Great article detailing the practice of business with the Chinese. In sum, they are untrustworthy, highly unethical, and frankly brutal in the treatment of business partners. Read the following book review for yourself.
Poorly Made in China by Paul Midler
Reviewed by Muhammad Cohen
When you buy for US$2 in New York an umbrella that's made in China, you have to wonder how they do it. After all, the umbrella components have to cost something, there's shipping, and there's profit for numerous middlemen and the retailer. Among the economic miracles unfolding in China over the past two decades, the most mysterious may be how a country that skipped the Industrial Revolution, substituting the Cultural Revolution, became the low-cost factory floor to the world.
Poorly Made in China: An Insider's Account of the Tactics Behind China's Production Game provides fascinating and disturbing answers. Chinese manufacturers cut corners wherever they can, from product quality to factory equipment and maintenance. They unilaterally change product and packaging specifications to trim costs. They raise prices after the deal is signed, leaving the importer to absorb the added cost. They reproduce their customers' products for sale at higher margins in other markets. With support from government, bankers, and networks of fellow manufacturers, they conduct manufacturing and customer relations as a game, treating the other party as a patsy not a partner, playing for the short term of making an extra penny at the risk of product quality but also taking a long-term, multidimensional outlook that outflanks the hapless customer.
. . .
cont.
http://www.atimes.com/atimes/China/KG18Ad02.html
Tuesday, July 21, 2009
Wednesday, July 15, 2009
The Theory and Practice of Credit Exchanges and Alternative Money
Money represents wealth. Money can be issued based on anything of value, be it a good or a service. Creating money to represent some object of wealth is called monetizing. Any collateral can be monetized to create new money. Even labor can be monetized to create money.
Money that is created apart from collateral wealth, apart from real goods and services, is inflationary, because it causes a surplus of money relative to wealth. Money can be printed, but unless wealth is created along with it, it does not make anyone richer.
Credit, the kind issued by a credit clearing exchange, can only be issued in the same fashion. Credit can only be created based on the monetization of some collateral or service. By definition, the creation of credit only makes sense to facilitate some mutual transaction. Credit cannot be given out freely, any more than money loans can be given out freely.
For this reason, in a credit exchange, people should not be extended unearned credit lines. Credit clearing exchanges die because of negative balances. Credit clearing must proceed on the same time-tested basis as any other banking function: on good collateral.
A credit clearing exchange cannot be run solely on idealism. It has to be based on real wealth and offer a real profit motive, both for the members and the exchange operator.
Without the availability of an interest charge on loaned money, the credit exchange operator has to rely on an alternate source of revenue: brokerage. The exchange is not offering a good, like money, it is offering a service. The service is to broker economic transactions, and to track objectively and accurately the mutual credit streams created.
A credit exchange is backed by nothing more or less than the full faith and credit of its members. The exchange only profits insofar as it facilitates economic transactions. The interests of the exchange and the members are aligned: profitable economic transactions.
This is the only economic function of a credit exchange: facilitating economic transactions that would not otherwise take place. The economic problem the exchange solves is a lack of cash. For example, a plumber and a mechanic have both lost their jobs. They are both without money, so in the regular scheme of things, neither can afford each other’s services. However, the credit exchange can step in and facilitate their mutual transaction, garnering a small brokerage fee for the service.
If the tradesmen were flush with cash, they would not need the credit exchange broker. Thus, the target audience for a credit exchange is clear: the unemployed and under-employed. People who have excess time, but not a steady cash flow, need the services of a credit exchange. Some people would also like to join the credit exchange as a form of advertising. The larger the labor pool, the more transactions would take place.
Thus, in practice, the exchange operator must seek out and recruit clients into the exchange. The operator should have an eye for specific industries and skills that would be most beneficial for the overall health the exchange network. The operator must deliberately and systematically seek to maximize in-network credit transactions. Each new member should be encouraged to invite others into the network as well.
New members should not be extended free credit, as the problem of free-riders would get too large. Rather, new members should be required to deposit their own good/service into the exchange vaults. Economically speaking, this is a deposit of wealth which the credit exchange then monetizes. The deposit would earn a balance in the network, and mark the official entry of the member into the exchange’s economic system.
Members have to monetize their own wealth-building service as a form of capitalizing their own credit account. For example, a mechanic could monetize 8 hours of his own labor, or he could monetize 80 hours of his own labor. It would be up to the exchange operator to establish an upper limit on the credit value that could be monetized by any member. This is a very intuitive form of a credit limit that even a new member would understand.
Beginning members might not be allowed to monetize any of their labor at first, but might have to operate solely on an service-rendered-first trade basis. Or beginners might be allowed to monetize a day’s worth of labor. But as their reputation score rose, the credit limit could rise with it. Soon, a member might be able to monetize a week’s worth of labor, or more, as appropriate.
Monetizing labor means that trade credit is granted a member, under the expectation that future labor will be done. The member would literally sign over a labor check, or labor bond, stating how much labor was deposited with the exchange. It is nothing more or less than a personal IOU signed over to the exchange.
The exchange operator would then be able to market that IOU. Someone who needs that service would purchase that service with their own IOU. This is how a purely credit exchange network would operate. The IOUs function as money, but they are backed solely by the full faith and credit of the issuer. A member would deposit their own personal IOU with the exchange, then complete that service when someone purchased the IOU.
If someone refused to, or was unable to, honor their IOU, functionally, that means they have defaulted on their credit. In such cases, the loss would have to be absorbed by the exchange operator. The operator must be running at a sufficient profit to enable the write-off of defaulted credit by unfaithful members. Obviously, this is exactly parallel to how a money bank must earn enough dollars in interest and fees to offset loan losses.
Members would be encouraged to be faithful guarantors of their IOUs by the benefits of being in-network. Their faithfulness and skill in fulfilling their IOUs would be revealed by their reputation score. If someone refused to honor their own IOU on day one, before they used anyone else’s services, there would be no harm done to the exchange itself. However, if someone spent two weeks using the services of the exchange, then refused to contribute in turn, that would be a huge loss for the exchange to absorb.
Everyone contributes with the expectation of getting something back, so widespread defaults could easily shake the confidence in the faithfulness of the exchange network itself. Members should be fully briefed on the high ethical standard that they are expected to maintain when they join the network. Obviously, refusal to honor even one IOU could be grounds for removal from the exchange network, and new members should be limited to very small account balances until they established their credit worthiness.
So far, I have only discussed the monetization and trading of services, but goods can be monetized into the exchange network as well. Rather than capitalizing their own labor through an IOU, someone might simply contribute a bicycle, or a car, or a bus, or whatever, into the capital fund of the exchange network. The member would receive trade credit, and the exchange operator would then market the collateral. Within network, members could offer their own goods directly for sale to other members for trade credit.
Counterfeiting is a huge problem for alternative currencies, as the printing technology is likely to be simplistic and the ability to track or prosecute counterfeiters almost non-existent. Trade credits and other alternative currencies should be electronic to the greatest extent possible. When printed, they should be printed in cheque form, to be countersigned upon transfer, so that a chain of legitimacy can be established. Using checks has the added advantage of preventing theft.
Money that is created apart from collateral wealth, apart from real goods and services, is inflationary, because it causes a surplus of money relative to wealth. Money can be printed, but unless wealth is created along with it, it does not make anyone richer.
Credit, the kind issued by a credit clearing exchange, can only be issued in the same fashion. Credit can only be created based on the monetization of some collateral or service. By definition, the creation of credit only makes sense to facilitate some mutual transaction. Credit cannot be given out freely, any more than money loans can be given out freely.
For this reason, in a credit exchange, people should not be extended unearned credit lines. Credit clearing exchanges die because of negative balances. Credit clearing must proceed on the same time-tested basis as any other banking function: on good collateral.
A credit clearing exchange cannot be run solely on idealism. It has to be based on real wealth and offer a real profit motive, both for the members and the exchange operator.
Without the availability of an interest charge on loaned money, the credit exchange operator has to rely on an alternate source of revenue: brokerage. The exchange is not offering a good, like money, it is offering a service. The service is to broker economic transactions, and to track objectively and accurately the mutual credit streams created.
A credit exchange is backed by nothing more or less than the full faith and credit of its members. The exchange only profits insofar as it facilitates economic transactions. The interests of the exchange and the members are aligned: profitable economic transactions.
This is the only economic function of a credit exchange: facilitating economic transactions that would not otherwise take place. The economic problem the exchange solves is a lack of cash. For example, a plumber and a mechanic have both lost their jobs. They are both without money, so in the regular scheme of things, neither can afford each other’s services. However, the credit exchange can step in and facilitate their mutual transaction, garnering a small brokerage fee for the service.
If the tradesmen were flush with cash, they would not need the credit exchange broker. Thus, the target audience for a credit exchange is clear: the unemployed and under-employed. People who have excess time, but not a steady cash flow, need the services of a credit exchange. Some people would also like to join the credit exchange as a form of advertising. The larger the labor pool, the more transactions would take place.
Thus, in practice, the exchange operator must seek out and recruit clients into the exchange. The operator should have an eye for specific industries and skills that would be most beneficial for the overall health the exchange network. The operator must deliberately and systematically seek to maximize in-network credit transactions. Each new member should be encouraged to invite others into the network as well.
New members should not be extended free credit, as the problem of free-riders would get too large. Rather, new members should be required to deposit their own good/service into the exchange vaults. Economically speaking, this is a deposit of wealth which the credit exchange then monetizes. The deposit would earn a balance in the network, and mark the official entry of the member into the exchange’s economic system.
Members have to monetize their own wealth-building service as a form of capitalizing their own credit account. For example, a mechanic could monetize 8 hours of his own labor, or he could monetize 80 hours of his own labor. It would be up to the exchange operator to establish an upper limit on the credit value that could be monetized by any member. This is a very intuitive form of a credit limit that even a new member would understand.
Beginning members might not be allowed to monetize any of their labor at first, but might have to operate solely on an service-rendered-first trade basis. Or beginners might be allowed to monetize a day’s worth of labor. But as their reputation score rose, the credit limit could rise with it. Soon, a member might be able to monetize a week’s worth of labor, or more, as appropriate.
Monetizing labor means that trade credit is granted a member, under the expectation that future labor will be done. The member would literally sign over a labor check, or labor bond, stating how much labor was deposited with the exchange. It is nothing more or less than a personal IOU signed over to the exchange.
The exchange operator would then be able to market that IOU. Someone who needs that service would purchase that service with their own IOU. This is how a purely credit exchange network would operate. The IOUs function as money, but they are backed solely by the full faith and credit of the issuer. A member would deposit their own personal IOU with the exchange, then complete that service when someone purchased the IOU.
If someone refused to, or was unable to, honor their IOU, functionally, that means they have defaulted on their credit. In such cases, the loss would have to be absorbed by the exchange operator. The operator must be running at a sufficient profit to enable the write-off of defaulted credit by unfaithful members. Obviously, this is exactly parallel to how a money bank must earn enough dollars in interest and fees to offset loan losses.
Members would be encouraged to be faithful guarantors of their IOUs by the benefits of being in-network. Their faithfulness and skill in fulfilling their IOUs would be revealed by their reputation score. If someone refused to honor their own IOU on day one, before they used anyone else’s services, there would be no harm done to the exchange itself. However, if someone spent two weeks using the services of the exchange, then refused to contribute in turn, that would be a huge loss for the exchange to absorb.
Everyone contributes with the expectation of getting something back, so widespread defaults could easily shake the confidence in the faithfulness of the exchange network itself. Members should be fully briefed on the high ethical standard that they are expected to maintain when they join the network. Obviously, refusal to honor even one IOU could be grounds for removal from the exchange network, and new members should be limited to very small account balances until they established their credit worthiness.
So far, I have only discussed the monetization and trading of services, but goods can be monetized into the exchange network as well. Rather than capitalizing their own labor through an IOU, someone might simply contribute a bicycle, or a car, or a bus, or whatever, into the capital fund of the exchange network. The member would receive trade credit, and the exchange operator would then market the collateral. Within network, members could offer their own goods directly for sale to other members for trade credit.
Counterfeiting is a huge problem for alternative currencies, as the printing technology is likely to be simplistic and the ability to track or prosecute counterfeiters almost non-existent. Trade credits and other alternative currencies should be electronic to the greatest extent possible. When printed, they should be printed in cheque form, to be countersigned upon transfer, so that a chain of legitimacy can be established. Using checks has the added advantage of preventing theft.
Teleb and Spitznagel Call for Debt Cancellation
Taleb and Spitznagel have an excellent grasp on the problem of high debt, and getting people thinking about debt cancellation is a good thing. They also point out the folly of current economic modeling, and the failure of the economists in general. But their proposal to convert debt to equity is highly problematic.
The idea is taken straight from corporate finance: Corporate debt holders, rather than receiving cash payment, will sometimes receive ownership shares in the company. Debt holders can often be forced into this conversion against their will, as the article suggests.
However, this article is the perverse opposite of that process. Rather than debt holders being forced to accept equity, he is suggestion that owners be forced to give away shares to debt holders! The idea that we should support a system in which debt holders forcibly acquire an ownership stake is highly objectionable, in fact, it is outrageous.
The proposal would benefit one group: the debt holders who are seeing their debt-generated wealth evaporate on a large scale. Now that debt payments are defaulting like crazy, these parasites are trying to get hold of the underlying assets. It is an outrage! And an example of the priveleged elitist attitude which sees the entire world as a bunch of cattle to be milked and butchered for their profit and convenience.
Taleb and Spitznagel are speaking for the parasite class, and as far as I am concerned, they should be told to go to hell. There will be no forcible debt to equity conversions.
The solution to a high debt depression is a Jubilee renewal, freeing the people from their debts, not a bail out for the parasite class. The government can directly pay off debts, and simultaneously raise bank reserve requirements to absorb the excess money to avoid inflationary effects. This is the People's Bailout, and we could do it right now, without violating any laws or contracts.
http://www.ft.com/cms/s/0/4e02aeba-6fd8-11de-b835-00144feabdc0.html
The idea is taken straight from corporate finance: Corporate debt holders, rather than receiving cash payment, will sometimes receive ownership shares in the company. Debt holders can often be forced into this conversion against their will, as the article suggests.
However, this article is the perverse opposite of that process. Rather than debt holders being forced to accept equity, he is suggestion that owners be forced to give away shares to debt holders! The idea that we should support a system in which debt holders forcibly acquire an ownership stake is highly objectionable, in fact, it is outrageous.
The proposal would benefit one group: the debt holders who are seeing their debt-generated wealth evaporate on a large scale. Now that debt payments are defaulting like crazy, these parasites are trying to get hold of the underlying assets. It is an outrage! And an example of the priveleged elitist attitude which sees the entire world as a bunch of cattle to be milked and butchered for their profit and convenience.
Taleb and Spitznagel are speaking for the parasite class, and as far as I am concerned, they should be told to go to hell. There will be no forcible debt to equity conversions.
The solution to a high debt depression is a Jubilee renewal, freeing the people from their debts, not a bail out for the parasite class. The government can directly pay off debts, and simultaneously raise bank reserve requirements to absorb the excess money to avoid inflationary effects. This is the People's Bailout, and we could do it right now, without violating any laws or contracts.
http://www.ft.com/cms/s/0/4e02aeba-6fd8-11de-b835-00144feabdc0.html
Tuesday, July 14, 2009
International Trade and Protectionism, part 3
Policy Implications
Americans spent 200 years of industrialization building up a high quality of life and standard of living, only to watch it petered away in the last generation through out-sourcing of industries and in-sourcing of cheap replacement labor. It shouldn’t be surprising that our average wage and quality of life have been deteriorating for the last 30 years.
The American wage supports an entire way of life, including a minimum wage, safety standards, environmental protections, health care costs, affirmative action set asides, and a retirement system.
Allowing jobs to be out-sourced to low wage countries destroys those aspects of the American dream. Obviously, foreign workers who have none of those advantages can work by the hour for cheaper, but the true cost is borne by American society as a whole.
A rational economic policy for America would safeguard the foundations of our industrial and productive strength. Trade should be open and free when based on true comparative advantage and fair competition, in other words, when it truly benefits both countries.
Imports from countries that do not support an equivalent standard of living should be penalized with a tariff, with the tariff revenue being used to support the American way of life that is undermined by the import.
Corporations that export American professional jobs should face penalties such as a higher corporate tax rate based on what proportion of their workforce has been off-shored.
Tariffs should be levied across the board on countries who engage in any currency manipulation for trade advantage or provide any export subsidies.
American economic policy should support domestic employment by focusing on a stable and profitable productive base, allowing imports and outsourcing only when it would provide a demonstrable benefit to the American standard of living.
Promoting off-shoring based solely on wage arbitrage is actually economically backwards, resulting in production that is less efficient and more costly when viewed in resource terms. Resource terms are real terms, an absolute measure, as opposed to money terms, which are relative and illusory. If off-shoring destroys a naturally evolved network of comparative advantage, it is economically backwards, even if it appears to "save money" in dollar terms. In other words, it is bad for the whole world's economy overall, not just the American economy.
Economic regions are defined by geography, common currency, free labor movement, and transportation integration. Economic regions should be encouraged to become as independent as possible, based on natural comparative advantages, which save resources and produce goods more cheaply on an absolute scale.
