Electric Car Builder Tesla increases Battery Order by 900%

Posted by PITHOCRATES - November 2nd, 2013

Week in Review

Say’s law states that supply creates its own demand.  Think of some of the greatest inventions in our life and you’ll see that Say’s law is true.  Today’s kitchens aren’t complete without a microwave oven.  Yet we didn’t demand a microwave oven.  Because we had no idea what it was until someone created it.  And told us how wonderful it was.  Then we started buying them.  The supply of microwaves came first.  The demand then followed.  Hence, supply created its own demand.  Just like Say’s law states.  You know who else believes in Say’s law?  Elon Musk.  The guy who founded PayPal.  SpaceX.  And Tesla Motors (see Tesla boosts battery order from Panasonic by Reuters posted 10/30/2013 on The Globe and Mail).

Tesla Motors Inc. will sharply increase the number of lithium ion battery cells it receives from Japan’s Panasonic Corp, in a deal that underscores the U.S. car maker’s confidence in the future of all-electric cars.

Electronics maker Panasonic, already Tesla’s primary supplier of lithium-ion batteries, will provide nearly 2 billion lithium ion cells to the car maker in the four years to 2017, the two companies said on Wednesday.

That is a big step-up from the 200 million cells Panasonic is expected to have supplied to Tesla in the two years ending this December.

The deal shows Tesla’s faith in its models despite slower-than-expected global sales of electric vehicles.

Going from 200 million to 2 billion?  That’s an increase of 900%.  It’s one thing to have faith and believe in your product.  Believing that your supply will create demand.  But there is another economic concept that may be pertinent here.  One from the Austrian school of economics.  Malinvestment.  Taking advantage of cheap capital and government subsidies to make bad investments.  Hence malinvestments.  For it is unlikely that any business is going to see a 900% sales growth in the coming year let alone the narrow niche market of electric cars.  Even Jean-Baptiste Say himself would probably say that’s some pretty wishful thinking that a 900% increase in supply will generate a corresponding demand.

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China, Taiwan, Four Asian Tigers and 1997 Asian Financial Crisis

Posted by PITHOCRATES - June 18th, 2013

History 101

Both Mao Zedong and Chiang Kai-shek were rather Brutal to any Political Opposition

Today many of the things we buy are stamped ‘Made in China’.  Because the Chinese can manufacture things cheaply.  For they have a booming export economy.  Which the Chinese built by introducing a little capitalism to the communist state.  And some things that were as un-capitalistic as you can get.  Like artificially low interest rates.  Currency manipulation.  Cheap labor.  And the strong arm of the communist ruling party to keep that labor cheap.  All of this to make their exports about the most inexpensive in the world.  Giving them a huge trade advantage.  Filling stores around the world with products stamped ‘Made in China’.

But before there was ‘Made in China’ there was ‘Made in Taiwan’.  Taiwan.  Officially the Republic of China (ROC).  Not to be confused with the People’s Republic of China (PRC).  AKA mainland China.  Taiwan (or the ROC) is an island in the Pacific Ocean off the China coast with Japan to the northeast and the Philippines to the south.  And is where Chiang Kai-shek and his Chinese Nationalists (Kuomintang or KMT) fled to during the Chinese Civil War when Mao Zedong and his communists conquered mainland China.

Both Mao Zedong and Chiang Kai-shek were rather brutal to any political opposition.  But while the PRC suffered some of the world’s worst famines and abject poverty Taiwan at least modernized into an advanced industrial economy.  Helped in large part by the KMT taking China’s gold reserves.  Their foreign currency reserves.  As well as the intellectual and business elites.  Who typically flee ahead of advancing communists.  As those are the people the communists usually kill or send off to reeducation camps.

