Posts Tagged ‘Economics’

China Trade War

July 5, 2013

From a favorite blog: Humble Student of the Markets

http://humblestudentofthemarkets.blogspot.com/

A series of comments regarding China’s economic policy.

http://humblestudentofthemarkets.blogspot.com/2013/07/roach-v-pettis-on-china.html

“Michael Pettis has a different take. He wrote a Foreign Policy article about the credit crunch related convulsions within the context of the transformation from an investment-led to a consumer-led economy and also urged caution by the West in their approach to China:”

“Last week is a reminder that Beijing is playing a difficult game. The rest of the world should try to understand the stakes, and accommodate China’s transition to a more sustainable growth model. As policymakers in China continue to try to restructure the economy away from reliance on massive, debt-fueling investment projects that create little value for the economy, the United States, Europe, and Japan must implement policies that reduce trade pressures. Any additional adverse trade conditions will further jeopardize the stability of China’s economy, especially as lower trade surpluses and decreased foreign investment slow money creation by China’s central bank. A trade war would clearly be devastating for Beijing’s attempt to rebalance its economy and have potentially critical implications for global markets.”

The comment above is stunning in its implications. I translate the comment into several variants. The first and most straightforward reads, “if the West doesn’t continue to buy China’s exports there will be a global recession.”

And, if that isn’t enough of a threat, “it is the responsibility of the West to raise the living standards of China’s peasants [by sacrificing its own workers standard of living].”

Last, and most fearsome, “the West must continue to build up a China that uses its economic might to intimidate its neighbors today and will use it to build a military force to intimidate the world tomorrow.”

China is a nation that has long tantalized the Western economies and political leaders by the sheer size of its population. The West drools over the prospect of being able to sell goods and services to the Chinese population. That drool blinds the West to the self-interest of the Chinese leadership. That is, China will only buy from the West until it either steals or copies technology that enables the Chinese to sell to their own people. The Chinese market is the proverbial carrot on a stick held in front of a Western donkey to entice the donkey to pull the Chinese cart. But the donkey never gets the carrot.

The Chinese leaders know full well that their own self interest is best served by providing for its own people. It must continue to control its population. Economic freedom begets political freedom. China will only buy from the West as long as it suits them. When it no longer does various rules, regulations, laws, partnership requirements, outright theft of trade secrets and technology, and any other useful methodology will be employed to deter and defer Western benefits. The West will forever remain outside the fence looking longingly at a market they will never conquer. For a preview examine the experience of Western companies in Russia under Putin. This too was a large market the West drooled over. It has proven to be a chimera.

Given the current Chinese weaponization of its economic might the West might well respond by ceasing to be a compliant sucker market for Chinese exports. A trade war is far preferable to a military war. A trade war with China is a weapon the West can use to bend China to the interests of the West and the global welfare. A trade war could be used to pressure China to crush the North Korean (and Iranian) nuclear threat once and for all. A trade war could be used to induce China to back off from its territorial ambitions in the China Sea. A trade war could be used to align China’s global interests with those of the West in regards to the Middle East (Syria, Iran); South America (Venezuela, Cuba) and even Africa. A self-sufficient, economically powerful China is a bull [tiger?] in a global China shop.

 

The Obama Recovery

February 20, 2013

The “Obama Recovery”

The two charts shown below show “Real Domestic Gross Product” on a quarterly basis. The first chart is January 1947 through October 2012 while the second is from January 1990 through October 2012. All data has been obtained from the St. Louis Federal Reserve “FRED” data base.

What is most disturbing is that beginning in fourth quarter 2007 GDP began to diverge from the historical, exponential trendline and has not reverted to the mean since. That is, Chart #1 (1947-2012) shows many quarters of GDP growth below the trendline and many above. That means GDP “reverts” to the mean (in this case the exponential trendline) when it gets too far above or below. Of course it is also a function of the trendline itself being fitted to the data after the fact.

GDP 1947-2012 Chart1

However, starting in 4th Quarter 2007 GDP moved away from the trendline and has been on a different path ever since. This shows up in both charts but is more pronounced in Chart #2 (1990-2012)

GDP 1990-2012 Chart2

As the “R2” figure indicates the trendline “explains” some 99% of the data. For the last 5 years to diverge as significantly suggests the US economy has in fact entered a new stage. And not a welcome one at that.

The divergence from historical trend is even more pronounced when viewed in Chart #2. Even worse is the flattening of real GDP in the last quarter of 2012. Although that data will likely be revised upwards the prospect of a reversion to the trendline seems bleak indeed without major changes in federal domestic policy. The likelihood of which is dim, at least for the next four years. By that time the US economy may be on another track but millions of Americans will be left behind forever.