Trade which is based on those comparative advantages between regions should be encouraged. However, wholesale relocation of productive industry from one region to another should be discouraged. Rather, domestic industries in each region should be nourished, with the goal of uplifting standards of living in each region without lowing standards of living in another, while maximizing the efficient use of scarce resources everywhere.
Only in this way can a long-term sustainable global economy, with rising standards of living for all, be established.
Americans spent 200 years of industrialization building up a high quality of life and standard of living, only to watch it petered away in the last generation through out-sourcing of industries and in-sourcing of cheap replacement labor. It shouldn’t be surprising that our average wage and quality of life have been deteriorating for the last 30 years.
The American wage supports an entire way of life, including a minimum wage, safety standards, environmental protections, health care costs, affirmative action set asides, and a retirement system.
Allowing jobs to be out-sourced to low wage countries destroys those aspects of the American dream. Obviously, foreign workers who have none of those advantages can work by the hour for cheaper, but the true cost is borne by American society as a whole.
A rational economic policy for America would safeguard the foundations of our industrial and productive strength. Trade should be open and free when based on true comparative advantage and fair competition, in other words, when it truly benefits both countries.
Imports from countries that do not support an equivalent standard of living should be penalized with a tariff, with the tariff revenue being used to support the American way of life that is undermined by the import.
Corporations that export American professional jobs should face penalties such as a higher corporate tax rate based on what proportion of their workforce has been off-shored.
Tariffs should be levied across the board on countries who engage in any currency manipulation for trade advantage or provide any export subsidies.
American economic policy should support domestic employment by focusing on a stable and profitable productive base, allowing imports and outsourcing only when it would provide a demonstrable benefit to the American standard of living.
Promoting off-shoring based solely on wage arbitrage is actually economically backwards, resulting in production that is less efficient and more costly when viewed in resource terms. Resource terms are real terms, an absolute measure, as opposed to money terms, which are relative and illusory. If off-shoring destroys a naturally evolved network of comparative advantage, it is economically backwards, even if it appears to "save money" in dollar terms. In other words, it is bad for the whole world's economy overall, not just the American economy.
Economic regions are defined by geography, common currency, free labor movement, and transportation integration. Economic regions should be encouraged to become as independent as possible, based on natural comparative advantages, which save resources and produce goods more cheaply on an absolute scale.
Trade which is based on those comparative advantages between regions should be encouraged. However, wholesale relocation of productive industry from one region to another should be discouraged. Rather, domestic industries in each region should be nourished, with the goal of uplifting standards of living in each region without lowing standards of living in another, while maximizing the efficient use of scarce resources everywhere.
Only in this way can a long-term sustainable global economy, with rising standards of living for all, be established.
Friday, July 10, 2009
International Trade: Comparative Advantage and Protectionism, part 2
That money saved is the usual macro-economic justification for off-shoring in the first place. Theoretically, that money saved creates a job elsewhere in the economy. This is where so many people trip up, unable to differentiate monetary effects from real economic effects. In real economic effects, production of the same output has become less efficient and capital destroyed.
The great lie told during this generation of outsourcing has been that these laid-off workers would move up the knowledge chain, into higher value-added occupations. However, we can see that this is empirically false.
The fact is, there is a natural limit to the amount of “knowledge economy” jobs that are available. Knowledge jobs (traditionally called white collar) are subsidiary jobs: they exist to support some other industry. Remove the base industry, and the knowledge job disappears with it.
The idea that you can have an entire economy based on knowledge jobs is silly, it does not even make sense. There are only so many accountants, teachers, lawyers, salesmen, and consultants needed for a given population. They are subsidiary jobs because all of these “knowledge-work” professions depend on other industries to create the wealth. Without a primary base of wealth-creating enterprises, white collar jobs are not required. The same thing goes for so-called service jobs. You can’t base an economy on retail, restaurants, hair stylists, and spas. All those jobs are possible in a wealthy and nicely diversified economy, but without a wealth-creating base, they wither and die as overall standards of living fall, because there is less real wealth circulating.
This is a simple truth: at the base of every economy are the wealth-producers, who create and build something tangible that improves our quality of life. Mining, farming, chemicals, steel, plastics, textiles, and manufacturing of all kinds, that is the basis of the modern economy. A huge chunk of white collar economic activity then develops to support those industries, trailing off into the salesmen and retail stores that move the wealth. Teachers, doctors, police, and government workers are necessary for civil society, but they do not create wealth, and their standard of living is dependent on the wealth-producing industries.
To help clarify the economic principle, let’s look at a practical example. A car factory in Michigan is shut down, with production moved to a car factory in China instead. Physical plant in Michigan is destroyed, and skilled workers are fired. Cars intended for the American market are now shipped in from China, consuming extra resources in the transportation process.
The process is only economically justified if the displaced workers can find a new activity that produces greater wealth than what they did before. Is that even possible? What are their options? In the real world, such displaced workers have to switch careers, becoming truck drivers, plumbers, laborers, or whatever. Does that increase wealth? Unfortunately not. Unless they are shifted to another wealth creating activity, they will merely become wealth-consumers, and compete with other workers in some service job. So, they lose their own high previous wage, and drive down wages in whatever field they go into, while adding nothing of wealth to the economy as a whole.
But what about the money the car company saved? Doesn’t that return somewhere in some efficiency to create a new job? Let’s follow the money trail and see. Ok, so assume the company’s dollar profits just went up by lowering labor costs. The dollars return to the US economy through executive salaries and stock owner dividends. From a class perspective, the rich just got richer and the poor got poorer, but is it good from a macroeconomic perspective?
The question is, what happens to those dollars when they enter the domestic economy? Of course, there are less dollars in the US economy at first, because the laid-off worker is not being paid. Say the worker was paid 100 dollars, but after outsourcing, 50 dollars go to the Chinese worker, and the remaining 50 dollars goes to corporate profits. However, the 50 dollars paid to the Chinaman have to come back to the US economy eventually, as dollars can’t be used in China. But when the dollars do get back to the US, there is less stuff to buy. Less goods are being produced because our industry was lost to outsourcing. A constant amount of dollars chasing fewer goods: a formula for inflation.
The only way to short circuit this process is to make sure the laid-off worker is moved into another productive industry. If the worker transitions to any non-wealth creating job, he will merely be adding to a fixed labor pool, with the effect of driving down wages. There is no way around this. If he becomes a laborer, we now have one more laborer, if he becomes a plumber, we have one more plumber, if he becomes an accountant, we now have one more accountant. In all cases, no new wealth is being produced, so wages can only be driven down as the fields are crowded with displaced workers.
We have the same amount of real wealth available, since the car he built is now build and imported from China. We are poorer in terms of resources however, if for no other reason than the increased transportation costs. We have the same amount of money in circulation, assuming that is kept constant. We just have more workers in other fields. This is known as downward mobility.
Even if he becomes a doctor, which would make him personally richer, the country overall is poorer. His dollar wage may have gone up, and the country gets a needed doctor, but our overall wealth went down. Doctors do not create wealth. Teachers do not create wealth, lawyers do not create wealth, government workers don’t create wealth… The list could go on and on. Unless our displaced worker finds another wealth-producing position to fill, our country got poorer.
Some have objected to protectionism on the grounds of scale, asking, so why doesn’t each state become protectionist, or it must be bad to move a factory from New York to Alabama, for example. Unfortunately, these questions reveal a poor understanding of comparative advantage in regional economies, so let us examine these claims.
Let’s say a factory owner sees a potential profit relocating a factory from high cost New York to low cost Alabama. How is that different from relocating to China? The key difference is the available movement of labor. If the displaced New York factory worker cannot find better employment in New York, he is free to move to Alabama himself and take advantage of its growing economy. Thus, in a regionally integrated economy like the United States, economic progress proceeds generally and in a healthy fashion.
Also, the white collar jobs that support the wealth-building activity are all created locally. So producing cars in Alabama will not only employ laborers and skilled factory workers, but also technicians, engineers, accountants, and lawyers. None of those jobs are available to Americans if the factory is located in China. The local wealth-creation supports higher wages for those positions, and drags up wages overall. This is a "drawing-upwards" of workers into higher standards of living, the opposite of what happens when displaced workers have to get retrained and placed into a labor pool with workers in an already-existing industry.
Americans spent 200 years of industrialization building up a high quality of life and standard of living, only to watch it petered away in the last generation through out-sourcing of industries and in-sourcing of cheap replacement labor. It shouldn’t be surprising that our average wage and quality of life have been deteriorating for the last 30 years.
The American wage supports an entire way of life, including a minimum wage, safety standards, environmental protections, health care costs, affirmative action set asides, and a retirement system. Allowing jobs to be out-sourced to low wage countries destroys those aspects of the American dream. Obviously, foreign workers who have none of those advantages can work by the hour for cheaper, but the true cost is borne by American society as a whole.
A rational economic policy for America would safeguard the foundations of our industrial strength. Trade should be open and free when based on true comparative advantage and fair competition. Imports from countries that do not support an equivalent standard of living should be penalized with a tariff, with the tariff revenue being used to support the American way of life that is undermined by the import. Corporations that export American professional jobs should face penalties such as a higher corporate tax rate based on what proportion of their workforce has been off-shored. Tariffs should be levied across the board on countries who engage in any currency manipulation for trade advantage or provide any export subsidies.
American economic policy should support domestic employment by focusing on a stable and profitable productive base, allowing imports and outsourcing only when it would provide a demonstrable benefit to the American standard of living.
The great lie told during this generation of outsourcing has been that these laid-off workers would move up the knowledge chain, into higher value-added occupations. However, we can see that this is empirically false.
The fact is, there is a natural limit to the amount of “knowledge economy” jobs that are available. Knowledge jobs (traditionally called white collar) are subsidiary jobs: they exist to support some other industry. Remove the base industry, and the knowledge job disappears with it.
The idea that you can have an entire economy based on knowledge jobs is silly, it does not even make sense. There are only so many accountants, teachers, lawyers, salesmen, and consultants needed for a given population. They are subsidiary jobs because all of these “knowledge-work” professions depend on other industries to create the wealth. Without a primary base of wealth-creating enterprises, white collar jobs are not required. The same thing goes for so-called service jobs. You can’t base an economy on retail, restaurants, hair stylists, and spas. All those jobs are possible in a wealthy and nicely diversified economy, but without a wealth-creating base, they wither and die as overall standards of living fall, because there is less real wealth circulating.
This is a simple truth: at the base of every economy are the wealth-producers, who create and build something tangible that improves our quality of life. Mining, farming, chemicals, steel, plastics, textiles, and manufacturing of all kinds, that is the basis of the modern economy. A huge chunk of white collar economic activity then develops to support those industries, trailing off into the salesmen and retail stores that move the wealth. Teachers, doctors, police, and government workers are necessary for civil society, but they do not create wealth, and their standard of living is dependent on the wealth-producing industries.
To help clarify the economic principle, let’s look at a practical example. A car factory in Michigan is shut down, with production moved to a car factory in China instead. Physical plant in Michigan is destroyed, and skilled workers are fired. Cars intended for the American market are now shipped in from China, consuming extra resources in the transportation process.
The process is only economically justified if the displaced workers can find a new activity that produces greater wealth than what they did before. Is that even possible? What are their options? In the real world, such displaced workers have to switch careers, becoming truck drivers, plumbers, laborers, or whatever. Does that increase wealth? Unfortunately not. Unless they are shifted to another wealth creating activity, they will merely become wealth-consumers, and compete with other workers in some service job. So, they lose their own high previous wage, and drive down wages in whatever field they go into, while adding nothing of wealth to the economy as a whole.
But what about the money the car company saved? Doesn’t that return somewhere in some efficiency to create a new job? Let’s follow the money trail and see. Ok, so assume the company’s dollar profits just went up by lowering labor costs. The dollars return to the US economy through executive salaries and stock owner dividends. From a class perspective, the rich just got richer and the poor got poorer, but is it good from a macroeconomic perspective?
The question is, what happens to those dollars when they enter the domestic economy? Of course, there are less dollars in the US economy at first, because the laid-off worker is not being paid. Say the worker was paid 100 dollars, but after outsourcing, 50 dollars go to the Chinese worker, and the remaining 50 dollars goes to corporate profits. However, the 50 dollars paid to the Chinaman have to come back to the US economy eventually, as dollars can’t be used in China. But when the dollars do get back to the US, there is less stuff to buy. Less goods are being produced because our industry was lost to outsourcing. A constant amount of dollars chasing fewer goods: a formula for inflation.
The only way to short circuit this process is to make sure the laid-off worker is moved into another productive industry. If the worker transitions to any non-wealth creating job, he will merely be adding to a fixed labor pool, with the effect of driving down wages. There is no way around this. If he becomes a laborer, we now have one more laborer, if he becomes a plumber, we have one more plumber, if he becomes an accountant, we now have one more accountant. In all cases, no new wealth is being produced, so wages can only be driven down as the fields are crowded with displaced workers.
We have the same amount of real wealth available, since the car he built is now build and imported from China. We are poorer in terms of resources however, if for no other reason than the increased transportation costs. We have the same amount of money in circulation, assuming that is kept constant. We just have more workers in other fields. This is known as downward mobility.
Even if he becomes a doctor, which would make him personally richer, the country overall is poorer. His dollar wage may have gone up, and the country gets a needed doctor, but our overall wealth went down. Doctors do not create wealth. Teachers do not create wealth, lawyers do not create wealth, government workers don’t create wealth… The list could go on and on. Unless our displaced worker finds another wealth-producing position to fill, our country got poorer.
Some have objected to protectionism on the grounds of scale, asking, so why doesn’t each state become protectionist, or it must be bad to move a factory from New York to Alabama, for example. Unfortunately, these questions reveal a poor understanding of comparative advantage in regional economies, so let us examine these claims.
Let’s say a factory owner sees a potential profit relocating a factory from high cost New York to low cost Alabama. How is that different from relocating to China? The key difference is the available movement of labor. If the displaced New York factory worker cannot find better employment in New York, he is free to move to Alabama himself and take advantage of its growing economy. Thus, in a regionally integrated economy like the United States, economic progress proceeds generally and in a healthy fashion.
Also, the white collar jobs that support the wealth-building activity are all created locally. So producing cars in Alabama will not only employ laborers and skilled factory workers, but also technicians, engineers, accountants, and lawyers. None of those jobs are available to Americans if the factory is located in China. The local wealth-creation supports higher wages for those positions, and drags up wages overall. This is a "drawing-upwards" of workers into higher standards of living, the opposite of what happens when displaced workers have to get retrained and placed into a labor pool with workers in an already-existing industry.
Americans spent 200 years of industrialization building up a high quality of life and standard of living, only to watch it petered away in the last generation through out-sourcing of industries and in-sourcing of cheap replacement labor. It shouldn’t be surprising that our average wage and quality of life have been deteriorating for the last 30 years.
The American wage supports an entire way of life, including a minimum wage, safety standards, environmental protections, health care costs, affirmative action set asides, and a retirement system. Allowing jobs to be out-sourced to low wage countries destroys those aspects of the American dream. Obviously, foreign workers who have none of those advantages can work by the hour for cheaper, but the true cost is borne by American society as a whole.
A rational economic policy for America would safeguard the foundations of our industrial strength. Trade should be open and free when based on true comparative advantage and fair competition. Imports from countries that do not support an equivalent standard of living should be penalized with a tariff, with the tariff revenue being used to support the American way of life that is undermined by the import. Corporations that export American professional jobs should face penalties such as a higher corporate tax rate based on what proportion of their workforce has been off-shored. Tariffs should be levied across the board on countries who engage in any currency manipulation for trade advantage or provide any export subsidies.
American economic policy should support domestic employment by focusing on a stable and profitable productive base, allowing imports and outsourcing only when it would provide a demonstrable benefit to the American standard of living.
International Trade, Comparative Advantage and Protectionism, part 1
The latest attack of economic propaganda came out of the G8 meeting in Italy today, extolling the virtues of free trade and vowing to fight protectionism. The classic formula -- "the Great Depression was made worse by protectionism" – continues to get ground into our collective mindset until it becomes an unquestioned axiom of thought. Heck, I used to believe it myself, until I actually starting analyzing it.
Here is the short-form rebuttal: in the 1920's, the US was the world’s number 1 exporter and creditor. Today, the US is the world's number 1 importer and debtor. The case against protectionism, for America, does not apply. Less developed countries have understood for centuries that domestic industries often need protection to stand a chance of getting off the ground against larger and richer foreign competition. From colonial America to post-war Japan, nurturing of domestic industry has always been practiced.
But what about today? Have we passed the point where national protectionism is not necessary, that it does more harm than good? In fact, it is the opposite. Our economic world today, more than any other time in history, calls for a certain amount of protectionism. I am not making this claim based on nationalism or some theory of social justice, either (although those arguments have their own merits). I am saying protectionism is justified solely on economic grounds.
In free-trade theory, when a domestic job is displaced due to foreign competition, a new job is supposed to open up somewhere in the economy because of the money saved, based on the efficiencies of comparative advantage in production. The idea is that a foreigner can produce something more efficiently, thus lowering overall costs, thereby freeing up more money, which will create a job somewhere else.
Comparative advantage is a powerful economic theory, and it has much truth to it. In order to understand why it doesn't it apply to certain aspects of international trade today, we have to understand why it does apply to some situations. Only by understanding its truth and correct application, can we understand when it is used falsely and incorrectly applied.
