Archive for the ‘Economy and Business’ Category

Vladimir Putin and the Panama Papers

April 8, 2016

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One of the Russian Federation’s big problems is that its millionaires and billionaires are sending their money abroad, adding to Russia’s serious economic problems.

Sergey Roldugin, friend of Vladimir Putin

Sergey Roldugin

The fact that the Panama Papers reveal that one of Vladimir Putin’s oldest friends, a cellist named Sergei Roldugin, is the nominal head of offshore companies controlling billions of dollars in assets, is a big deal – especially since Roldugin does not live the life of a millionaire or billionaire.

Putin said back in 2011 that rich Russians who keep their money offshore are unpatriotic.

The Panama Papers are a trove of documents about shell companies registered in tax havens in the files of a Panamanian law firm called Mossack Fonseca.  The documents were leaked about a year ago by an unknown person to a German newspaper, Seuddeutsche Zeitung, which shared them with other publications around the world and with the International Consortium of Investigative Journalists.  They spent a year picking through the material, and published their findings starting last Sunday.

A tax haven is a jurisdiction with low or zero taxes which provides anonymity and protects financial secrecy.  Drew Schwartz of VICE news explained how a tax haven can be used to hide a money trail.

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Why a profitable company laid off 1,400 people

March 28, 2016

carrier2WTTVIndianapolis

In February, 1,400 employees of Carrier Air Conditioner in Indianapolis were told their jobs were being transferred to Mexico to cut costs.

It turns out that, according to the annual report of United Technologies, its parent company, that Carrier was a profitable and growing business segment.  In 2015, it was UT’s best-performing division in the company.

So why mess with it?  UT management hoped to boost the company’s stock price by cutting costs.  Managers say they plan to keep on cutting costs for the indefinite future, evidently without regard to

All this runs contrary to the way I was taught in college that a capitalist free enterprise system is supposed to work.

I was taught that the duty of corporate management is to ensure that the corporation survives and is profitable into the indefinite future.  This goal is achieved by making good products and at a reasonable price, and provide good customer service.  To do this, it is necessary to re-invest a good portion of the profits in the business.

UT management’s philosophy is evidently the opposite—to take money out of the business and give it to the passive shareholders.

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The New York Times evidently had a good article on this, which unfortunately is behind a pay wall.  David Dayen summarized its conclusions in an article for Salon.

Last year, Carrier produced a significant chunk of total profits for its parent company, United Technologies.  Of $7.6 billion in earnings in 2015, $2.9 billion came from the Climate, Controls & Security division, where Carrier resides.  Profits from this division have expanded steadily in recent years, which is not what you’d expect from a unit desperate to cut labor costs.

A look at United Technologies’ annual report reveals even more good news: Commercial and industrial products, Carrier’s category, make up over half of UTC’s $56 billion in net sales. Climate, Controls & Security had 3 percent growth in 2015, the highest in the company; it was the only division to increase its profit margin year-over-year.

“Organic sales growth at UTC Climate, Controls & Security was driven by the U.S. commercial and residential heating, ventilation and air conditioning (HVAC) and transport refrigeration businesses,” according to page 14 of the report. In other words, air conditioners – what the workers are making in Indianapolis – drove the growth of the best-performing facet of United Technologies’ business.

So why would a profitable, growing business need to ship jobs to Mexico?  Because their shareholders demanded it.

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Qualitative easing and the Obama recovery

March 25, 2016

SPX-10-yr-yield-and-fed-intervention

The Federal Reserve Board’s policy of qualitative easing has helped the stock market recover.  But Americans who work in the real economy are still struggling.

Qualitative easing is the Federal Reserve Board’s policy of creating new money to buy Treasury bonds in order to keep interest rates low.  The greater the demand for bonds, the lower the interest rates, and the interest rate on Treasury bonds is generally the benchmark on all Treasury bonds.

The Fed’s Operation Twist was a sale  of medium-term Treasury bonds and purchase of 10-year bonds.  The Federal Funds rate is the interest rate for overnight loans among banks so they can meet the Federal Reserve’s requirement for reserves.

The chart above shows how QE correlated with the ups and downs of the stock market.  But, as I indicated in a previous post, American corporations did not advantage of low interest rates to invest in their businesses.  Instead they have transferred the gains to stockholders in the form of stock buybacks.

An economic recovery has taken place.  Most Americans are better off than they were at the depths of the crash.  But as economic recoveries go, this one has been weak.

2.household-income-monthly-median-growth-since-2000

The chart shows how important is it to always adjust for inflation.  A dollar in the year 2000 is not the same thing as a dollar in the year 2016.

