Saturday, December 30, 2006

Japan's Latest Bomb

And last to end this 2006 with a bang, I've done a little drawing inspired from a comment of my brother Fred about the rumors surrounding Toyota and Ford's recent meetings. Upon seeing this cartoon that I found super, he said the equivalent of "What a sad picture of the decline of US industry and innovation. The country we bombed to perdition in WWII comes to the rescue. Perhaps we should bomb Detroit to perdition?"

Gosh, we don't have to, the deed is done.

The following is my cartoon response. I couldn't decide whether to entitle it:

- If you can't beat 'em, join 'em.
- He who laughs last, laughs longest.
- Revenge is a dish that is best eaten cold.

So I just called it "Reversal of Fortune." Click on the image for a larger version.

Moral Hazard, Here We come

It's called the Short Sale. It's the hot item in the suffering real estate market.

Find yourself with a few "Late Payment" letters? Fearing bankruptcy and/or the loss of your credit and reputation?

devil on my shoulder
[Thanks to for the image.]

Try this:

Find a buyer willing to make an offer a bit below market and below what you owe on your house. Present the buyer to the bank, and tell the bank:

"Either you accept this lower offer or I'll go bankrupt."

The bank will think twice before saying no, because the cost of foreclosure, refitting and resale is higher than you'd think.

There is still some question as to whether the lender can pursue you after such a sale for the money they lost; but obviously, you'll work language to protect yourself into the sales agreement.

Does this sound like blackmail? Yes it does. Then again, the bank should never have lent you, an obvious spendthrift, the extra money in the first place; and this is simply their just desserts -- at least, that's what the little devil on your shoulder will whisper in your ear.

For an informative piece on the subject, see this.

French Piano Owners Beware

From this source and courtesy of the Club for Growth, we learn:

'The monster which French lawgivers intend to attack is ubiquitous. Its name is "piano," and the Minister of Finance seriously thinks of proposing a tax on those instruments not in use in a professional capacity - and they, of course, form the majority. There are in France about 500,000 pianos, and a tax of, say, 10s. would bring in the respectable sum of 250,000 [pounds]. It is very tempting to a Minister who struggles with an annual deficit.'

Good grief. This guy is expressing what I imagine every piano player in the country will feel when they get the bill.

[Thanks to for this image, for which I'll risk the accusation of bad taste.]

There's already an annual tax on TV sets in France, did you know that? Yup, you pay per set in the home. -- *Update* That's no longer true, it appears. See comment below. It's now per household. -- Of course, that's over and above the Value Added Tax at purchase.

In fact, is there anything left untaxed in France?

No More Plaza-Style Currency Intervention Nonsense, Please

I can't believe it, someone is pulling out the Intervention Rabbit again from the Magical Hat of Central Bank Hysteria, as a response to the imbalance between the dollar and the Chinese yuan and the overbearing trade issues. (See my previous post for a description of the problem.)

[Thanks to for the image.]

When will they learn? Monetary intervention has never worked and never will work, because (a) it's a Band-Aid; and (2) even if it might be efficacious, it's always too little, or too much, too late. Any sense of power or accomplishment is delusional, or coincidental.

Cato's James A. Dorn explains very nicely the most recent attempts at currency intervention. They are these:

1. September 1985 Plaza Accord. A secret meeting among the Group of Five (US, Japan, Germany, Britain, and France.) They wanted to "coordinate intervention to lower the value of the dollar against the yen and deutsche mark." (Sound familiar? Just substitute "yen and yuan" today.) At the time, "the United States was running twin deficits, and there was pressure on its major trading partners to let their currencies appreciate with the hope that U.S. exports would be come more competitive." (Hmm. Same refrain, same tempo.)

At the time, the dollar was already losing value (another familiar chime), and the accord, if it had any effect at all, probably only sent the balancing tendency into disarray. (Also, Japan only half-heartedly went along with the intervention, and was side-stepping it, as you can see from the article, by "sterilizing" its dollar sales through U.S. treasury bill purchases.)

2. Early 1987 Paris, the Louvre Accord. Reversal of the above. The Agreement instructed the Bank of Japan to buy dollars with yen liquidity (cash that the Japanese central bank had pumped into the system.) This "[e]xcessive money growth helped create the bubble economy of the late 1980s." (Another familiar popping sound?) By going along with this, the Japanese "sacrificed monetary stability for the sake of exchange rate intervention designed to stimulate the export sector. When the BOJ applied the brakes in mid-1989, money and credit growth dropped sharply, and asset prices collapsed in 1990. Monetary disequilibrium continued to plague Japan-especially its financial sector-for the next decade." Any wonder China doesn't want to follow suit? (But they have gotten themselves into a similar situation as the Japanese with the pegging of their yuan and may be forced to by circumstances. We'll see.)

Other Asian countries also imitated these errors and caused the 1997 Asian financial crisis, according to this article.

In the 1980s, the US current account deficit was at 3.4 percent of GDP. Today, we are at 6.5 percent. The interventionists are getting antsy. William Cline of the Institute for International Economics is among them. He calculates that the yuan will have to rise 46 percent if it is to find its normal level. He believes that by trying to manipulate the exchange rates all together as nations, the participating countries could limit the global damages.

But as Dorn points out:

"The problems with such an approach are (1) it would be very difficult to get such a large group of countries to agree on the needed adjustments; (2) no one really knows what the optimal realignment of exchange rates should be; and (3) it would be costly to enforce such an agreement."

Dorn prefers the laissez-faire approach, whereby China sees the error of its ways through internal fiscal pressures (capital inflows leading to excessive money and credit growth leading to the appreciation of the yuan.) He encourages China to become more transparent, to free their capital markets and exchange rate regime, and to stop pegging their currency. The same advice would apply, I think, to the other Asian countries who are just as guilty of pegging.

The Great Unknown is: How much time do the Chinese have to wise up before the problem solves itself in a violent way?

Wednesday, December 27, 2006

The Flaw In American Representative Democracy: Hypocrisy

My last post talks about the airline industry. Here we have agriculture, and only one example at that -- rice. Dan Griswold of Cato (one of my favorite tanks) argues in favor of dropping US subsidies to rice growers.

[Thanks to for this painting of a Louisiana rice pump.]

"What's this? Subsidies to *rice* growers? Are you sure?" you say. Yup. You heard right. "But I thought the paddies were all in Asia and other wet territories." Well, if you didn't know, we are the 10th largest grower in the world. Rice is grown in:


Their trade organization: USA Rice Federation

How much does the taxpayer pay to the producers of US rice? "Direct taxpayer subsidies to the rice sector have averaged $1 billion a year [repeat: a year] since 1998 and are projected to average $700 million a year through 2015." This accounts for "half of all income for U.S. rice farmers" and worldwide, such subsidies represent "an incredible 77 percent of gross receipts for rice farmers in OECD [Organization for Economic Cooperation and Development] countries in 2002-04."

And to make it worse, "[r]ice payments tend to be concentrated among a small number of large producers. (Ever heard of Archer Daniels Midland, anyone? I don't know if they receive direct subsidies, but they're sure as heck a member of the above trade organization.)

Here's a funny piece of data from the Washington Post: "[T]he federal government has paid at least $1.3 billion in subsidies for rice and other crops since 2000 to individuals who do no farming at all." People like an 87-year-old Texas doctor who collected $191,000 over the last ten years, and the Texas doctor who got $490,709 for owning a piece of land near Houston that "had once been used to grow rice."

