The latest scheme out of the European political class is the idea of creating an SPV (Special Purpose Vehicle) that will "leverage up" the $ 400 billion fund that had been previously put in place to "stabilize" the sovereign debt crisis. How will this work?
The idea is that you create this SPV (think Fund) and put $ 400 billion into it in the form of equity capital. The SPV then borrows $ 1.2 Trillion from willing bond buyers. That gives you $ 1.6 Trillion to buy up Greek, Spanish, and Italian debt and stave off disaster. So, the theory goes.
So who provides the $ 1.2 trillion in debt capital? That is, who are the willing bond buyers who think investing in a vehicle that buys trash will be a winner? If you thought Wall Street cooked up outrageous schemes, try this one on for size.
This idea will not work. It is not the magic elixir. No one in his right mind would provide the debt financing for this vehicle. The US, no doubt, will volunteer to put money into this. (We love throwing money away). But, the rest of the world will balk at this silly idea. The Chinese will not fall for this.
What this scheme shows is that the politicians still haven't figured out that defaults are inevitable. Only defaults have any real shot of turning the situation around in Europe. Politicians can only make things worse by these kinds of dreams and schemes.
Senin, 26 September 2011
Minggu, 25 September 2011
Mind The Gap
The so-called income gap between rich and poor is growing we are told. The rich are "sharing disproportionately" in the economic gains we are told. What does this mean? Should we do something about it? If so, what should we do?
Imagine, that adopting "Policy A" would double the income of the poorest sixty percent of the population, but, at the same time, quadruple the income of the richest forty percent of the population? Suppose that there was simply no other feasible way to double the income of the poorest sixty percent? Would you favor implementing "Policy A?" After all, "Policy A" increases inequality. The dreaded "income gap" widens under "Policy A."
One way to eliminate income inequality -- eliminate the income gap -- is to force the entire citizenry to live at the edge of starvation. This is, more or less, the experiment that the Soviet Union embarked upon in 1917. How did that turn out? The Soviet Union successfully eliminated the "income gap."
Suppose "taxing millionaires and billionaires" meant that unemployment for the rest of us would rise to double digits and stay there for the next thirty years. Is it still worth it, so that we can make "the rich pay their fair share," even if such a policy would guarantee that large numbers of people cannot find jobs?
Why does anyone care about the income gap? The issue is not how to divide a fixed pie after all. The issue is how to grow the pie. Suppose our only concern is with people whose income and wealth puts them in the bottom 50 percent of the pile. It might be necessary to enrich a few folks in order improve the lot of the bottom 50 percent. Who cares if the rich get richer?
Isn't it the right policy to try to improve the lot of the poorest 50 percent of our population regardless of how rich the rest of the folks get? It just might turn out that income inequality is a by-product of improving the lot of the poorest folks in society and that deliberate policies to reduce inequality damage the economic prospects of the poorest half of the population. So, why the interest in the income gap?
What we should be concerned about are policies that improve the economic prospects of the half of the population with the lowest income and least amount of wealth. If improving the prospects of the less fortunate increases income and wealth inequality, so be it.
Imagine, that adopting "Policy A" would double the income of the poorest sixty percent of the population, but, at the same time, quadruple the income of the richest forty percent of the population? Suppose that there was simply no other feasible way to double the income of the poorest sixty percent? Would you favor implementing "Policy A?" After all, "Policy A" increases inequality. The dreaded "income gap" widens under "Policy A."
One way to eliminate income inequality -- eliminate the income gap -- is to force the entire citizenry to live at the edge of starvation. This is, more or less, the experiment that the Soviet Union embarked upon in 1917. How did that turn out? The Soviet Union successfully eliminated the "income gap."
Suppose "taxing millionaires and billionaires" meant that unemployment for the rest of us would rise to double digits and stay there for the next thirty years. Is it still worth it, so that we can make "the rich pay their fair share," even if such a policy would guarantee that large numbers of people cannot find jobs?
Why does anyone care about the income gap? The issue is not how to divide a fixed pie after all. The issue is how to grow the pie. Suppose our only concern is with people whose income and wealth puts them in the bottom 50 percent of the pile. It might be necessary to enrich a few folks in order improve the lot of the bottom 50 percent. Who cares if the rich get richer?
