Liz Alderman's article in the New York Times today, "Euro or No, Economics of Everyday Greek Life is Eroding" provides a glimpse into the future of the western economies. Economic and civil order has broken down in Greece. The rising popularity of the neo-nazi party (now at 18 percent of the electorate) is gathering in the fruits of the collapse of the Greek welfare state. In time, democratic government will collapse in Greece to be replaced by one of the extremes. The so-called centrist governments cannot deliver and will not survive.
Greeks expect the promises of past governments to be honored. That is an expectation that has no hope of reality. Their frustrations are spilling over into everyday economic and political life. The beginnings of a similar breakdown are evident in Spain, Portugal and Italy. No government can survive by imposing a program of austerity. Their citizenry still believes the lies that they have been told for generations. It is too late to convince them that all of these benefits they have come to expect cannot be afforded.
Gradually, this collapse will extend across the plains of Europe and eventually engulf even France and Germany. The UK, not a member of the Eurozone, is not immune. Their fiscal path is a road to disaster as well. As for the US, the opening bell of the slide to disaster will be heard soon from California and Illinois.
The truth is that no society can survive as an entitlement society except at virtual poverty levels -- the old Soviet Union, modern day Cuba. The prosperity in the US and Europe that was built on free markets, self reliance, and limited government is being sabatogued by a growing state control of all aspects of economic life and a sense of entitlement by the bulk of their populations. This is the path to Greece.
Printing dollars and printing Euros -- the current policy of the Fed and ECB -- will only provide a brief breathing space as the western economies weaken. Fortunately, Asia is not marching down this path and the future is bright for Asia. But the lights are dimming in the West. Alderman's article today in the NY Times is one of many recent articles chronicling the slow slide of Greece into anarchy.
Rabu, 19 September 2012
Selasa, 18 September 2012
Why you borrow matters
Borrowing for investment may be a good idea. Debt is not a bad thing. It can be a good thing. It depends upon what you are borrowing for.
Borrowing to finance a new business or to expand an old one is a good idea. Borrowing for investment purposes is generally a good idea.
Borrowing is generally a bad idea if you simply borrow to finance consumption that you cannot otherwise afford. Eventually 'consumption borrowing' will lead to disaster since nothing is taking place that can pay off the debt that is being created. This is the type of borrowing that is taking place in western economies today.
As much as politicians talk about 'investing in our future,' what they invariably mean in practice is financing consumption for a favored part of the electorate. Rarely if ever is modern government spending intended to finance investment of any kind. Paying more money to your favorite public employee, including teachers, is not a form of investment -- it is a form of consumption for your favorite public employee unless they choose to save some part of it. Transferring wealth from rich to poor and supplementing that with more debt is simply an expansion of debt and consumption.
Borrowing to consume at the expense of private and public investment activity is a ticket to disaster. We see that disaster unfolding in the western economies today. In short order, the current euphoria in the US and in Europe over the virtues of printing money as a substitute for capitalism will turn to despair as their economies are crushed with the weight of too much debt. and too little economic activity.
You can only live off false promises for a limited period of time. Sooner or later, crushing the private economy, expanding the government sector, letting sovereign debt increase without limit only results in disaster.
Borrowing to finance a new business or to expand an old one is a good idea. Borrowing for investment purposes is generally a good idea.
Borrowing is generally a bad idea if you simply borrow to finance consumption that you cannot otherwise afford. Eventually 'consumption borrowing' will lead to disaster since nothing is taking place that can pay off the debt that is being created. This is the type of borrowing that is taking place in western economies today.
As much as politicians talk about 'investing in our future,' what they invariably mean in practice is financing consumption for a favored part of the electorate. Rarely if ever is modern government spending intended to finance investment of any kind. Paying more money to your favorite public employee, including teachers, is not a form of investment -- it is a form of consumption for your favorite public employee unless they choose to save some part of it. Transferring wealth from rich to poor and supplementing that with more debt is simply an expansion of debt and consumption.
