than the 2% temporary cut used to help the president’s reelection.

Regulatory costs, environmental policies that have shut down oil drilling on public lands and inflation (the incessant quantitative easing of the Fed putting more and more dollars into circulation) are keeping gas prices high.  For you can hide inflation in some consumer goods by reducing package sizes but you can’t do that with gasoline.  Because you sell gas by the gallon.  So the full cost of the Fed’s inflationary policies hit gas prices hard.  And, of course, high gas prices increases prices for everything else that uses fuel.  A large factor in the rise in our grocery bills.  Taking a bigger bite out of family budgets.  Leaving little for other consumer spending.

All of that said, consumers are benefiting from a housing recovery and rising stock prices…

They’re not able to save much, though. On average, people saved about 2.4% of their disposable income in January, down from 6.4% in December. That marks the smallest saving rate since November 2007.

Rich people are benefitting from the housing ‘recovery’ and stock prices.  Those who have a lot of money left over after meeting the living expenses.  Who can save a lot of money.  And invest it into housing.  Or stocks.  In fact, that’s why the stock market does well on news of the Fed continuing their quantitative easing.  For the rich are taking advantage of that cheap money to borrow it.  So they can invest it.  Trading on the interest.  Borrowing at low interest rates.  And investing in something that earns a higher rate of return.  People struggling to make their paycheck buy everything it once did as prices rise everywhere aren’t enjoying any benefits from that cheap money.  As they have no money left over to even save up a down payment on a house.  So they can take advantage of those low housing prices.  No.  The poor and middle class are not reaping anything in the current economic ‘recovery’.  Only the rich are.

Under President Obama the rich are getting richer.  And the poor are getting poorer.  Because of his economic policies.  Especially the Keynesian policies.  Keynesians look at personal savings as leaks out of the economy.  For if people aren’t spending money they are wasting money.  Which is the point of low interest rates.  To get people to borrow money to buy things.  Thus stimulating economic activity.  And generating more consumer spending.  But all that quantitative easing has raised prices so much that consumers are left with less and less money to spend.  The poor and middle class aren’t borrowing money to buy new houses.  They’re just trying to get by on what little they have.  Hoping for good economic times to return when their personal incomes rise once again.

Keynesian economics don’t work.  Just as Keynesian stimulus does not stimulate.  If it did we wouldn’t still have fewer jobs in the U.S. economy than when President Obama took office.  And he spent about $8000 billion on a stimulus bill.  The American Recovery and Reinvestment Act of 2009.  Some critics said it failed as an $8000 billion stimulus wasn’t big enough.  Even though the Obama administration declared the summer of 2010 the Recovery Summer.  Proof that the American Recovery and Reinvestment Act of 2009 restored economic prosperity.  Even though it didn’t.  For things still haven’t returned to where they were under George W. Bush.  Despite 4 years of Keynesian policies.  That haven’t raised personal incomes.  The true measure of any economic recovery.  And when personal incomes are the lowest they’ve been in 20 years, there hasn’t been any economic recovery.  Despite $800 billion in stimulus.  And 4 years of President Obama’s Keynesian economic policies.

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Trend Analysis – Liquidity

Posted by PITHOCRATES - January 7th, 2013

Economics 101

Liquidity can be More Important than Profitability to a Small Business Owner

Small business owners lose a lot of sleep worrying if they will have enough cash for tomorrow.  For next week.  For next month.  You can increase sales and add new customers but unless this creates cash those new sales and new customers may cause more problems than they help.  For a lot of businesses fail because they run out of cash.  Often times learning they have a cash problem only when they don’t have the cash to pay their bills.  So savvy business owners study their financial statements each quarter.  Even each month.  Looking for signs of trouble BEFORE they don’t have the cash to pay their bills.

Investors poor over corporations’ financial statements to make wise investment decisions.  Crunching a lot of numbers.  Analyzing a myriad of financial ratios.  Gleaning a lot of useful information buried in the raw numbers on the financial statements.  Small business owners analyze their financial statements, too.  But not quite to the extent of these investors.  They may look at some key numbers.  Focusing more on liquidity than profitability.  For profits are nice.  But profits aren’t cash.  As a lot of things have to happen before those profits turn into cash.  If they turn into cash.  The following are some balance sheet and income statement accounts.  Following these accounts are some calculations based on the values of these accounts.  With four quarters of data shown.

