Wednesday, October 31, 2012

Open letter to Paul Krugman - Or - The "Debt's Not a Problem When We Owe It to Ourselves" Tale

Dear Professor,

In a number of your columns (one here) you strongly assert that those who cry for fiscal prudence—that is, Washington spending within its means— "have no idea what they’re talking about — and the people who talk the most understand the least."

You support your case with the fact that financial markets "continue to lend to the U.S. government at incredibly low rates" ("incredibly" is indeed an apt description). But have you noticed "financial markets" (people that is) can change their collective mind very quickly? Yes, I'm talking about Europe. And how long do you suppose "financial markets" will accept a 1.7% yield on ten-year paper denominated in a currency that is expanding in supply to the tune of hundreds of billions a year? In other words, how long will "financial markets" be willing to lose money, in real terms, on their investment? Of course I'm referring to the "financial markets" that haven't unloaded their government debt onto the Fed's balance sheet. I guess, therefore, I should ask as well; how long can the Fed continue to create money to prop up the treasury market? Even you would agree this can't go on forever.

You've said that the debt is not a problem because we largely owe it to ourselves. That, somehow, the comparisons to over-indebted families just don't fly—because they owe "someone else". So then (keeping it in the family)—from the family-member creditor's perspective—if my brother continues to spend more than he makes, year in and year out, and borrows from me to keep afloat, by your way of thinking I'll continue to fund his lifestyle ad infinitum. Thus my brother's debt to me, however great, is of no burden to him—being that I'm family. Of course, as I'm sure you agree, that story—by itself—is utter nonsense. So, to be fair to your position, we must pretend that my brother would have his own currency—that he can print from the comfort of his own basement. And we must assume that me and the rest of the family (we are, by the way, a large family among a world of families) would be forever willing to trade our wares in exchange for his currency—since he produces all kinds of stuff that me and the rest of the family will always buy.

So, in our scenario, my brother continues to spend beyond his means, and borrows from me (having accumulated vast reserves of his currency) to make up the difference—thus a forever-greater portion of his income will go toward interest payments to me. And when those notes come due there must be other family members willing to buy his debt—otherwise I'll simply extend the terms. Hmm... So then, as he services this expanding bubble of debt, along with the ever-growing commitments he's made to the less-productive members of our family (my brother's a generous soul), he's having to divert resources away from the production of the stuff he sells to me and the rest of the family. Meaning, therefore, that his capacity for producing stuff is decreasing—relative to the supply of his currency circulating throughout the family. And God help us if he decides to start printing.

Pardon my condescension—I know, you are the economist—but the thing is, in this we-owe-it-to-ourselves tale, I am my brother's creditor. And I assure you, contrary to what you'd have your followers believe, there'll come a day (brotherly love notwithstanding) when I say enough's enough—when I tire of receiving payments in a currency that only buys a fraction of what it did when I lent him the money (there are other families, with other currencies, in the world I can trade with). And when that day comes and I stop funding my brother's lifestyle, make no mistake (for I know my brother), he'll come a begging for more credit. And if I'm of a mind to accommodate him yet again, I'll require a substantially higher return. But before we go there, I will impose myself onto his business, and demand massive spending cuts—lest I allow him to resort to his printing press to pay me back with his worth-less currency.

You see Professor, in our scenario I am your "financial market", and—sheltered as you've been from the real world—you do not know me very well.

Marty Mazorra

Tuesday, October 30, 2012

No economic silver lining to Sandy...

Two lines from today's article The Softer Side to Sandy's Economic Hit:

"But as the money flows into the regional economy, it will create a significant economic stimulus."

“The upshot is that, when we consider the cleanup activity, the overall impact on GDP growth could even be positive.”

This was the only article I chose to pull up on the subject—and I found precisely what I expected.

I am forever fascinated at how the broken window fallacy as taught by Frederic Bastiat, some 160+ years ago, survives, time and again, in the face of commonsense.

So, "as the money flows into the regional economy it will create a significant economic stimulus". Really? But what of the places where this money was headed before the storm? What of the economies in those areas? Is Peter not robbed of "significant economic stimulus" as we pay Paul?

Of course you can push back by saying that much of the money will come from insurance company reserves—idled money essentially. Now without getting into how the banks that hold insurance company reserves would allocate those dollars, let's just say that depleted reserves will indeed need replenishing (same goes for victims' personal savings). Meaning dollars that would have gone elsewhere, perhaps toward the purchase of securities, property, etc., within insurers' investment portfolios will now have to be rerouted into those low-yielding reserve accounts. Not to mention the unavoidable increase in all policyholders' future premiums—again, diverting recourses that would have been allocated elsewhere.

And before you start thinking that Federal assistance comes at no economic cost, let me halt that thought process with a reminder that you and I, the private sector that is, pay for everything the federal government does. Which of course includes future taxation as we pay on that ever-growing mountain of debt.

Another argument might be that to the extent reconstruction leads to better buildings, better infrastructure, etc., that we will indeed realize a net gain to the economy when it's all said and done. Of all the arguments this one's probably the best—however, this would assume that destruction-induced modernization trumps the economic benefit from the activities that will be sacrificed as resources are diverted. And if that were indeed the case, don't you suppose that the market would have rerouted resources toward the demolishing of those out-dated facilities the moment it determined that there was a better use for those resources?