International Investment poured into Southeast Asia and Spread the Asian Miracle beyond the Four Asian Tigers

Taiwan is one of the Four Asian Tigers.  Taiwan, South Korea, Singapore and Hong Kong developed advanced economies beginning in the early Sixties.  Thanks in part to laissez-faire economic policies of free trade, open markets, privatization and deregulation.  They also shrunk the size of their public sector.  And had a high savings rate.  Providing the capital for their industrialization.  While keeping personal and public debt levels low.  Because debt matters.  And the more of it you have the more difficult it is to get through a crisis.

But some of these countries also implemented non-laissez-faire economic policies.  Such as keeping domestic interest rates artificially low.  Even having special low rates for select export industries.  And there was some crony capitalism.  Government loaning to their crony capitalist friends.  Some of which disappeared thanks to a certain amount of corruption.  While a lot of it was used to make bad investments.  What those in the Austrian school of economics call malinvestments.  Investments not driven by the laws of supply and demand.  But for non-business reasons.  Growing big for the sake of being big.  Expanding just because of cheap interest rates.  Or the government choosing which businesses to expand.  And often choosing wrong.  Because those decisions were based on political reasons.  Or just a poor understanding of business in general.

The Asian Tigers served as a model for other nations.  Who followed their lead.  And got onto the export bandwagon.  Some even attracted foreign capital to build an export economy with high interest rates.  And pegged their currencies to the U.S. dollar.  To further encourage foreign investors to invest in their countries.  And it worked.  International investment capital poured into Southeast Asia.  Spreading the Asian Miracle beyond the Asian Tigers.

The Asian Tigers recovered the quickest thanks to their Laissez-Faire Economic Policies and their High Savings Rate

Then came the 1997 Asian financial crisis.  Starting in Thailand.  A nation that had a lot of foreign investment.  And a currency pegged to the U.S. dollar.  Then came a massive speculative attack on the currency.  Speculators were trying to force a devaluation of the Thai currency (the baht) by selling mass holdings of the baht.  In hopes of profiting by entering into agreements to repay a debt in baht at a later date.  If the baht devalued they could repay that debt with a cheaper baht.  Thus making a profit.  Thailand fought this devaluation, though.  By selling their foreign reserves to buy baht to maintain the peg to the U.S. dollar.  But they eventually ran out of foreign reserves to sell.  And had to let the baht float.  Causing a massive devaluation.  Making all that foreign debt much more expensive to repay.  Leading to defaults.  And bankruptcies.

Worried foreign investors started pulling their money out of Southeast Asia.  As they sold their holdings they flooded the foreign exchange market with these devalued currencies.  Putting additional pressure on exchange rates.  At the same time the United States was raising their interest rates to head off inflation there.  Those nations that pegged their currency to the U.S. dollar had to strengthen their currencies, too.  Raising the price of their exports.  Making them less competitive.  So exports fell.  Those higher U.S. interest rates made investment there more attractive.  Increasing the capital flight from these countries.  To try and stop this capital flight countries raised their interest rates.  Which further hurt their economies.  As it was more difficult and more costly to borrow money.

Before it was all said and done currencies, stock markets and other assets lost a lot of value in countries hit by the crisis.  Including the Asian Tigers.  But thanks to their laissez-faire economic policies and their high savings rate (except for South Korea) they recovered faster from the crisis than the other Southeast Asian countries.  Of the Four Asian Tigers South Korea suffered the most.  Thanks to a high level of foreign investment.  And numerous corporate bankruptcies.  Because of those malinvestments.  The causes of the 1997 Asian financial crisis are still debated today.  However what can’t be disputed is that those who suffered the least were those nations that embraced laissez-faire economic policies the most.  And those who interfered with market forces to stimulate an export economy tended to suffer more.  Something China (PRC) is doing.  Interfering with market forces to stimulate an export economy.  And making a lot of malinvestments.  As they try to bring their economy up to the standard of Taiwan (ROC).  Only without the laissez-faire economic policies the ROC used.  All but guaranteeing another financial crisis in the region.

