Category Archives: the economy

How Libertarians brought America Big Religion and Bigger Lawsuits…

(originally written Nov 2010; uploaded Aug 21, 2012 as part of my Great Upload of Musings…  for balance, I’ll soon post the follow-up which praises some portions of libertarian philosophy which are very dear to my progressive heart.  Politics makes for strange bedfellows, and I’m not above shacking up with occasional allies.  :)  )

 

It looks like the Democrats are going to get clobbered in the [2010 midterm] US elections. Economic malaise tends to do this to governing parties, which is one reason currency devaluation is the policy-du-jour: if country A can make its currency cheaper, it becomes more competitive and can export goods (and unemployment!) to countries B, C and D, whose currencies remain more expensive. It’s this kind of race to the bottom which has given gold aficionados their current decade in the sun. Of course, though Hemingway never lived to write about it, the sun also sets… :)

The Tea Party’s emergence has been an interesting but predictable phenomenon. The stagnation in American incomes for the past generation has finally hit a boiling point (what took so long?). Increased prosperity has largely been confined to the top 1% — and even then mainly the top 0.1% — of income earners in the population; those nice folks whose job titles begin with “Chief” and end with “Officer”. :)

In many cases, union-busting concessions levied in the name of improving competitiveness went straight into C-suite compensation: “trickle-up economics”, as it were. I don’t have the American numbers handy, but here are some Canadian ones. Perhaps one day, left-leaning parties will realize that they’ll get more support if they confine talk of tax increases to the very, very topmost folks. Noblesse oblige, and all that.

 

The anti-government stance of the — ugh — “Teabaggers” contrasts spectacularly with the strikers in France. The French were striking over a government plan to increase in the retirement age (from 60 to 62), to address pension costs. In other words, they were striking for more government (services, spending and so forth). Meanwhile, in the US, the Tea Party is agitating for less government.

One wonders if this different outlook comes from the two countries’ respective revolutions. In France, the French aristocracy was overthrown by the downtrodden masses, whereas in America, the British nobility was overthrown by a homegrown one. This is a simplification, but is reflected in the voting rights that resulted: every man in France had the right to vote as of 1792. (Revolutions, counter-revolutions, empires and monarchies made this a bit dicey for a few decades… ;) ) In the US, until about 1840, you couldn’t vote unless you were a property-owning white guy. So it was really a democracy of the rich. Not unlike today, really… ;) The rest of the XY club got to vote one Civil War later, vote-suppression campaigns notwithstanding. To give the US some credit, women’s suffrage arrived there in 1920, beating France by a quarter-century.

 

The Tea Party’s anti-government stance traces back to heavy funders the billionaire plutocrat Koch brothers, who have that libertarian streak common to the ultra-wealthy, and the clueless rubes who believe they’ll join those ranks if only [X] gets out of their way. The brothers Koch, building on decades of conservative dogma, have cunningly equated [X] to government; and specifically, a government that gave tax cuts to the bottom 98% of the population as one of its first orders of business.

As a quick recap, libertarians want minimal state interference in their daily lives. Most oppose motorcycle helmet laws as unnecessarily restrictive, but the hardliners — the few, the lucky few, that band of brothers — are still fighting… seat belts. And income tax. And public schools! Mind you, all groups have their flaky enthusiasts. ;)

Libertarianism has cast a large shadow over the American experience, and can be argued (weakly or strongly, you decide :) ) to be responsible for two standout features of American society: its litigiousness and its religiousness. This is ironic, because lawsuits are about the only thing that can cut the ultra-wealthy down to size… and because by and large, the only things libertarians abhor more than government services, are religious services. (Pun intended.) If you think governments are fussy about personal liberties… ;)

 

Putting my “Freakonomics” hat on, the litigious aspect of American society comes out of rational self-interest. If someone gets hurt — at work, in traffic, or elsewhere — and there’s a 1% chance a million-dollar complication will result later in life, very different results occur if you’re part of a universal healthcare system or not. In the former case, you won’t pay anything out-of-pocket: you’ll be subsidized by your fellow citizens. Unless there’s a matter of punishing gross negligence, you don’t have an incentive to sue. Besides, litigation is time-consuming, expensive, and stressful.