Although corporate executives did not take advantage of Qualitative Easing to invest in America, there was nothing besides politics holding back the federal government from investing in public works.  There is a lot of urgent work that needs to be done in maintaining and upgrading American’s physical infrastructure, such as upgrading public water systems to get the lead out.

With a lot of public work that needs to be done, a lot of people who need work and financing costs at historic lows, why not put the unemployed and under-employed to work doing what needs to be done?  Fiddling with interest rates and the money supply is not enough.

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African factory workers in deepest Iowa

March 14, 2016

Writer Paul Street reported for Counterpunch on his experiences working alongside Congolese and Sudanese immigrant workers in a Procter & Gamble factory in Iowa.

Here in and around the liberal bastion of Iowa City, a university town where wage-earners’ working class lives are all but invisible to a large local cadre of privileged and mostly white academicians, the lower end of the workplace and the job market – the factory and warehouse positions filled by temporary labor agencies, custodial jobs, taxi drivers, etc. – is crowded with immigrants.

Paul Street

Paul Street

It is chock full of nonwhite people who feel fortunate to have any kind of job that helps them escape danger, misery terror, and oppression in far-away places like the Democratic Republic of the Congo, Rwanda, Sudan, Honduras, Mexico, and Haiti.

Does anyone really believe that Iowa City’s giant Procter & Gamble plant – my low-wage, finger-wrenching workplace between from September of 2015 through February of 2016 and the origin point for many of North America’s leading hair-care products – is crawling with Congolese and Sudanese workers, along with a smattering of Central Americans, Caribbean islanders, marginal whites, Black Americans, and Africans from other states, because P&G (the nation’s 25th largest company and its top consumer packaged goods firm by far) is nobly committed to racial and ethnic diversity and a world without borders?

Of course it isn’t.  P&G reserves its better paid and more “skilled” and secure “career” production jobs almost completely for non-Hispanic whites.  These “plant technician” jobs require no more than a GED (high school equivalency) degree and start at around $20 an hour.

Street said P&G relies on Staff Management / SMX, a temporary help agency, to provide its lowest-paid workers.  They get $10 to $11.85 an hour.  SMX gets an additional fee—Street heard that it was $6—on top of that.

The work includes filling boxes on rapidly moving assembly lines with shampoo, conditioner and mouthwash bottles, building and wrapping pallets at the end of never-ending packaging-assembly lines, putting stickers on one shampoo or conditioner bottle after another, and more and worse.

It’s all performed in exchange for inadequate wages (far lower than they ought to be thanks to the SMX rake-off) and at constant risk of being sent home early and without warning since there’s often “no more product today” (that’s called “labor flexibility” and it’s no small problem for workers who already paid for a full day’s worth of child care).

He himself quit because, he found after five months of pulling apart tightly glued boxes, he could no longer clench and un-clench his fists.  The function in his hands returned after a week off the job.

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Does China’s currency manipulation hurt the US?

March 10, 2016

Hillary Clinton, John Kasich, Marco Rubio, Bernie Sanders, Donald Trump and other American politicians accuse the Chinese government of currency manipulation—that is, of keeping the exchange rate for its currency artificially low.

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As the charts indicate, this does not seem to be supported by the facts.  Notice that although the lines in the two charts are going in opposition direction, they both indicate that, over time, it takes fewer yuan to buy a dollar.  In other words, the value of the yuan over time is rising, not falling.

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Even if China was manipulating its currency in a nefarious way, I think it is futile for the U.S. government to demand that foreign countries act against their own perceived self-interest.

It is within Washington’s power to devalue the dollar, and there are reasons why this is not done.

Much of the world’s business is done in dollars.  This includes world oil sales.  Most of these dollars pass through American banks.

This is a source of Wall Street’s power and also Washington’s power.  It is why economic sanctions are so powerful a weapon of American foreign policy.  It is hard for foreign countries to avoid dealing with the United States and American banks.  As a debtor nation, the United States would not have nearly so much economic power otherwise.

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Free trade, fair trade and economic nationalism

March 9, 2016

The theory of free trade is that everybody benefits when individuals and corporations based in different nations are allowed to buy and sell goods and services without restriction.

India and trade DilemaUnfortunately most of the world operates on a different theory—that the exchange of goods and services should be to the benefit of the nation, not the corporation or the individual.

Subcontracting of manufacturing by, for example, Apple Computer to the Chinese company Foxconn is of mutual benefit to Apple and Foxconn, but it is not of mutual benefit to the USA and China as nations.  It is China’s gain and America’s loss.

