Weekly Update: What Just Happened??

So What Just Happened??

As I type the Dow future contract is implying a 525 point plunge at the open. This follows a 230 point gain on Thursday that was clearly all about the betting odds and the majority of prognosticators assuring the world that UK citizens aren't nearly bold enough to venture into an unknown that the world's experts promise would be far too treacherous to traverse.  

Ah, but those brave Brits (52% of them anyway) went ahead and voted themselves into the dark forest nonetheless! So what's it all mean?

Well, perhaps first and foremost, they get their identity back. There'll be no more subjugating to bureaucrats in Brussels and their cronies.  They'll control their own borders and, thus, their jobs market. They'll preserve their social services for themselves and, thus, not see those resources depleted on behalf of immigrants whom Angela Merkel says they must embrace. And they'll no longer contribute to, and succumb to, a regulatory regime that they believe stifles their economic growth potential.

So who could argue with that? And why are the world markets so upset?

For starters, Britain's trading partners --- Asians included --- worry that the political and regulatory uncertainty would do across-the-board economic harm. The International Monetary Fund and the majority of mainstream economists had threatened of long-term negative effects. The UK's own treasury warned that:

...the UK would be permanently poorer if it left the EU and adopted any of these models. Productivity and GDP per person would be lower in all these alternative scenarios, as the costs would substantially outweigh any potential benefit of leaving the EU.

The negative impact on GDP would also result in substantially weaker tax receipts, significantly outweighing any potential gain from reduced financial contributions to the EU. 

Here's CNBC on the global implications:

And here's why the fallout is global

Yeah, it does sound hyperbolic, but there are actually a couple arguments for why a British exit may hurt the rest of the globe.

In Europe, the EU could run into economic trouble for a couple of reasons. The lengthy and as-yet ambiguous exit negotiations could cripple investment, as mentioned above, but they could also lead tomore exits. Nationalist groups across Europe will be watching the referendum closely to see if they can use the results into their advantage.

Elsewhere, the economic risks are best understood as a function of uncertainty. EU uncertainty: If financiers and companies are concerned that they may get cut out of free-trade channels, they may find safer (which is to say, less productive) uses for their money. And British uncertainty: All those billions of dollars already invested in the U.K. and invested abroad by British entities could be in limbo as London rushes to negotiate new non-EU trade deals with key partners.

In the U.S., billions, if not trillions, of dollars could be called into question by a British exit: In 2014, American direct investment into the EU totaled about 1.81 trillion euros, and about 1.99 trillion euros flowed in the opposite direction, according to the European Commission.

If even a small percentage of that is disrupted, it could reverberate across the globe.

Similar concerns apply for Chinese, Indian, Japanese and other international companies and investors.

And then there's the issue of currencies...

With all of that uncertainty rushing around, a British exit will likely result in a massive rebalancing of currencies.

Investors will (and have already begun to) dive out of the British pound and into cash that's perceived as safe — the Swiss franc, the Japanese yen, the U.S. dollar. The euro could also see some weakening if investors are worried about the fate of the EU.

While being a safe haven could sound like a boon for the U.S. economy, such a large, sudden currency swing could have significant negative implications for American multinational corporations.

The fallout from those currency moves could be another source of short- and medium-term economic tumult.

As for the next potentially two-years of negotiations, will, as some believe, the EU play hardball with the UK ? Issuing a punishment that might deter others from following suit? Or does --- as I believe --- blogger Polemic Pain have it right?

Posted: 23 Jun 2016 08:15 PM PDT

Humankind has a natural inclination to avoid pain. If UK votes to leave and it threatens other countries' economic stability then other countries will do what they can to alleviate it. 

There is punishment and there is mutually assured destruction. It's much like the cold war. Threats are made but when fingers are on buttons they will waiver and diplomacy will take over to avoid net sufferance. 

I cannot believe that the EU, whose behaviour has constantly displayed a 'whatever it takes' response to survival, would let a Brexit vote paint themselves into a corner of sufferance. 

As any parent knows, threats of punishment before the action are a different matter once the action has taken place. Negotiation and compromise is still most likely. 

If we seriously think that, as the FT has suggested, the likes of the Mexican Peso's fate is in the balance of Brexit then something is messed up. Shock is one thing but reality is another. The tertiary correlations should be faded. 

Look at this as the Cuban missile crisis. Sense will prevail to protect the majority. If you don't believe me look at the response to the global financial crisis. The masses were forgiven their debt to preserve society.

Here's last night's commentary in case you missed it:

 

Socialism is a taxing, and economically destructive, proposition...

Well, for starters, when it all began I thought the notion that Donald Trump would win the Republican nomination to be, well, unthinkable. I just heard that Bernie Sanders won Indiana's primary. Suddenly I'm thinking the unthinkable for the Democrats as well.

Before I continue, you must know that I have no dog in this race. Let me rephrase that, I don't have so much as a flea in this race! Actually, not even an itch! I.e., I have zero regard or respect for a single candidate on either side of the aisle. So there! If I offend you, know that I do not do so in favor of any individual who opposes your chosen one.

As for the notion that a self-proclaimed socialist, democratic socialist, and progressive would be the choice of a majority of American voters suggests that a majority of American voters have virtually no concept of history (explains the youth vote, perhaps?) or of the utterly destructive incentives/tendencies of big government politicians who aim to centrally control  the economy our lives.

Back in January 2014 I wrote about a politician who made his way to office by promising to rescue his country's populace from their economic ills while having the upper income class foot the bill. Hmm... Kinda sounds like erecting a wall between businesses and success and having businesses pay for the construction... sound familiar?

Well, a funny thing happened on the way to the promised land the land of broken promises.

Here's that short essay (feel free to pass it along to the folks whom you passed "There Ain't No Such Thing As Free College Education" along to):

“How can we redistribute if there’s no wealth?” French President Hollande, of all people…

May today's (1/14/2014) Wall Street Journal Article Hollande Courts Business With Economic Revival Plan be a lesson to us on the economic realities of socialism---and the duplicity of politicians. I can almost make my entire point by excerpting the article. Here goes:

Speaking at a news conference designed to relaunch his presidency that—like France's economy—has been stuck in the doldrums, Mr. Hollande said he would tackle France's chronically high payroll taxes, addressing a long-standing demand of French business leaders.

Mr. Hollande is striving to repair relations with France's business community, which has voiced anger about climbing taxes and alarm that the euro zone's second–largest economy is losing ground to Germany.

Since his election in May 2012, Mr. Hollande has relied largely on tax increases to fix France's finances with only marginal efforts to pare expenditures. The economy has barely grown since he took power while unemployment has risen.

Business leaders say this has hampered their efforts to compete internationally. France stands out among European peers for its relatively high labor costs, which eat into profit margins necessary to invest and recruit. For nonfinancial corporations in France, gross profit share—a standardized measure of profit margins—stood at just over 28% at the end of 2012, compared with 38% in the wider euro zone and 40% in Germany, according to Eurostat.

"How can we run a country if entrepreneurs don't hire?" he said. "And how can we redistribute if there's no wealth?"

By the end of his mandate in 2017, Mr. Hollande said, French companies will no longer be required to foot the €35-billion ($47.9-billion) annual bill for France's generous family welfare programs. He said he planned to fund the tax cut by slashing government expenditures, a departure from his previous practice of forcing consumers to bear the burden through high sales tax.