We also pay as consumers. "Tariffs on imported rice drive up prices for consumers," he says.

Plus, hear this: "Steep barriers to rice imports drive a wedge between domestic and global prices, forcing consumers in the more protected countries to pay as much as four times the world price for rice." And the other edge of the same sword: "By subsidizing production and exports and restricting imports, U.S. policy drives down [sic] global prices for rice ... [perpetuating] poverty and hardship for millions of rice farmers in developing countries...."

"In the face of falling prices through 2001, American rice farmers switched from growing for the market to growing for the government." "The rice program exists not because it serves the national interest but because the special interests that benefit from it are more organized, concentrated, and motivated than the general public that pays for the program."

WE'VE GOT TO GET ORGANIZED, PEOPLE. Our elected representatives are listening to the wrong voices, we know this; but unfortunately, they've got the persuasive element: election money -- in the 2003-04 election cycle, $289,300 to be exact -- plus all of the lobbying that goes on.

Congress is preparing to rewrite the farm bill sometime in the first half of 2007. As Griswold puts it, "The rice program is not an asset to be jealously guarded; it is a national liability to be jettisoned as soon as possible."

Hear hear. I'm trying to do my part by passing along this research.

American Bully Tactics

The US is always so full of itself, with its supposed "free market" and its "free trade" rhetoric.

Using these arguments, we have been negotiating with the EU for the opening of their aviation markets. Since 1977, a treaty between the US and the UK limits Heathrow access to Virgin Atlantic, British Airways Plc, American, and United Air Lines. America has been using the "free competition" byline with some success, and negotiations are advancing in our favor.

[Thanks to for the photo.]

Then along comes Branson of Virgin Airlines, the British aviation success story, forcing us to put up or shut up. He wants access to the US internal air travel markets. Being much smarter than he sounds in his public appearances, he realizes he has to work around the existing protective barriers: He must create an American company that is owned and operated at least 75% by US citizens.

So he does it; or he thinks he does it. Everything goes according to plan. He figures out the US maze of barriers. He spends thousands of man-hours getting approval from the FAA for his aircraft, obtaining the permits, filing petitions and negotiating deals.

Obviously, these rumblings in their own home court don't appeal to the competition, Continental, American Airlines, Delta, US Airways, and the airline unions. They immediately get on the phone to their friendly Washington lobbyist, who jump onto the phone to their favorite Senators and Congress people, and -- bingo -- somehow the the Transportation Department "Sees the Light." Virgin America is not 75% controlled by US citizens. The oracle hath spoken.

Looking at the numbers, Branson's Virgin Group Ltd. only put up 25% of the initial $177 million investment, plus a $53 million loan. The rest of the company belongs to Black Canyon Capital in LA and Cyrus Capital Partners, a hedge fund in NY. Between them, they control 75% of the new airline. The crux of the matter seems to rest, according to an article at Bloomberg, upon the hiring of a fellow named Fred Reid as Virgin America CEO. Continental argues 'that since Reid "was hired by, and is clearly beholden to, the Virgin Group'' he cannot qualify as a citizen under U.S. law. Continental also argued that the Virgin Group conceived, financed and designed Virgin America, and hand-picked its fleet and key personnel.'

Hmmm. It would seem to me that either he's a citizen, or he's not. Period.

All of this is embarrassing for the Transportation Secretary Mary Peters, not only because they are the ones pressing for the opening of EU air space, but now Mr. Branson (presumably who has lobbyists of his own) can start to play hardball. The fist fight is on to decide who is the bigger bully.

Tuesday, December 26, 2006

Is The Fed Behind The 8-Ball Here?

The Federal Reserve Board has just revised a "Consumer Handbook on Adjustable-Rate Mortgages." I would say they're about three years late.

[Thanks to and Donald Heiduck for the image.]

According to a Joint Press Release from the Board of Governors of the Federal Reserve System and the Office of Thrift Supervision, and '[i]n recognition of the growing use of nontraditional mortgage products that allow borrowers to defer payment of principal and sometimes interest, the agencies have substantially revised the CHARM booklet [Consumer Handbook on Adjustable-Rate Mortgages] to include discussions about "interest-only" and "payment option" mortgages.'

"Charm booklet." That's cute.

The last few years have seen an explosion of adjustable-rate mortgages that is not only obscene, but that is criminal, IMHO. I believe the Fed is indirectly the instigator of these mortgages, which makes this feeble last-minute gesture of theirs all the more hypocritical.

One the one hand, they've been helping to create one of the biggest global liquidity bubbles in history, causing cash to flood so profusely that even people with bad credit scores can drown in it.

On the other hand, their holier-than-thou attitude pushes them to abuse free-market logic. Instead of attacking the real problem, which is the Fed itself, they decide that things have gotten a little out of hand and that it's time to warn people against -- whom? The banks? No, against themselves. I guess the Fed never heard the dictum, "A fool and his money are soon parted." As a rule, fools don't listen to good advice ... because they're a fool, remember? (Duh.)

Interesting how laissez-faire economics holds weight with those at the Fed only when it is convenient. They will intervene in the marketplace over and over, creating surperfluous money supply at the drop of a CPI hat; but when it comes to depriving the banks of the wherewithal to milk every spendthrift that walks in the door, "Oh no, that would be intervening in the marketplace. Let's print another booklet that no one will read." Do they really think consumers can ingest one more word on those mortgage applications that weigh in at about 20 pounds already, even without the Charm?

Tsk tsk, Federal Reserve Board. Shame on you. I agree you should never intervene in the marketplace; but you should abide by this golden rule even when it applies to yourself. Stop printing money whenever you feel like it, under the pretense that you're just "controlling the economy" -- something that you yourself admit is impossible.

Stop the charade, guys. Fools may be fools; but the balance-of-power minority (i.e. my readers) is not as stupid as you think.

Monday, December 25, 2006

An Unabashed Plug for Jacquie Lawson, a Free Market Success Story

This English artist is the best designer of e-cards on the net. She began in 2000, and her little enterprise now seems to occupy at least some of the time of five people, so she must be a business success story. I would like to know more about her; but meantime, I will share one of her free-access works to celebrate this Holiday Season. (She requests $8 a year for unlimited use of the new cards.)

This is the very first card she ever did. Click on this image for a glimpse of her work.

[Thanks to for the image and the link.]

If Jacquie is a financial success, there can be no better example of the free market at work. The internet affords a fabulous opportunity to those entrepreneurs who know how to exploit it, for relatively little start-up money.

Merry Christmas to everyone out there.

Sunday, December 24, 2006

A Little Forbidden "Foie Gras," Anyone?

Force-fed duck and goose liver is a French delicacy, as most people know; but it has begun to find disfavor with the PETA crowd in the US, and "somehow" -- I wonder why (duh) -- the political-correctness of it all has managed to infect local governments in places like Chicago and California, where prohibitions are either on the books or in the works.

[Thanks to for the photo.]

But like most prohibitions, it's having the opposite effect. Sales of the luxury item have blossomed as never before in Chicago, according to a producer in the New York region.

This article from the French newspaper Le Figaro describes the foie gras market situation from their point of view. The title of the article is:

"French foie gras manages to resist the attacks"

Here are the salient points (my translation):

"Chinese competition or American prohibition hasn't hurt this gastronomic speciality.... After a record 2005, consumption is again expected to rise. Sales have increase 16% in France during the first eight months of the year, while exports advanced 5%.... The professionals are smiling, and won't be discouraged by ... [Hungarian and Bulgarian competitors] who are already in second and third place worldwide, behind France, followed by Spain. Even the Chinese are beginning to show their face. Meanwhile, certain American regions forbid consumption of this food, in the name of animal rights.

