China Teaches Us

China has had phenomenal growth that slowed and now is continuing. The New York Times reports "the renewed growth has been fueled by rapidly mounting debt, as state-owned banks and the central bank have funneled hundreds of billions of dollars in additional lending to state-owned enterprises and government agencies to finance further investment projects."  We could do this too.  Our Federal Reserve could loan money to the national and state and local governments to build much needed infrastructure.  We are mired in old thinking that austerity is the answer to unemployment.  The debt of Chinese state-owned banks and the central bank is only a bookkeeping phenomena of no consequence. Central bank debt is just an accounting matter.  It can go on until the economy can not produce further goods. The limit is the real capacity of the economy.  Does anyone doubt that our economy can produce more?

Romney enriches himself

Romney received over 15 million from the government bailout of GM and its Delphi parts supplier.  A hedge fund that Romney invested in bot the bonds of Delphi at a discount and then received more than they paid for them when Delphi was saved from bankruptcy.  The trust fund moved most of the jobs to China and watched Delphi's stock price rise when it repudiated its pension funds obligations to its domestic workers.  Of course in Republican fashion, it conducted a multi-million dollar TV campaign claiming Obama  gave a handout to labor.  All of this is reported in The Nation magazine of Nov 5.

ECB offer to buy Spanish and Greek bonds

It is bloody nonsense for Spain and Greece to not sell their bonds to the European Central Bank.  They say they fear greater European control.  Well let chaos reign from more labor strikes and human suffering!

Portuguise Austerity Protested

“The austerity model has been applied rather mechanically,” he said. “This is not a country full of big companies that can adjust to a decline in their domestic market but rather small and medium-sized companies whose only option is then to close down.”says Viera Lopes quoted in NYT,

"Many stores in central Lisbon are now either closed or advertising huge discounts, as citizens struggle in a deepening recession that has pushed unemployment to a record 15 percent. A sharp rise in the sales tax has decimated the restaurant sector, including well-known venues like Bocca and Manifesto" NYT Oct. 18

This pain is not necessary. Why have austerity when the real economy could produce much more?

British Monetary Policy

"But there is also a growing sense (in Britain) that, with interest rates already at a record low (.5) and the economic effects of the central bank’s asset purchases unclear, monetary policy is becoming less effective as a means of stimulus.

Instead of central bank stimulus measures, some economists favor a slowdown in the pace of large government spending cuts intended to reduce the country’s budget deficit." NYT Oct 18 

       This economist agrees, but more is needed. When will central banks make interest-free loans to the country to create jobs in public works, etc.?  The problem is weak consumer demand.

Taxes and Jobs

Romney claims his proposed reduction in corporate taxes will create jobs.  This is bunk.

       US Corporate Cash Pile At $1.24 Trillion, Over Half Located Overseas reports Moodys.

Moody's expects overall business conditions to remain modest over the next year and expects companies to continue to use cash for shareholder dividends, share buybacks and acquisition activity.  Using profits to buy your own stock does nothing for jobs, and just enriches corporate management who own lots of their company’s stock.  Corporations have plenty of cash to increase investment in plant and equipment, but they will not do so unless consumer demand increases.

Nobel Without Emotion

 The new winners of the Nobel Prize  for economics must be living on another planet whose inhabitants have no emotions. Elegant theory it may be, but relevant to the real world is another mater.

"Mr. Shapley explained how individuals can be paired together in a stable match even when they disagree about what qualities make the right match. The paper focused on designing an ideal, perfectly stable marriage market: that is, how mates find one another in a fair way, so that no one who is already married would want (and be able) to break off and pair up with someone else who is already married.

It was an elegant and simple mathematical model that explained the optimal way to match up men and women.

Evolutionary theory is work of devil

Georgia Congressman Paul Broun says evolutionary theory is work of the devil.  And he is a member of the Science Space and Technology Committee. May heaven help us! The inmates are in charge of the asylum.

