Real-estate Out of Reach of the Super Wealthy

The housing boom is searching for ways to keep going. Prices for many high-end pieces of real estate are now out of reach for even the 1% of the super-wealthy.

During the last housing boom, terms were reset for the “little people” to make home ownership an attractive financial option. Mortgage maturities extended, down payments dropped, and of course every knows by now about the role that all-time low interest rates played in attracting people to debt-fueled spending.

Now we see similar changes taking place in the top-end of the real-estate market .

Consider this apartment recently listed in New York City. With rent set at $500,000 per month (!), it beats the previous record holder located at the Palace Hotel at 455 Madison Ave., which only rents for half that much.

Why pay $6 million a year to rent an apartment? (Or better still, who would do such a thing?)

Partly the answer lies in considering what it would take to purchase it. With rents this high, the selling price of this palatial pad would be around the $100 million mark. For even the super-rich, this is a bit of a stretch.

In many ways this current housing boom is constrained to the upper echelons of wealth. Now it seems as though even they might be finding prices  a little tough to swallow.

(Cross posted at Mises Canada.)

Prepare for the Global Corporate State of Facebook?

facebook-388078_640In the dystopian movie Rollerball, all the world is ruled by one giant corporate state “controlling access to all transport, luxury, housing, communication, and food on a global basis.”

Thanks to popular media and the errors of neoclassical economics, we are trained to accept this scenario, or one similar to it, often when we are told of the latest move by a mega-corporation to extend its market share.

Two recent articles about Facebook have highlighted the social media platform’s influence in determining what news articles you see and when and how you read them. Many publishers have figured out that Facebook drives a large amount of traffic to their sites, prompting many PR pundits to declare that “the home page is dead.” In a Wired article titled “How Facebook Could End Up Controlling Everything You Watch and Read Online,” Marcus Wohlson explores just that. Wohlson’s article was prompted by David Carr’s Sunday article at The New York Times in which Carr writes: “Given the amount of leverage Facebook has, many publishers are worried that what has been a listening tour could become a telling tour, in which Facebook dictates terms because it drives so much traffic. (Amazon’s dominance in the book business comes to mind.)”

Is Facebook a Proto-Amazon?

Note the reference back to Amazon. Wohlson invokes Amazon too in his own article, and this becomes especially relevant when Wohlson suggests even that Facebook will eventually “cut out the extra click” and become the publisher of content as well as the delivery platform.

The Ghost of Amazon thus looms over the equation, since Facebook is now being framed a proto-amazon which moves from “selling” the content of other publishers and becomes a publisher itself, thus controlling the content. The subtext behind this is an assumption that Amazon is itself an evil monopolist who is destroying the wonderful legacy publishers of old.

Frank Foer at The New Republic has declared that  ”Amazon Must Be Stopped” and Paul Krugman followed up with his own article claiming that Amazon  ”has too much power, and it uses that power in ways that hurt America.” The consensus seems to be that amazon is either a monopolist or at least has unjust monopsony power and must be taken down a notch. Interestingly, however, Matthew Yglesias (of all people) has stepped in to point out what every Austrian already knew: Amazon only has the market power it has because it is better at delivering the goods. Moreover, Amazon is not a monopolist at all because it already has several competitors, including the lowly underdog mom-and-pop operation known as Google.

Yglesias outlines the many ways that Amazon will not be taking over the world, and in fact is just replacing the useless and dinosaur-like book publishers of old.

So yes, maybe Facebook is the next Amazon, but as with IBM, Microsoft, Apple, and all the other megacorps that were supposed to take over the world, the fortunes of these companies rely fully on their abilities to actually attract customers from year to year.

In this, Facebook  looks weaker than Amazon. Less than a year ago, the press was declaring that Facebook still had a lock on the next generation of consumers and opinion-molders. Back in February, Pew reported that more than 70 percent of teens were still using Facebook. But only six months later, teen usage of Facebook had plummeted from 72 percent to 48 percent, meaning less than half of teens now say they use Facebook. Those are pretty grim numbers for a “monopolist” seeking to hold onto its dystopian global power.

Will Facebook be able to lure them back? Possibly, but then again, Facebook’s most fierce competitor may not even exist yet. We can’t guess what the future holds in the social media world, and those of us who are old enough to remember MySpace know how quickly reversals of fortune can unfold in this industry.