"American prohibition is good for sales

"'I sell four times as much foie gras in Chicago as last year!' laughs Ariane Daguin, who fabricates, distributes and iimports foie gras in a New York suburb. Ever since the midwest capital forbid restaurants from selling this product in April, curious consumers have reacted in accordance with the old prohibition reflex. 'Our attorneys said the sale is forbidden, but not consumption. That's why we began to see obscure-sounding "toasts" at $20 each.... Even establishments that never served foie gras before have begun putting it on their menu. For many, it's a question of principle: The government has no business dictating to people what they can eat,' continues Mrs. Daguin, who by the way has attacked the prohibition in the courts.... The mobilization campaign launched by Ariane Daguin has stopped [the anti-foie gras hysteria promoted by the likes of Kim Basinger, Martin Sheen, Loretta Swit, Arnold Schwarzenegger, and a few Chicago and New York lawmakers.]"

Saturday, December 23, 2006

In Paris, "Wall Street" Bonuses are "Hush Hush"

Another article in the French press details how things happen in a country where having more money than most is a sin. The French wealthy don't necessarily try to hide their riches from the tax man (some just leave the country); but they sure don't want to flaunt them in the face of a nation that considers the boss as the enemy and the rich to be thieves. It just might incite a neighbor's jealosy and land them in front of the French equivalent of an IRS audit.

bourse de Paris
[Thanks to for this photo of the former French "Place de la Bourse" (Wall Street)]

Nicolas Cori describes the French situation thus (my translation):

"In France, it's the Grand Taboo. While in the US the banks announce with pride the list of the highest bonuses as a sign of good financial health, most of their French counterparts skitter along the baseboards. 'We're not very chatty about employees' bonuses,' admits a porte-parole of the bank BNP Paribas. 'We don't give any details on the subject,' adds the Societe Generale (another major French bank.) Only the salaries of the major company position holders (CEO and Director) are published. But this absence of transparency does not mean that French traders are protected from the Anglo-Saxon excesses. Simply put, the figures remain confidential.

Even for the trade unions. 'For the bonuses, it's always cloudy,' complains the CGT of the Societe Generale. 'We don't know the amount, hidden under the chapter "Bonuses and Miscellaneous Benefits." We don't even know the number of beneficiaries, the number of non-recipients, or the average.' Management refuses to give any more details, explaining that 'this doesn't enter into the domain of salary negotiations,' according to Alain Treviglio of the CFDT for the Societe Generale. 'For management, the bonuses are "discretionary,"' he smirks.

"Millions! The few leaks there are tend to justify their suspicions. In 2000, the CGT of the Credit Lyonnais revealed that the Derivatives Department head received 10 million euros. His sidekick got 7 million. 'Scandalous and anti-citizen," declared the bank's CFDT representative; and as the CGT wrote in a letter to the CEO of the bank: 'Dear Mr. President, We too want to earn millions!'

Six years after this episode, we can imagine that such sums have become small change. At the Societe Generale, for example, the CEO Daniel Bouton (3.18 million euros in 2005) states that he is in about 50th position on a worldwide earnings scale. Given the level of across-the-[English] Channel salaries, French traders would have no difficulty threatening to leave for a London bank to force their management to kick it up a notch....

"... 'Everyone pretends to be unhappy [with his bonus], for fear of receiving less the next year.' ... 'No one admits how much he received.' Injustice reins. Inside a particular department, the managers can decide to give nothing to someone they dislike. And it's always the same departments who are privileged. The front office (notably, the traders) area always in front of the middle office and the back office (who maintain the follow-up market operations.)

"But even with these excesses, the system is accepted by the employees of the finance industry, because each one takes a piece of the action at his own level. 'In every department where I've worked, there were annual bonuses,' says Etienne, seven years of experience in the middle office of Societe Generale. 'In 2005, while my salary was 40,000 euros, I received 15,000 euros as a bonus.' That would certainly help to put up with quite a few injustices."

The Wall Street Bonus Story Across the Atlantic (And Get A Load of the Punch Line)

Record breaking bonuses have hit the headlines. $40 million for one, $53 million for another CEO of a Wall Street powerhouse. According to an insider, it's because there's too much capital flowing around with no place to go. I believe this, and it confirms my Excess Global Credit theory. (See my article on the subject.)

[Title of this photo from "How to Spot a Rich Guy"]

Here is a translation of parts of a commentary I found in the French press about what's going on in Europe. (Authors: Sabine Limat, Laurent Mauriac)

"Those with the big bonuses, please raise your hand

"The figures are indecent.... For a small handful of finance industry employees, the Christmas bonuses are the evidence. When the stock market explodes, when companies are merging as fast as they can, money floods through the large finance houses. And the amount of the "tips" becomes stratospheric.

"Jackpot. The explanation is as cold and hard as this one from a Wall Street analyst who has requested anonymity: 'The bonuses are a function of profits. Clients of Wall Street businesses have too much money. We are swimming in capital. There is too much capital available and not enough investment possibilities. American companies have restructured over the last five years. They are presently reaping in colossal profits.' And that's how, this year on Wall Street, ... bonuses have increased 17% to reach 23.9 billion dollars, and as much as 30% in the five top financial firms (Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns). The latter will be distributing 36 billion dollars in bonuses to their 173,000 employees around the world.

"Not all will hit the same jackpot. But for certain ones, it's better than the Lottery. Lloyd Blannkfein, nominated in June to head Goldman Sachs, will receive 53.4 million dollars. This is a record. Included in this sum is 27.3 million in cash, 15.7 million in stock and stock-options for a value of 10.5 million. Next to that, his salary of $600,000 looks positively skimpy....

"Symbol. With their Ferraris and their customized Bentleys, their "pied-a-terres" in Holland Park or Chelsea [London] bought for 5 million pounds cash without a flinch, their private jets and their Barbados vacations, the young and not-so-young young go-getters of London have no reason to envy their New York counterparts....

"... [A]ccording to a report published in October by the London Center of Economic and Financial Research, 4,200 of the 335,000 [financial] employees in the city will each receive a bonus this year of more than 1 million pounds (1.5 million euros [or 2 million dollars]).

"That's what life is like in those grand financial circles, even in Paris, where things may be done more discretely**.... Remains the question asked by our Wall Street analyst: 'If you have a good career, you have probably already put 10 to 30 million dollars away. What's the use of 5 million more?' His own answer: 'For these people, it has become a symbol, a confirmation of their professional excellence.'

"The 120 members of the clean-up crew of the London offices of Goldman Sachs will certainly appreciate this logic. They just went on strike last week, to protest against the company's refusal to increase their wages."

**My next post will be another article on the bonuses received by the big five's higher-ups in Paris.

Friday, December 22, 2006

China vs. the US: A Trade Battle In The Works?

Today, Bloomberg tells us that Chinese shoemakers are suing the European Union over customs duties recently imposed on their shipments. The American Congress is also threatening to slap the Chinese with a tariff on imports, in order to encourage them to allow their yuan (local money) to float so our gigantic trade imbalance can straighten itself out. (The Chinese are keeping their money, the yuan, cheap by "pegging" it to the dollar. For an explanation of this and how the Chinese and other nations are fixing the exchange rate of their currency in a manner that is against the rules, see my previous post.)

