Friday, August 31, 2012


According to Ben Bernanke, his research shows that the Fed's asset purchases boosted stock prices and helped the economy out of recession. That settles it folks, once and for all. Aggressive Fed intervention is critical to the success of our equity market and our economy. That without the genius of the Fed, stock prices can't rise and the economy can't grow.

As a side note, I just interviewed a rooster; and his research shows that his particular cockadoodledoo every morning is the reason the sun keeps rising.

Short-term guessing with other people's money - And - Perpetual Cronyism - And - As for Bernanke's Speech

Just listened to Credit Suisse's director of U.S. fixed income policy explain how their short treasury position (betting on a price drop) didn't pan out this morning - as they guessed wrong in terms of what Bernanke would commit to in his Jackson Hole speech. Now it's one thing to speculate, conversationally, on the moves of any given policymaker (or committee) - left to his (their) own biases - it's another altogether to risk other people's money based on such subjectiveness.

The articulate young man described what he had expected, why now he believes he didn't get it, and when asked if Bernanke would be swayed by pressure from politicians, he said "look, politicians make decisions for the good of the country" and (I think) went on to say something about the Fed's motives. After he made his remark regarding politicians, some chemical reaction in my brain entirely thwarted my ability to listen further or to give the slightest modicum of credence to anything this young speculator had to say. I would wager that this thirty-something "genius", rather than being the victim of extreme na

Wednesday, August 29, 2012

The Bernanke Effect - and - The Best thing for Your Portfolio

I read somewhere (I think it was Barry Ritholtz book Bailout Nation) that Alan Greenspan's first utterance when stepping off of a plane, while some crisis was brewing, was "what's the market doing?" As the Greenspan story goes, during the heydays of the '90s, he couldn't grab a bite in a Wall Street restaurant without having to meander through a standing ovation on the way to his table. "The Maestro" they called him.

Milton Friedman, as you might imagine, was on the very short-list of potential Washington appointees. But while he was more than willing to give private counsel to policymakers - which he did (but, alas, he says they never took his advice) - he made it very clear that he was of better service to the "ordinary man" in his capacity as a teacher. He said (words to the effect) that when one takes a position in Washington one must become a team player, and that simply wasn't his style. As for Greenspan, I've read a few of his writings from the days he clung to the coattails of Ayn Rand, and I can tell you, when Greenspan became the chairman he became the poster-boy for team players. Truly, the bailouts orchestrated by Greenspan the maestro would have received a blasting condemnation from Greenspan the Randian.

I can't speak as confidently to the history of present chairman Ben Bernanke. I don't know that he, like Greenspan, was a once free-market ideologue, later to be captured by the political process. But regardless of his upbringing, it is abundantly clear, with QE3 in the offing, that he guzzles the Kool Aid.

Here are a few of this week's headlines:

"Bernanke's Words Could Make or Break Market Rally"
"Chance of Fed QE3 Dims for Economists and Investors Alike"
"Global Shares Dip, Euro Steadies Ahead of Bernanke Speech"
"Euro Equities Drop on Eve of Bernanke Speech"
"Rupee Range-Bound Ahead of GDP, Bernanke Speech"
"Precious Metals, Other Markets to Take Cue From Bernanke Speech"

Now, just for fun, replace Bernanke with your last name. Now you tell me, with all of mankind hanging on your every word, and knowing what the markets want, would you confess that, after pumping trillions into the financial system, it's become glaringly apparent that the present economic anemia is in fact a structural, as opposed to a cyclical, phenomenon. That you can prime the pump till you're blue in the face, and while you would surely enjoy the applause next week when you dine at Delmonico's, the net economic effect of another round of QE is going to be zip.

Here's the thing folks, the market is already awash with liquidity and interest rates are lower than my wildest dreams could have ever conjured up. Another trillion of bond-buying would surely boost equity prices for a moment, but, I assure you, monetary easing has never been more unnecessary than it is today. And, alas, over-easing, as we've learned from the era of the Maestro, can lead to some amazing, and most pernicious, asset bubbles (the obvious, presently, would be the bulging bond market). So if he does the right thing (turns off the spicket), which I don't suspect he will, expect stocks to take an immediate hammering. And understand that, while you won't enjoy opening the envelopes sporting your next few monthly statements, taking the market's eye off the Fed and onto the prospects for future corporate earnings would be the best thing, longer-term, for your portfolio.

The Fishermen are Sleeping In

On most Thursday mornings, beginning in May and ending sometime mid-summer of each year, a Department of Fish and Game tanker loaded with dozens of squirmy 8 to 14 inch rainbow trout pulls up to a tiny reservoir about an hour’s drive north of Fresno, and sets them free.  Although I’m not sure “free” is an apt description of a trout’s existence in what amounts to an over-sized moss-infested pond, where only the heartiest of carp and a few catfish will survive the blistering heat of the coming August.

So why would the California Dept of Fish and Game do such a thing?  While I’ve yet to explore the economics of trout-planting—although we’re talking government so it wouldn’t be pretty anyway—it obviously has something to do with fishermen.  Those men’s men who—rather than sleeping in like city folk and later visiting the corner grocer to snatch the protein for the evening’s supper—will rise with the roosters, pack their trunks with rods, reels and split-shot sinkers and venture off to test their angling skills (and a fresh jar of glow-in-the-dark bait that smells just like the fish food at the hatchery) on the unwary salmonoids…

It is no doubt in the Department’s best interest, for whatever reason, to cater to the animal spirits of the Central California angler.  To get him out of the recliner and into the sporting goods store to purchase the government-issued license along with all the necessary tackle.  And/or perhaps to send out a game warden to lie in waiting behind a pond-shore bush in hopes of surprising the cheater who skipped the licensing part, and slapping him with a $400 (no kidding) fine.

We’ll call it a staging—an artificial catering to man’s primal urge to bear the wilds, to take the risks necessary to provide for his family.  But, alas, while most vivid on Thursdays, this grand illusion fades by Sunday.  And by the time Wednesday rolls back around, the returning gentleman, now with 6 grandkids in tow—anticipating another day of great fishing—drives away empty-ice-chested, and bewildered, in a very muddy (6 impatient yet playful junior anglers) sedan—indeed uninspired to return. The fact of the matter is a stagnant pond simply cannot sustain the type of fish you and I would bring home for supper.

Now let’s think in terms of fiscal and monetary stimulus.  The economy’s barely moving, and rather than clearing the muck and allowing the flow of fresh current, our “leaders” have been further damming the pond with new regulations and the threat of higher taxes.  It’s like expecting folks to come fishing when the pond is choked with moss and the DFG just doubled the price of a license.  Washington can toss in one-time incentives (Cash for Clunkers, Homebuyers Tax Credits and the like) and the Fed can plant billions a month till the cows come home, but until they pull the garbage (themselves) out of the back end of the pond, the fishermen, I’m afraid, are sleeping in.

Today's TV Segment (video)

Tuesday, August 28, 2012

Follow up to this morning's post ("my take on taxing home sales")

The email message I included in this morning's column suggested that anyone selling a home would pay a 3.8% tax on the entire proceeds. That would be factually incorrect. To the extent one would suffer the tax is subject to several parameters. Here's an excerpt from on the subject (btw I see where both sides of the aisle have accused factcheck of playing politics. I think we're safe on this one - the facts appear to leave little room for partisanship):

"The truth is that only a tiny percentage of home sellers will pay the tax. First of all, only those with incomes over $200,000 a year ($250,000 for married couples filing jointly) will be subject to it. And even for those who have such high incomes, the tax still won

My take on taxing home sales...

Apparently, according to the email message below, not everyone's aware of the coming national tax on home sales to help pay for health care reform. And of course the National Association of Realtors is pulling out all the stops to try and get it repealed. Now, before we get too sideways over this folks, make no mistake, we all pay for all of it, one way or another. Seriously, you haven't forgotten that every penny the government spends is taken from you and me, through taxation and/or inflation (printing of money), have you?

Sure, by all means holler all you will about the tax on home sales, and maybe you'll succeed in getting it repealed. But I assure you, it'll have absolutely no impact on the cost of the Affordable Care Act (ACA) - i.e., it won't save you a dime in taxes when it's all said and done.

That (reality) said:

A tax increase is, sadly, the definition of trickle down - ultimately sparing no rung on the economic ladder. A tax increase on commerce, for example, is a burden on the consumer, as the increase filters down through higher prices, and/or less production (less employment), and/or less innovation.