 

Paper, Gold, and the Middle of the Road

20_francs_belges_1871_aversOnce in a while, the gold standard makes a comeback in the public eye. Most recently it’s happened in connection to Steve Forbes’ book, Switzerland’s referendum, and the approaching mid-term elections in the US. Each time it’s a pleasant surprise, and a definite change of pace from otherwise grim news of war and higher taxes. And yet, the enthusiasm of those who claim the discourse has changed dramatically is unwarranted. Perhaps ‘goldbugs’ are not as mocked today as they were a few years ago, but the limits of the official debate as such have hardly shifted. Surely, we want a stable anchor for monetary policy, but we also want it to be somewhat flexible. We want to constrain the power of the central bank, but not so much that it can’t fight deflation or the balance of payments deficit. We might want the gold, but we definitely want to keep the paper. To paraphrase a Romanian playwright, a contemporary of Mises: let us revise the monetary system, as long as nothing changes. Or let us not revise it, as long as some essential aspects are changed.

There are, I think, two reasons why most debates (with a few welcome exceptions) are framed in this way. First, while the genuine gold standard ended before the First World War, the term itself—much like ‘liberalism’ —remained, only to acquire an unfortunate legacy over the last century. The merits of the pre-1914 system were forgotten once it was likened to the gold-exchange standard and the Bretton Woods monetary scheme. Careful consideration reveals major differences between these systems, but public opinion is not known for thorough research. With the failure of the Bretton Woods system in mind, one assumes, naturally, that the old fashioned version of the gold standard cannot solve modern monetary problems. Then, debates are mostly about how to revamp the currency system into a 21st century, ‘modern’ gold standard.

Read More→

Bank of Japan: Trick or Treat?

The Bank of Japan announced an unexpected major increase in its Quantitative Easing policy increasing its purchases from 50 to 80 trillion Yen sending US stock markets to all time highs and Japanese markets to multi-year highs. Some people made a bundle because of the move, others lost a bundle.

BOJ Chairman Kuroda

NEW YORK (MarketWatch) — U.S. investors scored a Halloween treat.

An unexpected everything-but-the-kitchen-sink stimulus plan by the Bank of Japan on Friday triggered some sizeable global market moves, across assets from currencies to stocks.

Considering the trillions of yen being bandied about, the market moves aren’t surprising— ¥80 trillion (roughly the equivalent of $714 billion), from 50 trillion. The central bank increased its purchases by ¥30 trillion from the prior pace, and markets went to town. The Nikkei 225 index NIK, +4.83% NIK, +4.83% got the ball rolling by rallying to a seven-year high.

It’s a coordinated global relay race where the central banks are passing the baton,” said Richard Gilhooly, U.S. director of interest-rate strategy at TD Securities.

“The problem with all this global currency devaluation is that nothing is based on fundamentals only intervention. It becomes a dangerous game over time as I believe overall risk assets have the propensity to be mispriced,” said Tom Tucci, head of Treasury trading at CIBC World Markets Corp., in a note.

Business Week Tries to Resurrect the Corpse of John Maynard Keynes

Night_of_the_Living_Dead_afficheJust when the current “discussion” on economics by public intellectuals like Paul Krugman hits bottom, Business Week decides to dig the hole even deeper by lionizing John Maynard Keynes. Keynes, according to BW, had the theories that can “fix” the currently moribund world economy.

There is a doctor in the house, and his prescriptions are more relevant than ever. True, he’s been dead since 1946. But even in the past tense, the British economist, investor, and civil servant John Maynard Keynes has more to teach us about how to save the global economy than an army of modern Ph.D.s equipped with models of dynamic stochastic general equilibrium. The symptoms of the Great Depression that he correctly diagnosed are back, though fortunately on a smaller scale: chronic unemployment, deflation, currency wars, and beggar-thy-neighbor economic policies.

The secret to understanding the vast wisdom of Keynes, writes Peter Coy, is found here:

An essential and enduring insight of Keynes is that what works for a single family in hard times will not work for the global economy. One family whose breadwinner loses a job can and should cut back on spending to make ends meet. But everyone can’t do it at once when there’s generalized weakness because one person’s spending is another’s income. The more people cut back spending to increase their savings, the more the people they used to pay are forced to cut back their own spending, and so on in a downward spiral known as the Paradox of Thrift. Income shrinks so fast that savings fall instead of rise. The result: mass unemployment. (emphasis mine)

Yes, the economy has fallen on hard times because individual households have saved “too much” money. That the latest downturn occurred when the rate of personal savings in this country was at historical lows apparently was lost on Coy, who is too eager to promote the “your spending is my income and my spending is your income” fallacy that has been pushed very hard in recent months by Paul Krugman.