Governments of China, Japan, Germany and other countries regard regard the unit of international economic competition as the nation rather than to the individual or the corporation.  They don’t care about the economic benefit to the trading partners.  They’re concerned about the economic benefit to the nation as a whole.

If an American corporation wants to do business in China or Japan, its executives have to provide something that benefits the Chinese or Japanese economy—a transfer of technology, or the creation of manufacturing jobs.

You have the strange situation of American business corporations dictating policy to Washington while kowtowing to Beijing.

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The anatomy of the U.S. balance of trade

March 9, 2016

us-trade-balance1

Source: How Much

The U.S. Census Department reported that the United States exported more than $1.5 trillion worth of goods and services in 2015 and imported more than $2.2 trillion worth, leaving a trade deficit of $735 billion dollars.

The map above and the two below, produced by How Much, a cost information web site, shows the flow of trade into and outside the United States last year.

The red countries are countries with which the United States has a trade deficit.  They sell us Americans more than they buy from us.  The green countries are countries with which the United States has a trade surplus.  They buy more from us Americans than they sell to us.

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USA-Imports-2015-2836

A couple of things jump out at me as I look at the three maps.

The oil-exporting countries – Saudi Arabia, Algeria, Nigeria, Venezuela, even Canada – are not large on the map.  Our U.S. trade deficit is mainly in manufacturing, not energy.  Domestic production satisfies about 85 percent of U.S. energy needs.

The United States has trade deficits with many countries, such as Germany, France, Sweden and Canada, that have generous welfare states, strong labor unions and high wages.  I don’t think impoverishment of American workers is not the key to a favorable balance of trade.

The North American Free Trade Agreement has not improved the U.S. trade balance with Canada and Mexico, and I can’t think of any other trade agreement since then that has done so with any other country.

Afterthought [3/10/2016].  The United States does a free trade agreement and a positive trade balance with Colombia, but I’m not sure what the balance would be if the revenues of the cocaine trade were included.

A guide to the candidates’ economic plans

March 4, 2016

Over the past few months, The Street, an investment news service, published these useful guides to the candidates’ economic proposals.

If Hillary Clinton is elected President, here’s what will happen to the U.S. economy by Leon Lazaroff.

If Ted Cruz were President, here’s what would happen to the U.S. economy by Ross Kenneth Urken.

If Marco Rubio was President, here is what would happen to the U.S. economy by Rhonda Schaffler.

If socialist candidate Bernie Sanders was President, here is what would happen to the to the U.S. economy by Emily Stewart.

If Donald Trump was President, here’s what would happen to the U.S. economy by Emily Stewart.

What is Hillary Clinton’s trade policy?

March 4, 2016
HIllary Clinton

HIllary Clinton

Unlike with Donald Trump and Bernie Sanders, it is hard to figure out Hillary Clinton’s positions on trade treaties.

They are clearly and consistently opposed to all the major trade treaties from the North American Free Trade Agreement onward, including the proposed Trans Pacific Partnership Agreement.

Clinton has been all over the map on this issue, supporting some trade treaties and opposing others.  The TPP agreement was signed while she was Secretary of State.  She supported it at the time, but now has doubts.  Some observers, however, wonder whether that is her true opinion, or whether pressure from the Sanders’ campaign has pushed her to the left.

If you put that topic to one side, I have to say that her foreign trade proposals are more detailed and thoughtful than either Trump’s or Sanders’.  She at least recognizes that the key is for the United States to rebuild its manufacturing strength rather than trying to force other nations to change their own economic policies.

Here are key Clinton proposals:

  • Reform the tax system so that American businesses can’t evade U.S. taxes by “inversion”—an accounting scheme where profits are assigned to overseas subsidiaries in tax havens.
  • Provide tax incentives for manufacturing companies to locate and remain in the United States, especially in high-unemployment areas.
  • Invest in infrastructure and in research and development to build up U.S. productivity.
  • “Aggressively combat” violations of trade treaties by foreign governments.
  • Set a “high bar” for future trade treaties.

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Does Bernie Sanders have a real trade policy?

March 3, 2016
Bernie Sanders

Bernie Sanders

Bernie Sanders is an economic nationalist, like Donald Trump.  But while Trump complains about how other countries are taking advantage of the United States.  Sanders talks about how international corporations are taking advantage of working people (to be sure, with China’s help).

He said he has voted against every trade treaty that came before Congress during his tenure in the House and Senate, and said that, if elected President, he would rescind them all.  Like Trump, he opposes the Trans Pacific Partnership (TPP) agreement.

