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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Britain and Scotland disagree over Scottish Currency in an Independent Scotland

Posted by PITHOCRATES - February 16th, 2014

Week in Review

The Eurozone was a grand idea to make an economic zone that could compete against the United States.  A United States of Europe, if you will.  But the Eurozone has suffered a sovereign debt crisis that was unavoidable.  As many analysts have identified the problem causing the Eurozone all its sovereign debt woes.  The lack of a political union.

The solution they say is for member states to give up some of their sovereignty and allow a Eurozone government have more control.  Like the United States of America has.  Which means putting even stricter controls on member states when it comes to their spending.  Which, in turn, would limit their deficits.  And their borrowing needs.  Which brought on the sovereign debt crisis in the first place.  Excessive spending beyond their ability to pay for with taxes.  Normally not a problem for other countries when another country spends itself into oblivion.  Unless, of course, there is a currency union with that country.  Which makes their problems your problems.  Problems that are impossible to solve without a political union.

The Eurozone sovereign debt crisis illustrates that a currency union without a political union will not work.  Which makes the movement for Scottish independence very interesting (see Britain warns Scotland: Forget the pound if you walk away by Belinda Goldsmith, Reuters, posted 2/13/2014 on Yahoo! News).

Britain warned Scotland on Thursday it would have to give up the pound if Scots voted to end the 307-year-old union with England, declaring the currency could not be divided up “as if it were a CD collection” after a messy divorce…

The message was aimed at undermining the economic case for independence and one of the Scottish National Party’s (SNP) key proposals – that an independent Scotland would keep the pound…

The debate has intensified in recent weeks with Bank of England chief Mark Carney cautioning that a currency union would entail a surrender of some sovereignty…

The SNP [Scottish National Party] has indicated that if London prevented a currency union, an independent Scotland could refuse to take on a share of the UK’s 1.2 trillion pounds ($1.99 trillion) of government debt which Britain has promised to honor…

Osborne said the nationalist threat to walk away from its share of UK debt would mean punitively high interest rates for an independent Scotland and was an “empty threat”.

“In that scenario, international lenders would look at Scotland and see a fledgling country whose only credit history was one gigantic default,” Osborne said.

Currently there is a political union between Scotland and England.  The United Kingdom (UK).  And Scottish independence would go contrary to what some analysts say is needed to save the Eurozone.  Political unity.  The problem in the Eurozone is that no one nation wants to give up any of their sovereignty and have some distant power tell them what they can and cannot do.  The way some in Scotland feel about London.  That distant power that governs the United Kingdom.

The British pound is one of the world’s strongest currencies.  A product of the powers in London.  Because they have political control across the UK.  If they lose their political control over Scotland will it damage the British pound?  If the Eurozone is any measure of a currency union without a political union, yes.  So it will be interesting to see what happens between these two great nations.  Whose people made the world a better place.  People like the great Scotsman Adam Smith.  And the great Englishman John Locke.  To name just two.  So whatever happens let’s hope it’s in the best interest of both countries.  For countries everywhere enjoying economic freedom and human rights can thank these two countries for their contributions to the British Empire.  Which helped spread the best of Western Civilization around the world from the United States to Canada to Australia to Hong Kong.  And beyond.

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Canadian Public Sector Workers average 18.2 Paid Sick Days a Year

Posted by PITHOCRATES - June 15th, 2013

Week in Review

Nations around the world are suffering financial crises due to the costs of their public sectors.  Which they pay for by taxing the private sector.  Even though people in the private sector don’t enjoy anywhere near the generous benefits the public sector enjoys (see Government to target public service’s sick days in next round of bargaining by BILL CURRY posted 6/10/2013 on The Globe and Mail).

The Conservative government is putting public-service unions on notice that sick days will be targeted in the next round of collective bargaining.

Treasury Board president Tony Clement said the government wants to move away from the current rules, where workers can use up to 15 paid sick days and five family days a year, in addition to vacation time.

The Minister stopped short of accusing public servants of abusing the system, but questioned why the federal absentee rate is higher than that of other governments and the private sector, where he said the average number of sick days is 6.7.

