Henry Ford, Bill Hewlett & Dave Packard, Steve Jobs & Steve Wozniak, Howard Schultz, Ray Kroc and Richard Branson

Posted by PITHOCRATES - February 25th, 2014

 History 101

(Originally published May 8th, 2012)

Capitalism allows Entrepreneurs to bring their Great Ideas to Life

Entrepreneurs start with an idea.  Of how to do something better.  Or to create something we must have that we don’t yet know about.  They think.  They create.  They have boundless creative energies.  And the economic system that best taps that energy is capitalism.  The efficient use of capital.  Using capital to make profits.  And then using those profits to make capital.  So these ideas of genius that flicker in someone’s head can take root.  And grow.  Creating jobs.  And taxable economic activity.  Creating wealth for investors and workers.  Improving the general economy.  Pulling us out of recessions.  Improving our standard of living.  And making the world a better place.  Because of an idea.  That capitalism brought to life.

Entrepreneurs Risked Capital to bring Great Things to Market and to Create Jobs

Henry Ford established the Detroit Automobile Company in 1899.  Which failed.  He reorganized it into the Henry Ford Company in 1901.  Ford had a fight with his financial backers.  And quit.  Taking the Ford name with him.  And $900.  The Henry Ford Company was renamed Cadillac and went on to great success.  Ford tried again and partnered with Alexander Malcomson.  After running short of funds they reorganized and incorporated Ford Motor Company in 1903 with 12 investors.  The company was successful.  Some internal friction and an unexpected death of the president put Ford in charge.  Ford Motor built the Model A, the Model K and the Model S.  Then came the Model T.  And the moving assembly line.  Mass production greatly increased the number of cars he could build.  But it was monotonous work for the assembly line worker.  Turnover was high.  So to keep good workers he doubled pay in 1914 and reduced the 9-hour shift to 8 hours.  This increased productivity and lowered the cost per Model T.  Allowing those who built the cars to buy what they built.  In 2011 the Ford Motor Company employed approximately 164,000 people worldwide.

Bill Hewlett and Dave Packard established Hewlett-Packard (HP) in 1939.  In a garage.  They raised $538 in start-up capital.  In that garage they created their first successful commercial product.  A precision audio oscillator.  Used in electronic testing.  It was better and cheaper than the competition.  Walt Disney Productions bought this oscillator to certify Fantasound surround sound systems in theaters playing the Disney movie Fantasia.  From this garage HP grew and gave us calculators, desktop and laptop computers, inkjet and laser printers, all-in-one multifunction printer/scanner/faxes, digital cameras, etc.  In 2010 HP employed approximately 324,600 employees worldwide.  (Steve Wozniak was working for HP when he designed the Apple I.  Which he helped fund by selling his HP calculator.  Wozniak offered his design to HP.  They passed.)

Steve Jobs had an idea to sell a computer.  He convinced his friend since high school, Steve Wozniak, to join him.  They sold some of their things to raise some capital.  Jobs sold his Volkswagen van.  Wozniak sold his HP scientific calculator.  They raised about $1,300.  And formed Apple.  They created the Apple I home computer in 1976 in Steve Jobs’ garage.  From these humble beginnings Apple gave us the iPad, iPhone, iPod, iMac, MacBook, Mac Pro and iTunes.  In 2011 Apple had approximately 60,400 full time employees.

Jerry Baldwin, Zev Siegl, and Gordon Bowker opened the first Starbucks in 1971 in Seattle, Washington.  About 10 years later Howard Schultz drank his first cup of Starbucks coffee.  And he liked it.  Within a year he joined Starbucks.  Within another year while traveling in Italy he experienced the Italian coffeehouse.  He loved it.  And had an idea.  Bring the Italian coffeehouse to America.  A place to meet people in the community and converse.  Sort of like a bar.  Only where the people stayed sober.  Soon millions of people were enjoying these tasty and expensive coffee beverages at Starbucks throughout the world.  In 2011 Starbucks employed approximately 149,000 people.

Ray Kroc sold Prince Castle Multi-Mixer milk shakes mixers to a couple of brothers who owned a restaurant.  Who made hamburgers fast.  Richard and Maurice McDonald had implemented the Speedee Service System.  It was the dawn of fast food.  Kroc was impressed.  Facing tough competition in the mixer business he opened a McDonald’s franchise in 1955.  Bringing the grand total of McDonald’s restaurants to 9.  He would go on to buy out the McDonald brothers (some would say unscrupulously).  Today there are over 30,000 stores worldwide.  In 2010 McDonald’s employed approximately 400,000 people.

Richard Branson started a magazine at 16.  He then sold records out of a church crypt at discount prices.  The beginning of Virgin Records.  In 1971 he opened a record store.  He launched a record label in 1972.  And a recording studio.  Signing the Sex Pistols.  And Culture Club.  In 1984 he formed an airline.  Virgin Atlantic Airways.  In 1999 he went into the cellular phone business.  Virgin Mobile.  In 2004 he founded Virgin Galactic.  To enter the space tourism business.  His Virgin Group now totals some 400 companies.  And employs about 50,000 people.

The Decline of Capitalism and the Rise of the Welfare State caused the European Sovereign Debt Crisis

And we could go on.  For every big corporation out there will have a similar beginning.  Corporations that use capital efficiently.  Bringing great things to market.  Introducing us to new things.  Always making our lives better.  And more comfortable.  One thing you will not find is a great success story like this starting in the Soviet Union.  The People’s Republic of China (back in the days of Mao Zedong).  East Germany (before the Berlin Wall fell).  North Korea.  Or Cuba.  No.  The command economies of communist countries basically froze in time.  Where there was no innovation.  No ideas brought to life.  Because the government kind of frowned on that sort of thing.