[Thanks to for the image.]

However, the Europeans and Americans may find that the Chinese are a more combative and armed trading partner than they previously thought.

The WTO (World Trade Organization) voted China into its membership on December 11, 2001. This did three things: (1) It opened their production to wider acceptance in the major foreign markets; (2) it required them to agree to adhere to WTO guidelines; and (3) it gave them access to -- and responsibility towards -- the WTO's supranational jurisdiction in trade matters.

The first one is hardly something they needed, because they are already one of the major world exporters given their industriousness and their comparative low cost of living that translates into low export prices, at least as long as it lasts. They seem to be learning fast about No. 3, if we are to judge by their European lawsuit. As to No. 2, this is the only one that makes them a little vulnerable to criticism and legal pursuit, e.g. for intellectual property violations (they export a huge quantity of pirated software and entertainment and have had trouble policing it), and for pegging their currency to the dollar (they have demonstrated an unwillingness to play by the international foreign exchange rules.)

This second problem opens them up to a claim by their trading partners, mostly the US and Europe, of currency manipulation. The US could allege that this manipulation has contributed unfairly to the present unusually large US Current Account Balance. (This is a balance sheet composed of trade balance + foreign investment balance, and it now shows a huge "surplus" in China and "deficit" in the US. See this article for a more detailed explanation.)

Here's how this EU example has played out: A few years ago, the Europeans began to note an influx of cheaper Chinese shoes and concluded that this must hurt their own shoe industry and that they must protect it by imposing customs duties. (Aside: This is a useless and counterproductive action, because it causes the price of shoes to rise, thereby penalizing the average consumer. Although the legislators may believe the customs duty preserves the European shoe manufacturing industry and therefore jobs, most realize that all it does is preserve higher shoe prices, keep the shoe factories from converting their activity into something more useful, and delay the inevitable. Sometimes, however, legislators do it anyway because they think it will force their trading partner to stop abusive practices.)

Under normal foreign exchange conditions, an influx such as this of cheaper products would eventually and quite normally cause the trade balance to become lopsided in China's favor; but it would also cause the importer's currency to drop in value given its increased availability on the currency market. Likewise, the exporter's currency would normally begin to rise in value because of its unavailability on that market. (i.e. The Chinese would be buying less from outside their country than they are selling there.) This is a well known market dynamic. As these changes in exchange value occur, they will tend to dampen the speed of influx of exports/imports that were causing the problem in the first place, because the rise in the exporter's currency would increase the price of the exporter's goods, and lower the price of the importer's competing export goods. Eventually, a balance is struck.

However, China is pegging its currency. In essence, it is absorbing most of the dollars and euros it receives as payment for its exports and using them internally, instead of allowing them to return to the foreign exchange market as they should, thereby forcing the lower-than-expected supply of dollars and euros on the international currency market to prop the dollar and euro price higher than it would otherwise be. They thereby prevent the tendency towards equilibrium between exports and imports from materializing. Although it maintains China's export advantage, it worsens the lopsidedness of the US/China or Europe/China trade balance and encourages economically unsophisticated legislators to respond to political pressure from their manufacturing-sector constituents by counterattacking with tariffs or customs duties.

This has now happened in Europe. This could happen here in the US very soon (see my previous post), but the Chinese have an important arm on their side: In the US, the law requires the Treasury Department to give an evaluation of status to the Congress twice a year. However, the language in this law makes it easy to avoid accusing a trading partner of manipulating their currency, and for some reason that is what Treasury Secretary Henry Paulson seems to want to do. (Could it be because a drastic change in the yuan/dollar ratio at this moment might increase the US CPI and damage our economy's current tentative status?)

This is an interesting development because we are seeing for the first time that the pegging activities of the Chinese central bank are finally causing repercussions, as would be expected; but they are not coming from outside, but through an unexpected back door: Their own shoe manufacturing industry's WTO complaints.

Something's gotta give.

Wednesday, December 20, 2006

Latest Bubble: The 2008 Presidential Election

"The chairman of the Federal Election Commission yesterday predicted that 2008 will produce the first $1 billion presidential race and that the $500 million that each party's candidate will need to compete will severely limit the field of contenders, reports The Washington Times. "'The 2008 presidential election will be the longest and most expensive in United States history,' FEC Chairman Michael E. Toner told The Washington Times."

from the Cato Daily Dispatch.

[Thanks to for the image.]

Tuesday, December 19, 2006

How Much is Too Much?

This is truly 1928 all over again. Dom Perignon at $15,000, Klimt paintings for $78.5 million at Christie's, 50,000 square foot homes.

Florida home
[Thanks to for the photo.]

Now, don't get me wrong. I'm all for capitalism, and I believe in the free market and competition. I also believe in an open labor market. But what rarified air are those guys in finance breathing, down there on Wall Street?

Their company-sponsored Christmas presents have become the latest bubble in and of themselves. You've all heard about the $53.4 million that went to Lloyd Blankfein over at Goldman Sachs, and the $40 million that went to John Mack at Morgan Stanley. Those are just the bonuses.

Here are some more figures for those of you who haven't heard about this yet:

- Wall Street is expected to pay out $23.9 billion in bonuses this year (17% ahead of last year).

- The upper echelon of Goldman Sachs could get $25 million each.

- Lehman Brothers and Bear Stearns will be paying out about $12 billion in compensation.

- Wall Street accounts for less than 5% of all the jobs in NYC, but 20% of the wages.

As much as I believe in capitalism and in the fairness of these numbers when compared to the competition, I cannot believe that there is this much disparity of income in the US, never mind the world. How can the upper echelon of economists and commentators deny this great income gap? It is unthinkable, even for the free market economist that I believe myself to be.

How do these guys look at themselves in the mirror? I just giggled at my own comment: of course -- they're proud of themselves. I would be; and why shouldn't they? And they'll give half of it to charity anyway.

But something stinks, and I don't think it's just my envy, although I'll admit there's a bit of that involved. (I would try to divide their income by my own blogger pay to give you an idea of how much they're making, but you can't divide by zero.)

Two Economists Debate The Dollar Situation

The Wall Street Journal gives us a nice debate between Professors Menzie Chinn and Kash Mansori about the yuan/dollar and current account situation.

[Thanks to for the image.]

Mansori's last sentence sums up the gist of the dialogue:

'The U.S. current account balance will fall, and the dollar will fall along with it. But because this situation is so novel, the questions "how?" and "when?" just don't have any easy answers.'

This statement, also by Mansori, gives a concise description of the problem:

'Never before has any country been able to run such a large current account deficit for so long. Never before has any country borrowed such a massive amount of money from the rest of the world in such a short period of time. Never before has the world changed its preference for international assets (particularly U.S. assets) so rapidly. Never before have global central banks accumulated such staggering quantities of foreign exchange reserves. Never before has our domestic financial system been so dependent on international capital for its low interest rates, and by extension, been so vulnerable to events in the foreign exchange markets. And never before has the country most at risk for a painful exchange rate adjustment -- been the owner of world's dominant reserve currency.'

The debate makes for a good read, even though they don't say much more than I already did here. Nothing has changed since my post, except that the US economy is holding up pretty well considering the housing smack it's getting and the mixed signals coming out of the data. Hot-cold, hot-cold, hot-cold. The Fed keeps talking inflation pressures to keep us from assuming they will lower rates anytime soon; but they don't want to raise rates for fear of causing consumer, producer and investor confidence to drop.

