Tuesday, May 27, 2014

Time to Put the QE Genie Back In Its Bottle

Price inflation seems to be right around the corner, if it isn't already here, which means that the Federal Reserve may soon have to put their QE genie back in its bottle.  At least that's my hope, for the sake of our children's future.

[Thanks to DinoRentosStudios.com for the image.]

The only problem is:  The economy isn't cooperating.  Employment figures, never mind the full-time work force, are stubbornly refusing to increase.  Jobs are not appearing as hoped.  And GDP is not up to expectations.

Hence, the Fed will be faced with a quandary.  And I can't wait to see what happens.  Please click on this link for some further thoughts on the subject.

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Tuesday, April 22, 2014

The Cacophony That Is Europe

I'm sitting behind my computer with an amazing view out my window. Europe (for me, France in particular) is beautiful this time of year.

View from my window above the Rhone River.

The serenity of the vista contrasts with the malaise I note on the television, originating for the most part from France's budgetary restraints, which in turn are imposed by its membership in the European Union.

The EU is a heroic effort that unites 28 very different peoples and cultures under one flag, while at the same time retaining each's individuality. This sounds ideal and seems to function well on the trade level. But in everyday-life reality, it can be quite cumbersome. For example:

My husband bought an electric lawnmower the other day. He handed me the user's manual. Here's the front page:

Looks normal. But take a closer look at the lower portion:

(Click on the image for an even larger version.)

This is a list of 27 languages presumably spoken in the European Union. (There are 28 countries, but I know that Germans and Austrians speak the same language; however, according to this website, there are only 23 official languages in the EU.) This means that in order to take advantage of the 28-country commercial market, Bosch, a German company, had to hire people to translate the owner's manual into the other 23-26 languages.

Each language section is four pages long. The whole document is 118 pages long. Think of the translation cost, the cost of the effort to limit translation cost by making the instructions as short and sweet as possible, and finally the printing cost. And now remember that this applies to every product sold in the EU. The overall expense must be staggering, probably enough to bail out Greece and maybe Cyprus.

I have bought items that need to be assembled (Ikea desk, for example) whose manufacturers have solved the language problem by issuing user's manuals that only have pictures. That's right, no words, only pictures. I know it sounds impossible to make complicated instructions so simple that no words are necessary, and–well, in fact it is. I had to spend triple the usual time trying to figure out what the pictures actually mean, and I'm still not sure the drawers are in the proper order. And when I say "usual time," as you know that's a lot of time. (Obviously the customer's time-opportunity-cost was not a priority here.)

Then there's the compliance cost that manufacturers must pay to satisfy 28 different sets of government regulations–most of which, of course, have been centralized in Brussels by now, with all of the "misfitting" on the local level that this implies.

Now try to conceive of the same problem spread among the thousands (if not tens of thousands) of matters that must be handled on the top government level. Is Europe even a rational possibility?

In Brussels, the hub of the EU, they seem to have solved the language problem during government sessions by making English the most commonly used language, even though Ireland is the only English-speaking country that is part of the fiscal union. (The UK and Ireland are the only English-speaking countries in the EU, but the UK and a few others have their own currency.)

I'm not sure what conclusion to draw from all of this, but so far the Union has held together in spite of the language barriers, the monstrous fiscal problems, and the incredible governance headaches described above. Skeptics such as Anna Schwartz don't believe the EU can possibly survive without a more integrated fiscal union. The powers that be seem to be driving in that direction, in spite of local resistance.

However, attempts to solve the very serious fiscal problems are causing political tensions to grow all over Europe. For example, France's President Hollande's popularity rating is down to 19 percent. Extreme-right and extreme-left parties in a number of countries are making hay with their ruling party's current predicament caused by the fiscal discipline imposed by Brussels. One of the platform planks of most of these extreme parties is an exit from the Union.

We'll just have to wait and see, won't we, as we try to make sense out of this 27-language and 28-culture European cacophony.

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Saturday, March 15, 2014

Update on Price Inflation - What Was That CPI Figure?

The penny has officially become worthless.  I finally had to admit this the other day when I found a pile of them in a parking lot, just as if they had been smelly old cigarette butts dumped out of a car ashtray by someone in a hurry.

A few months ago in an earlier post, I whined about the price of M&Ms, or more accurately about the dollar's decline.  I noted therein that my favorite little candies had gone from 5 cents when I was a girl in the 1950s, through 55 cents when I had my own little store in the 1990s, to 99 cents at my local supermarket in 2011.   So today, I was not particularly surprised to see that my little packet of goodies is now $1.19 in the same supermarket.

But when I did the calculations, I realized that's a 20 percent increase in three years.  That's almost 24 times the 5 cents I paid in the early 1950s....