So what do these numbers say about this year of business activity?  Well, the business was profitable in all four quarters.  And rather profitable at that.  Which is good.  But what about that all important cash?  With each successive quarter the business had a lower cash balance.  That’s not as good as those profitability numbers.  And what about accounts receivable and inventory?  There seems to be some large changes in these accounts.  Are these changes good or bad?  What about accounts payable?  Accrued expenses?  Current portion of long-term debt?  These all went up.  What does this mean in the grand scheme of things?  Looking at these numbers individually doesn’t provide much information.  But when you do a little math with them you can get a little more information out of them.

In Trend Analysis a Downward sloping Current Ratio indicates a Potential Liquidity Problem

Current assets are cash or things that a business can convert into cash within the next 12 months.  Current liabilities are things a business has to pay within the next 12 months.  Current assets, then, are the resources you have to pay your current liabilities.  The relationship between current assets and current liabilities is a very important one.  Dividing current assets by current liabilities gives you the current ratio.  If it’s greater than one you are solvent.  You can meet your current financial obligations.  If it’s less than one you will simply run out of current resources before you met all of your current liabilities.  In our example this business has been solvent for all 4 quarters of the year.

Days’ sales in receivables is one way to see how your customers are paying their credit purchases.  The smaller this number the faster they are paying their bills.  The larger the number the slower they are paying their bills.  And the slower they pay their bills the longer it takes to convert your sales into cash.  Days’ sales in inventory tells you how many days of inventory you have based on your inventory balance and the cost of that inventory.  The smaller this number the faster things are moving out of inventory in new sales.  The larger this number is the slower things are moving out of inventory to reflect a decline in sales.  These individual numbers by themselves don’t provide a lot of information for the small business owner.  Big corporations can compare these numbers with similar businesses to see how they stack up against the competition.  Something not really available to small businesses.  But they can look at the trend of these numbers in their own business and gain very valuable information.

The above chart shows the 4-quarter trend in three important liquidity numbers.  Days’ sales in receivables increased after the second quarter upward for two consecutive quarters.  Indicating customers have paid their bills slower in each of the last two quarters.  Days’ sales in inventory showed a similar uptick in the last two quarters.  Indicating a slowdown in sales.  Both of these trends are concerning.  For it means accounts receivable are bringing in less cash to the business.  And inventory is consuming more of what cash there is.  Which are both red flags that a business may soon run short of cash.  Something the three quarters of falling current ratio confirm.  This business is in trouble.  Despite the good profitability numbers.  The downward sloping current ratio indicates a potential liquidity problem.  If things continue as they are now in another 2 quarters or so the business will become insolvent.  So a business owner knows to start taking action now to conserve cash before he or she runs out of it in another 2 quarters.

Keynesian Stimulus Spending can give a Business a Current Ratio trending towards Insolvency

In fact, this business was already having cash problems.  The outstanding balance in accounts payable increased over 100% in these four quarters.  Not having the cash to pay the bills the business paid their bills slower and the balance in outstanding accounts payable rose.  Substantially.  As the cash balance fell the business owner began borrowing money.  As indicated by the increasing amounts under current portion of long-term debt and interest expense.  Which would suggest substantial borrowings.  Putting all of these things together and you can get a picture of what happened at this business over the past year.  Which started out well.  Then experienced a burst of growth.  But that growth disappeared by the 3rd quarter.  When sales revenue began a 2-quarter decline.

Something happened to cause a surge in sales in the second quarter.  Something the owner apparently thought would last and made investments to increase production to meet that increased demand.  Perhaps hiring new people.  And/or buying new production equipment.  Explaining all of that borrowing.  And that inventory buildup.  But whatever caused that surge in sales did not last.  Leaving this business owner with excess production filling his or her inventory with unsold goods.  And the rise in days’ sales in receivables indicates that this business is not the only business dealing with a decline in sales.  Suggesting an economic recession as everyone is paying their bills slower.

So what could explain this?  A Keynesian stimulus.  Such as those checks sent out by George W. Bush to stimulate economic activity.  Which they did.  Explaining this sales surge.  But a Keynesian stimulus is only temporary.  Once that money is spent things go right back to where they were before the stimulus.  Unfortunately, this business owner thought the stimulus resulted in real economic activity and invested to expand the business.  Leaving this owner with excess production, bulging inventories, aging accounts receivable and a disappearing cash balance.  And a current ratio trending towards insolvency.  Which is why Keynesian stimulus spending does not work.  Most businesses know it is temporary and don’t hire or expand during this economic ‘pump priming’.  While those that do risk insolvency.  And bankruptcy.

