Monday, May 10, 2010

Thoughts on the Greek So-called Crisis

What they call a crisis in Greece really has three aspects:

1) The Greek government is unable to make full repayment of loans

2) The impaired ability to repay current loans inhibits the government's ability to access new credit.

3) The governments inability to pay salaries in full makes employees mad, thus there are protests and riots.

What is clear from this is that the Greek government cannot support it's spending habits. They were able to get away with massive overspending in the short run because, for some reason, lenders were willing to lend. The risks associated with lending to the Greek government were apparent. Like al governments that maintain perpetual deficits, the Greek government was running a Ponzi scheme. They had no intention to ever pay down the outstanding principal of their loans. They instead use new borrowers to pay off old debts and hope that system can be maintained forever. Keep in mind, folks, that the new government of Greece came in to power a few months ago promising INCREASED spending.

But this Ponzi scheme has one key difference from the ones operated by Bernie Madoff and others. It's victims are fully aware of the scam.

So today we get news of a giant bailout, nominally of the Greek government. But the bailout will only increase the suffering of the Greek people. It is really the bondholders who are being bailed out. And though I have not the stomach to look at a list of these creditors, you can bet they have names like Goldman Sachs, Citigroup, Bank of America, Banco Santander, etc.

Through all the bullshit talk of contagion, the only people who would truly suffer from a Greek default are those who accepted the risk of a Greek default. And yes that includes a few grandmas and retired teachers, but mostly we are talking about wealthy, wealthy people. Again, we see a massive wealth transfer from the middle class to the rich.

So what about contagion? A Greek default would have little effect on the real economy. What the powers worry about is subsequent defaults of Spain, Ireland, Portugal, California, etc. But those governments need to default. The losses have already occurred. All that remains is to demand who bears those losses. Should it be the people who made the bad decisions? I think so.

So what about the civil servants who will surely be getting paycuts and pink slips? The first think everyone needs to recognize is that these people have been severely overpaid for a long time. The Greek tax base simply cannot support this level of services, nor the salaries given to those service providers. But, right now these people are being asked to shoulder the bulk of the burden of "fiscal responsibility," and that is just plain wrong. The people of Greece and the employees of the Greek government must accept the fact that their lifestyles have exceeded their productivity, and they must retrench, but those who underwrote the excesses must bear their share (in fact, rightfully the largest share) of the loss.

The Greeks were running a deficit of about 14% of GDP, in violation of their commitment to keep the deficit under 3%. I have 2 comments here. First, the Greek government has no right to the promised support from its Euro-neighbors. The Greeks reneged, and the German taxpayers and others should let them default.

But contrary to this, the rest of Euroland is coming to the rescue, and in exchange they are demanding austerity measures. Basically, they want Greece to reduce and limit the size of its deficit. This action obscures the true problem and completely fails to address its root cause. The Greeks do not need to reduce their deficit; they need to eliminate it. And this needs to happen not over the course of a few years; it needs to happen now.

So what should happen? The Greeks should say no-thanks to any bailout. They should negotiate a default with their creditors. This would give them the credibility to level with their citizens and reduce the scope of government action, and relieve them of the burden of paying off debts that have already soured.

This would make it difficult for Greece to access credit markets in the short-run, and there are people who say that a government must be able to borrow. I say that is ridiculous. Greece needs to learn how to operate a balanced budget. If they can prove to lenders that they are responsible, they should be able to borrow. Right now the opposite is true.

Friday, March 19, 2010

This Myth Makes No Sense

Have you ever walked into your boss's office and demanded a decrease in salary? If so, you probably left work that day, smiling from your successful negotiation, and stopped off at the steakhouse where you insisted they accept $60 for a $40 steak... More on that later.

At least since the days of John Snow, American power brokers have been publicly lambasting the Chinese government for currency manipulation. Specifically, the Chinese maintain an artificially low exchange rate by buying dollars and dollar-denominated bonds in the currency and bond markets. In other words, if the exchange rate of yuan-to -dollars (the number of Chinese yuan one can purchase with 1 U.S. dollar) were allowed to float freely, it would naturally decrease.

So, are the Chinese manipulating the market? Absolutely

Is this manipulation bad for the American people? That is another matter.

For if you are a U.S. consumer, understanding that your sneakers and plasticware are coming from China, you might ask for something else from your elected representatives.