The overture to French companies risks fueling tensions within Mr. Hollande's Socialist-dominated majority in parliament and angering the country's unions. "He's turned his back on workers," the left-leaning CGT union said in a statement.

Yes, promising the moon wins elections---we've witnessed that a lot of late. But, like I said the other day, the moon is---fortunately, ironically, for the promiser's political career (and the promisees' livelihoods)---unreachable. Although, as France's president is discovering, the air can get mighty thin even as you head in that direction---particularly in a country that was half way there to begin with. Ah, but Hollande, like all politicians, is of the family Chamaeleonidae: while campaigning in 2012 he donned his socialist colors and slid his way to office. Today, he senses danger. Survival going forward means blending with the folks whose vilification was so effective on the stump. I.e., he has come to understand that the economy will break him if he doesn't break his government's stranglehold over French businesses...

 

It's difficult not to stray just a bit from purely market/economic content herein (as I have of late [it's the season]), particularly when I hear directly from our clients that their delightful, bright and still impressionable children whom I've come to know  through the years---either in person or through their parents doting anecdotes---are being duped by political wolves in dogooders clothing, as they emerge into young adulthood .

Sure, a free college education for all sounds beautiful, but to truly believe that it's doable---that an education can in fact by some miracle ever be free---is to engage in the kind of magical thinking that we adored those years ago as the sparkles of our eyes sat on the knees of costumed jollymen and shared their hearts' desires. 

Today, sadly, the sparkles (in some) have given way to a bent-browed intensity---anger even---that says an education is a right that one should not have to pay for! Well, if indeed we go so far as to set our young adults onto the knee of Washington, while they'll surely, initially, hail the kings who upheld their "rights"---and for a time cast their votes accordingly---as they grow into productive, tax-paying members of society they'll come to know once and for all that there is no such thing as a free education. Like the day they realized that their shopping mall wishes were not magically met by the man with the beard---that it was Mom and/or Dad who ate the Christmas Eve cookies they placed by the fire, drank the milk, and paid for the red wagon---they'll come to know that an education worth having will never be free. Although there'll be no loving affection for the ones who fostered their naivete this time around, for it'll be them who are paying the bill! And, as my favorite breathing economist, Don Beaudreaux, instructs below, they'll pay it in more ways than one.

Pass this on to anyone whom you believe believes the free education fallacy, along with this link to Don's blog Cafe Hayek (where they'll receive an absolute wealth of education for the cost---a few minutes a day!)...

There Ain’t No Such Thing As Free College Education

by DON BOUDREAUX on APRIL 22, 2016

Here’s a letter to a high-school student from Kansas City who e-mailed me this morning:

22 April 2016

Mr. Parker J________

Dear Mr. J________:

Thanks for your e-mail, and good luck writing the essay for your high-school newspaper!

You ask “What … could be the possible effects of making public universities free to attend? Would the benefits outweigh the costs?”  My answer is simple: it is impossible to make universities free, and any attempts to perform this impossible feat will create more costs than benefits.

Universities – whether private or public – are built of land and materials, and they require for their daily operation not only non-human resources such as electricity, books, computers, printers, projectors, lighting, elevators, and office furniture, but also lots of human labor: professors, administrators, and staff.  Each of these resources, both non-human and human, could be used in ways other than to supply classroom instruction and research at the collegiate level.  So to use these resources in colleges is to sacrifice those goods and services that we’d enjoy if these resources were not used in colleges.  These sacrifices are real costs, and they must be borne by someone.

Government can certainly shift more of these costs from students onto taxpayers.  But such a shifting does not eliminate these costs.  Indeed, such a shifting of costs away from the most direct users of colleges (students) onto other people (taxpayers) will cause students to use collegiate resources more carelessly.  (Think of what you’d order at a restaurant if you knew that the restaurant will pick up the tab for whatever you order as opposed to you knowing that you must personally pay for whatever meal you order.)  The result is that colleges become more costly.

Government can hide these higher costs, but you and your fellow students will pay these costs eventually in the form of higher taxes when you enter the workforce and in the form of economic growth made slower because of the increasing waste of resources that “free” college entails.  (By the way, because I’m a tenured college professor, government attempts to make college “free” will likely cause my income to rise.  The reason is that such a policy will result in government funneling more and more taxpayer dollars into higher education.)

A final note: a big part of the cost of college – for many students the singlebiggest part of the cost – is not tuition and expenses.  It’s the income that students forgo by attending college rather than working.  So even if by some miracle a Pres. Sanders makes all of the vast resources that colleges now use free, each and every college student will still unavoidably bear the significant cost of foregone income.

In short, neither colleges nor college attendance can possibly be made free, and attempts to make them appear to be free will only make them more expensive over time.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

Middle Income Stagnation: Great Fodder for Budding Politicians...

I find myself presently in a state of waiting. My cell phone, through some magic, allows me access to dozens of books to keep me well occupied while I sit here. Should my wait take me deep into the evening I'll want for little as I'm finding the ebook on technical analysis to be quite interesting.

Makes me think:

Popular opinion/analysis says middle class folks have seen zero by way of inflation adjusted income gains for years. A find that proves to be great fodder for budding politicians.

Let's assume that those politically convenient findings are spot on: That a family with a $50k income, say, 25 years ago, survives on $82k today. Which, again, assuming 2% annual inflation, means said family has seen zero real income growth.

That is, same number of mid-priced TVs in the home, same number of mid-priced cars in the garage, same number of dinners out each month, same one family vacation a year, and so on. 25 years have passed and nothing, no lifestyle improvement whatsoever; or so the politician would have us believe.

Well, not so fast! Let's think about those mid-priced TVs for a minute. I wonder how many channel options today's family enjoys compared to the family of 1991, not to mention the high definition. And how about those mid-priced cars with the Bluetooth and the backup cameras; luxuries not available on the '91 mid-pricers. As for the dinners out, suffice it to say that along with a growing population, in a capitalist market, comes dining options that the '91 family could not have imagined. We can delve into entertainment options (like my ebooks) and other amenities/opportunities, such as cell phones and connecting with friends and loved ones through face-time and social media, but you get the point.

Bottom line, a middle income family today enjoys a vastly richer lifestyle on the very same real dollar of income than did the middle income family of a quarter-century ago.

That's free market capitalism at work!

If you find yourself warming up to the message of a Sanders/Clinton/Trump,etc., please understand that you're allowing the most thoughtless statistical analyses/interpretations to cloud your senses. And understand that the results of taxing producers to pay for the items that only a candidate desperate to win might propose (free college education and the like)---or, say, the walling off of trade (international trade being chiefly responsible for the above mentioned luxuries)---can only serve to limit the rate of enrichment that the family of 2041 will have otherwise enjoyed.

Sadly, the unskilled are losing the opportunity to show their stuff...

I am hard pressed to think of a law more pernicious than the minimum wage!

The agreement between an employer and an employee is a transaction, virtually like any other. The employee possesses talents that he/she brings to the marketplace. His/her customer---the purchaser of his/her offerings---is the employer. The employer will buy those talents at a price that when put to use nets it a margin above cost.