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Christmas and Keynesian Stimulus

Posted by PITHOCRATES - December 24th, 2012

Economics 101

Christians may not like the Crass Commercialization of Christmas but the Left Loves It

The Left does not have a war on Christmas per se.  For they love the consumer spending part of Christmas.  Which is pure Keynesian.  People go into debt to spend more money at retailers.  They love that part of Christmas.  What they don’t like is the religious stuff.  Especially Jesus.

They don’t like Jesus because He is the God the Christians worship.  Their Lord and Savior.  It’s these Christians that bother the Left.  Because of their opposition to birth control (mostly Catholics), abortion and having fun in general.  The kind of fun adults enjoy.  The kind of things Christians frown on.  Premarital sex.  Gay love.  Drinking and using drugs.  Coarse language and sexual situations on television shows and in the movies.  Things they champion on the Left.  Which makes the Left hate Christianity.  Which they see as nothing but a great killjoy.

It’s the moralizing the Left does not like.  But the one thing Christians don’t like about Christmas, its crass commercialization, they do like.  So the Left will try to band images of Christ from Christmas displays wherever they can.  Despite Christmas being the celebration of Christ’s birth.  But they will gather in Rockefeller Center to party when they light the Christmas tree.  Though they would prefer that we call it the holiday tree.

Retailers often become Profitable for the Year only because of this Temporary Spending Surge at Christmas

So there are two Christmases.  The one where Christians celebrate the birth of Christ.  Wish for peace on earth.  And good will towards man.  And the other Christmas.  The one marked by the orgy of consumer spending.  Much of it funded by one-time Christmas bonuses.  A celebration of demand-side Keynesian economics.  Where people spend their hard earned money instead of saving it.  And when their money runs out they spend even more using their credit cards.

Keynesians have a bunch of charts and graphs showing how great a stimulus this Christmas spending is to the economy.  And mathematical formulas.  They can tell you about the velocity of money. How fast money travels through the economy when it goes from consumer to seller.  The seller then becomes consumer.  And spends the money they just received.  Then the person who receives this money in a sales transaction goes out and spends it as a consumer.  And on and on it goes.  Flying through though the economy at breakneck speed.  Generating a whole lot of economic activity.

Retailers often become profitable for the year only because of this spending surge at Christmas.  In fact, to handle this surge in business they hire a lot of people at Christmas time.  Part-time people.  Proving again that pumping money into the economy creates jobs.  The main tenet of Keynesian monetary policy.  Pump cash into the economy and people will spend it.  Something the Keynesians have been doing since Richard Nixon decoupled the dollar from gold in 1971.  Ending any semblance of responsible monetary policy.  And recessions forever.  At least, that was the plan.

Keynesian Stimulus is nothing more than an Orgy of Temporary Consumer Spending just like at Christmas Time

When the economy slows down and people stop buying stuff businesses have to lay off workers.  So they won’t build stuff that no one will buy.  Laid off workers no longer have money to buy things.  Which causes other business to lay off workers.  So THEY won’t build stuff that no one will buy.  It’s a vicious cycle.  In fact, we call it the business cycle.  The boom-bust cycle.  From expansion to contraction.  From an economy hiring people to an economy laying off people.

Keynesian economics was supposed to remove the contraction side of the business cycle.  By picking up the spending slack.  When consumers stopped spending money the government would step in and replace their spending.  We call it stimulus spending.  Often spending money the government doesn’t have.  So they run a deficit (i.e., borrow money).  Or simply print money.  Which they did a lot of in the Seventies.  Unfortunately, as it turns out, you just can’t do that.  For when you print money you devalue it.  Which raises prices.  As it takes more of these devalued dollars to buy what they once did.

And this is why Keynesian economics doesn’t work.  Because a Keynesian stimulus is nothing more than an orgy of consumer spending.  Just like at Christmas time.  Which happens only for a limited time.  Businesses hire temporary part-time workers at Christmas because this spending does not last.  As it does not last during a Keynesian stimulus.  It doesn’t create any full-time jobs.  Because employers know it is only temporary.  And they know that higher prices will soon follow.  As they do after Christmas when the discounting ends.  Which will reduce future economic activity.  As it does after Christmas.  Once the deals end so too ends the orgy of consumer spending.  Leaving people to deal with the aftermath.  Depleted bank accounts.  A lot of credit card debt.  And a little buyer’s remorse.