For Chart #2 the starting point of 1990 was based on the fact that it is more contemporary data; it starts around the end of the 89-90 recessionary period; and the GDP chart shows it is relatively flat suggesting a good starting point. Even thought the “R2” data shows a diminution from 99% to 95% that is still a fairly strong representation. For reference the starting point of Chart #1 is that it is the earliest available data.

Retiree Stumbling Blocks

May 30, 2011

Five Retiree Stumbling Blocks

by John Wasik  May 27, 2011  posted on Morningstar.com

Comment regarding this post by John Wasik

“Republicans in the U.S. House have proposed privatizing Medicare for those under 55.”

Not true. First, “privatized Medicare” is an oxymoron. It’s either privatized or Medicare.  The Ryan plan provides a subsidized insurance voucher so that individuals can purchase the health insurance they need. I’m almost 65 and would prefer this approach to a one size fits all Medicare system that can’t tell the difference between
Prostate Cancer (for which I had surgery 6 months ago) and “The Scooter Store” mechanized chairs.

My private, individual insurance (BCBS) for myself and my wife is less than $12,000 a year (high deductible, HSA) and it provides excellent coverage. An assist on the premium/deductible (the Ryan plan) is all I would ask for in exchange for the Medicare taxes paid in over a lifetime. [Or, don’t tax me and I’ll pay for it all.]

Raising the retirement age is shorthand for letting more people die before they (a) collect any social security or (b) before they collect enough to recover what they paid in taxes. It ends up screwing the families of those
who end up in (a) or (b). Social Security is a massive, generational Ponzi scheme that depends on an ever growing mass of workers that either die young or young enough to ensure that benefits can be paid to those who win the longevity lottery. It is an insult to those who work with their hands and backs crafted by those who sit on their butts.

“My humble prediction is that taxes will be raised on retirees, out-of-pocket medical expenses will increase, or overall retirement benefits will be cut in some way.”

We have to do something to prevent national bankruptcy. As even Bill Clinton acknowledged, we can’t let health care devour the economy. Canada is facing that fact at this time and is struggling to figure out how – besides
letting people die – to pay for all the benefits promised. Doctors are leaving the Massachusetts single payer plan. It is a hopeless bureaucratic paper shuffle to promise a benefit that can’t be provided. It is high time we geezers take the lead in moderating our entitlements.

Didn’t save enough for retirement? Why is that a problem for my children, my grandchildren, my great grandchildren not to mention my neighbors? If you would not ask your children/grandchildren/great grandchildren for $500, $1000, $1500 or more each month why would you have government take it from them
and their neighbors?

The use of TIPs as an inflation hedge pales beside high quality, dividend stocks as suggested by the S&P Dividend Aristocrats. Combine those with an investment grade bond fund or individual bonds and manage the allocation between 25/75 (bond/equity) to 75/25 (bond equity) depending on your economic outlook.

Mr. Wasik’s suggestion to be flexible is about the only useful point to this article. If you can’t determine a retirement budget (replacement rate / cost of living) how did you ever figure out a pre-retirement budget?

As for political changes? They are always coming. The best defense is to be a responsible individual and vote for the rare politician who supports responsible policies. You don’t have to agree with the Ryan plan (I don’t agree
with all of it) but it is a well developed, responsible plan that deserves honest debate. Not MediScare tactics to scare my 92 year old mother. That’s total BS. It is time to face up to the fact that our government spends too
much, we have too much debt and we must cut back in order to enable our children and grandchildren to have a chance to grow the economy. That would be the best thing we can do in our retirement.

Social Security: The 6% Solution *

March 27, 2011

* Or, How to Transform SSA into an Individual Retirement Plan

Late in 2010 President Obama’s Deficit Commission disgorged their budget recommendations. The complex and difficult work under the combined wisdom of these earnest, well regarded, leaders has resulted in a series of entitlement proposals that are significant for their disregard for physical laborers, all young people and every responsible individual. Not to have seized this opportunity to revamp a failed program is a feckless and cowardly insult to hard working, responsible individuals and is most egregious to young people. Choosing to raise the taxation level, institute means testing and bump out the full retirement age could not be a bigger insult to America’s responsible citizens. No, this is just another instance of kicking the entitlement can down the road just as did the 1983 Greenspan Commission on Social Security. It too failed to correct the long term entitlement program and so will these proposals.

Raising the taxation level will, under the current SSA benefit scheme merely result in larger benefits to the upper income retirees down the road. It only temporarily solves the current benefit issue and does so by creating a worse predicament in future years. Means testing seems viable but it ignores the current SSA rules that link tax payments to benefits. Further, to change the program after the fact, when upper income individuals have already paid in their full tax payments only to find their benefits arbitrarily reduced upon retirement is dishonest at best. It will achieve full disrepute not by means testing directly but by instead instituting an increased tax rate on upper income SSA benefits. The left hand will take what the right hand gives. And the always favorite scheme of bureaucratic desk warmers to bump out the retirement age, is so rife with discriminatory application one wonders how it can pass the ADA (American’s with Disability Act). Anyone who physically labors will pay a steep price in lost benefits and lost jobs as they approach their later years. Who will hire a 60 year old laborer?