There is a reason why the West won the Cold War.  And why we won that war without the Warsaw Pack and NATO forces fighting World War III.  And why was this?  Because we didn’t need to.  For the communist world simply could not withstand the forces of living well in the West.  Whenever they could their people escaped to the West.  To escape their nasty, short and brutish lives.  In the command economies of their communist states.  Where the state planners failed to provide for their people.  Even failing to feed their people.  The Soviet Union, the People’s Republic of China and North Korea all suffered population reducing famines.  But not in the West.  Where we are not only well fed.  But our poor suffer from obesity.  Which is not a good thing.  But it sure beats dying in a famine.

Sadly, though, the West is moving towards the state planning of their one time communist foes.  Social democracies are pushing nations in the European Union to bankruptcy.  Japan’s generous welfare state is about to implode as an aging population begins to retire.  Even in the United States there has been a growth of government into the private sector economy like never before.  Which is causing the Great Recession to linger on.  As it caused Japan’s lost decade to become two decades.  And counting.  As it is prolonging the European sovereign debt crisis.  With no end in sight.  The cause of all their problems?  The decline of capitalism.  And the rise of the welfare state.  Which just kills the entrepreneurial spirit.  And the creation of jobs.  Which is one cure for all that ails these countries.  And the only one.  For only robust economic activity can pull a country out of recession.  And for that you need new jobs.  And the entrepreneurial spirit.  In short, you need capitalism.

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The French People have reached their Limit on Taxes and Protest their Government

Posted by PITHOCRATES - November 10th, 2013

Week in Review

The American left wants what Europe has a lot of.  Social democracies.  They want a great nanny state in the United States that provides cradle-to-the-grave welfare.  All funded with lots and lots of taxes.  Look to Europe, they say.  No one there complains about their high taxes.  And they enjoy wonderful cradle-to-the-grave welfare.  This is what the American people want, too.  So they can be as happy and content as Europeans (see French riot police use tear gas on anti-tax protesters by AFP posted 11/9/2013 on France24).

French riot police fired tear gas at hundreds of anti-tax demonstrators in northwest France on Saturday after protesters pelted them and tried to drive a tractor through a barricade, an AFP photographer said…

Demonstrators chanted slogans against France’s Socialist government, which earlier this month suspended the application of the so-called ecotax…

There were more anti-tax protesters elsewhere in Brittany and also around the country, including near the major cities of Lyon and Marseille, and in the capital Paris.

The ecotax, aimed at encouraging environmentally friendly commercial transport, imposes new levies on French and foreign vehicles transporting commercial goods weighing over 3.5 tonnes.

Well, apparently the French have reached their limit on taxes.  And this after they elected a socialist to office.

This is why there is such a sense of urgency on the left.  When Barack Obama became president what did the left do?  Address the horrible economy?  No.  They passed one of the largest welfare programs in history.  Obamacare.  While they held the House and Senate.  So instead of trying to make life better for all Americans by cutting taxes and regulations to stimulate economic activity they rammed Obamacare into law.  While they could.  For it isn’t often when the Democrats control the presidency and both houses of Congress.

And now there is even greater urgency.  For Europe’s social democracies are imploding.  And these nations are even turning away from their socialist pasts.  Turning back towards capitalism.  Which explains the urgency.  They want to hurry up and get a European-style social democracy in America before all of Europe abandons them.  Severely weakening the ‘look to Europe’ argument.  Especially if Europe embraces capitalism following the collapse of their social democracies.

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FT167: “When we lived more austerely there was no need for painful austerity to cure a bloated government.” —Old Pithy

Posted by PITHOCRATES - April 26th, 2013

Fundamental Truth

Wise Men in Governments can Do Anything but Pay for their Nanny States

Economics changed in the early Twentieth Century.  America once again had a central bank.  Progressives were expanding the role of government.  And a new economist entered the scene that the progressives just loved.  For he was a macroeconomist who said government should have an active role in the economy.  A role where government tweaked the economy to make it better.  Stronger.  While avoiding the painful corrections on the downside of a business cycle.  Something laissez-faire capitalism caused.  And could not prevent.  But if wise men in government had the power to tweak the private sector economy they could.  At least this is what the progressives and Keynesian economists thought.

That economist was, of course, John Maynard Keynes.  Who rewrote the book on economics.  And what really excited the progressives was the chapter on spending an economy out of a recession.  Now there were two ways to increase spending in an economy.  You can cut tax rates so consumers have bigger paychecks.  Or the government can spend money that they borrow or print.  The former doesn’t need any government intervention into the private sector economy.  While the latter requires those wise men in government to reach deep into that economy.  Guess which way governments choose to increase spending.  Here’s a hint.  It ain’t the one where they just sit on the sidelines.

Governments changed in the Twentieth Century.  Socialism swept through Europe.  And left social democracies in its wake.  Not quite socialism.  But pretty close.  It was the rise of the nanny state.  Cradle to grave government benefits.  A lot of free stuff.  Including pensions.  Health care.  College educations.  And a lot of government jobs in ever expanding government bureaucracies.  Where wise men in government made everything better for the people living in these nanny states.  And armed with their new Keynesian economic policies there was nothing they couldn’t do.  Except pay for their nanny states.

