Is the end nigh?

Two years ago, and one year ago, I was predicting terrible stagflation.  Not world ending stagflation but certainly an economic malaise.  Lately I've been starting to think we've weathered the worst and maybe managed a bumpy landing (for now at least).  I don't think the problems have gone away but maybe we've managed to postpone them for a while.

According to economist Nouriel Roubini, maybe not:

Krugman tells half a story

The Krugman answer.

Paul Krugman, economist, propagandist, and Keynesian ideologue looks to Europe and sees a failure of countries' attempts at austerity in helping their economies - as if the problem was one that could be solved overnight.  The same liberal logic used to defend president Obama - the recovery will take time - doesn't get applied when Krugman looks at the success or failure of solutions that don't fit his world view.

Specifically, in early 2010 austerity economics — the insistence that governments should slash spending even in the face of high unemployment — became all the rage in European capitals. The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in “confidence,” that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did.

Now the results are in — and they’re exactly what three generations’ worth of economic analysis and all the lessons of history should have told you would happen. The confidence fairy has failed to show up: none of the countries slashing spending have seen the predicted private-sector surge. Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending.

Furthermore, bond markets keep refusing to cooperate. Even austerity’s star pupils, countries that, like Portugal and Ireland, have done everything that was demanded of them, still face sky-high borrowing costs. Why? Because spending cuts have deeply depressed their economies, undermining their tax bases to such an extent that the ratio of debt to G.D.P., the standard indicator of fiscal progress, is getting worse rather than better.

(emphasis added)

The interesting point is that austerity measures don't produce results overnight, just as president Obama said there were scores of shovel-ready projects that would lift the country out of recession almost immediately turned out to be pure fantasy, it is fantasy to suggest that austerity, during a downturn would provide nothing but roses is a false claim.  Nobody suggested it would.

As for the lessons of history, in the early 1980s the deep economic recession under Reagan was deepened by the high interest rate policy which was designed to deepen the pain but significantly shorten the period of pain.  Krugman has not learned the real lessons of history - that long term solutions are not the best short term solutions.  Looking at the austerity measures taken in Europe in countries that had previously been on unsustainable paths, the long term is set up far better than additional stimulus efforts would have provided.  The point is - the results are not in this has just started.  True, it's painful, that's what happens withdrawal symptoms of an addiction.  But give it 10 years and you'll see an entirely different set of circumstances.  

The sad part of the proof will be this - if Krugman gets his way and Obama gets re-elected, the matter of proving the effectiveness of austerity measures will be easier because the United States will become the control group for the European austerity experiment. Spendthrift American government will end up being the cautionary tale Austrian school economists teach to a new generation of European economic students.

Is The Global Currency Reserve A Done Deal?

A U.N. panel of economists is attempting to steer the world away from using the American dollar and towards a global currency reserve. The plan is supposedly designed to help jump start the economies of prosperous nations and prevent future global economic crises. Fools.

Whether the international currency reserve changes or not will not have an impact on future crises. Let me explain something to these economists. Crises have occurred throughout history. No matter what action is taken now, at some point future economic downturns, and yes crises, WILL occur. Why?

As the saying in Ecclesiastes 3:1 goes, "To everything there is a season, and a time to every purpose under heaven."

In other words, there are bulls and there are bears, there are periods of prosperity and periods of poverty. There are times of war and times of peace. Thinking that some new economic plan can change the ebb and flow is ridiculous. You can't stop the tide. As economists you should no better than to make such a foolish statement.

When I was younger, I saw Star Wars with my father, a civil engineer. We watched Luke Skywalker speeding through the desert in his hovering vehicle (apologies to all Star Wars geeks - I loved the series but I don't recall what the vehicle was called). My father casually observed, "a vehicle floating like that is impossible". I had to admonish my father - I told him as an engineer he should know better than to make a statement like that. Nothing is impossible. Something might not be technically feasible currently, but that doesn't mean some day it wouldn't become a reality. Look at flight, space flight, computers, lasers, and even television. 200 years ago all would have been considered impossible.

My point is that making such blanket statements is foolish. No matter what economic 'solutions' these economists bring to the table, economic hardship has always occurred. For the foreseeable future, it always will occur. [Avoided falling into my own trap there.]