Comparative advantage is mainly rooted in geological and environmental factors. For example, people on grassland plains have a comparative advantage raising cattle, people on the coasts have a comparative advantage catching fish, and people in the mountains have a comparative advantage raising timber. In a primitive economy, people have to raise their own meat, catch their own fish, and build their own houses out of local resources. However, trading freely and widely allows them to specialize in what they have an advantage in, thereby benefitting everyone.
Another aspect of comparative advantage comes from relative location. Thus, a factory close to a source of materials has a comparative advantage over a factory far away. An oil field with easily extracted crude has a comparative advantage over a location with deeper, harder to access oil. A power plant close to its fuel source has a comparative advantage over one farther away, and so on.
All comparative advantage is rooted in the efficient use of scare resources. The rule is: less resources in, cheaper products out. We all get richer, meaning more output in less time using less resources, when everyone is operating at maximum efficiency. Healthy systems of domestic and international trade incorporate those efficiencies. For example, oil from the Middle East is more easily accessed than domestic sources, while coffee and bananas cannot be grown in America. These are exactly the kind of comparative advantages that lie at the heart of healthy trade, making us all wealthier by encouraging us to do what we have a natural efficiency doing.
The problem with comparative advantage in global trade today is that it is not based on real comparative advantage, but only on the illusion of advantage created by money. Thus, the dominant source of comparative advantage today is found in taking advantage of low wage labor in countries with cheap currencies and low standards of living. We are so accustomed to operating in the nominal terms of dollars that we are blinded to the real effects of such wage arbitrage.
Real comparative advantage takes advantage of real efficiencies to increase overall wealth. Exporting jobs to low wage countries decreases real wealth by working against natural efficiencies and increasing input and transportation costs. The problem is thinking in dollar terms, not in real terms. In real terms, what happens when an industry is off-shored? That domestic factory grew up at a natural nexus of efficiency related to labor, materials, markets, and transport. Moving that factory disrupts that natural efficiency and introduces massive inefficiencies. In dollar terms, it seems like a good idea, but in resource terms, it is not.
The comparatively cheap labor rate in dollars is papering over big losses of real wealth as resources are squandered to make factories from scratch in far distant locations. The distant location of the new factory also increases the loss of resources that results from transporting raw material and finished goods to a location that is far removed from either primary resources or consumer markets.
In short, from a purely macro-economic perspective, off-shoring decreases overall wealth. After off-shoring, production is transferred to a new location which takes greater time and uses greater resources. This is the opposite of comparative advantage, which is based on less time and less resources. After off-shoring, the real cost of production, measured in time and resources, has risen.
Meanwhile, at home, the factory is shuttered, meaning capital is destroyed, and the labor is idled, meaning skills and training (human capital) are wasted. Theoretically, these workers are going to find something else to do, but by definition, anything else they do will be less economically efficient, since they have already spent years training, mastering their specific economic role. Anything they do after layoffs will be an economic loss overall, unless they are immediately transferred into some high-value added endeavor.
Off-shoring means that local production networks based on real comparative advantages are tossed aside, throwing away those advantages for the sake of illusory dollar profits. Because no real efficiency is gain, we are actually getting poorer, because there is less overall wealth circulating in the economy.
Most people get stuck on this point, so it bears repeating until it is fully understood: When a production job is outsourced, no real wealth is created. Rather, real wealth is lost as comparative advantages, fixed capital, and labor skills are thrown away. We are actually getting poorer as wealth is thrown away and efficiencies lost. Corporations gain an advantage at the expense of domestic workers because of the illusion of dollar savings, but our collective standard of living falls.
The only hope, the leap of faith in trade theory, is that those displaced workers find a more efficient economic activity. From a macro-economic perspective, that new economic activity has to be more efficient and productive than the previous activity, or the economy has suffered a net loss.
But, should we take that leap of free trade faith? Is it possible for that laid-off worker to find a more productive activity? If they can’t find a more productive activity, their layoff is not economically justified.
Notice the macro perspective I am adopting here. From the macro economic perspective, replacing one worker with another only makes sense if it introduces a real efficiency into the process. Remember, giving a production job to a worker in China, who was previously unemployed, is economically neutral if it merely causes a worker in Detroit to be unemployed. That fact that the new Chinese factory is far away from sources, trade networks, and markets, means that the off-shoring starts out as an economically backward idea, since it consumes greater resources. Moving production to some far-away locale costs more, so it must be justified by a greater efficiency introduced elsewhere, or we have just gotten poorer (since we are using more resources to produce the same goods)!
From the individual corporation’s perspective, laying off the worker for a lower-wage worker increases profits. But that is exactly the illusion created by looking at the situation through the nominal dollar lens. The company is saving money, but by doing so, they are introducing inefficiencies into the economic system. The inefficiencies of off-shoring are only worth it if the displaced workers move into a more efficient occupation.
Notice that the off-shoring company does not care about the displaced worker. They company’s only concern is with their own higher corporate profits. This is the paradox of modern industrial economic policy planning. What saves money for individual companies is often bad for the economy as a whole.
Here is the short-form rebuttal: in the 1920's, the US was the world’s number 1 exporter and creditor. Today, the US is the world's number 1 importer and debtor. The case against protectionism, for America, does not apply. Less developed countries have understood for centuries that domestic industries often need protection to stand a chance of getting off the ground against larger and richer foreign competition. From colonial America to post-war Japan, nurturing of domestic industry has always been practiced.
But what about today? Have we passed the point where national protectionism is not necessary, that it does more harm than good? In fact, it is the opposite. Our economic world today, more than any other time in history, calls for a certain amount of protectionism. I am not making this claim based on nationalism or some theory of social justice, either (although those arguments have their own merits). I am saying protectionism is justified solely on economic grounds.
In free-trade theory, when a domestic job is displaced due to foreign competition, a new job is supposed to open up somewhere in the economy because of the money saved, based on the efficiencies of comparative advantage in production. The idea is that a foreigner can produce something more efficiently, thus lowering overall costs, thereby freeing up more money, which will create a job somewhere else.
Comparative advantage is a powerful economic theory, and it has much truth to it. In order to understand why it doesn't it apply to certain aspects of international trade today, we have to understand why it does apply to some situations. Only by understanding its truth and correct application, can we understand when it is used falsely and incorrectly applied.
Comparative advantage is mainly rooted in geological and environmental factors. For example, people on grassland plains have a comparative advantage raising cattle, people on the coasts have a comparative advantage catching fish, and people in the mountains have a comparative advantage raising timber. In a primitive economy, people have to raise their own meat, catch their own fish, and build their own houses out of local resources. However, trading freely and widely allows them to specialize in what they have an advantage in, thereby benefitting everyone.
Another aspect of comparative advantage comes from relative location. Thus, a factory close to a source of materials has a comparative advantage over a factory far away. An oil field with easily extracted crude has a comparative advantage over a location with deeper, harder to access oil. A power plant close to its fuel source has a comparative advantage over one farther away, and so on.
All comparative advantage is rooted in the efficient use of scare resources. The rule is: less resources in, cheaper products out. We all get richer, meaning more output in less time using less resources, when everyone is operating at maximum efficiency. Healthy systems of domestic and international trade incorporate those efficiencies. For example, oil from the Middle East is more easily accessed than domestic sources, while coffee and bananas cannot be grown in America. These are exactly the kind of comparative advantages that lie at the heart of healthy trade, making us all wealthier by encouraging us to do what we have a natural efficiency doing.
The problem with comparative advantage in global trade today is that it is not based on real comparative advantage, but only on the illusion of advantage created by money. Thus, the dominant source of comparative advantage today is found in taking advantage of low wage labor in countries with cheap currencies and low standards of living. We are so accustomed to operating in the nominal terms of dollars that we are blinded to the real effects of such wage arbitrage.
Real comparative advantage takes advantage of real efficiencies to increase overall wealth. Exporting jobs to low wage countries decreases real wealth by working against natural efficiencies and increasing input and transportation costs. The problem is thinking in dollar terms, not in real terms. In real terms, what happens when an industry is off-shored? That domestic factory grew up at a natural nexus of efficiency related to labor, materials, markets, and transport. Moving that factory disrupts that natural efficiency and introduces massive inefficiencies. In dollar terms, it seems like a good idea, but in resource terms, it is not.
The comparatively cheap labor rate in dollars is papering over big losses of real wealth as resources are squandered to make factories from scratch in far distant locations. The distant location of the new factory also increases the loss of resources that results from transporting raw material and finished goods to a location that is far removed from either primary resources or consumer markets.
In short, from a purely macro-economic perspective, off-shoring decreases overall wealth. After off-shoring, production is transferred to a new location which takes greater time and uses greater resources. This is the opposite of comparative advantage, which is based on less time and less resources. After off-shoring, the real cost of production, measured in time and resources, has risen.
Meanwhile, at home, the factory is shuttered, meaning capital is destroyed, and the labor is idled, meaning skills and training (human capital) are wasted. Theoretically, these workers are going to find something else to do, but by definition, anything else they do will be less economically efficient, since they have already spent years training, mastering their specific economic role. Anything they do after layoffs will be an economic loss overall, unless they are immediately transferred into some high-value added endeavor.
Off-shoring means that local production networks based on real comparative advantages are tossed aside, throwing away those advantages for the sake of illusory dollar profits. Because no real efficiency is gain, we are actually getting poorer, because there is less overall wealth circulating in the economy.
Most people get stuck on this point, so it bears repeating until it is fully understood: When a production job is outsourced, no real wealth is created. Rather, real wealth is lost as comparative advantages, fixed capital, and labor skills are thrown away. We are actually getting poorer as wealth is thrown away and efficiencies lost. Corporations gain an advantage at the expense of domestic workers because of the illusion of dollar savings, but our collective standard of living falls.
The only hope, the leap of faith in trade theory, is that those displaced workers find a more efficient economic activity. From a macro-economic perspective, that new economic activity has to be more efficient and productive than the previous activity, or the economy has suffered a net loss.
But, should we take that leap of free trade faith? Is it possible for that laid-off worker to find a more productive activity? If they can’t find a more productive activity, their layoff is not economically justified.
Notice the macro perspective I am adopting here. From the macro economic perspective, replacing one worker with another only makes sense if it introduces a real efficiency into the process. Remember, giving a production job to a worker in China, who was previously unemployed, is economically neutral if it merely causes a worker in Detroit to be unemployed. That fact that the new Chinese factory is far away from sources, trade networks, and markets, means that the off-shoring starts out as an economically backward idea, since it consumes greater resources. Moving production to some far-away locale costs more, so it must be justified by a greater efficiency introduced elsewhere, or we have just gotten poorer (since we are using more resources to produce the same goods)!
From the individual corporation’s perspective, laying off the worker for a lower-wage worker increases profits. But that is exactly the illusion created by looking at the situation through the nominal dollar lens. The company is saving money, but by doing so, they are introducing inefficiencies into the economic system. The inefficiencies of off-shoring are only worth it if the displaced workers move into a more efficient occupation.
Notice that the off-shoring company does not care about the displaced worker. They company’s only concern is with their own higher corporate profits. This is the paradox of modern industrial economic policy planning. What saves money for individual companies is often bad for the economy as a whole.
Minimum Wage Law Has Negative Effects
The following is probably the best essay I have read concerning the pernicious negative effects of the minimum wage law. Printed in full, original article here.
Minimum Wage, Maximum Stupidity
In a free market, demand is always a function of price: the higher the price, the lower the demand. What may surprise most politicians is that these rules apply equally to both prices and wages. When employers evaluate their labor and capital needs, cost is a primary factor. When the cost of hiring low-skilled workers moves higher, jobs are lost. Despite this, minimum wage hikes, like the one set to take effect later this month, are always seen as an act of governmental benevolence. Nothing could be further from the truth.
When confronted with a clogged drain, most of us will call several plumbers and hire the one who quotes us the lowest price. If all the quotes are too high, most of us will grab some Drano and a wrench, and have at it. Labor markets work the same way.
Before bringing on another worker, an employer must be convinced that the added productivity will exceed the added cost (this includes not just wages, but all payroll taxes and other benefits.) So if an unskilled worker is capable of delivering only $6 per hour of increased productivity, such an individual is legally unemployable with a minimum wage of $7.25 per hour.
Low-skilled workers must compete for employers' dollars with both skilled workers and capital. For example, if a skilled worker can do a job for $14 per hour that two unskilled workers can do for $6.50 per hour each, then it makes economic sense for the employer to go with the unskilled labor. Increase the minimum wage to $7.25 per hour and the unskilled workers are priced out of their jobs. This dynamic is precisely why labor unions are such big supporters of minimum wage laws. Even though none of their members earn the minimum wage, the law helps protect their members from having to compete with lower-skilled workers.
Employers also have the choice of whether to employ people or machines. For example, an employer can hire a receptionist or invest in an automated answering system. The next time you are screaming obscenities into the phone as you try to have a conversation with a computer, you know what to blame for your frustration.
There are numerous other examples of employers substituting capital for labor simply because the minimum wage has made low-skilled workers uncompetitive. For example, handcarts have replaced skycaps at airports. The main reason fast-food restaurants use paper plates and plastic utensils is to avoid having to hire dishwashers.
As a result, many low-skilled jobs that used to be the first rung on the employment ladder have been priced out of the market. Can you remember the last time an usher showed you to your seat in a dark movie theater? When was the last time someone other than the cashier not only bagged your groceries, but also loaded them into your car? By the way, it won't be long before the cashiers themselves are priced out of the market, replaced by automated scanners, leaving you to bag your purchases with no help whatsoever.
The disappearance of these jobs has broader economic and societal consequences. First jobs are a means to improve skills so that low skilled workers can offer greater productivity to current or future employers. As their skills grow, so does their ability to earn higher wages. However, remove the bottom rung from the employment ladder and many never have a chance to climb it.
So the next time you are pumping your own gas in the rain, do not just think about the teenager who could have been pumping it for you, think about the auto mechanic he could have become had the minimum wage not denied him a job. Many auto mechanics used to learn their trade while working as pump jockeys. Between fill-ups, checking tire pressure, and washing windows, they would spend a lot of time helping and learning from the mechanics.
Because the minimum wage prevents so many young people (including a disproportionate number of minorities) from getting entry-level jobs, they never develop the skills necessary to command higher paying jobs. As a result, many turn to crime, while others subsist on government aid. Supporters of the minimum wage argue that it is impossible to support a family on the minimum wage. While that is true, it is completely irrelevant, as minimum wage jobs are not designed to support families. In fact, many people earning the minimum wage are themselves supported by their parents.
The way it is supposed to work is that people do not choose to start families until they can earn enough to support them. Lower wage jobs enable workers to eventually acquire the skills necessary to earn wages high enough to support a family. Does anyone really think a kid with a paper route should earn a wage high enough to support a family?
The only way to increase wages is to increase worker productivity. If wages could be raised simply by government mandate, we could set the minimum wage at $100 per hour and solve all problems. It should be clear that, at that level, most of the population would lose their jobs, and the remaining labor would be so expensive that prices for goods and services would skyrocket. That's the exact burden the minimum wage places on our poor and low-skilled workers, and ultimately every American consumer.
Since our leaders cannot even grasp this simple economic concept, how can we expect them to deal with the more complicated problems that currently confront us?
Minimum Wage, Maximum Stupidity
In a free market, demand is always a function of price: the higher the price, the lower the demand. What may surprise most politicians is that these rules apply equally to both prices and wages. When employers evaluate their labor and capital needs, cost is a primary factor. When the cost of hiring low-skilled workers moves higher, jobs are lost. Despite this, minimum wage hikes, like the one set to take effect later this month, are always seen as an act of governmental benevolence. Nothing could be further from the truth.
When confronted with a clogged drain, most of us will call several plumbers and hire the one who quotes us the lowest price. If all the quotes are too high, most of us will grab some Drano and a wrench, and have at it. Labor markets work the same way.
Before bringing on another worker, an employer must be convinced that the added productivity will exceed the added cost (this includes not just wages, but all payroll taxes and other benefits.) So if an unskilled worker is capable of delivering only $6 per hour of increased productivity, such an individual is legally unemployable with a minimum wage of $7.25 per hour.
Low-skilled workers must compete for employers' dollars with both skilled workers and capital. For example, if a skilled worker can do a job for $14 per hour that two unskilled workers can do for $6.50 per hour each, then it makes economic sense for the employer to go with the unskilled labor. Increase the minimum wage to $7.25 per hour and the unskilled workers are priced out of their jobs. This dynamic is precisely why labor unions are such big supporters of minimum wage laws. Even though none of their members earn the minimum wage, the law helps protect their members from having to compete with lower-skilled workers.
Employers also have the choice of whether to employ people or machines. For example, an employer can hire a receptionist or invest in an automated answering system. The next time you are screaming obscenities into the phone as you try to have a conversation with a computer, you know what to blame for your frustration.
There are numerous other examples of employers substituting capital for labor simply because the minimum wage has made low-skilled workers uncompetitive. For example, handcarts have replaced skycaps at airports. The main reason fast-food restaurants use paper plates and plastic utensils is to avoid having to hire dishwashers.