According to John Maynard Keynes raising Tax Rates reduces New Economic Activity

The problem with a nanny state is things change.  People have fewer babies.  Health care and medicines improve.  Increasing lifespans.  You put this together and you get an aging population.  The death knell of a nanny state.  For when those wise men in government set up all of those generous government benefits they assumed things would continue the way they were.  People would continue to have the same amount of babies.  And we would continue to die just about the time we retired.  Giving us an expanding population of new workers entering the workforce.  While fewer people left the workforce and quickly died.  So the tax base would grow.  And always be larger than those consuming those taxes.  In other words, a Ponzi scheme.

But then change came.  With the Sixties came birth control and abortion.  And we all of a sudden started having fewer babies.  While at the same time advances in medicine was increasing our lifespans.  Which flipped the pyramid upside down.  Fewer people were entering the workforce than were leaving it.  And those leaving it were living a lot longer into retirement.  Consuming record amounts of tax money.  More than the tax base could provide.  Leading to deficit spending.  And growing national debt.

Now remember those two ways to increase spending in the economy?  You either cut tax rates.  Or the government borrows and spends.  So if cutting tax rates will generate new economic activity (i.e., new spending in the economy) what will a tax increase do?  It will decrease spending in the economy.  And reduce new economic activity.  Which caused a problem for these nanny states with aging populations.  As the price tag on their nanny state benefits eventually grew greater than their tax revenue’s ability to pay for it.  So they increased tax rates.  Which reduced economic activity.  And with less economic activity to tax their increase in tax rates actually decreased tax revenue.  Forcing them to run greater deficits.  Which added to their national debts.  Increasing the interest they paid on their debt.  Which left less money to pay for those generous benefits.

President Obama’s Non-Defense Spending caused a Huge Spike in the National Debt not seen since World War II

It’s a vicious cycle.  And eventually you reach a tipping point.  As debts grow larger some start to question the ability of a government to ever repay their debt.  Making it risky to loan them any more money.  Which forces these countries with huge debts to pay higher interest rates on their government bonds.  Which leaves less money to pay for those generous benefits.  While their populations continue to age.  Taking you to that tipping point.  Like many countries in the Eurozone who could no longer borrow money to pay for their nanny states.  Who had to turn to the European Union, the European Central Bank and the International Monetary Fund for emergency loans.  Which did provide those emergency loans.  Under the condition that they cut spending.  Money in exchange for austerity.  Something that just galls those Keynesian economists.  For despite all of their financial woes coming from having too much debt they still believe these governments should spend their way out of their recessions.  And never mind about the deficits.  Or their burgeoning debts.

But these Keynesians are missing a very important and obvious point.  The problem these nations have is due to their inability to borrow money.  Which means they would NOT have a problem if they didn’t need to borrow money.  So austerity will work.  Because it will decrease the amount of money they need to borrow.  Allowing their tax revenue to pay for their spending needs.  Without excessive tax rates that reduce economic activity.  Making the nanny state the source of all their problems.  For had these nations never became social democracies in the first place they never would have had crushing debt levels that cause sovereign debt crises.  But they did.  And their populations aged.  Making it a matter of time before their Ponzi schemes failed.  Something no nation with a growing nanny state and an aging population can avoid.  Even the United States.  Who kept true to their limited government roots for about 100 years.   Then came the progressives.  The central bank.  And Keynesian economics.  Putting the Americans on the same path as the Europeans (see US Federal Debt As Percent Of GDP).

Debt as Percent of GDP and Wars R2

With the end of the Revolutionary War they diligently paid down their war debt.  Which was pretty much the entire federal debt then.  As the federal government was as limited as it could get.  Then came the War of 1812 and the debt grew.  After the war it fell to virtually nothing.  Then it soared to pay for the Civil War.  Which changed the country.  The country was bigger.  Connected by a transcontinental railroad.  And other internal improvements.  Which prevented the debt from falling back down to pre-war levels.  Then it shot up to pay for World War I.  After WWI the Roaring Twenties replaced progressivism and quickly brought the debt down again.  Then Herbert Hoover brought back progressivism and killed the Roaring Twenties.  FDR turned a bad recession into the Great Depression.  By following all of that Keynesian advice to spend the nation out of recession.  From the man himself.  Keynes.  The massive deficit spending of the New Deal raised the debt higher than it was during World War I.  Changing the country again.  Introducing a state pension.  Social Security.  A Ponzi scheme that would struggle once the population started aging.

Then came World War II and the federal debt soared to its highest levels.  After the war a long decline in the debt followed.  At the end of that decline was the Vietnam War.  And LBJ’s Great Society.  Which arrested the fall in the debt.  Its lowest point since the Great Depression.  Which was about as large as the debt during the Civil War and World War I.  Showing the growth in non-defense spending.  Then came Reagan’s surge in defense spending to win the Cold War.  Once the Americans won the Cold War the debt began to fall again.  Until the Islamist terrorist attacks on 9/11.  Halting the fall in the debt as the War on Terror replaced the Cold War.  Then came the Great Recession.  And President Obama.  Whose non-defense spending caused a huge spike in the national debt.  Taking it to a level not seen since World War II.  When an entire world was at war.  But this debt is not from defense spending.  It’s from an expanded nanny state.  As President Obama takes America into the direction of European socialism.  And unsustainable spending.  Which can end in only but one way.  Austerity.  Painful austerity.  Not like the discomfort of the sequester cuts that only were cuts in the rate of future growth.  But real cuts.  Like in Greece.