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Banking, Lending Standards, Dot-Com, Subprime Mortgage and Bill Clinton’s Recessions

Posted by PITHOCRATES - March 19th, 2013

History 101

Lending more made Banks more Profitable as long as they Maintained Good Lending Standards

Money is a commodity.  And like any commodity the laws of supply and demand affect it.  If a lot of people want to borrow money interest rates rise.  This helps to make sure the people who want to borrow money the most can.  As they are willing to pay the higher interest rates.  While those who don’t want the money bad enough to pay the higher interest rates will let someone else borrow that money.  If few people want to borrow money interest rates fall.  To entice those people back into the credit markets who had decided not to borrow money when interest rates were higher.

Okay, but who is out there who wants people to borrow their money?  And why do they want this?  The key to any advanced civilization and the path to a higher standard of living is a good banking system.  Because if ordinary people can borrow money ordinary people can buy a house.  Or start a business.  Not just the rich.  For a good banking system allows a thriving middle class.  As people earn money they pay their bills.  And put a little away in the bank.  When a lot of people do this all of those little amounts add up to a large sum.  Which converts small change into capital.  Allowing us to build factories, automobiles, airplanes, cell towers, etc.  Giving us the modern world.  As banks are the intermediary between left over disposable cash and investment capital.

Banks are businesses.  They provide a service for a fee.  And they make their money by loaning money to people who want to borrow it.  The more money they lend the more money they make.  They pay people to use their deposits.  By paying interest to people who deposit their money with them.  They then loan this money at a higher interest rate.  The difference between what they pay to depositors and what they collect from borrowers pays their bills.  Covers bad loans.  And gives them a little profit.   Which can be a lot of profit if they do a lot of lending.  However, the more they lend the more loans can go bad.  So they have to be very careful in qualifying those they lend money to.  Making sure they will have the ability to pay their interest payments.  And repay the loan.

With the Federal Reserve keeping Interest Rates low Investors Borrowed Money and Poured it into the Dot-Coms

Just as a good banking system is necessary for an advanced civilization, a higher standard of living and a thriving middle class so is good lending standards necessary for a good banking system.  And when banks follow good lending standards economic growth is more real and less of a bubble.  For when money is too easy to borrow some people may borrow it to make unwise investments.  Or malinvestments as those in the Austrian school of economics call it.  Like buying an expensive car they don’t need.  A house bigger than their needs.  Building more houses than there are people to buy them.  Or investing in an unproven business in the hopes that it will be the next Microsoft.

America became the number one economic power in the world because of a good banking system that maintained good lending standards.  Which provided investment capital for wise and prudent investments.  Then the Keynesians in government changed that.  By giving us the Federal Reserve System.  America’s central bank.  And bad monetary policy.  The Keynesians believe in an active government intervening in the private economy.  That can manipulate interest rates to create artificial economic activity.  By keeping interest rates artificially low.  To make it easier for anyone to borrow money.  No matter their ability to repay it.  Or how poor the investment they plan to make.

The Internet entered our lives in the Nineties.  Shortly after Bill Gates became a billionaire with his Microsoft.  And investors were looking for the next tech geek billionaire.  Hoping to get in on the next Microsoft.  So they poured money into dot-com companies.  Companies that had no profits.  And nothing to sell.  And with the Federal Reserve keeping interest rates artificially low investors borrowed money and poured even more into these dot-coms.  Classic malinvestments.  The stock prices for these companies that had no profits or anything to sell soared.  As investors everywhere were betting that they had found the next Microsoft.  The surging stock market made the Federal Reserve chief, Alan Greenspan, nervous.  Such overvalued stocks were likely to fall.  And fall hard.  It wasn’t so much a question of ‘if’ but of ‘when’.  He tried to warn investors to cool their profit lust.  Warning them of their irrational exuberance.  But they didn’t listen.  And once that investment capital ran out the dot-com bubble burst.  Putting all those newly graduated computer programmers out of a job.  And everyone else in all of those dot-com businesses.  Causing a painful recession in 2000.