But in the latter case, medical complications could very well bankrupt you. (Medical costs are perennially the leading cause of bankruptcy in the US.) As such, litigation becomes a matter of self-preservation. Instead of one out of a hundred victims receiving a million dollars of medical intervention at some point in the future, all hundred will be in the courts to get the money that could save them from bankruptcy, up-front. That’s a hundred million dollars cash; an enormous drag on the system. All thanks to the paradigm shift from a country of millions, to millions of fiefdoms of one. :)

 

In recent centuries, the welfare state (in rich countries) has expanded into roles religious communities have traditionally paid — caring for the ill and infirm, minding children, and so forth. The reason churches and temples provided these services instead of business people, is that it’s tough to profit from these activities. (The current setup in most places, where houses of worship can provide such services alongside the public sector, is probably a good thing all in all, because a little competition keeps everyone honest.)

In the US, though, the paucity of public social spending means religious communities have retained a tremendous influence; they’re the only groups who will consistently provide the social services non-multimillionaires will depend on at one point or another in their hopefully-long lives! As such, being part of a faith community is a matter of rational self-interest for the average American; in addition to the spiritual nourishment they hopefully provide, they usually offer support / safety net services when there’s no publicly-funded game in town…

Central planning – not just for the communists anymore

(written Aug 22, 2011; uploaded Aug 8, 2012 … but still valid, I think!     :)  )

(also, Jesse was kind enough to post a lightly-adapted version on his blog, last year)

It’s been a rough few weeks for the capitalist system, which bestrides the globe like a teetering colossus. Not only has there been stock market turmoil worldwide, and the temporary threat of a (temporary) US default on its debts … but an esteemed, very well-to-do economist suggested that Karl Marx was right! In the Wall Street Journal, no less!

That would be Nouriel Roubini, whose claims to fame came from timely warnings about the US housing bubble (2005-ish) and subsequent US stock market collapse (2008-ish). Now, it’s important to note that he only said that Marx was right in that capitalism could collapse on itself. Not that it actually would. A slight distinction lost on many a lefty website in the past couple weeks. ;)

>

Most people are familiar with the spectacular failures of central planning in Communist regimes. According to the resurgently-fashionable Austrian school of economics this is because an economy is too complex to be managed by one expert, or even one committee of experts, regardless whether the clubhouse door reads “Politburo” or “Dragon’s Den”. Rather, society’s fastest path to prosperity consists of allowing every person to decide what’s in their best interest. It’s basically the “million monkeys at a million keyboards” approach. :)

A biological analogy comes from flocks of birds, schools of fish, and ant colonies, among others. These swarms function extremely well, despite being composed of simple critters following simple rules, and despite the anarchic lack of a leader directing things. Our own “simple critter rules” in modern society are probably along the lines of “try to get a higher paying job, and pay lower prices for stuff, within the laws of the land, and without making too many enemies”.

A business analogy comes from Toyota. Their quality went from hopeless to fearsome by training every employee to be competent enough to figure out how to do their own job better, and then allowing them to do so. If their management tried to dictate how each task was to be done, they’d’ve topped out at early-80’s American carmaker quality levels. ;)

In a similar way, they decided not to try to predict the right production levels for each model, colour, and trim level. Rather, they would pre-build enough cars to fill dealership inventory… and each time a customer purchased a vehicle, they’d build one more of that exact model, in that colour, at that trim level. (In economic nerdspeak, they responded to that “market signal”.) So if 5% of Corolla drivers wanted a green car with deluxe extras, in the long run 5% of Corolla production would consist of deluxe green vehicles.

>

Since the flaws of central planning / benefits of distributed decision-making occur in the public sector, the private sector, and even in biology, we can generalize that the USSR’s economic problem was ultimately that a small group of people would decide how to (mis)allocate most of the country’s resources. (The little people, after all, could still choose whether to wait in line for an hour for bread, or wait in line for an hour for shoes…)

>

>

Let’s move on to capitalism, now. In the past thirty-odd years, there’s been an immense concentration of wealth — particularly in Anglo-American countries (the US, UK, us, the Aussies). The US is at the leading edge of this trend, with the top 1% owning 42% of the wealth, or about six times as much as the bottom 4/5 of the population. And this means that in recent decades capitalism has moved towards the central planning ideal of a few people in charge of all the resources. This narrowing of perspective has in turn led to policies progressively more disastrous for the moved and the shaken… which was exactly the Soviet denouement.

