Author Archive for David Howden

The Housing Boom Returns

BowConstJuly09For the last decade (or more), Canadians have been ebullient about their home-grown housing boom. Home prices in Toronto have grown by leaps and bounds over the past decade. New homeowners have rushed in to take advantage of what seems like a surefire path to riches.

Unfortunately while your home might be an asset if you own it outright, for the vast majority increasing housing prices have meant higher mortgage or rent payments. Associated home-ownership fees have also risen steeply. Property taxes are a percentage of assessed value, so they have also risen over the boom. Utility expenses have gone up, as have general maintenance costs. In short, it’s not cheap owning a home.

Apparently Canadians now spend more income on housing then almost anywhere else on the planet. The average Canadian can expect to roughly 43 cents of every dollar earned to housing expenses (rent, utilities, etc.). Americans aren’t far behind at 42 cents, and us North Americans are only “beaten” out by the Swedes and the Dutch (45 and 51 cents of each krona and euro).

For Canadians, according to a BlackRock survey, this leaves just 13% of their income available to be saved, and 10% to be invested. These are the lowest rates in the world.

Many think that this savings rate is low because, 1) housing is a form of savings, and as long as that market remains robust their will be no problem, or 2) high housing prices have squeezed the amount of savings available (i.e., savings is a residual or sorts).

The problem with these interpretations is that it treats the expenditure categories as separate of one another. Actually savings are low and housing prices high for the same reason – they are both interest-rate sensitive and an extended period of record low interest rates at the hands of the Bank of Canada has caused both results. Since most houses are bought on credit and over an extended period of time, low interest rates have fostered the housing boom. And since interest is a component of what you earn on savings, lower interest rates discourage savings (and encourage spending, which also contributes to the housing boom).

Canada’s housing boom isn’t a positive development, and Canadians are now getting a glimpse of why not. Like any inflationary process, the immediate effects seem positive as people feel wealthier given their early purchase of an asset that later goes up in value. As all prices start to rise the effect is reversed, and inflation slowly (or quickly in some cases) impoverishes the country. Add to these rising prices the fact that we’ll have lower growth rates due to an extended period without savings and you can probably foresee that this isn’t just a problem in the present but one that will persist for some time.

(Cross posted at Mises Canada.)

QE’s Seeds are Already Sown

rsz_badseedThe Federal Reserve has finally ended its quantitative easing programs. Since the financial crisis of 2008, the Fed has pursued what seemed like an endless policy of asset purchases. As recently as September 2008 the monetary base in the US was just a hair over $800 bn. Today this figure is just shy of $4.2 trillion, for a total increase of 425%.

For its part Janet Yellen and her gang of Fed economists are probably pretty pleased with themselves. Unemployment is down, headline inflation remains muted, and the word on Wall Street is that a worse crisis has been averted. The stock market is at record highs, and banks (and bankers) are back to their pre-crisis eminence.

One of the true marks of a great economist is an ability to see past the obvious outcomes and into the veiled results of policies. Friedrich Bastiat’s great essay on “that which is seen, and that which is not seen” provides a cautionary parable that disastrous analyses result when people don’t bother looking further than the immediate results of an action.

Nowhere is this lesson more instructive than with the Fed’s QE policies of the past 6 years.

Consider the Austrian business cycle theory. The nub of the theory is that changes in the money market have broader results on the greater economy. In its most succinct form, when a central bank pushes interest rates lower than they should be (by buying assets, for example), the greater economy gets distorted. Some of these distortions are immediately apparent, as consumers buy more goods and everyone takes on more debt as a result of lower interest rates. Some of the distortions are not immediately apparent. The investment decision of firms gets skewed as interest rates no longer reflect savings preferences, and the whole economy becomes fragile over time as erroneous investments add up (what Mises’ coined “malinvestments”).

When a financial crisis or economic recession hits, it’s almost never because of some event that apparently happened at the same time. The crisis of 2008 did not occur because of the collapse of Lehman Brothers. It happened because the whole financial system and greater economy were fragile following years of cheap credit at the hands of the Greenspan Fed. If anything, Lehman was a result of this and a great (if unfortunate) example of the type of bad business decisions firms are lured into by loose money. It wasn’t the cause of the troubles but a result of them. And if Lehman didn’t go under to spark the credit crunch, some other fragile financial institution would have.

The Great Depression is a similar case in point. It wasn’t the stock market crash in 1929 that “created” the Great Depression. It was a decade of loose money policies by the Fed that created a shaky economy. Again, if anything the stock market crash was the result of stock prices being too buoyant and in need of a repricing to reflect economic fundamentals. Just like today, stocks rose to such storied heights as a result of cheap credit, not because of the seemingly “great” investments funded by it.