I propose a “6% Solution” to the current Social Security Ponzi scheme. My proposal gives individuals control over their retirement funds and retirement age. It also provides a wealth creation scheme that protects their families in the event of early death or disability. It specifically avoids giving monies to Wall Street or to the government. It utilizes existing government guarantees to protect the individual accounts along with a new scheme to provide a minimum return on their retirement funds. At the same time it provides a secondary revenue stream to government to provide funds for current retirees, those who are disabled and to provide for the minimum return on the retirement accounts. That secondary revenue stream is simply the employer’s portion of the current social security tax.

My proposal will result in the “Individualization of Social Security”. This is not privatization with its Wall Street connotations. Individualization uses the existing banking system with its FDIC guarantees and is premised on typical bank Certificates of Deposit. In essence an individual’s monthly social security tax payments would be deposited in a Retirement Certificate of Deposit (RCD) in a bank of their choosing. This RCD would, to the bank, be the same as any other CD. The bank would use those funds to make loans to individuals and businesses. The RCD would receive the current FDIC protection ($250,000 at present). However, the RCD may not be cashed or used as collateral. It is strictly intended to provide retirement benefits.

The new minimum return scheme is to ensure that every individual is able to earn a minimum 6% return on their RCD. This is necessary because of the Federal Reserve’s repeated and ongoing action to maintain interest rates at levels that provide little or no interest income. The basic idea is that the bank will pay the RCD interest at the higher of 6% or the current 10 year treasury note rate. The government will guarantee the bank the difference between 6% and the current 10 year treasury note. This difference is currently about 3.35% owing to the Federal Reserve’s monetary policies. The money to provide this subsidy is obtained from the secondary revenue stream. Of course if the Federal Reserve would raise interest rates to more normal levels the subsidy would all but disappear.

There would need to be a transition of course for those who have been in the workforce for some time but who are still distant from retirement age. Such a transition could be accomplished by a transfer of the existing Treasury notes or notes in the social security trust fund to each individual according to their own individual work history. Each bank can redeem those treasury notes/notes for capital from the Federal Reserve. In this way the individual retirement CD accounts, the RCD’s, can be funded.

This not a perfect scheme and likely has serious flaws. However, it is an attempt to put each working individual in charge of their retirement. At the same time it removes government from direct responsibility while leaving government (e.g., taxpayers) liable to protect and guarantee the retirement accounts. By limiting the accounts to an RCD as opposed to stocks or bonds the taxpayer guarantee is likely to have limited exposure. There are three principal benefits to this scheme.

  1. charge each individual worker with responsibility for their own retirement by giving them direct ownership of their retirement account.
  2. remove the workers retirement funds from government control thus eliminating the resulting spending of those funds by the government and limiting government control over individuals retirement choices.
  3. ensure workers retirement funds are isolated from Wall Street and in exchange provide guaranteed minimum returns and security of the accounts.

When Experts Disagree –

March 21, 2011

For some time now I have been pondering the conumdrum of what to do When Experts Disagree. Naturally the next line would have to be, ” And, When Don’t They?”

My interests (as with many people) lie in the political, economic, financial and investment worlds but like most folks I dip into other worlds such as medicine, environment, education and social policy as I meander down life’s paths. And as I peek into those side worlds and stare at my intrinsic worlds I am confident that this issue of When Experts Disagree flows into nearly (if not every) facet of our modern life. The great question is what, exactly, do we – the decided non-experts do when those experts upon whom we supposedly depend disagree?

As an example,Professor Don Boudreaux wrote a letter to the Wall Street Journal, noting one such disagreement among economics experts:

Justin Lahart accurately reports that, as recently as last year, the late Paul Samuelson dismissed F.A. Hayek’s book The Road to Serfdom as alarmist and wrong: “Sweden and its Scandinavian neighbors are among the most socialistic countries in the world, as Mr. Hayek defined them, Mr. Samuelson pointed out.  ‘Where are their horror camps?’ he [Samuelson] wrote” (“The Glenn Beck Effect: Hayek Has a Hit,” June 17).

Indeed, do physicists even agree on the speed of light? The short answer is, at best, maybe, maybe not. From another area, Curious About Astronomy, comes another type of disagreement among experts.

However, other astronomers disagree that the experiment is able to measure the speed of gravity, arguing that the effect is much smaller than the scientists claim and that (in effect) they got their arithmatic wrong when they decided that the speed of gravity did come into the equations. They are not claiming that the speed of gravity is different to that of light, just that it could not be measured in the experiment.