The same goes for the coming surtax on corporate dividends (also pays for ACA), as those who rely on dividend income cut back their spending, in effect hitting commerce (the sequence outlined above) - plus the ultimate impact of making investment income less attractive. You tax something, you get less of it. And less investment means less capital in the private sector to grow jobs, innovate, etc.

Of course there's the counter argument; that a tax increase, while it may indeed have a negative impact in one place, stimulates growth in others. I.e., the government takes from the private sector, pays its people (who spend), pays the interest on the national debt (to people [worldwide] who spend), invests in its special-interest industries (you know the ones), who create 'something', and create jobs in the process. Thus, at worst, nothing's lost. At best, society gains.

If you buy the notion that society either looses nothing, or in fact gains, as government redistributes capital - if you truly believe that the process of spending other people's money on other people could ever result in a net gain (or a wash even) to society, when compared to the process of business people (and consumers) allocating their own hard-earned resources - you crazy!

A friend forwarded me the following yesterday. The linked article (I only read the intro) begins with a quote from the President promising absolutely no tax increase whatsoever on folks earning less than $250k. I suppose this tax on home sales contradicts that message, but again, repealing it in no way mitigates the hit the middle (and low) incomer will take on behalf of the Affordable Care Act. Of course the ultimate question is, what will he/she receive in return? There will of course be winners and losers. As for the purported benefit to society, well, let's hope. I would be a skeptic - and I sincerely hope I'm wrong...

Home Sales Tax becomes effective Jan 1, 2013
National Sales Tax on all home sales
The National Association of Realtors is not pleased with this new tax and hopes this information is forwarded to every voter prior to the election in November.

It doesn

Monday, August 27, 2012

You Crazy!

I think Bernanke's going to signalthat we should not expect QE3 before next year. Therefore I think the market will take a hit. Uhh, wait a sec; the market really ought to rally, since the Fed's expecting the economy to pick up steam.

I think Bernanke's going to signalthat they will indeed implement QE3 before next year. Therefore I think the market will rally. Uhh, wait a sec; the market really ought to tank because the Fed believes the economy's going to weaken further.

Clearly, the market has signaled that the former in each of the above would be its position. Therefore it has no faith whatsoever in the Fed's predictive capacity. Think about it; if the Fed eases, the market rallies, but the market of course wouldn't rally if it thought the Fed was right - that things are bad enough to warrant a whole new round of money printing. Now if the Fed doesn't ease, the market sells off, but the market of course wouldn't sell off if it thought the Fed was right - that things are looking up and therefore more QE simply isn't necessary.

Or maybe it's the market that's all screwed up (market here btw = Wall Street traders). Maybe traders have it backwards. Maybe they simply don't understand that another round of QE would confirm that the Fed is sincerely frightened about our economic future, and, given the law of diminishing returns (after two rounds of QE), traders should be intently nervous in such event. Or, vice versa, that the Fed pulling the plug on more stimulus would be a huge endorsement on behalf of the health of the economy going forward, which should have them buying like crazy.

Or maybe it's traders thinking that retail investors (consumers) are all screwed up. That retail investors believe the hype that stimulus (fiscal and monetary) actually works. That since the economy always seems to find its way to the next expansion, and since stimulus always comes during the preceding contraction, that stimulus therefore always creates expansions. Thus, if the Fed does the QE, retail investors will stampede into stocks.

Or maybe this is the inflection point; where the Fed finally has it right. Or where the trader finally has it right. Or where the consumer finally has it right. Or where they all get it right at precisely the same time. But then what happens?

I guess you better stay tuned. Or, better yet, you better tune out. Because if you think you can understand, let alone time, market volatility, you crazy!

Sunday, August 26, 2012

The Mini Bubble Plot Thickens (video)

These two whacky gentlemen make the case that government intervention distorts the free market process. In a normal setting, we wouldn't quarrel over an investor's decision to hold an asset until the market improves. He would certainly have the right, pursuing his own objectives, to hang onto a property indefinitely. And of course he alone would bear the market-risk, as well as the costs, of maintaining his property. But in the case of Government Sponsored Owned Enterprise (GSOE [govt now owns 80% of the company]) Fannie Mae, which, along with GSOE Freddie Mac have received nearly $200 billion taxpayer dollars (a little more than the president promised to spend to pack the government's freezers with meat), it's you and I who ultimately bear the costs of their collusion with the Fed to bolster the housing market.

As I preach, ad nauseam (read Bailing Out thy Neighbor), when government intrudes, the pricing mechanism becomes distorted, and gluts remain - leaving the market to ultimately cure matters in a more painful (than otherwise might have been) fashion.

A good friend, more versed than me on the housing market, forwarded me this video:

Click here to view...

Saturday, August 25, 2012

Hence, we are where we are...

So Jane's rapid recovery (per yesterday's column) correlates with her discovery of her husband's peanut butter cups. And as far as Jane is concerned, it was not simply a case of correlation, it was indeed a case of causation.

So the economy's recovery correlates with fiscal and monetary stimulus. As far as the politician and the Fed Chairman are concerned, we're talking causation there as well.

Of course there are ancillary benefits to consider. Jane has grown (and I do mean grown!) to love that curious combination of chocolate and peanut butter. And the politician and Mr. Bernanke sleep much better knowing that they can tap trillions to avert a career-killing (theirs) economic contraction. In other words, there can be substantial short-term [egocentric] incentives to believing a certain thing.

Others have incentives as well: If you're the CEO of Hershey's, you'll promote Jane's science. If you're a recipient of government subsidy, or an economist in line for an appointment to the President's Council of Economic Advisors, you'll praise the efforts of Washington and the Fed.

If you're today's voter who doesn't give much thought to the importance of the business cycle and free markets, their rhetoric, alas, makes perfect sense to you. Hence, we are where we are...

Friday, August 24, 2012

Today's Quote

From A Capitalism for the People, by Luigi Zingales...

"At the top of the Grand Canyon there is a sign that reads, in large print, "Please do not feed the wild animals." In smaller type, it explains that feeding the animals will make them lose their ability to search for food on their own, jeopardizing their ability to survive in the wild. Human beings put up the sign. If the matter had been left to the animals, most of them would probably have preferred no sign: they are better off taking advantage of tourists' generosity, and they don't care enough about the survival of their species to forgo free lunches.

Much the same is true for business. Individually, businesses are better off with the free lunches offered by the government. This is why they spend so much money lobbying Washington. The overall free-market system, however, is worse off as a result. Just as it would be dangerous to let the animals determine the rules of the national parks, it is dangerous to allow businesspeople to dictate the rules of doing business, since they do not consider how bailouts weaken the functioning of the market. Like feeding animals, helping a large firm or a country avoid financial distress seems charitable but in the long run hurts the recipient. A country that protects wild animals from the corruption of free food should likewise protect businesses from the corruption of subsidies."

That's it! Peanut Butter Cups!

So Jane underwent this medical procedure that rendered her house-bound for several days. The doc said she can return to work in a week, but to take it very easy and expect to remain sore for at least three weeks. To Jane's pleasant surprise, she found herself virtually pain-free by day fourteen (a full week sooner than expected). Now she's wondering. "What gives? What did I do that caused me to recover so much faster than I was supposed to?" Then she remembered, while she was home recuperating, she stumbled across her husband's stash of Reese's Peanut Butter Cups and, in her weakened state, Jane couldn't resist. She figured she downed, on average, six a day—a habit that found her in the Costco bulk-candy aisle on her lunch break the first day back to work. Eureka! That's it! Peanut Butter Cups! Jane discovered that the consistent daily dose of six Reese's Peanut Butter Cups, speeds up recovery after surgery by 33% (well worth the weight gain). Now, should she ever undergo another procedure (gastric bypass perhaps), she'll know to double-up on the Reese's—now a staple in her diet—to quicken her recovery.

So we had this great recession, people lost their jobs, real estate tanked, stocks plummeted and the politicians and the Fed jumped in with a few trillion in fiscal and monetary stimulus. The recovery is less robust and taking longer than those "experts" predicted, but we are nonetheless growing, and they did stimulate. It, therefore, makes perfect sense—stimulus works. The recovery began whilst they were pumping in all that liquidity. So now we can conclude that, had they borrowed and printed twice as much, we'd be growing at double the pace. They now have all the empirical evidence they need to justify all the intervention their hearts desire the next time the economy contracts.