The Fed has lowered interest rates since July 2006. We have just come off the the period with the most rapid and extreme increase in the money supply ever recorded in American history. The seeds of the next Austrian business cycle have been sown. In fact, they are probably especially fertile seeds when one considers that the monetary policy has been so loose by historical standards. Just as cheap credit of the 1920s beget the Great Depression, that of the 1990s beget the dot-com bust and that of the mid-2000s beget the crisis of 2008, this most recent period will also give birth to a financial crisis.

When the next crisis comes there will no doubt be economists and commentators who blame it on some proximal event, like the failure of a large important financial institution. Don’t be fooled. The seeds of the next crisis are already sown. Fed policy under Ben Bernanke and Janet Yellen has distorted the economy in a way that makes it precariously fragile, and susceptible to collapse.

(Cross posted at Mises Canada.)

Regulation through taxation

Hungary_-_Location_Map_(2013)_-_HUN_-_UNOCHA.svgOne lesson from the United States’ Obamacare debacle has been that if Congress can’t get its way through regulation, it can always resort to taxes. At least that’s the Supreme Court’s view, after it declared the Affordable Care Act constitutional because it amounted to a tax, something that falls under the domain (apparently) of Congress.

So now why all the commotion with Hungary using the same tack with the internet?

The Eastern European country has just implemented a new tax on bandwidth. Roughly 60 cents will be charged per gigabyte of internet transfers. The tax comes at a time when the government of Hungarian Prime Minister Viktor Oban has been cracking down on the media. Since the internet is now the most popular platform for information sharing, I’m sure the new tax will serve to limit the competitive capabilities of alternative news sources – bloggers, for example!

(Cross posted at Mises Canada.)

Legal Victory for the IRS

160px-IRS.svgWith the IRS scandals of early 2014 all but a distant memory, some closure is coming to the groups that the long arm of the tax law harassed. Unfortunately the verdicts aren´t going the way the affected would like.

The IRS may have inadvertently figured out how to win its legal battles against aggrieved tea party groups: Give them what they wanted in the first place — tax-exempt status.

That was a major reason a Republican-appointed federal judge on Thursday threw out two lawsuits brought by more than 40 conservative groups seeking remedies for being singled out in the tea party targeting scandal, a victory for the IRS.

More troubling than the apparent lack of justice (we wronged you, but then later made it up to you so we don´t need to be punished?!) is the reasoning behind the Federal Judge´s decision.
Judge Reggie Walton of the U.S. District Court of the District of Columbia dismissed almost all counts brought against the tax-collecting agency in two cases, ruling that both were essentially moot now that the IRS granted the groups their tax-exempt status that had been held up for years.Walton, a President George W. Bush-appointee, also said individual IRS officials could not be fined in their individual capacity for allowing such treatment because it could hurt future tax enforcement.
I guess I missed the memo where enforcement of the law included provisos to protect the ability of the law-breaker to further break the law in the future. I mean, wasn´t the original problem that the IRS was unduly harassing certain groups? If that´s the case, and the IRS is found guilty (which it was, just not punished), shouldn´t the law try to stop such harassment from happening again.
To use an analogy, let´s say I park in of my neighbour´s lane so he can´t leave to get to work in the morning. A couple days later I move my car, and the obstruction is gone. My neighbour takes me to court, and the court agrees that I unduly blocked him, but I´ve since moved my car so it´s a moot point. My neighbour says that´s ridiculous, and wants charges against me for trespassing on his property and stopping him from leaving. The court finishes by telling my neighbour that nothing can happen to me personally because that would dissuade me from parking in his lane in the future and blocking him in.

If you think that I´m getting off scot-free in the example above, I can only think of what you think of the IRS right now.

There Was No Contagion

Eurozone_2009.svgIf you use the word “contagion” these days, people are likely to think you’re talking about ebola. Backup five years ago, and contagion was the buzzword to describe the financial crisis.

The European government bond market was falling apart, and allegedly it had nothing to do with the precarious public finances they were built on. Instead the excuse was that  there were a couple bad apples (Greece, Ireland, and than Portugal), and these isolated cases were shaking investors’ nerves and causing them to be irrationally weary about supposedly “safe” countries, like France or Germany.

At the time I said it was a completely ridiculous use of the word contagion, as normally one would only use that if the person infected was not culpable in transmitting the disease.

The one common theme amongst European public finances was that they had high tax rates and even higher levels of expenditure. Deficits, extremely large in some cases (Ireland), were practically the norm. If countries were having a tough go issuing more debt, it wasn’t because of some vague cause like contagion, but because of years of bad political choices left them in terrible financial shape.