“Look, I think that the great majority of public servants are, when they take time off, they are sick. But there’s no question that the rate of sick leave, when you’re looking at 18.2 days as an average in a year, is well beyond not only private sector norms but other public-sector norms,” Mr. Clement said Monday at a news conference on Parliament Hill…

Union leaders also took issue with comparisons of public- and private-sector absenteeism, arguing the private sector does not document sick days in the same way as governments do…

“Mental illness, stress, anxiety, depression were not admitted to or acknowledged,” he said. “Cancer was much less treatable than it is today. So the workplace has changed dramatically in the past 40 years, but the disability management system has not. Employees are getting lost or forgotten in the system.”

Yes, we admit and acknowledge those illnesses more today than we used to.  And we do treat cancer more than we once did.  However, these illnesses do not affect the public sector differently than they affect the private sector.  So if the private sector is averaging 8.7 sick days there is no reason why the public sector should be averaging 18.2 sick days.  On top of 5 family days.  Holidays.  And vacation time.

One of the arguments for a single-payer health care system in the United States is that people will be healthier.  With access to health care doctors will catch disease early and stop it in its tracks.  Now either the Canadians are milking the system or a single-payer health care system doesn’t make people healthier.

If the organization a person works for can get by for a month (after you add together all that paid time off) without that person being there chances are that they can get by the other 11 months of the year without that person being there.  Which is why you don’t see 18.2 sick says in the private sector.  Because it’s too great a cost burden to pay people for not working.  As private sector employers can’t just raise their prices to cover this cost.  Whereas the government can raise taxes.  Or print money.

But there even is a limit for government, too.  As we can see by the Eurozone sovereign debt crisis.  And the need to cut back on generous sick pay in Canada.  Higher taxes reduce economic activity.  Which reduces government revenues.  Which they make up with borrowing.  Until they suffer a sovereign debt crisis.  Like in the Eurozone.  Where a country is so deep in debt that no one wants to loan them anymore.  For it is unlikely that a nation so deep in debt will ever repay that debt.  Which is why these generous public sector benefits are simply not sustainable.  When you can no longer tax or borrow you have but one option left.  You have to cut costs.  And the public sector will have to live more like the private sector.  Less exalted and privileged.  As public servants should.

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The EU will have to find another way to Confiscate Private Sector Wealth because the ETS is Kaput

Posted by PITHOCRATES - April 20th, 2013

Week in Review

The Emissions Trading Scheme (ETS) was the European Union’s (EU’s) way of combating global warming.  By making carbon emitters pay for their carbon emissions.  But Europe is mired in recession.  And the Eurozone is suffering a sovereign debt crisis.  Which hasn’t helped to pull Europe out of recession.  And it appears that the economic reality in Europe is dooming the ETS (see If Carbon Markets Can’t Work in Europe, Can They Work Anywhere? by Bryan Walsh posted 4/17/2013 on Time).

But the ETS—and carbon trading more generally—is not doing well, and its problems are taking some of the green shine off of Europe. Since its launch the ETS has struggled, with the price of carbon falling as the 2008 recession and overly generous carbon allowances undercut the market. In the ETS business are given free allowances to emit carbon—too many free allowances mean they don’t need to reduce their carbon emissions much, which erodes the demand for additional carbon allowances on the market and causes the price to drop. Prices fell from 25 euros a ton in 2008 to just 5 euros a ton in February. There was a way to fix this—take 900 million tons of carbon allowances off the market now and reintroduce them in five years time, when policymakers hoped the economy would be stronger and demand would be greater. As anyone who’s taken Econ 101 would know, artificially reducing the supply of carbon allowances in such a drastic way—something called “backloading”— should force the price back up.

But on April 16, the European Parliament surprised observers by voting down the backloading plan. In turn, the European carbon market collapsed, with the price of a carbon allowance falling by more than 40% over the day. “We have reached the stage where the EU ETS has ceased to be an effective environmental policy,” Anthony Hobley, the head of climate change practice at the London law firm Norton Rose, told the New York Times. The ETS is a mess.

Backloading failed because even in very green Europe, economic concerns seemed to trump environmental ones. European Parliamentary members worried that any action that would cause the price of carbon to rise would add to European industry’s already high energy costs.

