Archive for category economic and political philosophy

Video: The Great Unwind!

Mar 5

Posted by sheffner in economic and political philosophy, music | Comments off

Dark Side of Camelot revisited

Oct 22

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I’m selling a history book, “The Dark Side of Camelot”. The book reveals, erm, the dark side of John F Kennedy’s presidency. This is not just a seamy underside, it’s a 180 degrees from the image of JFK we were taught in school and developed thanks to the media.

A new book about the Clintons sheds some interesting light on the legacy of this dark side. The following quote from a review of that book could just as easily and truthfully have been applied to JFK and his family:

the phenomenon that has allowed the Clintons to prosper from their unbridled hubris and brazen recklessness was identified by Stone with a reference to a book with that title: “Elite Deviance” by David Simon, is something that Stone summarily described as “an anomaly in which a tiny few people who have enough material wealth, political influence, and personal connections can immunize themselves from considering the consequences of their most abhorrent, destructive, vile, and even criminal behavior.”

Hubris. An interesting word. This article says the proper transliteration is “hybris”, and quotes the Greek historian Herodotus on the subject. A theme that runs through Hersh’s account of the dark side of JFK’s presidency is that of what might best be called hubris. Several people who were close to the Kennedy’s refer to their sense that they were above the constraints that bind ordinary mortals; Hersh’s interviewees often mention JFK’s “recklessness” which seemed to come from a strong sense of invulnerability, a sense that they would suffer no untoward consequences for their actions. Here’s the Herodotus quote:

Herodotus believed that there were invariable laws to the rise and fall of empires. Empires rose and fell—as they still do today—because of individual decisions made by individual leaders.

The greatest mistake made by those in power, like Darius, was the sin of hybris. That Greek word means “outrageous arrogance.” Hybris (and that is the way it should be transliterated) is the outrageous arrogance that marks the abuse of power. Only those invested with enormous power can commit the sin of hybris. Hybris is the imposition of your will, at all costs. The Greeks believed that hybris was preceded by ate or moral blindness that makes you believe that you can do anything you want to and there will be no consequences from either Gods or men. It was this hybris that led Darius to undertake a preemptive war against Athens. It was his moral blindness that believed he would never know defeat. He ignored all the warnings that the Gods sent him because he felt so secure in his power.

What Henry Hazlitt Can Teach Us About Inflation in 2014 – James Grant – Mises Daily

Jun 9

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Henry Hazlitt was an American journalist who lived through the Great Depression and went on to write about economic (and other) matters in The American Mercury, The New York Times and Newsweek. The Henry Hazlitt Memorial Lecture is a lecture held annually at the Mises Institute. This year, the lecture was given by financial journalist Jim Grant.

Jim Grant wrote an article for the Mises Institute based on his lecture but including some things he did not mention. One of them was this definition of deflation:

“Deflation,” too, is a perennially misunderstood term. It is not — as one so often hears it defined — a simple decline in aggregate prices. Let’s try a mind experiment. Suppose you lived in a time of material and technological wonder: of digital technology that sets robots to work, makes universally accessible the canon of human knowledge and, to be sure, of human error and coordinates and arbitrages the world’s far-flung labor markets. As it costs less to make things, so it should cost less to buy them.

Would you call this happy state of affairs “deflation” — or might you call it “progress”? Most Americans seem to not to mind it, whatever the Federal Reserve chooses to call it. They spend half their weekends looking for it.

With this in mind, let’s hear from Hazlitt himself, master of economic clarity. Here he is in June 1946 — in the New York Times, no less — taking the government to task for its misplaced worry about a return to the 1930s.“A Washington correspondent of the Wall Street Journal reports that the government economic experts are now convinced the ‘deflation’ and not inflation will be the big problem six months to a year from now,” Hazlitt began. “Planners of federal financial policy make no secret of their belief that the danger of post-war inflation was passed in late spring, and that from now on the greater danger lies in too-rapid deflation. Such a belief on the part of the government planners in Washington would not be surprising, the whole economic philosophy they have adopted leads them to believe that ‘the real danger is deflation,’ whatever the evidence may be on the other side.”

In 1946, as now, the government held up the threat of deflation to justify a policy of ultra-low low interest rates and easy money. Now ladies, and gentlemen, I have devoted thirty-one years of my life to writing about interest rates, and I have to tell you that I can’t see them anymore. They’re tiny. And so they were in 1946. Then, as now, the Fed had been conscripted into the government’s financial service. Just as it does today, the central bank pushed money-market interest rates virtually to zero and longer-dated Treasury securities to less than 3 percent. Just as it does today, the Fed had its thumb on the scales of finance.

via What Henry Hazlitt Can Teach Us About Inflation in 2014 – James Grant – Mises Daily.