As it turns out, two NBER economists have drawn the same conclusion with a retrospective look at the Eurocrisis. Not only could they find only very small “spillover effects” (contagion) during the crisis, but investors didn’t seem that worried either.

Of course, if there was no contagion, and investors weren’t even erroneously acting like there was one, who was behind all the talk? As always, politicians searching for an excuse for their shoddy finances latched on to a notion and got the world worked up in a frenzy, giving them free reign to pass whatever policies they liked to keep their financial endgame going a little while longer.

(Cross posted at Mises Canada.)

A Sensible Central Banker?

1280px-Ottawa_-_ON_-_Bank_of_CanadaWith all the lunacy coming from the world’s central bankers since, well, ever, it’s refreshing to hear something (anything!) sensible coming from one of them finally. Bank of Canada Governor Stephen Poloz’s recent announcement that the BoC would stop using forward guidance included all sorts of encouraging tidbits.

Canada’s central bank needs to communicate with “full transparency” the risks that it is weighing because, according to Poloz, this “causes the market to assess new information more or less the way as the central bank does.” In effect, he wants the BoC to stop trying to trick investors to get them to do things they otherwise wouldn’t.

Poloz is also concerned not just with the risks lurking around the dark corners of the economy, but the uncertainties no will see coming.

As economists and policy makers, we know that uncertainty is everywhere and that it has worsened in the aftermath of the global financial crisis…. I believe that the sort of uncertainty we are dealing with today is more profound than that which is typically subjected to rigorous analysis – that it simply does not lend itself as easily to either mathematical or empirical analysis, or any real sort of formalization.

Of course, the BoC leaves unchanged its commitment to low interest rates, but it’s heartening to see some recognition of the risks involved with this policy.

(Cross posted at Mises Canada.)

Be Careful When you Wish for a Weak Dollar

12531001294_cdcbab77cd_bA little over a year ago, Canadians were alarmed by the surging loonie. As the argument went, foreigners (and Americans in particular) couldn’t afford to buy Canadian-made goods. Since the country couldn’t compete, better get the Bank of Canada on the job and inflate so as to depreciate the dollar.

One year on and people got what they wished for. The loonie has lost about 7% of its value against the Greenback, and nearly 15% since 2012. This should be a great stimulus for the economy, right?

Wrong. Not only has manufacturing not rebounded from the depreciation, but now Canadians are getting hit hard on everything they import into the country, which for the average Canadian is one out of every three dollars they spend.

The Globe and Mail (which less than a year ago was one of the main promoters of the “prosperity through depreciation” argument) has changed its tune.

A money-saving suggestion for Canadians with a taste for travel in the United States: Skip the trip.

The Canadian dollar’s descent to five-year lows in early October reminds us that a weak currency has its price. Everything we import from the United States costs more, although intense competition among retailers may limit the impact for a while at least. A more immediate impact is the cost of buying U.S. dollars and paying credit card bills for U.S. purchases.

The cheapest vacation of them all is the staycation, where you do all the fun stuff you don’t normally have time for in your hometown. But there’s a certain satisfaction you get from visiting different places that staycations can’t match.

Be careful what you wish for. Just like in other economic matters, depreciating one’s currency is not a panacea. At least Canadians will have lots of time to think about this as they sit at home this coming holiday season.

(Cross posted at Mises Canada.)

Some Fortunate Facts about Ebola

220px-Mosquito_2007-2With reporters of the Western World losing their heads over the outbreak of the Ebola virus, it’s helpful to put it in the context of other diseases.

This year roughly 8,000 West Africans have contracted the disease, mostly limited to just four countries (Liberia, Nigeria, Sierra Leone and Guinea). Of these there are 3,866 confirmed deaths, for a mortality rate of a hair under 50%.

This might seem pretty serious, but as far as threats in West Africa, it’s really small potatoes.

Malaria is so common that in these countries that it is almost a rite of passage. Last year there were about 1 million cases reported in the four aforementioned countries. Of these around 15,000 people died. The mortality rate of 1.5% might not be high by Ebola standards, but in terms of gross numbers there is no comparison.

Ebola seems to be a big deal because it is not a virus that is present in general life. While malaria is a continual threat, outbreaks of Ebola happen only every so often. (There have been 14 since 2000, though this most recent one of the largest.) These past outbreaks were also big news items at the time, and I doubt anyone remembers them any longer. Certainly the only memory of Ebola that I can remember is compliments of a Saturday Night Live skit in the late mid-1990s.