Employees enjoy the luxury of focusing their talents for an agreed upon number of hours each day. Their remuneration affords them lifestyles consistent with the value of their talents in the marketplace. Should they desire a richer lifestyle they must improve the quality, the value, of their offerings (their talents).

Here's an analogy:

Chances are your neighborhood department store has a clearance section. That's where the items that management determines offer the least value to the typical customer, and therefore garner the lowest prices, rest. Some folks enjoy sifting through the clearance aisles in hopes of finding an overlooked gem that might fulfill a want/need at an unusually low price.

My 19-year old son Ryan is a great kid and a real hard worker. Thing is, he has virtually no marketable work experience. So, his offerings are his ethic, his integrity, his arms, his legs and his stamina. The latter three are commonplace among teens. The ethic and integrity will only come forth after the fact, after he gets an opportunity to show his stuff to an employer. Ryan, before he got his current minimum wage-paying job, sat in the clearance aisle of the department store of available labor.

California is about to boost its minimum wage by 50%, from $10 to $15/hour. Essentially, the state is about to force its department store of labor to move all of the items, the Ryans, off of the clearance shelves and place them next to the merchandise that legitimately, to the eye, justifies a $15/hour wage. We may as well say they'll be discarding those clearance items, since placing a $15 price tag on a $10 item virtually eliminates its chances of being sold.

Trump the entrepreneur vs. Trump the politician on trade... Or, Trump, by Trump the politician's definition, gets beat badly by China!

Donald J. Trump is indeed a phenomenon. Early in his campaign his blusteryness inspired my oldest son to declare that he hopes he lasts a while because he's so dang entertaining! Well, last he has, and, yes, my son is growing concerned---as are our trading partners. Here's CNBC quoting a Japanese university professor on how the opinion of Mr. Trump has evolved among Japan's top policymakers:

"To start with they just thought 'he's funny'," said Masatoshi Honda, a professor of politics at Kinjo University. "But recently they're starting to worry — what happens if Trump wins?"

Politics often comes up these days as we review client portfolios and discuss the prospects for 2016. And while a few are bold enough to declare their support for Trump, there are those who profess to be uncommitted, yet laud the phenom's willingness to speak his mind and the potential for him to shake up the establishment---in a good, or perhaps refreshing, way. "He's not a politician" and "he's not politically correct" are common laudations. Hmm...

Here's my view (on his trade rhetoric):

Mr. Trump the businessman enjoys the freedom to import materials and labor from wherever in the world offers him the best terms. He strikes deals, makes trades. He doesn't "beat" anyone. He says he "beats China and Japan all the time." Nope, can't be! There's no "beating" in trade. Each party delivers to the other what it deems to be of lesser value (to itself) than what it garners from the other. Different people have different wants at different times, and different geographies house different resources and folks with different talents. Each party to a transaction generates a product or a service more efficiently than its partner, hence one party trades the stuff it produces more efficiently for the stuff the other party produces more efficiently.

Ah, but what about trade deficits? Truly, there are no such things, they're myths! How so? Well, think about it: Mr. Trump says we have a $50 billion annual trade deficit with Mexico. Really? Would he truly have us believe that Mexico presents us with $50 billion more in stuff than we give it in return? My, if it were only so! The fact is, along with various goods and services, we hand over fifty-billion U.S. dollars---a "product" that Mexico would only accept if it had its eyes on $50 billion worth of stuff the U.S. had to offer (or knew that it could trade those dollars to other parties in the world who had their eyes on stuff the U.S. had to offer). And, oh my goodness, do we ever have stuff to offer! In addition to the $180 billion or so a month in goods and services the U.S. sells to other countries’ buyers, it possesses the most fertile ground for financial products on the planet. We indeed have the deepest markets! The world comes to the U.S. for corporate stocks and bonds, derivative investments, bank deposits, treasury securities and, not to mention, real estate and private businesses. That's how the $50 billion comes home!

Come to think of it, if a so-called trade deficit, as Mr. Trump presents it, were a bad thing---if it indeed measures to what extent one (or an entity) has been beaten---then, clearly, Mr. Trump gets forever killed by the likes of China! Think about it; his companies buy materials, components, source their labor (his clothing line ain't made in the U.S.) from other nations---he mentioned in an interview that he recently bought thousands of windows from China and complained that nobody makes them here. And what is China buying from Mr. Trump? I don't know; a stay at a hotel? A round of golf? A few shirts and ties? I strongly suspect that Mr. Trump's companies buy far more stuff from China than they sell to China. Again---by his own definition---he's getting completely destroyed by China! 

Of course he's not losing to China any more than China is losing to him. Mr. Trump wants to build towers and golf courses, make clothing, etc., in the most profitable manner possible; China wants U.S. dollars because U.S. dollars buy stuff the world over.

So, in a nutshell, Trump the entrepreneur expands his fortune (profits from the advantage his trading partners enjoy in the production of certain goods and inexpensive labor) by offering his international trading partners the currency they need to expand their fortunes.

As for Trump the politician, well, he profits from the fears, misconceptions and prejudices of an apparently large number of U.S. voters by proposing policies that, if implemented, would limit other American entrepreneurs' ability to take full advantage of what the outside world has to offer. Other than the bluster, there's nothing unique, or refreshing, about Trump the politician on trade.

Should we really discourage illegal immigration?

I absolutely know I am (or Milton Friedman is) about to ruffle a feather or two. Before you watch the video, and send me your barbs, ponder these words of wisdom:

“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.” Nassim Taleb

“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.” Nassim Taleb

"There is now scientific evidence indicating that the part of the brain associated with reasoning is inactive when people are given information that conflicts with their own thoughts about a particular subject. In place of reason people seek out information and opinions that confirm their own views." Anthony Crescenzi

Consummate Cherry Pickers!

Ever feel manipulated by a politically-motivated media, or by a politician him/herself? The notion that the game is rigged in favor of the "rich" plays effectively these days from both sides of the aisle. Well, what if I told you that the recent outsized gains by the wealthy have much to do with timing and little to do with what conniving candidates might have you believe?

Scott Winship's research will enlighten you. Here's a snippet (HT Don Boudreaux):

ABSTRACT

According to many observers, incomes have stagnated for most Americans since the Great Recession, while the rich get richer. This claim, however, is based on analyses that cherry-pick start and end dates to assess income growth: the top 1 percent of households see sharper income declines during economic downturns than everyone else, and the Great Recession was especially destructive.

KEY FINDINGS

An accurate accounting of who is gaining and losing in the U.S. economy requires a broad view across an entire business cycle: while the richest households tend to gain the most during economic expansions, this is partly because they also lose the most during recessions.

In the current, ongoing, business cycle, real incomes declined between 2007 and 2014; the top 1 percent experienced nearly half of that total decline.

From 1979 to 2007, 38 percent of income growth went to the bottom 90 percent of households, amounting to a 35 percent increase ($17,000) in its average income.

Even if one ignores the Great Recession and cherry-picks the expansion period of 2009–14, it is not true that all gains during the recent expansion have gone to the top 1 percent—in fact, only about half did.

Be optimistic, yet beware the grand planners!