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Hurricane Sandy Generates Economic Activity at the Expense of those who Lost Their Homes

Posted by PITHOCRATES - November 25th, 2012

Week in Review

Hurricane Sandy left a swathe of destruction in its path.  But it turns out there is a silver lining to this death and destruction.  It’s providing an economic stimulus.  A regular Keynesian stimulus bill.  Only without the messiness of having to get a majority vote in Congress.  Something the politicians can really get behind.  If only they could get a hurricane generating machine (see Sandy Seen Boosting U.S. With as Much as $240 Billion Rebuilding by Jeff Kearns, Susanna Pak and Noah Buhayar posted 11/23/2012 on Bloomberg).

John Cataneo is working his 20 employees overtime and still can’t keep up with demand from customers who need plumbing repaired after superstorm Sandy. He says he’s hired two new workers and may need more…

Cataneo’s experience shows how the storm is giving the U.S. Northeast — and the rest of the country — an economic boost that may eventually surpass the loss of business it caused. Reconstruction and related purchases and hiring may range from $140 billion to $240 billion and increase U.S. economic growth by 0.5 percentage point next year, assuming $50 billion in losses, according to Economic Outlook Group LLC, a Princeton, New Jersey-based forecasting firm.

Well, that’s good news, isn’t it?  Up to $240 billion in new economic activity.  Wow.  Guess hurricanes are good things.  A blessing.  Providing new jobs.  Injecting new money into the local economy.  Why, there hardly is a downside.  Except for this (see After Sandy damage, insurance adjusters may bring more bad news by Ben Berkowitz, Michelle Conlin and Jonathan Allen posted 11/23/2012 on Reuters).

After another day of pumping out their swampy, moldy houses, neighbors in Breezy Point in New York City huddled at the quaint generator-powered firehouse Wednesday night, stamping their feet to stay warm. Neighbors picked at food from tin cans and sipped soups from Styrofoam cups as they lamented the growing holes in a safety net they thought they had: homeowner’s insurance.

“They’re covering five shingles and a piece of gutter, and that’s it,” says Kathleen Valentine, a fire alarm dispatcher who spent the night of Superstorm Sandy working while her house filled with water and dead fish. Her insurance agent from Narragansett Bay Insurance Company said her policy would pay only for wind damage. She is still waiting for someone from the federal flood insurance program to show up…

The trouble is, many homeowners don’t read those policies closely enough to realize that most don’t cover flooding. They don’t always get both homeowner’s insurance, usually provided by a private company, and flood insurance provided through the U.S. government’s National Flood Insurance Program.

Only 14 percent of homeowners in the Northeast hold flood insurance policies, according to the Insurance Information Institute.

Federal law requires flood insurance to mortgage any home in a designated high-risk floodplain. But once the initial policy, usually for a year term, expires, no law says you have to renew it, and many people don’t because banks don’t make them.

In New Jersey, only 231,000 of the homes in the 20 coastal counties had flood insurance, according to FEMA.

There’s a reason why private insurance companies don’t sell flood insurance to people living in high-risk floodplains.  The cost of the policies would be so high to cover the losses in the event of a flood (pretty much rebuilding all houses in the area) that no one would buy the insurance.  So why bother?  Which is why the federal government provides flood insurance.  So they can spread the cost of flood claims to people who don’t live in high-risk floodplains.  Something insurance companies can’t do.  Because they don’t have the power to tax or print money.  But even the policies the government sells are too expensive for 86% of the people living in high-risk floodplains.  So they don’t buy them.  And suffer the consequences when the flood comes.

So that blessing of Keynesian-like economic stimulus?  The money to pay for it comes from in part insurance companies who can’t invest that money elsewhere.  In part from the federal government, further increasing the federal deficit which is ultimately paid by the taxpayers.  But mostly from the people who lost everything and have to pay out of pocket to rebuild their lives.  This is the blessing of that economic activity.  The destruction of lives so other people can prosper.

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Economic Stimulus

Posted by PITHOCRATES - November 5th, 2012

Economics 101

Prices match Supply to Demand letting Suppliers know when to bring more Goods and Services to Market

There is a natural ebb and flow to the economy.  Through good times and bad.  And you can tell which way the economy is heading by prices in the market place.  When prices are rising times are typically good.  As people are gainfully employed with money to spend.  As they compete with each other for the goods and services in the market place demand rises.  Growing greater than the supply of goods and services.  So prices rise.  Because when there are fewer goods and services they are worth more money.  For those who have them to sell.  Because demand is so great people are willing to pay top dollar for them.  To get them while supplies last.  This attracts the attention of other suppliers.  Who want to cash in on those high prices.  So they bring more goods and services to market.