As for being infectious, Ebola is transmitted through bodily fluids. Even the CDC admits that the potential for widespread infection is quite low since direct contact with someone infected with the disease is necessary.

Malaria, by contrast, is spread by a means mostly out of our control – mosquitoes. Cover up because you could be in trouble if you get bit with a mosquito that previously bit an infected person. By comparison, stopping the transmission of Ebola relies on clean hospital practices when dealing with patients, as well as sanitary disposal of infected corpses. (Incidentally, those rules aren’t unique to stymieing the spread of Ebola and apply to basically any infectious disease.)

Just like I can’t remember any of the other 14 outbreaks of Ebola these past 14 years, I’m sure this one will fade away from my memory. More likely it is promoted by news agencies looking for a story. Of course, if that were the case you’d wonder why people wouldn’t be more interested in the tens of millions who have contracted malaria over the past decade.

(Cross posted at Mises Canada.)

Venezuela’s Biggest Shortage

Breast_implants_in_hand_01Venezuela’s socialist government has beset the population with all sorts of terrible travesties, from high inflation to shortages of toilet paper. Now the country’s poor citizens have one more shortage to grapple with: breast implants.

Apparently the country’s restrictive currency controls have hindered physicians from buying approved implants. Unable to beautify themselves the way they want, women are resorting to barter to pay for their silicone. Of course, because of the vagaries of the black market they are forced to resort to, these ladies are not sure of what exactly is in their implants. On Craigslist, “sellers post pictures of black market implants of unknown origin sitting in sealed packages on kitchen tables, complete with stories of spouses who changed their minds and reassurances that the pouches remain sterile.”

At least one doctor has doubts as to the black market implants’ safety, claiming that the cheaper implants come with heightened risks:  “I’m not saying they’re not safe, but I’ve removed more than a few ruptured Chinese implants. I just don’t feel comfortable with them.”

Some may think this is not a big deal, or that these women shouldn’t be so vain as to concern themselves with such procedures. This largely misses the point. It’s not up to me to decide whether food or breast implants is more important, valuable, or a more egregious shortage to face. That’s for the individual to decide.

More than 85,000 breast implants were performed in the country last year – more than every country except the U.S., Brazil, Mexico and Germany, all countries with vastly larger populations. In beauty conscious Venezuela, these things matter.

Maybe protests over food shortages have been insufficient to get the government to liberalize its exchange rate policy, but let’s hope that the dearth of breast implants gives them one (or two) more reasons to rethink it.

(Cross posted at Mises Canada.)

Housing Bubble on the Thames

With London England the new place to be for oil-rich Russian oligarchs and Middle Eastern sheiks, the question going around is whether house prices are in a bubble. Despite a brief blip down with the credit crunch in 2007-08, prices are back and higher than ever.

london real estate

The ever-entertaining Tim Harford chimed in recently with a very sensible opinion that economists have a very difficult time identifying what, exactly, constitutes a “bubble.”

One way to look at whether prices are “fair” (short of the obvious answer that “they must be if someone is voluntarily willing to pay the price”) is to look at the price of the foregone alternative.

In the housing market you either rent or own. We can compare the cost of renting an abode with that of purchasing it outright to see whether property values are fairly valued. By this measure homes in the US and Japan, according to Harford, are reasonably priced by historical norms while in London they are about 1/3 over-valued.

Fair enough, but what if the price of rents is also unusually high? After all, the central banks of the world have been pumping aggressively for the past five years. The reason was to keep spending going. One result is that by keeping the printing press running all prices are higher than should otherwise be the case.

At the end of the day, it could be that both housing prices and rents are overvalued! Perhaps it is because cheap credit induces more people to live alone than would otherwise be the case, or in bigger houses than are necessary, or in locations (like London) that wouldn´t be sustainable without such easy credit.

(Cross posted at Mises Canada.)

Uncle Sam´s Annual Borrowing 14 Times Worse Than Thought

SONY DSCLots of people like to concentrate on the deficit when looking at public finances. In 2013, he federal government of the United States ran a budget deficit of $614 billion, which is quite a bit, but seemingly small relative to the $17 trillion economy. (Though as I recently showed, if you want to understand how precarious public finances are you should assess them relative to tax receipts and not a country´s total income.)

David Stockman´s recent article raises a whole new reason to be scared.

The actual amount of borrowing that the federal government did in 2013 was over $8 trillion! Because so much of Uncle Sam´s debt is of a short-term nature, it is necessary for the federal government to continue seeking the kindness of strangers to keep its debt rolled over.

Since total federal tax receipts amount to just shy of $2 trillion last year, the government needed to borrow four times more than its annual “income” just to stay afloat.