His opposition is fully justified, in my opinion.  The World Trade Treaty, the North American Free Trade Agreement (NAFTA) and similar agreements limit the ability of national governments to regulate foreign corporations, and give these corporations equal standing with supposedly sovereign governments.

These agreements are not what I would call free trade, but Sanders is not for free trade either.  He says he is for “fair trade,” which I take to mean a fair balance of trade with other nations.  Unlike Trump, he does not say anything about imposing new tariffs and restrictions on imports.

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Would Donald Trump’s trade policy work?

March 3, 2016

Donald Trump’s trade policy might be better than what the United States has now.  The problem with Donald Trump’s trade policy is that it is based on trying to force China and other countries to comply with U.S. demands rather than improving American economic performance.

Ultimately the future of the United States rests on what we Americans do, not on what the Chinese do or do not do.

Donald Trump

Donald Trump

He is right about one important thing.  Washington’s trade policies have not served Americans well.

In some ways, current reflect the priorities of Richard Nixon and Henry Kissinger, who thought the trade policies that favored nations such as Japan or Saudi Arabia were a price worth paying to keep them as loyal allies during the Cold War.

In other ways, they reflect the neo-liberal philosophy that emerged during the administrations of Ronald Reagan and Bill Clinton, which was that the route to prosperity was to serve the interests of large corporations.

International agreements such as the North American Free Trade Agreement and the proposed Trans-Pacific Partnership Agreement guaranteed the rights of corporations to move money and goods freely, but restricted the rights of governments to legislate on behalf of workers, consumers and the environment.

Such agreements have contributed to the erosion of American jobs, wages and national economic strength.

Donald Trump’s solution, as stated on his web site, is as follows:

  • Declare China a currency manipulator and demand that China allow its currency to rise to its natural rate.  Trump said its current rate is between 15 percent and 40 percent too low.  A rise in the exchange rate for the Chinese yuan would, all other things being equal, raise the prices of Chinese-made products in the U.S. and other countries.
  • Demand that China obey international standards for copyright and patent protection.  This would mean greater revenues for U.S.-based and other non-Chinese media, drug and information technology companies.
  • Demand that China stop subsidizing its export industries by such means as free or cheap rent, utilities, tax breaks and raw materials, low-interest loans and special tax breaks.
  • “Challenge” China to comply with 21st century labor and environmental standards
  • Lower or eliminate the U.S. government budget deficit so that we wouldn’t have to depend on the Chinese and other foreigners to buy government bonds.
  • Reduce the top corporate tax rate from 35 to 15 percent, and eliminate inheritance taxes and capital gains taxe
  • Build up American military forces in the South China Sea.

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Donald Trump and his art of the deal

February 26, 2016

Man is the most vicious of all animals, and life is a series of battles ending in victory or defeat.  You just can’t let people make a sucker out of you.
        ==Donald Trump, in a 1981 interview

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What kind of a businessman is Donald Trump?  What does his business career reveal about what kind of a President he would be?

the-trumps-9780743210799_hrI read two biographies, THE TRUMPS: Three Generations That Built an Empire by Gwenda Blair (2000) and  NEVER ENOUGH: Donald Trump and the Pursuit of Success by Michael D’Antonio (2015), and some magazine articles to try to learn an answer.

Gwenda Blair’s book goes into Trump’s family background – his immigrant grandfather, Frederick Trump (originally Friedrich Drumpf), who operated saloons during the Klondike Gold Rush of the 1890s, and his father, Fred Trump, who built FHA-subsidized housing in Brooklyn.

Michael D’Antonio’s book brings his career down nearly to the present.  Neither book is a hatchet job and both authors are careful to give credit where credit is due.  But both writers reinforced my belief that Donald Trump is not the kind of person I want to see in the White House.

Trump’s purpose in life is to demonstrate that he is a winner, which is validated by making others into losers.  Winners, because they are strong and smart, deserve to be both rich and famous—fame being the most important.  Losers, because they are weak and gullible, deserve no pity.

Like his lawyer and mentor, Roy Cohn, he never backed down, always counterattacked, and never forgave an injury.

MichaelD'Antonio.NeverEnough51C4Vkw0E2L._SX327_BO1,204,203,200_He was a risk-taker, a skilled negotiator and a brilliant self-promoter.

He was a skilled negotiator, who understood the other person’s weaknesses and desires,  He could not be bluffed or intimidated.  Seemingly insurmountable difficulties spurred him into redoubled efforts.  All these are good qualities.