Borrowing to consume at the expense of private and public investment activity is a ticket to disaster. We see that disaster unfolding in the western economies today. In short order, the current euphoria in the US and in Europe over the virtues of printing money as a substitute for capitalism will turn to despair as their economies are crushed with the weight of too much debt. and too little economic activity.
You can only live off false promises for a limited period of time. Sooner or later, crushing the private economy, expanding the government sector, letting sovereign debt increase without limit only results in disaster.
Jumat, 14 September 2012
More Bad Policy from Bernanke
Ben Bernanke is printing money once more. Not content with the current historic expansion in the money supply, Bernanke is headed off to new records. Somehow pumping more liquidity in the system is going to offset the negatives that face employers. How?
If paying an employee $ 35,000 per year means a cost of $ 70,000 per year because of health care mandates, employee payroll costs and litigation risks, how does additional liquidity matter? With Dodd-Frank and the regulators forcing the banks out of the lending business for middle Americans, what difference does additional liquidity and lower mortgage rates make? What is Bernanke thinking?
Bernanke's policies are not without cost, though they seem clearly without benefit. The cost will come when inflation rears its ugly head. Bernanke assumes that can't happen unless the economy is near full employment. He's wrong. We can have inflation and unemployment and they can both grow at the same time. The Democrats were able to accomplish this in the late 1970s which was a prelude to the Age of Reagan.
Perhaps it is time to rethink whether or not we need a Fed. America's fastest growth in GDP was the period from 1865 to 1913. America had no central bank during that period. No Central Bank may be a better solution than what Bernanke is providing.
If paying an employee $ 35,000 per year means a cost of $ 70,000 per year because of health care mandates, employee payroll costs and litigation risks, how does additional liquidity matter? With Dodd-Frank and the regulators forcing the banks out of the lending business for middle Americans, what difference does additional liquidity and lower mortgage rates make? What is Bernanke thinking?
Bernanke's policies are not without cost, though they seem clearly without benefit. The cost will come when inflation rears its ugly head. Bernanke assumes that can't happen unless the economy is near full employment. He's wrong. We can have inflation and unemployment and they can both grow at the same time. The Democrats were able to accomplish this in the late 1970s which was a prelude to the Age of Reagan.
Perhaps it is time to rethink whether or not we need a Fed. America's fastest growth in GDP was the period from 1865 to 1913. America had no central bank during that period. No Central Bank may be a better solution than what Bernanke is providing.
Jumat, 07 September 2012
Winners and Losers
It is not as if some folks aren't winning. Politicians are winning. They are well paid, have juicy retirement benefits and if, perchance, they lose an election, there are more than enough PACs around who will hire them as consultants to live out life in luxury. Look at Newt Gingrich for example. He made himself millions of dollars after 'retiring' from public office by consulting, not only for PACs, but for beta noires like FNMA.
Who else is winning? Academics with tenure are winning. They have protected jobs with high income and rich benefits. Public employees and teachers, who haven't lost their jobs. They are winning. Upper income folks collecting social security and medicare. They are winning. Middle income Americans on food stamps -- they are winning. Rich folks. They are winning. They know that the coming tax increases won't effect them, because they don't have to show income. Warren Buffett, if he wishes, can reduce his taxable income to zero and pay no taxes. So, what does he care what the tax rates are? Raise them, he says. Why not? He won't be paying them.
So there are winners! That helps explain how in an economy with no job creation, the current Administration still commands the support of half of the electorate. The losers are ordinary citizens -- mostly middle and lower income -- who hope to provide education and a future for their children. They and future generations are the losers. Opportunities for ordinary citizens without political connections or who don't fall into a politically connected or protected class are disappearing in the Obama USA. The losers are the poor who are denied a leg-up in the economy by minimum wage laws, litigation threats built into law and employer mandates on employees. The war on poor people engaged in by the Obama Administration has born fruit. Poor and minorities in the US are in the worst economic condition in three decades.
So while the rich, the movie stars, the public employees, the tenure-protected world, and the politicians comfortably enjoy the fruits of the Obama economy, everyone else better find some way to survive. It certainly won't happen in the job market as long as the Obama folks are in office.