The problem is not just that the total amount of public debt outstanding is high, or that the yearly deficit adding to this debt is significant. It´s that so much debt is of a short-term nature, which necessitates the Treasury to continually seek out new borrowers. The risk is that one day borrowers will demand more than the paltry interest rates T-Bills are currently yielding, a situation that would result in either a terrible auction at low rates or significantly higher interest charges. I can´t really see Uncle Sam liking either of these options.

(Cross posted at Mises Canada.)

More European “Growth” Shenanigans

10530873-european-union-logoEurope got some good news in early June as the EU changed its statistical guidelines on how to compute GDP. Among other changes, expenditures on prostitution and illicit drugs (hookers and blow, colloquially) will now be included.

Of course, some countries have been including these items for years. Back in 2006, the Greek government was able to increase its reported GDP by 25% overnight by including these items! The reason the Greek government made the change back then was to have more flattering debt and deficit to GDP figures than otherwise. We now know how that story ended.

As Tim Harford recently brought to light about Britain´s Office of National Statistics´ (ONS) attempts to include some of these less savory expenditures into its GDP calculation:

The ONS has made valiant assumptions in estimating that 60,879 sex workers are each employed 1,300 times a year at an average rate of £67.16. If true, that is an industry big enough to allow every man in the country between the age of 15 and 64 to visit a sex worker every three months.

For government officials putting stock in GDP figures when drafting new policies, maybe it´s time to come to the realization that these numbers obscure more than they expose.

(Cross posted at Mises Canada.)

More New Taxes on the Way

7067732521_aaac69e754_bThe Canadian province of Ontario is a financial basket case. The provincial government pays nearly 10% of its tax revenue on interest to cover the $270bn. debt load (over $20,000 per Ontarian). To put this in perspective, the slow-motion train wreck state of California only pays out a little under 3% of its tax revenue on interest and the average Californian’s share of the state debt is around $3,000.

Never fear. Premier Kathleen Wynne is on the job and has promised to get the deficit under control and Ontario’s finances back on track.

Notwithstanding the fact that her original election platform was based on spending money the province didn’t have. When she realized this problem the solution was to get Ottawa to make cuts so that Ontario would not have to pay taxes to the federal government, and instead use that money for its own in-province expenses. That didn’t work out, so it’s on to plan “B” (or is it “C”?).

Wynne’s new plan to balance the budget is a Hail Mary. In a letter drafted to her Deputy Premier, Wynne charged her second in command to get the budget balanced.

You will…transform and modernize public sector service delivery while protecting vital public services… You will drive efficiencies and reduce costs to achieve our commitment to eliminate the deficit by 2017-18.

Pretty simple. Don’t cut vital services, and create enough new efficiencies to  eliminate a $35bn. deficit (a little more than 5% of the province’s GDP). That’s about $2,600 per Ontarian: man, woman, and child.

Expenditure reductions of this magnitude are almost certainly not going to happen. In fact, since the only two certainties of this world are death and taxes, let’s look at the more likely solution.

Although she doesn’t mention it, one problem is that the province’s economy is slowing down. And this means that taxes are falling. Rather than do what any reasonable individual or business would do when their income falls – cut some expenses – Wynne’s provincial government is responding by hitting people up for more cash. Buried in her budget cuts you might remember this little doozy.

In addition to chopping spending, the government has jacked up income taxes on people making over $150,000 per year.

Wynne ran on promises she can’t keep, and now that she holds the purse strings she’s going after the easier option. Ontario is already a financial disaster. Why not face up to the reality that the province has lived beyond its means for far too long?

(Cross posted at Mises Canada.)

Forced Organ Donations

6404030777_8e70499ac4_bIn his work A Critique of Interventionism, Ludwig von Mises concluded that an endless progression of interventions was the inevitable consequence of otherwise well-intentioned policy makers

“In a private property order isolated intervention fails to achieve what its sponsors hoped to achieve. From their point of view, intervention is not only useless, but wholly unsuitable because it aggravates the “evil” it meant to alleviate…. If government is not inclined to alleviate the situation through removing its limited intervention and lifting its price control, its first step must be followed by others.”

In short, interventions beget interventions.

There is a lot of talk going around at the moment about the blood and organ shortages in healthcare. As we are not allowed to sell such goods on any legal market, those in need must rely on the charity of others to donate the relevant body parts.

Of course, as with any shortage the price must be hampered from functioning freely. In blood and organ markets the relevant price is set at zero, since one is not allowed to sell them for pecuniary gain. Like other similar markets (like rent controlled apartments), there is a large amount of people who want organs when the price is free and very few want to give them away. It’s not just an economic disaster, but a healthcare one as well.