Another Setback for Abenomics

May 31

Posted by sheffner in economic and political philosophy | Comments off

That nice Mr. Abe has been working so hard to make his Abenomics work that it seems a shame that not everyone supports it. In fact, some people, like this writer below, can’t see the point of a 2% inflation target at all. Why ever not? He obviously hasn’t read Milton Friedman and is therefore obviously an ignoramus. Anyway, here’s the quote:

‘Inflation’, i.e., consumer prices, appear to be the only thing that is in a fairly strong uptrend by Japanese standards anyway. We can therefore remain fairly certain that real incomes continue to decline. Considering the aging population with ever more people relying on some sort of fixed income, the BoJ’s inflationary policy makes even less sense in Japan than elsewhere. For unknown reasons rising prices are hailed as a ‘success’. We know of approximately 127 million Japanese consumers who would disagree.

In fact, it feels totally bizarre to read about this every time. Consider the formulation in the excerpt from Reuters below: “Nationwide consumer prices showed that inflation picked up in April, excluding the April 1 sales tax hike – a welcome sign in the Bank of Japan’s battle to bring inflation to 2 percent.”

A central bank ‘battling’ to increase inflation? It is a ‘welcome sign’ when consumer prices are rising? All we can say to this is that it proves that world has gone mad and that there is nothing more absurd than the economic theories on which modern central banking is based.

via Another Setback for Abenomics |.

Japan’s Self-Defeating Mercantilism – Why isn’t the medecine working?

Mar 23

Posted by sheffner in economic and political philosophy, news | Comments off

In the 16 months since Japanese Prime Minister Shinzo Abe launched his bold plan to reflate Japan’s shrinking economy the yen has depreciated by 22% against the dollar, 28% against the euro and 24% against the renminbi. The hope was to stimulate trade and push the current account decisively into the black. Yet the reverse has occurred. Japan’s external position has worsened due to anemic export growth and a spiraling energy import bill: in January it recorded a record monthly trade deficit of ¥2.8trn $27.4bn. Having eked out a 0.7% current account surplus in 2013, Japan may this year swing into deficit for the first time since 1980. So why is the medicine not working?

via Guest Post: Japan’s Self-Defeating Mercantilism | Zero Hedge.

It’s a long article, well worth reading. Here I’ve selected excerpts and commented on them.

First, the title is tautologous: mercantilist policies have always been self-defeating for the nation as a whole in the long run. They are designed to bolster a particular group of people or section of the economy, at the expense of the individual and the consumer. Murray Rothbard put it this way:

In the days of Adam Smith and the classical economists, mercantilism was properly regarded as a blend of economic fallacy and state creation of special privilege….

Mercantilism, which reached its height in the Europe of the 17th and 18th centuries, was a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special subsidy and monopolistic privilege to individuals or groups favored by the state. Thus, mercantilism held that exports should be encouraged by the government and imports discouraged. Economically, this seems to be a tissue of fallacy; for what is the point of exports if not to purchase imports, and what is the point of piling up monetary bullion if the bullion is not used to purchase goods?

… Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.… But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.

“Mercantilism: A Lesson for Our Times?”, Murray Rothbard, writing in the Freeman, 1963. (See also the Wikipedia for Schools article on Mercantilism.)

But it’s not working! In 2013, Japan recorded a record annual trade deficit of 11.47 TRILLION yen (up from 6.94 trillion in 2012; that’s an increase of nearly 100%!). Rising costs for imports outstripped growth in exports.

Recall that Mr. Abe’s policy was to weaken the yen in order to boost exports. Trouble is, Japan is a resource-poor nation, something that all Japanese schoolchildren know. Many products manufactured in Japan require raw materials which must be imported. Thanks to Mr. Abe’s “weak yen” policy, those imports cost Japanese manufacturers and importers more. In addition, there were the unexpectedly large amounts of LNG which were required to power Japan’s industry to replace the lost wattage of the 54 nuclear power stations which were taken offline after the 2011 earthquake-tsunami-Fukushima disaster.

Brilliant, Mr. Abe!

Back to the article. Here’s the theory:

Consumers are immediately hit with an implicit “tax” as imported goods cost more, while export-oriented firms get an effective subsidy.

Yes, exporters get a boost, but against this, in Japan’s case, must be offset the rising costs of energy and of importing raw materials.