So please, let's not pretend there lies an economic silver lining in the midst of a natural disaster. If you're looking for something good, look no further than to the sheer tenacity of the human spirit, and to the outpouring of warmth from the human heart.

Friday, October 26, 2012

The thing about the GDP number...

At 5 a.m. PST last Friday Dow futures were implying a 90 point drop at the open. At 5:30 Q3 GDP numbers were reported better than expected (2% annualized). By 6 a.m. Dow futures pointed to a 1 point gain. Whew!!

The report showed that while private consumption ticked up a bit, government spending made a somewhat bigger contribution to the number. In other words, the American consumer spent a bit more of her income in Q3 on herself and her family, while politicians spent a bit more of her future income wherever they saw fit.

So what's the problem? GDP's up and the market likes it!

The problem, aside from the govt spending her future income part, is that the number merely sums the components — there's no accounting for the ultimate economic impact of say personal consumption (the consumer spending her own money on herself) vs government spending (the politician spending the consumer's income wherever he sees fit—where, alas, all too often—it's most politically expedient). Nor can it account for the impact of various categories within a component. For example; if personal spending on health care happens to spike, that would help the GDP number, but that's clearly not a way to grow the economy.

Bottom line; if government spending is to garner a larger share of GDP (as it did in Q3) going forward, we are in a world of hurt ($16 trillion in debt and counting—not including the tens of trillions in unfunded promises! Not to mention the long-term economic impact of government crowding out the private sectoras it controls an ever-greater portion of yours and my income while inspiring producers to allocate more of their resources to lobbying*, as opposed to production). 

*Read Mamas Don't Let Your Babies Grow Up to be Lobbyists...

Wednesday, October 24, 2012

When your creditors have had enough...

In this morning's NY Times Nicholas Kristof presents his case that Europe's present mess is the result of the austere policies implemented by Germany and Britain. Like Rep Merchant, whom Kristof quotes, I believe Europe is indeed setting has set an example for the U.S.. Now I don't know if Kristof is taking Merchant out of context, but when I say Europe has set an example, I'm talking about an example of how to create one royal mess. That is—on its path to this predicament—Europe has set an example of how not to be.

In my simpleminded view of the world, Europe's profligate nations have boxed themselves into the proverbial corner, and the notion that they, by the grace of the ECB, can print themselves out is utterly ludicrous. It's as if Austerity, for Greece, Spain, etc., is a choice. Clearly it's not. Austerity is what happens, in the words of Margaret Thatcher (on socialism), when "you run out of other people's money"—or, when your creditors have had enough.

If we're lucky it'll play out here at home the way I presented in the last paragraph of this June 2012 message:

Throwing Money at Problems Caused by Throwing Money at Problems

Ask yourself, who would sign on to run a company where he’d have to answer to a board made up of ardent supporters on one side of the table and individuals committed to making certain he does not receive a second employment contract on the other?

And let’s say that said company is an utter fiscal disaster and that, given the makeup of the board, there’s virtually no chance of him measurably turning things around during the course of his first employment contract. And that the pay for running this bloody behemoth doesn’t come near what he earns currently.

In summary, this new job would subject he and his family to unrelenting, and vicious, attacks, an utterly palpable sense of futility, a virtual no-win scenario and a huge cut in pay.

So who would want to be elected or reelected President? A politician is a special kind of person. Egomania is THE requisite, along with a strong will to succeed to two full terms. Which leads to an extreme aversion to short-term pain and therefore policy decisions aimed at placating the populace with short-term remedies to long-term problems. I.e., throwing money at problems that were caused by throwing money at problems.

That my friends is the fundamental “problem” in the world today. But, alas, that’s the nature of politics, and life—people pursue their own objectives. We simply have to train our officials better. We have to teach them that it’s in their best interest to make better policy decisions.

Is that a pipe dream? Of course it is! We don’t like pain anymore than politicians do.

So here’s how this plays out: The patient (the economy) ultimately heals itself—by the grace of its immune system (the entrepreneurial spirit)—and grows us out of this predicament, albeit much slower than it would have without all the meds*. And the politician takes the credit.

*Read Haven’t We Done Enough?

Today's TV Segment (video)

Tuesday, October 23, 2012

Four Ways to Dilate Your Pupils

These are nervous times for investors—we fear the bear [market] hiding behind every bush. Perspective can be hard to come by when you've got that deer-in-the-headlights feeling. So let me help you dilate those pupils by giving you four reasons to look beyond the coming election, the "Fiscal Cliff", the European debt crisis, and so on.

First, keep in mind that the human condition is such that we tend to feel (not necessarily believe) that whatever is happening at this moment will happen forever. Of course, whether it's good times (tech in the '90s, real estate in the '00s) or bad (the '90s tech bubble burst, the '00s real estate bubble burst), we know that's never the case. The economy, like life, is forever a moving target.

Second, per this article, companies are currently sitting on record cash. If you had your druthers, would you prefer to own stocks when companies are flush with cash, or largely spent?

Third, would you rather own stocks when the retail investor has thrown all caution to the wind (tech in the '90s, real estate in the '00s) or when, per this video, he's so afraid of stocks that he won't invest even to collect the match in his 401(k)?

And fourth, bonds are pricier (yields lower) than they've been in the history of mankind. Not only do they offer virtually no [growth] competition for stocks, they represent capital (like all that cash on corporate balance sheets) that will someday look to expand its horizons.