Canadian composer and 16 time Grammy award winner, David Foster, is aggressively pushing the opt-out idea for organ donation.

Opt-out, really, it makes so much sense,” Foster said in an interview from Los Angeles. “Hey, you’re an organ donor unless you say you don’t want to be one. That makes perfect sense.

We don’t have an opt-out clause in any other goods. Your clothes aren’t donated to the needy when you die unless you explicitly say otherwise. Your car does not go on the market to alleviate the “car shortage”, and your home doesn’t automatically get given away to someone without a home.

The shortage in the organ market is caused by poor incentives and a lack of economic signals. With no price to work its magic, no one knows what a kidney, or liver, or whatever organ, is worth. Without the possibility of being remunerated for their time and goodwill, very few want to go through with an organ donation.

Forcing people to donate unless they explicitly say they don’t want to is not a solution. It’s the creation of an unnecessary law, or intervention, to fix a problem caused by another intervention. Mises was right. Don’t let another healthcare failure beget even more.

(Cross posted at Mises Canada.)

Billionaires Loading Up on Cash

4880265002_5bf1a62db3_bOne of Ludwig von Mises’ most insightful parts of Human Action is his discussion on the reason to hold a cash balance. By using his construct of the “evenly rotating economy”, Mises shows that the only reason why an individual would not hold cash is because he is fully certain of his future monetary expenditures.

Every individual knows precisely what amount of money he will need at any future date. He is therefore in a position to lend all the funds he receives in such a way that the loans fall due on the date he will need them. Let us assume that there is only gold money and only one central bank. With the successive progress toward the state of an evenly rotating economy all individuals and firms restrict step by step their holding of cash and the quantities of gold thus released flow into nonmonetary—industrial—employment. When the equilibrium of the evenly rotating economy is finally reached, there are no more cash holdings; no more gold is used for monetary purposes.

Turn the reasoning around and you can see that greater cash balances imply a greater uncertainty as to the future.

There has been much discussion of the sharp increase banks’ excess reserves over the past six years. Now we find out that billionaires are also hoarding cash.

According to the new Billionaire Census from Wealth-X and UBS, the world’s billionaires are holding an average of $600 million in cash each—greater than the gross domestic product of Dominica. That marks a jump of $60 million from a year ago and translates into billionaires’ holding an average of 19 percent of their net worth in cash.

Nor is this jump in cash holdings a phenomenon of the super-wealthy. Those who are merely wealthy are getting in on the act too:

[L]arge cash holdings aren’t specific to billionaires—millionaires and multimillionaires are also holding cash hordes, on the order of 20 percent to 30 percent of their net worth.

Some might view this as indicative of the general unease generated by the market at the moment. Of course, Mises would say that the market is always at a state of unease given that it deals with unknown future values. A better explanation for the sudden jump in cash balances is that investors just don’t know what to expect the future to bring.

(Cross posted at Mises Canada.)

The Scottish Referendum

I’ve refrained from comments on the Scottish referendum on independence. Let people decide their own path is a reasonable stance to take, so let the Scots decide the future of Scotland.

Yet in discussion with one of my past students yesterday, the question arose “should other citizens of the United Kingdom have a say in the matter?”

Matters are often much more clear in theory than in practice. Any divorce is difficult. One person can put in motion the steps to one (“I want a divorce”), but the details of how the separation is achieved is a bilateral process. In dissolving a marriage, the couple needs to hash out who gets the house, the car, what percentage of debt, and so forth. Children complicate the matter by introducing a human element.

The divorce between the rest of the U.K. and Scotland would be no different. There are shared assets, and debts. How much of the public debt should Scotland take with it? How much of the U.K.’s military equipment would the newly independent country have a claim too? Would Queen Elizabeth still reign over the country, or would a governor general be appointed for her, or would the severance from the crown be complete?

These are thorny, but essential, issues. They are important enough that clear answers should have been provided in the vote. Without a defined pathway outlining exactly how the new country of Scotland would be formed, and what it would look like, people didn’t know exactly what they are voting for.

Instead of grappling with these issues, voters were given an easy yes or no question: “Should Scotland be an independent country?” It’s difficult, at least for me (but then I am far removed from any Scottish descent by now), to answer this question because the comparison is apples to oranges. I know what Scotland looks like today, but I have no idea what the independent country alternative will turn out like.

So the answer remains: “should the English, Welsh and Northern Irish also have had a say in the vote?”