Political seasons forever foster the characterization of the times as in desperate need of repair. The populace is wooed into believing that progress has been stymied by the shenanigans of the wooer's opposing party. Not that progress is not indeed often stymied by political processes, but to accept the notions that we are to be rescued from some impending collapse by increasing taxes on employers and by the delivering of "free" college educations to all (for two examples), or that life in these United States is not presently "great" for the majority of its citizens, is to be the pawn of the politician.

Matt Ridley, in the epilogue to his 2015 book The Evolution of Everything elegantly sums up reality. Here are a few snippets:

There are two ways to tell the story of the twentieth century. You can describe a series of wars, revolutions, crises, epidemics, financial calamities. Or you can point to the gentle but inexorable rise in the quality of life of almost everybody on the planet: the swelling of income, the conquest of disease, the disappearance of parasites, the retreat of want, the increasing persistence of peace, the lengthening of life, the advances in technology. I wrote a whole book about the latter story, and wondered why it seemed original and surprising to do so. It was surely gloriously obvious that the world was a much, much better place than it had ever been. Yet read the newspapers and you would think we had lurched from disaster to disaster, and faced a future of inevitable further disaster. Glance at school history curriculums and you find them utterly dominated by the disasters of the past – and the crises of the future. I could not quite reconcile in my mind this strange juxtaposition of optimism and pessimism. In a world that delivers an endless supply of bad news, people’s lives get better and better.

Now I think I understand, and it has been the purpose of this book partly to explore that understanding. To put my explanation in its boldest and most surprising form: bad news is manmade, top– down, purposed stuff, imposed on history. Good news is accidental, unplanned, emergent stuff that gradually evolves. The things that go well are largely unintended; the things that go badly are largely intended. Let me give you two lists. First: the First World War, the Russian Revolution, the Versailles Treaty, the Great Depression, the Nazi regime, the Second World War, the Chinese Revolution, the 2008 financial crisis: every single one was the result of top– down decision-making by relatively small numbers of people trying to implement deliberate plans – politicians, central bankers, revolutionaries and so on. Second: the growth of global income; the disappearance of infectious diseases; the feeding of seven billion; the clean-up of rivers and air; the reforestation of much of the rich world; the internet; the use of mobile-phone credits as banking; the use of genetic fingerprinting to convict criminals and acquit the innocent. Every single one of these was a serendipitous, unexpected phenomenon supplied by millions of people who did not intend to cause these big changes. All the interesting things are incremental, says the psephologist Sir David Butler, and very few of the major changes in the statistics of human living standards of the past fifty years were the result of government action.

It is a fair bet that the twenty-first century will be dominated mostly by shocks of bad news, but will experience mostly invisible progress of good things. Incremental, inexorable, inevitable changes will bring us material and spiritual improvements that will make the lives of our grandchildren wealthier, healthier, happier, cleverer, cleaner, kinder, freer, more peaceful and more equal – almost entirely as a serendipitous by-product of cultural evolution. But the people with grand plans will cause pain and suffering along the way.

Your Weekly Update AND Times Like These (the return of the gloom gang)... Plus, a bonus section on free trade...

WARNING! The China section (after the first two paragraphs) gets a bit wonky. If you're not in the mood, skip to "The Fed" and continue. I think you'll find the "What else?" section interesting. And please keep an open mind when you get to the bonus section---this is the season (occurs every 4 years) where our minds tend to fixate, which makes it easy to lose sight of the big picture...

The all-too-usual suspects for this weekend's commentary would be: The presently tight correlation between oil and stocks, China's "predicament(s)", and the Fed (I'll insert corporate earnings next week). Being that these subjects are indeed "all-too-usual" (these days), I'll keep the following as concise as possible:

The oil/stock trade:

I'll continue to hammer this one into submission during my daily commentaries. I.e., nothing to add for now.

China:

If you've been reading this blog, you know all-too-well my view on the China economic rebalancing story. I'll add that while I do not share the view that China is on the verge of a debt-induced collapse, I am now of the opinion that we very well could see the Yuan trend notably lower going forward. This trend, by the way, will have no relation to the manipulative rants of at least two of the fascinating characters currently eyeing the seat of the leader of the "free world" (amazingly, the two I'm referring to seemingly sit on opposite extremes of the political spectrum, yet they trumpet the same utterly-destructive protectionist rhetoric*)---They would have you believe that China has been aggressively "cheating" us Americans by devaluing its currency so as to deliver us more affordable China-made goods (Oh I wish it were true!)---a claim they, as well as past candidates, have been making for years.

Here's a 10-year chart that unequivocally dispels that myth:     (And, folks, the notion that any rung on the U.S. economic ladder would be somehow enriched by limiting the global reach of U.S. businesses and the freedoms of U.S. consumers [to transact anywhere on earth they choose under the most favorable terms], is utter pernicious garbage. It's a playing on age-old fears that politicians have been exploiting for centuries. Please send me a message if you need convincing and I'll do my darndest [I'll include a primer at the end below]. Or simply ask yourself this American [Great American!] question: Will the proposed policy expand or limit my personal freedoms? Also [although that last question ought to be enough], understand that when it comes to commerce, any policy that would limit your access to imported goods under anything but the terms you and the supplier agree on, or that would limit a U.S. business from exploiting any and all global opportunities to achieve the greatest efficiencies, not only flies in the face of true American values [liberty, for example], it is---as virtually every non-political economist agrees---utterly destructive from a macroeconomic perspective!---As I attempt to illustrate in the video at the bottom...)

click to enlarge



As you can see, the Yuan rose steadily for years against the dollar. As for the plunge in mid-2015, while some were screaming "unfair devaluation" (or, "unfairly" offering U.S. consumers a price break on China-made goods [how dare they try and save us money!]), the fact of the matter is that China aimed (and succeeded) for its currency to be accepted in the IMF's SDR (Strategic Drawing Rights) basket of world currencies (along with the U.S. dollar, the Japanese Yen, the Euro and the GB pound). To gain acceptance they had to allow the Yuan more float (i.e., a more market-determined value). Plus, as China's economy slows (per the rebalancing), capital has been looking for the exits. Maintaining the old peg to the dollar (the rate the Chinese central bank held) has become ever more expensive.  Dropping the "daily fix" by 2 percent better accommodated present market forces, plus the new practice of adjusting it (the daily fix) to account for the previous day's close is yet more evidence that they're serious about allowing the market more say in the pricing of the Yuan.

As for why I see the Yuan possibly falling further: The extent to which the central bank has had to prop up the currency (a practice that is the complete opposite of what those candidates claim), even after last year's "devaluation", clearly signals that capital is fleeing the country. That propping depleted reserves by over $half a trillion last year. The chart below illustrates the decline, plus the fact that while $3.3 trillion (green line) remains a huge war chest (the world's largest, in fact), it only amounts to 16% of China's total M2 money supply (yellow line). I.e., I see China allowing for further careful depreciation, assuming capital continues to leave the country, as opposed to greatly depleting a reserve base that is sufficient to pay off their short-term dollar debt, times 5, as well as purchase all of their imports for the next two years running, according to Nomura Holdings Inc.     click to enlarge



This is the perfect segue for my present view on the Fed:

Recent global market turmoil, plus the prospects for the dollar to appreciate even further (to the perceived detriment of the export side of the U.S. economy)---potentially exacerbated by potentially higher rates and the China story I just told (all of which flies firmly in the face of the Fed's inflation objective), makes the odds of the Fed achieving its goal of 4 rate hikes in 2016 highly unlikely. A scenario I suspect the equity market will heartily welcome.