Clearly this disagreement is at an intellectual level far beyond my capability. But, then, I’m not an expert in anything so almost every disagreement by experts is beyond my intellectual capability. The question though remains: what do I (we), as  non-experts do when experts disagree – as they almost always do?

Take another set of disagreements at the stratospheric intellectual level. This is the abstract for a translation of a disagreement between Albert Einstein and Walter Ritz.

During 1908 and 1909 Ritz and Einstein battled over what we now call the time arrows of electrodynamics and entropy. Ritz argued that electrodynamic irreversibility was one of the roots of the second law of thermodynamics, while Einstein defended Maxwell-Lorentz electromagnetic time symmetry. Microscopic reversibility remains a cornerstone of our current paradigm, yet we are finding more and more evidence that experimentally discerned time arrows are asymmetrical and that they all point from past to future. This paper furnishes some comments about events leading up to the Ritz-Einstein confrontation, some subsequent developments, and an English translation of their agreement to disagree. A side by side comparison of two recent summaries of their battle communiques is included to provide an overview of what they had to say about this current issue.

In matters of scientific fact we may – and most assuredly I emphasize MAY – allow scientists to conduct their experiments to discover the facts of a situation. But what happens when the science community cannot experiment but can only create models they think mirror reality? This is precisely the circumstance in the arguments regarding global warming. Or, more specifically, anthropogenic global warming (AGW), warming caused exclusively by the acts of man. The facts cannot be determined by experiment. The various scientific camps create computer models and argue about the models and the input data and it all has taken on the slimy sheen of a political argument, not a scientific one.

What would we do if our lives were dependent on deciding which of these experts, these intellectual giants was correct? Or even which was more correct? How would we decide? What would be the basis of our decision? Ultimately, might one even be so arrogant as to ask why even consult the experts? For if they ultimately disagree and we are not expert yet we must make a decision then why consult them at all? How would we, on what basis would we, differentiate between the various expert camps?

What do we do when our experts disagree?

Wilmingwood

March 21, 2011

Wilmington, NC
StarNews      03/03/2011
Letter to Editor:

[Note: NC has a film industry incentive to give filmmakers a 25% rebate on their expenses. The editors of the local paper find this just peachy.]

The editors congratulate themselves on the erstwhile success of the film industry in, “Wilmington’s film business on a roll; let’s hope it continues”. Yes, the local film industry is on a roll all right, they’re rolling away with our tax dollars. Golly, who would have thought that bribing a favored industry with a tax credit equaling 25% of its expenses would actually bring that industry to town. Amazing, simply amazing. As Claude Rains famously remarked, “I’m shocked, shocked …”! And as the film industry responds to these tax credit bribes the surprised editors shout with “Glee” or is it just glee? But economically this is “The Night of the Living Dead”.

As a small business owner I’m tired of the endless pleadings for “more porridge tax credits please sir!” as if film is the only industry that needs to remain competitive. What pray tell (is prayer permitted in Willmingwood?) would the editors expect to happen if other industries received the same bribe? Would pharmaceutical companies (PPD) show up in force? What about nuclear (GE) facilities? Might some more build plants nearby? How about a 25% tax credit for specialty glass (Corning)? Would Corning manufacture their Gorilla Glass locally? Or, forsooth, would a 25% tax credit lure more cement plants (Titan)? The list is endless really. In fact, the State of North Carolina could bankrupt itself by bribing industry to locate here. We know that the film industry responds to “The Bribe” (1949). So will others.

An Economic Parable

May 28, 2010

A group of individuals arrive at the shores of an assumed to be deserted land. Well, there may have been some a-priori occupants but they only have knives and the new group has guns. The earlier occupants are quickly dispatched. The new group settles onto the new land to begin an new economy. 

Some in the group are hunters, some are farmers. Some have a skill at turning clay into pots that store food stuffs for the long winters. Some have a skill at turning hides and furs into clothing to stay warm during those long cold winters. Others have a skill at turning trees into lumber and thence into shelter, yada yada yada, long cold winter. Some actually have little or no skill and lack the intellect to develop same, but they are able to provide value by their labors and assist the skilled individuals in their respective tasks. 

Early on the economy was a simple barter system. Furs for lumber, grain for leather, shelter for clay pots. Within the small group it was perfectly reasonable to maintain a book of ledgers to ensure the barter was fair (that is, bilaterally agreeable) and completed or fulfilled. Clearly the farmer may need some assistance while the crop was growing but before it was harvested. The laborer desired some record of their labors to trade for the future harvest. A record was needed to ensure such trade occurred. 

That barter exchange was recorded in the great ledger and the laborer was given the right to obtain some agreed upon amount of grain whence the harvest occurred. In like manner the hunter provided a fur credit to the timber person in exchange for future shelter. As the shelter was completed that barter credit was reduced. Should the shelter credit exceed the fur debit the hunter would be obliged to provide additional furs during the following hunting season. Ditto the farmer and potter and so on. 