I like the divorce analogy. Why bind one person in a relationship if they don’t want to be. But I can’t help but feel that many divorces are put in motion in the heat of the moment, and when the terms of separation are hashed out, regret ensues. The grass is always greener, after all. Knowing in advance exactly what the new future would look like could save a lot of heart ache.

The whole referendum was a fiasco from the start. It was a political sham. No one knew what was being voted on, except some vaguely appealing concept of “independence”. If the decision is “no”, as it looks right now, there will always be a portion of voters wondering what could have been. If it was turned out that a new country was formed, the melee that would ensue in working out the details of separation could prove to be the messiest divorce ever.

Think of the hard feelings that couples have while getting divorced after a few short years of marriage. Kris Humpries and Kim Kardashian knew each other for seven months, were engaged for 90 days, and married for only 72 more. The divorce took 536 days to settle.

Scotland has been married to the U.K. since 1707. That’s over 300 years, or 112,554 days (but who is counting?). Breaking up that history would be a nightmare.

Possible? Yes. Drawn out with more hard feelings than glee? Almost certainly.

I think it’s great that the Scots got to decide on their future. I wish more people had the opportunity. I just wish the politicians staging the vote spent more time informing them what that new future would look like.

(Cross posted at Mises Canada)

IMF: QE Encourages Risk

Headquarters_of_the_International_Monetary_Fund_(Washington,_DC)Recently the Fed released research stating that it encouraged moral hazard and risk taking with its QE programs. Never one to fall behind, now the International Monetary Fund is in on the trick.

After promoting QE for years (see here and here), the IMF is finally coming to realize what has been apparent for years now to almost everyone who doesn’t work for the Fed or the IMF : that low interest rates encourage risky decisions.

But [the IMF] also warned that financial market indicators suggested investor bets funded with borrowed money looked “excessive” and that markets could quickly deflate if there were surprises in U.S. monetary policy or the conflicts in Ukraine and the Middle East.

As the IMF put it in its technical language, “New downside risks associated with geopolitical tensions and increasing risk taking are arising.”

It’s reassuring that after years of prodding people to borrow and spend by taking advantage of low interest rates, the IMF now wants to warn us of the risks involved. Oh well, better late then never.

(Cross posted at Mises Canada.)

The Strike to End All Strikes

1280px-BC_Legislature_Buildings_and_Undersea_GardensThe teachers’ strike in British Columbia, Canada, is over… almost. On Thursday, 40,000 public school teachers in the province will vote on whether to accept the proposed contract. Neither side got everything it wants, and the main headline is that teachers will receive a 7.25% salary raise over 6 years. The province also pledged to add $100-million to an education fund to benefit BC teachers over the next five years.

Education minister Peter Fassbender is seemingly satisfied at a job well done: “We have guaranteed that every student’s educational journey in this school year will be kept whole.”

Right. Not counting the five weeks of shuttered classrooms lost so far this year. That’s over a quarter of the fall term, for those that are counting.

Premier Christy Clark was also pleased with the deal:

We’ve found a way to give teachers a fair raise, improve classroom composition – to really make it work for teachers, but at the same time that we’re making sure it still works for taxpayers. So we’re not going to have to raise taxes, we aren’t going to go into deficit and we’re not going to increase our debt.

No new taxes, but no new debt from this multi-million dollar deal. The money has to come from somewhere. For all of these points Ms. Clark raises to be true, the province must be cutting spending from elsewhere. She doesn’t say where that is, but I have a feeling the offsetting cuts figments of her imagination. My money is on a this settlement attributing to a deficit, or higher taxes, at some point in the future.

While encouraging teachers to accept the deal, BC Teachers’ Federation president Jim Ikers chimed “Be proud… There are meaningful achievements in this deal for teachers and students.”

And therein lies the rub. Everyone should be pleased with this outcome, because a painful strike is the only way it was going to happen. With a near monopoly on schooling in the province (nearly 90% of students are educated in the public system), there is no competitive check to let any of the belligerents settle their dispute elsewhere.

Parents are obviously upset because they don’t have any choice in the matter. Moving to a nice neighborhood with a good school is about all they can do to have a say in their child’s education. Contrast this with, say, buying clothes where you can go where you want and direct your money at the store that best suits you. Parents in BC pay their taxes, and lose all control of how that money is allocated.

It’s fun to poke fun at entitled teachers, but think about it from their point of view. You are in an industry with only one company to work for. Your pay is pre-determined according to a scale that you have no control over, by people you will never meet. Your colleagues cannot be let go if they do not perform. You enter the job wide-eyed and bushy tailed, only to find that for all the efforts you do, there is not much you can do to peaceably argue for better working conditions. No bantering over your salary raise for the coming year during the annual performance review. No back-and-forth with the boss over your working hours. If you are dissatisfied, it’s nearly impossible to quit your job and look for another in the same field (and licensing requirements across provinces make teachers trained for one system unemployable in others). There is only one recourse left to this group if they want a better work life – strike!