That so-called respected economists and writers can fall for this fallacy does not speak well of economic discourse these days. First, the whole argument is circular in nature, presenting a picture of an economy in which any cutback in spending by even just one person can morph into horrific consequences. (Think of the Butterfly effect, economically speaking.) This is not a description of an economy at all, but rather of a perpetual motion machine that always must stay greased with the spending of money.

The “your spending is my income” approach should be laughable on its face, for if I already have income to spend and you also have income to spend, then why do we need to engage in what Krugman essentially describes as a one-to-one swap of money? It makes no sense.

The problem is that Coy and Krugman, like Keynes before them (and Bernard Mandeville before Keynes), did not understand what constitutes an economy and how things get out of kilter. The current economic morass did not occur because people suddenly started saving “too much” money, but rather because central banks and governments were promoting unsustainable lines of production. When those lines of investment broke down, as surely they had to do, then what was needed was a liquidation of the malinvested resources and a return to sustainable lines of production.

Unfortunately, governments and central banks actively have tried to block the needed economic readjustments and they have stymied real-live market entrepreneurs at every turn through high taxes, increased and punitive regulations, and through hostile rhetoric. Hillary Clinton’s recent declaration that businesses do not “create jobs” is just another example of the political madness at hand.

Instead of real entrepreneurship in which entrepreneurs find ways to move resources from lower-valued to higher-valued uses, as determined by the choices of individual consumers, governments have created unholy partnerships with politically-connected businesses to set up huge regimes of “crony capitalism.” And despite the claims that governments have been pursuing “austerity” measures, governments have been reckless with spending and regulation and central banks have relentlessly printed money.

While BW and its amen corner want us to believe that all that the economy needs is a long burst of government spending, the truth is that governments cannot self-generate wealth through spending. Wealth needs to be created and entrepreneurs and profit-making businesses are the entities that create wealth, not the state.

Unfortunately, modern public intellectuals have confused spending with wealth creation, and as long as their ideas dominate the current discourse, along with the dangerous anti-enterprise rhetoric being uttered by politicians, we are going to have many more years of economic stagnation. It does not have to be this way, but until more people are willing to accept the Austrian ideas of entrepreneurship and the structure of production, that is what we must endure.

Patrick Barron: The End of the US Dollar Imperium, Part 2

alexJeff Deist and Patrick Barron continue their discussion on monetary imperialism. They delve deeper into US dollar supremacy, and how it might end with a whimper instead of a bang; how the Bundesbank is a potential savior for the world monetary order, while the IMF is a paper tiger; how elites will have an increasingly hard time denying gold a role in the global monetary system, and how America’s fiat dollar corrupts cultures as well as economies.

Patrick Barron is a private consultant in the banking industry. He teaches in the Graduate School of Banking at the University of Wisconsin, Madison, and teaches Austrian economics at the University of Iowa, in Iowa City, where he lives with his wife of 40 years.

This interview is also available at Mises.org and Stitcher.

The Olympics: The Biggest Corporatist Sports Scam of All

USA_I_in_heat_1_of_2_man_bobsleigh_at_2010_Winter_Olympics_2010-02-20 The 2022 Olympics (i.e., the Winter Games) is now down to only two applicant nations: China and Kazakhstan. This follows the withdrawal of Norway after the taxpayers of Norway balked on ponying up the cash necessary to make the Olympics a playground for the world’s richest cronies and politicians.

Theoretically, the Olympics are a private organization, but in practice, it is a corporatist organization run by plutocrats whose mission in life is apparently to squeeze as much tax revenue as possible out of the residents of the countries and cities that host the Olympics. This is done by demanding the usual brand-spanking new stadiums and facilities from the host cities that later become white elephants. But the IOC also demands countless perks for itself, such as only the finest food and drink, and special driving lanes on streets and highways. (See photos of the abandoned Olympics facilities in Athens.)