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FT161: “Only in government can rank amateurs be put in charge of industries.” —Old Pithy

Posted by PITHOCRATES - March 15th, 2013

Fundamental Truth

Politicians love Keynesian Economics because it’s a Pathway to European Social Democracy

For years now we’ve been hearing about President Obama’s efforts to create jobs.  Going all the way back to that laser-like focus he was putting on job creation.  And there was that $800 billion stimulus bill.  That stimulated little but Democrat campaign contributors.  The president has been talking about job creation for a long time.  Yes, he can talk the talk.  But he sure can’t walk the walk.

A big reason why the economy is still so anemic is in large part due to Obamacare.  The onerous requirements of the new health care law have frozen new hiring.  And dampened business growth.  For all those small businesses that are just starting up and trying to gain some traction see massive new costs coming their way.  On top of the massive costs they’re paying already.  From taxes.  To regulatory costs.  Increasing the cost of doing business.  And leaving less and less to reinvest into their business.  So they can grow and hire new people.  Creating jobs.  Which is something the president claims he’s all for.  Yet it is his policies that are preventing these job creators from creating jobs.  And there is a reason for that.

The president and the Democrat Party (and many in the Old Guard of the Republican Party) are Keynesians.  And they believe in the economic policies of John Maynard Keynes.  Which ushered in the era of Big Government.  And massive interventions into the private economy.  A substitution for socialism.  Providing a pathway to socialism.  As in the European variety.  Those social democracies that are all wallowing in the European sovereign debt crisis.  Because their governments grew too large.  Intervened too much into the private economy.  And spent far too much money they didn’t have.

Nixon, Ford and Carter tried Keynesian Economics on a Grand Scale once Nixon Decoupled the Dollar from Gold

All government economists are Keynesian economists.  The Keynesians tell their friends in government to keep interest rates artificially low to stimulate the economy.  Because they believe that even though consumer demand isn’t there businesses will borrow this cheap money and expand production.  And hire more people.  Also, if the economy is not performing as it should be the government needs to spend money.  With make-work programs. Paying people to do things like dig ditches.  And fill them back in.  Because they will take their earnings and spend it.  Creating economic activity.  And the government should do this with deficit spending.  Spending money they don’t have.  Either by printing it.  Or borrowing it.

They have been trying this since World War I or so.  In fact, Keynes met with FDR.  Telling him about his economic theories.  Some of which FDR took to heart.  For he did increase the size of government.  And he spent money on a lot of make-work programs.  None of which pulled the economy out of the Great Depression.  And he tried for over ten years.  Nixon, Ford and Carter tried Keynesian economics on a grand scale.  Once Nixon decoupled the dollar from gold.  Stopping the gold flow out of the country due to Nixon’s inflationary policies (foreign governments said if you want to make the U.S. dollar worthless we’ll take the gold instead at the promised exchange rate of $35/ounce).  Once they no longer had to honor that promise they were able to print even more money. Unleashing an inflation that reached double digits in the Seventies.  And caused massive unemployment and stagnant economic growth.  Stagflation.

This was a failure of Keynesian economics.  For the theory went if you have a recession you used inflation to end it.  And you did that by printing money.  But instead of an improved economy all they got was inflation (and higher prices) to go with an already bad economy.  Which just made everything worse.  Had they continued the classical economic policies that made America the number one economic power in the world (thrift, low taxes, low regulations, the gold standard, savings, etc.) there would have been no inflation.  And there would have been a lot of new economic activity.  Because this is what happened in the past with these policies.  While every time Keynesians tried to spend their way out of a recession it has never worked.  As the historical record clearly documents.

Obamacare will do to Health Care what Government has done to Businesses in our Big Metropolitan Cities

Now either those in government don’t understand this.  Or they do.  And just don’t care about the economic damage they cause as they are more interested in expanding their control over the private economy than they are about the American people.  Which means they’re either not very smart.  Or they’re devious.  Lying to the American people just to advance their agenda.  A larger and more powerful federal government.  Compounding this problem is that most of our politicians don’t understand the first thing about business.  Most are lawyers who think businesses are little more than cash piñatas.  Good for suing.  Or taxing.  But they have no idea how they work.  Which builds the case for our politicians not being very smart.  As well as being devious.

Worse, it’s these same people who are regulating the hell out of our businesses.  These people who don’t understand the first thing about running a business.  But are killing small businesses with costly regulations.  Especially in the big cities.  Where there is so much costly red tape to cut through to open a business.  And to run a business.  Especially if you want to hire employees.  A regulatory nightmare few business owners ever expected.  And so complex and costly that a lot of businesses fail because they don’t charge enough to cover all of their costs.  But these politicians don’t care.  As evidenced by the amount of business they drive out of large metropolitan cities.  Detroit once was the automotive capital of the world.  But the city government grew so large and costly that the costs of doing business in Detroit soared to pay for it.  Making it just too costly to do business in Detroit.  So businesses left.  First the jobs left.  Then the people.  The two greatest employers in Detroit these days are the City of Detroit.  And the Detroit Public Schools.  Both paid with tax dollars.  Generated by businesses.  That are no longer there.  So facing bankruptcy due to the crushing costs of government (primarily pensions and health care benefits), the governor declared an emergency.  And assigned an emergency manager to fix Detroit’s finances.