Never mind the distortions caused by programs like Cash for Clunkers and the Home-buyer Tax Credit—two (among others) that proved to be very costly—while delivering virtually nothing but a brief sugar high followed by renewed, accelerated even, declines in both sectors. Never mind that we've added trillions in public debt while the needle barely budged. Never mind that the Fed has bloated its balance sheet to the trillions—purchased assets [with newly created money] to inject liquidity into the system—and headline unemployment remains north of 8%.

I can't help but wonder, had the politicians and the Fed stayed out of the economy's way—had they let the markets work—if we wouldn't be feeling a whole lot healthier (leaner  for sure) right about now?

Thursday, August 23, 2012

Damn Dirty Capitalists!

My youngest son would be the family scientist. He's into space, into the computer, he's into watching the Sci-Fi channel, he likes creating volcanic eruptions with soda pop, and, of course, he loves Popular Science magazine. Suffice it to say, Ryan has more to offer his old man, in terms of paradigm expansion, than I do him. But every now and again he presents me with an opportunity to disabuse him of someone's, well-intended I suppose, attempt to influence his thinking about the present and future state of this big blue marble upon which we tread our ever-too-dirty feet. Last evening presented one of those opportunities.

"Hey Dad, what do you think of this?" was all it took to set off one of my family lectures on free markets (always works to clear the room of pesky youngens) and, ulimately, send me to my iPad to compose the next blog post:

In the July 2012 issue of PS, Mara Grunbaum offers an enlightening, if not frightening, view, of our "four potential futures". In her article, Four Futures, How the choices we make today will change the world, she offers up statistics, illustrated (convincingly) in numbers and charts, to support the notion that the key to creating income equality, curing world hunger, preserving water supplies, stemming population growth and preserving the environment for eons to come is to embark upon what she terms the Great Transition, or number 4, below.

"Possible Scenarios" (and, parenthetically, my sarcasm)

1. Market Forces: Business as usual - the economy grows, technology advances. Poorer regions build up industries, and environmental problems become more serious. (Damn those capitalists!)

2. Policy Reform: Governments take rapid action to meet U.N. climate targets and other sustainability goals, but economic growth remains the strongest factor in developing new policies. (Damn those capitalists and those crony politicians [I sympathize re; politicians]!)

3. Fortress World: Environmental, economic and social problems overwhelm current systems, and governments become authoritarian. The wealthy retreat to protected enclaves, leaving poor masses in a degraded wasteland. (She definitely watches the Sci-Fi channel)

4. Great Transition: Society's values change radically to prioritize environmental preservation, social equality and cooperation. (And of course we'd all agree on what "environmental preservation" truly means. And it'd be no sweat coming up with acceptable standards determining "social equality". And being that we humans are not naturally a competitive bunch, we'd all cooperate and create social and environmental harmony).

Here's an excerpt from's Don Boudreaux's piece on how much man has gained by (perhaps) warming things up a bit:

"Being no physical scientist myself, I accept Mr. Muller

Market Commentary (audio)

Click here for today's commentary...

Wednesday, August 22, 2012

Today's Quote

I took today's quote(s) from Now think in terms of, in the words of Greek Prime Minister Antonis Samaras, "a smaller, healthier and significantly more efficient public sector." And "we are progressing with structural reforms and privatization." Hmm...

Apparently Greece's mess stems from a large, sickly and significantly inefficient public sector - and - too much state-run as opposed to private-run industry. Or, in other words, moving to less government and more private sector is Greece's only shot at turning itself around.

Now think in terms of in what direction you see our great nation heading. Something we should speak up about, I suspect...

Samaras promised that Greece will soon have "a smaller, healthier and significantly more efficient" public sector. "I have decided that for every ten public servants going into retirement, we will only hire one new one." Samaras also promised further tax and labor market reforms to boost the country's competitiveness.

The Greek prime minister called for more solidarity from Eurozone partners. "We must escape this negative psychology that is like a deep black hole," he said. "We are progressing with structural reforms and privatization. And it is not fair when some in Europe keep want [sic] to push us back into that hole."

TV Segment August 22, 2012

Tuesday, August 21, 2012

Not enough "bailing out thy neighbor"?

The President is catching some flak from economists and political allies [even] on apparently not doing (spending) enough to help underwater homeowners (given the continued moribund state of the housing market).

Sunday, August 19, 2012

Saturday, August 18, 2012

Everything you need to know about collectivism - Or - Mediocrity, a lofty goal

So my 20 year old son is taking a class called "Argumentation". Of course I'm thinking, facetiously, "okay, that's practical given the present state of the education budget." Now my boy, I'm proud to say, is highly motivated - which explains his disappointment on day-one when he was assigned to a group consisting of five students who'll be his teammates for the entire semester. Their first assignment was to come up with a controversial political issue to build an argument around. He quickly, and I suppose slyly, text (or is it 'texted'?) me asking for a topic or two. Of course I was back to him with like a dozen topics in like a dozen seconds.

To make a short story shorter, he discovered right away that his cohorts weren't the least bit enamored by the subject matter. In fact, he strongly suspects that he'll be carrying their load for the entire semester. Great for them, not so great for him. A somewhat demotivating experience, you might say.

Upon hearing his story, I said "Jonathan, you've just learned everything you need to know about collectivism. Now if you want to have some fun in your next political science course, bring up this topic. That is, how any form of collectivism, call it 'groupism' if you like, results in the reduction of the productive and the expansion of the unproductive."

We could call it the striving for mediocrity. The pulling from those who produce and the distributing among those who don't. The sad thing is, mediocrity, as an objective, is entirely unattainable. For it inspires the unproductive to do virtually nothing (while their sustenance is a granted) and the productive to do virtually nothing (while the bulk of their production is distributed among the unproductive). The end result; virtually nothing.

Note: We can say the same about growing government in general. Without question (literally without question), government growth comes directly at the expense of private sector production. As Europe has taught us, this is not a good thing.

Rand and Friedman on Paul Ryan

Paul Ryan is an interesting character. Among today's politicians I would put him on my very short list (albeit at the bottom) of those who, given the opportunity, "might" enact legitimately good fiscal policy. Alas, our current President and 99+% of Congress didn't make my list. Honestly, as of this moment, it consists of just two names (so being at the bottom [of a list of two] ain't all that bad) and both have Paul (as in Ron Paul - although his position on earmarks troubles me) in their name. Monday's New York Times called Ryan a disciple of Ayn Rand and Milton Friedman. Now when I think disciple, I'm thinking "follower", I'm thinking "someone who lives the teachings of whom he follows." I don't doubt that Ryan has read many of the works of these two greats (apparently he read Atlas Shrugged as a teenager and encourages all of his interns to read it as well), but, based on his voting record, I don't know that "disciple" fairly characterizes his commitment to the philosophies of Rand and Friedman.

Having myself read many of the works of both, here's my impression of how they'd, were they alive to tell, feel about Mr. Ryan today:

As for Ayn Rand, I'll simply say that she was as pure a libertarian as they came. And she was quick to condemn (and I do mean condemn) any politicymaker for the slightest transgression. Therefore, obviously, with few exceptions, she was no fan of politicians. Ryan's yea votes on bailouts for the airline, financial and auto industries, I assure you, would have won no praise from Ms. Rand.

As for Milton Friedman, he would have seen real potential in the young congressman. He would have gladly met with Ryan, I'm sure at Ryan's request, and counseled him to live up to his rhetoric. To walk his talk. He would have told the unresisting congressman to put free trade at the very top of his agenda. He would have tried to convince Ryan that the 'loss' (as in profit and loss) is essential to the efficacy of free market capitalism. That the absolute best economic policy is one where government allows the natural culling of industries by the free market. That when government bails out an industry it steals from the productive sectors of the economy and creates a moral hazard that will come back and bite society in the worst way. He would have applauded Ryan's attempts at entitlement reform and encouraged him to work harder at freeing individuals from the shackles of government "assistance".

As for me, among the four characters vying for the White House, Ryan's my man. I cringe however, given his voting record, when I hear him referred to as a champion for the free market. But I do appreciate his willingness to tackle the inevitable implosion of our present entitlement system. As for his position on trade, I'm guardedly optimistic, inspite of what he said this week on the stump in Ohio:

"Free trade is a powerful tool for peace and prosperity. But our trading partners need to play by the rules." In reference to China he said "They steal our intellectual property rights. They block access to their markets. They manipulate their currency."