Faced with a bevy of such demands  in a 7,000-page dossier from the IOC, Norway chose to withdrawal. The “diva-like demands for luxury treatment” for the IOC were outlined by the Norwegian media, including:

  • They demand to meet the king prior to the opening ceremony. Afterwards, there shall be a cocktail reception.
  • Drinks shall be paid for by the Royal Palace or the local organizing committee.
  • Separate lanes should be created on all roads where IOC members will travel, which are not to be used by regular people or public transportation.
  • A welcome greeting from the local Olympic boss and the hotel manager should be presented in IOC members’ rooms, along with fruit and cakes of the season. (Seasonal fruit in Oslo in February is a challenge…)
  • The hotel bar at their hotel should extend its hours “extra late” and the minibars must stock Coke products.
  • The IOC president shall be welcomed ceremoniously on the runway when he arrives.
  • The IOC members should have separate entrances and exits to and from the airport.
  • During the opening and closing ceremonies a fully stocked bar shall be available. During competition days, wine and beer will do at the stadium lounge.
  • IOC members shall be greeted with a smile when arriving at their hotel.
  • Meeting rooms shall be kept at exactly 20 degrees Celsius at all times.
  • The hot food offered in the lounges at venues should be replaced at regular intervals, as IOC members might “risk” having to eat several meals at the same lounge during the Olympics.
  • All furniture should be OL-shaped and have Olympic Appearance.

If this were all privately financed, there’s no reason to complain, but the IOC can hardly be described as “private sector.” The Norwegian controversy highlights that fact that, according to The National Post, “the International Olympic Committee is a notoriously ridiculous organization run by grifters and hereditary aristocrats [read: the descendants of highly successful thieves and murderers of old].”

Not surprisingly, Kazakhstan and China, those great bastions of thriving free markets, continue to compete for the chance to host the 2022 games. This, of course, only lends more credence to the assertion that the Games have become an enormous exercise in international prestige and fantasies about the Keynesian multiplier in which the central planners assume that it is much better to force the people to pay for another luge track rather than just allowing them to waste their money on food, clothing, or education.

Part of the reason that Norway has pulled out is that its government is at least somewhat answerable to the taxpayers while the governments of Kazakhstan and China are not. Norway’s withdrawal follows previous withdrawals from Sweden, Poland, and Ukraine. (Sweden now says is would have stayed in if the IOC were less bureaucratic.)

The controversy, and the fact that available host cities for the IOC continue to dwindle, has forced the IOC to say that it will “review” the way it demands perks from host cities, although it’s highly unlikely that anything the IOC does will put much of a dent in the huge bill that the IOC and its pals in government send to the taxpayers every few years. Denver, Colorado, where the voters refused to approve tax dollars for Olympics facilities, remains the only city to have ever rejected the IOC after it had already been chosen as the host city. Some other cities now appear to be catching on earlier in the process.

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.)

Mark Thornton on the European Debt Crisis

PressTV Reports:

Over the past several years, most of the attention of the eurozone debt crisis has been focused on the economic struggles of Greece, Spain and Portugal and without a doubt things will continue to get even worse in those nations.

However, the predictions have been that in 2014 and 2015, Italy and France will start to take center stage in eurozone debt crisis. France has the fifth largest economy on the planet, and Italy has the 9th largest economy on the planet, and at this point both of those economies are rapidly contracting.

See Mark’s analysis at the 12:12 mark and again at the 20:45 mark.

presstv

Amity Shlaes: Blame the Economists

John_Maynard_KeynesReading the news, one could be forgiven for coming to the conclusion that virtually all economists work for the government or the Fed, and that few of them have real (i.e., private sector) jobs. Of course, there are many practitioners of microeconomics who do an enormous amount of good in society for private clients. Austrian economists have long focused on microeconomics because only microeconomics focuses on the only unit that matters in economic action: the individual. The amount of sound, practical microeconomic wisdom found in Mises’s Bureaucracy, for example, is impressive.

In this article in the Wall Street Journal, Amity Shlaes examines the role of economists in the private sector, and the good many of them do. Macroeconomists, on the other hand, are another story. The macroeconomists, Shlaes notes, are guilty of “guildthink.” That is, macroeconomists in Washington exist in a closed system of like-thinking ideologues who shut out dissenting opinion:

When it comes to Washington policy, macroeconomists shut out innovative colleagues, some even of the sort Mr. Litan celebrates. The ruling macro-theorists, for instance, demonstrate an annihilating contempt for the Austrian School, which focuses more on individuals than aggregates. The same contempt is directed at Public Choice Theory, which predicts that governments will take advantage of market crises to expand in nonmarket sectors. Scholars from these schools do not win top positions at the Fed or at major universities and firms.