Now the people who destroyed the business environment in our big metropolitan cities are taking over health care.  Who know even less about health care than they do about running a business.  There are some doctors in Congress.  But only approximately 3.7% are doctors.  And only 16 of the 20 are Republicans.  So they will have little say with the Democrat-passed Obamacare.  While Obamacare will do to health care what government has done to businesses in our big metropolitan cities.  It will destroy it.  Because health care is very complex.  Doctors spent some 8 years of schooling to become a doctor.  And spend their career in continuing education to stay current in their fields.  But who will be managing these professionals now?  Rank amateurs.  For only in government can rank amateurs be put in charge of industries.

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Henry Ford, Bill Hewlett & Dave Packard, Steve Jobs & Steve Wozniak, Howard Schultz, Ray Kroc and Richard Branson

Posted by PITHOCRATES - May 8th, 2012

History 101

Capitalism allows Entrepreneurs to bring their Great Ideas to Life

Entrepreneurs start with an idea.  Of how to do something better.  Or to create something we must have that we don’t yet know about.  They think.  They create.  They have boundless creative energies.  And the economic system that best taps that energy is capitalism.  The efficient use of capital.  Using capital to make profits.  And then using those profits to make capital.  So these ideas of genius that flicker in someone’s head can take root.  And grow.  Creating jobs.  And taxable economic activity.  Creating wealth for investors and workers.  Improving the general economy.  Pulling us out of recessions.  Improving our standard of living.  And making the world a better place.  Because of an idea.  That capitalism brought to life.

Entrepreneurs Risked Capital to bring Great Things to Market and to Create Jobs

Henry Ford established the Detroit Automobile Company in 1899.  Which failed.  He reorganized it into the Henry Ford Company in 1901.  Ford had a fight with his financial backers.  And quit.  Taking the Ford name with him.  And $900.  The Henry Ford Company was renamed Cadillac and went on to great success.  Ford tried again and partnered with Alexander Malcomson.  After running short of funds they reorganized and incorporated Ford Motor Company in 1903 with 12 investors.  The company was successful.  Some internal friction and an unexpected death of the president put Ford in charge.  Ford Motor built the Model A, the Model K and the Model S.  Then came the Model T.  And the moving assembly line.  Mass production greatly increased the number of cars he could build.  But it was monotonous work for the assembly line worker.  Turnover was high.  So to keep good workers he doubled pay in 1914 and reduced the 9-hour shift to 8 hours.  This increased productivity and lowered the cost per Model T.  Allowing those who built the cars to buy what they built.  In 2011 the Ford Motor Company employed approximately 164,000 people worldwide.

Bill Hewlett and Dave Packard established Hewlett-Packard (HP) in 1939.  In a garage.  They raised $538 in start-up capital.  In that garage they created their first successful commercial product.  A precision audio oscillator.  Used in electronic testing.  It was better and cheaper than the competition.  Walt Disney Productions bought this oscillator to certify Fantasound surround sound systems in theaters playing the Disney movie Fantasia.  From this garage HP grew and gave us calculators, desktop and laptop computers, inkjet and laser printers, all-in-one multifunction printer/scanner/faxes, digital cameras, etc.  In 2010 HP employed approximately 324,600 employees worldwide.  (Steve Wozniak was working for HP when he designed the Apple I.  Which he helped fund by selling his HP calculator.  Wozniak offered his design to HP.  They passed.)

Steve Jobs had an idea to sell a computer.  He convinced his friend since high school, Steve Wozniak, to join him.  They sold some of their things to raise some capital.  Jobs sold his Volkswagen van.  Wozniak sold his HP scientific calculator.  They raised about $1,300.  And formed Apple.  They created the Apple I home computer in 1976 in Steve Jobs’ garage.  From these humble beginnings Apple gave us the iPad, iPhone, iPod, iMac, MacBook, Mac Pro and iTunes.  In 2011 Apple had approximately 60,400 full time employees.

Jerry Baldwin, Zev Siegl, and Gordon Bowker opened the first Starbucks in 1971 in Seattle, Washington.  About 10 years later Howard Schultz drank his first cup of Starbucks coffee.  And he liked it.  Within a year he joined Starbucks.  Within another year while traveling in Italy he experienced the Italian coffeehouse.  He loved it.  And had an idea.  Bring the Italian coffeehouse to America.  A place to meet people in the community and converse.  Sort of like a bar.  Only where the people stayed sober.  Soon millions of people were enjoying these tasty and expensive coffee beverages at Starbucks throughout the world.  In 2011 Starbucks employed approximately 149,000 people.

Ray Kroc sold Prince Castle Multi-Mixer milk shakes mixers to a couple of brothers who owned a restaurant.  Who made hamburgers fast.  Richard and Maurice McDonald had implemented the Speedee Service System.  It was the dawn of fast food.  Kroc was impressed.  Facing tough competition in the mixer business he opened a McDonald’s franchise in 1955.  Bringing the grand total of McDonald’s restaurants to 9.  He would go on to buy out the McDonald brothers (some would say unscrupulously).  Today there are over 30,000 stores worldwide.  In 2010 McDonald’s employed approximately 400,000 people.

Richard Branson started a magazine at 16.  He then sold records out of a church crypt at discount prices.  The beginning of Virgin Records.  In 1971 he opened a record store.  He launched a record label in 1972.  And a recording studio.  Signing the Sex Pistols.  And Culture Club.  In 1984 he formed an airline.  Virgin Atlantic Airways.  In 1999 he went into the cellular phone business.  Virgin Mobile.  In 2004 he founded Virgin Galactic.  To enter the space tourism business.  His Virgin Group now totals some 400 companies.  And employs about 50,000 people.