As a result, many low-skilled jobs that used to be the first rung on the employment ladder have been priced out of the market. Can you remember the last time an usher showed you to your seat in a dark movie theater? When was the last time someone other than the cashier not only bagged your groceries, but also loaded them into your car? By the way, it won't be long before the cashiers themselves are priced out of the market, replaced by automated scanners, leaving you to bag your purchases with no help whatsoever.
The disappearance of these jobs has broader economic and societal consequences. First jobs are a means to improve skills so that low skilled workers can offer greater productivity to current or future employers. As their skills grow, so does their ability to earn higher wages. However, remove the bottom rung from the employment ladder and many never have a chance to climb it.
So the next time you are pumping your own gas in the rain, do not just think about the teenager who could have been pumping it for you, think about the auto mechanic he could have become had the minimum wage not denied him a job. Many auto mechanics used to learn their trade while working as pump jockeys. Between fill-ups, checking tire pressure, and washing windows, they would spend a lot of time helping and learning from the mechanics.
Because the minimum wage prevents so many young people (including a disproportionate number of minorities) from getting entry-level jobs, they never develop the skills necessary to command higher paying jobs. As a result, many turn to crime, while others subsist on government aid. Supporters of the minimum wage argue that it is impossible to support a family on the minimum wage. While that is true, it is completely irrelevant, as minimum wage jobs are not designed to support families. In fact, many people earning the minimum wage are themselves supported by their parents.
The way it is supposed to work is that people do not choose to start families until they can earn enough to support them. Lower wage jobs enable workers to eventually acquire the skills necessary to earn wages high enough to support a family. Does anyone really think a kid with a paper route should earn a wage high enough to support a family?
The only way to increase wages is to increase worker productivity. If wages could be raised simply by government mandate, we could set the minimum wage at $100 per hour and solve all problems. It should be clear that, at that level, most of the population would lose their jobs, and the remaining labor would be so expensive that prices for goods and services would skyrocket. That's the exact burden the minimum wage places on our poor and low-skilled workers, and ultimately every American consumer.
Since our leaders cannot even grasp this simple economic concept, how can we expect them to deal with the more complicated problems that currently confront us?
Tuesday, July 7, 2009
It's All About the Productive Jobs
The basis of any and all economic activity is simple: productive jobs. Always keep in mind this basic law of economics: production must always preceed consumption. Part of the propaganda effort against the common citizen is the idea that consumption is all-important. Much propaganda is crafted trying to paint a rosy picture of the economy because of the importance of consumer confidence leading to greater spending. Along with allied stupidities like "we have to get credit flowing again" to "stimulate the economy".
Obviously, consumer confidence and available credit have their place in ramping up economic activity, but their effect is overshadowed by the far more important power of productive employment. Nothing elevates consumer confidence and loan applications like having a high paying and stable job. In fact, without a high paying and stable job, consumer confidence and credit applications are simply impossible, as people without jobs can't buy things or get loans.
These facts are so obviously plain, simple, and true, it is a marvel that anyone could ever support economic policies that aren't based on the fundamental importance of productive jobs. And yet, it seems we have built an entire generations worth of economic policy ignoring that fact. Even more unbelievably, our current economic policy, in the midst of a collapsing economy, is still operating in complete ignorance of the fundamental importance of productive jobs.
The official (and understated) unemployment rate is 9.5% and rising, the highest in 26 years. The United States now has fewer jobs than it did nine years ago, even though the work force has grown by 12.5 million people since then. It's the first time since the Great Depression that a recession has wiped out all the jobs created during the previous business cycle.
So, why was job growth from 2000 to 2007 so ephemaral and easily lost? They were in bubble jobs, unsustainable jobs. Most were parasite jobs (paper pushing finance jobs), and even the productive jobs (like construction) were often malinvested (into overbuilding). The debt-based bubble years of 2000-2007 have left us in worse condition than when we started, as now we are over-built and heavily burdened by debt.
Dr. Housing Bubble puts it eloquently in his recent analysis [here]:
"It is amazing how little focus has been given to job creation. If we spent half the amount of time as we did in bailing out the crony banks on job growth we’d be in much better shape. But as many of you now know the U.S. Treasury and Federal Reserve when push comes to shove, answer to their banking oligarchs first and then to whatever they have time for. That is why the unemployment situation is quickly falling apart. In fact, that is why we have seen no employment plan come out from either the last or current administration. No matter what tax break you give for buying a home, without a job it really doesn’t matter. That is something that really amazes me in this current economic crisis. Where are the jobs going to come from? If anything, I can stand behind a job plan more than I can stand behind a crony banking bailout. Yet all this time is devoted to saving Wall Street and banks. Now you know who the Fed serves and it isn’t the American citizen."
also, "It is amazing that the Federal Reserve, which in its mission talks about maintaining stability, has presided over: the Great Depression, multiple recessions, the 1987 Panic, the technology stock crash, and housing bubble. By this simple definition they have failed miserably. They operate as a cartel and when things are going well, it goes better for those connected here. When things hit the fan, they take care of their banking partners and take the average taxpayer out to dry."
Meanwhile, the productive economy continues to shed jobs because of high debt in a deflationary environment, which leads to both job destruction and constrained consumer spending. The fundamental solution to a debt deflation is cancellation of debt. Why is no one talking about this?
Obviously, consumer confidence and available credit have their place in ramping up economic activity, but their effect is overshadowed by the far more important power of productive employment. Nothing elevates consumer confidence and loan applications like having a high paying and stable job. In fact, without a high paying and stable job, consumer confidence and credit applications are simply impossible, as people without jobs can't buy things or get loans.
These facts are so obviously plain, simple, and true, it is a marvel that anyone could ever support economic policies that aren't based on the fundamental importance of productive jobs. And yet, it seems we have built an entire generations worth of economic policy ignoring that fact. Even more unbelievably, our current economic policy, in the midst of a collapsing economy, is still operating in complete ignorance of the fundamental importance of productive jobs.
The official (and understated) unemployment rate is 9.5% and rising, the highest in 26 years. The United States now has fewer jobs than it did nine years ago, even though the work force has grown by 12.5 million people since then. It's the first time since the Great Depression that a recession has wiped out all the jobs created during the previous business cycle.
So, why was job growth from 2000 to 2007 so ephemaral and easily lost? They were in bubble jobs, unsustainable jobs. Most were parasite jobs (paper pushing finance jobs), and even the productive jobs (like construction) were often malinvested (into overbuilding). The debt-based bubble years of 2000-2007 have left us in worse condition than when we started, as now we are over-built and heavily burdened by debt.
Dr. Housing Bubble puts it eloquently in his recent analysis [here]:
"It is amazing how little focus has been given to job creation. If we spent half the amount of time as we did in bailing out the crony banks on job growth we’d be in much better shape. But as many of you now know the U.S. Treasury and Federal Reserve when push comes to shove, answer to their banking oligarchs first and then to whatever they have time for. That is why the unemployment situation is quickly falling apart. In fact, that is why we have seen no employment plan come out from either the last or current administration. No matter what tax break you give for buying a home, without a job it really doesn’t matter. That is something that really amazes me in this current economic crisis. Where are the jobs going to come from? If anything, I can stand behind a job plan more than I can stand behind a crony banking bailout. Yet all this time is devoted to saving Wall Street and banks. Now you know who the Fed serves and it isn’t the American citizen."
also, "It is amazing that the Federal Reserve, which in its mission talks about maintaining stability, has presided over: the Great Depression, multiple recessions, the 1987 Panic, the technology stock crash, and housing bubble. By this simple definition they have failed miserably. They operate as a cartel and when things are going well, it goes better for those connected here. When things hit the fan, they take care of their banking partners and take the average taxpayer out to dry."
Meanwhile, the productive economy continues to shed jobs because of high debt in a deflationary environment, which leads to both job destruction and constrained consumer spending. The fundamental solution to a debt deflation is cancellation of debt. Why is no one talking about this?
Monday, July 6, 2009
California Issues its Own IOU Money
The official name for this new money issue is registered warrants, popularly called IOUs, but it is a form of money, like a bond or a real bill. Banks are accepting these IOUs (for this week at least), and there is a market already developing for them. I'll call them CaliBonds, since that what they really are.
The CaliBonds are issued for face value, but come with an interest premium (3.75%) payable at a certain future date (starting October 2nd, if the state has cash available). In order to complete the loop and have these function fully as money, the state would just have to make them acceptable for state payments like taxes, fees, and so on.
The first batch of 27,000 Calibonds worth $53 million are being mailed today, mostly to residents owed tax refunds. By the end of July, California will have issued $3.2 billion worth of CaliBonds.
Bids on the CaliBonds are already coming in below face value as investors attempt to take advantage of their uncertainly. In all honesty, their future payment is definitely in question, so below face value is probably an accurate assessment of their value.
Looking at California area Craigslist ads, a number of people are offering to pay cash for these CaliBonds right now. Three ads posted today in Los Angeles mentioned specific amounts: one ad is offering 65%, another 70%, while another is offering 90% of face value. One ad posted yesterday in San Diego offered 85%. Some entrepreneur has also already set up an IOU exchange web site http://ioumarket.com/ (although it has only 3 ads as of Monday afternoon).
This is while banks are honoring them, this week only, maybe. What will happen when banks are no longer accepting them for deposit? Values would likely fall even further.
While they provide tax exempt income, the real difference between these CaliBonds and real bonds is that no one is offering to buy these CaliBonds. They are being forced on people who were expecting cash. The fact they are being bid at a 10-35% discount shows more of their true worth. Regular citizens, who expected a cash refund on their tax overpayments are being given the short end of the stick.
The funny part is, a 3.75% tax free return is not bad in today's environment, and normally, people don't get any interest on their refund checks. The big question, IF, IF, IF the state government makes good on the payments in October.
Payment categories protected by the State Constitution, federal law and court decisions (education, debt service, state payroll, pensions, In-Home Supportive Services, and Medi-Cal providers) will receive regular payments in cash. All other general fund payments will be paid with CaliBonds (including payments to local governments for social services, private contractors, state vendors, income and corporate tax refunds, and payments for State operations including legislative per diem).
UPDATE:
The California registered warrants were available for redemption a month early:
http://www.sco.ca.gov/eo_news_registeredwarrants.html
The CaliBonds are issued for face value, but come with an interest premium (3.75%) payable at a certain future date (starting October 2nd, if the state has cash available). In order to complete the loop and have these function fully as money, the state would just have to make them acceptable for state payments like taxes, fees, and so on.
The first batch of 27,000 Calibonds worth $53 million are being mailed today, mostly to residents owed tax refunds. By the end of July, California will have issued $3.2 billion worth of CaliBonds.
Bids on the CaliBonds are already coming in below face value as investors attempt to take advantage of their uncertainly. In all honesty, their future payment is definitely in question, so below face value is probably an accurate assessment of their value.
Looking at California area Craigslist ads, a number of people are offering to pay cash for these CaliBonds right now. Three ads posted today in Los Angeles mentioned specific amounts: one ad is offering 65%, another 70%, while another is offering 90% of face value. One ad posted yesterday in San Diego offered 85%. Some entrepreneur has also already set up an IOU exchange web site http://ioumarket.com/ (although it has only 3 ads as of Monday afternoon).
This is while banks are honoring them, this week only, maybe. What will happen when banks are no longer accepting them for deposit? Values would likely fall even further.
While they provide tax exempt income, the real difference between these CaliBonds and real bonds is that no one is offering to buy these CaliBonds. They are being forced on people who were expecting cash. The fact they are being bid at a 10-35% discount shows more of their true worth. Regular citizens, who expected a cash refund on their tax overpayments are being given the short end of the stick.
The funny part is, a 3.75% tax free return is not bad in today's environment, and normally, people don't get any interest on their refund checks. The big question, IF, IF, IF the state government makes good on the payments in October.
Payment categories protected by the State Constitution, federal law and court decisions (education, debt service, state payroll, pensions, In-Home Supportive Services, and Medi-Cal providers) will receive regular payments in cash. All other general fund payments will be paid with CaliBonds (including payments to local governments for social services, private contractors, state vendors, income and corporate tax refunds, and payments for State operations including legislative per diem).
UPDATE:
The California registered warrants were available for redemption a month early:
http://www.sco.ca.gov/eo_news_registeredwarrants.html
Decrease Your Tax Withholding Now
It is a popular pasttime in America to get a big refund check in the mail when filing taxes. It's an understandable habit, as getting a big refund is a great feeling, like finding money in your pockets, and people prefer to over-withhold, since finding out you owe thousands is a real bummer. Heck, I've done it that way myself for years.
Now, however, is the time to change that habit. I did it a couple months ago, and if you haven't yet, you need to do it now. Change your withholdings so they take the bare minimum out of your check.
The fact is, it is very unlikely that any refunds will be issued next year. Already this year, a number of states have failed to process refunds properly. I myself don't want to trust government to have the money, or be willing to part with it, when refund time comes.
News articles are already being written about the problems people are facing when trying to secure a refund.
http://www.breitbart.com/article.php?id=D997417O0&show_article=1
You have been warned!
Now, however, is the time to change that habit. I did it a couple months ago, and if you haven't yet, you need to do it now. Change your withholdings so they take the bare minimum out of your check.
The fact is, it is very unlikely that any refunds will be issued next year. Already this year, a number of states have failed to process refunds properly. I myself don't want to trust government to have the money, or be willing to part with it, when refund time comes.
News articles are already being written about the problems people are facing when trying to secure a refund.
http://www.breitbart.com/article.php?id=D997417O0&show_article=1
You have been warned!
Tuesday, June 30, 2009
Student Loan Forgiveness
So, government will forgive your government-sponsored student loans if you work for the government. Classic example of how government power expands, slowly, incrementally, then totally.
http://www.ibrinfo.org/
http://www.ibrinfo.org/
Wednesday, June 17, 2009
Economic Misinformation about Falling Real Estate and Walking Away
Just read this blurb concerning housing: "If tens of thousands of these property owners who are 'underwater' decide to bail, South Florida would be hit with an economic crisis that will accelerate the decline in property values, cost thousands more jobs and could put hundreds of companies in jeopardy, economists, brokers and government officials warn. The scenario could re-accelerate the downward spiral in a real estate market that many hope may finally be reaching bottom and drag the broader economy down further. " [article here]
Balderdash and hogwash, all of it. This is the problem of a media that is controled by certain economic interests (the parasites): the news reflects only their worldview and perspective.
If you happen to be an economic parasite, yes, falling real estate is a big problem. For the vast majority of citizens, and for the economy as a whole, falling real estate prices is the best thing that could possibly happen.
Low house payments means more disposable income, which means more consumer spending. Low commercial rents means more profitable small businesses, and lower start-up barriers. All of which means greater productivity and more jobs.
Overall, the idea that low land prices somehow would hurt the economy is a total and complete lie. The only ones who benefit from high land prices are the parasite classes, and honest articles about real estate should declare this fact.
If we had a "HomeOwners Union", right now would be the perfect time to go on a mass mortgage payment strike, and sweep the feet out from under these economic parasites once and for all.
If you are currently underwater on your mortgage, you should be doing everything in your power to get out from under it, forthwith and posthaste. Unless there are some overriding personal reasons, perpare for evacuation. But not before extracting every last dollar out of your investment. Forget jingle mail: don't leave until the sherrif forcibly evicts you, and fight it every step of the way to maximize your returns. Forget your sunk costs, that is a psychological fallacy: the fact you have lost money in the past does not mean you should continue to throw good money after bad. Analyze your credit score rationally: your credit score is only worth a few thousand dollars, most likely. If you can save $50K by walking away, the hit to your credit will be worth it.
The banks are more than happy to milk you like a cow until you are dry as a bone. Don't fall for their propaganda and misinformation that would keep you in their cattle pen, also known as perpetual debt enslavement.
Balderdash and hogwash, all of it. This is the problem of a media that is controled by certain economic interests (the parasites): the news reflects only their worldview and perspective.
If you happen to be an economic parasite, yes, falling real estate is a big problem. For the vast majority of citizens, and for the economy as a whole, falling real estate prices is the best thing that could possibly happen.
Low house payments means more disposable income, which means more consumer spending. Low commercial rents means more profitable small businesses, and lower start-up barriers. All of which means greater productivity and more jobs.
Overall, the idea that low land prices somehow would hurt the economy is a total and complete lie. The only ones who benefit from high land prices are the parasite classes, and honest articles about real estate should declare this fact.
If we had a "HomeOwners Union", right now would be the perfect time to go on a mass mortgage payment strike, and sweep the feet out from under these economic parasites once and for all.
If you are currently underwater on your mortgage, you should be doing everything in your power to get out from under it, forthwith and posthaste. Unless there are some overriding personal reasons, perpare for evacuation. But not before extracting every last dollar out of your investment. Forget jingle mail: don't leave until the sherrif forcibly evicts you, and fight it every step of the way to maximize your returns. Forget your sunk costs, that is a psychological fallacy: the fact you have lost money in the past does not mean you should continue to throw good money after bad. Analyze your credit score rationally: your credit score is only worth a few thousand dollars, most likely. If you can save $50K by walking away, the hit to your credit will be worth it.
The banks are more than happy to milk you like a cow until you are dry as a bone. Don't fall for their propaganda and misinformation that would keep you in their cattle pen, also known as perpetual debt enslavement.