Who else is winning? Academics with tenure are winning. They have protected jobs with high income and rich benefits. Public employees and teachers, who haven't lost their jobs. They are winning. Upper income folks collecting social security and medicare. They are winning. Middle income Americans on food stamps -- they are winning. Rich folks. They are winning. They know that the coming tax increases won't effect them, because they don't have to show income. Warren Buffett, if he wishes, can reduce his taxable income to zero and pay no taxes. So, what does he care what the tax rates are? Raise them, he says. Why not? He won't be paying them.
So there are winners! That helps explain how in an economy with no job creation, the current Administration still commands the support of half of the electorate. The losers are ordinary citizens -- mostly middle and lower income -- who hope to provide education and a future for their children. They and future generations are the losers. Opportunities for ordinary citizens without political connections or who don't fall into a politically connected or protected class are disappearing in the Obama USA. The losers are the poor who are denied a leg-up in the economy by minimum wage laws, litigation threats built into law and employer mandates on employees. The war on poor people engaged in by the Obama Administration has born fruit. Poor and minorities in the US are in the worst economic condition in three decades.
So while the rich, the movie stars, the public employees, the tenure-protected world, and the politicians comfortably enjoy the fruits of the Obama economy, everyone else better find some way to survive. It certainly won't happen in the job market as long as the Obama folks are in office.
Kamis, 06 September 2012
When The Cheering Stops
The ECB's bond buying program is essentially equivalent to printing Euros and buying bonds of countries whose finances are failing. This shifts the burden of debt toward France and Germany, all but engulfing them into the same cauldron as Greece, Spain, Italy, Portugal and Ireland. That all of these countries continue to run large fiscal deficits seems not to concern anyone. Nothing has changed in regard to the dramatic debt buildup that continues to run apace throughout the Eurozone.
Now to add to their other woes, all of the Eurozone countries are now headed into recession. Germany had been an exception, but no longer. Greece and Spain live with daily street riots and unemployment in excess of 25 percent. It is hard not to see France and Germany headed that way.
Monetary expansion will not solve Europe's problems. It actually make them worse, because it weakens each country's resolve to get their fiscal house in order. Rising yields on sovereign debt forces countries to face facts. An explosion of printed Euros does the opposite. Now Greece and Spain will think there is no reason to reform their economies. After all, Germany has ridden to the rescue.
Don't laugh America. This is coming to your shores sooner than you think. California and Illinois will soon be pressing Washington for a similar bailout of their fiscal catastrophes. This would mean that Texas and Virginia, states with much better fiscal discipline, would essentially begin underwriting the nonsense that goes on in California and Illinois.
No one seems to want to face reality. The welfare state is failing throughout the Eurozone and in the US. There simply are not enough resources, no matter who you tax or what other spending you cut, to fund the grand plans of the welfare state. The jig is up. What the ECB is doing is burying their head in the sand, hoping and praying that the problem will go away. It won't.
Now to add to their other woes, all of the Eurozone countries are now headed into recession. Germany had been an exception, but no longer. Greece and Spain live with daily street riots and unemployment in excess of 25 percent. It is hard not to see France and Germany headed that way.
Monetary expansion will not solve Europe's problems. It actually make them worse, because it weakens each country's resolve to get their fiscal house in order. Rising yields on sovereign debt forces countries to face facts. An explosion of printed Euros does the opposite. Now Greece and Spain will think there is no reason to reform their economies. After all, Germany has ridden to the rescue.
Don't laugh America. This is coming to your shores sooner than you think. California and Illinois will soon be pressing Washington for a similar bailout of their fiscal catastrophes. This would mean that Texas and Virginia, states with much better fiscal discipline, would essentially begin underwriting the nonsense that goes on in California and Illinois.
No one seems to want to face reality. The welfare state is failing throughout the Eurozone and in the US. There simply are not enough resources, no matter who you tax or what other spending you cut, to fund the grand plans of the welfare state. The jig is up. What the ECB is doing is burying their head in the sand, hoping and praying that the problem will go away. It won't.