Isn't it the right policy to try to improve the lot of the poorest 50 percent of our population regardless of how rich the rest of the folks get? It just might turn out that income inequality is a by-product of improving the lot of the poorest folks in society and that deliberate policies to reduce inequality damage the economic prospects of the poorest half of the population. So, why the interest in the income gap?
What we should be concerned about are policies that improve the economic prospects of the half of the population with the lowest income and least amount of wealth. If improving the prospects of the less fortunate increases income and wealth inequality, so be it.
Jumat, 23 September 2011
If You Want Jobs, The Micro Environment Must Change
The regulatory and litigation environment virtually guarantees that job growth in the US will be anemic for years to come. No macro activities (or short term tax gimmicks) will change the employment picture.
The truth is: employers are scared to expand payrolls. They don't want to get sued; they don't want to take on future health care and retirement liabilities that are limitless; they don't want to deal with all of the extra costs that government has imposed on employers. The motives for all of this employee protection were no doubt noble.
The latest wrinkle is that Obama's "Job's Plan" permits the unemployed to sue a business that has the temerity to hire someone who already has a job elsewhere instead of hiring an unemployed person. Laws like that make employers leave the playing field. Who wants to hire anyone when the very act of taking on a new hire can trigger litigation that can put you out of business? Why can't the Obama folks get this?
Until the micro conditions of the labor market change (and no one is really discussing making these changes), the poor, the minorities, the less-educated have no real future in this economy other than collecting welfare checks and entitlement payments. Working for a living is increasingly not a likely possibility.
Obama and the liberal elite don't get this because they know nothing about hiring and why businesses hire people. None of the Obama people have any experience at all with business or with unemployment.
The Obama folks think that the solution is to have government build roads and patch up airports and transfer money to public employees. That is not the answer. The only people that benefit from stuff like that are highly paid union employees with rich retirement plans and generous health plans. They really don't need the government's help. They are riding high in this economy. Obama and his gang are riding high as well.
But, Americans that are least able to defend themselves -- lower middle income, minorities, the lower-skilled work force -- have no real chance in the economy that Obama and his crowd have created. Businesses are not going to hire employees that are "lawyered up" and ready to sue them. Why should they? The alternative is to outsource and to substitute capital for labor. That will continue.
We need micro changes. Even if the economy grows, the beneficiaries will not be the unemployed. Obama has seen to it that these folks have no real shot.
The truth is: employers are scared to expand payrolls. They don't want to get sued; they don't want to take on future health care and retirement liabilities that are limitless; they don't want to deal with all of the extra costs that government has imposed on employers. The motives for all of this employee protection were no doubt noble.
The latest wrinkle is that Obama's "Job's Plan" permits the unemployed to sue a business that has the temerity to hire someone who already has a job elsewhere instead of hiring an unemployed person. Laws like that make employers leave the playing field. Who wants to hire anyone when the very act of taking on a new hire can trigger litigation that can put you out of business? Why can't the Obama folks get this?
Until the micro conditions of the labor market change (and no one is really discussing making these changes), the poor, the minorities, the less-educated have no real future in this economy other than collecting welfare checks and entitlement payments. Working for a living is increasingly not a likely possibility.
Obama and the liberal elite don't get this because they know nothing about hiring and why businesses hire people. None of the Obama people have any experience at all with business or with unemployment.
The Obama folks think that the solution is to have government build roads and patch up airports and transfer money to public employees. That is not the answer. The only people that benefit from stuff like that are highly paid union employees with rich retirement plans and generous health plans. They really don't need the government's help. They are riding high in this economy. Obama and his gang are riding high as well.
But, Americans that are least able to defend themselves -- lower middle income, minorities, the lower-skilled work force -- have no real chance in the economy that Obama and his crowd have created. Businesses are not going to hire employees that are "lawyered up" and ready to sue them. Why should they? The alternative is to outsource and to substitute capital for labor. That will continue.
We need micro changes. Even if the economy grows, the beneficiaries will not be the unemployed. Obama has seen to it that these folks have no real shot.
So, Why the Selloff?
Other than Obama's new(?) tax plan to tax "millionaires and billionaires," there wasn't much news to point to for an explanation of the nearly 8 percent drop in world equity markets from Tuesday at 2 PM until Thursday afternoon's market close.
Greece is old news and so is the weakness in the American economy. Nothing new on this front was announced prior to the selloff.