Yet, apparently, about 130 members of Congress have sent a letter to King Bush the 3rd requesting that he take punitive action on the Chinese.

Leaving aside the fact that if the Congress feels this is necessary, they should levy tariffs on Chinese goods, like the Constitution says is THEIR job, let's examine this policy.

It is really quite simple. Our government wants the Chinese to allow their currency to appreciate against ours. In other words, they want the Chinese to make the dollars you and I buy things with, LESS valuable. This is exactly equivalent to demanding that the Chinese raise prices on everything we buy from them AND telling them to pay us lower prices for everything they buy from us.

Now, if you've had any experience living in the world, you know that lower prices are better for consumers and higher prices are better for sellers. So why would our government advocate a policy that is bad for almost all Americans?

Well, the short answer is that they don't understand economics. Yes, a few select US exporters would benefit, but let's look at the big picture. The Chinese are allowing us to buy their products at below-market prices. They are effectively giving us stuff for free. If they choose to do this, why would we want to stop them?

Now in my opinion, it is the Chinese that are making a mistake. They are foregoing the benefits of their own productivity. Of course, they feel like there are sufficient benefits to maintaining this policy, and they may be right. But the day will come when that ceases to be true. The best thing we can do is take advantage of the policy while it lasts and prepare ourselves for the day when it stops.

It is certain that the day will come, with or without U.S. pressure, when the Chinese will allow their currency to float. And when that day comes, look out, we will feel it. Be careful what you wish for; be even more careful what you allow your elected representatives to demand.

Saturday, February 20, 2010

The Audacity Of Running For President Without Knowing Any Economics

Barack Obama said last week, in reference to the large bonuses paid to Jaime Dimon of JP Morgan Chase and Lloyd Blankfein of Goldman Sachs that:

“I know both those guys; they are very savvy businessmen... I, like most of the American people, don’t begrudge people success or wealth. That is part of the free-market system.”

He also said:

“There are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.”

Well, our president obviously does not know what a free-market system is, but he ought to know at least this: We don't have one. Not in banking anyway - the market for banking services in the U.S. is just about the least free of all markets that we have. There are no bailouts in a free market.

These two men, far from being successful businessmen, are among the primary beneficiaries of anti-free market policies. They have not earned their money by being good bankers, but by effective lobbying. They are good at convincing powerful people that they deserve wealth that other people have earned. In fact, they have destroyed wealth and, in a free-market system, would earn no more than a subsistence wage.

Economic activity is all about production and trade. What we produce can be consumed or saved. What we save can sit idle or be used to produce things for future consumption. When we use savings for the latter it is called investment. Savings (also called wealth) is really just an uncertain claim on future consumption. It is uncertain because an investment may or may not work out well. For example, building a house that no one wants to live in is an investment with a negative return; making a small machine that can store and play thousands of songs that is consumed by millions of people has a positive return.

The role of bankers is an important one in any economy, but it is often performed quite poorly. Actually, the role of a banker is simple - he is the middleman between savers and investors. Savers are not necessarily good at producing things that can be consumed in the future, so they take their money to a banker. In theory, the banker knows people who are good at producing. They make a deal that gives the investors access to the savers' resources and all three share the proceeds in some way that they agree to among themselves.

Now, some of these investments fail and some succeed, but in a free market, we can expect that, on average, they will have a positive return. This is true, not because the group of bankers and investors are inherently skilled, but because those who are not skilled will fail and move into other professions. An investor who consistently has negative returns will eventually lose the trust of the bankers and lose access to the resources of savers; a banker who consistently funnels money to failed enterprises will lose savers as customers.

But this process of weeding out incompetent bankers only happens if the bankers must rely on their own success to make a living. If an outside entity, like the government, gives bankers an opportunity to continue banking after they have failed, the system falls apart.

Bailouts accomplish exactly that, and Goldman Sachs and JP Morgan Chase were among those at the front of the bailout line.