So do I know for sure that this is the ideal time to buy stocks? Of course not. But I do know that pendulums swing, that there's an enormous amount of cash in the system earning less than nothing (inflation adjusted), that smart investors go against the retail-investor herd, and, once again, that bonds presently offer no competition for stocks. And I also know that things can indeed get worse before they get better.

Market Commentary (audio)

Click here for today's commentary...

Monday, October 22, 2012

Whom should we protect? (and a short white board lesson)

In yesterday's Washington Post, Alan Sloan writes of the peril that could befall 950 Americans who work for Residential Capital, LLC—a mortgage services company in Waterloo, Iowa. The servicing of $365 billion worth of mortgages is currently for sale, in bankruptcy court. Should Ocwen Financial (a U.S. company) emerge as the highest bidder, all that service work would, presumably, move to India. Apparently—at least in the opinion of the owners of Ocwen—this is a service performed more profitably when performed abroad.

Like you, I cringe when I think about those 950 folks in Waterloo—Sloan sensitively brings their stories to life in his column. But in all fairness, we must also consider another group of Americans whom he fails (not purposely I'm sure) to recognize. They would be the folks who work, and would hope to start working, in the following industries:

Precious stones & metals
Mineral fuel, Oil, etc.
Optical instruments & equipment
Electrical machinery
Aircraft and parts
Organic chemicals
Iron and steel

These represent U.S. industries that export to India. Or I should say; the industries that capture the U.S. dollars (claims against U.S. stuff)—that companies like Ocwen invest in India—as they flow back to the U.S., to the tune of $10 billion from January to June of this year alone.

"Yes, but", says the self-proclaimed patriot, "we, nonetheless, buy more stuff from them—we run a merchandise "trade deficit" with India". "Yes, but", says those who understand trade, "that means they have dollars left over after they buy stuff directly from us—dollars that folks in other countries will gladly accept in trade (because they buy stuff from us) for whatever Indians desire from them". "Okay", says the spp, "but when you add it all up, we run a merchandise "trade deficit" with the world". "Ah yes, but", says twut, "the balance represents our capital account surplus, which represents foreign investment in U.S. assets".

As you can see, all things considered, our trade with India reaches far beyond India and benefits more than just the industries referenced above.

Here's the above in a short white board lesson:

Sunday, October 21, 2012

The Aging of America, The Stock Market, and Free Trade (white board illustration)

A friend called me recently and asked what I thought about the prospects for the market, long-term, in light of the aging American population. The story goes that as baby boomers age, they become conservative and allocate less of their portfolios to stocks. Here's my answer:

Saturday, October 20, 2012

The pursuit of happiness...

The miracle is not that we do this work, but that we are happy to do it. —Mother Teresa

Was Mother Teresa a self-interested individual? Was it the pursuit of personal happiness that led her to Calcutta and to the building of one of history's great charitable organizations (Missionaries of Charity)? Would she have found contentment working her way up from account rep to CEO of Apple?

Was Steve Jobs a self-interested individual? Was it the pursuit of personal happiness that led him to build one of history's great enterprises? Would he have found contentment as a volunteer for the Peace Corps?

Let's compare how a passionate progressive and a free market enthusiast might assess the lives of these two remarkable individuals. Both would indeed sing the praises of Mother Teresa. And I suspect both would cheerfully (more so the capitalist) dub Steve Jobs a true benefactor to society. But if asked which of the two has made the greatest contribution to the world, well, let's just say there'd be no meeting of the minds.

For the progressive there's no contest—Mother Teresa was a saint in the truest sense of the word. The mere suggestion that a profit-seeking capitalist's societal contribution is somehow superior to hers is an utter insult to humanity. Of course to the capitalist—the global impact of the genius of Steve Jobs is utterly incomparable.

I say the point is entirely mute, for—within the bounds of the laws of their country—people possess the right to pursue happiness, without regard to whether, or in what manner, their actions benefit society. And this freedom is truly what has made America a great nation—the point made in this excerpt from my July 2012 essay When the Human Spirit Meets With Liberty:

"What do you suppose was chiefly on the minds of our ancestors as they braved the seas to come to America? Did they come with hopes of building a “great society” (per Lyndon Johnson and so many of today’s “progressives”)? A society where all manner of men, regardless of their output, would be delivered an equal share of some national pie? Indeed, would they have risked their lives only to have the fruits of their sacrifice divvied up amongst the masses?

And what do you suppose explains the incomparable advancement of the human condition that has occurred on these shores during the life of this very young country? It’s the momentum from our nation’s genesis. It’s what happens when the human spirit meets with liberty. Our wealth is not the result of one collective ideal. It is the result of millions of individuals pursuing their own separate interests."

This debate itself is a most dangerous one—for it demands judgment—and judgments made at high enough levels can become law. Which, I'm afraid, is the very aim of today's progressive: He would change the world from the top down. He would have government narrow the chasm separating the rich and the poor—institutionalizing, and thus imposing, [his view of] the spirit of Mother Teresa onto the country. He would take more from those of means and distribute to the down-trodden. The fact that there's utterly no empirical economic justification for his plan poses no deterrent. To him "social justice" trumps all.