In time supply catches up to demand.  And passes it.  Suddenly the market has more goods and services than people are buying.  As inventories grow retailers stop buying so much from their wholesale suppliers.  Who in turn stop buying so much from their manufacturers.  Who in turn stop buying so much from their raw material suppliers.  And manufacturers and their raw material suppliers begin laying off workers.  So there are fewer people gainfully employed with money to spend.  The fewer gainfully employed buy less than the more gainfully employed.  Causing inventories to grow larger as more goods are going into them than are coming out of them.  So they start cutting prices.  To unload these inventories before people start buying even less.  Because they spent a lot of money to build those inventories.  And it costs to hold these items in warehouses and stockrooms.

And that’s the natural ebb and flow of the economy.  What economists call the business cycle.  That goes from an expanding economy to a contracting economy.  From boom to bust.  From inflation to recession.  Something normal.  And natural.  Though it could be unpleasant for those who lose their jobs.  But it’s something that must happen.  To correct prices.  You see, prices make all of this work automatically.  They match supply to demand.  Letting suppliers know when to bring more goods and services to market.  And when they’ve brought too much.  When the economy goes into recession prices fall.  Which tells suppliers that supply exceeds demand.  And that anything additional they bring to market will not sell.  As they incur costs to bring things to market this is very good information to have.  So they don’t waste money.  Leaving their businesses short of cash.  Possibly causing their businesses to fail.

Whenever we Devalue the Dollar with Inflationary Monetary Policy Prices Rise

No one likes losing their job.  Because they need income to pay their bills.  And the government doesn’t like people losing their jobs.  Because they tax those incomes to pay the government’s bills.  And unemployed people pay no income taxes.  So the government tries to tweak the economy.  At the federal level.  To extend the inflationary periods of the business cycle.  And they do that with inflationary monetary policy.  Using their monetary powers to keep interest rates below the true market interest rate.  Hoping it will encourage suppliers and consumers to keep borrowing and spending money.  Even though supply had already caught up to and passed demand.  Such that everyone that wanted to buy something could.  While every supplier that wanted to sell something couldn’t.

Some people take advantage of these lower interest rates.  Some people will remortgage their homes to lower their monthly payment.  Which will give them a little more disposable cash each month.  Which they may use to buy more stuff.  But other people will take this opportunity to buy a large house just because of the low interest rate.  As some businesses may borrow to expand their business just because of the low interest rate.  Not for unmet demand.  These actions may not help the economy.  In fact they may hurt the economy in the long-term.  When the inevitable recession comes along and they are so overextended they may not be able to pay their bills.  They may lose their house.  Or their business.  For the worst thing to have whenever you suffer a reduction in revenue or income is debt.

But there is an even worse effect of that inflationary monetary policy.  When you increase the money supply you increase the total amount of dollars in the economy.  But they’re chasing the same amount of goods and services.  Which makes each dollar worth less.  Requiring more of them to buy the same things they once did.  Which is why whenever we devalue the dollar with inflationary monetary policy prices rise.  So, yes, there may be an initial expansion of economic activity.  But some people will have inflationary expectations.  That is, they know prices will go up in the very near future.  So they won’t increase production.  Why?  While an initial burst of economic activity may draw down those bloated inventories those coming higher prices will increase business costs.  Which businesses will have to pass on in the prices of their goods.  And how do higher prices affect consumers?  They buy less.  So manufacturers are not going to expand production when price inflation is going to reduce their sales in the long run.

Cutting Taxes and Reducing Costly Regulations have Stimulated Economic Activity every time they’ve been Tried

Perhaps the worst effect of inflation is the false information those higher prices give.  When consumer demand rises so do prices.  And it’s a signal to suppliers to bring more goods and services to market.  But when prices rise because of a depreciated dollar and NOT due to higher consumer demand, some may bring more goods and services to market when there is no demand for it.  So you have rising prices.  And expanding production.  Producing more goods than the market is demanding.  Creating a bubble.  Adding a lot of stuff to the market place at very inflated prices.  That no one is buying.  Then the bubble bursts.  And recession sets in.  As businesses lay off workers to adjust supply to meet actual demand.  And those inflated prices fall back to market values.  The higher inflationary monetary policy pushed those prices up the farther they have to fall.  And the more painful the recession will be.