You can almost sympathize with the opprobrium felt by the teachers.

This strike will not be the strike to end all strikes, because the conditions for why the strike was necessary are not fixed. There is no competition in schooling as long as it remains in the public’s hands. Parents will continue feeling trapped and looking to the government to maintain services with minimal amounts of disruption, since they can’t vote with their feet and send their kids elsewhere. Teachers will continue protesting and threatening for better conditions the next time their contract expires because it’s the only way they can argue for a better working life.

If you want to understand why public school teachers’ strikes are so disruptive, think about the one main fact that separates that industry from others. It’s not hard to please customers (parents). It’s not demanding employees (teachers). It’s that the lack of competition means that a strike is the only way the two sides can settle disputes.

(Cross posted at Mises Canada.)

The Regret of War

Enlist_in_the_Navy_LCCN2002699395.tifWe all have regrets. But if you find yourself consistently ruing your past decisions, maybe it’s best to rethink your rashness.

Writing in the Financial Times this weekend, Richard McGregor gives some perspective on Americans’ change of heart for wars.

In the wake of a triumph in WWII, in 1950 65% of polled Americans supported sending troops to Korea. Two short years later only 37% felt the same way. We know what a boondoggle it turned out to be, but few would remember that nearly two-thirds of Americans supported the Vietnam War early on. As it neared the end, almost no one could stomach it any longer.

And speaking of boondoggles, don’t forget that when American went into Iraq in 2003 more than 70% of the population thought it was a good idea. By 2010 only around half that many thought so. The incursion into Afghanistan in the wake of 9/11 was the most “popular” war in America’s recent history – it was almost unanimous! 93% of polled Americans supported it. Today, public opinion is split 50/50.

We all make mistakes, but should heed Albert Einstein’s advice that the definition of insanity is doing the same thing over and over, expecting a different result.

Why is this troubling right now? With troubles brewing afresh in Syria and Iraq, 61% of Americans think there is a threat to the national interest, and only 13% disagree. Let’s hope cooler heads prevail.

(Cross posted at Mises Canada.)

Government Interest Payments Overwhelming

It’s not just homeowners who have to worry about rising interest rates, the Federal government might soon get a taste of its own medicine.

With the Fed doing all it can to stimulate inflation, increases to interest rates are taking a front seat amongst borrowers’ fears. From the admittedly partisan Republican Senate Committee on the Budget comes this report outlining how federal interest outlays will dovetail with other expenses in the future.

CBO - interest expense

To summarize:

The U.S. gross federal debt currently stands at $17.548 trillion, and net interest payments to our creditors are the fastest-growing item in the budget. In 2014, the Congressional Budget Office projects that the nation will spend $233 billion on interest payments. By the end of the budget window in 2024, however, CBO forecasts that interest payments will nearly quadruple to an astonishing $880 billion. Every dollar spent paying our creditors is a dollar wasted—money for which we get nothing in return. Interest payments threaten to crowd out every other budget item. To put the $880 billion, single-year interest payment in perspective, here is what we currently spend on other budget items:

  • Federal Courts – $7.4 billion

  • Department of Education – $56.7 billion

  • Secret Service – $1.8 billion

  • Food Inspection – $2.3 billion

  • Census Bureau – $1.0 billion

  • Border Patrol – $12.3 billion

  • National Parks – $3.0 billion

  • NASA – $17.6 billion

  • Centers for Disease Control – $7.1 billion

  • Federal Prison System – $6.9 billion

  • Workplace Safety Inspections – $0.9 billion

  • Immigration and Customs Enforcement – $5.6 billion

  • FDA – $2.6 billion

  • Federal Highway Budget – $40.4 billion

  • Coast Guard – $10.0 billion

  • Small Business Loans – $0.9 billion

  • Veterans’ Health Care – $55.3 billion

  • FBI – $8.3 billion


Every debt incurred today will be paid off in the future. The graph above may be shocking to some, but it’s only a very small part of the picture. This is just interest on debt, and doesn’t even include the costs of repaying the principal. Of course, the principal never really gets repaid as the government just borrows afresh to paper over its old debts. Interest payments, on the other hand, must be paid lest savers stop lending money to the government.

Nor is this only a concern for the future. Last year the government spent more on interest payments (c. $700 bn.) than it did on Medicare (a little under $600 bn.).

(Cross posted at Mises Canada.)