I wish I’d come to this insight on my own, but I have to credit the thoughtful blog of a well-to-do American serial entrepreneur and, uh, military theorist. (I try to keep my reading varied. ;) )

Capitalism’s path back from central-planning roulette will require a more equitable (or at least, less inequitable) distribution of wealth, by which to rebuild the middle class. This in turn generally starts with higher taxes on the extremely wealthy. So one-time world’s-richest-man Warren Buffett’s recent New York Times editorial is timely; he asked why he paid 17% in taxes on his $40,000,000 of income last year, while his staff (earning probably one-thousandth as much) paid an average of 36%. Which is what Roubini was complaining about, in saying that too much wealth was being redistributed from labour to capital.

>

There would be a terrible irony if Marx was right and unchecked capitalism destroyed itself by evolving the self-crippling features of a communist economy, and one does hope that we can reform our current market systems before things get worse. I wouldn’t mind a future that leans Swedish: for all their semi-socialist tendencies, the Nordic smorgasborgers still manage to regularly create free-market titans.* That’s a combination which could conceivably appeal to both the Conservatives and the (now-post-Layton) NDP. Don’t fear, though, I’ve become benumbed to vain aspirations… ;)

– – – – – –

* among them Ericsson, H&M, IKEA, Metro (the free commuter papers), Saab and Volvo, Tetra-Pak, and even BRIO, makers of those beloved wooden train sets of my youth.  Sure, some of them may now be on their last legs, but no doubt there are other emerging Swedish entrepreneurs to fill the gaps…

Bankers uber alles

A few weeks into a planned three-month stint as a full-time parent, I’m amazed at how much less time I have; the only breaks I get in the day, are when our son naps! In contrast, I could reliably eke in minutes here and there throughout the workday; if I had a meeting in four minutes, or was waiting for a kettle to boil to refill my tea, I could whip out a paragraph or two, no problem.  You could think of it as the typing equivalent of the scam in Office Space where the heroes skim a half-cent off everyone’s hourly wages, into a slush fund.  The movie referenced Richard Pryor pulling the same scam in Superman 3, a movie with which our elder (or less-hip) readers may be more familiar.  ;)

>

There was a recent IMF study not too long ago which concluded that a too-big financial sector was an impediment to growth.  The explanation is that when the financial sector gets too bit, it causes the misallocation of capital.  Which I’m guessing, based on recent experience, is code for “derivatives” and other highfalutin forms of gambling.

One sign that more financial innovation is worse-not-better, come from high-frequency trading algorithms — an example of which is the software “glitch” that caused Knights Capital to lose $440 million in 45 minutes last week.  And that wasn’t market capitalization, that was basically cash-on-the-books!  :)

High-frequency trading algorithms have flourished in the past few years, as under-regulation made way for un-regulation.  These enabled financial behemoths to make huge trading profits virtually every day, off of their customers, by “front-running”.  Which, as I understand it, is a fancy way of saying they inserted themselves as middle-men into every trade.  HFT is defended as the latest in financial innovation, which is a like saying bridge tolls are the latest in automobile technology.  ;)

HFT algorithms submit bids-to-buy and offers-to-sell hundreds of times per second (see here for pretty graphs) in various patterns to determine exactly what price sellers and buyers are seeking, and are willing to accept.  The bids and offers would be near-immediately cancelled, because the investment banks had no interest in actually following through with them — for all intents and purposes, these were fake bids and offers.  (Which would make HFT trading a form of quote-stuffing.)  The brokerage firms would then run-in-front of the buyers (hence “front-running”) to buy the stock first, then immediately turn around and sell it to the other buyers for just a bit more.  The other buyers, in many cases, being the brokerage house’s clients.  How does that saying go?  “Do unto others before they can do unto you”?  :)

Putting it in real-world terms, if a mutual fund wanted to buy a million shares of BigCorp at $10, but were willing to pay $10.05 per share, in an earlier era they might have gotten an average price of $10.02.  Thanks to HFT front-running, their average price might be in the whereabouts of, say, $10.025.   As the guys in Office Space proved, getting a fraction of a cent off of zillions of transactions, can be really lucrative!