Austerity fails

Paul Krugman "concludes is that a disproportionate share of the bad news is coming from countries pursuing the kind of austerity policies Republicans want to impose on America.

O.K., it doesn’t say that in so many words. What the report actually says is: “Activity over the past few years has disappointed more in economies with more aggressive fiscal consolidation plans.” But that amounts to the same thing.

Leadership?

A survey of voters after the Presidential debate says  Romney is the best leader. But, with respect to the economy he has never said exactly what he is leading us to except that the market is magic.

Forget Bank Bailouts

Crisis is the mother of innovation in fiscal policy.  In the face of recession when consumer demand is weak, I have long advocated that central banks make loans to the treasury to employ people and put more spending power into the economy.  After saying they would never do it, the European Central Bank, is buying the debt of its member governments.  This will relieve the pressure on countries facing extremely high interest rates on their borrowing.  This enlightened policy is somewhat offset by the EU governments (led by Germany) insistence on budget cutting austerity which reduces consumer spending, in exchange for EU bailout money. Forget bailouts, they would not be needed if the central bank was doing its job.

      The Japanese central bank is the most progressive buying corporate bonds, commercial paper, exchange traded funds, and J-Reits.  The U.S. Federal Reserve is the least progressive of the three biggest central banks.  It only buys government bonds.  It says its program will lower long term interest rates.  This is a nonsensical objective since rates are already historically low.  Our problem is not high borrowing costs, but the fact that business does not want to borrow when consumer demand is low. 

      Financial columnist, John Plender, writing in the Financial Times 26 Sep 2012 worries about central bank balance sheets and the quality of collateral.  He does not understand that a central bank can’t go bankrupt.  It can just create more money via more loans and try again to get the economy moving.  A really progressive central bank would buy things owned by consumers such as home mortgages.  I do not approve of countries such as Greece with overly costly public employee pensions and early retirement that are unfair to other citizens.  But, think what their economies would look like if pensioners had no money to buy consumer goods.  The Greek government could subsidize all pensions and tell the retirees to go out and buy.  Instead, more austerity is being insisted upon for the Greek, Italian, and Spanish governments.  The world’s policy makers and general public are asking the wrong question when they see rising public debt.  The problem is not debt, but how it is financed. The problem is not the inability of European and US economies to produce more goods, witness the excess capacity in plant and equipment and unemployment. 

Can't Add

Romney wants to cut the budget, but proposes to increase defense spending, one of the largest items in the budget.  This will appeal to those who think we can lead with bombs and others who can't add.

Selective Perception

"Chances a Republican believes today that Iraq had weapons of mass destruction at the time of the 2003 invasion: 2 in 3."
Source: Harper's Index, September 2012.
Proving once again that we see what we want to see!

Taxes on Rich

Sixty-four percent of Americans favor higher taxes on those earning >$250,000.  Why do let a vocal minority rule us?

Good Newsfrom Krymsk

A Russian town suffered a devastating flood recently killing 172.  More than 2,000 young volunteers responding to internet messages arrived to help.As one activist observed "It's a new story for everyone--for society to help society to solve problems without any help from the government."
NYT July 15.

Underwater Home Mortgages

The county of San Bernardino, California, is considering using eminent domain to acquire home mortgages where the principal owed is greater than the current value of the home.  Let’s run some numbers to see how this would work.  Suppose a home purchased at the height of the real estate boom for $200,000.  Today it might be sold for $100,000.  Using eminent  domain, a local government could pay the market value for the mortgage and resell it to private investors.  The bank immediately receives 100,000 rather than waiting for a costly foreclosure process and trying to sell or rent the property when there is a glut of offerings.  Homeowners now have a mortgage payment that is affordable and have no fear of being forced from their home.  Is this not a win-win outcome?