But he was not always a man of his word, did not always told the strict truth, and made others pay the price of his failures.

He played off multiple negotiating partners against each other.  He enticed lenders into giving him so much credit that they threw good money after bad rather than cut their losses.  He was a master of publicity and used notoriety as a business asset.

He is a workaholic who does not drink, smoke or use drugs.  He lives in luxurious settings among expensive possessions, but takes no time to enjoy them.  He is uninterested in art, music, literature or fine food and wine.  His one indulgence has been the company of beautiful women, which adds to his fame and celebrity.

Unlike his father, Fred Trump, he was not an especially good manager of his businesses.  Once he has completed a deal, he then becomes interested in the next deal.  The same was true of his first two marriages.

Based on his life history, I think it is plain that Trump regards the Presidency as another prize to be won, rather than a duty to be performed or a means to right wrongs.  I don’t know what he would do if elected.  I’m not sure he knows.

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How rich is Donald Trump, really?

February 26, 2016

Many multi-billionaires would just as soon not call attention to their wealth.  But Donald Trump thinks it important to not only be rich, but seem rich.  He regards his reputation for being rich as an important business asset.

He once sued a biographer for $5 billion for underestimating his net worth.  Tim O’Brien, author of Trump Nation, estimated Trump’s net worth at $150 million to $250 million in 2005.  Trump said his true net worth was $5 billion.

O’Brien and his publisher won the lawsuit, but legal costs probably ate up any profit they might have made from the book, and then some.

He once sued a biographer, Tim O’Brien, author of Trump Nation, for $5 billion for unde estimating his net worth in 2009 at $150 million to $250 million.  TrumpHe lost the lawsuit, but legal expenses ate up any profit the author of publisher may have made on the book.

But how rich is he, really?

valuingdonaldtrump-1x-1

Source: Bloomberg Politics.

Trump is on record as favoring “truthful hyperbole”.   Whatever that means, I suppose it applies to his net worth along with everything else.

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The biggest human-created economic problem

February 10, 2016

Debt-and-GDP-II-1-15-2016-510x358

debt-chartII-2-8-2016-510x396

These two charts, which I found on a blog called PeakProsperity, show the world’s fundamental human-created economic problem.

The problem is the fact that debt is increasing faster than economic output.

This is not just true in the United States.  It is true of all the world’s advanced industrial countries.

The results of increasing debt are:

  • An upward redistribution of income from wealthy lenders to non-wealthy borrowers.
  • A diversion of capital away from investment in production to produce new wealth.
  • Another recession, worse than the last, because, as Michael Hudson says, debt that can’t be repaid, won’t be.

The United States and other industrial countries have treated the big banks and investment houses as too big to fail and their executives as too important to jail.

But at some point, either in this economic cycle or the next or the one after that, the bank failures will be too big to bail.

I like to think that the debt problem is caused by malfeasance of bankers and the wealthy.   The reason I like to think so is that this is a solvable problem.

The worse possibility is that the possibilities for economic growth have been exhausted, and that there is nothing left to invest in that is as profitable credit card debt, student debt and other forms of debt.

If I voted strategically …

February 3, 2016

If I voted strategically, instead of for the candidate I want to win, I probably would vote for Hillary Clinton in the New York Democrat primary and for the Republican candidate in the general election.

The reason is that whoever is President from 2017 to 2021 is going to be blamed for the next stock market crash — unless it happens later in the current year — and it almost certainly will be worse than the 2008 crash.

It will be worse than the one before because nothing has been done to address the abuses that caused the previous crash—neither punishing accounting control fraud, nor breaking up the “too big to fail” banks, or curbing reckless speculation, nor creating good jobs, nor reducing income inequality.

The main thing that is propping up the financial markets is the Federal Reserve Board’s lid on bank interest rates, which drives investors into the stock and bond market, and this cannot go on forever.

If the Presidency is held by defenders of the status quo, it will be easier in 2020 for progressives to make the case for changing the status quo.

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Quantitative easing didn’t revive the economy

January 18, 2016

nomura-koo

The Federal Reserve System pumped billions of dollars into failing banks by buying up their toxic assets, and pumped up the stock market by holding down interest rates to as near as zero as possible.

This benefited Wall Street and the big banks, but, as the chart above demonstrates, it didn’t help the real economy much.

The top line on the graph shows the amount of money the Fed pumped into the banks.  The next line shows the amount of new money that actually went into circulation.  The third line shows the amount of loans the banks made.  The line in the second chart shows the rate of inflation by the most conservative measure.