The true free market capitalist would change government as well. But rather than expanding its reach, he'd rein it in. He's after freedom—the freedom to operate in the competitive world market. He knows that the lesser the constraints, the more creative he'll be, the more value he'll bring to his customers and, thus, the more successful will be his endeavors. Here's the last paragraph of the above-referenced essay:

"I pursue my separate interests when I assist you in pursuing yours. If I make pizza for a living, it is in my best interest to sell you the best tasting pie I can profitably produce. Competition with other establishments keeps me forever striving to be the best. If you like my pizza, it is in your best interest to tell all your friends so that I remain in business. Apply this simple logic to every profession (save for politics) and you understand how, as Adam Smith put it two-plus centuries ago in The Wealth of Nations, the freedom to pursue one’s own objectives promotes necessarily “an end” that is “most advantageous to society”"

The world will always have its blessed Mother Teresa's—and they'll forever inspire us in the most beautiful sense. But will the world always have its Steve Jobs's? Today's progressive should surely hope so. For, in the words of Milton Friedman:

"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.”

And that great Smithian economist Mother Teresa:

“I can do things you cannot, you can do things I cannot; together we can do great things.”

Wednesday, October 17, 2012

What about that would-be retiree? - And - The Mother of all Bubbles

The Fed—through extreme, and unprecedented, measures—strains to keep interest rates at all-time lows. Bernanke reports that present circumstances demand that the Fed place its full attention on its full-employment mandate—and that maintaining historically-low interest rates is key to that aim.

(I am sympathetic to the notion that politically-induced uncertainty has much to do with today's lack of job-producing capital investment. That—even though cash is cheap and abundant—until there's clarity, there'll be scant long-term allocation of capital.)

There's this pervasive, and logical, belief that access to low-cost capital ultimately induces job growth. But what happens when, like the present, it's slow to come? What happens when, for whatever reason, companies aren't putting all that capital to work—and hence the Fed pulls out every conceivable stop to keep interest rates at, or (inflation adjusted) below, zero? What happens when that sixty-two year old gent with a million bucks in his 401(k)—who had planned to retire once his 401(k) hit a million bucks, who figured a million bucks would yield him a cool, safe, $40,000 per year, who vividly remembers the two bubbles (tech and real estate) of the past twelve years, and who is understandably ultra-conservative—looks at today's CD and treasury rates? What's he to do when a million dollars today in a 10-year treasury note would yield him a safe, but not cool, $17,000 per year? Do you suppose that he—not willing to buy junk bonds or high-yielding stocks—hangs onto his job? A job that—were he to leave the workforce as originally planned—would have been available to one of the 7.8% (i.e., a little [headline] job growth).

Clearly the Fed has calculated that maintaining low borrowing costs (and inflated asset prices) offers more to the economy than does interest income to seniors. It's a plausible position. But let's not pretend the process doesn't cause a few unintended casualties along the way (Bernanke goes mute on this subject).

As for post-process: The buying down of interest rates—like Cash for Clunkers, Homebuyers Tax Credits, Payroll Tax Holidays and the like—provides, at best, temporary stimulus (and even that's in question). And I suspect that when that party ends, it'll end with a bang—recall sales plunging after expiration of the two aforementioned "stimulus" programs. Although, make no mistake, the pain of auto and home sales coming down off of their artificial boosts would pale in comparison to the impact of the bursting of the mother of all bond market bubbles.

Today's TV Segment (video)

Inexcusably Lame - And - Romney, version 2009, gets it...

Like I said after the first debate, "you know your man's lying when he starts moving his lips". "Politicians lie, it's their thing"—and I don't suspect there's a single exception amongst them.  That in mind; below are excerpts from two articles worth reading—the oft-here-quoted Don Boudreaux's No Debate, Both Men are Economically Illiterate, and Matt Coldagelli's A Long Island Brawl.

Here's the incomparable Don Boudreaux. He has a knack for illustrating commonsense (as well as complex) economics like none other. His blog should be daily reading for anyone who thirsts for brutally honest economic commentary. And I highly recommend his book Globalization:

"By this logic, the President’s policy is inexcusably lame.  If creating more jobs in U.S. tire factories justifies forcing consumers to pay higher prices for tires, the Obama administration should also outlaw the sale of used tires (which, like low-priced imports, are “flooding our domestic market”).  Indeed, the president should seek legislation mandating that all rubber used to make tires be non-vulcanized.  The resulting decline in tire durability will, by ensuring that our market is no longer “flooded” with long-lasting tires, create even more jobs in U.S. tire factories."

Matt Coldagelli nails both men as well. But if we surrender to the truth that neither care much for truth, and then catch one, off-guardedly, out of campaign mode, we just might be inspired (as you'll see below). Candidates are not into educating, they essentially form their opinions as to what the populace believes (for example: that trade and outsourcing are hurting our economy—per one of last evening's questioners) and try to convince us that they're on our side. Then, once elected, they effort to impose their core  (assuming they have one) positions, incognito. If I'm right, and should Romney become our next president, when it comes to outsourcing to technology—and I'll bet (as his private sector history suggests) to foreign labor as well—I'm [guardedly] encouraged.

Here's a snippet from the article, which is a snippet from another article. This is Romney in 2009.