      The Securities Industry and Financial Markets Association objects emphasizing that it would be an abrogation of contract.  But, thousands of underwater homeowners are already doing that, walking away from their homes.  The only real losers would be those mortgage holders who benefit from the struggles of homeowners to keep their payments current.  For a short time the mortgage holders can pretend that their balance sheets contain the full value of the mortgages they have issued, but it is an illusion that can’t be sustained.  We need new ideas to deal with an unprecedented problem.

     

Mao & Marx

Mao must be turning over in his grave what with a new theme park being planned for Tibet.  And then there are the gated subdivisions of the super rich around Beijing with garages filled with Cadillacs.
Likewise Marx and Lenin must be wincing in disbelief at the Russian fasionistas who are the best customers for the high fashion houses of Paris and Milano.  I won't live long enough to see the next revolution, but it will surely come.

Fed Fumbles

The Federal Reserve just announced its latest solution to the slow economy.  It is called the "twist."  They will sell short term bonds and buy long term bonds.  This will hopefully lower long term interest rates.  Whopee!  Interest rates are  already at historic lows, but the private sector does not want to borrow because consumer demand is inadequate.  Instead of trading in the financial markets, the Fed should be buying something that everyone has so as to put new money in the hands of consumers.  You can hear the no-nothings scream socialism.  Why buying bank assets is OK say them, giving money to real people is some how bad.  Go figure!
   The same problem pervades Europe.  The European Central Bank buys assets of failing banks, but does not buy bonds of failing nations. 

Austerity

A private firm is all about cash flow.  If the cash flow is negative it can't survive for long.  But, the government (Federal Reserve) is not about cash flow.  It is about estimating the the real productive potential of the economy and increasing the money supply to bring it forward.  Discussion of austerity misses the point of our present unrealized and wasted capacity.  If the banks don't create enough money (loans) to create full employment, the the US Treasury and Federal Reserve must do it.
     Government needs to spend more not less using loans from its own bank, not more borrowing from financial markets. As a recent New York Times editorial says, our problem is inadequate consumer demand.  It is inadequate because unemployed people can't buy and that now includes laid off teachers, police, and fire fighters. What a waste.  All due to myth and superstition and false analogies between private debt and public. 

Cross of Gold

Presidential candidate William Jennings Bryan admonished policy makers not to "crucify mankind on a cross of gold." In the face of the financial crisis of 1893 and unemployment, he advocated the coinage of silver from government stockpiles to increase the money supply and increase consumer demand.  Of course, the wealthy opposed him as they were not hurting
     Today the unemployed are being crucified on a cross of austerity that the wealthy says is good for them.  The fact that austerity has failed has not dulled support.  Austerity has already made a deep bite in local police, fire, and schools, and libraries.  Voters in several European countries have vented their rejection of austerity, but no alternative has emerged such as I suggest.  The EU has tried to help banks, but has done nothing to aid consumers so the bank bailouts are not working.

Spanish Banks and Unemployment

It is sad to see viable small businesses in Spain laying off employees because their banks have called in the loans necessary for operating capital as reported in the New York Times Sunday.  This makes unemployment worse and recovery impossible.  No amount of austerity will solve this problem.  The banks do not require bailouts, they need a change in the rules so that failed loans (mortgages for real estate) are not a charge against their capital.  There is so way that a bank can stay viable with a historic 20 to 30 percent change in real estate values.  These loans have to be removed from the books as was done in Iceland.  Government austerity will only make the problem worse.

Financial Whales

While JP Morgan Chase recently lost two or three billion dollars, Boaz Weinstein of the $5.5 billion Saba hedge fund made an astronomical sum.  What useful service did Weinstein perform to earn this kind of money?  None!  He observed a price difference between a credit derivative index and the market it was supposed to track.  The aberration was caused by a trader for Morgan called the London Whale.  The Whale kept selling and Weinstein began buying. Like in poker, someone who makes a mistake often doubles down to scare off competitors, but the Whale did not scare Weinstein.  (NYT  May 27, 2012) You need a lot of capital to play this game such as Morgan has as one of the nation's largest banks.  The Whale lost.  Should we care?  Morgan points out that their loss is a tiny fraction of their assets.  This is one meaning of “too big to fail.”  Still, it was just this kind of trading that made the recent financial crisis a crisis. 