In the capital markets, the effect is to lower the value of domestic bonds in foreign currency terms, with the result that yields rise. This means that the cost to the government of financing its deficit rises, forcing a reduction in government spending. As a result of these effects, resources are shifted from the household and government sectors and into the corporate sector. The effect of this resource reallocation should be to boost productivity, which in turn initiates a virtuous circle of rising incomes and ultimately higher consumption.

Needless to say (for those living in Japan), neither has happened. Why not?

in addition to devaluing, it is also engaging in massive quantitative easing. This keeps bond yields low, enabling the government to keep financing its deficit at low cost. There is thus no incentive for the government to cut spending— and in fact the consumption tax hike will be offset by even more spending. Furthermore, low bond yields suppress the financial income of household savers.

Great. So in addition to having to pay more for imported goods, and for electricity (both for their own household use and for that of the manufacturing industries), consumers are unable to gain any real benefits from their savings, because interest rates are so low.

Question: if savings are discouraged, how will the capital needed for future investment be accumulated?

The end result of all this is that the government bears none of the burden of the adjustment and the household sector bears all of it, through higher import costs and lower financial income. With the household sector’s spending power thus crimped, companies have no incentive to invest in domestically-focused production. Instead, all their investment will be geared toward exports—mercantilism on steroids.

With the predictable result that the consumer gets it in the shorts. Of course, exporters, to the extent that they are individuals, are also consumers.

Since all the leading economies favor policies that support production over consumption, the world is getting more goods than it can absorb. The result is ongoing price declines, which have the effect of deferring the ultimate global recovery.

The problem is not falling prices per se (see this brilliant article debunking the “deflation is evil” myth); the problem is subsidized production, because this distorts price signals and prevents resources from being re-allocated in a timely fashion.

What this means is that Japan’s ultra-mercantilism is self defeating. In a global environment of weak demand and disinflation any volume increase in its exports will have to be paid for through price reductions…

Japan’s most likely path is that the yen keeps falling, the BoJ keeps printing money, and the dollar value of exports stagnates as devaluation and price cuts offset any volume increases. And so, paradoxically, the current account will continue to deteriorate into permanent deficit, despite ultra-mercantilism. At this point the game will have changed in Japan and Abenomics will have manifestly failed to deliver on its stated objectives.

The sad part is that this outcome is all so predictable. We don’t actually have to try the experiment to know that it is highly likely to fail, meaning it won’t result in increased productivity, economic growth, consumption or savings.

How will Japan’s voters react when they see that Abenomics has failed? Is there anyone offering any alternative to mercantilist policies?

Tags: economy, Japan

Deflation – is it good or bad?

Mar 8

Posted by sheffner in economic and political philosophy | Comments off

Reposted without comment. Is deflation good or bad? You decide. In the red corner, repeating the “20 years of deflation” myth (prices did not fall for 20 years in Japan; they were flat. The evidence is here):

“We should first make sure that Japan exits from 20 years of deflation,” said Hiromi Yoshida, acting secretary-general for the LDP upper house caucus, urging Abe to remain focused on the economy.

via Abe bracing for spring storm- Nikkei Asian Review.

And in the blue corner:

What is it with this perennial fear the chief money printers have of falling prices? Not that we are likely to see it happen, but if it does, what of it? Bloomberg reports on the recent ECB decision with the following headline: “Draghi Says Deflation Danger Should Abate as Economy Revives”
The headline alone is a hodge-podge of arrant nonsense. First of all, ‘deflation’ (this is to say, falling prices), is not a ‘danger’. Speaking for ourselves and billions of earth’s consumers: we love it when prices fall! It means our incomes go further and our savings will buy more as well. What’s not to love?

The problem is of course that when prices decline, the ‘wrong’ sectors of society actually benefit, while those whose bread is buttered by the inflation tax would no longer benefit at the expense of everybody else. But they never say that, do they? Has Draghi [or Abe, Ed] ever explained why he believes deflation to be a danger? No, we are just supposed to know/accept that it is.
… ‘Inflation’ is not the same as ‘economic growth’ – on the contrary, it both causes and frequently masks economic retrogression. …

As Austrian economists have long explained, it is simply untrue that prices must rise for the economy to grow. Consumers obviously benefit from falling prices … All of us can easily ascertain how beneficial the decline in computer prices, cell- and smart phone prices, prices for TV screens, etc. is. Naturally, it would be even better if all prices fell, not only those on a select group of consumer goods.

What about producers? Won’t they suffer? By simply looking at the share prices and earnings of the companies that make all the technological gadgets the prices of which have been continually declining for decades, everybody should realize immediately that the answer must be a resounding NO. This is by the way not only true of the firms that are in the final stages of the production process, i.e. the stages closest to the consumer. It is obviously also true for the firms in the higher stages of the capital structure. But why? It is quite simple actually: prices are imputed all along the chain of production. What is important for these companies to thrive are not the nominal prices of the products they sell, but the price spreads between their input and output.