Thursday, June 11, 2009
Media Spin on Foreclosures: Pick Your Headline
Ok, lets play the media spin game, you get to choose the headline. Which would you choose, and why?
a) "Foreclosure Increase Smallest in Three Years"
b) "Foreclosures Fall 6 Percent"
c) "Foreclosures Rise 18 Percent"
d) "Foreclosure Filings at Third Highest Ever"
Incredibly, they are all true, to wit: a) the year over year percentage increase, from May 2008-2009 is smallest in 3 years, b) they fell 6% from their all-time high of last month, c) they have risen 18% month to month since last year, and d) speaks for itself, and is the most truthful and relevent point of them all: the foreclosure flood is larger than ever in the last three months.
Do you think it is an accident that all the media headlines sound like A or B, chosing to mislead with percentages?
Here's my headline for the day: "Media Reality Distortion Sees Record Increase, More Credibility Lost"
a) "Foreclosure Increase Smallest in Three Years"
b) "Foreclosures Fall 6 Percent"
c) "Foreclosures Rise 18 Percent"
d) "Foreclosure Filings at Third Highest Ever"
Incredibly, they are all true, to wit: a) the year over year percentage increase, from May 2008-2009 is smallest in 3 years, b) they fell 6% from their all-time high of last month, c) they have risen 18% month to month since last year, and d) speaks for itself, and is the most truthful and relevent point of them all: the foreclosure flood is larger than ever in the last three months.
Do you think it is an accident that all the media headlines sound like A or B, chosing to mislead with percentages?
Here's my headline for the day: "Media Reality Distortion Sees Record Increase, More Credibility Lost"
Tuesday, June 9, 2009
Economy Still Grinding Down
The US press continues its black-out on reality. Our media handlers clearly view us as cattle. Hell, hard to blame them. Unfortunately, reality proceeds regardless. The debt deflation continues to wipe out business activity, while, as I noted in the last post, the global stimulus money drives up basic prices.
Thanks to AEP, and the British free press, for some unbiased reporting:
For guidance on where we are in this long-drawn saga, I look to Berkeley's Barry Eichengreen, author of the Great Depression classic Golden Fetters – which avoids the error of viewing the 1930s through a US prism. He has crunched the latest data with Trinity College Dublin's Kevin O'Rourke for VoxEU, concluding that the global rupture over the last nine months has been more violent than in the early slump. This is logical. Global debt leverage is much greater this time.
The fall in industrial output has been roughly equal to the 1929-1930 stage for Germany and the Anglo-Saxons, but worse for Japan, France, Italy, and Eastern Europe. The collapse in world trade has been swifter: the global equity crash has been twice as bad. "It's a depression alright. The good news is that the policy response is very different. The question now is whether that response will work," they said.
The elastic was bound to snap back, just as it did in the bear rally of early 1931. Whether the underlying economy has begun to heal is another matter. World Bank chief economist Justin Yifu Lin said capacity utilization is running at an historic low of 50pc-60pc. Companies will have to fire a lot of workers. This is where the danger lies, and why he fears that deflation is creeping up on us.
Trade data from Asia are flashing warning signals again. Korea's exports were down 28.3pc in May, reversing the April rebound. Malaysia has slipped to -26pc, and India has touched a new low of -33pc.
US freight data is getting worse, not better. The Association of American Railroads said traffic was down 22pc in the third week of May from a year earlier. Canadian freight was down 34pc. The American Trucking Association (ATA) said it saw fresh drops of 4.5pc in March and a further 2.2pc in April. Tonnage is down 13pc over 12 months. Bob Costello, the ATA's chief economist, said companies have not cut inventories fast enough to keep pace with declining sales. The contraction in truck volume has "accelerated".
Yes, the Baltic Dry Index for bulk shipping of resources has quadrupled since January, but this reflects China's bid to stockpile metals while prices are low.
Stephen Roach, Morgan Stanley's Far East chief, fears an "Asian Relapse", saying the region is prisoner to its fatal dependency on exports to the West. The export share of GDP has risen from 36pc to 47pc across developing Asia over the last decade.
"China's incipient rebound relies on a time-worn stimulus formula: upping the ante on infrastructure spending in anticipation of an eventual rebound of global demand," he said. The strategy cannot work this time because Americans have exhausted their credit, and their desire to borrow. Consumption will fall from its peak of 72pc of GDP to the "pre-bubble norm" of 67pc, if not more.
David Rosenberg from Gluskins Sheff expects Americans to retrench ferociously as 78m baby boomers face the looming threat of penury in old age. "The big story is that the personal savings rate hit a 15-year high of 5.7pc in April. I believe it could test the post-War peak of 15pc. Too many pundits are still living in the old paradigm of Americans shopping till they drop," he said.
The list of countries in deflation is growing every month: Ireland (-3.5), Thailand (-3.3), China (-1.5), Switzerland (-1), Spain (-0.8), the US (-0.7), Singapore (-0.7), Taiwan (-0.5), Belgium (-0.4), Japan (-0.1), Sweden (-0.1), Germany (0).
Yet markets seem to think otherwise, and this has its own awful consequences. Inflation fears have driven 10-year US Treasury yields to 3.86pc, a full point above levels in March when the Fed intervened to force rates down. US mortgage rates have jumped to 5.29pc. Gilts have reached 3.92pc, and French 10-year bonds are at 4.05pc.
This bond revolt is enough to bring any global recovery to a shuddering halt. The irony is that those fretting loudest about inflation may themselves tip us into outright deflation, with all the perils of a debt compound trap.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5461562/Merkels-inflationary-fretting-may-wake-the-bears-from-hibernation.html
Thanks to AEP, and the British free press, for some unbiased reporting:
For guidance on where we are in this long-drawn saga, I look to Berkeley's Barry Eichengreen, author of the Great Depression classic Golden Fetters – which avoids the error of viewing the 1930s through a US prism. He has crunched the latest data with Trinity College Dublin's Kevin O'Rourke for VoxEU, concluding that the global rupture over the last nine months has been more violent than in the early slump. This is logical. Global debt leverage is much greater this time.
The fall in industrial output has been roughly equal to the 1929-1930 stage for Germany and the Anglo-Saxons, but worse for Japan, France, Italy, and Eastern Europe. The collapse in world trade has been swifter: the global equity crash has been twice as bad. "It's a depression alright. The good news is that the policy response is very different. The question now is whether that response will work," they said.
The elastic was bound to snap back, just as it did in the bear rally of early 1931. Whether the underlying economy has begun to heal is another matter. World Bank chief economist Justin Yifu Lin said capacity utilization is running at an historic low of 50pc-60pc. Companies will have to fire a lot of workers. This is where the danger lies, and why he fears that deflation is creeping up on us.
Trade data from Asia are flashing warning signals again. Korea's exports were down 28.3pc in May, reversing the April rebound. Malaysia has slipped to -26pc, and India has touched a new low of -33pc.
US freight data is getting worse, not better. The Association of American Railroads said traffic was down 22pc in the third week of May from a year earlier. Canadian freight was down 34pc. The American Trucking Association (ATA) said it saw fresh drops of 4.5pc in March and a further 2.2pc in April. Tonnage is down 13pc over 12 months. Bob Costello, the ATA's chief economist, said companies have not cut inventories fast enough to keep pace with declining sales. The contraction in truck volume has "accelerated".
Yes, the Baltic Dry Index for bulk shipping of resources has quadrupled since January, but this reflects China's bid to stockpile metals while prices are low.
Stephen Roach, Morgan Stanley's Far East chief, fears an "Asian Relapse", saying the region is prisoner to its fatal dependency on exports to the West. The export share of GDP has risen from 36pc to 47pc across developing Asia over the last decade.
"China's incipient rebound relies on a time-worn stimulus formula: upping the ante on infrastructure spending in anticipation of an eventual rebound of global demand," he said. The strategy cannot work this time because Americans have exhausted their credit, and their desire to borrow. Consumption will fall from its peak of 72pc of GDP to the "pre-bubble norm" of 67pc, if not more.
David Rosenberg from Gluskins Sheff expects Americans to retrench ferociously as 78m baby boomers face the looming threat of penury in old age. "The big story is that the personal savings rate hit a 15-year high of 5.7pc in April. I believe it could test the post-War peak of 15pc. Too many pundits are still living in the old paradigm of Americans shopping till they drop," he said.
The list of countries in deflation is growing every month: Ireland (-3.5), Thailand (-3.3), China (-1.5), Switzerland (-1), Spain (-0.8), the US (-0.7), Singapore (-0.7), Taiwan (-0.5), Belgium (-0.4), Japan (-0.1), Sweden (-0.1), Germany (0).
Yet markets seem to think otherwise, and this has its own awful consequences. Inflation fears have driven 10-year US Treasury yields to 3.86pc, a full point above levels in March when the Fed intervened to force rates down. US mortgage rates have jumped to 5.29pc. Gilts have reached 3.92pc, and French 10-year bonds are at 4.05pc.
This bond revolt is enough to bring any global recovery to a shuddering halt. The irony is that those fretting loudest about inflation may themselves tip us into outright deflation, with all the perils of a debt compound trap.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5461562/Merkels-inflationary-fretting-may-wake-the-bears-from-hibernation.html
Friday, May 29, 2009
Commodities Spike Up: Here Comes Inflation
Well, the eye of the storm appears to be passing, and the winds of inflation are picking back up. Take advantage of the low prices now to stock up, before the inflation hits the consumer level.
The interest on the long bond is continuing to rise, which will quickly wipe out the idea of housing recovery. Don't buy into this false real estate bottom. As mortgage rates rise up, the price of housing will fall.
Layoffs are going to be a huge problem going forward as well, as we have just begun to see the government cutting bloodbath, not to mention the collapse of the American car industry.
With joblessness, cost of living, and interest rates rising, combined with the negative supply trends of reverse migration and an aging population, the housing market is in for a long long fall. No need to rush there.
Commodities headed for the biggest monthly rally in 34 years, led by energy, as the slumping dollar boosted demand for raw materials as a hedge against inflation.
In May, the Reuters/Jefferies CRB Index of 19 energy, metal and agricultural prices has gained 14 percent, the most since July 1974. The dollar was poised for the biggest monthly drop since August against a basket of six major currencies.
Crude oil was set for the biggest monthly gain in a decade. Gasoline has soared more than 30 percent in May. Gold copper surged, while corn and soybeans reached the highest since September.
Crude-oil futures for July delivery rose $1.10, or 1.7 percent, to $66.18 a barrel on the New York Mercantile Exchange. This month, the price has jumped 29 percent, the most since March 1999.
Gasoline futures for June delivery rose 1.64 cents, or 0.9 percent, to $1.9269 a gallon. In May, the price has surged 31 percent, the most since March 2006.
Today, cotton jumped the most allowed by ICE Futures U.S. in New York. Gold futures topped $980 an ounce, and silver was poised for the biggest monthly gain in 22 years.
The interest on the long bond is continuing to rise, which will quickly wipe out the idea of housing recovery. Don't buy into this false real estate bottom. As mortgage rates rise up, the price of housing will fall.
Layoffs are going to be a huge problem going forward as well, as we have just begun to see the government cutting bloodbath, not to mention the collapse of the American car industry.
With joblessness, cost of living, and interest rates rising, combined with the negative supply trends of reverse migration and an aging population, the housing market is in for a long long fall. No need to rush there.
Commodities headed for the biggest monthly rally in 34 years, led by energy, as the slumping dollar boosted demand for raw materials as a hedge against inflation.
In May, the Reuters/Jefferies CRB Index of 19 energy, metal and agricultural prices has gained 14 percent, the most since July 1974. The dollar was poised for the biggest monthly drop since August against a basket of six major currencies.
Crude oil was set for the biggest monthly gain in a decade. Gasoline has soared more than 30 percent in May. Gold copper surged, while corn and soybeans reached the highest since September.
Crude-oil futures for July delivery rose $1.10, or 1.7 percent, to $66.18 a barrel on the New York Mercantile Exchange. This month, the price has jumped 29 percent, the most since March 1999.
Gasoline futures for June delivery rose 1.64 cents, or 0.9 percent, to $1.9269 a gallon. In May, the price has surged 31 percent, the most since March 2006.
Today, cotton jumped the most allowed by ICE Futures U.S. in New York. Gold futures topped $980 an ounce, and silver was poised for the biggest monthly gain in 22 years.
Monday, April 27, 2009
The Jubilee Solution to the Economic Crisis: the People’s Bailout
The worldwide economy is unraveling because of high debt. High debt is destroying the economy not only because businesses are forced to liquidate in the face of unpayable debt, but also because consumers won’t spend when their debt load gets too high. The high debt load is made worse by deflation, which makes older debt harder to pay off.
Jubilee means the forgiveness of debt, but can the principle of Jubilee debt forgiveness be applied to our current economic situation? Yes, it can. In fact, debt cancellation is the only solution to the problem, other than letting the problem run its course through a long period of economic depression, which cancels debt the slow and painful way.
The central governments of the world are currently attempting to inflate the money supply, through quantitative easing, to counter the deflation and stimulate growth. However, this approach is failing for a number of reasons. The basic disconnect is in giving the stimulus to banks, rather than directly to citizens.
Stimulation only works if the cash is spent. If the government prints a billion dollars only to bury it under the ground, obviously, no stimulus and no inflation will take place. Giving the cash to the banks is roughly equivalent to burying the new money under the ground. For one, the banks are using it to shore up their balance sheets, for two, consumers are already buried in debt and facing mass layoffs, so taking on more debt is not an option, so the money just sits in the banks.
The Jubilee economic solution would combine cash stimulus with debt cancellation. However, rather than bailing out the banks, and encouraging the people to go into greater debt, the government will give cash stimulus directly to the people. People will be targeted according to their debt, receiving cash payment equal to their debt level, payment going directly to the debt holder. In effect, everyone’s debt will be cancelled.
In order to prevent runaway inflation, the government will at the same time raise the banks’ cash reserve requirement in equal proportion to the cash stimulus. Thus, the cash will pass through the citizens, paying off their debt, and get soaked up back into the vaults of the banks.
The net effect will be a reset of the financial system, as all debts get fully paid off. Without the crushing weight of credit cards, mortgages, car payments, and student loans, people will be free to spend and invest again. The debt deflation will be totally defeated, and unemployment will quickly shrink as the business liquidation cycle ends and the economy takes off, with the desired upward effect on wages. The stage would be set for a new economic expansion as investments, inventions, and innovations are freed up to work their wealth-creating magic.
This is the Jubilee solution to our economic crisis. The beauty of the plan is that it would not require any new laws nor a Constitutional Amendment, and would not require the abrogation or violation of any contracts. Essentially, it could be done by executive action, but obviously, widespread Congressional support would be ideal as well.
What can you do to help make it happen? Spread the word however you can: tell your friends and family, blog it, forward it, provide the plan to your political representatives, run for office yourself, the possibilities are endless.
This is the Jubilee solution to our economic crisis, the people’s bailout. God bless us all.
note: by cash, I do not imply actual paper script to be printed and distributed; electronic credit money would actually work much better.
Jubilee means the forgiveness of debt, but can the principle of Jubilee debt forgiveness be applied to our current economic situation? Yes, it can. In fact, debt cancellation is the only solution to the problem, other than letting the problem run its course through a long period of economic depression, which cancels debt the slow and painful way.
The central governments of the world are currently attempting to inflate the money supply, through quantitative easing, to counter the deflation and stimulate growth. However, this approach is failing for a number of reasons. The basic disconnect is in giving the stimulus to banks, rather than directly to citizens.
Stimulation only works if the cash is spent. If the government prints a billion dollars only to bury it under the ground, obviously, no stimulus and no inflation will take place. Giving the cash to the banks is roughly equivalent to burying the new money under the ground. For one, the banks are using it to shore up their balance sheets, for two, consumers are already buried in debt and facing mass layoffs, so taking on more debt is not an option, so the money just sits in the banks.
The Jubilee economic solution would combine cash stimulus with debt cancellation. However, rather than bailing out the banks, and encouraging the people to go into greater debt, the government will give cash stimulus directly to the people. People will be targeted according to their debt, receiving cash payment equal to their debt level, payment going directly to the debt holder. In effect, everyone’s debt will be cancelled.
In order to prevent runaway inflation, the government will at the same time raise the banks’ cash reserve requirement in equal proportion to the cash stimulus. Thus, the cash will pass through the citizens, paying off their debt, and get soaked up back into the vaults of the banks.
The net effect will be a reset of the financial system, as all debts get fully paid off. Without the crushing weight of credit cards, mortgages, car payments, and student loans, people will be free to spend and invest again. The debt deflation will be totally defeated, and unemployment will quickly shrink as the business liquidation cycle ends and the economy takes off, with the desired upward effect on wages. The stage would be set for a new economic expansion as investments, inventions, and innovations are freed up to work their wealth-creating magic.
This is the Jubilee solution to our economic crisis. The beauty of the plan is that it would not require any new laws nor a Constitutional Amendment, and would not require the abrogation or violation of any contracts. Essentially, it could be done by executive action, but obviously, widespread Congressional support would be ideal as well.
What can you do to help make it happen? Spread the word however you can: tell your friends and family, blog it, forward it, provide the plan to your political representatives, run for office yourself, the possibilities are endless.
This is the Jubilee solution to our economic crisis, the people’s bailout. God bless us all.
note: by cash, I do not imply actual paper script to be printed and distributed; electronic credit money would actually work much better.