Based on the Labor Force Participation Rate we are in one of the Worse and Longest Recession in U.S. History

Encouraging malinvestments in dot-coms was not the only mismanagement Bill Clinton did in the Nineties.  For he also destroyed the banking system.  With his Policy Statement on Discrimination in Lending.  Where he fixed nonexistent discriminatory lending practices by forcing banks to abandon good lending standards.  And to qualify the unqualified.  Putting a lot of people into houses they could not afford.  Their weapon of choice for the destruction of good lending practices?  Subprime lending.  And pressure from the Clinton Justice Department.  Warning banks to approve more loans in poor areas or else.  So if they wanted to stay in business they had to start making risky loans.  But the government helped them.  By having Fannie Mae and Freddie Mac buying those risky, toxic loans from those banks.  Getting them off the banks’ balance sheets so they would make more toxic subprime loans.  And as they did Fannie Mae and Freddie Mac passed these mortgages on to Wall Street.  Who chopped and diced them into new investment vehicles.  The collateralized debt obligation (CDO).  High-yield but low-risk investments.  Because they were backed by the safest investment in the world.  A stream of mortgage payments.  Of course what they failed to tell investors was that these were not conventional mortgages with 20% down payments.  But toxic subprime mortgages where the borrowers put little if anything down.  Making it easy for them to walk away from these mortgages.  Which they did.  Giving us the subprime mortgage crisis.  And the Great Recession.

So Bill Clinton and his Keynesian cohorts caused some of the greatest economic damage this nation had ever seen.  For Keynesian policies don’t create real economic activity.  They only create bubbles.  And bubbles eventually burst.  As those highly inflated asset prices (stocks, houses, etc.) have to come back down from the stratosphere.  The higher they rise the farther they fall.   And the more painful the recession.  For this government intrusion into the private economy caused a lot of malinvestments.  A tragic misuse of investment capital.  Directing it into investments it wouldn’t have gone into had it not been for the government’s interference with market forces.  And when the bubble can no longer be kept aloft market forces reenter the picture and begin clearing away the damage of those malinvestments.  Getting rid of the irrational exuberance.  Resetting asset prices to their true market value.  And in the process eliminating hundreds of thousands of jobs.  Jobs the market would have created elsewhere had it not been for the Keynesian interference.  We can see the extent of the damage of these two Clinton recessions if we graph the growth of gross domestic product (GDP) along with the labor force participation rate (the percentage of those who are able to work who are actually working).  As can be seen here (see Percent change from preceding period and Employment Situation Archived News Releases):

Labor Force Participation Rate and GDP Growth

The first Clinton recession caused a decline in the labor force participation rate (LFPR) that didn’t level out until after 2004.  Even though there were not two consecutive quarters of negative GDP growth during this time.  Usually what it takes to call an economic slump a recession.  But the falling LFPR clearly showed very bad economic times.  That began with the dot-com bubble bursting.  And was made worse after the terrorist attacks on 9/11.  Eventually George W. Bush pulled us out of that recession with tax cuts.  The much maligned Bush tax cuts.  Which not only caused a return to positive GDP growth.  But it arrested the decline of the LFPR.  But the good times did not last.  For the second Clinton recession was just around the corner.  The subprime mortgage crisis.  Created with President Clinton’s Policy Statement on Discrimination in Lending.  That unleashed real economic woe.  Woe so bad we call it the Great Recession.  The little brother of the Great Depression.