This should make China happy.  For there was no way no how they were going to pay for the carbon emissions from their airplanes entering European airspace.  In fact they warned they would cancel their Airbus orders and give them to Boeing if the Europeans tried to force them to help bail out the Eurozone in their sovereign debt crisis.  For this was what the ETS would ultimately do.  Transfer great amounts of wealth from the private sector to the public sector.  Which would have gone a long way in helping the Eurozone to continue to spend money they don’t have.

The ETS was nothing but a new tax on business.  Cloaked in the guise of making the world a better—and greener—place.  But the EU is suffering economically.  A large part of the sovereign debt crisis is due to having less economic activity to tax.  So the EU needs to improve the economy.  So they can generate more tax revenue from the current tax rates.  But increasing taxes on the carbon emitters will not help businesses.  It will only increase the cost of business.  Increasing their prices.  Making them less competitive in the market place.  Reducing their sales.  And killing jobs.  Which will generate even less tax revenue from the current tax rates.

The problem in the EU is not global warming.  Or insufficient tax revenue.  They have a spending problem.  This is what caused their deficits.  That gave them their soaring debt.  Just like every other nation that ever suffered a debt crisis.  Including the U.S.  Trying to fix a spending problem with more taxes just doesn’t work.  Only a cut in spending can fix a spending problem.  It’s not like the old chicken and egg question.  Excessive and unsustainable spending always comes before a debt crisis.  Always.

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Cyprus and the Eurozone Crisis shows why we’d be better off with a Gold Standard

Posted by PITHOCRATES - March 30th, 2013

Week in Review

Debtors love inflation.  They love to borrow cheap dollars.  And love even more to repay their loans with even cheaper dollars.  Creditors, on the other hand, hate inflation.  Because they are on the other side of that borrowing equation from the debtor.  And when a debtor repays a loan with depreciated dollars the creditor who loaned that money loses purchasing power.  Causing the creditor to lose money.  Just because they had the kindness to loan money to someone who needed it.  Which is a strong disincentive for making future loans.

This has long been at the heart of all banking wars.  And banking crises.  The fight between paper money and hard money.  Printed dollars versus specie (gold and silver).  People who want to borrow money love paper.  Because banks could make a lot of it to lend.  Something they can’t do with gold and silver.  Because it takes a lot more effort and costs to bring new gold into the economy.  Those who want to borrow money argue that hard money hinders economic activity.  Because there is a shortage of money.  And because governments are always interested in boosting economic activity they are always in favor of expanding the paper money supply.  This generous expansion of credit is currently miring the Eurozone in a sovereign debt crisis.  And launched a confiscation of wealth in Cyprus.  Greatly threatening the banking system there.  As few depositors trust their money will be safe in their bank.  Causing people to return to specie (see Cypriot bank crisis boosts demand for gold by Ian Cowie posted 3/27/2013 on The Telegraph).

The Cypriot banking crisis reminds even the most trusting savers that not all banks or jurisdictions are safe – and is boosting demand for gold, bullion dealers claim.

As if to prove the old adage that it’s an ill wind that blows no good, enthusiasts for the precious metal argue that financial shocks in the eurozone are reminding savers of gold’s attractions…

[Daniel Marburger, a director of Jewellers Trade Services Partners (JTS)] said: “The situation in Cyprus has reignited the wider Eurozone sovereign-debt crisis. At a time like this, people are attracted to gold because it is the ultimate crisis commodity.

“The proposed levy on deposits of Cyprus’s savers has not only shaken confidence in the single-currency Eurozone, it illustrates the fragility of savings held within the banking system. In our experience, clients are attracted to gold because it offers insurance against extreme movements in the value of other assets. Unlike paper currency, it will never lose its intrinsic value…”

“The events in Cyprus prove once again that bank customers do face risks as creditors who are owed money…”

When you deposit your money into a bank you become a creditor.  You are loaning your money to the bank.  Who pays you interest to loan your money to others.  If the inflation rate is greater than the interest you earn your money actually shrinks in value.  And the more they print money the more it shrinks in value.  That’s why as a creditor you won’t like the harmful effects of inflation.  Even if it makes the people happy who borrow your money from the bank.  Because they get a real cheap loan at your expense.