Thursday, April 16, 2009
Jubilee without Theft or Inflation
I believe that Jubilee could be accomplished without the complaints of theft or inflation that typically arise. Here is how it would work:
The government would issue checks to everyone to pay off their debts.
While doing so, the government would raise bank reserve requirements by the corresponding amount.
Thus, a huge new pool of money would come into existence to pay off people's debts, but then it would get sunk in the banks, never to recirculate to cause inflation.
No contracts would be violated, no cases could be dragged to court, no extra laws would have to be passed.
Viola! Rejoice in the Jubilee Year!
The government would issue checks to everyone to pay off their debts.
While doing so, the government would raise bank reserve requirements by the corresponding amount.
Thus, a huge new pool of money would come into existence to pay off people's debts, but then it would get sunk in the banks, never to recirculate to cause inflation.
No contracts would be violated, no cases could be dragged to court, no extra laws would have to be passed.
Viola! Rejoice in the Jubilee Year!
Tuesday, April 14, 2009
The Economic War against the Common Man
What really happened
Exerpts of a brilliant economic analysis follows, read the full essay here: http://www.marketoracle.co.uk/Article9986.html
Iceland’s financial crisis today is less an issue of international law as of outright lawlessness perpetrated by the purveyors of so-called free market democracy. Nations pressing Iceland for payment impose one set of laws for others while following quite a different set for themselves. Preaching to Iceland about international law, the United States and Great Britain themselves have broken the clearest of international laws – those against waging aggressive war. Their propagandists are skillful at using the language of capitalism and morality, yet they are neither capitalist nor moral. Their financial strategy is to play an ages-old psychological game. Make countries like Iceland feel guilty about being debtors rather than recognizing they have been victims of an international Ponzi scheme. In a nutshell, the game is to lay down “laws” for debtors in the form of destructive austerity programs fashioned by irresponsible and indeed, parasitic creditors. This “aid advice” ends in outright asset stripping, both public and private.
Asset stripping to pay debts has caused collapse time and again in history, but is strangely downplayed in today’s academic curriculum as an “inconvenient truth” as far as vested financial interests are concerned. Income is siphoned off by a scheme that is elegant and simple. Hapless victims – and now entire economies, not just individuals – are maneuvered onto a debt treadmill from which there is no escape. Creditors pile on credit and let the debts grow at the “magic of compound interest,” knowing that their loans cannot be repaid – except by asset sell-offs. No economy’s productivity can keep pace with exponentially compounding debt. Whatever was owned (and indeed, financed originally by public debt but now paid off) is stripped away for interest payments that never end. The aim is for these payments to absorb as much of the surplus as possible, so that the national economy in effect works to pay tribute to the new global financial class – bankers and money managers of mutual funds, pension funds and hedge funds.
The product they are selling is debt. They build up their own wealth by indebting others, and then forcing sell-offs to buyers who take on their own debt in the hope of making asset-price gains as property prices are impossibly inflated relative to the wages of living labor. This has become the new, euphemistically dubbed post-industrial form of wealth creation – a strategy that is now collapsing economies throughout the world.
The second important principle is how radically today’s post-capitalist order has inverted traditional ways of making money. Instead of making profits on new capital investment, the easiest path to quick riches in today’s global financial system is to foreclose at pennies on the dollar, and make a “capital gain” by flipping property onto world financial markets that are being inflated by central banks. While financial spokespersons promise that “there is no such thing as a free lunch,” today’s hit-and-run financial bubble, fraud and insider privatizations culminating in public-sector bailouts (“socializing the risk” while privatizing the profits and capital gains) – has become all about obtaining a free lunch.
But it is a zero-sum gambling game, with losers on the other side of the table from the winners. One party’s gain is another’s loss – and indeed, this kind of game ends up shrinking the economy by diverting resources away from real investment in tangible capital formation. Unlike industrial capitalism, which employs labor and invests in capital equipment to turn raw materials into salable commodities, today’s post-industrial financialized system only offers the virtual (and temporary) wealth of asset bubbles. Its financial managers claim to be acting in the tradition of classical economists and share their concept of free markets, but in actuality they have been part of an intellectual fraud that depicts their system as something other than the financialized wealth extraction on the real economy of production and consumption that it is. Financialized wealth is extractive, not productive. That is because loans, stocks and bond securities are claims on wealth, not real wealth itself.
Fortunately, this need not happen in countries that do not impose debt leveraging on themselves, but only in countries that let the public utility of money and credit creation be privatized in the hands of a cosmopolitan financial class.
Consider the role of banking in this neo-feudal order. Banks do not create credit to finance manufacturing – that is done mainly out of retained earnings and equity. Banks create credit primarily to lend against collateral already in place – loans that simply extract money from the economy. This is an inherently destructive act, one that is anti-capitalist in the sense that it undercuts industrial growth in favor of interest extraction and short-term speculative gains.
The trick is to get this policy welcomed as if it were progress, as “post-industrial” rather than a lapse backward. Only today is it becoming apparent that the collateral-based lending of banks “creates wealth” mainly by inflating asset-price bubbles, especially in real estate. Bankers calculate how much debt a given flow of residential or commercial real estate income can support, and create enough credit to make a loan large enough to absorb this surplus revenue. Bankers do the same with industry by lending corporate raiders enough money in take-over “junk” bonds to turn profits into a flow of interest payments for themselves, and with capital gains for the raiders. Central banks fuel this process by swamping economies with easy credit (that is, debt) that keeps the financial sector fat while impoverishing the increasingly indebted nation.
Finance thus is the historical antithesis of property, sanctifying its own right to expropriate indebted property owners. Originally denounced by Christianity, Judaism and Islam, interest-bearing debt has sanctified itself as the predominant form of wealth. This is not what the classical economists and democratic political reformers expected to see. They explained how to avoid this economic dystopia by appropriate government tax policy and regulation to minimize the economic role and political power of post-feudal bankers and rentiers. (Rentiers are people who live off interest and rents, that is, off absentee incomes paid on a regular basis.)
Bankers managed to convince ambitious fortune-seekers that the way to wealth and economic growth lay in debt leveraging, not in staying free of debt. Selling debt as their product, banks and speculators at the world’s financial core needed to prepare for what they must have known would lead to economic collapse and destroyed economies throughout history. They prepared the path to ruin by ideological engineering aimed at shaping how populations think about history, so as to accept debt pyramiding as a good economic strategy.
Turning economic power into political power - Creditors in most countries have been able to turn their economic power into political power with the aim of shifting the tax burden off themselves and onto labor and industry. The final coup de grace occurs when they get the government to bail them out from their losses on bad loans. In the United States, Congress has tripled the national debt in less than a year to bail out creditors with little thought of helping debtors, or even of prosecuting the massive financial fraud involved in its subprime real estate bubble and the sale of junk mortgages to gullible foreign buyers.
Allowing economies to be crippled with interest payments was unthinkable until recently. To achieve so radical a break in the public’s idea of prosperity and self-reliance, it has been necessary for creditors to wipe out knowledge of how legal systems have been amended to put creditor interests above those of debtors over the past eight centuries – and how the leading classical economists and Enlightenment cultural and religious leaders sought to subordinate creditor interests to those of growth and prosperity for the economy at large. But the new banking class has been clever enough to hire the best propagandists money can buy while remaining blind to the havoc they are wreaking with people’s lives.
The trick is to fool debtors into thinking that “free markets” means paying one’s debts. Creditors can succeed in letting debt leveraging and “the magic of compound interest” empty out economies only by diverting attention from what Adam Smith and other classical economists warned against. For them, a free market was one free of debt – especially foreign debt. In The Wealth of Nations (especially Book V, chapter 3), Smith warned against creditors becoming “free” enough to disable the ability of governments to protect citizens from creditors – especially the Dutch, who were the major investors in British monopolies created to be sold to pay for that nation’s seemingly eternal wars with France. The problem was that creditors sought to extract the wealth of nations for themselves, not to create wealth. Their greed was destructive to society as a whole, because it was easier to simply strip assets than to create real capital.
The tacit assumption is not that bankers’ exorbitant greed is achieved at the expense of the economy at large, but that the financial sector’s prosperity is a precondition for the economy to grow. The bankers try to cap matters by trotting out poor retirees (like the widows and orphans of old – presumably those living on “fixed incomes” in the form of trust funds) whose meager savings should be supported. Doing so just happens to save the financial oligarchy of billionaires at the top of the economic pyramid, but not the proverbial victims.
The use of human shields such as union members concerned about the investments of their pension funds to protect the wealth of the kleptocrats is likewise shameless. Wall Street sages in the United States, for example, shed crocodile tears over the fate of the working people suffering from the stock market collapse, knowing full well that financial assets are heavily concentrated at the top of the economic pyramid, with workers having, only a meager share of those stocks and bonds. Ignored is the fact that the government could bail out failing pension funds (like Social Security) directly at just a small fraction of the cost of propping up the assets of the affluent.
The best path for nations is to put their own economic growth before the interests of creditors. For many generations this ethic supported a set of political checks and balances that kept the growth of international debt in terms considered to be tolerable – much too heavy by the free-market standards of Smith and John Stuart Mill, but not so high as to prompt widespread defaults and debt repudiation.
This ethic has changed in recent years. Countries have accepted creditor propaganda that debts are a “point of honor,” much as the poor believe that paying their debts – even when they are in negative equity – is the “honest thing to do.” Obviously this ethic is not self-applied to the world’s largest financial institutions or real estate speculators. But Iceland accepted it in what is a characteristic of small, closely-knit communities where the word of neighbors is their bond. The root of Iceland’s ethic is mutual aid and prosperity for all. It is a fine, highly socialized attitude, and therefore tragic that it has helped lead the nation to fall prone to the snake oil of debt peonage.
Having stuck Third World countries with debts beyond their ability to pay, the IMF and World Bank used their creditor leverage to force governments to impose draconian austerity plans that had the effect of preventing growth toward industrial and agricultural self-sufficiency, thereby also crushing prospects for competitiveness. The IMF and World Bank then demanded that debtor countries sell off their public infrastructure, land, subsoil rights and other assets to pay the debts that these institutions sponsored so irresponsibly. (If IMF loans were not simply irresponsible, then they knowingly crippled debtor-country economies.) It is an age-old story of conquest, now accomplished without conventional warfare.
Psychologists have explained the creditor proclivity for violence by the tendency for rentiers to fight for unearned income – inheritance, or other “free wealth” that they have obtained without effort of their own. People who work for a living and are able to support themselves believe that they can survive, and so there is less of the kind of panic that creditors and other free lunchers feel at the thought that their extractive revenue may end. They fight passionately against the prospect of having to live on what they produce or earn by their own merits. So the last thing that rentiers really want is a free market. In a shameless irony, they tend to accuse populations of being terrorists if they seek to defend themselves against predatory creditors and land-grabbers!
This is just the opposite of the free markets that were promised them back in 1990-91. Instead of economic growth, the “real” economy of production and consumption shrunk, even as foreign financial inflows inflated property prices for housing and office space, fuel and public utilities. Real estate and utility services hitherto provided freely or at subsidy to the economy at large were turned into a predatory vehicle for foreigners to extract income, putting the domestic population on rations, much as what occurs under military occupation. Yet the public media, academic centers and parliaments have persuaded populations that this is part of a natural order, even the product of how a free-market is supposed to operate, rather than a retrogression back to quasi-feudal institutions. The simplistic idea is that making money is itself “capitalist” ipso facto, regardless of whether industrial capital is being created or dismantled and stripped.
Most societies throughout history have sought to provide credit legally in ways that do not permit creditor oligarchies to emerge. Today’s creditor advocates are at war with the spirit of this idea. And in taking this position, they reject the thrust of the Enlightenment’s anti-usury laws, classical political economy’s distinction between productive and sterile investment, the St. Simonian attempt at financial reform, and the Progressive Era’s attempt to mobilize national credit to fund productive industrial investment rather than being extractive, benefiting only the few. The classical idea of economic freedom itself was formulated as the antithesis to feudal-epoch finance. And the ideal of freedom from predatory finance is what is being threatened today, as if society has forgotten how long and hard the reform struggle has been.
The common thread in these ideas is that people deserve to receive the fruits of their labor. This means bringing prices in line with actual labor-costs of production. It also means that one’s wealth should be limited to only what one creates – not land and natural resources, or monopoly privileges to extract income via control of roads, the right to create money and other natural monopolies. The aim of social reform for many centuries has been to purge capitalism of its legacy of absentee rentier property ownership patterns and creditor-oriented laws inherited from medieval times. The way to do this is to treat banking like transportation and the broadcasting spectrum, as a public utility to form a just fiscal base, not something to be privatized so that individual rentiers can tax society at large for what rightly is a public utility.
The problem goes to the very foundation of economic theory. Any set of statistics reflects categories in economic theory, and in recent years the Chicago School has taken the lead in what is now a nationwide trend to exclude the history of economic thought from the academic curriculum. One can get all the way through a Ph.D. without having surveyed the evolution of classical economics from the Physiocrats through Adam Smith, John Stuart Mill and the Progressive Era reformers. The essence of social reform throughout the Enlightenment, and indeed extending all the way back to the Church Schoolmen is no longer taught – the distinctions between earned and unearned income and wealth, and productive and unproductive (or “sterile”) employment and investment. Post-classical thought insists that all income is productive in proportion to whatever it earns – including the collection of economic rent or extortion of monopoly super-profit, or financial charges for interest and credit card fees, and the exorbitant salaries and bonuses that financial managers pay themselves. All revenue – and therefore, all wealth – appears to be “earned.” By their definition. This denies the concept of “investment in zero-sum activities that merely transfer income into the unproductive sector’s pockets, in contrast to creating income.
As a guide to policy reform, classical economics aimed at creating an economic and fiscal system that would bring market prices in line with technologically necessary costs of production. All such costs ultimately are reducible to labor. The necessary complement to the labor theory of value (adjusted for different grades of labor, the cost of their education and the linkage between wage levels and productivity) was the analysis of economic rent – an institutional add-on reflecting property ownership patterns, financial charges and taxes, not inherent costs of production. The classical reform program was to minimize the cost of production and of living, making economies more competitive by purifying industrial capitalism and removing its remaining feudal legacies, above all the right of hereditary absentee owners (landlords) to siphon off a rental charge for access to land for sites supplied by nature and given value by local public spending (e.g., “location, location, and location,” as real estate agents explain matters to prospective buyers) – and the right of bankers to charge for creating credit that governments could freely create themselves.Fighting against progressive reforms, banks and other financial institutions have sought to preserve their special privileges by law, minimizing taxes on themselves by shifting the burden onto labor and industry. What they have achieved by financializing economies is (1) to raise the cost of living and the cost of doing business; (2) to free their major customers – mortgage borrowers – from taxation so as to leave as much surplus as possible available to be paid as interest; (3) to collect revenue hitherto used to finance the public sector by capitalizing it into interest charges and to inflate the price of housing and other real estate and privatized monopolies; (4) to effectively shift taxes onto labor and industry, thereby raising prices and undermining the competitive power of financialized economies. This is a travesty of classical “free market” policy. It is a policy for predators that mainly burdens economies with high interest and fees while also making the tax burden more oppressive while they reap the benefits.
John Maynard Keynes believed that the proper task of governments was to prevent over-indebtedness from leading to economic depression. He concluded his General Theory (1936) with a call for “euthanasia of the rentier.” Hoping to make credit productive, not extractive, his followers have advocated making banking a public utility so as to steer debt creation to fund growth in the means of production, not economic overhead by inflating property bubbles. Radical as this may appear today, this was the aim of the 19th century classical economists, and underlay the financial reforms that shaped the 20th-century economic takeoff. Only quite recently has the global financial press rediscovered this logic in the wake of today’s bubble meltdown.
Exerpts of a brilliant economic analysis follows, read the full essay here: http://www.marketoracle.co.uk/Article9986.html
Iceland’s financial crisis today is less an issue of international law as of outright lawlessness perpetrated by the purveyors of so-called free market democracy. Nations pressing Iceland for payment impose one set of laws for others while following quite a different set for themselves. Preaching to Iceland about international law, the United States and Great Britain themselves have broken the clearest of international laws – those against waging aggressive war. Their propagandists are skillful at using the language of capitalism and morality, yet they are neither capitalist nor moral. Their financial strategy is to play an ages-old psychological game. Make countries like Iceland feel guilty about being debtors rather than recognizing they have been victims of an international Ponzi scheme. In a nutshell, the game is to lay down “laws” for debtors in the form of destructive austerity programs fashioned by irresponsible and indeed, parasitic creditors. This “aid advice” ends in outright asset stripping, both public and private.
Asset stripping to pay debts has caused collapse time and again in history, but is strangely downplayed in today’s academic curriculum as an “inconvenient truth” as far as vested financial interests are concerned. Income is siphoned off by a scheme that is elegant and simple. Hapless victims – and now entire economies, not just individuals – are maneuvered onto a debt treadmill from which there is no escape. Creditors pile on credit and let the debts grow at the “magic of compound interest,” knowing that their loans cannot be repaid – except by asset sell-offs. No economy’s productivity can keep pace with exponentially compounding debt. Whatever was owned (and indeed, financed originally by public debt but now paid off) is stripped away for interest payments that never end. The aim is for these payments to absorb as much of the surplus as possible, so that the national economy in effect works to pay tribute to the new global financial class – bankers and money managers of mutual funds, pension funds and hedge funds.