What else?

Well, in times like these, the gloom gang always shows up in full force. Prognosticators claiming uncanny predictive prowess seem to come out of nowhere with their auguries of Armageddon. Of course market crashes do occur from time to time, and, my!, how incredible you'd be (or seem) if you could accurately predict one.

So, if you aim to be viewed as credibly incredible, why not give it a shot. And then keep shooting, because ultimately the market will have a "crash" and you can tout your incredible self as an all-seer whose books should be bought, newsletter should be subscribed to, and whose counsel should garner top-dollar.

Here's the link to  Michael Johnston's A Visual History of Market Crash Predictions.

A few snippets:

In that interview, Nenner predicted challenging days ahead:

It is going to be very difficult few years to make some money. … I don’t expect the economy to pick up until 2020.

For anyone who listened to him, making money was indeed difficult. Those who held the market came out fine though; the Dow has added almost 8,000 points since that prediction.

In late 2011, Dent made headlines by predicting that the Dow was eventually heading to 3,000. (CNBC has mercifully misplaced the image titled “chart_scary.jpg,” perhaps after renaming as “chart_neverhappened_758.”)

Dent is selling a number of different products, including The Great Crash Ahead (published 6,700 Dow points ago) and The Demographic Cliff: How to Survive and Prosper During the Great Deflation of 2014-2019 (published 1,600 Dow points ago). 

Dent’s company also offers a number of newsletters; a lifetime subscription comes at the bargain basement price of $7,500.

Farrell, a former investment banker, has authored nine books. One of those, Think Astrology & Grow Rich, seems to recommend making investing decisions based on the positions of the stars. This is, unfortunately, not a joke; they guy splashing “stock crash” headlines across one of the most widely-read financial sites in the world wrote a book with this advice:

When Uranus and Neptune go into Aquarius, I look toward information and technology.

Fast forward 11 months to June 2015, and two things have changed: the stock photo of a bear (now much less menacing), and the price of the Dow (up about 1,500 points). Everything else is about the same; Cook is calling for markets to drop by about 25 percent, using some back-of-the-envelope math from 1987.

In addition to the book he co-authored with Michael Sincere, Cook sells trading seminars designed to “maximize your trading personality with an approach tailor made to you.”

Robert Prechter was described at the time of his 2010 call for Dow 1,000 as a “market forecaster and social theorist.” Echoing the words of George R.R. Martin, he made a dire prediction that the rally from the market bottom was setting investors up for more heartache:

I’m saying: ‘Winter is coming. Buy a coat.’ Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.

Following Prechter’s advice was anything but benign; the Dow had added almost 2,000 points before the end of the year.

Additional advice from Prechter is available in many forms, including a “Financial Forecast Service” ($59 per month) and the “Elliott Wave Trader’s Classroom” ($49 per month).

Mark Hulbert, a journalist who monitors and reports on the performance of investment newsletters, has at times found it tempting to make a few predictions of his own. In late 2013 — about a year after a similar prediction — he warned that another 1987-like crash was “inevitable.”

 subscription to Hulbert’s newsletter costs $59 for the first year.

David White, a financial planner in Michigan, predicted in early 2012 that the Dow would fall by nearly half to 7,000 by the summer. The Dow finished the year above 13,000.

In August 2011, longtime market bear Bill Strazzullo appeared on CNBC and advised “investors” to wait until the Dow hit 9,000 to buy and then sell around 11,500. The Dow never even dipped below 10,000, but has continued to run far higher than his sell point.

David Stockman was Ronald Reagan’s budget director and a former Michigan congressman. In March 2013, shortly after publishing The Great Deformation, he penned an op-ed in the New York Times warning of a coming economic meltdown and advising investors “to get out of the markets and hide out in cash.”

Marc Faber is a Swiss investment advisor and author of the Gloom, Boom & Doom Report ($300 per year). He’s made a number of bearish calls over the years, including a prediction of a market crash in 2014.

In early 2011 Brady Willett encouraged subscribers to Fall Street ($180 annual subscription) to sell stocks, based on the premise that Warren Buffett had begun a “hibernation process” that involved moving to cash. Buffett has, of course, continued to do deals and has maintained exposure to U.S. stocks. Since this article was published, Berkshire Hathaway (BRKB) has gained about 65 percent.

Be back soon...

*P.s. Here's a little something I wrote and illustrated back in the fall of 2011 (BONUS SECTION ON FREE TRADE):

Where Left and Right Merge

Plain and simply, the imposition of what the consumer will be fooled to believe are punitive (U.S. job saving) tariffs on foreign imports - per the coming proposal from a bipartisan (left and right merge on this one) band of manipulators (lead by Democrat Shumer and Republican Graham), at the behest of Presidential-wannabes Mit Romney and Michele Bachman - would, if passed, only serve to hurt Americans employed by American exporters, Americans who work for American businesses that benefit from our discretionary spending - and virtually every other American consumer through higher prices of everyday items. I.e., the net result of protectionism is forever the taking of money from the consumer-at-large and the handing it to a select (politically powerful) few.

Thus, the mere suggestion that this politically-inspired proposal, were it to pass, would do anything other than severely hurt our already limping economy, is an utter insult to our intelligence. Shumer, Graham and the candidates are either profoundly ignorant or assume so of us.

Of course non-competitive U.S. industries lose jobs to trade, but other (competitive) industries benefit mightily. Here's my rendition of a story Don Boudreaux tells in his book Globalization (a great read!):

Imagine there are only two countries in the world, China and the U.S... And China wants absolutely nothing from the U.S.. Therefore, being that U.S. dollars offer them no value, the Chinese refuse to sell U.S. citizens a single item. That's a bummer, because we really want their tires. However, when a third country, Australia, enters the story, opportunity presents itself. Australians desire U.S. software, while China wants Australian wool. So then:

1. China sells tires to the U.S....
2. China now has U.S. dollars to buy wool from Australia..
3. Australia now has U.S. dollars to buy software from the U.S....

Now I'll add the manipulation: The United Steelworkers Union cries foul (actually happened in '09 by the way), buys favor with a U.S. President (Obama) - who points to the trade deficit with the surely-cheating China - and Voilà! we tariff Tianjin Tires. And, alleluia, we save American (tire manufacturing) jobs. And, alas, we destroy American (tech industry, etc.) jobs.

Here's me illustrating the above:

Minimum wages for all! Except union employers, that is...

In an utter fit of hypocrisy, LA's AFL-CIO chapter is requesting an exemption for union employers from the new minimum wage regime that it lobbied to put in place. Many, like me, argue that unions argue for minimum wage to do damage to their non-union competition---presuming it's a more effective strategy than hiring folks to chant and wave disparaging signs around their competition's storefronts.

Chris Tilly, an urban planning professor at the University of California, Los Angeles makes the argument, he presumes, on behalf of unions:

"The argument for a union exemption for minimum wage is that workers represented by unions have the ability to bargain for a combination of wages, benefits and working conditions that works best for them,"

In reality, Tilly makes a case for those (of us) who see minimum wage as one of the most destructive laws ever constructed (it absolutely alienates low-skilled workers from the workforce): He unwittingly implies that many companies cannot afford to pay their least productive individuals $15 per hour while at the same time provide additional benefits and optimal working conditions. And he's right!