Such guildthink is what proved fatal just before 2008 and after. There were no Public Choice School theorists at the White House or powerful institutions to warn that there might be a housing bubble if government expanded its presence in the housing sector. Few elite economists warned that the administration might use a financial crisis to undermine bankruptcy precedent or socialize health care. Ironically, analysis by economists demonstrates the inefficiency of guilds, yet these scholars perpetuate their own. Until that changes, go ahead and blame the economists.

Book Review: Rothbard’s Making Economic Sense

B575Ben Kramer-Miller writes at Seeking Alpha:

Summary

  • A series of newsletter articles and shorter essays designed for the layperson interested in libertarian ideas and free market thought.
  • The book is highly entertaining and extremely accessible to people of all backgrounds.
  • Rothbard’s bluntness is appreciated in our sanitized, “PC” collective consciousness.
  • *Note that this book has been made available for free by the Mises Institute. You can find it here.

    Those who are looking for an introduction to Rothbard’s work and Austrian economics more generally should probably look at What Has Government Done To Our Money (also available at the Mises Institute) and discussed by yours truly here. But those who are interested in an informal, layman’s explanation of various economic (and political/social) phenomena as well as a work designed to be – in most places – anything but pedantic should consider reading through Making Economic Sense.

    Read the full article.

    Judge Napolitano Versus Forced Quarantines

    NNSA-NSO-1189One can make the case that in a thoroughly decentralized and anarchistic society, persons may find themselves in a state of practical near-quarantine because private owners of airlines, airports, lodging facilities, and even communities with private security may refuse entry or passage to persons suspected of being contagious. In such cases, persons would be restricted to places owned by themselves or by those who will agree to allow the person on the premises. Thus, in such a situation, a “quarantine,” practically speaking, is less like imprisonment and more like house arrest depending on negotiations with numerous private owners. In modern states, on the other hand, the widespread nature of “public goods” and prohibitions of discrimination by private owners often means that quarantine becomes a function of the central state and often ends up being little better than a jail sentence where the person in question is locked inside some official facility for a period of time.

    Thus, quarantines (of a sort) can arise within a totally (or mostly) privatized society, but how they look and are carried out in practical terms can vary significantly.

    For an example of the arbitrary, slipshod, and due-process-less way that American governments deal with such issues, we need only look to the case of the nurse in New Jersey who was being confined in spite of the fact that she had been proven to be Ebola-free. (Note: she has now returned to Maine, where the State of Maine promises to confine her although she continues to be symptom-free.)

    In the US, travelers are subject to the arbitrary edicts of politicians who can imprison people with the stroke of a pen,with  no prior warning, and no due process. As Napolitano explains in this video, US governments have known about the Ebola outbreak since March, yet did not warn healthcare workers traveling to west Africa that they could be subject to quarantine upon return. Any responsible government body would have done so. When such persons returned, no steps had been taken (at least not in New Jersey) to administer a quarantine in any way that might be described as humane. As Napolitano notes, when they quarantined the NJ nurse in question, they “put her in a tent in a parking lot” and “gave her a porta potty and a granola bar.” It seems the government intended to keep her in these conditions for 21 days.

    Read More→

    Forbes Takes Another Look Through the Austrian Lens

    Michael Pollaro writing at Forbes.com reexamines the implilcations of the ending of Quantitative Easing policy by the Federal Reserve: “The lion’s share of the supposed economic strength we see today is both artificial and unsustainable because it is built on malinvestments born out of the monetary largesse underwritten by the Federal Reserve’s policies. Normalize those policies; i.e., end QE and raise interest rates, and sooner or later those malinvestments will be liquidated. The supposed economic boom will turn to economic bust, and with that, a bust in the publicly traded equities that lay claim to those malinvestments.”

    Looking through the lens of ABCT, the dynamics here can be explained thus… For the past five-plus years, emboldened by the near zero interest (discount) rates fostered by the Federal Reserves, continually cashed-up investors and speculators have been bidding up the price/value of all financial assets, driving a wedge between the value of those assets as priced in their respective markets and their true value based on properly discounted, expected future cash flows.