In fact, the computer/electronics sector is the one that comes closest to showing us how things would likely look in a free, unhampered market economy.

via via Acting Man | No, Deflation is Not a ‘Danger’ |.

Tags: Japan

Bitcon?

Dec 4

Posted by sheffner in economic and political philosophy, money | Comments off

Businessman, investor and IT expert Karl Denninger weighs in on Bitcoin. He seems to believe in inherent value, which Gary North does not, but otherwise he makes many of the same points.

Speaking of Gary North, he has another couple of articles about Bitcoin up today. It’s all the rage! (Here’s the first of his articles on Bitcoin which I blogged about recently.)

Back to Denninger. These are just the key points. Click the link to read the entire thing (it’s short and sweet).

Let’s go over what defines a currency. To be one you need:

It must be a store of value. That is, if I put some amount of value into it today that value should be reasonably stable over time. Nothing that is fluctuating in purchasing power by 5, 10 or even 20% in a day can be said to have such a quality, irrespective of whether it is going up or down.

It must be a medium of exchange. In order to perform this function people must accept it in trade for other goods and services – real goods and services. You need to be able to buy a gallon of gasoline, a basket of food, a car, a computer and similar with it. The problem is that until it is a store of value it will not be a medium of exchange because the people who produce things would be insane to widely accept it when they cannot reasonably expect the value you give them to be constant for enough time for them to obtain more raw materials and similar with what you tendered to them.

It should be self-verifying, at least for reasonably-small transactions. I should be able to know if the “coin” you intend to spend is valid and not a counterfeit by trivial examination. …

It would be nice if it was reasonably anonymous, at least without valid legal process. Digital currencies that operate by publication have an inherent issue here in that the transaction is not only indelibly recorded by cryptographic signature but it is available for everyone, everywhere, to see on a permanent basis.

The mania currently being found in digital commodities is amusing to watch but none of these are in fact “currencies” since they fulfill neither of the primary requirements of same nor either of what I consider to be the two most-important secondary characteristics.

Instead these fads are more akin to tulip bulbs.

via Market-Ticker – The Argument Against Digital “Currencies”

Tags: Bitcoin

Abenomics, Shinzo Abe, Bank of Japan Infographic – Saxo Capital Markets

Dec 1

Posted by sheffner in economic and political philosophy | Comments off

Can Abenomics save the Japanese economy? (Click the graphic to see a larger, clearer version.)

Here’s a useful “infographic” as they’re called on Abenomics, produced by investment group Saxo Capital.

Read the whole thing at Abenomics, Shinzo Abe, Bank of Japan Infographic – Saxo Capital Markets.

The main points:

How does Abenomics work?
Structural reforms key to Abenomics success
Abenomics lifts consumer sentiment
The dangers of Abenomics

And a few excerpts. These should be read in conjunction with “This Inflation is Supposed to be GOOD for Japanese Workers?” which I’ll comment on in a minute. As the mainstream seem to be harping on how “fresh” and “exciting” Abenomics is and how it has led to a surge in the Japanese stock market, I’ll focus here on some more sobering, long-term aspects of it.

For Abenomics to succeed, Japanese households will need to reverse the recent deflationary trend of excess saving and encourage consumers to spend more.
Further problems await Japan: the unsustainable ratio of the elderly to the working population, fallout should fiscal stimulus fail, and snowballing costs for imports.
Abe’s structural reforms carry with them several risks. The domestic agriculture sector could suffer from increased marketplace competition should tariffs on imports be removed. Any agreements with the TPP would mean greater dependency on government support among Japanese farmers, adding a further load on finances.

Read the whole thing at Abenomics, Shinzo Abe, Bank of Japan Infographic – Saxo Capital Markets.