The equity markets seem to be stuck in a very wide trading range since early August. If so, the market probably rallies from here. My own guess continues to be that this is buying time for long term investors. This is not a time to be exiting equity markets, but a time to be planting a large foot into these markets.
It is scary. Government policies in western countries have been so absurd for so long that one despairs that things can ever be turned around. But, they can be and, I think, will be. Most Eurozone countries are going to default on their debt and a number of high-profile European banks have no hope of survival. Once these things happen, then we have a real chance for an economic revival.
As long as western politicians think there is some magic and painless solution to the debt crisis that avoids defaults, then economic stagnation will continue. But, the clock is ticking. Defaults will come whether politicians like it or not. The sooner the better.
So, it still makes sense to own equities -- perhaps more now than ever. Markets can see into the future and past unpleasant events. We will get there and get past all of this.
Greece is old news and so is the weakness in the American economy. Nothing new on this front was announced prior to the selloff.
The equity markets seem to be stuck in a very wide trading range since early August. If so, the market probably rallies from here. My own guess continues to be that this is buying time for long term investors. This is not a time to be exiting equity markets, but a time to be planting a large foot into these markets.
It is scary. Government policies in western countries have been so absurd for so long that one despairs that things can ever be turned around. But, they can be and, I think, will be. Most Eurozone countries are going to default on their debt and a number of high-profile European banks have no hope of survival. Once these things happen, then we have a real chance for an economic revival.
As long as western politicians think there is some magic and painless solution to the debt crisis that avoids defaults, then economic stagnation will continue. But, the clock is ticking. Defaults will come whether politicians like it or not. The sooner the better.
So, it still makes sense to own equities -- perhaps more now than ever. Markets can see into the future and past unpleasant events. We will get there and get past all of this.
Senin, 19 September 2011
The Obama Tax Plan
Obama will announce his new tax plan today -- more than $ 1.5 trillion in new taxes. Even a Democratically-controlled Congress wouldn't pass something like this in the middle of a recession. You have to wonder if Obama really cares at all. He is wasting everyone's time with proposals like this. He should go back to Martha's Vineyard.
Minggu, 18 September 2011
It Won't Be Long Now
Goodbye Greece. We are getting into the fourth quarter on the Greece situation. The Germans are increasingly unlikely to continue the bailout game for domestic political reasons. Ditto for Greece. The Greeks are more likely to roll back their existing "austerity" measures than enact new ones. The game is just about over. Default is coming soon.
Then we look to Spain and Italy and watch that story unfold in much the same manner.
Then we look to Spain and Italy and watch that story unfold in much the same manner.
As If Things Weren't Bad Enough
Here comes the President -- one more time: "Tax the Millionaires and Billionaires." Same ole, same ole.
Hidden in his tax-the-rich proposal is the virtual elimination of the current municipal bond market, because the Obama proposal essentially eliminates tax exempt interest on municipal bonds. That should help our cities and states!
If the Obama package could pass, it would nail the coffin shut on any future American economic progress. We would become the new Japan with no real prospect for economic growth in the next half century. (That may happen anyway. Obama has done a lot of damage already).
Fortunately, no one is listening to Obama anymore and new taxes are not in the cards with a Republican House of Representatives.
All Obama signifies with the package to be released on Monday is his irrelevance. He doesn't understand the private sector, he doesn't understand the dynamics of the entitlement programs, and he doesn't seem to care anyway.
He's still having a good time in the White House. There are still a lot of parties to attend and fun things to do. That the country is collapsing economically is not something that Obama seems much bothered about.
Nothing new there.
Hidden in his tax-the-rich proposal is the virtual elimination of the current municipal bond market, because the Obama proposal essentially eliminates tax exempt interest on municipal bonds. That should help our cities and states!
If the Obama package could pass, it would nail the coffin shut on any future American economic progress. We would become the new Japan with no real prospect for economic growth in the next half century. (That may happen anyway. Obama has done a lot of damage already).
Fortunately, no one is listening to Obama anymore and new taxes are not in the cards with a Republican House of Representatives.
All Obama signifies with the package to be released on Monday is his irrelevance. He doesn't understand the private sector, he doesn't understand the dynamics of the entitlement programs, and he doesn't seem to care anyway.
He's still having a good time in the White House. There are still a lot of parties to attend and fun things to do. That the country is collapsing economically is not something that Obama seems much bothered about.
Nothing new there.
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