A lot of individual savers bought stocks and bonds because their banks wouldn’t give them any interest on their savings accounts.  This would have been a good thing if the money that went into the financial markets had been invested in starting or expanding businesses, but this didn’t happen.

Corporations are sitting on trillions of dollars in cash.  They understand that the speculative boom sparked by qualitative easing is bound to crash.

LINK

The Chart That Explains Everything by Mike Whitney for Counterpunch.

Fed at Fault: What Goes Up Must Come Down on the Deconstructed Globe.

Why Are the Largest Corporations Sitting on Trillions in Cash? by Gaius Publius for Down With Tyranny!

Big Short Genius Says Another Crash Is Coming by Jessica Pressler for New York magazine.

China’s debt threatens its economic miracle

January 11, 2016

asian-debt-has-rocketed-since-the-crisis-while-the-us-has-paid-down-its-debts-as-a-percentage-of-gdp

I read a couple of articles the other day about how China’s amazing economic growth may hit a wall because of overhanging debt.

Countries get in trouble when the overall debt—governmental, individual, business and financial—increases at a faster rate that the output of goods and services (GDP).

What this means in the short run is a transfer of wealth from taxpayers and workers to holders of financial assets.  What this means if it goes on long enough is a financial crisis.

As economic Michael Hudson wrote: Debt that can’t be paid, won’t be.

The point of about debt is that no matter how rich you are, you can pile up more debt that you can pay.  And no matter how large and strong a nation’s economy, the economy can pile up more debt than can be paid.

The United States in the 1920s is an example.  The USA had the world’s strongest manufacturing economy.  It had a large domestic market and strong exports.  Yet it took more than 10 years to fully recover from the financial crash of 1929.

China has many more governmental powers to head off a crash than the U.S. government did back then.  The question is how they will be used.  Propping up failed companies and financial institutions does not solve the underlying problem.

The world as a whole is in the same situation, so it is not as if global economic growth will solve China’s debt problem—or America’s.

LINKS

China’s $28 Trillion Problem: the dark side of China’s debt by Mike Bird and Jim Edwards for Business Insider.

How China Accumulated $28 Trillion in Debt in Such a Short Time by Jim Edwards for Business Insider.

The $26 trillion dollar debt problem that is crushing competitiveness in China by Nick Edwards for the South China Morning Post.

Is the Chinese Economy Really in Trouble? by Eamonn Fingleton for The Unz Review.  The case for not selling China short.

Heed the fears of the financial markets by Lawrence Summers for the Financial Times.

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Les Leopold on runaway inequality

January 2, 2016

I grew up and spent my early working years in the golden age of capitalism, which was from 1945 to 1976.  Almost anybody—as least, any white American man—who was willing to work could get a decent job sufficient to support a family.

Then a lot of things turned bad as once.  Worker pay no longer kept pace with productivity, but the pay of CEOs and wealthy investors grew much faster.   Manufacturing declined and high finance expanded.  Hourly wages declined and debt increased.  What went wrong?

LesLeopoldRunawayInequality51uuYumpldL._SX319_BO1,204,203,200_I recently finished reading a book, RUNAWAY INEQUALITY by Les Leopold (recommended by my e-mail pen pal Bill Harvey) that explains what happened as well as anything I’ve come across.

He blames America’s current woes on the adoption of what he calls the Better Business Climate model of economic policy.

This model is based on the argument that the key to economic prosperity is economic growth, that economic growth depends on investment, and that investment depends on business profitability, and that the way to increase business profitability is lower taxes, lower social spending and fewer regulations.

0.9265We used to call this Reaganomics.  Now we call it neoliberalism.   Many people thought it was a plausible response to the economic stagnation and high inflation of the late 1970s.  I myself thought it was worth a try (more fool I).  I wouldn’t have objected to making rich people richer if everybody else had benefitted in the long run.

But this isn’t how things worked out.  Instead:

  • Wage increases stopped keeping pace with productivity.
  • The CEO-worker wage gap took off.
  • The financial sector grew at the expense of manufacturing.
  • Wall Street profits skyrocketed.
  • The income gap between the super-rich and the rest of us widened.
  • Corporate debt, consumer debt and government debt rose.

What went wrong?

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Economic snapshots of 2015

December 26, 2015

I thank my e-mail pen pal Bill Harvey for pointing me to these charts from the Economic Policy Institute.  Any candidate for national office who ignores the issues raised by these charts isn’t worth listening to.

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Does it matter if Fed raises a key rate 1/4 of 1%?

December 16, 2015

fed funds chart_0Source: Zero Hedge.