The Decline of Capitalism and the Rise of the Welfare State caused the European Sovereign Debt Crisis

And we could go on.  For every big corporation out there will have a similar beginning.  Corporations that use capital efficiently.  Bringing great things to market.  Introducing us to new things.  Always making our lives better.  And more comfortable.  One thing you will not find is a great success story like this starting in the Soviet Union.  The People’s Republic of China (back in the days of Mao Zedong).  East Germany (before the Berlin Wall fell).  North Korea.  Or Cuba.  No.  The command economies of communist countries basically froze in time.  Where there was no innovation.  No ideas brought to life.  Because the government kind of frowned on that sort of thing.

There is a reason why the West won the Cold War.  And why we won that war without the Warsaw Pack and NATO forces fighting World War III.  And why was this?  Because we didn’t need to.  For the communist world simply could not withstand the forces of living well in the West.  Whenever they could their people escaped to the West.  To escape their nasty, short and brutish lives.  In the command economies of their communist states.  Where the state planners failed to provide for their people.  Even failing to feed their people.  The Soviet Union, the People’s Republic of China and North Korea all suffered population reducing famines.  But not in the West.  Where we are not only well fed.  But our poor suffer from obesity.  Which is not a good thing.  But it sure beats dying in a famine.

Sadly, though, the West is moving towards the state planning of their one time communist foes.  Social democracies are pushing nations in the European Union to bankruptcy.  Japan’s generous welfare state is about to implode as an aging population begins to retire.  Even in the United States there has been a growth of government into the private sector economy like never before.  Which is causing the Great Recession to linger on.  As it caused Japan’s lost decade to become two decades.  And counting.  As it is prolonging the European sovereign debt crisis.  With no end in sight.  The cause of all their problems?  The decline of capitalism.  And the rise of the welfare state.  Which just kills the entrepreneurial spirit.  And the creation of jobs.  Which is one cure for all that ails these countries.  And the only one.  For only robust economic activity can pull a country out of recession.  And for that you need new jobs.  And the entrepreneurial spirit.  In short, you need capitalism.

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The Weight of Europe’s Sovereign Debt Crises forces Rich People to flee with their Wealth to Escape ever Higher Taxes

Posted by PITHOCRATES - April 21st, 2012

Week in Review

The problem with the European sovereign debt crisis is the population growth rate.  These nanny states set up their social democracies when people were having babies.  And based their calculations on a continuing rising birthrate.  Which would have paid for their social democracies until the cows came home.  But then something happened.  They stopped having babies.  And now have a declining birthrate.  Which means they have an aging population.  There are more people becoming seniors than there are being born.  There are more people leaving the workforce than there are entering the workforce.  And worse of all is that they have better health care.  And are living longer.  Put it all together and you have a real big problem (see Europe’s old wealth seeks new home in Asia by John O’Callaghan and Charmian Kok posted 4/17/2012 on Reuters).

Wealthy people from Europe and the Americas have long looked to the East for ways to build and preserve their fortunes. But only recently have they started opening family offices – private companies that manage the trusts and investments of rich households – in the region in earnest…

Campden Wealth, which provides research and data on family offices, says up to 10 European family offices have moved to Singapore since the financial crisis in 2008, bringing $5-$10 billion worth of assets with them.

Singapore, a global banking and investment centre in the heart of Southeast Asia, is an attractive base for its efficient registration process, relatively benign regulations, smooth movement of money, financial infrastructure and low tax rates…

Asia’s prospects are alluring as economies in Europe and the United States look weak. After the crisis, regulatory pressures in the West and a crackdown on offshore centers have hastened the pace of family offices moving to Singapore and Hong Kong…

The Spinolas are clubbing together with two other family offices to cut costs and leverage on efficiencies. Parly officials declined to identify the partners, other than to say they are “household names” in Europe – one is an English entrepreneur who has donated much of his money to charity and the other is a Swiss-based family…

Concerns about the health of big banks and dismay at their hard-sell tactics that pushed products of dubious merit onto high net worth clients – such as mortgage-backed securities that turned toxic – are other factors.

The tax-consumers are growing at a greater rate than the taxpayers.  Which means you have to raise tax rates on taxpayers.  Find other things to tax.  Or cut back on pensions and health care for retirees.  Not a difficult decision for the politicians to make.  They’re going to raise tax rates.  And find other things to tax.  Precisely because the population is aging.  For they’re just not going to cut any benefits from the largest voting block out there.

And, of course, the fallout is that rich people will finally say enough is enough.  They’ll take their wealth and leave.  Because they’re tired of being screwed.  Whether it was the American government passing off toxic subprime mortgage backed securities as safe investments through their GSEs Fannie Mae and Freddie Mac.  Or government taking an ever larger piece of their wealth through ever higher taxes and costly regulations.  They’ve had enough.  So they’re taking their wealth (i.e., much coveted investment capital businesses so desperately need) to greener pastures.  Investing in economies in other nations.  And donating large sums of their wealth to charities in other nations.  Which, of course, will cause ever greater budget hardships.  Because contrary to popular belief rich people pay the lion’s share of a nation’s income tax.  So when a big chunk of their wealth leaves the country it will explode budget deficits.

The sad truth is this.  There isn’t enough wealth to confiscate to pay for rising pensions and health care benefits with a declining birthrate.  There just aren’t enough rich people.  No matter how you crunch the numbers.  You just can’t have a declining number of taxpayers pay for a growing number of tax consumers.  It will only lead to deficits.  And sovereign debt crises.  Kind of like what they’re having in Europe right now.  Because of their unsustainable social democracies.  And unless they start having babies like they once did there is no way to sustain the unsustainable.