Cleary one of, if not the first issue the group needed to settle was the barter level of exchange. How many furs, and of what type would be required for a shelter of some defined size. How much grain and fruit, what type, what condition, is equivalent to the farm laborer assistant for their labors. Only through much discussion, and some argument was the great barter book of ledgers (GBBL) developed. And it was never really a settled matter. As conditions and requirements varied so too did the individual barter levels between the various skill groups. It was a dynamic system, flexing with the winds of change. 

As the group procreates and their population grows new issues arise. New skill sets develop such as doctoring for the sick or injured. Caring for the children so others can be productive. Caring for the elderly. Maintaining the ever changing GBBL. Each of these new skills needed to be correlated with the original skills in the GBBL and again, as circumstances varied so too did the new skills values need to be adjusted. Too many individuals desiring to trade child care labor for grains and fruits reduced the value of that labor. Too many farmers and not enough hunters ensured full belly’s and cold backs. Again, the value of those individual labors and skills required constant adjustment in the GBBL. 

Enough the people cried. The GBBL is beyond recognition. The scribes cannot keep up with the population growth and the constant, daily variations of the barter exchange rates. We need a better system. One that permits rapid, individual adjustments on demand. So, computers were born? No, I’m kidding. Actually money was created. And so, in a massive group project the people spent one long cold winter converting the GBBL to a money system. Creating their money in one ducat denominations they laboriously converted their GBBL exchange rate to a ducat exchange rate. One that all agreed fairly represented the values of the different skills, labors and goods the community produced. 

But the people also understood, intuitively and literally, that the money being created must relate to the skills people possess, labors they provide and goods they create. Further, that new money can only be created in response to a new amount of goods being provided. Else the value of that money would decline and all would suffer. That is, assume the group creates 1000 ducats for the entire community economy. And that those ducats are distributed according to the skills, labors and goods based on the new money exchange rate system (MERS) which in turn was originally derived from the GBBL. 

Yet suppose one member (a thief working as a scribe) secretly forges another 20 ducats for their own purposes. The thief has reduced the value of everyone’s skills, labors and goods by 2%. Why? Because the thief – who provides no skills, no labors and no goods – quietly spends their 20 ducats to purchase a variety of goods and services that they would not otherwise possess. And that spending is in addition to the spending of the ducats legitimately acquired. Others in the community, desiring some of those same goods and services find a shortage and they begin to bid amongst themselves for the now scarce items raising the cost of such to equal the demand. The thief, amazed at the success of this nefarious deed, plots their next turn of fraudulent money creation. 

The difficulty for the group is that new money must be constantly created in response to new goods and services that are created. As a child matures to a productive adult they provide a service or create a good that did not and would not otherwise exist. To facilitate the integration of that item into the economy requires additional money creation but only in proportion to the goods and services being provided. As the new money is created the thief recognizes a marvelous, if opprobrious, opportunity. As the community creates new money in response to population growth the thief will forge a new batch as well. Indeed the thief rightly recognizes that as the money supply – along with population – grows the opportunity to quietly insert the forged ducats improves until it is hardly an issue for the thief at all. 

If the productive population grows at 5% per year (long cold winters, yada yada yada) it will double in some 14 years. [That assumes a population compounding; without compounding it will take about 20 years.] The economy would then have some 2000 legitimate ducats circulating due to the doubling of the productive members.  The thief meanwhile continues to forge 2% each year and adjusts for the growing money supply. Over the 14 years the thief actually creates some 392 ducats or some 20% of the total money supply (392 forged/1980 legitimate)! So a simple plan to steal just 2% per year results in a 20% theft over 14 years. Indeed, if one accurately counts the money in circulation and if the thief adroitly forges new ducats right alongside the valid ducats the actual money supply becomes not 2000 (1980 mathematically) ducats but 2400 ducats (or 2372 mathematically). The purchasing power of the legitimate and productive members of the community has been methodically reduced by some 20% in just one generation. 

The problem for the community is that some of the other scribes have observed that one of their brethren has been curiously non-productive yet continues to acquire a marvelous supply of community goods and services. On inspection they discover the ruse and confront the thief about the forgery. The scribes being largely unhappy at the lowly position they occupy in the MERS and recognizing their critical linkage in the maintenance of that MERS decide not to expose the thief but to emulate them. At least most of the scribes, uh, subscribe to that philosophy. The few remaining are either blissfully unaware or threatened into submission. 

Now the forgery begins apace. Each of the scribes committed to undermining the money system (SCUM) demands a share of the forgery. Indeed their demands are so great that the modest 2% theft rate is wholly insufficient. The SCUM decide to bump up their forgery rate to an obscene, but lucrative 10% each year. Awesome. But the scheme takes a coolly cynical and sinister turn. For the SCUM recognize that their new theft rate may be a bit obvious. As a group the SCUM decide to shower some their new found largesse to the benefit of a select few members of the community. The very members whose support is vitally necessary to the SCUM remaining in their positions as scribes. After all, the community may, if it so desires, change the individuals working as scribes. But by enlisting the support of key members of the community the SCUM ensure their positions and hence, their theft. 