The Open Market Committee of the Federal Reserve System has raised a key interest rate from a quarter of a percentage point to half a percentage point.

Many economists and writers fear this may sink the economic recovery.  I say that if such a minute change will sink the recovery, the recovery was leaky to begin with.

The interest rate is the Fed Funds target rate, the interest rate at which banks lend money to each other overnight in order to have the minimum reserve funds required by the Federal Reserve System.

One of the goals of the Federal Reserve System is to strike a balance between unemployment and inflation by regulating interest rates and the supply of money.

The idea is that when interest rates are low, people borrow more money to spend and investment, resulting in more jobs but also inflation and price increases.  When interest rates are high, the reverse supposedly happens.

But key interest rates have been at nearly zero (or below zero according to some measures), and the economy hasn’t responded.  The increase in jobs is much less than in previous economic recoveries, while inflation continues low.

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The case for a global debt writedown

November 18, 2015

Debt that can’t be repaid, won’t be.
==Michael Hudson

Since the 1970s, every economic recovery has been weaker than the one before.  Michael Hudson, in his new book, Killing the Host, said the reason is that, with each recovery, there has been a greater overhang of debt, which drains resources from the real economy of tangible goods and useful services.

The current economic recovery has been a recovery of the financial markets, not a recovery of jobs and wages of ordinary people.   United States and European Union economic priority has been to protect bond-holders and creditors from loss.

HudsonKillingtheHost41Jz7lQkwrLHudson argued that this is unsustainable.   Either there will be a planned write-off or write-down of global debt, or there will be a financial collapse, like the one that began the Great Depression of the 1930s.  Either way, the debt will be wiped out.

His preference is for what he called a Clean Slate, as was done in West Germany in 1947 as part of a currency reform.  Basically, most German debts were canceled, except for employer wage contracts and bank accounts below a certain maximum amount (since wiping out bank debt means wiping out bank savings).

This, together with tax reform, the lifting of wage and price controls and the 1953 forgiveness and restructuring of German public debt, made possible the German economic miracle.

As Hudson admitted, this is pretty strong stuff and unlikely to be accepted.  An alternative is the enforcement of an old New York law, going back to Revolutionary times, against fraudulent conveyance.  This means that a debt is void if the lender knew in advance that it couldn’t be paid back.

If Snidely Whiplash lends money to Mrs. Innocent Goodbody, a poor widow living on Social Security, with her $250,000 house as collateral, with the expectation she won’t be able to keep up the payments and he’ll be able to foreclose on the house—that’s an example of “fraudulent conveyance.”

This applies to the subprime mortgages and “liar’s loans” prior to the 2008 financial crash.  Another concept, “accounting fraud,” applies to the bad loans that were given high debt ratings, securitized and sold to the unwary.  Canceling debt originating in fraudulent conveyance and accounting fraud would have a huge impact.

Hudson said that home mortgages could be scaled back to what is necessary to amortize a property based on its assessed value.  Or mortgages could be scaled back to 25 percent of the borrower’s income, which is what conservative lending practices require in the first place.

Congress in fact authorized a program to do just that as part of the 2008 bank bailout.  But Timothy Geithner, Obama’s Treasury Secretary, declined to implement it.

All this disrupt the financial markets and the economy generally, but Hudson wrote that it would clear the way for a good economic expansion, based on investment in the real economy, as happened in Germany.

Anyhow, he wrote, the alternative is more foreclosures, more economic hardship, more government bailouts until it becomes absolutely clear that that the debts are unpayable.   In the end, debt that can’t be paid, won’t be.

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History of U.S. Treasury bond interest since 1790

November 16, 2015
treasuries

Double click to enlarge.

Source: Wealth of Common Sense (via Barry Ritholtz)

This chart is an interesting snapshot of American financial history.

It shows the interest rates on U.S. Treasury bonds from 1790, when they were first issued at a rate of 8.7 percent, through the third quarter of 2012, when they were at an all-time low of 1.62 percent.  As of this morning, the 10-year Treasury yield is 2.26 percent.

Why would people lock in their savings at such a low interest rate?  If they are foreigners, it could be because they have more confidence in the value of the U.S. dollar than they do in their own currencies.  Or it could be that they fear another financial crash that would wipe out the value of most stocks and bonds.

A question about economic efficiency

November 16, 2015

The following is from Retrotopia, an on-line utopian science-fiction novel currently being serialized by John Michael Greer on his web log.