Hey!! I thought raising the minimum wage was supposed to be a good thing!

From the New York Post's "Buffalo Wild Wings Hiking Menu Prices":

“Current costs for traditional chicken wings of $1.98 per pound are 30 percent higher than our third-quarter average cost,” Chief Executive Sally Smith said.

“Given this trend and known raises in certain minimum wage rates, we are increasing menu prices an average of 3 percent at the end of November,” she said.

From Washington Policy Center's "Will Seattle Be Ground Zero of an Automation Nation":

Just look at how McDonald’s has responded to France’s $12 an hour minimum wage.  In 2011, McDonald’s invested in 7,000 touch screen computers in France to reduce the number of workers needed.  Restaurants around the country are already exploring automation as a means to cut costs; Applebee’s is installing 100,000 tabletop tablets for ordering and payments.

Many food businesses are considering a machine that can freshly grind, shape and custom grill 360 gourmet burgers per hour, no human labor needed.   Alpha, the burger-making robot, can even slice and dice the pickles and tomatoes, put them on the burger, add condiments and wrap it up.  The manufacturer makes the point that cashiers or servers aren't even needed: "Customers could just punch in their order, pay, and wait at a dispensing window."  The maker says Alpha will pay for itself in a year.

But it isn’t just fast food workers and waiters who will lose their jobs to automation as the result of an artificially high mandated wage.  In response to the threat of a higher minimum wage, a manufacturing company in Seattle has decided to begin replacing most of its 100 employees with automation in coming years.

The company initially planned to simply leave Seattle and relocate in a neighboring city to escape the impending $15 wage mandate.  But once the Governor and some lawmakers began pushing for a higher state minimum wage earlier this year, which is already the highest of any state in the nation, the company made the hard decision to stay in Seattle and begin moving towards automation.  The company shared their story but requested anonymity because its employees do not yet know they will be unemployed in the near future, thanks to the city’s new minimum wage.

Now hey! We've been promised by certain politicians (the featured politician may come as a surprise) and economists that raising the minimum wage wouldn't hurt the consumer---that it wouldn't result in higher prices or lose anybody his/her job. Actually---despite all the supposed "empirical evidence"---I thought it would...

Imagine working 4 weeks just to buy a DVD player...

I moved out of my folks' place at the tender age of 19. My roommate---my older and then wealthier brother Dan---splurged for a brand new VHS player. I vividly recall the price tag---it was a ton of money---$549.99.

My wife is visiting an elderly friend tomorrow. Their plan was to watch one of her dear friend's favorite old movies. While confirming their date my wife asked if she has a DVD player. She does not.

Judy just returned from our neighborhood department store toting a brand new stylishly sleek Sony DVD player. She says to me "guess how much it cost?" I say "three bucks" (gripes her when I do that). After socking me on the shoulder she says "twenty nine dollars!".

Some---politicians and narrow-thinking, and/or politically-inspired, economists---would have you and I believe that non-rich folks have seen virtually no real increase in their wages over the past few decades. I guess it depends on how you measure such things. If you measure wages in terms of what they'll buy, well... think in terms of hours worked:

A person making only the California minimum wage ($3.35) in 1981 had to work 164 hours (about 4 40-hr weeks)---not counting withholdings---saving every dime, to buy (not counting sales tax) him/herself a bulky grey movie player. In other words, very few 1981 minimum wage earners enjoyed in-home major motion pictures. Today, a California minimum wage ($9) earner gets a sleek black Sony, with a wireless remote (my brother's had a wire), in less than 4 hours! In other words, very few, if any, 2014 minimum wage earners do not enjoy in-home major motion pictures.

Don Boudreaux tells this story beautifully in several blog posts. Here's one...

An idea for the "task force of mayors"...

Here's an excerpt from yesterday's New York Times article Task Force of Mayors Address Income Gap: 

Income inequality has long existed, but the disproportion is stark when looking at how wealth has been distributed over nearly four decades, said Jim Diffley, an economist at IHS Global Insight, a worldwide information company that prepared the report using census and other data. “The purpose here was really to document the extent of income inequality,” he said.

From 1975 to 2012, the highest-earning 20 percent of households markedly outpaced the lowest-earning 20 percent in America. In 1975, the wealthiest households captured 43.6 percent of the nation’s income, while the poorest had a share of 4.3 percent. In 2012, low-income households saw their share drop to 3.2 percent while the high earners saw their share jump to 51 percent. “From the mayors’ standpoint, is this something we can grow out of or should we come up with policy to ameliorate the problem?” Mr. Diffley asked.

Hmm.... "captured"... Let's change the feel of the above and use "generated" instead:

In 1975, the wealthiest households generated 43.6 percent of the nation's income, while the poorest generated 4.3 percent. In 2012, low-income households generated 3.2 percent while the high earners generated 51 percent.

Make no mistake, there's not some preset quantity of income out there to be "captured", or distributed by some central body. That thought is ludicrous. One generates one's income by providing goods and/or services others produce goods and/or services (to generate income) in order to obtain.

Yes, there are actors in the economy who produce little of value or, worse yet, destroy value and yet get by. Like, for example, politicians and failed bankers. Understand, however, that those actors only get by as a consequence of government intervening into market processes. Bankers would---on occasion over the years---have personally failed were it not for taxpayer-funded bailouts. And politicians... well, with the way they allocate resources, they couldn't even begin to breathe the air of a true market environment.

So, does "the gap" really matter? Think about it. Why would it? Why would we even measure such things, other than out of pure envy or for political gain? What must occur in order for the vast majority of high earners to become high earners? They would have to produce value that exceeds their earnings. Right? I mean, would you pay someone as much or more than what you deem to be the value of his/her services to you? Of course not! You'd only pay for services that you value more than the money you paid.

So what should we measure? Perhaps simply the number of poor folks? And what can a "task force of mayors"---if they're truly interested in helping poor folks---do? For starters, they can lobby against the obviously destructive intrusions into employer/employee contracts. Such as minimum wage laws. Which price a large percentage of uneducated folks entirely out of the workforce---as those folks are too often unequipped to produce value in excess of mandated wage levels.

Sure, in theory, you can tax producers at a higher rate and use the take (what's left after it's sifted through government that is) to pay to educate/train poor folks. But wouldn't it make more sense to allow actual employers to invest directly in the training? The money government would have taken in tax hikes---without minimum wage laws---would be used to bring poor folks directly into the workforce; as employers could pay wages low enough to allow for the expense of training and have it still be a productive experience. How much faster would poor folks learn real skills? And, thus, become truly self sufficient? How much better would the economy be if resources were actually allocated to their most productive use?

Here's Milton Friedman:

A no-brainer (i.e., brainless) proposition...

Just watched a Bloomberg taped interview featuring a Standard & Poor's economist making the case that income inequality slows economic growth. Then read Paul Krugman bouncing up and down atop that bandwagon in today's New York Times.