What??  That may be par for the course, but let's ask the obvious question:  What was that CPI figure again??

Thanks to Wikipedia and Scott Ehardt for this image.

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Wednesday, February 12, 2014

Argentina: A Deadly Mix of Totalitarian Thuggery and Business Cowardice

This weekend's Wall Street Journal published an article by Taos Turner on price inflation in Argentina. What I take away is that the country is in a state of internal warfare.

The Pertinent Fact:

According to the article, Argentina's public is now confronted with 30 percent annual price inflation.

The Cause and Cure, according to Argentina's Ruling Class of Thugs:

Friends of Cristina Kirchner have created propaganda posters accusing CEOs of large retailers of gouging the public. The gaudy creations now paper the walls of large cities. The caption reads: "THESE ARE THE PEOPLE WHO ARE ROBBING YOUR SALARY." Below an unflattering photo and the CEO's name and company is written: "They are increasing the price of everything to take your money." (The modern equivalent of Wanted-Dead-or-Alive posters?)

Elsewhere, individual consumers are encouraged to report any "unfair pricing" through an 800 number or via a government-provided app on smartphones. (Sounds powerful and scary, but I am curious to know who will do what with the information.)

Kirchner's cabinet chief, Jorge Capitanich, denies that macroeconomics have anything to do with Argentina's price inflation. He states that all the economists blaming the government's economic policies are prejudiced. He is sure of this, he declares, because he knows all of them and "[t]hey are all undercover agents." (For whom, he doesn't say.)

The Asininely Feeble Response of Retailers:

"In January, retailers agreed to freeze prices on about 200 products ranging from detergent to condoms."

[Audible gasp.]

That's it? No riposte? No counterargument? Not even the slightest attempt at self defense? Just a whimper and capitulation? I can here them now in their boardrooms: "Let's give them cheap condoms, that should do it."

No wonder totalitarians win. Their enemies are weak and short-sighted, and they cave in at the first boo.

[Thanks to Skreened.com for the image.]

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Monday, February 10, 2014

The Law of Unintended Consequences

I always read John Mauldin's weekly newsletter, and in one was a quoted passage that made me gasp in disbelief:

"In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

"There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

"Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil."

– From an essay by Frédéric Bastiat in 1850, "That Which Is Seen and That Which Is Unseen"

I gasped, because I had two simultaneous thoughts:

1)  What a simple, commonsensical, yet ingenious remark.

2)  How can it be that Bastiat wrote this in 1850, and we still don't get it?

Good grief.

[Thanks to Impactedbygrace for this image.]

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Monday, January 27, 2014

Why We Are Not Seeing Price Inflation

The Keynesians are saying that price inflation is not a problem and probably won't arrive. The Austrians and others are saying that price inflation must come at some point, given all the monetary stimulus introduced by the Fed. But could they both be wrong?

I hypothesize that price inflation is already here. Please read my argument at this Seeking Alpha article.

Now you see it, now you don't.

Screen shot of the French movie "The Magician"
by George Melies, 1898, from Wikipedia Commons

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Friday, January 03, 2014

Proof that Social Benefits Can Be Counterproductive

Publicly funded benefits such as welfare, food stamps, and other kinds of nationalized kindness are sometimes self-defeating. Would parents accept in their house and finance indefinitely the needs of an able-bodied grown person, plus his or her partner and their child, without expectation of a helping hand? Probably not. So why is it okay when society does it?

I have just received unequivocal proof that publicly funded welfare benefits destroy the incentive to work in some individuals and therefore cause an unnecessary drain on a society's collective resources.

How do I know this for a fact? I just got a letter from someone who owns a small apartment in France. She is advertising to rent it out, and this is what she writes:

"I got a call [from a prospective renter], but it doesn't sound good. She's a young girl with a child who lives about two hours from here, and who wants to move to [city] because her family is here. The problem is that she doesn't have a job, and she has a boyfriend who doesn't either, so they'd be three. The worst part is that she said, 'We don't plan on working, because with our State Family Benefits and our Minimum Reintegration Benefits, we have 1,000 euros, and we also qualify for Housing Benefits ….'" [E-mail from L.D. dated 1/3/2014]

I rest my case.

Brood Parasitism, as illustrated in Wikipedia.

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Friday, December 13, 2013

Why Extending Unemployment Benefits is a Bad Idea

Danny Vinik, publishing in Business Insider, discusses the pros and cons of extending unemployment benefits, but in spite of a good presentation of the issue, he draws the wrong conclusion.

Average duration of unemployment
United States - 1950 to 2010
[Image from Wikipedia commons
Click on it for a larger version]

Rand Paul had argued: "I do support 26 weeks of unemployment, if you extend it beyond that you do a disservice to these workers. When you allow people to be on unemployment for 99 weeks, you are causing them to become part of this perpetual unemployed group in our economy."