Which is why people are drawn to gold.  Because they can’t print gold.  So it holds value better than paper.  And the government can’t just confiscate a percentage of your savings if it isn’t in the bank.  Another reason why people are drawn to gold.  If the banking system collapses, or if the government seizes people’s retirement savings to ward off a banking system collapse, people can take their gold and move somewhere else that isn’t having a financial meltdown.  And not lose any of their wealth.

Which is, of course, the last thing you want to happen in a country.  For a sound banking system is essential for a prospering middle class (if it weren’t for banks only rich people would own homes, cars, go to college, etc.).  Which is why a responsible monetary policy, and responsible people in government, is a prerequisite for a sound banking system.  Which few nations in the Eurozone have.  As few nations throughout the world have.  For they all want to buy votes by giving away free stuff.  And having the power to print money allows them to give away a lot of free stuff.  Pensions.  Health care.  College educations.  Lots and lots of government jobs.  Etc.  But there comes a point when you give away too much.  And you have sovereign debt crises.  As well as confiscations of wealth.

This was the advantage of a gold standard.  Like when we coupled the value of our world’s currencies to the price of gold.  It did not allow any nation to inflate their currency.  For if they did people would exchange that devalued currency for the fully-valued gold.  A strong incentive not to devalue your currency.  Which was nothing more than a promise to pay in gold.  The gold standard kept governments responsible.  But because it made it so difficult to buy votes everyone cheered when President Nixon decoupled the dollar from gold.  Putting an end to the last vestiges of a gold standard.  Allowing governments everywhere to be irresponsible.  Bringing on financial crises.  And the confiscation of wealth.  As we see happening in Cyprus.  And will no doubt see elsewhere.

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European Keynesians recommend Anti-Business Policies to spur New Economic Activity

Posted by PITHOCRATES - March 23rd, 2013

Week in Review

In the U.S. some state governments are lamenting the fuel efficiencies of today’s cars.  They don’t like them.  Because unlike the gas-guzzlers of yesteryear fuel efficient cars don’t burn a lot of fuel.  And you’re probably thinking isn’t that the point of making cars more fuel efficient?  So they burn less fuel?  So this is a good thing, yes?  Well, if you’re thinking like that you’re obviously a selfish person.  For these states have expensive union pay and benefit packages they must for their government workers.  And their retired government workers.

Cars that are buying less gas are paying less state fuel taxes.  Which is forcing these states to spend less on maintaining roads.  As there just isn’t enough cash left over after paying pensions and health care costs.  It’s getting so bad that states want to tax drivers by the mile they drive and not by the gallon of gas they buy.  So these selfish people driving fuel efficient cars will pay the same taxes those driving gas-guzzlers pay.  So whenever anyone talks about the economic benefits of new governmental regulations they’re probably not telling the whole story (see European Car-Efficiency Rule Would Cut Fuel Bill by 25% by Alex Morales posted 3/17/2013 on Bloomberg)

A European Union plan to tighten emissions standards on cars would cut auto-fuel costs by almost a quarter in 2030, according to a report e-mailed by a group promoting policies to reduce carbon emissions in the region.

Fuel bills would fall 57 billion euros ($75 billion) from a projected cost of 245 billion euros in 2030, said the European Climate Foundation, which contributed to the report prepared by Cambridge Econometrics and Ricardo-AEA. Producing fuel-efficient vehicles would add 22 billion euros of capital costs, it said.

“The effect of reduced spending on fuel more than outweighs the impact of increased spending on vehicle technology to reduce carbon emissions,” according to the e-mailed report. “Most of the money spent on fuel leaves the European economy, while most additional money spent on fuel-saving technology remains in Europe as revenues for the technology suppliers…”

Today’s report for The Hague-based foundation, examines the effects excluding taxes in 2030 of meeting the proposed car and van standards for 2020, plus improved efficiency of less than 1 percent a year for the following decade. The policy would add 356,000 jobs to the EU economy by 2030, even after accounting for lost posts in refining, according to the report’s authors.

Gas prices are higher in Europe because they tax their gas more.  Europe is in the midst of a sovereign debt crisis.  As excessive budget deficits raise borrowing costs.  So Europeans are not going to see any savings with these more fuel efficient cars.  For countries running chronic deficits are just not going to allow a major source of tax revenue wither away.