The S&P economist stressed education as one answer to this perceived economic problem. Krugman, on the other hand, goes right for the jugular with the no-brainer "solution", tax the rich (a place the S&P economist didn't go, by the way). Not, mind you, the "no-brainer" in the sense that it's the obvious "solution", but in the sense that raising taxes on those who made and maintain their fortunes by producing the goods and services the masses most desire, and filtering that take through the fingers of politicians who---with all their personal incentives---produce virtually nothing of value, is an utterly brainless proposition.

You don't need a PhD in economics to understand that if we raise taxes on producers we get less production. And if we get less production, we get less opportunity for everyone, especially those at the lower rungs of the economic ladder.

Apparently, in fact---in that Krugman has a PhD in economics---it takes something more. Like truly caring about those in need (which would inspire a thoughtful PhD to offer up legitimate strategies that might help them become productive)---as opposed to caring only about promoting your personal stock by bolstering the biases of your audience.

Taddelech's miracle...

From Bloomberg.com last Tuesday:

“The work is good because I pay my rent and I can look after myself,” she said, wearing an aqua Huajian polo shirt. “It’s transformed my life.” Taddelech said she wants to work for two more years at the plant and become a supervisor. She eventually aspires to build her own house.

Taddelech Teshome is obviously a proud, hardworking and ambitious individual. But without a miracle, she would have surely been relegated to whatever existence a monthly income of far less than $30 affords.

Taddelech is Ethiopian, and, yes, her salary is $30 per month. And, yes, her job has transformed her life.

Her transformation has nothing whatsoever to do with the good intentions of Western philanthropists. The miracle was wielded by the hands of a most greedy, unabashed Chinese capitalist whose future success hinges upon Taddelech's overall well-being.

That capitalist would be Zhang Huarong, who, armed with three sewing machines, began making shoes from his home in Jiangxi province in 1982. Today, Zhang's company, Huajian Shoes, supplies the likes of Nine West and Guess with shoes and 3,500 Ethiopians with jobs.

As you might imagine, Ethiopian logistics are a hurdle:

Transportation and logistics that cost as much as four times those in China are prompting Huajian to set up its own trucking company.

A trucking company that will aggressively exploit (i.e., strengthen---mentally and physically---to the point where they become productive employees) yet more of the locals.

Here's what's next for Taddelech's community:

A model of a planned new plant at the edge of Addis Ababa is displayed at the factory. The 126-hectare (341-acre) complex, partly financed by more than $300 million from Huajian, will
include apartments for workers, a “forest resort” district and a technical university.

Cheap labor is truly a beautiful thing for the venturesome capitalist (not to mention his customers) who would dare exploit it. Ah, but miraculous are the transformations seen in the lives of the exploited...

Where would we be without capitalism and globalization?

I just read a fine article in the New York Times written by professor Tyler Cowen of George Mason University (HT Don Boudreaux). The gist was that while inequality is major in today's political discourse, in reality it's declining when viewed through a global lens. Of the reader comments I skimmed, not a single contributor shared my favorable view of the article.

Here's a relatively tame one that kinda sums up the overall sentiment of the comments:

OK, I think I've got the message. Rather than try to reduce income equality in the US--for example, by ending special tax breaks for billionaires--we should keep in mind that even though the average American worker's real-dollars income is stagnant or falling, the global economy will very gradually improve if we peons just suffer quietly and let billionaires take an ever-larger share of American's income.

I assure you the commenter has not read much any of Cowen's work. Had she, she'd not have presumed he is at all in favor of extending special tax breaks to billionaires.

We can take this one in myriad directions, but in the interest of time this morning allow me to make one very simple, and obvious, point:

I recently found myself in conversation with a bright and delightful 15 year-old who comes from an economically-challenged American family, we'll call her Mary. Mary and her 4 siblings are being raised by Mom and Dad who don't work outside the home. She mentioned that they might move her grandmother in, and if they do her mom would receive an extra $240 per month. When talking about the dynamics of living in such tight quarters---sharing her bedroom with two siblings, and thinking she'll have to squeeze Grandma in there somewhere---she mentioned that her sister is not at all happy right now because her older brother's tablet broke, so he confiscated his little sister's laptop and won't give it back. Mary doesn't understand why her brother is always on her sister's laptop because usually all he wants to do is play on his X-Box. Mary's on her third smart phone this year by the way.

My intent in sharing my conversation with Mary is not at all to complain about incentives---about the technological luxuries afforded to many Americans who receive government assistance. And while it doesn't address the alleged stagnation of the "average American worker's" income, I'd just like to pose one basic question: where would we (on whatever rung of the economic ladder we rest) be without capitalism and globalization?

 

Nooooobody politicks like Krugman - AND - If Republicans had the White House - AND - NEWS FLASH: LeBron back to Cleveland...

I read Paul Krugman. He's been such an inspiration to me. I'm sure he's inspired as many of my ramblings as have other Nobel laureates, like Friedrich Hayek and Milton Friedman. The thing is, while I seem to always sympathize with Hayek, and almost always with Friedman, I rarely (there'll be the occasional errant point) side with Krugman. His column this morning is no exception.

I generally can't even get through an entire Krugman op-ed without jumping over to the notes app on my iPad and start flailing away, which is what just occurred. He writes:

But I now think that class interests also operate through a cruder, more direct channel. Quite simply, easy-money policies, while they may help the economy as a whole, are directly detrimental to people who get a lot of their income from bonds and other interest-paying assets — and this mainly means the very wealthy, in particular the top 0.01 percent.

Now, I pay my bills by helping others invest their money. We have lots of retired folks who supplement their social security, and maybe a private pension, with income from their portfolios. In fact, over the past few years, a number of prospective average American clients have wandered into our offices (2 over the past two weeks) hoping we might have an answer to their dilemma: what to do with those few thousand (not million) bucks that used to generate, say, 25% of their retirement income safe and soundly in bank CDs. Again, these are your everyday, not rich, American older folks whose good night's sleep rests on the safety of their money.

One dangerous side effect of today's monetary policy is that it inspires safety-minded retired folks to take more risk in a desperate attempt to preserve their retirement income.

Reading on; Krugman anticipates my objection:

Complaints about low interest rates are usually framed in terms of the harm being done to retired Americans living on the interest from their CDs. But the interest receipts of older Americans go mainly to a small and relatively affluent minority. In 2012, the average older American with interest income received more than $3,000, but half the group received $255 or less. The really big losers from low interest rates are the truly wealthy — not even the 1 percent, but the 0.1 percent or even the 0.01 percent. Back in 2007, before the slump, the average member of the 0.01 percent received $3 million (in 2012 dollars) in interest. By 2011, that had fallen to $1.3 million — a loss equivalent to almost 9 percent of the group’s 2007 income.

Okay, but in 2007, those $3k/year incomes were easily $10k+/year. Notice how he goes back to 2007 for the .01 percent, but sticks with 2012 for "older Americans?" So who do you think feels the pinch more, the .01 percenter who still receives seven figures in interest income---and, by the way (a very big "by the way"), has made an utter killing in the stock market, and who knows to what extent has exploited crazy-low borrowing rates to acquire more assets---or the "older American" trying to get by on a fixed income.

Krugman rails against the politicking of the right (and of course they do politick). But, oh my!, nobody, but NOOOOOBODY, can politick (bend facts, omit details, etc., etc., etc.), like Krugman.