The product they are selling is debt. They build up their own wealth by indebting others, and then forcing sell-offs to buyers who take on their own debt in the hope of making asset-price gains as property prices are impossibly inflated relative to the wages of living labor. This has become the new, euphemistically dubbed post-industrial form of wealth creation – a strategy that is now collapsing economies throughout the world.
The second important principle is how radically today’s post-capitalist order has inverted traditional ways of making money. Instead of making profits on new capital investment, the easiest path to quick riches in today’s global financial system is to foreclose at pennies on the dollar, and make a “capital gain” by flipping property onto world financial markets that are being inflated by central banks. While financial spokespersons promise that “there is no such thing as a free lunch,” today’s hit-and-run financial bubble, fraud and insider privatizations culminating in public-sector bailouts (“socializing the risk” while privatizing the profits and capital gains) – has become all about obtaining a free lunch.
But it is a zero-sum gambling game, with losers on the other side of the table from the winners. One party’s gain is another’s loss – and indeed, this kind of game ends up shrinking the economy by diverting resources away from real investment in tangible capital formation. Unlike industrial capitalism, which employs labor and invests in capital equipment to turn raw materials into salable commodities, today’s post-industrial financialized system only offers the virtual (and temporary) wealth of asset bubbles. Its financial managers claim to be acting in the tradition of classical economists and share their concept of free markets, but in actuality they have been part of an intellectual fraud that depicts their system as something other than the financialized wealth extraction on the real economy of production and consumption that it is. Financialized wealth is extractive, not productive. That is because loans, stocks and bond securities are claims on wealth, not real wealth itself.
Fortunately, this need not happen in countries that do not impose debt leveraging on themselves, but only in countries that let the public utility of money and credit creation be privatized in the hands of a cosmopolitan financial class.
Consider the role of banking in this neo-feudal order. Banks do not create credit to finance manufacturing – that is done mainly out of retained earnings and equity. Banks create credit primarily to lend against collateral already in place – loans that simply extract money from the economy. This is an inherently destructive act, one that is anti-capitalist in the sense that it undercuts industrial growth in favor of interest extraction and short-term speculative gains.
The trick is to get this policy welcomed as if it were progress, as “post-industrial” rather than a lapse backward. Only today is it becoming apparent that the collateral-based lending of banks “creates wealth” mainly by inflating asset-price bubbles, especially in real estate. Bankers calculate how much debt a given flow of residential or commercial real estate income can support, and create enough credit to make a loan large enough to absorb this surplus revenue. Bankers do the same with industry by lending corporate raiders enough money in take-over “junk” bonds to turn profits into a flow of interest payments for themselves, and with capital gains for the raiders. Central banks fuel this process by swamping economies with easy credit (that is, debt) that keeps the financial sector fat while impoverishing the increasingly indebted nation.
Finance thus is the historical antithesis of property, sanctifying its own right to expropriate indebted property owners. Originally denounced by Christianity, Judaism and Islam, interest-bearing debt has sanctified itself as the predominant form of wealth. This is not what the classical economists and democratic political reformers expected to see. They explained how to avoid this economic dystopia by appropriate government tax policy and regulation to minimize the economic role and political power of post-feudal bankers and rentiers. (Rentiers are people who live off interest and rents, that is, off absentee incomes paid on a regular basis.)
Bankers managed to convince ambitious fortune-seekers that the way to wealth and economic growth lay in debt leveraging, not in staying free of debt. Selling debt as their product, banks and speculators at the world’s financial core needed to prepare for what they must have known would lead to economic collapse and destroyed economies throughout history. They prepared the path to ruin by ideological engineering aimed at shaping how populations think about history, so as to accept debt pyramiding as a good economic strategy.
Turning economic power into political power - Creditors in most countries have been able to turn their economic power into political power with the aim of shifting the tax burden off themselves and onto labor and industry. The final coup de grace occurs when they get the government to bail them out from their losses on bad loans. In the United States, Congress has tripled the national debt in less than a year to bail out creditors with little thought of helping debtors, or even of prosecuting the massive financial fraud involved in its subprime real estate bubble and the sale of junk mortgages to gullible foreign buyers.
Allowing economies to be crippled with interest payments was unthinkable until recently. To achieve so radical a break in the public’s idea of prosperity and self-reliance, it has been necessary for creditors to wipe out knowledge of how legal systems have been amended to put creditor interests above those of debtors over the past eight centuries – and how the leading classical economists and Enlightenment cultural and religious leaders sought to subordinate creditor interests to those of growth and prosperity for the economy at large. But the new banking class has been clever enough to hire the best propagandists money can buy while remaining blind to the havoc they are wreaking with people’s lives.
The trick is to fool debtors into thinking that “free markets” means paying one’s debts. Creditors can succeed in letting debt leveraging and “the magic of compound interest” empty out economies only by diverting attention from what Adam Smith and other classical economists warned against. For them, a free market was one free of debt – especially foreign debt. In The Wealth of Nations (especially Book V, chapter 3), Smith warned against creditors becoming “free” enough to disable the ability of governments to protect citizens from creditors – especially the Dutch, who were the major investors in British monopolies created to be sold to pay for that nation’s seemingly eternal wars with France. The problem was that creditors sought to extract the wealth of nations for themselves, not to create wealth. Their greed was destructive to society as a whole, because it was easier to simply strip assets than to create real capital.
The tacit assumption is not that bankers’ exorbitant greed is achieved at the expense of the economy at large, but that the financial sector’s prosperity is a precondition for the economy to grow. The bankers try to cap matters by trotting out poor retirees (like the widows and orphans of old – presumably those living on “fixed incomes” in the form of trust funds) whose meager savings should be supported. Doing so just happens to save the financial oligarchy of billionaires at the top of the economic pyramid, but not the proverbial victims.
The use of human shields such as union members concerned about the investments of their pension funds to protect the wealth of the kleptocrats is likewise shameless. Wall Street sages in the United States, for example, shed crocodile tears over the fate of the working people suffering from the stock market collapse, knowing full well that financial assets are heavily concentrated at the top of the economic pyramid, with workers having, only a meager share of those stocks and bonds. Ignored is the fact that the government could bail out failing pension funds (like Social Security) directly at just a small fraction of the cost of propping up the assets of the affluent.
The best path for nations is to put their own economic growth before the interests of creditors. For many generations this ethic supported a set of political checks and balances that kept the growth of international debt in terms considered to be tolerable – much too heavy by the free-market standards of Smith and John Stuart Mill, but not so high as to prompt widespread defaults and debt repudiation.
This ethic has changed in recent years. Countries have accepted creditor propaganda that debts are a “point of honor,” much as the poor believe that paying their debts – even when they are in negative equity – is the “honest thing to do.” Obviously this ethic is not self-applied to the world’s largest financial institutions or real estate speculators. But Iceland accepted it in what is a characteristic of small, closely-knit communities where the word of neighbors is their bond. The root of Iceland’s ethic is mutual aid and prosperity for all. It is a fine, highly socialized attitude, and therefore tragic that it has helped lead the nation to fall prone to the snake oil of debt peonage.
Having stuck Third World countries with debts beyond their ability to pay, the IMF and World Bank used their creditor leverage to force governments to impose draconian austerity plans that had the effect of preventing growth toward industrial and agricultural self-sufficiency, thereby also crushing prospects for competitiveness. The IMF and World Bank then demanded that debtor countries sell off their public infrastructure, land, subsoil rights and other assets to pay the debts that these institutions sponsored so irresponsibly. (If IMF loans were not simply irresponsible, then they knowingly crippled debtor-country economies.) It is an age-old story of conquest, now accomplished without conventional warfare.
Psychologists have explained the creditor proclivity for violence by the tendency for rentiers to fight for unearned income – inheritance, or other “free wealth” that they have obtained without effort of their own. People who work for a living and are able to support themselves believe that they can survive, and so there is less of the kind of panic that creditors and other free lunchers feel at the thought that their extractive revenue may end. They fight passionately against the prospect of having to live on what they produce or earn by their own merits. So the last thing that rentiers really want is a free market. In a shameless irony, they tend to accuse populations of being terrorists if they seek to defend themselves against predatory creditors and land-grabbers!
This is just the opposite of the free markets that were promised them back in 1990-91. Instead of economic growth, the “real” economy of production and consumption shrunk, even as foreign financial inflows inflated property prices for housing and office space, fuel and public utilities. Real estate and utility services hitherto provided freely or at subsidy to the economy at large were turned into a predatory vehicle for foreigners to extract income, putting the domestic population on rations, much as what occurs under military occupation. Yet the public media, academic centers and parliaments have persuaded populations that this is part of a natural order, even the product of how a free-market is supposed to operate, rather than a retrogression back to quasi-feudal institutions. The simplistic idea is that making money is itself “capitalist” ipso facto, regardless of whether industrial capital is being created or dismantled and stripped.
Most societies throughout history have sought to provide credit legally in ways that do not permit creditor oligarchies to emerge. Today’s creditor advocates are at war with the spirit of this idea. And in taking this position, they reject the thrust of the Enlightenment’s anti-usury laws, classical political economy’s distinction between productive and sterile investment, the St. Simonian attempt at financial reform, and the Progressive Era’s attempt to mobilize national credit to fund productive industrial investment rather than being extractive, benefiting only the few. The classical idea of economic freedom itself was formulated as the antithesis to feudal-epoch finance. And the ideal of freedom from predatory finance is what is being threatened today, as if society has forgotten how long and hard the reform struggle has been.
The common thread in these ideas is that people deserve to receive the fruits of their labor. This means bringing prices in line with actual labor-costs of production. It also means that one’s wealth should be limited to only what one creates – not land and natural resources, or monopoly privileges to extract income via control of roads, the right to create money and other natural monopolies. The aim of social reform for many centuries has been to purge capitalism of its legacy of absentee rentier property ownership patterns and creditor-oriented laws inherited from medieval times. The way to do this is to treat banking like transportation and the broadcasting spectrum, as a public utility to form a just fiscal base, not something to be privatized so that individual rentiers can tax society at large for what rightly is a public utility.
The problem goes to the very foundation of economic theory. Any set of statistics reflects categories in economic theory, and in recent years the Chicago School has taken the lead in what is now a nationwide trend to exclude the history of economic thought from the academic curriculum. One can get all the way through a Ph.D. without having surveyed the evolution of classical economics from the Physiocrats through Adam Smith, John Stuart Mill and the Progressive Era reformers. The essence of social reform throughout the Enlightenment, and indeed extending all the way back to the Church Schoolmen is no longer taught – the distinctions between earned and unearned income and wealth, and productive and unproductive (or “sterile”) employment and investment. Post-classical thought insists that all income is productive in proportion to whatever it earns – including the collection of economic rent or extortion of monopoly super-profit, or financial charges for interest and credit card fees, and the exorbitant salaries and bonuses that financial managers pay themselves. All revenue – and therefore, all wealth – appears to be “earned.” By their definition. This denies the concept of “investment in zero-sum activities that merely transfer income into the unproductive sector’s pockets, in contrast to creating income.
As a guide to policy reform, classical economics aimed at creating an economic and fiscal system that would bring market prices in line with technologically necessary costs of production. All such costs ultimately are reducible to labor. The necessary complement to the labor theory of value (adjusted for different grades of labor, the cost of their education and the linkage between wage levels and productivity) was the analysis of economic rent – an institutional add-on reflecting property ownership patterns, financial charges and taxes, not inherent costs of production. The classical reform program was to minimize the cost of production and of living, making economies more competitive by purifying industrial capitalism and removing its remaining feudal legacies, above all the right of hereditary absentee owners (landlords) to siphon off a rental charge for access to land for sites supplied by nature and given value by local public spending (e.g., “location, location, and location,” as real estate agents explain matters to prospective buyers) – and the right of bankers to charge for creating credit that governments could freely create themselves.Fighting against progressive reforms, banks and other financial institutions have sought to preserve their special privileges by law, minimizing taxes on themselves by shifting the burden onto labor and industry. What they have achieved by financializing economies is (1) to raise the cost of living and the cost of doing business; (2) to free their major customers – mortgage borrowers – from taxation so as to leave as much surplus as possible available to be paid as interest; (3) to collect revenue hitherto used to finance the public sector by capitalizing it into interest charges and to inflate the price of housing and other real estate and privatized monopolies; (4) to effectively shift taxes onto labor and industry, thereby raising prices and undermining the competitive power of financialized economies. This is a travesty of classical “free market” policy. It is a policy for predators that mainly burdens economies with high interest and fees while also making the tax burden more oppressive while they reap the benefits.
John Maynard Keynes believed that the proper task of governments was to prevent over-indebtedness from leading to economic depression. He concluded his General Theory (1936) with a call for “euthanasia of the rentier.” Hoping to make credit productive, not extractive, his followers have advocated making banking a public utility so as to steer debt creation to fund growth in the means of production, not economic overhead by inflating property bubbles. Radical as this may appear today, this was the aim of the 19th century classical economists, and underlay the financial reforms that shaped the 20th-century economic takeoff. Only quite recently has the global financial press rediscovered this logic in the wake of today’s bubble meltdown.
Thursday, April 9, 2009
The Pyramid Scheme of Money Creation and Destruction
Money is created and destroyed in one giant chain of credit clearing, both by the government and banks.
It officially starts in the creation of the monetary base by the Federal Reserve when it buys US Treasury securities. The Fed acquires Treasury securities, meaning it finances a loan to the US government. The Treasury then pays interest to the Fed for holding its bonds. The Fed pays for the Treasury bonds in cash, but it does not really pay the Treasury, it pays the people, by disbursing the cash to banks and citizens.
Say you get a loan from the bank. The bank gives you the money, but creates a loan you have to pay back. The loan is a negative balance for you, but a positive balance for the bank.
But where did the bank get the money? From the Fed! The Fed did the same thing for the bank that the bank did for you. The bank takes a loan from the Fed, getting cash to spend, but having a negative balance with the Fed, owing the Fed that money.
Ok, good so far, but where does the Fed get the money? The Fed gets the money from the Treasury. The Fed balances its cash distributions with assets of US bonds. Technically, the Fed gave a loan to the Treasury, and receives interest payments from Treasury just like anyone else when they buy a Treasury bond.
When the Fed buys bonds from the public, they are paying out money to the public, thereby expanding the money supply. When the Fed sells bonds to the public, they are taking money in from the public, thereby shrinking the money supply. When the Fed buys bonds directly from the Treasury, they are going through the motions of giving a cash loan to the Treasury, which really means distributing cash to the public, thereby expanding the money supply.
Why does the Treasury take loans from the Fed, and pay the Fed interest on those loans, rather than just distributing the money directly to the people? Good question. There are many people calling for the Treasury to do just that, taking direct control of the money supply and eliminating the role of the Fed.
However, it is a mistake to assume that this process starts at and is controlled by the Fed. In actually, most money is actually created by banks. When a bank gives you a loan, they give you the cash, an asset for you, and they get the loan note, an asset for them.
They are required to have a certain reserve cash amount, to be equal to about 10% of outstanding loans. But they don't check their reserves before they give you the loan. They give you the loan, then later, check to see if they have enough reserves to cover their outstanding loans. If they are short on reserves, they borrow the money from other banks, or directly from the Fed.
This is the Fed's role as lender of last resort. As the public demands more and more loans, the Fed is in the back of the whole system, creating more and more cash for the banks to loan out.
This is why Obama and his banking handlers are always talking about "getting credit going again" and other vacuous phrases. To them, the whole thing is a top down process, but one based on people's appetite for loans. So, to them, encouraging the people to spend more and go into greater debt makes perfect sense.
The whole system is leveraged to the hilt, due to the effects of fractional reserve banking. Because a loan at one bank deposited elsewhere becomes the basis for a new loan, which is then deposited elsewhere to become the basis of a new loan, the whole money system becomes a huge pyramid scheme built up on the much smaller value of original loans.
Thus, one bad loan destroys at least 10X its own value of money in the rest of the system. This inevitably happens in a debt deflation, as loans go bad on a large scale, the monetary system collapses, feeding further loan failure, and further monetary destruction. The so-called "credit crunch", which is a monetary black hole created by bad debt sucking in all the money around it and gaining strength as it goes.
This deflationary black hole wipes out the value of capital which had been bid upwards with debt leverage. The falling value of capital then wipes out the loans built upon that inflated capital base, dragging down the value of the remaining capital in a vicious cycle. Productive enterprises are wiped out and labor laid off as loans fail and debts become unpayable.
It's all quite inevitable given our system of credit money and fractional reserve banks. It happened even when our currency was on the gold standard, so that is no panacea. In fact, many blame the gold standard for prolonging the crisis, since it prevented the government from inflating the money supply to counteract the deflation.
The current government effort to reinflate the system with cash reserve injections and happy-face propaganda cannot work because it is targetted precisely backwards. The effort should not be to pump the banks full of capital, because the whole system is based on the demand of the people for more loans and their ability to pay them back. The government should let each and every bad bank fail, but provide massive stimulus checks directly to the people. That would do more than anything else to keep consumer confidence high and stimulate spending, far more than the vague terror caused by seeing our banking system on life support. Or, more simply, as I have been advocating from the start, cancel massive amounts of debt, which would stimulate optimism and spending without the pernicious effects of currency inflation.