“Mr. Carr,” Melanie Berger said then, “Since the end of the embargo we’ve been approached four times by the World Bank and the IMF.  I’ve been involved in the discussions that followed.  Each time, their economists have made long speeches about how the way we do things is hopelessly inefficient, and how we’ve got to follow their advice and become more efficient.  Each time, I’ve asked them to answer a simple question: ‘more efficient for what output in terms of what input?’  Not one of them has ever been able, or willing, to give me a straight answer.”

Source: The Archdruid Report

The assumptions and logic of neoliberalism

November 14, 2015

There is no such thing as society.  There are only individuals, and their families.      ==Margaret Thatcher

∞∞∞

Neoliberalism is the philosophy that economic freedom is the primary freedom, economic growth is society’s primary goal and the for-profit corporation is the ideal form of organization.

It is the justification for privatization, deregulation and the economic austerity being imposed on governments by lending institutions.

What follows is my attempt to understand the thinking behind neoliberalism.  I welcome comments, especially from those who think I am wrong or unfair.

17149339-Abstract-word-cloud-for-Neoliberalism-with-related-tags-and-terms-Stock-PhotoGovernment is by definition coercive.  All governmental authority is ultimately backed by armed force.  The role of government should be limited to protection of life and property and enforcement of contracts.   

Private enterprise is by definition free choice.  Privatization by definition increases freedom.  All income deriving from the private sector, and not involving force or fraud, is earned income.

Most people are good judges of their individual self-interest and bad judges of the common good.   People generally make good decisions as consumers and poor decisions as voters.  Consumer choice is more meaningful than the right to vote.

Free markets, though the law of supply and demand, coordinate individual choices without the direction of any particular people or group of people.  The free market is more impartial and just than any system of planning or regulation could be.

A capitalist dictatorship that protects property rights is better than a socialist democracy that attacks property rights.

Economic growth is the key to increasing economic well-being.  Growth is produced by capital—that is, by investment in machines, factories and other human-made goods that generate new wealth.  

In a free enterprise economy, capital is invested by private individuals based on the law of supply and demand.  Whatever diminishes the ability of individuals to accumulate wealth or respond to the signals of the free market diminishes capital and retards economic growth.

Money spent on welfare and charity may temporarily alleviate distress, but it will not cure poverty.  Only capital investment and economic growth will do that. 

Capital investment and economic growth should take precedence over public education, public health, the environment and other so-called pubic goods, because they are the means of generating the wealth that pays for the public goods.

Banks, investment firms and financial markets are the key institutions of society.  They must be preserved in order to support investment and economic growth.

Monetary obligations are absolute.  Any person, organization or government that borrows money has an absolute obligation to pay it back, no matter what the sacrifice.  People who don’t repay their debts or fulfill their contracts are parasites on the system.

Inequality is a good thing.  To break up accumulations of wealth that have been acquired by legitimate means is not only unjust because it destroys the just reward for achievement.  It destroys the capital by which new jobs and wealth are created.

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Comrade capitalism: Putin and the oligarchs

November 14, 2015

A new hereditary oligarchy of wealth is emerging in Russia.  But it does not consist of the sons and daughters of millionaires and billionaires.  Rather it consists of the sons and daughters of influential officials in the government security apparatus, starting with President Vladimir Putin’s daughter.

2014-03-07-PUTINThey are much like the so-called nomenklatura, the privileged sons and daughters of high-ranking Communist Party officials in the old Soviet Union.

Many of Russia’s millionaires and billionaires got rich by buying up government-owned factories and resources cheap right after the disintegration of the Soviet Union.

Reportedly when Putin took power, he called in Russia’s richest business people and told them he would not inquire into how they got their wealth—provided they did not oppose his policies.

He meant what he said.  Those who did oppose him have been crushed.  But even those who keep their heads down and their mouths shut do not feel secure.  Many wealthy Russians are investing outside Russia because they don’t think their assets are safe at home.

This is what people in Third World dictatorships do.  It doesn’t speak well for Russia’s future.

LINKS

Comrade Capitalism: Putin’s daughter, a young billionaire and the president’s friends by Stephen Grey, Audrey Kuzmin and Elizabeth Piper for Reuters.  (Hat tip to O).

Remote Control: Can an exiled oligarch persuade Russia that Putin must go? by Julia Ioffe for The New Yorker.  Profile of Mikhail Khodorovsky.

Alexandra Tolstoy interview: “Sergei must have planned his escape.  He didn’t tell me so I didn’t have to lie about it” by Kim Wilsher for The Guardian.  (Hat tip to O).

Half of Russia’s Richest People Are Planning to Cash Out by Alexander Sazanov for Bloomberg News.

 


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