Mr. Weinstein has been banned from the Bellagio Casino in Vegas.  In this case, the Casino should be banned and banks should not be allowed to make such bets (Volker Rule).  These brilliant minds should find something else to do with their smarts like making useful products and investing in plant and equipment that provide jobs.

The French Get It

Francois Hollande, the socialist candidate for the French presidency, is advocating that the European Central Bank make loans to nations (not just banks). The ECB is prohibited from doing so, but it is time to change the rules and abandon austerity that is only making things worse. I have long advocated that central banks loan money interest free to nations that have excess capacity (see earlier blogs).

What a waste!

"An American soldier dies every day and a half, on average, in Iraq or Afghanistan. Veterans kill themselves at a rate of one every 80 minutes. More than 6,500 veteran suicides are logged every year — more than the total number of soldiers killed in Afghanistan and Iraq combined since those wars began." These wars must stop. They are not worth the cost of destroying the cream of our youth.
Source: New York Times, 15 April 2012

Crocodile Tears

Let's all shed some crocodile tears for the unfortunate execs of GM, AIG, and Ally Financial Inc. for whom the government has ordered a 10 percent salary reduction. General Motors CEO Akerson will only receive $9 million. GM still owes the government $25 billion.
I suppose these underpaid execs will leave for other bankrupt firms such as Kodak.

What is our biggest problem?

The two chairs of the Commission appointed to develop a plan for reducing the Federal deficit agreed that the debt was the nation's biggest problem and unsustainable. We have to cut defense, social security and medical care they say. But, they know it won't happen.

This has become conventional wisdom. Why does not anyone raise the question of what the real economy of people and factories is capable of producing. Have we lost the knowledge needed to produce? Have the factories rusted?

No. This is an institutional failure, not a physical problem. There is an alternative to borrowing more money in the market. The Treasury could borrow from the nation's own bank,the Federal Reserve. Tell me why it is OK to create money every time a private corporation borrows money from a bank, but not OK if the government does the same thing??

Stock market and the economy

Fed chief Bernanke said that deep problems remain in the labor market. So the S&P hit its highest close in 4 years. Go figure! Of course behavior in a gambling casino doesn't have to make sense.

Good news? Layoffs in January were 154,000 fewer then than in December, 2007. Bad news: firms hired 778,000 fewer workers then they did in December, 2007.

"the fact that labor demand appears weak in most industries appears weak in most industries and locations is suggestion of a general shortfall of aggregate demand, rather than a worsening mismatch of skills and jobs." WSJ March 27, 2012.
This problem will not be fixed by tax cuts and austerity.

Afghanistan--go slow or get out

Karzai has asked us to go slow, how about real slow as in Get Out?

British Colonial Failures

The Brits “retained significant control (over Iraq) … until the late 1950s. Yet by repeatedly putting its faith in unpopular rulers who could be depended upon to ensure a steady supply of oil, London inadvertently set off several nationalist explosions. A string of army coups, starting in 1958, eventually led to Saddam Hussein.”

In Nigeria, Britain distrusted educated natives “and decided to grant resources and autonomy to more traditional tribal chieftains, who were intent on pursuing local, not national interests. Britain’s decision to join the Islamic north of the country with non-Muslim settlements in the south fed tribal conflicts and insurgencies that have lasted to this day.”

In the Sudan, “British authorities ruled the north and south separately, ultimately to calamitous effect. Southern Sudan has recently become a separate country after decades of bloodshed, and the last 10 years have seen unconscionable war and genocide in the Darfur region, which was mindlessly tacked on to Sudan during World War I.”