Vinik counters that the reasons for people becoming long-term unemployed are not clear. He points to various studies in support of his argument, and he is fair enough to refer also to a few that support Paul. (For the links, see his original article above; and for further research on the effect of unemployment insurance on the rate of unemployment, see this interesting page at Wikipedia that has some great links to the original research of competent scientists on this issue.)

Mr. Vinik ends with this: "Given the mixed evidence, each scenario is equally likely. Which one would you rather risk? Causing Americans to scam the government for a year or immiserating [sic] millions? This shouldn't be a difficult decision….[Sen. Paul and his Republican colleagues] may be right that jobless benefits discourage work. But they may also be wrong and that's a risk that's too big to take."

What do I take away from Vinik's piece? First, that sound public-policy research is difficult to do, and we desperately need for it to be done so that people don't act on hunches like this; and second, that Vinik's logic is a perfect example of why we don't want human agents interfering with the natural processes of the business cycle. Allow me to explain.

Public-policy science is difficult but vital.

Vinik's piece is interesting and balanced as far as it goes, but he makes two vital mistakes in his conclusions: He affirms that curtailing unemployment benefits would immiserate millions. This statement belongs among those earlier ones that he readily admits have not yet been proven to a high measure of scientific probability. Therefore, this conclusion is quite possibly just as wrong, or even more so.

He also affirms that the alternative choice, allowing a few to scam the system, does little harm. By the same reasoning, this statement is just as apt to be fallacious.

We don't want human agents interfering with natural business-cycle processes.

The problem with interposing oneself as the decider in quandaries like the one facing our legislators is that, at the same time as one gets a warm fuzzy feeling for helping potentially (but not certainly) immiserated millions, one is simultaneously-and certainly-acquiring the responsibility for creating a moral hazard.

I have discussed moral hazard before as follows:

"Kevin Dowd, in a Cato piece entitled 'Moral Hazard and the Financial Crisis,' defines moral hazard this way: " 'A moral hazard is where one party is responsible for the interests of another, but has an incentive to put his or her own interests first….' "New York Times Journalist Shaila Dewan defines it as 'the undue risks that people are apt to take if they don't have to bear the consequences.' "

When a legislator thinks like Mr. Vinik and decides to increase benefits as the lesser of two evils, she spends the money of the country's taxpayers instead of her own, not only (1) to acquire a warm fuzzy feeling, and probably, to some degree, (2) to incur the favor and votes of the unemployed; but also (3) to avoid the fear (not necessarily the reality) of immiserating millions for what she believes is the relatively small cost of allowing some to scam the government, the expense of which would accrue to a large group of people including herself for whom the individual cost is small, and (4) all the while ignoring the possible counterproductivity of adding to the number of government programs that already allow people to scam the taxpayers of some very big bucks–i.e. billions and billions.

I am referring here to, e.g.,: - the unemployment program itself - agriculture subsidies - the food stamp and other dole programs - energy programs - education - fraudulent claims for disability - taxation programs - Medicare/Medicaid fraud and and lots of other abused programs.

So what is the alternative to government doling out money to avoid disappointing some sector or other of the public? I would say, first, stop playing with our money supply, and second, enforce simple and sensible regulation of the banks. But those are subjects for another day.

Then, legislators should instead leave these sticky issues to the states where experimentation can determine the best path forward. For example, should private nonprofits or, better still, individuals themselves take over their own unemployment insurance? I realize that the idea of a nonprofit helping the unemployed, or of an unemployed helping herself, seems like a novelty; but to give just one example, someone has come up with the idea of private unemployment accounts, much like our current 401(k)s, and it is currently working in Finland, of all places. (See the above-linked Wikipedia page under "Finland.")

Don't this and other novel ideas deserve at least experimentation before we do any more blind bailing out of anyone and everyone, including the unemployed?

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Wednesday, November 27, 2013

Bubbles or No Bubbles?

I have vented my unscientific opinion about the existence of asset bubbles in our economy.  If you are interested in this subject, please be so kind as to click on the following link:

Asset Bubbles, How Do I Love Thee?

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Monday, November 18, 2013

Economic Common Sense from a Liberal?

Sometimes one finds basic logic in the strangest places. Kristen Bell, a young TV and movie actress writing in last May's Time magazine to describe the genius of Perry Chen (the inventor of Kickstarter, the "catalyst for the crowd funding economy"), says this:

"There's something so smart and magical about that idea–connecting consumers with creators and letting them vote with their own money."

Kristen is a vegetarian, PETA supporter, and a campaigner for Obama, according to Wikipedia. Isn't the world a strange place.

[Photo from Wikipedia commons.]

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