What happens now is painfully obvious. The community is so large and diverse it is difficult for any one member or even a small group to understand what is happening in their midst. For while they seem to be prospering, they each have more ducats this year than last, they also seem to be trapped in an economic paradox. With each step of growing prosperity, more ducats, they seem less able to obtain the goods and services required. Indeed, it is only by committing their future service and goods that they are even able to maintain their current standard of living. It is a curious paradox indeed. 

At the new, higher, theft rate of 10% per year the SCUM reap vast rewards – as do their key supporters. Indeed, in just 10 short years even as the community economy grows apace at a compounded 5% annually the SCUM ravage enough of the new growth to effectively steal half of the community wealth. In just those 10 years the SCUM rise from having stolen 20% of the economy (as measured by the forged/legitimate money supply ratio) to having stolen an additional 83% of the economy. Combining both the original theft and the new theft the SCUM have stolen an amazing 95% of the community economy as measured by the forged/legitimate money supply ratio. 

And the people of the community are left with a conundrum. How can they continue to improve their economy with growing population and growing production of goods and services yet lose individual economic ground each year? True they each have vastly more ducats than just a few years prior but strangely those ducats just don’t purchase as many goods or services as they used to. Are the productive members really better off? Can they finally gather enough disenchantment with the SCUM to remove them from their high offices? Will they revolt against the key SCUM supporters? Or will they succumb to the temptation to join them?

100 Population Base   1000 Money Supply
5% Population/Money Rate   2% Old Thief’s Rate
        10% SCUM Rate  
  Population Money Thief      
1 105 1050 20      
2 110 1103 21      
3 116 1158 22      
4 122 1216 23      
5 128 1276 24      
6 134 1340 26      
7 141 1407 27      
8 148 1477 28      
9 155 1551 30      
10 163 1629 31      
11 171 1710 33      
12 180 1796 34      
13 189 1886 36 Total Thief Amount  
14 198 1980 38 392 20%  
15 208 2079 198      
16 218 2183 208      
17 229 2292 218      
18 241 2407 229      
19 253 2527 241      
20 265 2653 253      
21 279 2786 265      
22 293 2925 279      
23 307 3072 293      
24 323 3225 307 SCUM Thief Amount  
25 339 3386 323 2813 83%  
    Total Thief+SCUM 3205 95%  

State Pension Abuse

March 13, 2010

The article in today’s (March 10, 2010) Star News, “N.C. among states raising pension-investing risks” will sadly receive far less attention than it should. [Note: the original article is, “Public Pension Funds Are Adding Risk to Raise Returns” and was published in the NY Times on March 9, 2010.] In the same vein a subsequent article, “A richer retirement for ex-ABS boss” (March 13, 2010) adds fuel to the pension abuse fire. In fact, the NC pension system is a state level version of the federal Fannie Mae / Freddie Mac debacle. That is, Fannie Mae and Freddie Mac were deemed independent of the federal government by such luminaries as Rep. Barney Frank and Sen. Chris Dodd. That is, they were independent right up to the day that the federal taxpayer became fully liable for all their debts and fraudulent activities (see accounting frauds – Fannie Mae and Treasury, debts, Fannie Mae and Freddie Mac).

The NC pension system is undoubtedly deemed independent of the state’s taxpayers. And so it will remain right up to the day that the system is broke and the state taxpayers will become obligated to cover all the pension obligations incurred by a profligate state government that is owned and operated for the benefit of the state employees not the state taxpayers.

A recent article regarding a local state employee exemplifies this future debacle. The retiring Supreme Court Clerk when asked about her future plans noted that she will have to do something since she is only 48 and can’t draw her pension until she’s 50! What private sector employee gets a full pension at 50? And I mean full private sector not some quasi-governmental organization like Cape Fear PUA or the ABC folks. When state (and quasi-state) employees are able to take full pensions at age 50 and receive their benefits for 30, 40 years or more who will pay them? Given the failure of the pension board to meet its projected 7.25% return assumption for over a decade who will pay the promised benefits? It certainly won’t be the state employees.

The one answer, the only answer, the answer every time is the state taxpayer will pay. Indeed, no sentient being expects the state NOT to bail out the pension plan when it fails. And clearly it will fail when the investment assumptions are based on the benefits to be paid not the returns that can conservatively be earned. This is a prime example of government not by the people, of the people, for the people but government by the government, of the government, for the government. Government looks to the taxpayer every time. Government is not longer the servant of the people, it is our master. It is a classic case of heads, the taxpayer loses and tails, government wins. Here’s how it works.