Now, are Japan’s workers all excited about inflation and Abenomics? Wolf Richter writes this article on Zero Hedge. “This Inflation is Supposed to be GOOD for Japanese Workers?” Key points:

The Japanese Statistics Bureau just reported incomes and expenditures of households with two or more persons. This is by far the largest category of households in Japan. Due to the cost of housing in large urban areas – and due to remnants of tradition – a large number of singles live with their parents. This category is further divided into “workers’ households,” “no occupation” households, and “other” households.
Incomes of the all-important “workers’ households” rose a measly 0.1% from a year ago to ¥482,684. In nominal terms. But adjusted for inflation – yes, here is where the benefits of Abenomics are kicking in – incomes fell 1.3%. Disposable incomes fell 1.4%. The details were ugly: “Current income” (salaries and wages) dropped 1.2% and “temporary bonuses” plunged 19.5%. Income from self-employment and piecework plummeted 20.8%.
Spending rose a scant 0.4% in nominal terms from a year ago – but adjusted for inflation, spending fell 1.0%.
And this despite rampant frontloading of big-ticket purchases. The consumption-tax hike from 5% to 8%, to take effect on April 1, is motivating households to buy big-ticket items now and save 3%. It has turned into a frenzy. Durable goods purchases, the primary target of frontloading, jumped 40.4% in October from a year ago. While it’s goosing the economy now, it will create a hole starting next spring. Japan has been through this before [w]hen the consumption tax hike from 3% to 5% was passed in 1996
frontloading of a few big-ticket items is hitting day-to-day expenditures.
This is the benefit of inflation without compensation! A process that ever so slowly hollows out the middle class and pushes the lower classes deeper in the quagmire. It’s hurting workers and consumers. It’s constraining the real economy. Yet, holders of assets that the central bank inflates into the stratosphere benefit.

Doesn’t look good, does it, boys and girls?

Tags: Japan

Are Bitcoins money? Or another Ponzi scheme?

Nov 29

Posted by sheffner in economic and political philosophy | Comments off

I blogged a week ago about Bitcoins, quoting investor Peter Schiff on the matter. His opinion: Bitcoins are not money and they constitute (yet another) grand Ponzi scheme. (Bitcoin was then $880.)

As I write, the price of 1 Bitcoin on the Mt Gox exchange is $1,158. In fact, it jumped several dollars while I was typing this sentence! (It is now $1,155 or ￥118,372.881.)

Schiff’s argument is that Bitcoins lack the one key value that gold has, and that is that gold is valuable to people in itself, not just as money. Bitcoins are of no value to anyone other than as digital money, and indeed its value as digital money is still very limited, as this article shows:

There really aren’t big-name retailers on board with the digital currency at this time… big-name tech companies like Google, Amazon and eBay aren’t going to play along either, as they all have their own payment mechanisms to push (Google Wallet, PayPal and Amazon’s one-click checkout experience, respectively).”

But the list of vendors is growing at a pace that only rivals the explosion in the price of Bitcoin itself…

“There’s nothing you can do with a Bitcoin except give it to somebody else”

So Schiff’s argument is that Bitcoin does not have intrinsic value, unlike gold, which means that people will either use it to pay for things, or hoard it hoping its value will go up. Which means that people are hoarding it, because there are still not many businesses that accept Bitcoins as payment (although that number is growing).

Historian, economist and newsletter-writer Gary North has an article on Bitcoin today: Bitcoins: The Second Biggest Ponzi Scheme in History (the biggest scheme is Social Security).

“Nobody is going to be getting rid of an asset that has moved from $2 to $1,000 in one year in order to buy pizzas.”

North’s point is that BITCOINS ARE NOT MONEY, because “The central benefit of money is its predictable purchasing power.”

Now let us look at bitcoins. The market value of one bitcoin has gone from about $2 to $1,000 in a year. This is not money. This commodity is not being bought for its services as money. It is unpredictable to a fault.

Admittedly, those who got in early on this Ponzi scheme are doing very well. They will probably continue to do well for a time. As more people hear about this investment, which is justified in terms of its future potential as money, more people will buy it. Late-comers are not buying it because they understand its potential as future money, any more than the late investors in Charles Ponzi’s scheme thought they were buying into the arbitrage potential of foreign postage stamps. They are buying Bitcoins because we are in the midst of a Ponzi scheme mania. They will continue to buy because they think this time it’s different.

This digital so-called money will not be used to facilitate exchange. Nobody is going to be getting rid of an asset that has moved from $2 to $1,000 in one year in order to buy pizzas. People want to hang onto it, refusing to sell, in the hopes that it will go to $2,000. This is the classic mark of Ponzi scheme psychology. People do not buy the investment for the benefits that the investment provides as an investment, in other words, because it is a capital asset. They buy it only because it has gone up in price. They expect this to continue.

Read the rest at Bitcoins: The Second Biggest Ponzi Scheme in History.

I must admit I was tempted at one point, once I could see the price movement of Bitcoin. However, I am not really interested in Bitcoin as an investment. I want to use it as a form of payment, an alternative to credit card and Paypal. However, the price of Bitcoin is now too high for me. I do not hold Bitcoins as of this writing.

Tags: Bitcoin

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