I suspect, if he truly buys into Rand and Friedman (both fiercely advocated unilateral free trade), that he knows better. That this morning's rant was purely politically motivated. Sure, the intellectual property issue is something that needs addressing, but as for the blocking of access to their markets; if they choose to compromise their own citizens while sending us affordable goods, that'll be their undoing, not ours. As for manipulating their currency; again, that's a price their people pay (reduces their purchasing power) to benefit us. And oh what a contradiction, when you consider how our Fed manipulates the value of the dollar.

Here's the thing folks. I know my readership is largely composed of passionate conservatives, and I do sympathize. But I think the days of falling in love with policymakers, making them out to be something they're not, have got to end. We need to hold our politicians, particularly our favorites, accountable for every move they make. They need to understand that their career success will be predicated upon their willingness to adhere to the most basic fiscal principles: Balancing the budget, paying down the debt, getting out of the way of business (meaning simplifying tax and regulatory policy, and putting and end to all the cronyism [a long shot I know]), never engaging in protectionism, and incentivizing individuals to get off the dole and back to work*.

*No jobs you say? "They" do the above (simplify policy, etc.) - that is, create a little certainty - and just you watch.

Friday, August 17, 2012

The Other One Percent (guest blog)

Every now and again a subscriber, either by email or in the comments section of the blog, presents me with a perspective that expands a given topic – taking it yet deeper than did my essay.  This is one of those times.  Professor Baldis is a deep thinker and clearly a free market ideologue.  I found his history lesson on the contribution to education by some of America’s most successful individuals to be particularly provocative.  As well as his question as to where we’d be if the redistributive forces that too-many professors advocate were unleashed onto our society.  This was his reply to my recent column Never took Economics.  The second to last sentence of the last paragraph speaks to how desperately neglected are the economics departments of today’s universities…


The (Other) One Percent

The title of this reply is “The Other 1%”. The economics professor that you refer to in your essay rails against the “1%” who has more than they should have, needs, and deserves.  It doesn’t matter what they started with, how they got it, or what they plan to do with it.  The fact is…the 99% don’t have it, particularly the professor.  Why this attitude?  Envy (identified as one of the seven deadly sins, I believe) can cloud thinking and judgment.  After all, it’s not fair that the professor spent the first 18 years of his life engaged in public education programs, and then spent the next 10 years of his life attending universities, culminating in a Ph.D.; termed a “terminal” degree, because there is none higher.  (Or is it because that’s when one stops thinking and learning?)

‘Poor’ professor, for 28 years he worked hard in school.  In fact, only 1% (the other 1%) of the U.S. population has a doctoral degree.  You would think that the intellectual elite would be compensated very well.  The top 1% in business are compensated with millions!  Professors may make $100,000, give or take. (FYI, CSU Fresno professors make $65,000 – $95,000. A few do make more, some less).  The ‘poor’ professor says, “It’s not fair!”  (Envy)

The professor reported, “My parents started reading to me on the day of my birth, because the Department of Health and Human Services website (supported through federal taxpayer funding) said it was healthy and the right thing to do.  My parents carefully followed the California Department of Education, Infant/Toddler Learning and Development Guidelines (supported through California State taxpayer funding) to ensure I began learning as soon as possible.  I was enrolled in preschool programs through the California First Five program (supported through California State taxpayer funding).  My parents used my uncle’s address as our home address so that I could attend public school (supported through California State taxpayer funding) in a better, oops…uh, different school district.”  (The professor began his life living according to guidelines written by learned authorities (Ph.D.’s) and funded by taxpayer monies; gee…I wonder how this might influence his thinking?)

The professor says, “I went to Columbia School of Business to earn my B.A.!” (Established in 1916 by the trustees of Columbia University with a generous supporting gift from Emerson McMillin, founder of E. McMillin & Company, a New York bank).

The professor shouts, “I attended the Wharton School of Business to earn my M.B.A.!” (In 1881, American entrepreneur and industrialist, Joseph Wharton, founder of Bethlehem Steel Corp., provided the money to establish the world’s first collegiate school of business.)  The professor cried out, “I attended Harvard Business School and spent countless hours in the Baker Library to earn my Ph.D.!” (In 1924 George F. Baker donated $5,000,000 dollars to build the HBS.  He was a co-founder of the First National Bank of the City of New York, the forerunner of today’s Citibank N.A.)

Wow!  Who would have thought that all those greedy, undeserving, 1%’ers would give away so much? Even today, the Bill Gates Foundation gives away about $1,000,000 a month!  I wonder how much all those people would be able to give away if they only brought home $50,000 a year.  I wonder where we would sit our fat rear-ends to watch concerts if SaveMart had been broken up into Mom & Pop stores?  I wonder where the severely injured and burned would be treated if the Peters family were forced to pay 75% of their money in taxes?  I wonder where our CSUF students of business would study if Sid and Jenny Craig hadn’t been allowed to capitalize on our fat rear-ends because Obama Care determined that only the government should provide those types of healthcare services?

But, back to our ‘poor’ professor.  (Of course, we won’t dwell on the fact that he chose his career path) Twenty-eight years in school (paid for by scholarships, grants, and state and federal financial aid).  Lands his first teaching job at age 29 at CSUF (working for the government).  Spends the next 10 months (remember summer vacation) of every year for the next 5 years working diligently to earn tenure. (Really?  A guaranteed job for life?  Vive la France!)  He then spends the next 8 years working hard through the promotion ranks to achieve full professor status.  At age 42, he’s now at the top of his profession (still working for the government) and making less than $100,000 a year.  It’s not fair!  (Envy)

After all, he has a lot of knowledge about economics.  So what is missing?  Umm?  Oh yeah…experience. Well, actually he has experience.  His experience is working for the government.  He has experienced the fact that his budget, his salary, his expenses are all reimbursed by the state (government).  His entire lifestyle depends on tax revenues.  So why should we expect him to teach economics any differently than he does.  We teach what we know.  This guy has been supported, in one way or another, by tax revenues for his entire life.  Everything that has allowed him to be where he is today has come from taxes and government.  Therefore, if he seeks to have more, he returns to the wellspring of life…taxes and government.

It is said that knowledge plus experience equals wisdom.  In his own way, the professor is wise.  (I guess, well….????).  What we need is perhaps what Emerson McMillin, Joseph Wharton, and George F. Baker might have been thinking.  Let’s take the best and the brightest, who have private sector, “real-world” experience (as they did) and give them a little “book learnin’.”  Now that’s the recipe for an effective economics professor.  I nominate Marty Mazorra.  My years of conversations with him tell me that he is exactly what university economics departments need.

Sorry for rambling on so long.  It’s what us college teachers do.

Mark Baldis, Ph.D.
Department of Kinesiology
California State University, Fresno



Thursday, August 16, 2012

Can you believe this market?

Can you believe this market? Here we are; Europe's still the mess, we're tiptoeing on the edge of the "fiscal cliff", the economy's barely budging, and stocks are up double digits on the year. So what gives?

The correct answer is simply; buyers have come to the auction at a time when the owners of stocks are fairly content hanging onto their shares. Thus, buyers have to pay up to acquire the positions they're after.

But, given my intro, why on Earth would buyers come to market in the midst of all the uncertainty? I suspect it's because they believe the political ramifications of the death of the Euro and the falling off the "fiscal cliff" are far too great. That currencies will be printed and cans will thus be kicked far enough into the future to allow for some capital gains in the meantime. And they're also keenly aware of the bubble in bonds, the record level of sideline cash, the pristineness of corporate balance sheets, the retail investors' exodus from the market (when they're ready, they'll stampede back), and the compelling valuations of share prices (relative to forward earnings).

Of course this doesn't mean the market, while climbing this wall of worry, doesn't slip off a few ledges in the months ahead. I'll bet it does, but I'll never try to time it (other than through rebalancing).

Wednesday, August 15, 2012

The Price of Protein

I make my living by investing other people's money. And I believe that investors (in general) are best-served, long-term, by taking an ownership interest in the global companies that feed, house, transport, heat, cool, employ and entertain them, and the rest of us 7 billion Earthlings. Therefore, as you might expect, when the stock market goes down, my income goes right down with it. And of course I'm not alone; the investment industry is a big, job sustaining, systemically vital, industry for sure.