    Now, in our minds, nowhere is this wedge greater than in the equity market. You might say wait a minute. Where’s the wedge? Don’t most broad-based market PE multiples – like the roughly 16 handle on the 12-month forward multiple of the S&P 500 – say otherwise? Have not company per share earnings been growing, especially recently, right along with equity share prices? Yes, but what strikes us is the reason for a good portion of that earnings growth; namely, it’s a function of the same swathe of money that has inflated equity share prices. We point to the unprecedented deluge of financial engineering programs orchestrated by company CEOs – refinancing tactics, stock buybacks, dividend hikes and of course M&A – financed off the back of the Federal Reserve’s QE purchases and ZIRP policies.

    So, when might this wedge in the equity markets be filled? Well, in accordance with ABCT, it will begin when the monetary largesse that is currently feeding the equity market boom (and financial engineering boom) abates. Could that be when the last vestiges of QE3 work their way through the financial markets? Or will it have to wait until the Federal Reserve begins raising rates? Perhaps the banking system will fill the void being left by the Federal Reserve with its own swathe of money creation? Maybe some cross-border capital flows coming from European investors could help fill that void too? Indeed, could the Federal Reserve fill the void itself with QE4. These are tough questions, ones we will be examining in future posts.

    Poland to German Taxpayers: Subsidize our National Defense!

    gimmeComing in Monday’s Mises Daily, Patrick Barron will explore the moral hazard that often plagues collective security organizations like NATO. Why be careful, responsible, and restrained with your own defense when you can get the taxpayers in a foreign country to pay for it?

    Today, the news from Europe illustrates this well. From today’s Open Europe news summary:

    Die Welt reports that “Poland is worried about the weakness of the German army”, citing Polish Defence Minister Tomasz Siemoniak, during a meeting with his German counterpart in Berlin yesterday, as saying that, “We need a strong German army which does not shy away from the responsibility of defending their allies.”

    Now, I can certainly understand that old nationalistic tensions mean that many Poles may still feel that Germany owes them something big time. But every German who actually invaded Poland is either dead or will soon be dead. And they’re certainly not paying much in the way of taxes. That burden falls to much younger workers, and it’s unclear how a foreign government’s demands for more loot will help German-Polish relations in the long run. Meanwhile, NATO is simply providing the means to further stoke such tensions.

    The Economist Discovers the Entrepreneur

    Source: 'The Economist'

    Source: The Economist

    Sean Corrigan writes: 

    The Economist Discovers the Entrepreneur.

    In its latest edition, in a piece entitled ‘Monetary Policy: Tight, Loose, Irrelevant’, the ineffably dire Ekonomista considers the work of three members of the Sloan School of Management who conducted a study of the factors which – according to their rendering of the testimony of the 60-odd years of data which they analysed in their paper, “The behaviour of aggregate corporate investment” – have historically exerted the most influence on the propensity for American businesses to ‘invest’.

    The article itself starts by deploying that unfailingly patronising, ‘it’s economics 101′ cliché by which we should really have long ago learned to expect some weary truism will soon be rehashed as fresh journalistic wisdom.

    It may be only partly an exaggeration to say that the weekly then adopts a breathless, teen-hysterical approach to a set of results which, with all due respect to the worthies who compiled them, should have been instantly apparent to anyone devoting a moment’s thought to the issue (and if that’s too big a task for the average Ekonomista writer, perhaps they could pause to ask one of those grubby-sleeved artisans who actually RUNS a business what it is exactly that they get up to, down there at the coalface of international capitalism). Far from being a Statement of the Bleedin’ Obvious, our fearless expositors of the Fourth Estate instead seem to regard what appears to be a tediously positivist exercise in data mining as some combination of the elucidation of the nature of the genetic code and the first exposition of the uncertainty principle. This in itself is a telling indictment of the mindset at work.

    For can you even imagine what it was that our trio of geniuses ‘discovered’? Only that firms tend to invest more eagerly if they are profitable and if those profits (or their prospect) are being suitably rewarded with a rising share price – i.e. if their actions are contributing to capital formation, realised or expected, and hence to the credible promise of a maintained, increased, lengthened or accelerated schedule of income flows – that latter condition being one which also means the firms concerned can issue equity on advantageous terms, where necessary, in the furtherance of their aims.

    Read the whole thing.

    GDP Up 3.5%

    Gross Domestic Product has been reported to be an unexpectedly high 3.5% in the third quarter (on an annual basis). However the growth was led by a “surprisingly” high increase in defense spending and a reduction in the trade deficit (which accounts for 2% of the 3.5%). The last time defense spending had a surprising increase was the third quarter of 2012 (also a quarter leading up to an election) there was a sharp fall off in defense spending the next quarter. The GDP deflator was 1.3% for the quarter on an annual basis.