Rabu, 05 September 2012
The ECB Buys Bonds
Today, Mario Draghi is scheduled to announce that the ECB will buy the bonds of Greece, Portugal and Ireland (this gives holders of Spanish and Italian bonds the near certainty that they will be next if line if only their countries request it). Somehow this cheers financial markets. You have to wonder why. A similar pattern occurs when bad economic news hits the US economy. The market pundits then rush to the microphones to announce gleefully that the Fed will act and all will be well. Is all well?
The idea that the ECB purchases of bonds will have any impact on the collapsing economies in the Eurozone and their spiraling debt is ridiculous. The welfare state is no longer affordable in Europe or the US and that reality cannot be offset by temporary gyrations of the central banks. It is just a question of numbers. Taxing rich folks won't help either. Eliminating defense spending in the US and everywhere in the world won't matter either. The only thing that matters is reigning in the entitlements. Absent that, the debt crisis and economic crisis will simply get worse.
There are micro-economic things that could help: eliminate minimum wages, curtail employer mandates, roll back employee litigation rights. These things would make employees more attractive to employers and spur hiring.
What is happening in Greece is instructive. The black market economy is thriving. Greek workers can get jobs in the black market and they are taking these jobs. There are no employer mandates, minimum wages, free health care, guaranteed vacations or guaranteed retirements in the black market economy. Much of this goes on in the US as well, of course. New Yorkers who have nannys are well aware of how the black market works even in the good old USA. Perhaps the black market is the only real hope for those struggling to find jobs. The legal market has too many "protections" for employees that make employees toxic to employers.
But, meanwhile at the aggregate level, countries have run out of funds. The sleight of hand at the ECB will work only so long as the markets have not really understood what is actually going on. Then it will cease to work and the reality of "no money" will once again set in. Both Europe and the US are broke. Nothing but cutting entitlements will have any impact on their current plight.
The idea that the ECB purchases of bonds will have any impact on the collapsing economies in the Eurozone and their spiraling debt is ridiculous. The welfare state is no longer affordable in Europe or the US and that reality cannot be offset by temporary gyrations of the central banks. It is just a question of numbers. Taxing rich folks won't help either. Eliminating defense spending in the US and everywhere in the world won't matter either. The only thing that matters is reigning in the entitlements. Absent that, the debt crisis and economic crisis will simply get worse.
There are micro-economic things that could help: eliminate minimum wages, curtail employer mandates, roll back employee litigation rights. These things would make employees more attractive to employers and spur hiring.
What is happening in Greece is instructive. The black market economy is thriving. Greek workers can get jobs in the black market and they are taking these jobs. There are no employer mandates, minimum wages, free health care, guaranteed vacations or guaranteed retirements in the black market economy. Much of this goes on in the US as well, of course. New Yorkers who have nannys are well aware of how the black market works even in the good old USA. Perhaps the black market is the only real hope for those struggling to find jobs. The legal market has too many "protections" for employees that make employees toxic to employers.
But, meanwhile at the aggregate level, countries have run out of funds. The sleight of hand at the ECB will work only so long as the markets have not really understood what is actually going on. Then it will cease to work and the reality of "no money" will once again set in. Both Europe and the US are broke. Nothing but cutting entitlements will have any impact on their current plight.
Senin, 03 September 2012
Reflections on Eastern Europe
For those wondering....I have been traveling through Eastern Europe for the past three weeks, spending time mostly in countries that emerged from Soviet dominance in 1989-91. I visited some of these countries before the Soviet breakup and the difference is breathtaking. Freedom is breathed on every street corner. Gone are the gray and dismal lines of people shuffling along the streets with their eyes on the pavement. While there may be issues here and there -- there always are issues when people are free -- there is no question that all of these countries are in a better situation.
Putin is, of course, not happy about this. Gone is the Soviet empire. Eliminating discord by imposing totalitarian dictatorships is out of style in this part of the world. These folks appreciate freedom in a way that the western world cannot appreciate, as the western world gradually gives up the freedoms that took centuries to put in place.