You see, inflationary monetary policy interferes with the natural ebb and flow of the economy.  And the automatic price mechanism that matches supply to demand.  By trying to expand the inflationary side of the business cycle, and contract the recessionary side, governments make recessions longer.  And more painful.  Which is why Keynesian stimulus policies (lowering interests rates and deficit spending) don’t stimulate long-term economic activity.  Yet it is what most governments turn to whenever the economy slows. While there is another way to stimulate economic activity.  One that is not so popular with most governments.  Across the board tax cuts on business and personal incomes.  And reducing costly regulations on businesses.  These make a more business-friendly environment.  Encouraging businesses to expand and hire people.  Because these actions will have a positive impact on a business’ long-term outlook.  And with consumers having more disposable income (thanks to the cuts in personal income tax rates) businesses know there will be a market of any increase in production.

So there you have two ways to stimulate economic activity.  One way that works (tax cuts and reducing costly business regulations).  And one that doesn’t (lowering interest rates and deficit spending).  So why is the one that doesn’t work chosen by most governments over the one that does?  Because governments like to spend money.  It’s how they build constituencies.  By giving generous benefits to voters.  But to do that they need tax revenue.  Lots of tax revenue.  Produced by increasing tax rates as often as they can.  So they cannot stand the thought of cutting taxes.  Ever.  Which is why they always choose inflationary policies over tax cuts.   Even though those policies fail to stimulate economic activity.  As proven throughout the era of Keynesian economics.  While cutting taxes and reducing costly regulations have stimulated economic activity every time they’ve been tried.

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After the Fed says they will Print More Money (QE3) Egan-Jones downgrades U.S. Sovereign Debt

Posted by PITHOCRATES - September 16th, 2012

Week in Review

Back when the Congress and the White House were battling it out to raise the debt limit the final compromise to raise the limit caused Standard and Poor’s to lower the U.S. sovereign debt rating for the first time in history.  The Left blamed the Republicans for refusing to raise taxes.  As if the excessive spending had nothing to do with it.  Well, another credit agency is downgrading the U.S. sovereign debt rating.  And this happened after the Fed announced QE3.  And nothing else (see Egan-Jones downgrades U.S. rating on QE3 move by Wallace Witkowski posted 9/14/2012 on Market Watch).

Egan-Jones Ratings Co. said Friday it downgraded its U.S. sovereign rating to AA- from AA on concerns that the Fed’s new round of quantitative easing, or QE3, will hurt the U.S. economy. The ratings agency said the Fed’s plan of buying $40 billion in mortgage-backed securities a month and keeping interest rates near zero does little to raise GDP, reduces the value of the dollar, and raises the price of commodities.

QE3 is Keynesian stimulus.  Printing money.  Which according to Egan-Jones won’t help the economy.  Apparently the people at Egan-Jones aren’t Keynesians.  Like in the Obama administration.  And at the Fed.  QE3 will devalue the dollar and raise prices.  While it may cause some short-term stimulus it will only make things worse in the long run.  Because of that inflation.  And it doesn’t address the real drag on the economy.  The anti-business policies of the Obama administration.  The biggest one being Obamacare.  With Taxmageddon right up there with it.  It’s the high taxes and costly regulatory policies that are holding back economic growth.  And devaluing the dollar doesn’t help these problems.  It only compounds them.  By raising prices.

QE3 will take a bad economy and make it worse.  Making the recession longer.  And the eventual recovery more painful.  Just like every recovery after a long period of inflation.  Just like after the Seventies.  Just like after the Nineties after the dot-com bubble burst.  Just like now after the subprime mortgage crisis.  There is a pattern here.  Easy money leads to irrational exuberance.  (Reckless spending encouraged by cheap money.)  And very unpleasant recoveries.  We got out of the early Eighties recession by cutting taxes.  Not with inflationary monetary policies.  We got out of the early 2000s recession by cutting taxes.  Along with some inflationary monetary policy.  The recovery wasn’t as long lasting as it was following the Eighties.  Now they are only proposing inflationary monetary policy without any tax cuts.  Which is why the Great Recession lingers still.  Proving tax cuts stimulate.  Not inflationary monetary policy.