We just have to be patient to see where all of this will go, don't we? T'ain't easy.

Did I ever tell you about gold as a store of value? (Rhetorical question, for those who haven't read many of my posts.) Because while the dollar dithers, gold is quietly coming into its own.

Once more for the back row:

You can take gold out of the standard, but you can't take the standard out of gold.

Monday, December 18, 2006

The Good News and the Bad News Out of Congress

Three Republicans have finally lived up to their anti-pork-barrel rhetoric. They are Jim DeMint of South Carolina, Tom Coburn of Oklahoma, and Jeff Sessions of Alabama, and they have "blocked a giant, fat-filled omnibus spending bill that was stuffed with more than 10,000 waste-ridden, earmarked pork projects that would have cost $17 billion." (Source)

[Thanks to for the image.]

That's the good news.

Then we also have the bad news: Democrat Senator Charles Schumer of New York has co-authored a bill with Republican Lindsey Graham "that would impose a tariff of 27.5 percent on Chinese imports into [the US.]"

Tariffs as a scare tactic for the Chinese may or may not work; in any case, they will force prices up and hence CPI inflation up. The Fed should fight this with tooth and nail. They can't prevent a politician from grandstanding; it's unconstitutional, I suppose, under the First Amendment. But they can try to educate them about the ramifications of tariffs on the general public.

When a tariff is put in place, the cost of it must be recuperated in prices or in its absorption by the producer. With all the competition they must have, I doubt the Chinese manufacturing industry can absorb it; so prices will go up. The politicians see it as a competitive tool, but in fact it is a boomerang that comes right back and hits us regular Joes in the pocketbook.

Saturday, December 16, 2006

Here's What Actually Happened in China

I had to go to the French press to get this .

Here are the essential passages of new information not included in American renditions of Paulson and Bernanke's visit to China:

"... Two days of dialogue between the two heavyweights of the global economy did not facilitate a solution to their commercial conflicts."

[Thanks to for the photo.]

"The general tone of the inaugural session at the People's Palace was given by the Madam Vice Prime Minister Wu Yi, the government's delegated interlocutor. She promised: 'China will continue to improve its socialist market economy system.' 66 years old, pilar of the CCP and negotiator at China's entry into the WTO in 2001, Wu Yi is often referred to as 'the Iron Lady' by the Chinese media. Opposite the imposing Washington delegation, composed of the Federal Reserve President, Ben Bernanke, and a cortege of secretaries of state, she didn't deviate from her reputation. 'Peking has the sentiment that certain American friends have not only a limited knowledge of Chinese reality, but they hold veritable misconceptions about it,' she explained firmly. 'This lack of understanding' is not 'favorable to a healthy development of bilateral relations.' The speech, accompanied with long explanations of 5,000 years of Chinese history, is almost a rebuke of Washington pressures to accelerate Chinese economic reforms."

According to this article, Paulson has stated that each side will continue to make an effort towards compromise. The US will "encourage national saving" (this statement conflicts with Bernanke's speech [read here]), while China will take measures to "increase both consumption and the flexibility of the foreign exchange rate."

The Iron Lady, on the other hand, stressed the differences between the two nations. She encourages the West to make an effort to understand China, arguing that the Chinese have proven their good will; presumably, it is now up to the West to do as much.

I also learned frorm this site (12/14/06 article entitled "La Chine et Les Etats Unis Entament...") that the US has threatened to "pull the trigger to unleash a complaint at the WTO" saying that if they resort to this, it would be because "we will have the feeling that the dialogue option hasn't worked and doesn't look as though it will work."

In other words, it looks like a floating yuan is not on the immediate horizon, and the conflictual tone may be rising between the US Congress and Chinese banking authorities.

Friday, December 15, 2006

Socialist Bernanke Pushes Government Spending and a Reduction of Savings for China

I couldn't believe my ears, but that's exactly what he said, because I've got the transcript of the speech here. (If you want to hear it straight out of the horse's mouth, go here and click on the "Bernanke Urges China" audio/video link from December 15, 2006.)

He says:

"Although more flexibility in the exchange rate would be helpful, the most direct and probably the most effective way to reduce the external surpluses and increase the welfare of Chinese households is to take measures to reduce domestic saving relative to domestic investment. Why is domestic saving so high at present? The high saving rate of households, even very poor households, likely reflects the relatively thin 'social safety net' in China."

Tell me I'm dreaming. He's made a direct connection between a country's social safety net and the rate of savings. That is an obvious booboo, because Europeans save much more than Americans, and their government-sponsored social safety net is much more comprehensive than ours.

On the contrary, Bernanke should be encouraging Americans to save more like the Chinese (and raise the rates so it becomes profitable to do so.)

And this:

"Combined expenditures by the central government and local governments on education, health, pensions and relief, and social security amount to only about 4 percent of GDP, lower than most other countries at similar income levels. In the absence of a stronger social safety net, Chinese households save at high rates to protect themselves against risks such as unexpected medical expenses and poverty in old age."

What's wrong with this picture? He should be holding the wise Chinese up to the American public as examples of what Americans should do for their own future. Instead, he says this:

"A sustained program of expanding social services has the potential for reducing saving and raising living standards in China and, at the same time, moderating China's external surpluses. In particular, increased government spending on health, education, and other types of social services would raise both household consumption and government consumption, and thus reduce national saving."

Has he taken leave of his senses? Or perhaps they stopped talking years ago. I feel a sinking sensation in the pit of my stomach. They told me he was a create-it-and-spend-it Keynesian, but I just didn't see to what degree. He is Keynes personified.

There is so much to say about this that I am speechless for the moment. I will revive soon.

[Thanks to for the photo.]

Overtaxed Johnny Hallyday Leaves France (Johnny Hally-Who?)

Another overtaxed high-income Frenchman votes with his feet by deciding to avoid the outrageous income taxes exercised in his country. He has just set up legal residence in his favorite play town, Gstaad, Switzerland.

Johnny Hallyday
[Thanks to for the photo of this aging rocker.]

An article at says that in 2003, the French finance ministry estimated that around 370 persons had decided to establish residency outside France for fiscal reasons.

But who is Johnny Hallyday, you ask. His name evokes among the French a similar emotion to that sparked by Elvis Presley in the US. He's Homegrown Rocker No. 1. I realize that no one has heard of him here; but that doesn't tarnish his local reputation one bit. He's been bellowing, heaving and gyrating with the best of them since back in the 1950s when his star began to climb, and it has yet to completely wane even though he is 63. Somehow, he has avoided becoming a living has-been (or a dead one, like so many), as his bank account seems to prove.

There is a well-founded principle in economics, which for some reason the government tax departments of the world are loathe to adopt. It is called the Laffer Curve.

laffer curve
[Thanks to for this neat illustration.]

The curve demonstrates the relationship between tax rates and tax revenue collected by governments as that rate rises in proportion to income. Time after time, the facts on the ground replicate this curve.

Why are the realistic and reasonable axioms of science so less popular than the mediatic and sensational ones? The answer is probably a political one. "Tax the rich" just sounds so equitable and gets so many votes.

Treasury Secretary Paulson's Remarks After China Visit Reveal Little, As Expected

The press release gives the usual cloudy rhetoric about the nature and details of the discussions, but we learn this:

[Thanks to for the image.]

1. They talked about the trade imbalances and China's need to let their currency float more freely. The US tried to insist on this "in the clearest possible terms" arguing that more flexibility will "help China achieve more balanced economic growth, enhance the effectiveness of monetary policy, safeguard the health of the financial sector and promote over time an orderly reduction of external imbalances."