"A simple example — let’s pretend there’s a little country with 200 people. This is a long time ago –  100 people raise the food, 100 people build the homes. Someone comes up with the idea of making a plow, hitching it to a farm animal and now they only need 50 people to raise the food. Is that a good idea or a bad idea? To the 50 people who lose their jobs, it’s a very bad idea, and they will resist with great energy and passion the idea of allowing horses to draw plows because it will make their life far more uncertain, at best. Those of us who stand back a bit say, no no no, don’t you understand that by having these plows and releasing those 50 people that someone, one of them or someone else is going to come up with something else for them to do? Making chairs, making movies whatever that is going to make everyone better off. More productivity will make everybody wealthier and more successful."

And thanks to Matt for the plug. But Jeff Goldblum? Really?

Tuesday, October 16, 2012

The unsavory effects of government going green... (white board lesson)

Charles Lane's Washington Post expos√© of the unsavory effects of "government" going green is something everyone should read. The message being, when the politician picks a winner, the taxpayer is forever the loser. Here are the highlights—bolding and parenthesizing done by me. If you want to cut to the quick, go straight to the white board:

Al Gore is about 50 times richer than he was when he left the vice presidency in 2001. According to an Oct. 11 report by The Post’s Carol D. Leonnig, Gore accumulated a Romneyesque $100 million partly through investing in alternative-energy firms subsidized by the Obama administration.

As the Democrats become more committed to, and defined by, a green agenda, and as they become dependent on money from high-tech venture capitalists and their lobbyists, it becomes harder to describe them as a party for the little guy — or liberalism as a philosophy of distributive justice.

("distributive justice" is A deciding what's just for B and C, distributing accordingly, and taking a huge cut in the process.)

Green energy is not cost-competitive with traditional energy and won’t be for years. So it can’t work without either taxpayer subsidies, much of which accrue to “entrepreneurs” such as Gore, or higher prices for fossil energy — the brunt of which is borne by people of modest means.

Democrats try to square this circle by talking up “green jobs,” but expensive electricity is bad for industry, as Germany is discovering. Fact is, subsidies for green energy do not so much create jobs as shift them around.

It’s one thing to lose your job because a competing firm built a superior mouse trap; it’s quite another, justice-wise, to lose it because a competitor talked the government into taking its side.

In the following presentation, along with illustrating how the whole green jobs argument fails inspection, I make a case for capitalism being the best thing happening on behalf of the environment. For more (great examples btw) on that go to and type "cleaned by capitalism" in the search bar.

Political favor comes at a very high cost...

Do you agree with President Obama and Mitt Romney that China is cheating and that it's time we put an end to it? I'm thinking you might want to consider the cost.

From this morning's NY Times on the 2009 tariff on Chinese Tires (the example I use in my white board illustration):

"Gary Hufbauer, a trade expert with the Peterson Institute, said the action protected at most 1,200 American jobs but last year alone cost American consumers $1.1 billion in higher-priced tires. China responded with tariffs on imports of American chicken parts that cost American poultry producers an estimated $1 billion in lost sales."

If we take Mr. Hufbauer's statement at face value, and accept his estimate of 1,200 jobs saved, the math says the President's gift to the United Steel Workers Union came at an astounding cost—to the American consumer—of $1,750,000 per job, last year alone. We can only imagine what the true cost is when we consider the jobs lost and/or jobs not gained as a result of all that redirection (and loss) of capital—all for political favor.

That would be a redistribution that ought to have the 99.999999614% (everyone but the 1,200 tire workers) up in arms.

Monday, October 15, 2012

Maybe it's viral... (and a few related links)

Here's Harvard's Larry Summers in this morning's Washington Post;

"This is a dangerous cycle whatever your economic beliefs. Doctors who prescribe antibiotics warn their patients that they must complete the full course even if they feel much better quickly. Otherwise, they risk a recurrence of illness and, worse, the development of more antibiotic resistance. So it is with economic policy. Advocates of orthodoxy prize consistency. Those like me whose economic thinking emphasizes promoting demand worry that expansionary policies carried out for too short a time prove insufficient to kick-start growth while discrediting their own efficacy and reducing confidence."

I find Dr. Summers' antibiotic analogy, in one respect, to be right on the money—in that policymakers view the economy like a patient in need of medicine—otherwise I think he's entirely missing the mark. A medicine analogy does work well, however more-so for those whose "economic thinking" doesn't emphasize the government "promoting demand":

After injecting several hundred billion of fiscal stimulus, and two rounds of QE (in the $trillions)—the patient is barely out of bed. And since none of that has worked, policymakers, fearing another code red—and undyingly committed to their diagnosis—have installed onto the patient a pump that will infuse 40 billion units of their antibiotic, per month, for, how long? Oh that's right, this prescription comes with unlimited refills.

I wonder at what point, if ever, Dr. Summers would entertain the possibility that perhaps we're dealing with something more akin to a virus than a bacteria. That all the meds are serving only to compromise the patient's immune system—that the slow recovery is the result of policymakers' desperate measures to get the patient up and running without allowing the virus to run its course.