Only a Keynesian could put together such a report.  For Keynesians don’t know the first thing about business.  All they know is tax, borrow, print and spend.  The very things that got Europe into their sovereign debt crisis.  Spending money they don’t have.  No.  Increasing the cost of business does NOT help a business.  It forces them to make cuts elsewhere.  Directing capital to where the government wants it.  Not the market.  So while the government forces them to spend money on tightening emissions standards they will spend less money on adding things people want in their cars.  If you add a few thousand in new emission systems they may have to eliminate the music system or some other creature comfort.  Unless people can afford to spend a few thousand more on their cars.

They won’t be able to afford these higher priced cars.  So they, instead, will buy less expensive cars.  Either smaller cars.  Or foreign made cars.  Or they will just not buy a car at all.  Leaving them little more than toys for the rich.  Who can afford to pay no matter what the government decrees.  And any savings in fuel costs?  There will be none.  When the governments see all that loss tax revenue they’ll find something else to tax.  They’ll have to.  Because they’re all running chronic deficits.

This is yet another example of why we should never listen when a Keynesian is talking.  Or anyone that says higher taxes and more regulations will create economic activity.  For they are either completely ignorant of business and economics.  Or they’re just lying to help advance an anti-business government agenda.

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The Greek Crisis is Now Threatening the Credit Rating of the Stronger Eurozone Members

Posted by PITHOCRATES - July 29th, 2012

Week in Review

Since 2009 we’ve been hearing about the European sovereign debt crisis.  Also known as the Eurozone crisis.  And here we are in 2012.  Despite numerous rescue packages and recovery plans the crisis continues on.  Greece can’t borrow money in the credit markets because no one believes Greece will ever be able to pay them back.  For Greece has been running some pretty big deficits.  Which has accumulated an enormous pile of debt.  Resulting from their large spending obligations for public sector wages and pensions.  They don’t have the money.  They can’t borrow the money.  So a massive Greek default is likely.  Which because of the common currency will be felt throughout the Eurozone (see Germany’s AAA rating under threat after Moody’s cuts outlook by Jamie Dunkley posted 7/24/2012 on The Telegraph).

Moody’s warned the outlook for the ratings of Germany, Luxembourg and the Netherlands is negative because the threat of a Greek exit from the eurozone and the need for greater financial support for struggling eurozone countries from the strongest members of the bloc.

In a statement, issued after the close of the US markets, it added: “The level of uncertainty about the outlook for the area and the potential impact of plausible scenarios on member states, are no longer consistent with stable outlooks.”

Not some pleasant choices.  Have a Greek default damage your credit rating.  Or make your taxpayers pay for another nation’s debt.  Which begs the obvious question.  Or should.  How is having other people pay for spending you can’t afford going to solve your problem of spending more than you have?  If Greece doesn’t cut their spending nothing will change in the long run.  They will need another emergency bailout following this emergency bailout.  Because this emergency bailout doesn’t address the source of their trouble.  Excessive government spending.

Keynesians encourage excessive government spending because they think it’s stimulative.  That it creates economic activity.  In fact the Keynesian solution to the Greek crisis is more government spending to stimulate the economy.  Which begs the obvious question.  Or should.  If government spending does all of this why after all of their government spending is Greece on the precipice of bankruptcy?  Huh?  Answer that one smart Keynesian person.

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Debt Crises in Ireland, Greece, Portugal and now Spain may Prove too much for the Euro to Survive

Posted by PITHOCRATES - June 3rd, 2012

Week in Review

The woods are lovely, dark and deep.  But I have promises to keep.  And miles to go before I sleep.  And miles to go before I sleep.  Lines from a poem by Robert Frost.  For some reason this came to me as I read about the never-ending crisis that is the sovereign debt crisis in Europe.  And the Eurozone.  For the Euro is lost in those dark and lovely woods.  Woods that are so deep that it will never find its way out.  And the only kind of sleep the Euro is going to get is the kind you don’t wake up from (see Britons face £5bn bill to help out Spanish as fears grow that Madrid will have to ask IMF for €300billion bailout by Hugo Duncan And James Salmon posted 6/1/2012 on the Daily Mail).

British taxpayers could be forced to stump up another £5billion to rescue Spain as the crisis in the eurozone spirals out of control.