Now let's say you raise hogs for slaughter, and pay your taxes just like everybody else. You tell me, how would you feel if, when the next [inevitable] bear market brings stocks down by its (by definition) 20%+, and my income along with it, the President stepped in and committed your money to buying up equities just to help me out. I don't expect you'd care too much for that idea. Might even chap your hide just a little, huh? You'd (being a purveyor of pork) know intuitively that being in business means taking risks, and dealing with the seasons - dealing with the inevitable cyclicality of life as we know it. Smart folk plan for down markets, be they of the stock or the livestock variety. Plus, if the government stepped in and artificially boosted equity prices every time they dropped by some measure, it'd kill the opportunity for opportunists to get in cheap.

Well that's precisely what he's fixin to do for the meat industry. Apparently the midwestern drought is pushing feed prices through the barn roof, and therefore meat producers are turning livestock into deadstock (less head to feed) at an accelerated pace. And the over-abundance of animal protein coming to market is, of course, bringing down the price per gram. And our good President says he'll have none of that. That the government buys meat and has lots of freezers. And I suspect the beneficiaries of this shopping spree, both direct and ancillary, have lots of votes.

(note; don't waste your time going all partisan on this one. His predecessors [on both sides] did the same for their supporters virtually without exception).

So let's see, again, we know intuitively that being in business means taking risks, and dealing with the seasons. That smart folk plan for down markets. And that bailing out smart folk inevitably makes them dumb [risk-taking] folk (think bankers). Plus, the politician stepping in to boost prices (and his poll numbers) kills the opportunity for you and I to save a buck at the meat market (and ultimately increases our taxes) - not to mention how it'll inspire more kills of pigs, steers and chickens. Think about what that will do to the supply of meat in the not-too-distant future (while we wait for piglets, calves and chicks to grow up), and thus its price?

TV Segment August 15, 2012

Monday, August 13, 2012

Never took economics - And - Products of Our Environment

I consider myself unusually fortunate for oh so many reasons. Not the least of which being that I never took a college course in economics. My many articles on the economy are therefore seat-of-my-pants, unqualified, essays (at best). I'm thinking that's a good thing.

As I pondered how I'd articulate today's message, I was reminded of when my father talked me into trying out the life insurance business at the tender (impressionable) age of 22 (1984). My introduction to "financial planning" was with a company then called The Bankers Life of Iowa, now called The Principal Financial Group. As the name-change implies, the life insurance agent of the mid-80s, assuming he's not now recruiting new "agents"—or selling medical equipment—is a "financial planner", "financial consultant", "financial services professional", "retirement planning specialist", "risk management specialist", "investment planner" or any of at least a dozen other smart-sounding monikers I've heard over the years. I often find myself hesitating when someone asks me what I do. Partly because I tire of impromptu market predictions (you'd think they'd ask me), but mostly because I have to think for a second or two to come up with a title. No kidding. I have two designations; one says I'm a financial planner, the other says I'm a financial consultant. For some reason I never want to say "planner", I do sometimes say "consultant", but that begs a second question - "what kind?" Usually I say investment advisor (makes sense, since give investment advice is what I do), then endure the soothsaying. Strangers who've stumbled onto a blogpost or two might think me an economist. One thing I don't do is sell life insurance.

If you're considering becoming a financial 'whatever', step one is to get yourself hired by a sponsoring company. Your company will house you, train you, and compensate you for your sales successes. Sales generally involve products - and, as you might imagine, different products come wrapped in different sales incentives. With regard to life insurance, the size of the premium (obviously) determines the size of the commission. I found it quite convenient how expensive permanent (or some hybrid of permanent and term) insurance was forever better for the customer than cheap term insurance. They even had these software "planning" programs designed to help the adviser help the client meet his or her financial goals. Funny how those programs virtually always concluded that, to meet their long-term financial objectives, 30 year-olds John and Mary needed to buy say half-a-million each of Superduper Protector Retire-in-Style Plus for $400 per month - when they could have purchased 20 year term policies for $40.

(note: I know some of my regular readers sell insurance and will have legitimate gripes with what I just wrote. I understand that today's policies have substantially more to offer (legitimately so) than the fare offered 28 years ago. And that different problems call for different solutions. So chill!)

Back to economics: Had I taken such college courses, my then moldable brain might have fallen into the sculpting hands of Keynesian-ideologue professors - and I might thus be coming at you with chapter and verse as to why government intervention will ultimately save our day. Had I been tutored by free-enterprise fanatics (one of which I've become), I might be wondering if I'm true in my assertions or just asserting some bloated-egoed academic's assertions. Not that I'm not, nevertheless, a creature of the ideological climate from whence I came, but I can say (thank God) that much of what I espouse comes from my own personal private sector experience. That said, my initiation into the financial planning business subjected me to the intense tutelage of passionate proponents of [panacea] permanent insurance, of the very high-priced variety - but, inspite of that formal indoctrination, I didn't join their ranks (and yes—my insurance-selling friends—there are legitimate uses for such coverage [often in estate planning and deferred-comp cases]).

My point, which I make more precisely in the following essay, is this; a little formal education [in economics] can, and too often does, go a long way in the wrong direction. Of course I'm asserting that big government is a bad thing.


The above was inspired by the following essay. I came across this yesterday evening while putting the final touches on my latest project. I wrote it two and a half years ago, yet the message remains timeless:

Products of Our Environment

The measure of one’s intellect is no match for one’s predisposition. 

With bent brow he peers above wire-rimmed spectacles resting near the tip of his nose, his gaze descending upon three dozen young under-frontal lobe-developed college freshmen. With blatant contempt for the values that built a great nation and provided him a platform to stand above the impressionable, the pretentious PhD addresses his barely post-adolescent pupils. With incomparable eloquence he marvels the lower-classmen. His charge is to teach, his objective to impeach. To impeach a commoner’s allegiance to his country, to a flag dressed in stars and stripes. He exposes capitalism for how he sees it – a system of selfishness, of ruthless abandon, of obscene opulence—there are no subtleties in his reproach.

He offers up the life of one William Gates, the near-wealthiest man on earth and the product of the dark-sided capitalism. He implores his students to consider his rhetorical query; “how can we allow a single human being to earn literally hundreds of millions of dollars in a single calendar year while others toil for a workman’s wage?” Lacking sufficient knowledge, or courage, not a student would challenge the pompous professor.

Later that evening, as my then eighteen year-old son shared his story, I was utterly amazed to find that I could actually feel my pulse pounding from within my eyeballs. While I was fully aware that my offspring would encounter ideologies that wouldn't always jibe with the teachings of his old man, I was nonetheless taken aback (to put it mildly) that this econ professor would dare exploit his position to promote his warped ideology. I then proceeded to equip my son with the obvious retorts, such as; “how can we allow a college professor to knock down six figures when we have kindergarten teachers working their bottoms off for less than half that amount?”

I was considering how I might personally lambast the conceited collectivist for imposing his personal agenda onto my young son and his classmates when the obvious occurred to me; there was no way I nor anyone else would change this sadly misguided individual’s mind or how he addresses his students. And besides, he’s just an unfortunate product of his environment—perhaps a disciple of one of his own college instructors. Challenging him directly or petitioning for his dismissal for pushing his politics (of course politics does impact the economy—therefore the gent, since he’s paid to teach economics, should explore history’s related record—but then of course he’d have no support for his position) would be a profound waste of time and energy. In fact, in a way, I’m kind of glad he’s there. In the case of my son, he’s learning that ignorance is ignorance, even when it’s well-credentialed and dressed in fine eloquence.

Of course I’ve nothing to worry about; Nick is an independent-thinking, proud-to-be-a-capitalist young man. Or he’s, in the for-sure opinion of any passionate socialist, a product of his environment—a disciple of a delusional free-market-capitalist father. And I’m okay with that.

So I, the capitalist whacko, think the socialist professor is nothing more than an extension of his ideological upbringing, and he would think the same of me. And you know, maybe we’re both right—perhaps we are each, when it comes to our politics, largely products of our environment. And to be perfectly (intellectually) honest, while I’m no psychologist, I do believe that to be the case. In fact I’m reasonably certain this condition afflicts virtually all walks of people—and trust me; the measure of one’s intellect is no match for one’s predisposition. Years spent at our nation’s greatest universities can be practically wasted, for, when the academic emerges, his insight into the world at large is first and foremost filtered through the political veil that has been engrained into his very being. Therefore, in the case of my son’s teacher, again, there’s absolutely no changing his mind. And the same goes for me. There’s absolutely nothing that will change my belief in free-market capitalism. 