    Roy Cordato Explains Obamacare

    6839833657_c7b0ecf372_bRoy Cordato has written an insightful piece on Obamacare at the Carolina Journaldemonstrating that the “right” to health care granted by Obamacare is really a “legal obligation” to purchase health care insurance:

    For decades pundits have been debating whether people have a “right” to health care. The notion of rights that is typically invoked is distinct from the question of whether people have a right to enter the market for health care services and engage in exchange activity in order to obtain health care.

    “Rights,” in the view of the president and those who believe in a specific “right to health care,” imply a guarantee that the right holder can obtain health care services either without charge or at prices that are “affordable,” hence the official title of Obamacare: the Affordable Care Act. (See this previous “Economics & Environment Update” newsletter for a more detailed discussion of different conceptions of rights.)

    This notion of rights therefore implies an obligation on the part of others. There are two possibilities. The first, typically not invoked, is that health care providers have an obligation either to provide their services for free or to adjust the prices of their services according to the incomes of their clients. There is a reason why this kind of obligation is not advocated by anyone, although Medicaid reimbursement schemes do attempt to invoke this approach to a limited extent. It is a form of price control that would dramatically curtail the supply of heath care services, as occurs in the Medicaid system.

    The other, and more typical, scenario is that the obligation to sustain this right falls on taxpayers. That is, the cost of health care to the health care rights holder is made affordable through taxpayer subsidies. This is the single-payer model in which the government, within limits defined by the government, picks up everyone’s health care tab.

    So how does Obamacre fit into this picture? The fact is, it doesn’t. The centerpiece of Obamacare is not a universal right to health care but a universal obligation to obtain health insurance. Because of this, it does not recognize or grant rights of any kind but denies them while mischaracterizing obligations as rights.

    What distinguishes all rights from obligations is the ability to refuse to exercise the right. If someone is not legally allowed to refrain from engaging in an activity, then there is no right, only an obligation.

    Allegedly Obamacare guarantees a right to access health care by guaranteeing a right to obtain health insurance, either by purchasing a plan through the Obamacare exchanges, through an employer plan, or, if income-qualified, through Medicaid. But since it is illegal to refuse to exercise this so-called right, it is not a right at all but a legal obligation.

    It cannot be both. The right to say no is an implication of the right to say yes.

    In examining Obamacare’s so-called right to health insurance, the farce of using the language of rights can be exposed easily. This point is made quite obvious with the individual mandate, which imposes a fine on any person who does not purchase a government-approved health insurance policy. Obamacare guarantees a right to health insurance only in the way that the draft guarantees a right to serve in the military.

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    Yellen Wants Austrians on Fed’s Board

    6269797026_7936c8edc9_bAccording to a Wall Street Journal article posted online this morning, the Federal Reserve chair(wo)man Janet Yellen expressed that the “economics profession … could benefit from a more diverse range of views.” Delivering introductory remarks at a conference, Yellen stated:

    Did the economics profession recruit and promote the individuals best able to bring the energy, the fresh insights, and the renewal that every field and every body of knowledge needs to remain healthy?

    Her answer to the rhetorical question is “no.” The Federal Reserve suffers from a discussion that lacks dissenting views. In fact, she specifically noted how the Fed would benefit from a “range of views and perspectives”:

    There has been a fair amount of public debate in recent years about the health of the economics profession, prompted in part by the failure of many economists to comprehend the dire threats and foresee the damage of the financial crisis.

    [...] I believe decisions by the Federal Reserve Board and the Federal Open Market Committee are better because of the range of views and perspectives brought to the table by my fellow policymakers, and I have encouraged this approach to decision making at all levels and throughout the Fed system.

    It seems the system is about to change. So when will we see Austrians take place on the Federal Reserve Board? Not any time soon, the “range of views and perspectives” Ms. Yellen calls for is not “views” or “perspectives” at all – but gender. She is simply working hard to find female Keynesians to take place on the Board. How that could possibly change anything is not entirely clear.

    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.)

    Nobel Winner Jean Tirole’s Faulty Views on Monopoly

    6942Mises Daily Wednesday by Frank Shostak:

    Economics Nobel Prize winner Jean Tirole still clings to the old neoclassical model “perfect competition” and monopoly, in which there is no place for entrepreneurship, and which fails to grasp that consumers benefit more from a diversity of goods than a diversity of firms.