Fears are mounting that Madrid will have to ask for an emergency bailout of up to £300billion as it struggles to prop up its basket-case banks.

A third of that money could come from the International Monetary Fund – including around £5billion from the UK, even though Britain is not in the eurozone.

UK taxpayers have already coughed up £12.5billion to rescue debt-ridden Greece, Ireland and Portugal…

But growing doubts over how the Spanish government will finance the £15billion needed to rescue Bankia, one of its biggest lenders, have raised fears that it will follow Ireland, Greece and Portugal in requiring a bailout from Europe and the IMF.

This week US investment bank JP Morgan warned a joint rescue of Spain could cost around £300billion.

The Spanish banking system has been crippled by nearly £150billion in toxic property loans.

At the heart of the sovereign debt crisis in Europe is debt.  They have way too much of it.  So much that the odds are not good that they will ever be able to repay it.  Which makes people very reluctant to loan them any more money.  It’s like loaning a friend money who already owes you a lot of money.  Do you loan him more money?  It just may help him turn his life around.  Start anew with a new job.  Earning enough money to support himself and pay you back.  That’s one possibility.  Then there’s the possibility he may just blow the money on booze, drugs and women.  You know he’s just going to spend whatever else you loan him.  And not pay any of it back.  So it would be rather foolish to loan him more money.

This is the decision facing the people who could attempt to bail out those in the Eurozone.  They’ve already loaned them a lot of money.  So these in-trouble countries can sustain the government spending their current tax revenue can’t support.  But the deal was to cut back that spending so they can live on what their tax revenue CAN support.  But there’s only one problem.  The people of these countries reject calls for them to live within their means.  And have had enough of austerity.  And that’s a big problem.  Because if they don’t live within their means they will perpetuate the sovereign debt crisis.  As they will always need to borrow more money to pay for the things that their tax revenue can’t afford.  Until the day this house of cards collapses.  And the longer it goes on the more money people will lose in bad loans to these in-trouble countries.

The central problem in this crisis are bad loans.  Caused by the easy credit policies of central banks to loan money to anyone so they can buy a house.  All this easy credit caused housing booms in countries all around the world.  And housing bubbles.  Then the bubbles burst.  Leaving countries with debt crises as toxic mortgages weakened banking systems everywhere.  And still Keynesian economists are urging central banks to repeat this reckless lending behavior again to stimulate economies.  And to bail out the Eurozone.  The problem is that the central banks have so destroyed their economies no one is borrowing money.  Or spending money.  Because no one thinks the worst has passed.  And businesses and private citizens have learned the lesson from the great debt crisis we’re going through everywhere.  Too much debt is a bad thing.  And are refusing to take on new debt.  And using what income they have to pay down existing debt.  Contrary to all Keynesian doctrine.  For they want reckless and irresponsible spending.  Because they believe only spending is good.

Politicians and central bankers said the situation in the eurozone was unsustainable and drastic action was needed to prevent the ‘disintegration’ of the single currency.

They spoke out as European leaders scrambled to stop the financial crisis in Spain spiralling out of control and infecting other countries such as Italy…

Mario Draghi, president of the European Central Bank, said the eurozone was unsustainable in its current form.

In his sharpest criticism yet of eurozone leaders’ handling of the crisis, he said the European Central Bank could not ‘fill the vacuum’ left by governments in terms of economic growth or structural reforms.

So, no, more easy credit isn’t the solution.  Countries must live within their means.  Which means adopting austerity measures.  And find ways to achieve real economic growth.  Not the kind that leads to bubbles.  Or sovereign debt crises.  And the best way to generate real economic growth is with tax cuts.  Cutting spending as needed so they spend only what their tax revenue can afford.  They must stop running deficits.  And stop borrowing money.  (Good advice for the United States as well).  As the private sector economy picks up because of a more business-friendly tax structure they will create jobs.  So all of those government workers who lost their jobs in the public sector can get new jobs in the private sector.  Whose salaries and benefits will not have to be paid for by more government borrowing.  If they adopt pro-growth policies like this the international community may still be able to help them.  And save the Euro.  But will they?  With all of that public opinion against any more austerity?  Don’t know.  Probably not. 

It’s unlikely that the Euro will ever find its way out of the woods.  For these woods are scary, dark and deep. 

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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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