Links to articles relating to this message:

Bloody Keynesians by Don Boudreaux
Reducing Real Output by Increasing Federal Spending by Dwight Lee
The Thing About Coffee (my post from yesterday)
Between the Proverbial Rock and a Hard Place
No Magic Pill (speaks to the stock market, but it's the same basic message)

Sunday, October 14, 2012

The thing about coffee - Or - Firm in his addiction - Or - Empirical evidence is in the eye of the beholder

"The question we should ask", says Paul Krugman in Friday's NY Times, "is what policies would offer the best prospects for healing the damage?" The administration "would have tried to accelerate recovery by sustaining public spending and putting money in the hands of people likely to use it. Republicans, on the other hand, insist that the path to prosperity involves sharp cuts in government spending. And Republicans are dead wrong." He goes on to cite the just-released IMF World Economic Outlook, a report that, he says, combines "short-term prediction with insightful economic analysis". A "grim and disturbing document, telling us that the world economy is doing significantly worse than expected, with rising risks of global recession. But the report isn't just downbeat; it contains a careful analysis of the reasons things are going so badly. And what this analysis concludes is that a disproportionate share of the bad news is coming from countries pursuing the kind of austerity policies Republicans want to impose on America". He then confesses; "O.K., it doesn't say that in so many words. What the report actually says is: "Activity over the past few years has disappointed more in economies with more aggressive fiscal consolidation plans.""

Fascinating that a man of Krugman's intellect, and tenure as a political commentator, would suggest that today's Republican politician—campaign pledges notwithstanding—is somehow less predisposed to spending than his predecessors. I see little, at this juncture, to support that assertion (look no further than their voting records).

The thing about coffee—for the infrequent user—is that the occasional cup will deliver that generally desirable kick. But when one finds oneself partaking on a daily basis, for an extended period of time, it, oddly, can deliver the opposite effect—sluggishness. Should the heavy user find himself in need of a boost (an approaching deadline perhaps)—if caffeine is to remain his stimulant of choice—he'll have to step it up; go high-octane and maybe throw in a Red Bull or two. Knowing full-well he'll be suffering the ultimate consequence—a major crash—once the deadline is met. But if he is to keep from destroying his health, crash he must.

From what I understand about alcohol (boring me doesn't drink), the casual user gets by just fine on the occasional beer, glass of wine, etc. He enjoys the short-term effect, and his life is all about facing the everyday challenges that come with the typical modern human experience. The functioning alcoholic, on the other hand, feels miserable when that cup of coffee on his desk isn't spiked with whatever it is he spikes that cup of coffee with. "Functioning alcoholic" is a term used for addicts who can hold down a job while simultaneously holding down their liquor. The term, however, is not to be confused with a "functioning liver"—and therein lies the problem. On the surface things may appear just great, while, inside, the abuser eventually drowns his organs and, alas, shortens his modern human experience.

Today's politician (central planner) is, at best, the chronic caffeine addict. At worst, he's the functioning alcoholic. He is forever haunted by his constituents' query; "are we better off today than we were four years ago?" The notion of coming down off of years of over-spending, and suffering the healthy, market-clearing (and economy-saving) pain of recession—on his watch—doesn't warrant the remotest consideration. And, sadly, as any user can attest, the greater the [stimulant-induced] sluggishness, the greater will be the cry for continued (and heightened) stimulus—particularly when the inevitable "crisis" (or garden-variety recession) occurs. And just like the in-denial addict who believes he can drink his way to success, the planner—whose mantra, a la  J.M. Keyneswould be "in the long run we're all dead"—assures us he's got everything under control.

I find it utterly baffling how, in the face of the developed world's record sluggishness and runaway deficits,  Krugman remains firm in his conviction. Or is it that he's firm stuck in his addiction? That would make sense—for addictions make blunderers out of otherwise bright individuals.

Now to be fair, he's hardly the only hard-core addict Keynesian among us. They are aplenty, and they do indeed have their arguments, as market-advocates (like yours truly) have theirs. Each side offers up its empirical evidence—which neither side accepts. The ardent Keynesian proffers a compelling—to the layman—expos√© of how free-market-fanaticism put us in this pickle. His opponents, he accuses, are addicted to an out-dated ideology—and he has all the "empirical" evidence to prove it.

Thus, with both sides stuck as they are, when we step outside the spin—when we look at the world objectively—we conclude that ideology is indeed (I here confess) addicting, that the Keynesian vs Laissez-faire argument is eternal, and that empirical evidence is forever in the eye of the beholder.

May the following wisdom of Nassim Taleb inspire you to keep your wits about you. As for me, alas, I'm too far gone...

"Our ideas are sticky. And we tend to stick to our theories. Good idea then to delay ones theories, for once they're made they're very difficult to let go of."

"Once your mind is inhabited with a certain view of the world, you'll tend to only consider instances proving you to be right. Paradoxically, the more information you have, the more justified you'll feel in your views."



Thursday, October 11, 2012

I Beg Your Forgiveness!

A prejudice can be so subtle that even the afflicted himself may be left entirely unaware. In this instance I'm referring, alas, to yours truly. You've noticed how I view myself a passionate advocate for free trade—how I effort mightily to clear your mind of the rubble heaped upon it by (per my accusations) self-serving politicians and well-meaning ignorants. But then, as I realized (to my dismay) last evening, I turn around and waste your time (in yesterday's white board lesson and last year's article) and completely—innocently—mislead you. I cited statistics suggesting that you and I allocate 88.5% of our spending to domestic goods and services. Well, ignorance—I just realized—has been mine: I was dead wrong! I thus owe you the sincerest apology, for I in no way meant to mislead you—I honestly believed those bogus stats.