The state employees pay the least possible amount that is politically acceptable into the pension plan. The pension board makes absurd assumptions about investment returns. The board then promises extravagant benefits based on those faulty assumptions. When the investment returns do not in fact occur the pension board then seeks authority for “flexibility and the tools to increase portfolio return and better manage risk.” to quote Janet Cowell, ex-state treasurer. In other words the pension board wants to speculate with the pension money in order to earn the higher returns needed in order to pay the extravagant benefits promised. And why not? If the pension boards speculative investments fail – and fail they eventually will (see Harvard, Endowment Fund, Losses) – then the pension board will simply ask the taxpayer to take over the obligations.

As an example of these extravagant pension benefits, consider our local ABC administrator Billy Williams. To calculate his pension the state treasurer uses the average of his four highest paid years, plus other factors such as  date of birth, estimated social security benefits, unused sick leave, the number of beneficiaries and the length of his employment. There are few, very few, if any private sector employees who can ever hope to obtain such extravagant benefits. Yet it is these very same private sector taxpayers who will ultimately be responsible for Billy Williams’ pension benefits. In short, state employees, through the state pension board and state treasurer get to speculate with their pension money so as to receive these extravagant benefits knowing full well that the state taxpayer will bail them out if the pension system fails. It is a win-win for the state employees and a lose-lose for the state taxpayers.

Where should the pension board invest the money? First, they should buy all the state and local bonds. Only when all state and local bonds have been purchased should the pension system be permitted to invest in federal bonds. That’s it. By investing in the state and local bonds the pension system and by extension, the state employees will have their fates tied to that of the state taxpayer instead of to some Wall Street hedge fund.

Manufacturing (Dis)Employment

February 11, 2010

 RedSt8r: The following is my comment regarding the letter from Professor Don Boudreaux to the Wall Street Journal

“Picking Winners” by Making the Rest of Us Losers [Please read his entire post]

by Don Boudreaux on February 9, 2010

Below are two letters [ RedSt8r: I’ve only reprinted one letter ] that I sent yesterday to the Wall Street Journal.  Both are in response to this essay whose author argues that America needs an “industrial policy.”  (This essay has many flaws beyond those that I highlight in my letters.)

John Hofmeister builds his case for a U.S. industrial policy on a foundation of falsehoods (“The U.S. Needs an Industrial Policy,” Feb. 8).

The most notable falsehood is Mr. Hofmeister’s assertion that American manufacturing is faltering.  In fact, America remains the world’s leading manufacturing country, one whose manufacturing output continues to increase.  For example, in inflation-adjusted dollars, the value of U.S. manufacturing output in 2007 was 8 percent higher than it was in 2000, 69 percent higher than it was in 1990, and 184 percent higher than it was in 1980.

And while it’s true that the Chinese will one day produce more manufacturing output than do Americans, that eventuality is hardly surprising given that China is home to one-sixth of the world’s population.  Moreover, the fact that manufacturing outputs in newly industrializing nations such as China are growing faster than American output no more means that American manufacturing is in poor health than does the fact that a two-year-old girl is growing faster than her ten-year-old brother mean that the brother is shrinking, is in poor health, or is in need of a ‘height’ policy.

REDST8R:

Professor Don,

Your recent letter to the Wall Street Journal continues a theme of yours, to wit, that manufacturing in the United States is alive and well. To buttress this claim you provide statistical evidence showing that the dollar amount of manufactured products is high and rising. I will stipulate that your statistics are valid, that your math is accurate and that as far as it goes your conclusions valid.

 But from the hinterlands I see a wholly different picture. Out here in non-tenured land I see manufacturing employment as seriously ill and getting worse. The chart below is based on data obtained at www.bls.gov/cps. It shows the percentage of workers employed in manufacturing versus the total employed work force.

Manufacturing Employment as a Percent of Employed

As this chart demonstrates the manufacturing employed are dropping in a rather precipitous manner and have been doing so ever since the WWII peak. I concede that this is not all bad as many such workers were able to find alternative employment and the cost of manufactured goods was minimized. I do not believe this to be the case any longer.

You provided a cute analogy to a 2 year old girl growing “faster” than her 10 year old brother. I suggest a more accurate analogy is the 2 year old growing “faster” not just while she is young but throughout her life. Surely at some point, when she is 12 for example,  the now 20 year old brother who may now be smaller than his 12 year old sister should be examined for some pathological issue. That is the case today with manufacturing in the United States.

I don’t really care that the dollar value of manufactured items has risen as you indicate. That only tells me that lower value manufacturing and the jobs that go with it has been transferred overseas. Please explain to me why that 2 year old girl – China – who should be eating more (relatively) than her older brother – America – is in fact not doing so? Shouldn’t the newly developing, rapidly growing, third world nation such as China be importing vast quantities of raw materials and finished goods to fill the growing demands of her population? And shouldn’t that be confirmed by a current account deficit as she buys more goods from overseas and consumes more internally? Yet that is clearly not the case. In fact the older brother, your analogy, is consuming more and growing less than his younger sister. Something is clearly wrong and yet you persist in following ideological paths rather than the evidence in front of you.