Looking the Part (guest blog)

Here's my friend and entrepreneur Phillip Pistoresi on dressing the part:

President Obama set the trend for campaigning and administering his important speeches with his tie off, collar unbuttoned and his shirt sleeves rolled up. I suppose it is to give the impression that he is just a fellow hardworking

Sunday, August 12, 2012

Nice try John (video)

Whole Foods CEO John Mackey has charged himself with the duty of changing what he believes to be the tarnished image of business. He suggests that corporations, in general, have an undeservedly poor rep among consumers. In this interview he makes reference to the works of Adam Smith. The same Adam Smith who said "I have never known much good done by those who affected to act in the public good", and, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." Considering the billions corporations pay lobbyists each year, I'm with Adam Smith on this one.

Mr. Mackey also speaks of his efforts to get government (as opposed to the free market) to impose standards on producers of organic foods. Not a libertarian (as he considers himself) sort of act in my estimation.

I say let's not fret over the consumers' view of businesses in general. Companies, independent of one another, will, through the free market [competitive] process, determine the quality of their own reputations.

From a purely business standpoint, you gotta appreciate his efforts. I mean don't you want to spend your money at an institution with a CEO so concerned with the public good? Even though you can get [a lot of] (virtually) the same stuff at Trader Joe's (so I'm told) at noticeably lower prices?

Saturday, August 11, 2012

Is what's good for GM good for America? (video)

Dr. Horwitz does a very nice job of describing what we all should know intuitively. That, aside from rewarding failure, bailing out failed companies creates moral hazard, redistributes wealth and crowds out markets. And, as I've illustrated here aplenty over the years, subsidies benefit only those subsidized, at the expense of you and me.

I have an alternate (or, let's say, an additional) view with regard to Wal-Mart. Dr. Horwitz suggests that one reason Wal-Mart supported raising the minimum wage was because of the harm it would levy onto its competitors. While I suspect that may very well be the case (I've written here, hereandhere on Wal-Mart and Senator Durbin's coup that reduced the debit card swipe fee at the expense of the consumer), being that its customer is your everyday consumer, lobbying for higher wages (for simply the sake of higher wages) might seem like a net win for Wal-Mart - provided it doesn't result in higher unemployment among its low-income customers. In the end however, regardless of Wal-Mart's motive, whether we're talking putting the competition out of business or putting more money in the hands of its customers, it's still the government redistributing private sector resources, at the expense, ironically, of the minimum wage worker (read San Fancisco Discriminates):

Simple Math - And - What I like about Paul Ryan

How's the economy these days? How's the outlook for jobs, housing, auto sales, etc.? "Horrific" - if you watch Fox News. "Hopeful, inspiring even" - if you watch MSNBC. If you're a Fox News Republican; "four more years of President Obama will be our undoing." If you're an MSNBC Democrat; "we're finally turning the corner - gaining some momentum - and it's critical that we give the President four more years to finish the job."

I suppose I'll never meet a tax cut I won't like. Anytime we leave more capital in the hands of the people who've earned it, I'm all for it. Of course the problem is the spending. The President's term had seen an increase in spending not rivaled since the days of LBJ. I'm talking about GW Bush by the way. "Not fair!" You Foxnewsers cry. "Bush had 9/11 and the Middle East to contend with." You're right, discretionary defense spending rose by 107% during his two terms. However, discretionary domestic spending rose by 62%.

As for President Obama, there are those, no doubt MSNBCers, who would have us believe that spending has in fact trended lower under his administration. In the examples I've seen, the chart conveniently began after year one of his term - after spending utterly skyrocketed.

But of course politicians will manipulate charts till the cows come home, all in an effort to shield the painfully obvious. Under President Bush we saw spending rise from $1,789,000,000,000 to $2,983,000,000,000, a 70% increase - while revenue went from $2,025,000,000,000 to $2,524,000,000,000, a 35% increase. We can talk about Laffer Curves (how tax cuts can result in increased tax revenue) till yet more cows come home, but, no matter how you slice it, spending it faster than we're making it leads, at best, to a weakened economy.

As for President Obama, all you need to know is that the government is set to spend roughly $3,800,000,000,000 this year, against expected revenue of $2,500,000,000,000 - that's overspending at a rate of 52%. Is 'unconscionable' too strong a word?

Yes I know, we probably should be talking about Congress when it comes to spending. But we won't be - the charts forever fall on Presidents.

As for Mitt Romney picking Paul Ryan as his running mate; if Romney is to be the next president, and you're concerned with these numbers, you should (Ryan's yea votes on TARP and the auto bailout notwithstanding) like this pick. What I like about Ryan for the next 3.5 months is that I believe he'll bring the real, pressing, issues to the debate. And I suspect a heightened level of maturity as well. I.e., I don't expect we'll hear the utter silliness - such as Romney Hood or Obamaloney - coming from the composed young Congressman.

Friday, August 10, 2012

Could it have been the prostitution industry that saved the finanical industry?

The other day I was listening to the audio version of Dubner and Levitt's book Super Freakonomics. The part about the study that says Chicago prostitutes are substantially more likely to have sex with a police officer than be arrested by one got me thinking.

You may recall when the governor of New York, the man who vowed to take down the city's oldest industry, left office in disgrace because, as it turned out, he was quite the prominent patron to that very industry. That's right; Mr. Spitzer was caught, red-handed, handing $4,500 to his favorite "escort". A prostitute, who, surely, would not be sympathetic to the Occupy Wall Street movement - for the Wall Street bailouts, I cynically suspect, were essential to the continued success of her enterprise.

Chris Dodd and Barney Frank stamped their names onto some 2,000+ pages of regulation supposedly designed to protect society from the big bad banks. They vowed to put an end to the inherent moral hazard of what's been dubbed the "too big to fail" doctrine. I suppose I should read it before I pass judgment. But then again, if it's judgment I'm concerned with, I could read the King James version of the Bible - four times - in the time it would take me to read the Dodd Frank bill just once. All I know, because I read it somewhere, is that 77% of all US banking assets are now controlled by the 10 largest US banks. Talk about your perverse incentives!

So here's the narrative: Capitol Hill threatens the financial industry. The financial industry's most alluring characters therefore, bearing (or perhaps baring) gifts, descend upon Washington. Washington thus bends the regs to accommodate its benefactor. In essence; the more Washington threatens to have its way with the financial sector, the more the financial sector will have its way with Washington.

It's like the Elliot Spitzer story: He threatened the prostitution business, then partook. Now you tell me, who owned whom? Did the pimp at all concern himself with Spitzer? Or did Spitzer worry about the pimp (the one who Fed-Exed him the envelope with all those digital images)? I.e., I don't suspect the big banks, nor NYC prostitutes, have much to worry about these days.

Hmm... Come to think of it. Maybe there's more to the prostitution angle than meets the eye. Indeed, could it have been the prostitution industry that forced the bailout of the financial industry? Seriously: What if Wall Street happens to be a prime source of business for a major prostitution ring? And what if the ring's leaders are aware of the power of the politician over the banker? Would that not inspire the prostitutes to cozy up to the politicians? For then, when the banker'sin jeopardy, Fed-Ex envelopes might suddenly appear in oh too many inboxes on Capitol Hill. Then Voila! Bailouts galore!

I know; not nice, unfair, and a terrible insult to the morally-adequate politician. Right?

Wouldn't smaller government mitigate (to no small degree) virtually all manner of ill-reputant (corporate at least) incentives?

Thursday, August 9, 2012

Inflection point for China - And - The Most Important Point

The Communist Party of China finds itself in a precarious position these days. In some circles it's lauded for the success of the Chinese economy, but, truly, that would be sorely misplaced laudation. At best, we can stretch only far enough to credit the CPC with not quashing the groundswell of capitalism that began after Mao's death in 1976. I am certain, however, that there comes a saturation point where an autocratic rule, for the sake of its own survival, must clamp down on entrepreneurialism. It's the old adage, if you're not moving forward, you're moving backward. The years ahead will be telling...