I am now in Prague in the Czech Republic, where the dismantling of the Soviet Empire received its first expression in the "Prague Spring" of 1968 and later in the "Velvet Revolution" of 1989. The President of the Czech Republic, Vaclav Klaus, is a Ph.d economist and is the most conservative leader of any country in the world. He is chairing the Mont Pelerin Society meetings here in Prague, which is a varied collection of libertarians and conservatives from all over the world.
This Euro is a hot topic here. None of the countries that I have visited use the Euro but they are all, but one (the Ukraine), members of the European Union. There is widespread agreement here that the Eurozone will not survive the current crisis. The numbers provide no prospect of survival. It is possible to 'extend and pretend' by having the ECB buy Spanish, Italian and Greek bonds. But, that strategy only puts off, briefly, the ultimate outcome. The Eurozone cannot pay its bills. It's that simple.
It is well known here that the US situation is no better. Besides the well known entitlement fiasco (a $ 70 trillion problem), individual states in the US (Illinois and California) are careening toward bankruptcy at a fast clip.
The Eurozone and the US have essentially the same problem. As societies get wealthier they decide that their governments need to do things, more things. But, since these things cost money, these societies simply borrow it -- on the open market -- pledging the resources of unborn generations. For a while, this seems to work. But it doesn't work any more. There is no set of taxes, spending cuts or anything else that can make it work. The only mystery is when and how it collapses.
Most of the problems in the western world are bi-partisan in nature. This isn't a situation of Republican vs Democrat. Both political parties endorse and have supported the growth in entitlements and the growth in the regulatory and tax environment. The same is true in Europe. It seems democracy is ultimately a ticket to big government, improperly financed.
But those countries not in the Eurozone are generally in a much better position. Countries in Asia are sitting well also. Many of these countries have not shackled themselves to massive entitlement programs and most of them have high domestic savings rates. As the western world tries to find its way out of an impossible dilemma, the Asia nations and the non-Euro nations of Europe face a much brighter future, even if the present road is a bit murky.
Putin is, of course, not happy about this. Gone is the Soviet empire. Eliminating discord by imposing totalitarian dictatorships is out of style in this part of the world. These folks appreciate freedom in a way that the western world cannot appreciate, as the western world gradually gives up the freedoms that took centuries to put in place.
I am now in Prague in the Czech Republic, where the dismantling of the Soviet Empire received its first expression in the "Prague Spring" of 1968 and later in the "Velvet Revolution" of 1989. The President of the Czech Republic, Vaclav Klaus, is a Ph.d economist and is the most conservative leader of any country in the world. He is chairing the Mont Pelerin Society meetings here in Prague, which is a varied collection of libertarians and conservatives from all over the world.
This Euro is a hot topic here. None of the countries that I have visited use the Euro but they are all, but one (the Ukraine), members of the European Union. There is widespread agreement here that the Eurozone will not survive the current crisis. The numbers provide no prospect of survival. It is possible to 'extend and pretend' by having the ECB buy Spanish, Italian and Greek bonds. But, that strategy only puts off, briefly, the ultimate outcome. The Eurozone cannot pay its bills. It's that simple.
It is well known here that the US situation is no better. Besides the well known entitlement fiasco (a $ 70 trillion problem), individual states in the US (Illinois and California) are careening toward bankruptcy at a fast clip.
The Eurozone and the US have essentially the same problem. As societies get wealthier they decide that their governments need to do things, more things. But, since these things cost money, these societies simply borrow it -- on the open market -- pledging the resources of unborn generations. For a while, this seems to work. But it doesn't work any more. There is no set of taxes, spending cuts or anything else that can make it work. The only mystery is when and how it collapses.
Most of the problems in the western world are bi-partisan in nature. This isn't a situation of Republican vs Democrat. Both political parties endorse and have supported the growth in entitlements and the growth in the regulatory and tax environment. The same is true in Europe. It seems democracy is ultimately a ticket to big government, improperly financed.
But those countries not in the Eurozone are generally in a much better position. Countries in Asia are sitting well also. Many of these countries have not shackled themselves to massive entitlement programs and most of them have high domestic savings rates. As the western world tries to find its way out of an impossible dilemma, the Asia nations and the non-Euro nations of Europe face a much brighter future, even if the present road is a bit murky.
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