Insider Trading Hooey

October 25, 2009

The Saturday, October 24, 2009 issue of the Wall Street Journal’s “Weekend Journal” had a front page article, “Learning to Love Insider Trading” by one of my favorite bloggers. The author is Professor Donald J. Boudreaux, Professor of Economics at George Mason University. His blog, “Café Hayek” is on my daily reading list. More often than not I find agreement with his points of view. Not so with this article. In fact, were I the professor and this a student paper it would get no more than a “D” and even that only for penmanship.

 In support of insider trading Prof. Don provides two examples. The first is the governmentally imposed gasoline price fixing and limitations on purchases. How this relates to insider trading is a mystery. Prof. Don writes that it shows the failure of price discovery as it relates to supply and demand. Of course it does. That was the explicit purpose. Governmentally imposed price and supply controls are political in nature not economic. They are imposed for political reasons; they are designed for political benefit and they are wholly divorced from economic purpose. This example fails the test of relevance.

 The second example Prof. Don provides involves “unscrupulous management” that drives a company to the brink of bankruptcy but hides the financial facts from both the public and creditors alike. In this example Prof. Don uses actual, literal, criminal fraud to justify insider trading. This is even more mystifying than the price controls example. Knowingly using false information to obtain credit is criminal fraud. Hiding the actual financial condition of a publicly traded company from the shareholder owners also constitutes criminal fraud – at least in my mind it does. There simply is no link between these two non sequiturs and insider trading.

 The only other justification the professor provides are quotes from two other economists, Henry Manne and Jeffrey Miron.  The quote from Henry Manne is instructive in that Prof. Don explains it as saying, “… when insiders trade on their nonpublic, nonproprietary information …” which is interesting in itself on several counts. First, “insiders trade on their …” except that it isn’t “their” information it is the owners information. The insiders have no right to sell what isn’t theirs in the first place. Second, “nonpublic” is quite absurd since the whole issue is about nonpublic information. If the public knew the information there would be no insider trading taking place. Third “nonproprietary” information is the key to the whole issue. What possible information could be of value that isn’t proprietary? Near the end of the article the professor addresses, or feigns an attempt to address this issue but his examination is, to be polite, weak. By definition, if it is of value it must be proprietary.

Prof. Don’s quote from Jeffrey Miron, “In a world with no ban, small investors might fear to trade individual stocks and would face a greater incentive to diversify; that is also a good thing.” Right, illegally trading on stolen information that effectively robs small investors of prospective gains thereby forcing them to diversify is a good thing. Sigh. Apparently only insiders and large, presumably professional, traders have the right to profit from stolen information. Small traders should buy their mutual funds and shut up.

Trying to exculpate insider trading for its supposed beneficial economic effects is so wrong it’s bordering on the absurd. Seriously this is a “broken window” type of economic theory. It’s analogous to saying that having your car stolen is economically beneficial since you have to replace your car and that creates economic activity.

Trying to exculpate insider trading because of insider non-trading is equally absurd. Professor, insider buying and selling or not buying and not selling is public (or should be) information. You can read about it all the time. There are a number of web sites that provide such information such as, http://www.insidercow.com/ . MSN’s site gives small and large traders access to insider buy/sell information at  http://moneycentral.msn.com/investor/invsub/insider/trans.asp . An investor can just type the ticker symbol for the data. When corporate insiders don’t sell shares – for whatever reason – this information is publicly available simply because they don’t sell! Claiming such non-activity as a prosecutorial bias and thereby justifying the insider trading is more non sequitur masquerading as reasoned thought.

In the end there is one issue that Prof. Don ignores that I find most troubling. I am a small business owner, the majority partner actually. Everything my partner and I provide in our business belongs to us. If an employee uses my computer for their personal email they do so at my convenience. As a courtesy I would periodically ask them to remove any personal items so that business functions can proceed uninhibited but it is my computer and I can do with it as I wish. We do not allow them to use our company vehicles for any personal reasons. They can’t use our tools or offices for private functions. Nor can they use our financial data or business plans for their own personal gain. In short what Professor Boudreaux ignores are the ownership rights of the shareholders. None of the insiders has unequivocal ownership rights to the information they are selling. At best they share ownership unless it is a private company and they are the sole owners. But in that case there is no public trading taking place. At bottom all insider trading robs information from the rightful owners for the personal gain of the employee insider.

Professor Boudreaux’s failure to protect the ownership rights of shareholders is a significant and substantive failure on the part of one who otherwise champions individual rights and freedoms.