2. The Chinese responded that they are aware of their need for "open, competitive markets, including capital markets" that will enable them to float their currency more effectively; and they have agreed that the NYSE and the NASDAQ should open offices in China. That's an interesting detail I hadn't heard before.

3. They discussed China's violation of US and other international property rights, and China has promised to do what it can to enforce the existing international laws.

4. They discussed Doha (international trade) and energy issues. The statement makes reference to the Future Gen project, "an international effort aimed at developing clean, renewable energy supplies."

5. They have set up a "workplan" to measure the milestones of progress, focusing on the "opening of services, health care, energy and the environment, transparency, investment and aviation." (Aviation? Don't know just what that means.)

The next meeting is scheduled for May in Washington.

Sounds like status quo, but we will see if there are any changes in the speed with which the dollar/yuan exchange rate moves over the next few months. You'll find a good chart here.

Thursday, December 14, 2006

Average Government Employee Wages Almost 50% Higher Than The Private Sector

Wow. September's private industry employer compensation costs were $25.52 per work hour, on average. For state and local governments, the figure is $37.91. (Source.)

[Thanks to for this picture of someone who, to be fair, is probably not a government worker; in fact he has probably just pulled an all-nighter.]

Those wage stats almost need no further comment, but you may be curious to know what accounts for the difference. Here are some more details:

Private Industry:

Average wages and salaries: $18.04/hour, 70.7% of $25.52
Benefits: $7.48 (29.3%)

State/Local Government:

Average wages and salaries: $25.53, or 67.3% of $37.91
Benefits: $12.38 (32.7%)

Another interesting fact or two:

State and local government management and related occupations earned $46.66 on average, while the private service sector equivalent earned $28.72. Sales occupations earned only $25.85 at this higher level of paycheck.

I can look for some market reasons for this imbalance, but they all fall through. For example, higher compensation is usually required when jobs are unpleasant or difficult. I doubt this is the case around those padded desks and cushy chairs. Is it hard to attract and keep employees? My information says no, they tend to hang on for life. Do the jobs require a greater degree of education than the private sector? Not in general, and obviously not at the entry level, as our collective observant eye has noted at your local DMV, immigration, unemployment or social security office. Are the working conditions dangerous? Well, I don't think so, although I suppose you never know.

What I do know are three factors: (1) Government workers are unionized to some degree, even though they seem to be the last who would need it.

(2) The government enterprise does not fit into the usual free market wage competition scenario, because there is no end requirement for profitability.

(3) Your and my tax dollars are an infinite source of compensation dollars, and we don't demand a balance sheet before buying government services. Remember: The various levels of our governments serve us; we are not their slaves. We "buy" their services. I know that seems odd, given that you must acquiesce to the extortion of your paycheck out of your clenched fist. It's one of those odd paradoxes of life.

Not requiring balance sheets from our government sector is a serious mistake on our part. Governments' feet should be held to the fire of balanced budgets, tax increase barriers and quasi-market standards of income and expenditure limitations, although I suppose we could dispense them from having to show a profit -- and then again, why should we? The money could pay off borrowing expenses.

Just another of my pipe dreams.

Tuesday, December 12, 2006

Identity Theft: Time to Do Something About It: My Suggestion

UCLA has been victim of one of the largest hacker schemes ever reported. It is time something were done about the preserving of private information in large data bases. The only real duty of the federal government is to protect us all; the rest is just frosting on the cake -- or rather dross (worthless scum formed on the surface of molten metal, the closest thing my brother could find to an antonym of the cake metaphor.)

[Thanks to for the image.]

Why can't government officials act when they need to, i.e. be useful instead of spending all their time voting themselves some pork to fatten up their next election numbers?


The federal government should declare it illegal to store social security numbers on any computer for more than the few hours necessary to check credit or number validity. The law should require that after a few hours the numbers be replaced by an internal code system of some kind.

That goes for the three credit agencies and the federal Social Security and other agencies as well, whose data bases are prime targets and probably the subject of much hacker brain-racking "as we speak."

This defensive action may represent a large expense now, but it would save our governments, our economy, the credit card companies, and the credit agencies millions in the longer run, in the form of credit fraud.

Let's get on the stick. What are we waiting for? A national crisis?

Cato: As Usual On the Button, This Time About Foreign-Held US Assets; But They Miss One Important Detail

Cato is one of my favorite think tanks, next to AIER (the American Institute for Economic Research.) (Unabashed Side-Note Plug: AIER is the only subscription and small donor supported, therefore truly non-partisan, and hence 100% scientifically motivated economic think tank in the world, I believe [until proven otherwise], even though it's an obscure one, given that unadulterated science is not often the stuff of headlines. But I'm digressing again.)

[Thanks to for the photo of its founder, E.C. Harwood]

Cato's William A. Niskanen has written a piece on foreign investment in the US, how it has increased from 19% in 1994 to 52% in 2005, and how it "has had broadly beneficial effects on the U.S. economy, so we should clearly welcome the willingness of foreign central banks to invest in U.S. debt."

This is true. If foreigners and their central banks had not been willing to so invest, says Professor Niskanen citing stats in a paper from the National Bureau of Economic Research's Francis and Veronica Warnock of the University of Virginia, "the interest rate on 10-year treasury bonds would have been nearly one percentage point higher."

At the same time, Professor Niskanen admits that "[i]t's true that large foreign ownership of U.S. debt increases our vulnerability to decisions by other governments. If, for whatever reason, they decide to stop buying U.S. debt, we risk a run on the dollar, an increase in interest rates, inflation, a decline in real domestic investment and a probable recession."

And heaven knows those reasons are not rare these days, especially in view of the dollar's weakness -- a point Cato doesn't address here, for an unknown reason.

His remedy is for the US to fight this imbalance on two fronts: the overblown federal budget deficit, and the US population's allergy to saving. He says he wouldn't raise taxes, which would simply lead to even less saving; so he prefers to reduce federal spending. He says no more about the US distaste for saving, so from his omission we can assume that he thinks reduction of the budget deficit is the way to go.

What he forgets is this:


Now even I, a savings-inclined human if there ever was one, am loathe to sink even so much as $1,000 into a savings account or CD that would cost me money rather than reward me for my abstention of consumption. I'd rather buy a solid, non-depreciating flat screen monitor instead.

To go one step further, I ask why were savings rates so low?


This seems so obvious to me, that I can only conclude I must be nuts -- either that, or it is the monetarily powerful who have lost their marbles. They prefer to run the risk of causing the collapse of the dollar (it's already lost about 40% of its value -- how much does it have to lose to be called a "collapse?"); or, they just figure they can hang onto the dollar's "tallest-midget" status to keep our collective US head just in front of the competition.

That's no way to manage a currency, is it? Strangle the little fish by robbing them of their incentive to save, while feeding the frenetic speculative frenzy of the hedge fund sharks? If you ask me, it's criminal behavior on the part of the world's central bankers (until proven otherwise to my "nutty" sense of logic.)

Monday, December 11, 2006

Here's the New Climate-Sensitive Cow

Isn't he cute?

[Thanks to for the original image, that KatyDee has tweaked.

My Brother the Inventor

My brother Fred has come up with a great idea: Install afterburners on cows. Afterburners are: "An auxiliary device, as on internal-combustion engines and incinerators, for burning undesirable exhaust gases produced during the original combustion."