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The Chinese Scale Back their Ambitious High-Speed Rail Plans because their Keynesian Polices Unleashed Inflation

Posted by PITHOCRATES - October 30th, 2011

Week in Review

Railroads are expensive to build.  And to operate.  Especially high-speed railroads.  Why?  Because unlike airplanes that fly in the air between cities trains have to travel on track between cities.  And that’s a whole lot of railroad infrastructure.  That’s why railroads don’t suffer as much during times of escalating fuel costs as trucking and aviation.  Because fuel isn’t their greatest cost.  As it is for trucks and planes.  It’s that massive infrastructure that they have to build.  And maintain.

To build a railroad you need lots of money.  And lots of labor.  Preferably cheap labor.  And that usually means government money.  And immigrant labor.  That’s how they built the first transcontinental railroad in America.  Along with a lot of inefficiencies.  And corruption.  Typical when you put government and big piles of money together.

That first transcontinental railroad needed a lot of ‘fixing up’ before it was safe for use.  They had to move some track from ice to terra firma.  Rebuild some bridges that weren’t disposable after a few uses.  That kind of thing.  Because that’s the kind of craftsmanship you get when government is in charge of the money.  What we call crony capitalism.  Government rewarding their friends.  Picking winners and losers.  And helping those who will help them.  That is, return the favor of government contracts with campaign contributions.

Governments all around the world are in favor of building more high-speed rail.  Because it will ‘put people to work’.  And ‘save the planet’.  By moving people out of gasoline-powered cars into electricity-powered trains.  Electricity that is generated from even more polluting coal-fired power plants.

The Americans have been trying.  Obama’s stimulus included billions for high-speed rail.  That did nothing.  Meanwhile the Chinese have been doing it.  By making money for the banks to lend.  And using cheap ‘second-class’ migrant labor from China’s countryside to build their high-speed rail.  And how has that been working?  Not so good (see Can’t pay, won’t pay posted 10/29/2011 on The Economist).

EFFORTS to curb inflation in China are having some painful side-effects. A squeeze on bank lending has prompted some businesses short of cash to stop paying wages to blue-collar workers. Even the much-vaunted state sector is feeling the pinch. Work has all but ground to a halt on thousands of kilometres of railway track, and many of the network’s 6m construction workers have been complaining about not being paid for weeks or sometimes months…

The government touted building railways as a great way to keep the economy buoyant during global financial trouble, and boost employment. But the $600 billion stimulus launched in 2008 is all but spent. Indeed, the central government has urged state banks to cut back on lending in order to curb inflation, which in the year to July reached a three-year high of 6.5%, before dropping to 6.1% in September.

Yet another example of why Keynesian economic stimulus stimulates only economic bubbles and inflation.  Which are always corrected by recessions.  And the greater the stimulus/bubble the greater the recession.  Of course Keynesian government economists everywhere will all come to the same conclusion.  That China isn’t spending enough.  And that governments everywhere should follow the Chinese example.  But without the one flaw of turning off the easy credit spigot.  Because Keynesians always say that any inflation created by government stimulus is minor and negligible in comparison to all the good that it does.

Similar problems have also been reported in road building and property construction, prompting a growing number of demonstrations and violent incidents, including clashes with employers and suicides. Such difficulties are likely to get worse towards the end of the year, when companies traditionally try to settle accounts with employees. Wage inflation is adding to employers’ woes. Minimum wages have risen by an average of nearly 22% in the two-thirds of China’s provinces which have adjusted them this year. Nice if you can get it, but not much use if you are not being paid at all.

But the Keynesians couldn’t be more wrong.  Once inflation starts it ripples through the economy.  Costs go up.  Wages go up.  Increasing consumer prices everywhere.  There’ll be some economic prosperity for a little while.  But soon inflation will eat away at the standard of living.  People will be making more money everywhere.  But that money will buy less and less.  It will buy less of a house.  Fewer toys.  And even less food.  This is the endgame of Keynesian stimulus.  And we’re seeing it played out on a grand scale in China.  Like we saw in Japan during their Lost Decade.  Where the Japanese suffered a deflationary spiral that just never ended.  To correct all that damage caused by their Keynesian bubble.

This could prove to have a devastating effect on the American economy.  For the Americans will have no one left to finance their debt.  And yet President Obama, the Democrats and all those mainstream Keynesian economists are all clamoring for one thing.  Can you guess what that is?  That’s right.  More Keynesian stimulus.

Some people just never learn.

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