It officially starts in the creation of the monetary base by the Federal Reserve when it buys US Treasury securities. The Fed acquires Treasury securities, meaning it finances a loan to the US government. The Treasury then pays interest to the Fed for holding its bonds. The Fed pays for the Treasury bonds in cash, but it does not really pay the Treasury, it pays the people, by disbursing the cash to banks and citizens.
Say you get a loan from the bank. The bank gives you the money, but creates a loan you have to pay back. The loan is a negative balance for you, but a positive balance for the bank.
But where did the bank get the money? From the Fed! The Fed did the same thing for the bank that the bank did for you. The bank takes a loan from the Fed, getting cash to spend, but having a negative balance with the Fed, owing the Fed that money.
Ok, good so far, but where does the Fed get the money? The Fed gets the money from the Treasury. The Fed balances its cash distributions with assets of US bonds. Technically, the Fed gave a loan to the Treasury, and receives interest payments from Treasury just like anyone else when they buy a Treasury bond.
When the Fed buys bonds from the public, they are paying out money to the public, thereby expanding the money supply. When the Fed sells bonds to the public, they are taking money in from the public, thereby shrinking the money supply. When the Fed buys bonds directly from the Treasury, they are going through the motions of giving a cash loan to the Treasury, which really means distributing cash to the public, thereby expanding the money supply.
Why does the Treasury take loans from the Fed, and pay the Fed interest on those loans, rather than just distributing the money directly to the people? Good question. There are many people calling for the Treasury to do just that, taking direct control of the money supply and eliminating the role of the Fed.
However, it is a mistake to assume that this process starts at and is controlled by the Fed. In actually, most money is actually created by banks. When a bank gives you a loan, they give you the cash, an asset for you, and they get the loan note, an asset for them.
They are required to have a certain reserve cash amount, to be equal to about 10% of outstanding loans. But they don't check their reserves before they give you the loan. They give you the loan, then later, check to see if they have enough reserves to cover their outstanding loans. If they are short on reserves, they borrow the money from other banks, or directly from the Fed.
This is the Fed's role as lender of last resort. As the public demands more and more loans, the Fed is in the back of the whole system, creating more and more cash for the banks to loan out.
This is why Obama and his banking handlers are always talking about "getting credit going again" and other vacuous phrases. To them, the whole thing is a top down process, but one based on people's appetite for loans. So, to them, encouraging the people to spend more and go into greater debt makes perfect sense.
The whole system is leveraged to the hilt, due to the effects of fractional reserve banking. Because a loan at one bank deposited elsewhere becomes the basis for a new loan, which is then deposited elsewhere to become the basis of a new loan, the whole money system becomes a huge pyramid scheme built up on the much smaller value of original loans.
Thus, one bad loan destroys at least 10X its own value of money in the rest of the system. This inevitably happens in a debt deflation, as loans go bad on a large scale, the monetary system collapses, feeding further loan failure, and further monetary destruction. The so-called "credit crunch", which is a monetary black hole created by bad debt sucking in all the money around it and gaining strength as it goes.
This deflationary black hole wipes out the value of capital which had been bid upwards with debt leverage. The falling value of capital then wipes out the loans built upon that inflated capital base, dragging down the value of the remaining capital in a vicious cycle. Productive enterprises are wiped out and labor laid off as loans fail and debts become unpayable.
It's all quite inevitable given our system of credit money and fractional reserve banks. It happened even when our currency was on the gold standard, so that is no panacea. In fact, many blame the gold standard for prolonging the crisis, since it prevented the government from inflating the money supply to counteract the deflation.
The current government effort to reinflate the system with cash reserve injections and happy-face propaganda cannot work because it is targetted precisely backwards. The effort should not be to pump the banks full of capital, because the whole system is based on the demand of the people for more loans and their ability to pay them back. The government should let each and every bad bank fail, but provide massive stimulus checks directly to the people. That would do more than anything else to keep consumer confidence high and stimulate spending, far more than the vague terror caused by seeing our banking system on life support. Or, more simply, as I have been advocating from the start, cancel massive amounts of debt, which would stimulate optimism and spending without the pernicious effects of currency inflation.
Wednesday, April 1, 2009
Note to Government: Balance Your Budget
It is starting to hit people at every level of government with full force. After the "end of the world" budget cuts of last year, even more will need to be cut this year. California, for example, has to cut godawful amounts from their budget, and they are being cut off from any more credit.
The only solution left is budget cuts. Here is a simple idea: slash the budget across the board, starting with salaries, which make up the supermajority of all government budget items. For example, in education, salaries make up over 90% of the budget. Keep that in mind the next time you see some pathetic teacher protest over school budget cuts. It's never about saving the children, it's always about saving their salaries. What a joke. If government workers were willing to take a pay cut, there would be no need to cancel any programs.
Individual responsibility is going to return in a storm, as all the slackers, losers, welfare dregs and their social engineering leftist government-employed handlers are suddenly cut off from the public feedbag. Watching this unfold is a libertarian's wet dream.
Unfortunately for all of you reading this blog, our federal government is going to do its best to borrow and print money to pay the gap in all these deficits (not even to mention to yawning fiscal chasm known as the federal deficit).
What that means is, the savings and purchasing power of the working middle and upper classes are going to be siphoned away through inflation, to bail out those government programs.
Gear up for the fight now.
The only solution left is budget cuts. Here is a simple idea: slash the budget across the board, starting with salaries, which make up the supermajority of all government budget items. For example, in education, salaries make up over 90% of the budget. Keep that in mind the next time you see some pathetic teacher protest over school budget cuts. It's never about saving the children, it's always about saving their salaries. What a joke. If government workers were willing to take a pay cut, there would be no need to cancel any programs.
Individual responsibility is going to return in a storm, as all the slackers, losers, welfare dregs and their social engineering leftist government-employed handlers are suddenly cut off from the public feedbag. Watching this unfold is a libertarian's wet dream.
Unfortunately for all of you reading this blog, our federal government is going to do its best to borrow and print money to pay the gap in all these deficits (not even to mention to yawning fiscal chasm known as the federal deficit).
What that means is, the savings and purchasing power of the working middle and upper classes are going to be siphoned away through inflation, to bail out those government programs.
Gear up for the fight now.
Who Defends the Common Man?
The more things change the more they stay the same, eh? In 1896, William Jennings Bryant defended the economic well being of the common man against the finanacial interests of the east coast financial oligarchs. The country was on the gold standard, and the common man was pressed down with a heavy debt burden. Jennings stood for bimetalism, which meant inflating the money supply with silver to ease the debt burden under the deflationary gold standard. I have provided some exerpts from his speech. Notice how he denounces trickle-down economics, 90 years before Reagan introduced it to our modern ears. Amazing, truly amazing.
WJB's biography follows, he is my new hero:
William Jennings Bryan (March 19, 1860 – July 26, 1925) was the Democratic Party nominee for President of the United States in 1896, 1900 and 1908, a lawyer, and the Secretary of State under President Woodrow Wilson. One of the most popular speakers in American history, he was noted for a deep, commanding voice. Bryan was a devout Presbyterian, a supporter of popular democracy, a critic of banks and railroads, a leader of the silverite movement in the 1890s, a leading figure in the Democratic Party, a peace advocate, a prohibitionist, an opponent of Darwinism, and one of the most prominent leaders of Populism in the late 19th - and early 20th century. Because of his faith in the goodness and rightness of the common people, he was called "The Great Commoner."
The question remains more pressing than ever: who stands up for the common man? In Bryant's day, the Democratic Party proudly stood up for the average worker. Today, the same party actively engineers massive transfers of wealth to the investment classes. It is unreal. The common man has no one, absolutely no one.
Exerpts from his 1896 speech:
But we stand here representing people who are the equals before the law of the largest cities in the state of Massachusetts. When you come before us and tell us that we shall disturb your business interests, we reply that you have disturbed our business interests by your action. We say to you that you have made too limited in its application the definition of a businessman. The man who is employed for wages is as much a businessman as his employer. The attorney in a country town is as much a businessman as the corporation counsel in a great metropolis. The merchant at the crossroads store is as much a businessman as the merchant of New York. The farmer who goes forth in the morning and toils all day, begins in the spring and toils all summer, and by the application of brain and muscle to the natural resources of this country creates wealth, is as much a businessman as the man who goes upon the Board of Trade and bets upon the price of grain. The miners who go 1,000 feet into the earth or climb 2,000 feet upon the cliffs and bring forth from their hiding places the precious metals to be poured in the channels of trade are as much businessmen as the few financial magnates who in a backroom corner the money of the world.
We come to speak for this broader class of businessmen. My friends, we say not one word against those who live upon the Atlantic Coast; but those hardy pioneers who braved all the dangers of the wilderness, who have made the desert to blossom as the rose—those pioneers away out there, rearing their children near to nature’s heart, where they can mingle their voices with the voices of the birds—out there where they have erected schoolhouses for the education of their children and churches where they praise their Creator, and the cemeteries where sleep the ashes of their dead—are as deserving of the consideration of this party as any people in this country.
It is for these that we speak. We do not come as aggressors. Our war is not a war of conquest. We are fighting in the defense of our homes, our families, and posterity. We have petitioned, and our petitions have been scorned. We have entreated, and our entreaties have been disregarded. We have begged, and they have mocked when our calamity came.
We beg no longer; we entreat no more; we petition no more. We defy them!
The gentleman from Wisconsin has said he fears a Robespierre. My friend, in this land of the free you need fear no tyrant who will spring up from among the people. What we need is an Andrew Jackson to stand as Jackson stood, against the encroachments of aggregated wealth.
He says that we are opposing the national bank currency. It is true. If you will read what Thomas Benton said, you will find that he said that in searching history he could find but one parallel to Andrew Jackson. That was Cicero, who destroyed the conspiracies of Cataline and saved Rome. He did for Rome what Jackson did when he destroyed the bank conspiracy and saved America.
We say in our platform that we believe that the right to coin money and issue money is a function of government. We believe it. We believe it is a part of sovereignty and can no more with safety be delegated to private individuals than can the power to make penal statutes or levy laws for taxation.
Mr. Carlisle said in 1878 that this was a struggle between the idle holders of idle capital and the struggling masses who produce the wealth and pay the taxes of the country; and my friends, it is simply a question that we shall decide upon which side shall the Democratic Party fight. Upon the side of the idle holders of idle capital, or upon the side of the struggling masses? That is the question that the party must answer first; and then it must be answered by each individual hereafter. The sympathies of the Democratic Party, as described by the platform, are on the side of the struggling masses, who have ever been the foundation of the Democratic Party.
There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.
You come to us and tell us that the great cities are in favor of the gold standard. I tell you that the great cities rest upon these broad and fertile prairies. Burn down your cities and leave our farms, and your cities will spring up again as if by magic. But destroy our farms and the grass will grow in the streets of every city in the country.
If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.
WJB's biography follows, he is my new hero:
William Jennings Bryan (March 19, 1860 – July 26, 1925) was the Democratic Party nominee for President of the United States in 1896, 1900 and 1908, a lawyer, and the Secretary of State under President Woodrow Wilson. One of the most popular speakers in American history, he was noted for a deep, commanding voice. Bryan was a devout Presbyterian, a supporter of popular democracy, a critic of banks and railroads, a leader of the silverite movement in the 1890s, a leading figure in the Democratic Party, a peace advocate, a prohibitionist, an opponent of Darwinism, and one of the most prominent leaders of Populism in the late 19th - and early 20th century. Because of his faith in the goodness and rightness of the common people, he was called "The Great Commoner."
The question remains more pressing than ever: who stands up for the common man? In Bryant's day, the Democratic Party proudly stood up for the average worker. Today, the same party actively engineers massive transfers of wealth to the investment classes. It is unreal. The common man has no one, absolutely no one.
Exerpts from his 1896 speech:
But we stand here representing people who are the equals before the law of the largest cities in the state of Massachusetts. When you come before us and tell us that we shall disturb your business interests, we reply that you have disturbed our business interests by your action. We say to you that you have made too limited in its application the definition of a businessman. The man who is employed for wages is as much a businessman as his employer. The attorney in a country town is as much a businessman as the corporation counsel in a great metropolis. The merchant at the crossroads store is as much a businessman as the merchant of New York. The farmer who goes forth in the morning and toils all day, begins in the spring and toils all summer, and by the application of brain and muscle to the natural resources of this country creates wealth, is as much a businessman as the man who goes upon the Board of Trade and bets upon the price of grain. The miners who go 1,000 feet into the earth or climb 2,000 feet upon the cliffs and bring forth from their hiding places the precious metals to be poured in the channels of trade are as much businessmen as the few financial magnates who in a backroom corner the money of the world.
We come to speak for this broader class of businessmen. My friends, we say not one word against those who live upon the Atlantic Coast; but those hardy pioneers who braved all the dangers of the wilderness, who have made the desert to blossom as the rose—those pioneers away out there, rearing their children near to nature’s heart, where they can mingle their voices with the voices of the birds—out there where they have erected schoolhouses for the education of their children and churches where they praise their Creator, and the cemeteries where sleep the ashes of their dead—are as deserving of the consideration of this party as any people in this country.
It is for these that we speak. We do not come as aggressors. Our war is not a war of conquest. We are fighting in the defense of our homes, our families, and posterity. We have petitioned, and our petitions have been scorned. We have entreated, and our entreaties have been disregarded. We have begged, and they have mocked when our calamity came.
We beg no longer; we entreat no more; we petition no more. We defy them!
The gentleman from Wisconsin has said he fears a Robespierre. My friend, in this land of the free you need fear no tyrant who will spring up from among the people. What we need is an Andrew Jackson to stand as Jackson stood, against the encroachments of aggregated wealth.
He says that we are opposing the national bank currency. It is true. If you will read what Thomas Benton said, you will find that he said that in searching history he could find but one parallel to Andrew Jackson. That was Cicero, who destroyed the conspiracies of Cataline and saved Rome. He did for Rome what Jackson did when he destroyed the bank conspiracy and saved America.
We say in our platform that we believe that the right to coin money and issue money is a function of government. We believe it. We believe it is a part of sovereignty and can no more with safety be delegated to private individuals than can the power to make penal statutes or levy laws for taxation.
Mr. Carlisle said in 1878 that this was a struggle between the idle holders of idle capital and the struggling masses who produce the wealth and pay the taxes of the country; and my friends, it is simply a question that we shall decide upon which side shall the Democratic Party fight. Upon the side of the idle holders of idle capital, or upon the side of the struggling masses? That is the question that the party must answer first; and then it must be answered by each individual hereafter. The sympathies of the Democratic Party, as described by the platform, are on the side of the struggling masses, who have ever been the foundation of the Democratic Party.
There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.
You come to us and tell us that the great cities are in favor of the gold standard. I tell you that the great cities rest upon these broad and fertile prairies. Burn down your cities and leave our farms, and your cities will spring up again as if by magic. But destroy our farms and the grass will grow in the streets of every city in the country.
If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.
South Park calls for Jubilee
Everyone had a chance to see the new South Park episode about the economic crisis (go here if you haven't http://dailybail.com/home/financial-comedy-genius-south-park-is-in-recession-and-needs.html)?
In the end, guess what solves the economic crisis? One kid pays everyone's debt off. Makes sense, doesn't it? If no one is in debt anymore, the economy can recover.
Still have yet to hear anything about debt cancelation by anyone in government. Just more bailouts of the finance industry.
So, given the choice between helping the common man and helping the mega-rich, our government chooses the rich. Hmmm, weird how that works.
In the end, guess what solves the economic crisis? One kid pays everyone's debt off. Makes sense, doesn't it? If no one is in debt anymore, the economy can recover.
Still have yet to hear anything about debt cancelation by anyone in government. Just more bailouts of the finance industry.
So, given the choice between helping the common man and helping the mega-rich, our government chooses the rich. Hmmm, weird how that works.
The 4th Branch of Government: the Banking System
Lawmakers have often believed they could ignore the big questions on how our money system is structured. Right from the Constitutional Convention delegates ignored society’s monetary power and the excellent record of government issued money in building colonial infrastructure and giving us a nation. They left the money power up for grabs instead of properly placing it in a fourth, monetary branch of government.
History shows that the money power will be a fourth branch whether we recognize it as such or not. It’s not safe to leave so much power and privilege in private hands! It’s counter to our system of checks and balances. The developing financial crisis requires us to re-evaluate and focus on it now. Lets fulfill our responsibility to get a real understanding of this problem and the solution.
As the late Congressman Wright Patman, Chairman of the House Committee on Banking and Currency for over 16 years, said,
"I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money....I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with the Congress for sitting idly by and permitting such an idiotic system to continue."
http://www.monetary.org/amacolorpamphlet.pdf (page 3)
History shows that the money power will be a fourth branch whether we recognize it as such or not. It’s not safe to leave so much power and privilege in private hands! It’s counter to our system of checks and balances. The developing financial crisis requires us to re-evaluate and focus on it now. Lets fulfill our responsibility to get a real understanding of this problem and the solution.
As the late Congressman Wright Patman, Chairman of the House Committee on Banking and Currency for over 16 years, said,
"I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money....I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with the Congress for sitting idly by and permitting such an idiotic system to continue."
http://www.monetary.org/amacolorpamphlet.pdf (page 3)
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