[Thanks to for the image.]

According to this article at The Independent citing a UN Food and Agricultural Organization report entitled Livestock's Long Shadow, cows are now the latest danger to the planet, because they "are responsible for 18 percent of the greenhouse gases that cause global warming, more than cars, planes and all other forms of transport put together."

"Burning fuel to produce fertiliser to grow feed, to produce meat and to transport it - and clearing vegetation for grazing - produces 9 per cent of all emissions of carbon dioxide, the most common greenhouse gas. And their wind and manure emit more than one third of emissions of another, methane, which warms the world 20 times faster than carbon dioxide."

Livestock produce 100 other gases, plus ammonia. They cause deforestation. They absorb too much water ("it takes a staggering 990 litres of water to produce one litre of milk.") Weeds fed from livestock waste choke all other life. Pesticides, antibiotics and hormones enter water and kill coral reefs.

I guess the end of the world is nigh.

Good grief. I'll have to ask my brother which is worse: the cow flatulence's methane itself or the afterburner's combined production of heat and CO2.

Sunday, December 10, 2006

A Third French Leftist Complains About the ECB's Rate Raise

Jean-Pierre Chevenement, another presidential candidate from the leftist MRC Party (Citizens Republican Movement), adds his complaint to the growing list.

baby upset
[Thanks to for the photo.]

What the people should know and don't, is that the cause of the rise in general prices is loose monetary credit on the part of the ECB. Why don't they know this? Because no one tells them; and anyway, they're not particularly interested. They go about their business, while relying on the very politicians they despise, to destroy their money supply and hence their very day-to-day living conditions. I wish I could make them more aware, get them more involved; but them's the breaks. I'm just a lonely little economic gadfly. But I digress.

According to Monsieur Chevenement, raising the European Central Bank rate to 3.5% is "dangerous," "aberrant," and "a dangerous decision for market activity and employment in Europe. Not only does the strong-euro policy penalize our exports, but it discourages investment and precipitates relocation [of companies to other economic zones.] ... Those Frankfort gnomes are guarding their revenues and asphyxiating employment.... [I]n order to move out of production stagnation in Europe and away from mass unemployment, it is urgent that we reorient Europe's construction and put in place an economic government of the euro zone." [My translation.]

Ho Hum. More vague phrases. Exactly what does Monsieur Chevenement mean by the above-mentioned "economic government of the euro zone"?

From his earlier statement, we can assume he means lowering the ECB rate, among other things, i.e. flooding the euro zone with cheap euros. Not only does he want to do this; he also wants national government officials like himself to have the power to dictate how the multiple-nation ECB manipulates the money supply. He doesn't stop to think what a flood of cheap euros will do to monetary stability and to the people's purchasing power in the longer run, because short-term booms are more advantageous to a short-term politician like himself.

What Monsieur Chevenement is recommending is age-old Keynesian economic policies (named after John Maynard Keynes) that prescribe creation of extra credit in order to sustain and encourage production and employment. These policies had been discarded by most reasonable economic scientists a long time ago, but they are now enjoying a rebirth in the platform of some economists who call themselves Neo-Keynesians. I think they will be ushered to the nearest exit again soon, or at least I hope so. But all of this goes on behind economics' closed doors.

Saturday, December 09, 2006

Another French Socialist Shows His Economic Ignorance

Didier Migaud, the French equivalent of a congressman and former budget official, objects to the recent European Central Bank decision to increase interest rates.

[Thanks to for the photo.]

On the face of things, I kind of agree that the central banks of this world would do better to leave interest rates alone and abandon the idea of a joy-stick "Monetary Policy." (See my previous post.) What they are doing is point-blank intervening in the money markets.

But you can't have one-sided intervention unless you want things to get out of hand. What balloons up, must shrink down. A loosening of central bank interest rates and of the credit faucet must perforce be countered by a subsequent recuperative squeezing of the said rates and credit availability.

Like most living creatures, Monsieur Migaud only gripes when the medicine becomes bitter to his own taste. As long as the credit pumps are working in his favor, he says nothing; as soon as the proverbial punchbowl is retired, he starts to gripe.

But both manipulators and manipulatees are hypocritical here. If the governments and central banks of the world want to treat market participants and their elected representatives as children, then they should give them a tap on the butt, tell them to sit down, and explain to them that you can't binge on rum punch all day long, that at some point you have to return to common sense and submit to the hangover.

Mr. Migaud has at least the excuse that he is acting according to his socialist beliefs, which say that Big Government must be a father to this irresponsible albeit permissive society. The hitch is that the concept of good governmental parenting is a counterproductive delusion, and one that will only hasten the spoiled and immature adolescents toward their own self-destruction. (Oof. That egg was hard to lay.)

Segolene Royal's Economic and Sociopolitical Ignorance is Showing

France will choose its new president next year, and one of the major candidates, Socialist Party's Segolene Royal, has begun to show her true colors.

segolene royal
The Old Segolene
[Thanks to for this pic.]

segolene royal
The New Segolene
[Thanks to for this one.]

In a recent speech before the Socialist Party congress in Porto, Ms. Royal said [my translation]:

"It is no longer up to Mr. Trichet [president of the European Central Bank] to command the future of our economies, it is up to the leaders who have been chosen by the people. [In other words, me hopefully.]" [Words put in her mouth by the blogger.]

Ms. Royal obviously doesn't see the benefits from having an independent central bank, nor does she see the dangers from not having such independence -- a big faux-pas.

She profits from this speech opportunity to campaign just a little for the folks back home. (What politician in their right mind wouldn't?) She wants to construct "the Europe of those people who succeed in combatting unemployment, elevated prices and all other forms of social insecurity ... but we must also construct the Europe of the top minds, intelligence, qualifications, the Europe of research, environment, and the post-petroleum era."

Whoa, hold your horses, Segolene. What ever happened to the government of the people, for the people, and *by the people*, not just by some Ivy-League elite? Yes, I know you've given lip service to your party voters by making gestures towards some future "dialogue with the people" on everything from the price of a stamp to relations with Iran (yes, that's pretty much one of her platforms), but what's this other stuff?

As to the "dialogue with the people", the Dutch pretend they successfully exploit such a formula -- they have something they call the Polder Model (Go to the article of 7/6/2004 called Third Way, No Way by Hans LaBohm). But the Dutch are not the French (they hide their emotions and their politics better [joke, for you PC police]), and anyway, Holland's economy is not living up to expectations. Read this 2003 article, old but still relevant.)

Ms. Royal, you obviously don't believe in republican democracy; you believe in "dirigisme," or state planning. "But of cawse", you reply, "zat's ze definition of socialisme." But don't you see the inherent hypocrisy? You talk about a France of the People, but you don't *believe* in a France of the People; you believe in a France of the Pied Piper with yourself and your elite colleagues in the leading role.

I call you "La Gauche Caviar" -- the Caviar Left. We've got'em here, too.

Oh well. That was Robespierre's great weakness back in the 18th century. Even these modern European "cerveaux" (brainy ones) don't seem to have caught onto it yet.

Friday, December 08, 2006

Paulson and Bernanke Going to China

Treasury Secretary Paulson and Fed Chairman Ben Bernanke will be going to China next week to discuss various matters. The latest news is that the US won't be "finger-wagging" at the Chinese to get them to do anything specific, but they will be discussing "long-term structural issues" and "disparate economic and financial issues at high levels of government."

[Thanks to for the image.]