Read the following excerpts (I highly recommend the entire piece) from Paul Gregory's excellent article China's growth: Planning or Private Enterprise? Then my follow up commentary where I get to the ultimate bottom line:

"China's private enterprise reforms began first in agriculture in 1978 and spread from there. Agriculture accounted for most of Chinese output and most of the labor force when Mao died in 1976 and the reform period could begin. The freeing of agriculture from collective farms is the most important untold part of the Chinese growth story.

Agricultural reforms began spontaneously from below, even before the "Reform" Party Congress of 1978 that installed reformer Deng Xiaping in power. A Chinese reform official later admitted: "In fact, reform wasn't discussed. Reform wasn't listed on the agenda, nor was it mentioned in the work reports."What became known as the "contract responsibility system" was sparked spontaneously by eighteen peasants from Xiaogang village in Anhui province. They secretly divided communal land in November 1978 and agreed to farm their plots individually, each contributing their share of the state quota. The state got its due and the peasants kept what was left over. The peasants' separation of their land from the collective farm was illegal, highly dangerous, and done without the approval of regional officials. Why did they take the chance?

Kate Zhou explains that the peasants had seen their parents and children die from starvation during the 1958-1961 famine of the Great Leap Forward. They understood they had to take care of themselves. The contract responsibility system spread like wildfire from village to village and from province to province, notably without endorsement by or encouragement from regional or national authorities.

As agricultural production soared, Deng Xiaping and his CPC realized that they should not resist something that was working. By 1982, more than 90 percent of rural dwellers worked under the contract responsibility system, but they were allowed only one- to three-year contracts on their land. It was only in 2003 that the state gave out longer-term leases.

The spontaneous reforms in agriculture meant that new supplies of food products needed markets and that markets needed infrastructure. Rural dwellers created a private trade network, and, within one year, most state food stores were out of business. Rural entrepreneurs then created new businesses, such as hotels, services, private restaurants, and small-scale manufacturing, through the three Fs (friends, family and fools). They bribed local officials to register their companies as "township and village enterprises." They created fake "red hat" enterprises, that is, private companies masquerading as state companies, and sham collective enterprises, or they used state enterprises to issue receipts and open bank accounts. Large private manufacturing firms developed first in predominantly agricultural provinces. China's largest agribusiness was founded by brothers who left the city to found their company in rural Sichuan. Rural entrepreneurs built the largest refrigeration and air-conditioning companies in China."

"China is, in fact, two separate economies: the private and the state. The "private" economy includes joint ventures with Hong Kong and Taiwanese entrepreneurs, medium and small manufacturing and service businesses, food-processing plants, and just about everything else. The most successful private enterprises are listed on Chinese stock exchanges. Having shareholders gives added protection from arbitrary state action. State officials think twice about alienating hundreds of shareholders versus only a few owners. The private economy has operated in a shadowy world of semi-legality and has had to survive on its own wits. It had to wait until 2007 for the Chinese legislature to recognize the legitimacy of private property.

The state sector of "national champions," run by the CPC or by closely-connected persons, is the second Chinese economy. There are more than 150,000 state-owned enterprises after the weeding out of unprofitable state enterprises under the policy of "grasping the big and letting go of the small," begun in 1998.They decided that the government would control the biggest and most important companies but let the smaller ones fend for themselves. These 150,000 companies account for only three percent of the total number of state and private companies, but for more than 90 percent of the market value of listed Chinese companies.

Many private enterprises formally operate under the legal protection of state or collective enterprises. Hence, it is difficult to calculate the shares of the state and private economies. If we adopt the broadest definition, the state economy is, at most, half.China today is split roughly fifty-fifty between the state and private economies.

We lack exact calculations of the relative rates of growth of the state and private economies, but the private economy, with an average growth rate of nearly nine percent from 1980 to the present, has grown much faster than the state sector. In 1978, state enterprises and rural communes produced all of China's GDP. By 2004, there were more than three million private companies employing more than 47 million workers.By 2011, there were 52 million private companies employing 160 million workers.Clearly, the major part of China's growth has come from private initiative.

The private economy performs better than the state economy. An OECD study finds that total factor productivity of privately controlled enterprises is twice that of state-owned enterprises.22(Total factor productivity is the amount of output for each unit of labor and capital input.) Private companies earn higher profits, and state enterprises earn a four- percent return on capital, versus much higher rates for private companies.If state enterprises average profit rates of four percent, then, whenever inflation exceeds four percent, their real profit rate is negative. Private companies borrow in private markets at rates up to 18 percent. They must earn profit rates above that if they are to continue in business."
"Some economists buy the story that one-party rule enables poor countries to make tough decisions that "messy" democracies cannot. The most developed line of argument comes from Nobel laureate Eric Maskin and his Chinese co-authors, who cite regional competition among officials as the key to Chinese success. Instead of micromanaging the entire economy, they write, the CPC appoints and monitors the bosses who run its provinces, cities, and municipalities. Because of China's size, regions are often the equivalent of medium-sized countries. Regional mayors, governors, and local party bosses run relatively self-contained and self-sufficient regions. Nearly 70 percent of total government expenditure in China takes place at the sub-national level.

The CPC, however, tightly controls appointments, promotions, demotions and firings. Maskin et al. argue that the CPC runs a tournament among regional bosses to promote those who produce high growth rates, achieve low rates of unemployment, or attract foreign direct investment. Indeed, empirical studies show that promotions of Chinese regional officials depend on relative growth and job creation.

This "efficient CPC" narrative rings false on a number of accounts. Tales of lurid corruption and excesses of princelings (children of the first-generation CPC leaders) belie the image of a benevolent CPC. That still-poor China has more billionaires than any country other than the United States raises additional suspicions. Political economists have long demonstrated that "benevolent" dictatorships are torn apart by principal-agent problems, greed, opportunistic behavior, and corruption. Why would China be an exception?"

As Mr. Gregory suggests, there's another camp that believes (or desperately wants to believe) that China's government controls and allocation of resources have much to do with its modern-day economic success. I must say that, for me [a passionate liberal (in the traditional "favorable-to-and-respectful-of-personal-rights-and-liberties" sense of the word)], both camps entirely miss the most important point. If the collectivist indeed has it right with regard to growth, I'd sacrifice any amount of GDP for personal liberty every day for the rest of my economically-compromised life. If there's one thing the big-government lobby cannot deny, it's that liberty always wanes as government gains.

But, thank God, the reality (and the true beauty) of it is, as Milton Friedman so eloquently put:

"The great achievements of civilization have not come from government bureaus. Einstein didn't construct his theories under order from a bureaucrat. Henry Ford didn't revolutionize the automobile industry that way. In the only cases in which the masses have escaped from the grinding poverty you're talking about, the only cases in recorded history are where they've had capitalism and largely free trade. If you want to know where the masses are worse off, it's exactly in the kinds of societies that have departed from that. So the record of history is absolutely crystal clear - that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system."

Wednesday, August 8, 2012

TV Segment August 8, 2012

Careful what you ask for mon ami...

Do you like working? Earning a paycheck? Seriously. Do you work for the private sector? Would you like to keep your job? Get a raise? A 401(k) match? Medical Insurance? Want your employer to pay into your social insurance program? Let me guess; yes, yes, yes, yes, yes, yes, yes and yes.

Now let me ask you; do you feel there's too great a divide between the top say 10 or 20%, in terms of personal income and wealth, and the rest of us? Do you think those top earners should pay yet more (they provide the lion's share of government revenue already) of their income to Uncle Sam? Do you suppose you'd benefit somehow in the process. Let me guess (for the sake of my argument); yes, yes and yes.

If you happen to live in France, mon ami, you're about to get your wish. Your new president, socialist Francois Holland, has vowed to raise the income tax for those earning more than a million euro a year (that would be yours and/or many of your amis' employers) to 75%.

Now let me ask you; who you gonna blame when your boss packs up and heads to Singapore, and you have to pack up your desk?

From this morning's NY Times articleIndigestion for 'les Riches' in a Plan for Higher Taxes:

Monday, August 6, 2012

Mamas don't let your babies grow up to be lobbyists!

Gerald Cassidy lobbied to insert $27 million into a Dept of Ag appropriations bill to build and operate a nutrition center at Tufts University back in 1978. He and his firm instantly became the lobbying darling of a number of other universities, then private businesses. By 2006, Cassidy and Associates was raking in $26 million a year (as reported in Luigi Zingales's A Capitalism for the People). Gerald's reported net worth in 2007 was $125 million.