Quotes from Isaac Chotiner’s review of Kwasi Kurateng, Ghosts of Empire in the New York Times, March 4, 2012.

Oil subsidies

Obama proposes an end to government subsidies of oil companies. It's about time.

Going to the dogs

Consumer spending for pets was $51 billion last year. Economists are fond of saying that non disputum de gustabus, or in matters of tasted there can be no dispute. But, surely some critique of spending is as important as improving the efficiency of production of questionable value. The content of GNP is important as well as the quantity.

Romney on Taxes

Romney proposes more tax breaks for the rich. He would eliminate taxation of investment income, reduce corporate taxes, and eliminate estate taxes. After seeing the steadily increasing share of national income going to the top one percent, Romney wants to make it worse.
Reducing corporate taxes as a stimulus for investment is a myth. Corporations have a record amount of accumulated savings that they don't want to invest now. The problem is inadequate consumer demand, not corporate profits.

Enough Nukes

The U.S. has 1,656 nuclear warheads deployed. Obbama wants to reduce them. In hearings last week, Rep. Thornberry R-Texas objected. For military reasons? No, his district has the Plantex plant that built many of the warheads and still maintains them. It would be cheaper and safer if we sent all the employees a severance check. While the Republicans argue over who hates gays the most, no one talks about the dangers of nuclear warheads.

Capitalism

Capitalism is commonly described as the system of private ownership (often rarefied as individualistic, though in fact it is corporate and collective). Its primary character is a system wherein selected corporations are given totemic symbols in their accounts (no printing press necessary) enabling them to order people and resources around. The primary creation of these symbols by commercial banks is the essence of capitalism. It requires collective action and legitimation far beyond the individual. This is far from just an assortment of individuals buying cheap and selling high. Markets are only a handmaiden of the essentially collective monetary system—collective, planned and centralized.

The private ownership of capital begs the question of where capital comes from in the first place. No individual Robin Crusoe ever created a unit of credit that can be subsequently traded for labor or iron. The very word capitalism suggests its essence is capital, a collective institution, not individualism. The common dichotomy of capitalism vs. socialism misses the point.

Right to Work (or right to steal)

If there was ever a misleading label, it is “right to work” laws that prohibit employers from automatically with-holding union dues from wages. The law could be called “right to benefit from the efforts of others.” If a union obtains higher wages and better work conditions from employers, all employees benefit whether or not they stood in the picket lines or contributed to union administrative costs. There is no easy guide to public policy here when freedoms conflict. Whose freedom counts is the tough issue.

Super Bowl Blues

The average 30 second ad during the Super Bowl cost $3.5 million. Absurd. They were wasted on me, I did not watch.

Prices

Cadillac Escalade automobile, $77,000
Columbia Grammar School, New York City, 37,000
Manhattan Private School Advisory consultants, 21,500
Harvard tuition, 36,000

Eat More Vegetables

The US Dept of Agriculture has been trying to write new rules to combat obesity in school children by reducing starchy foods and increasing fruits and vegetables in subsidized school lunches. But this ran into a buzz saw of lobbying by potato growers, farm state senators, etc. The proposed rules were changed to accommodate the special interests--including allowing a bit of tomato paste on a pizza to count as a vegie!
Again political campaign contributions corrupt.

The Newt

Why would Gingrich, a thrice married Catholic, become the darling of the Evangelicals in South Caroline? David Reynolds writing in the New York Times suggests that they don't like Romney, not his theology, but because Mormans compete so effectively for converts.

Show Biz

Prince (aptly named) Fielder will play for the Detroit Tigers baseball team for $215 million over nine years. I don't suppose he would like to donate to a scholarship fund at some Michigan University??

Bitter Irony

Bitter irony of the week: A super-rich couple gave $5 million for Newt Gingrich's South Carolina campaign and another 5 million for his upcoming Florida primary. The money in South Carolina was used to purchase negative ads that harped on Romney's wealth.

Tell me this world makes any sense!