Friday, August 7, 2009

"The Precondition For Hope Is Understanding Reality"

"The Obama brand offers us an image that appears radically individualistic and new; it inoculates us from seeing that the old engines of corporate power and the vast military industrial complex continue to plunder the country. Brand Obama is about being happy consumers. We are entertained; we feel hopeful; we like our president; we believe he is like us. But like all branded products spun out from the manipulative world of corporate advertising, we are being duped into doing and supporting a lot of things that are not in our interest. What for all our faith and hope has the Obama brand given us? His administration has spent, lent, or guaranteed 12.8 trillion in taxpayer dollars to Wall Street and insolvent banks in a doomed attempt to re-inflate the bubble economy, a tactic that at best forestalls catastrophe and will leave us broke in a time of profound crisis. Brand Obama has allocated nearly $1 trillion in defense-related spending and the continuation of our doomed imperial project in Iraq, where military planners now estimate that 70,000 troops will remain for the next 15-20 years. Brand Obama has expanded the war in Afghanistan, including the use of drones sent on cross-border bombing runs into Pakistan that have left 700 civilians dead since Obama took office. Brand Obama has refused to ease the restrictions so workers can organize, and because of pressure from the for-profit health care industry refuses to consider single-payer, not-for-profit health care for all Americans, and Brand Obama will not prosecute the Bush administration for war crimes, including the use of torture, and has refused to dismantle Bush's secrecy laws or restore habeus corpus. ... Brand Obama does not threaten the core of the corporate state anymore than did Brand George W. Bush."

Now that is what I mean when I say Obama is more Bush than Bush. Those words come from Chris Hedges, of the left-wing It comes from a July 22nd speech at Town Hall Seattle. It's well worth a listen, especially for those who still see Obama as the bringer of change he pretended to be.

Friday, July 24, 2009

You Call That A Recovery

Economic activity can be broken into 2 categories: production and trade. In abstraction, both can be analyzed identically because production is actually a type of trade.

Trade, as we typically think of it, creates value by putting goods and services into the possession of the people who value them the most. Trade effectively funnels products to their highest-valued use.

Through production, we trade basic resources for finished products. The other side of the production coin is destruction. The inputs are sacrificed so that we may have the output.

There is no guarantee, however, that the output is of higher value than the inputs. We must be careful what we destroy.

If a business loses money in the long-run (that is, if total cost exceeds revenue), that business is destroying value. We know this because costs can only exceed revenue if the group of inputs has greater value in some other capacity. Unfortunately, value-destroying processes enter into GDP positively; they are really a negative. GDP is a very poor measure of the health of our economy.

It is commonly believed that any production process adds value because the finished product can be consumed whereas the raw resource would sit idle otherwise. But that ignores the possibility of using those resources for something else. There is also value in having the option to use a resource in the future.

There will always be some waste in the economy. We do not have perfect foresight, so we are unable to limit our production to only those that create value. Usually they are a very small portion of total production. Recently, destructive processes (example: General Motors) have been a relatively large share of the total. The result: recession.

The proper response to a recession is twofold: acceptance and recovery. Acceptance means stopping the destructive processes. Recovery means taking the resources that were involved in the destructive processes and finding better ways to employ them.

Acceptance can be quite painful. It involves things like bankruptcies, job losses, foreclosures, asset price declines. But, it is a necessary pre-condition for recovery.

The paths of acceptance and recovery vary in different sectors of the economy and for individual economic agents, and they can coincide to some degree. But acceptance can also be mistaken for recovery.

For example, when a business increases profit by cutting cost (i.e. contracting production) that is acceptance. They are lessening or eliminating the destruction of value. This is why we should let failures fail gracefully instead of bailing them out.

Thus profit can increase as GDP contracts and, importantly, we are better off, on average, as a society as a direct result of this contraction. This might be what people mean when they say 'jobless recovery.'

Make no mistake, though, there is no such thing as a jobless recovery. Labor is the most important input to production, and employment is the best indicator that we have as to the real level of our output. If there are more willing workers sitting idle today than at the beginning of the recession, then we haven't recovered. If net job losses continue to occur, we haven't started to recover - because we haven't fully accepted our recession.

Sunday, July 12, 2009

In Defense of Failure

All advances that the human race has ever made are the result of trial and error. It is not a blind process; we learn from mistakes and from successes. We pass on knowledge. Our ideas are informed by our own experience and the experience of those who went before. We are smart people, but we are only smart because people have tried things with little or no foreknowledge of the nature of the results. They allowed themselves to fail, and did. But along the way successes appeared, and multiplied and persisted. The failures were thrown out, resurfaced at times and were thrown out again. This is the essence of economic growth. It is the essence of all growth.