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Faced with Unpleasant Austerity Spain follows Greece’s Lead and Riots in the Streets

Posted by PITHOCRATES - March 31st, 2012

Week in Review

The Eurozone is suffering the consequences of their social democracies.  Their cradle-to-the-grave welfare state.  And huge governments full of government jobs.  Paying nice salaries and benefits.  Greece is on the brink of bankruptcy because of their out of control spending.  And when they try to rein in that spending the people take to the streets in violent protest.  Making it very hard for the government to take back some of the free stuff they’ve been giving out to buy their votes.  And making it ever harder to avoid bankruptcy.  Now it’s Spain’s turn (see Spain Unions On Strike Over Austerity Plans by Robert Nisbet posted 3/30/2012 on Sky News).

Scores of Spanish workers have been arrested after protesting on a day of anger over a swingeing austerity drive and changes to labour laws…

In scenes reminiscent of anti-austerity demonstrations in Greece, tens of thousands held protest marches in Madrid and other cities…

There is widespread anger at moves by Prime Minister Mariano Rajoy’s conservative government – which is not yet 100 days old – to slash Spain’s debt and boost the economy.

Spain’s biggest unions called the 24-hour strike over labour reforms which make it cheaper and easier for companies to lay people off and cut wages without consultation.

The government claims they are needed to tackle the 22.85% jobless rate, which is predicted to rise to almost 24.3% this year…

The government is under pressure to reduce its budget deficit, which last year ballooned to 8.51% of all the goods and services produced by Spain.

The European Union says this must be reduced to 5.3% this year and 3% in 2013 but economists warn that growth in Spain is so sluggish and debt so high, it will be a tough deadline to meet.

There is good reason for nervousness in the Eurozone. Unlike Greece and Portugal, Spain is deemed too big to bail and British banks are also heavily exposed to Spanish debt.

With unemployment running at 50% among young Spaniards and, as a member of the Eurozone, no monetary levers to pull, the government in Madrid says it has little choice but to wield the axe once again.

Peak unemployment in the U.S. during the Great Depression was about 25%.  So Spain is enduring Great Depression unemployment.  That’s bad.  What’s worse is that those who can be the most violent in their discontent, the young, suffer from 50% unemployment.  Filling them with discontent.  And a lot of free time on their hands.  Never a good combination.

If Spain has a high budget deficit it can only mean one of two things.  Either their government is spending too much.  Or their economy cannot generate sufficient tax revenue from their tax structure.  Either taxes aren’t high enough.  Or taxes are too high and they dampen economic activity thus reducing tax revenue.  With those high unemployment numbers, though, the smart money is on ‘they’re spending too much’.  Both the government.  And the employers.  Where the unions are holding the cost of labor (wages and benefits) so high that it’s too costly to hire more employees.  Whereas if the market set wages and benefits these costs would come down to reflect that large surplus of labor out there.  And the people who want jobs could get jobs.

The problem with these social democracies is that they are anti-business.  They favor the public sector over the private sector.  But you can’t keep beating up on the private sector.  Because they pay the taxes that fund the public sector.  A lot of that unemployment no doubt are government workers they let go to meet their Eurozone requirements.  And there are probably a lot more to follow.  If they reduce the cost of labor in the private sector the private sector will be able to absorb these people.  And as the private sector grows and becomes more productive more people will be paying taxes.  And they will be able to bring down those massive budget deficits. 

But if they don’t bring down labor costs or cut government spending, hello Greece.  Which they are currently experiencing in the streets of Spain.  Which, incidentally, is the path the U.S. is currently on.

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North Koreans hate Socialism and Try to Escape what some in the West call a Socialist Paradise

Posted by PITHOCRATES - March 10th, 2012

Week in Review

You know who really hates North Korea?  I mean, really, really hates it?  Not just a little.  But a lot.  No, not President Obama.  Not even George W. Bush hated North Korea that much.  No.  The people who really, really hate North Korea are the North Koreans.  Who have to live under tyranny, poverty and famine.  So they try to escape their socialist ‘paradise’ by escaping across the border (see N.Koreans Keep Fleeing Despite Tough Border Controls posted 3/11/2012 on The Chosunilbo).

The group said a five-member family from Musan, North Hamgyong Province suddenly disappeared on Feb. 17. Although the entire border nearby was shut down and searched, nobody was able to find them. Five days later, a worker at a cooperative farm in Onsong, North Hamgyong Province was arrested for crossing the river, and another person was arrested in China after making it across. On Feb. 23, two women who tried to cross the river from Hoeryong, North Hamgyong Province were arrested as well…

One defector who held a senior position in the North said, “The North Korean regime is pushing people to construction sites and robbing them of their hard-earned foreign currency” in order to prepare for the centenary of regime founder Kim Il-sung in April.

A researcher at a state-run research institute said, “Poverty is a major factor pushing people out of the country. The underground economy is booming and disparity in wealth has intensified in North Korea. The poorest of the poor, who had a glimmer of hope after the death of Kim Jong-il, now see their hopes thwarted and eventually decide to leave.”

Good Friends said the food shortage is getting worse, with some people saying it is even worse than the famine of the late 1990s. North Korea needs 5 million tons of food a year but only manages to produce 4 million tons. During the famine, food production fell below 3 million tons due to poor harvests and mismanagement.