Not in Ma and Pa Cassidy's wildest dreams could they have imagined that their boy would have become such a phenomenally successful consultant thief. By 2006 the firm had cost the U.S. taxpayer tens of billions of dollars in pork-barrel projects it helped pass through Congress. Lord only knows the economic cost of all that misallocation of resources.

This is in no way hyperbole folks. The above represents no less than legalized rustling of consumer capital. And make no mistake; the larger the government, the more the opportunity for special interests to collude with the politician, and the more the mamas who'll want their babies to grow up to be lobbyists...

The lobby industry's total annual revenue in 1975 was $100 million - by 2011 its take was $3.3 billion. Wow (although that's down from 3.5 billion in 2010)! Think what all that money, cumulatively over the years, might have accomplished in the R&D departments of the companies who hired those guns. What a waste!





Harry Dent's prediction...

Just watched Harry Dent justify his Dow 3,000 (no typo) prediction in 2.5 years in an interview with CNBC's Maria Barturomo. He based his assumptions on the aging U.S. baby boomer, U.S. consumer spending and saving (lack thereof) patterns, and the mounting burden of government debt. Maria clearly wasn't buying it. But she was apparently too polite (or perhaps too young to know) to dent Mr. Dent's story with:

"But Harry, didn't you predict a Dow 40,000 (no typo) by 2011 in your best-seller The Roaring 2000s? Haven't you learned, from experience, that prognosticators like yourself inevitably (except when they luck out) play the fool? And by the way, the U.S. represents a mere 4% of world population. Certainly the demographics are vastly different in other parts of the globe. And all of the Dow components are multi-national companies. As Marty Mazorra :) recently blogged, there's simply too many moving parts to know for sure where things will be tomorrow, let alone two and a half years from now."

Saturday, August 4, 2012

TV Segment, August 1, 2012

In this TV segment I use the term "open market operations" when discussing "quantitative easing". To clarify: In essence, the two are the same, except for the fact that "open market operations" is the regular practice of buying and selling (with banks) short-term debt to control the Fed Funds Rate (the rate banks pay one another for very short-term loans). "Quantitative Easing" is the buying of longer dated debt in an effort to reduce longer-term interest rates and injectlend-able (for mortgages, etc.) capital onto bank balance sheets...
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Friday, August 3, 2012

California, doing it right for a change...

Watch Diane Sawyer's video and get yourself all worked up, as I'm sure 99% of her viewers did, over the shameful outsourcing to China. Then allow me to disabuse you with one simple point in my commentary below. You'll (hopefully) understand that the shame is the utterly uninformed Ms. Sawyer's, who certainly, bless her heart, has good intentions.


The California assemblyman talks of the "multiplier effect" of spending government money in the most inefficient manner. He's suggesting the (excess) taxpayer money for the projects, had they used U.S. firms, would have made its way into the economy by way of the U.S. workers' pay checks. Now who'd argue with that logic? Government hires U.S. workers, pays them U.S. dollars that remain in the U.S. economy. As opposed to paying (albeit fewer) U.S. dollars to Chinese workers. Makes perfect sense, right?

Nope, sorry. Think about "U.S. dollars to Chinese workers." Why would Chinese workers want U.S. dollars? Would you take a job in say Ethiopia if you were paid in birr? What will the Macy's cashier back in California say when you present your 600 birr to buy a 30 dollar necktie. Of course you'll leave tieless, with all that dough 'birr'ning a hole in your pocket. You'd only take the job in Ethiopia if there were something you were after in Ethiopia (perhaps they make great neckties). Otherwise, Ethiopia has no opportunity to outsource to your services. The U.S. dollar, on the other hand, in the hands of a Chinese worker, is a precious commodity indeed. For there is clearly U.S. stuff the Chinese want (our exports to China have been rising consistently btw). And of course when they spend those U.S. dollars they're supporting U.S. producers - and the folks they hire (what news network stands up for them?).

Now consider the "multiplier effect": Less taxpayer money spent on the project means more money creating permanent jobs in the real economy (as opposed to the temporary jobs created by the project). Plus; those dollars paid to Chinese workers = more jobs in U.S. export industries.

Or, consider it in terms of the consequences of protectionism: I.e., allocating public funds (taking from the taxpayer) for the purpose of creating employment for a select group, at the expense of private sector jobs accross all sectors (serving both domestic and foreign customers), is the definition of inefficient allocation of resources (or bad business practice).

Seriously, haven't we Californians been complaining for years about our elected officials egregious mismanagement of our resources? If anything, we should be encouraged by their efforts to build the new Bay Bridge as efficiently as possible.

Wednesday, August 1, 2012

Car Wash Economics - and a postscript on the coming election

"Cool, this won't take long" I said to my wife as we came to a stop second in line to mount the conveyer belt at Jack's Full Service Car Wash. "Whoa, where'd they come from" I said as we dismounted the belt and turned into the covered area where they do the vacuuming, wash your windows, etc. All three lanes were full. Windex bottles, rags and vacuum hoses were flying in all directions. What a contrast. Driving in you'd think business was hurting, particularly it being a Saturday afternoon. Driving out you'd think it was booming.

How would you view my scene in a car wash economic context? Taking it all in, I suspect you'd think the car wash economy, due to the short incoming line, is about to hit a soft patch. But what if I'd left out the first sentence altogether? You'd then surely think the car wash economy, due to the jam-packed finishing area, is in great shape.

And what if I had told an altogether different story. What if I'd said that while second in line I had noticed in the mirror that dozens of cars were filing in behind us, and that when we pulled into the finishing area, we drove to the very front of lane number one? I suspect you'd say the car wash economy is about to take off. But what if I'd left out the first sentence altogether? You'd surely think the car wash economy is in big trouble.

I could say here that there's no wonder car wash economists (like all other economists) seldom get it right. But of course any good car wash economist would have considered the whole scenario (the former); the booming finishing area and the very small number of waiting customers. He then could publish an analysis, and counsel his car wash owner clients accordingly. "Demand, as evidenced by incoming traffic, is waning - and we should all thus hunker down accordingly." That is until tomorrow's unanticipated rainstorm hits that neighborhood full of unwashed automobiles. There's no wonder economists, like stock market guessers, seldom get it right. There's just too many moving parts.

Speaking of market guessers: Let's say you're in the market to buy a car wash. And that you're savvier than the average bear. Jack's is a thing of beauty. Clean, well-kept, state of the art. Yes, business is slow, but you believe in the cyclicality of things, and the surrounding neighborhood looks to sport plenty of folks too lazy busy to break out their own hoses. And because he's been at it awhile, and things are unusually slow, Jack wants out. And, because things are slow, he's ready to deal, big time. I.e., you're in luck!

The best time to buy car washes, construction companies, chip makers, appliance manufacturers, movie makers, drug makers, insurance companies, phone companies, banks, etc., is when the average bear is running for the hills...

All things are cyclical my friends: Unemployment will remain above 8% until it doesn't. Corporations will hold onto their trillion-plus in cash until they don't. Banks will keep their trillions in excess reserves until they tire of earning one quarter of one percent (or [perhaps] until the Fed stops paying them one quarter of one percent). Interest rates will stay at record lows until they go up. Politicians will run deficits until voters no longer allow it. And, yes, cars will always get dirty...

P.s: As for the coming election, you'd think, given the present state of the economy, Romney would be sporting a double-digit lead - but, at this juncture, it's a horse race. I suppose it's all about thelike-ability factor (how can a guy as accomplished as Romney be so uninspiring on the stump?). I don't buy the "this is the most important election in our nation's history" line. Clearly, neither candidate [truly] subscribes to the ideology, let alone possesses the hutzpah, that would tilt policy toward getting Washington the hell out of the economy's way. We therefore, from a policy standpoint, tread water (in terms of the national debt and budget deficit) for another four - to eight - years. Change in Washington will come when we elect a [like-able] libertarian (a Ron Paul-type) and a like-minded Congress. In the meantime we go to work, build our homes, buy our computers and our coffee makers, go see Batman, fill our prescriptions, pay our premiums, upgrade to the iPhone 5, 6, 7, 8, etc., beef up our portfolios and, yes, wash our cars...