I was struck by this epiphany while mentally recounting a conversation with a friend who had just returned from Jamaica—where he and his wife celebrated their 10th wedding anniversary. We were echoing one another about how a dramatic increase in regulations in our respective industries has served only to increase our cost of doing business, when he mentioned another thousand dollars he recently flushed down the regulatory toilet that "could have been used for giving tips in Jamaica" (earlier we discussed the challenge of determining how much to tip all those outstretched palms you encounter while traveling internationally). I said "you know that too-many Americans would say that at least the thousand bucks stayed in the U.S., as opposed to going to some foreigner. Truly, most people are entirely ignorant of the fact that the minute you hand over a tip, in U.S. dollars (claims against U.S. stuff), to a foreigner (or, for that matter, convert a dollar to his currency) you are unequivocally supporting the U.S. economy."

That's right folks, as I've expressed here—ad nauseam—when we spend money on goods and services produced abroad we are, without question, supporting our own economy. Only a foreigner who plans to buy from (or invest in) us will be willing to sell to us. Therefore, again, the 88.5% figure is entirely bogus. Literally 100% of our expenditures directly (yes directly) benefit the U.S. economy.

I beg your forgiveness...

May the best loser win (a musical parody for the election)


If you're at all sympathetic to a politician positioning himself around "fair" trade—when policy is enacted to "level the playing field"—you my friend are being taken. You see select jobs preserved by some legislative act, but you don't see the utter destruction that comes from protection. For as the [unavoidable] negative effects emerge they'll come cloaked in excuses that will lend themselves to yet more government intervention.

It's the definition of a vicious cycle: His faux-patriotism seals your vote as it seals him support from the favored industry. And he seeds yet more opportunity for government to grow—as it intervenes into a hamstrung (by protectionism) economy—and himself the support of soon-to-be-cronies as other industries lobby for the same protection.

Don Boudreaux makes the point perfectly in this letter to the Winston-Salem Journal regarding a "new law that will save textile jobs".

"Will the President post photos on his website of Americans whose jobs are destroyed because foreigners will now have fewer dollars to spend and invest in the U.S.? Will Mr. Obama boast that his re-election strategy includes a policy that, by dulling the creative forces of competition, diminishes America’s economic dynamism and, hence, reduces its economic growth?"

Be sure to read the entire letter...

Wednesday, October 10, 2012

The Most Pernicious Misconception (white board lesson)

If Mitt Romney's $2+ million investment in three Bain Capital funds that invest in China hurts his prospects come November, he deserves it. How dare he, as an investor, pump capital right into China, while, as a candidate, vow to crack down on its "cheating"! Today's NY Times cites Bain's acquisition of a company that, pre-Bain, ran two camshaft manufacturing plants in Michigan—employing 500 people—that now makes them in China. My the hypocrisy!

As an investor he continues to fund enterprises that exploit the freedom to do business wherever they determine is in the best interest of their shareholders and customers. As a candidate, alas, he plays to the consumer's most pernicious misconception. As a President he'll surely not (let's pray) do direct harm to the U.S. consumer, auto manufacturers (think camshafts), and, consequently, the economy by inhibiting our ability to access the goods we desire wherever we can most cost-effectively find them—his portfolio suggests he knows better.

Two lessons below: One on outsourcing and a very short one on subsidies. And click here for the article I reference in the "outsourcing" video...

Today's TV Segment (video)

Tuesday, October 9, 2012

Market Commentary (audio)

Click here for today's audio commentary...

Coordinated Actions of Uncoordinated Actors - Or - How "pride persuades us that we have attained to knowledge"

I entirely agree with  (in terms of history supporting) CNN Money's Allan Sloan's assertion that the stock market, over the course of a term in office, goes largely un-directly-affected by the man who occupies the President's chair. During the few weeks and months surrounding the election, however, traders may indeed transact in one direction or the other based on the leading, then elected, candidate's stated positions on taxes, regs, stimulus, etc.. I.e., in the very short-term, one could argue that election results do impact the stock market.

Where I entirely disagree with Mr. Sloan is his statement that "things stabilized" during the first months of President Obama's term "because of coordinated actions by central banks and governments throughout the world." As if to imply that, without intervention, markets would not clear and "things" wouldn't stabilize on their own. I would in fact argue that markets don't clear, or, at a minimum, take longer to clear because of the "coordinated actions" of those who I view to be grossly uncoordinated actors.

Like I said in That's It! Peanut Butter Cups!

"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%."

Or, better yet, as Pierre-Daniel Huet said in A Philosophical Treatise Concerning the Weakness of Human Understanding (1934):

"Although we know nothing, we nevertheless deceive ourselves, by giving ourselves up to our own pride, which easily persuades us that we have attained to knowledge; and that weakness and ignorance is so much the more to be pitied; that though it may sometimes happen that we speak the truth, yet we cannot be sure whether we do or do not."

Saturday, October 6, 2012

Chameleons - Or - A Nobel Prize does not a role model make...

"I understand they are going to have "fact checkers" standing by (at the debate)— just in case either candidate happens to say something factual." —Jay Leno

News Flash! Candidates caught lying during last week’s presidential debate! Want me to list the lies? Sorry, not happening! Just Google a replay of last Wednesday’s match—they're easy to spot—every time your man moves his lips, he's lying.

Are you surprised? Shocked? Flabbergasted? Incredibly naive? If you’re any of the first three, you’re for sure the fourth. Truly; ‘honest politician’ is the oxymoronest of oxymorons. To even suggest that your man is honest—regardless of his conduct in the private sector—is to believe a fairytale.