P.s: I do believe that the "conservative" politician is politicking, big time, in his attack on easy monetary policy. But not because he's advocating for his super-rich supporters (whose portfolios have done quite well of late), but because he believes it works. And that---he believes---an abrupt 180 in policy would spook the economy into a slowdown that would improve his party's prospects in the coming two election seasons. The irony is that, his rhetoric (over debt, bubbles, inflation, etc.) is truly the stuff we should concern ourselves with.

In other words, if Republicans had the White House, and if they controlled the Senate, I can assure you, they would be huge fans of the Fed right about now. And of course the Democrats would be on the attack...

NEWS FLASH! Just received a Bloomberg text stating that LeBron (think Bernanke/Yellen) is going back to Cleveland (think Republicans)! Recall that LeBron (Yellen) was utterly reviled in Cleveland (Republicanland) after defecting to the Heat (the left). Now, that very same LeBron (Yellen), same jump shot (same monetary policy), etc., is about to become Cleveland's (Republicanland's) darling once again.

Direct experience with minimum wage...

Some academics, and some politicians, are working overtime to convince us that raising the minimum wage will not hurt---will help actually---the minimum wage earner. I believe I've made (or repeated) every case against raising the minimum wage that I'm capable of from my vantage point.

I do have employees, but their productivity---and the competition from other employers in my industry---demands that I pay them wages much higher than the minimum. So I can't speak from direct experience. However, Andy Puzder, CKE Restaurants' CEO, can (be sure to read the entire piece and/or watch the interview:

When there’s a demand for labor, the cost of labor goes up. When there’s no demand for labor, it goes down and you can’t solve that problem by having the government artificially mandate a wage increase when there’s no economic growth to support that,” says Puzder. “What businesses do is they increase their prices and they move to automation so you have less jobs.

Once upon a time the Supreme Court got it right...

The un-economically-tutored Catherine Rampell chides IKEA and Gap for singing their own praises for paying "average" wages above the minimum.

Katie Little reports on how a booming economy pushes up wages, naturally, and how employers accommodate the increase in labor costs (HT Darren Thomas).

Of course I could default to the usual, and tell you how government intrusion is not only not necessary, but counterproductive, when it comes to the setting of wages. But, for today, we'll simply talk very basic economics.

So let's say I'm an employer who pays his people way above the minimum wage. What's it to me if Washington mandates a higher minimum wage? I mean, I don't pay it. In fact I'd benefit, since some folks would be making a little more money and, therefore, they'd be able to buy more stuff from my company. Or they'd buy more stuff from my customers' businesses and, therefore, allow my customers to buy more stuff from me. Not to mention that my cheaper-pricing competitors who pay minimum wage might have to adjust and make me more competitive. Hell yes! Raise that sucker!!

Am I making sense? Of course. What I just said---save for the last part---was intuitive. But what if I took a minute and began thinking about who supplies me with the supplies I need. Do my suppliers all pay above the minimum wage? And if, in the off chance they do, do their suppliers? Do their suppliers suppliers? Do their suppliers suppliers suppliers? Is there someone somewhere along the chain who'll have to compensate for, say, a 39% hike ($7.25 to $10.10) in the cost of certain labor? Well of course, there has to be. I mean, the promoters of minimum wage say the would-be "beneficiaries" number in the millions.

So now that we've established that someone else's increase in labor costs can indeed impact me, what are we to think? Well, we can hope that, by some magic, politicians know better than do employers how to make their businesses better. You've heard some say that raising the minimum wage will actually make its payers more profitable, as they'll end up with more productive individuals. Again, the far-reaching assumption here is that employers can't, on their own, find the optimum wage for their low-skilled workers---and that politicians can. You struggle with that one too, right?

Ask an intuitive person why raising the minimum wage is a bad idea and there's a good chance she'll say "inflation". Businesses will surely raise prices to offset the higher labor expense. Well, perhaps, but not necessarily, or initially. Some I suspect will lay off a worker or two, then squeeze more out of who's left to avoid, or to delay, having to increase their prices. Some will go ahead and make that investment in automation that they've been pondering the past few years (see Katie Little's article).

And what's the overall impact of such adjustments? That would be less total employment. You know the old adage, "raise the price of something and you get less of it". And less total employment means more pressure on our social safety net (read higher taxes and/or government debt).

Oh, and what about my personal life? Even if, as an employer, I don't immediately register the impact of raising the minimum wage, I'll surely see it in my private affairs. Maybe I like to travel, and maybe I eat out a lot while on vacation. And maybe I like my hotel room cleaned every morning. Lots of the human tasks devoted to the catering to my activities while escaping the grind are provided by minimum wage-paid folks. Will I pay more for R&R? Or will R&R suppliers---in fear of losing a customer---make the necessary cuts to keep their rates reasonable? Will I then notice their reduced capacity to serve?

Jack Loesch makes the inflation case nicely:

Thus in the long run the minimum wage worker is back to where he or she started as far as a standard of living and all that has been accomplished is to jumpstart inflation. A minimum wage increase does not improve their long-term purchasing power. It does however reduce the purchasing power of all those who did not get a pay increase along with the increased minimum wage. When a restaurant is forced to raise its prices because many of their employees just received a government mandated raise, everyone who didn't benefit from the raise but must pay the higher prices is worse off.

As you might imagine, I can proceed in this vein for a very very long-time. There's virtually no end to the hypotheticals that would point to the ills of politicians dictating to businesses the management of their payrolls. So we'll cut to the chase.

I could cite examples like Switzerland and Singapore, places where folks enjoy average incomes exceeding those of American workers, yet have no minimum wage restrictions. But each situation possesses its own unique set of circumstances---other than the lack of a minimum wage---that one can point to to explain away such phenomena. So allow me to make what the proponents of politicians picking numbers and making them law would deem a pithless point, that it's all about freedom. The freedom of low-skilled individuals to compete for work. The freedom of employers and employees to contract with one another, without the dictates of politicians who are utterly clueless as to the conditions that would lead these two parties to the optimum outcome.

Once upon a time the Supreme Court got it right:

Lochner v. New York, 198 U.S. 45 (1905), was a landmark United States Supreme Court case that held that "liberty of contract" was implicit in the Due Process Clause of the Fourteenth Amendment. The case involved a New York law that limited the number of hours that a baker could work each day to ten, and limited the number of hours that a baker could work each week to 60. By a 5–4 vote, the Supreme Court rejected the argument that the law was necessary to protect the health of bakers, deciding it was a labor law attempting to regulate the terms of employment, and calling it an "unreasonable, unnecessary and arbitrary interference with the right and liberty of the individual to contract."

That's it, "the right and liberty of the individual to contract."

Now, if you wish, go ahead and Google the Bakeshop Act. You'll find claims that it was an effort by the Bakers' Union to protect its members against the ills of long hours subject to hazardous working conditions. Dig a little deeper and you'll find the truth: That, like other intrusions on the right-to-contract, such as the Davis Bacon Act, the Bakeshop Act was designed to squash the big bakeshops' non-union competition. By simply adhering to a most basic "American" principle, the 1905 Supreme Court thwarted an all out attack on low-skilled individuals.

Who's going to save them now?