This recession not only had two consecutive quarters of negative GDP growth but five of six consecutive quarters showed negative growth.  And one of those quarters nearly reached a negative ten percent.  Which is when a recession becomes a depression.  This recession was so long and so painful because those artificially low interest rates and the pressure on bankers to lower their lending standards created a huge housing bubble.  Pushing housing prices so high that when the housing bubble burst those prices had a very long way to fall.  Worse, President Obama kept to the Keynesian policies that caused the recession.  Trying to spend the economy out of recession.  Instead of cutting taxes.  Like George W. Bush did to pull the economy out of the first Clinton recession.  Worse, anti-business policies and regulations stifled any recovery.  And then there was Obamacare.  The great job killer.  Which he helped pass into law instead of trying to end the Great Recession.  GDP growth eventually returned to positive growth.  And the official unemployment fell.  A little.  But the president’s policies did nothing to reverse one of the greatest declines in the LFPR.  More people than ever have disappeared from the labor force.  That will take a lot of time and a lot of new, real economic activity to bring them back into the labor force.  And no matter what the current GDP growth rate or the official unemployment rate are it doesn’t change the reality of the economy.  Based on the LFPR it is in one of the worse and longest recession in U.S. history.  And the worse recovery since the Great Depression.  Because of President Obama’s embrace of Keynesian policies.  Which do more to increase the size of government than help the economy.

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China adopts Keynesian Policies and Wastes Capital on a lot of Hayekian Malinvestments

Posted by PITHOCRATES - January 22nd, 2012

Week in Review

Keynesians love Big Government.  And state capitalism.  Where the state actively intervenes in the private sector.  So you know the Keynesians love China.  As the Chinese leadership loves Keynes (see Keynes v Hayek in China posted 11/17/2011 on The Economist).

The present leadership of the Chinese Communist Party, Hu Jintao and Wen Jiabao, have embraced Keynesian prescriptions with great determination. In response to the financial crisis of 2008 they approved an audacious stimulus package, unbalancing the government’s books and spurring the country’s banks to lend. That helped defend their peculiar brand of capitalism from a crushing slowdown…

Whereas Keynes worried about inadequate investment—too little entrepreneurial spending to keep everyone gainfully employed—Hayek worried about bad investment. If credit were too easy, he argued, entrepreneurs would embark on overambitious projects that take too long to reach fruition and make insupportable claims on society’s resources.

It is not hard to find overambitious projects in China: think of the country’s “ghost cities”, such as Ordos in Inner Mongolia, which is being built by government fiat long before people are ready to live in it…

Spurred on by the government, China’s banks increased their lending by almost 9.6 trillion yuan ($1.5 trillion) in 2009. That is roughly twice the size of the Indian banking system, as Bank Credit Analyst, a research company, has pointed out. In other words, China’s lenders added two Indias to their loanbooks in the space of a year…

China’s authorities now admit what was always obvious: many of these projects will fail to raise enough revenue to repay their creditors. Defaults have already surfaced in Yunnan province and elsewhere. Some of these projects will be abandoned halfway. They are what Hayek would call “malinvestments”, investments in capacity that no one is willing to pay for or wait for.

It is clear that China’s Keynesian policies have produced exactly what Hayek said they would.  A whole bunch of malinvestments.  A great misallocation of productive capital.  Building things that no one wants.  Such as empty apartment buildings in ‘ghost’ cities.  Capitalists could have used that capital to build who knows what.  But we’ll never know.  Because the free market didn’t allocate that capital to where capitalists would have used it to produce things people wanted.  Pretty much anything but empty apartment buildings in ‘ghost’ cities.

If those empty apartment buildings have to demolished a Keynesian would be okay with that.  Because those demolition crews would be paid.  And they would then take those wages and buy stuff.  Thus generating more economic activity.  Just as a Keynesian would be okay with you buying 4 identical flat-screen televisions only to throw 3 away.  Because the purchase of 4 flat-screens generates more economic activity than the purchase of only one.  So if you’re a fan of Keynesian economics and state capitalism you can do your part.  Whenever you buy anything by an extra 3 so you can throw them away.  And see how Keynesian economics makes you, the capital provider, feel.

I’m guessing it may convert you from a Keynesian to a Hayekian.  When you learn how terrible it is to waste good capital, a.k.a. your paycheck.

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