In other words, these meetings are about subjects much too intricate and important to be revealed to the general public.

In July of 2005, the Chinese did seem to heed a US and global request to allow their yuan to appreciate. Although there's not much point in speculating as to what will be said, we should keep an eye on stats and official announcements after December 14. We may get an inkling then of what important message was sent and received successfully, if any.

Fed Worried About Commercial Real Estate Bubbling?

Perhaps the Fed got burned on the residential real estate bubble, so this time around, they're trying to stop the floodwaters before they run into the commercial real estate barn.

[Thanks to for the photo.]

Here is a release from the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC giving guidance on commercial real estate lending concentration, which sounds timely inasmuch as the commercial real estate sector seems to have taken on all that global liquidity that the private real estate market couldn't force feed into its stomach anymore.

No one at the Fed seems overly concerned about the origin of all of this liquidity. Wonder why.

This reminds me of those occasions when the Mississippi floods over its banks. Everyone runs around with their slicks on, throwing sandbags in front of their doors and alongside the insufficient levies, in the vain hopes that the water will obey their symbolic gestures.

The only thing that will cure a flooding Mississippi is for whoever is in control to turn off the rain.

Thursday, December 07, 2006

The Monetary Policy That Isn't

I like Donald L. Kohn, if I can judge him by this Dec. 1 speech at the International Research Forum on Monetary Policy in Washington.

For the second time, I am impressed with the humility expressed by members of the Federal Reserve. Now I'm really convinced this bureaucracy is trying to turn over a new communication leaf.

But are they turning over a new monetary-policy leaf as well? I don't think so.

Image hosted by
[Thanks to candistackable and for the photo. Click for larger image.]

Kohn comes right out and says it:

"What are the basic sorts of uncertainty faced by central banks? In informal terms, we are uncertain about where the economy has been, where it is now, and where it is going."

How's that for honesty? Have they decided to try something different than Greenspan's intriguing Medicine-Man verbal smoke-and-mirrors?

Kohn goes on to tell us that in fact central bankers don't really have a true "Monetary Policy" per se, that they are not only uncertain about the economy, but they are also divided about how to achieve their stated goals of stable prices and employment.

Judging from Kohn's statements, the Fed has taken the present confused state of macroeconomic theory for permission to go into the candy store of conflicting research models and pick-and-choose among them to justify doing what they want, when they want.

These admissions of uncertainty and unstable policy decision-making are refreshing and this new leaf is a more honest one; but this honesty don't reassure us, the public, that central bankers have changed their policy of fickle monetary intervention. Economic policy uncertainty is a good reason for central banks to get out of the money-creation business and get into the money standardization business where they belong; however, central bankers are far from agreeing with me. After all, they'd lose the prestigious part of their job, wouldn't they?

I think an unfettered money market would determine with great precision the amount of money in circulation, when and if monetary policy could confine itself to creating a sound banking environment and a pivotal monetary standard. Stated another way, my confidence in the money-creating capacity of the market is based on TWO CAVEATS. The market will not make a penny more than is dictated by production, assuming there are strictly enforced ((1) banking credit-creation parameters, and (2) currency standardization.

Banking honesty through transparency and wise lending policy are essential, this goes without saying; but standardization of the monetary unit is also essential. Our money should correspond to some kind of asset of stable value, such as gold -- and I hasten to add that gold prices may be wild and speculative now, but as an asset, gold's true and underlying value throughout history has been just about the most stable the world has ever known. (For beginners, keep in mind that the dollar "price" of gold and its true "value" are two different things in these times of fiat, speculative currencies, i.e. unstandardized currencies. See my earliest posts between March 12 and 15, 2005, for an explanation of these differences.)

In order to function properly and to avoid distortions in macroeconomic fluctuations, money must be a unit worth something of relatively constant value. The rest -- including the role of central bankers and their "Monetary Policy" (or lack of same) -- is just froth on the cappuccino.

Tuesday, December 05, 2006

What? Someone is optimistic about the Future of US health care? Well, I'll be darned.

That person is Jennifer Openshaw, writing at

US health care is a mess, no one can deny this. Although the quality of care can be generous and excellent for the lucky insured, treatment is expensive for the uninsured middle class and for employers and employees, who collectively are the market participants paying the price for government health benefits for the uninsured lower income bracket and elderly.

Where every other country seems to be offering nationalized care -- France, Germany, England, Sweden, Norway, Holland, Spain, Canada, etc., i.e. most "civilized" nations -- the US seems to be dragging its heels.

And rightly so. Some of us can see that national health systems have huge bugs in them, most notably (1) a lack of open and public price negotiation (the public is not involved in the pricing procedure, but rather a limited number of payers negotiate with caregivers behind closed doors to fix and contract prices for a defined period of time), which leads to (2) the equivalent of government price controls, leading to (3) less innovation and research, coupled with (4) poor medical sector remuneration, all the above leading to (5) inferior care on an overall basis, including long waiting lists.

In their defense, I must say that people like the French are very happy with their system. Their doctors and nurses seem to be people of religious devotion to their vocation, willing to work for less pay and do it with a smile. But those contented patients and caregivers in France don't notice that more ambitious health professionals have abandoned the country for greener pastures.

Soon we will face a national debate about this issue, as Hillary, the great defender of national care, and/or her Democrat colleagues get their act together; and we Libertarians who defend the free market at every chance expect to cringe; but we may be surprised to see that even the Democrats can understand the market problem with a one-payer system, and that even they may come up with some compromise solutions that could be worth considering.

[Thanks to for the photo.]

Market participants are already finding ways to introduce competition into the US system, according to Ms. Openshaw. Aetna has initiated a program whereby they publicize hospital and medical charges so that those who pay co-payments and high deductibles can become aware of how much caregivers are invoicing *before* choosing one. Florida's government health service department is doing likewise. (Don't forget, state governments are market participants, too.)

Maybe there's hope? It's the first optimistic note I've heard on this subject in a long, long time.

The Libertarian Swing Vote Lost It for the Republicans on Big Government Binging

Cato Institute's David Boaz does an excellent job of pinpointing the rift within the Republican Party in this paper called "The Libertarian Vote." It is not just an anti-war vote; it is an anti-big-government vote as well.

Since Reagan's time, the Republicans have said they stood on a platform of smaller government, fiscal wisdom, and a non-inflationary monetary policy. They have won votes based on the swing voters' faith in the ultimate strength of the Republican politicians' intentions and character.

In truth, however, even during Reagan's presidency, the Republicans showed little backbone on the economic front and managed to lose the majority in the Senate in 1987. After getting it back in 1995, losing it in 2001, and gaining it back in 2003, they've lost it again in 2007.

In the House, Republicans gained the majority in 1995 for the first time in many years, probably thanks to Reagan's powers of persuasion. Without the follow-through, they have managed to lose it back in 2007.

[Thanks to Michael Hodges for the graph. See link below.]

Federal spending, a huge budget deficit and growing national debt are some key issues that are driving swingers away.

As the article says:

'There has always been a tension between Republican libertarians, who believe that individual choices should be unconstrained by received wisdom, and Republican traditionalists, who believe pretty much the opposite. ... But for a long time, the two wings of the party could paper over these differences. ... Would libertarians be more comfortable in the company of Democrats? On moral questions -- abortion, gay marriage, stem cell research -- clearly they would. But on economic issues, the answer is less obvious."'

To see exactly what kind of an economic mess government has gotten us into, see Michael Hodges's Grandfather Economic Report.