If we fear failure, we risk stagnation. We miss the opportunity to expand our knowledge base and improve the standard-of-living. But if we come to hate failure we risk much more. The aversion to failure might not cause us to avoid risk but to dress up failure as a success, to allow bad ideas to persist. This causes us to move backward as it amounts to the destruction of welfare. It locks resources into unproductive pursuits.

La Boca

For my first few weeks in Buenos Aires I enrolled in a Spanish class at a place called Expanish. The students were a mix of laid-off bankers from the U.S. and Europe and global-soul type travellers from North America, Europe, and Australia. My teacher, Diego, is a local guy, a writer and father of two. He chain-smoked, hated to be in nature, and is a very bright guy overall. Outside of living in Madrid for about a year, he's only been outside of Greater Buenos Aires once, for a bus trip taken with his high school senior class. He knows a lot about Argentina, though not from experience, but he is encyclopedic in his knowledge of the city. A great deal of time was spent in these classes discussing things to do in the city. We were not only students of Spanish, but also visitors to a rich city.

La Boca is one of the primary tourist draws of Buenos Aires. More specifically, the caminito in the barrio known as La Boca. The barrio is also home to the famous football team, Boca Juniors. The caminito photographs well; you have seen it if you have ever looked through a tour guide on Buenos Aires. But the surroundings of the caminito are the streets of Buenos Aires with the reputation of being the worst for crime. The people here are poor; tourists with money come through regularly. A low cost way to make money is to buy a gun or a knife and take some of that tourist money.

I hear first-and-second hand accounts of being mugged in La Boca regularly. A guy had a gun pulled on him, then was stabbed, supposedly in the touristy section. Most of the foreigners I know from the tango scene have not been to La Boca, even if they have lived here for months or years. Locals don't seem to be inclined to go either.

Diego says it's not dangerous if you act smartly. Busses can drop you off and pick you up at the caminito and if you stay off the backstreets, no one will bother you. Those who would rob others don't waste their time with Argentines. So Diego told us they'll say something like "Que hora es?" (What time is it?) when a stranger walks by. If he responds "no tengo reloj" (I don't have a watch) they leave him alone. If he says something like "I don't know Spanish," they rob him.

About six weeks after Diego told us this, I decided to spend an afternoon at the caminito. The 168 bus, which comes right by my house, goes to La Boca. My friend said she knows where to get off, so off we went. 45 minutes later, I learned that the 168 is not one of the many busses that drops people at the caminito. So we disembarked, walked across a park and then arrived at the backstreets of La Boca. Moreover, we did not know exactly how to get to the caminito.

I've walked down streets, at all hours of night, that would give my mother a heart attack if she saw them. But they could not inspire in me the dread I felt in the light of day here. Strange looking people lined the street, sitting on stoops, drinking and smoking, wearing hoods that hid their faces. I saw a taxi and almost got in it to travel about 2 blocks. We moved a meter or 2 into the street, and sure enough, I heard it, "Que hora es?" I didn't respond.

2 blocks away we made it to the football stadium. There were more people here and kids kicking a ball around. The atmosphere felt marginally better, but we still weren't sure of our direction. My friend had been trying to learn English and she spoke to me in English. "No quiero hablar ingles aca," I said to her in a low voice.

7 or 8 more blocks and we made it safely to the caminito. I like it. Sure it is touristy, but they present themselves well. We sat outside with a Belgian beer and listened to a bandoneonista, not watching the third-rate tango dancers. The music had more appeal for me. Down the road, dancers danced the chacarera and zamba, which are 100 times more entertaining for me to watch. Tango, the dance, for me, is an art form to be felt; I still do not enjoy watching it. Wax figures of Eva Peron, Carlos Gardel, and others I don't recognize look over the street from high balconies. There is some nice artwork as well.

The tango dancers very overtly asked us for money, which highly offended my friend, who is from Buenos Aires. At first, they seemed to think we were obligated. After we told them that we are tango dancers, they left us alone. I think they knew that we could tell they weren't so good. Most tourists, I guess, are happy to pay obscene amounts and the dancers get used to this. It is probably quite lucrative.

As for me, I was content to overpay for the beer.