The Stalinist regime of North Korea is the logical extreme of socialism.  The more the state gets involved in the private sector the worse life gets for those who must live in the private sector.  And when you reach full-blown communism the only way the state can survive is by enslaving their people.  Like in North Korea.  Where they prevent anyone from escaping their socialist ‘paradise’. 

The social democracies in Europe still cling to some vestiges of capitalism.  Why?  Because as of now their people can still escape their social-democracy paradises.  But once they cross the Rubicon and their state capitalism collapses under the weight of their massive debt burdens, they’ll have to arm their borders.  To keep their taxpayers from escaping.  So they can continue to fund the ruling class.  And the ever shrinking middle class who survive only because of their connections to the ruling class.  Sort of like it was back in the days of feudalism.  Only with nicer toys.  For those connected enough to have them.

Communists are anti-capitalists.  Just like all those people on the left who attack capitalism in America.  So what’s the difference between the anti-capitalists in oppressive communist regimes and those in the United States?  Protesting is a lot more fun in the United States than in oppressive communist regimes.  Because of capitalism.  It is capitalism that lets the anti-capitalists take a break from their protesting and enjoy a frothy cappuccino at a conveniently located coffee shop.  While protestors in communist regimes are arrested and sent to prison camps.  Or worse.  Why, capitalism even makes protesting capitalism better.  Something the protestors don’t really think about.  Because for them protesting is all about the fun.  Not the ideology.  And they have no desire to live under what they claim to want.  For anyone who enjoys a frothy cappuccino during a nice outdoor protest will have a rude awakening to see how a communist regime responds to their ‘difference of opinion’.

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Germany to offer State-Funded Childcare to turn Mothers into Something more Useful – Taxpayers

Posted by PITHOCRATES - March 3rd, 2012

Week in Review

The social democracies of Europe are going broke.  Why?  Growing government benefits.  And an aging population.  Which means there are fewer people entering the work force than leaving it.  Which, of course, means fewer and fewer people have to support more and more people in retirement.  And how did this happen?  Europeans stopped having babies.  Fewer babies means fewer taxpayers.  And fewer taxpayers means each taxpayer has to pay a large share of the total tax burden.  Which spells one BIG problem.  And Germany’s solution to all of this?  Make it even less appealing to have and raise children (see Germany is healthy, could be healthier posted 2/24/2012 on The Economist).

Another interesting aspect of the German economy, and one of its major weaknesses, is often overlooked (though not by Matthew Yglesias)—low participation of (married) women and mothers in the (paid) labour force. There are two economic reasons for this shortfall: taxes and child care…

Progress has been made, though: from 2013 on, there will be a legal entitlement to child care when the child turns one, and all states are busy expanding supply…

With its ageing population—only in South Korea will the dependency ratio increase faster, says the OECD—Germany may be forced to speed up the reform process in order to raise the employment of women.

The social democracies of Europe have destroyed the family.  The more the state provides the less children need parents.  Even children as young as one will be put into the cold world of state-funded child care .  So the mother can be freed of providing a loving and nurturing home for her children.  And, instead, enter the work force and do something more useful for the state.  Like paying taxes.

If they didn’t stop having babies they wouldn’t be in this mess.  For even the greatest of all Ponzi schemes will work if there are always more people entering the scheme than there are collecting benefits from it.  So the best way for Europe to save their welfare state is to nurture the family.  Let mothers stay at home and mother their children.  Stop making being a mom a four-letter word.  Bring back the family and you start reversing the trend in 20 years.  If you don’t and you provide more state-funded child care  it will only require more taxes.  Making it ever harder to raise a family (someone ultimately pays for ‘free’ child care ).  Thus further discouraging women from being mothers.  Which will never reverse the downward trend in birthrates.  Or the downward trend in new taxpayers entering the workforce.

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Moody’s follows Fitch and Standard & Poor’s and downgrades Eurozone Countries

Posted by PITHOCRATES - February 18th, 2012

Week in Review

Now it’s Moody’s turn to show their lack of confidence in the Eurozone (see Moody’s downgrades European countries by James O’Toole posted 2/14/2012 on CNNMoney).

Moody’s cut the credit ratings of six European countries on Monday amid continued anxiety over the continent’s debt crisis and its sluggish economy.

Italy, Malta, Portugal, Slovakia, Slovenia and Spain were all downgraded, while three other countries — Austria, France and the United Kingdom — had the outlook on their current Aaa ratings changed to “negative…”

The move follows similar downgrades of European nations recently by fellow rating agencies Fitch and Standard & Poor’s, and comes as investors are waiting to see whether euro-area finance ministers will approve the latest bailout for Greece this week…

Investors may be heartened by the fact that Moody’s didn’t downgrade the eurozone’s bailout fund, the European Financial Stability Fund.

Interesting.  They didn’t downgrade the European Financial Stability Fund.  But they downgraded the countries that fund it did.  Interesting because the member states guarantee the loans.  The interest costs.  And the capital raising costs of this Eurozone bailout fund.  So if the member states are greater risks one would think the thing they fund and guarantee would be a greater risk, too.

Looks like those social democracies of Europe are learning their lessons about socialism.  It’s costly.  And it bankrupts nations.  Capitalism doesn’t do this.  Only those nations that abandoned capitalism in favor of social democracy find themselves in these financial messes.  Sadly, two of the great nations of capitalism are limping down this same road.  The UK.  And the USA.  Who had their credit rating downgraded themselves only last year.  And the latest budget offered by the Obama administration forecasts a $1.3 trillion deficit.

Those who do not learn the lessons of history are condemned to repeat history’s worst mistakes.  And, apparently, we are.

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