Getting back to the dollar, is dumping it a good idea? There are pros and cons to America in doing so. But the reality is, even after Geithner's silly stumble, he was reasonably quick to correct himself and state that for the foreseeable future, the dollar would be the international standard currency reserve. So is the global currency reserve or the basket currency China had been suggesting a done deal? Hardly. Is it something likely to be argued at the upcoming G20 meeting? For sure. But at this point I don't see the change coming. Perhaps things would have been different if the Dow had continued to fall and was below 5000, and similar struggles were snowballing in other countries at the rates they were back in Q4 2008. But my gut feeling is that the talks about changing the currency, regardless of what Russia, China and France might say, will not gather any momentum. I could be wrong, but I don't see this as being Bretton Woods redux.

Limited Government

Recently the Gadfly posted an excellent Milton Friedman video, and it reminded me to post another Milton Friedman video wherein he discusses limited government. If you want to make the argument about limited government to friends and family and don't know where to begin, study the video - Friedman makes excellent points and they are easy to absorb. If you don't feel confident enough to discuss it with others, just show them the video. It's about half an hour, but worth the watch.




*Requires Shockwave player.

Mr. President, you want to WHAT?

According to the Economist,

CREATING political theatre by cracking down on executive pay may prove to be the easy part for Barack Obama. Coming up with a sensible and effective way to compensate senior managers at companies bailed out by the American taxpayer will be far trickier—and the new president’s first effort, unveiled on Wednesday February 4th, is unlikely to be his last. 

Capping the non-equity-based remuneration of executives in companies receiving “exceptional assistance” at $500,000 a year and banning “golden parachutes” for failed executives is likely to strike most Americans as fair, or even generous, given that Mr Obama himself earns a mere $400,000 and the rules will apply only to new bail-outs. Indeed, after the outrageous payment of

billions of dollars in bonuses by Wall Street firms that had survived only because many more billions had been injected into them by the government, the executives should probably be grateful for getting off so lightly. Moreover, executives will be allowed grants of restricted stock (which they cannot sell until the taxpayer is repaid), so they may yet end up making a fortune.

The Obama administration, having had years of Democrat meddling in industries and causing problems - most notably in banking, and the auto industry, now wants to further regulate the industries that are suffering most. Unquestionably, there are elements of unscrupulous greed in the banking sector. But consider the following;

1. The talented people whose salaries would be capped are not held hostage to the banking industry, nor to employment in American firms.
2. Capping those who could earn more is an imposition on simple supply and demand curves and therefore will ultimately cause an imbalance that will resolve itself in other ways.
3. Not only will this cause an exodus of these executives to elsewhere, it will therefore create a void of top talent in the industry, therefore dooming it to further erosion of quality.
4. It opens the opportunity up for foreign banking to fill the void - by meddling Obama is doing to the banking industry what years of liberal policy managed to do (or at least substantially aid in doing) to the auto industry - hobble it and make it vulnerable to leaner, more efficient and responsive foreign competition.

Take the creative and talented executives and relegating them to substandard pay is a recipe for failure. Two obvious examples come to mind;

In Canada, there is a shortage of doctors. Wait times in hospitals and clinics are terrible. The reason - socialized medicine. Someone with a MD certification can make multiple times the income in the United States than they can make remaining in Canada. So where do the best doctors from Canada go? Take a guess. I'll give you a hint - it's south of Canada and it isn't Mexico.

The example that Democrats might prefer to point you to is sports - basketball has a salary cap for example. But the comparison is a specious one for a number of reasons. Firstly if you play basketball and are a top talent there are no alternative leagues to lay in if your salary gets capped below your market worth. Secondly the cap is at a team level, not an individual level. For comparison purposes it's like saying to a bank that if your executives number 1,000 you can pay them a combined amount of $500 million. In that case the bank could still decide to split that unevenly so not all executives would necessarily be capped at $500,000. Thirdly, the NBA has a soft cap, not a hard cap. That means there are exceptions. And frequently, many if not most teams are not under the cap during a season.

Once again Mr. President, a populist, class-warfare instigating idea that ultimately is not healthy for American banking but makes you look like a good guy, is a BAD, BAD idea. But we know you aren't averse to social engineering of any type, and I'm sure you'll proceed. After all the effects won't be fully realized until after you've left office. In fact, many will never realize at all what damage you will have caused, in this effort and in others. But remember this - the great innovations of our time, or of any time, did not come under socialist utopias like the Soviet Union or Communist China or in Michael Moore's medical utopia of Cuba. No they came in societies, including of course America, where the government's job was to ensure public safety and business job was to ensure their own profits and well being.

The government's job is not, and should never be, to ensure cradle to grave welfare of persons or businesses. Deliberately or not, you seem intent on turning the public safety net into a hammock. The thing is, a hammock needs to hang off of sturdy trees. That would be a robust economy in this metaphor, but also seem to want to chop down those trees. I for one am wholeheartedly unimpressed.