Politicians lie, it’s their thing. And, by the way, the larger we grow the government, the deeper it penetrates our daily lives, and the more we inspire the worst sort of intellectual dishonesty, in politicians and, sadly, in us. The most ardent small-government-advocate of a citizen can be swayed when a bit of legislation tilts the playing field in his direction. It happens all the time; deficit spending is a bad thing, that is until some of it lands on your doorstep. Therefore, alas, it's us—we’re the problem. The politician is nothing more than a chameleon—he blends into the environment we create. Thus, he won’t even begin to change his colors until we change ours.

Of course it doesn't help when a high profile Nobel laureate economist would impose his politics onto an unsuspecting public: NY Times columnist/economist Paul Krugman shames challenger Mitt Romney for stating that preexisting conditions would be covered under his health care plan—apparently, per Krugman, they wouldn't be. Now there's not a thing wrong with exposing one of Romney's lies—that's my whole point. But when we condemn the character of one candidate without acknowledging the other's deceptions, we are anything but intellectually honest. We expect that sort of thing from the likes of—it lists 12 Obama Debate Lies (and counting) and makes no mention of Romney's aspersions. But a Nobel economist? Shame on Mr. Krugman for his blatant hackery. He holds himself to the lowest journalistic standard—as he forever proffers his one-sided arguments. But hey, like the athlete with the Heisman, or the ring, the Bank of Sweden recognizing Krugman for his work on international trade patterns does not a role model make.

Thursday, October 4, 2012

It indeed takes two...

It forever fascinates me how highly intelligent, highly-credentialed, individuals can be as easy to capture by special interests (of the private and public sector varieties) as your everyday, less [formally] educated, bloke. Perhaps easier in all-too-many cases. I am especially taken when a college professor writes of the ills of cronyism as if, during the courtship, it's a one-sided affair—the bad guy (in today's example) being the gift-bearing baron.

Take MIT's Simon Johnson for example. In his NY Times article Money, Power and the Rule of Law—along with pointing an accusing finger at business and blaming 19th Century monopolies on the "market mechanism"—he applauds the efforts of NY Attorney General Schneiderman in bringing a case against JP Morgan. He makes no mention of the circumstances under which JP Morgan came to acquire Bear Stearns, nor how the timing might serve to legitimize President Obama's January pledge to crack down on those (ex any sitting politicians) who brought on the worst recession since the Great Depression.
 And while I share (passionately) the disgust over big business exploiting every opportunity to tilt the playing field in its favor, (as I wrote here) not holding the politician equally (at least) accountable is like absolving the cheating spouse of blame in the extramarital affair.

Wednesday, October 3, 2012

Oh those subtleties, and subsidies...

Oh those subtleties, and subsidies, that go unnoticed. As Don Boudreaux once again points out, liberal access to global markets enriches our lives in myriad ways, not the least of which being affordable access to healthy foods.

Maybe she'll tell him at night "Let's Move you to the Oval Office couch!"





3 October 2012


Editor, Chicago Tribune


Dear Editor:


Michelle Obama must be crazy angry at her husband!


In a move to win more votes from Florida farmers, Mr. Obama's administration will end a 16-year-old trade agreement that allows Americans to buy low-priced tomatoes from Mexico ("U.S. groups fear Mexican trade war over Obama tomato move," Oct. 3). 


By artificially forcing up the price of tomatoes - a low-calorie food rich in vitamins and antioxidants - Mr. Obama's trade policy might well fatten his vote total.  But his gluttony for votes will also raise Americans' costs of eating the healthier diets that the First Lady so publicly and passionately insists are vital to our nation's well-being.


Because Ms. Obama selflessly wishes to improve Americans' eating habits, I'm sure that she'll vigorously denounce the greed that prompts her husband to jeopardize our health for his own narrow interests.



Donald J. Boudreaux

Professor of Economics

George Mason University

Fairfax, VA  22030


Don't let em fool ya...

JP Morgan did two huge favors for the federal government during the 2008 credit crisis. It took $25 billion in TARP money it didn't need—which it paid back the minute the government gave it permission to pay it back—and it acquired Bear Stearns. The Bear deal was struck over a weekend, at, again, the government's behest, and with virtually no time for due diligence.

In January President Obama announced the creation of a mortgage fraud task force to pursue legal cases against the perps who "brought down the system"—ex any sitting politicians of course. New York Attorney General Eric Schneiderman, the head of said task force, announced Monday that he's bringing suit against JP Morgan for "systemic" mortgage-securities-related fraud allegedly committed by Bear Stearns before it was acquired by JP Morgan. Schneiderman made it abundantly clear that a message must be sent to the American people that those who caused the crisis (ex any sitting politicians of course) will be held accountable

While it is utterly unconscionable that no 'individual' heads have rolled [in court] over the egregious mismanagement, greed, neglect and outright fraud at every level and with every player of the mortgage process—given the circumstances, the timing, and their bringing civil charges against JPM, as opposed to criminal charges against any ex-Bear execs, the only message the American people need to get, is that this suit is entirely politically motivated—no doubt JP Morgan (2008 beneficence notwithstanding ) is a most attractive [political] target given its recent controversial multi-billion dollar trading loss.

By the way, don't think for a minute that JP Morgan helped the government out of the goodness of Jamie Dimon's heart. I suspect, strongly, that it was either a case of paying back, or paying in advance (both actually) for political favor. Expect this case to dry up sometime post-election...