>

The usefulness of a big financial sector may actually get some discussion in this year’s US elections, since Mitt Romney made his fortune as a financier.  His company, Bain Capital, would purchase companies, loot everything of value, then shut the doors.  Kind of a profit-through-bankruptcy model.  Romney was caught a few months back saying “corporations are people”, inspiring Stephen Colbert’s SuperPAC to air an ad comparing Romney to a serial killer (Mitt killed a lot of companies; companies are people; therefore Mitt is a serial killer).

Of course, Colbert is exaggerating for effect.  :)  Romney wasn’t so much a serial killer, as a guy who bought people and turned a profit by selling off their organs; if they died, that was unfortunate, but… hey, wait, that meant there would be more organs to sell!  It’s a kind of “the sum of the parts is greater than the whole” philosophy.

>

It’s well-known that Romney is a Mormon; and congratulations to those guys for getting one of their own on the Presidential ticket.  Despite this, I think Hinduism is the most illuminating lens through which to understand the Presidentially-aspiring Romneys.  (Mitt’s father George tried to get the Republican leadership nomination in the 1960’s.)  While George Romney led a car company, American Motors, that created jobs and prosperity for employees and suppliers alike, Mitt Romney was a corporate raider whose company, Bain Capital (fitting, that) would buy other companies, extract the wealth, and let them go under, causing misery.

Applying a Hindu overcoat to the Mormon Romneys, we might say that George Romney was the Brahma (“the creator”) to Mitt Romney’s Shiva (“the destroyer”).  ;)

>

As an appended aside, the fact that Bain was allowed to continue doing what it did, may reflect the fact that for the past generation the US has followed a policy of deliberate deindustrialization in favour of a service economy.  Pity then, that too much finance isn’t good for you, eh?  One definitely gets the impression that industry in Germany, other European countries, and Japan remains healtheir than in the Anglo-capitalist countries have (US, UK, Canada, Australia).)

>

Still, the foibles of Knights Capital, Bain Capital, and even HFT front-running, are beer-league infractions compared to the scandal surrounding LIBOR — the London InterBank Offered Rate — which investment bankers have been manipulating to their benefit since 1991 or earlier.  That’s so long ago, the Soviet Union was still around!!

Just as the central bank’s prime rate is the reference rate for mortgages in many countries, LIBOR has been a reference rate for probably trillions of dollars of loans and investment products (“interest rate swaps”) over the years.  So LIBOR manipulation is a Very Big Deal — conceivably, in a just world, every affected party could sue for damages.  And according to Matt Taibbi, the floodgates may have started

Fortunately for those involved, we don’t live in a just world, and the principals involved seem as likely to go to jail, as the Washington Generals are, to beat the Harlem Globetrotters…  :P

>

The acknowledgement of LIBOR manipulation gives credence to gold enthusiasts’ long-held insistence that gold prices are also manipulated.  Of course, given that prices have gone up five-fold in 12 years, it can be hard to feel empathetic.  ;)  There’s also the reality that the world is ruled by is’s, not should’s.  Enbridge might think the Northern Gateway pipeline should get built; whether it is built, is another thing entirely.  Titans and insiders should play fair, but alas, in life, that’s not the way to bet.  :)

>

The chart which probably best shows why gold bugs have been up in arms for years, is the following.  It shows daily price movements, on a percentage basis, over the course of four years (from 2006 to 2010).  Visually, you can see that in each two-minute span, prices generally move a maximum of about ± 0.004%.  Except for one wee anomaly at -0.018%.  Which occurs exactly when markets close in London.  Where brokerage houses have been coincidentally manipulating LIBOR for the past twenty years.  Smoke, meet fire; fire, smoke.  ;)

>

I don’t think such price charts follow a “normal distribution” as defined by statistics, but if for our purposes we pretend they do, and we assume that one standard deviation is ±0.003%, that would mean 99.7% of the data would fall within ±0.009%, which looks roughly right.  This would also mean that the -0.018% datapoint represents six standard deviations, which screams “special cause” as opposed to “nothing to see here, but normal variation”.

I can’t pretend to know these apparent chicaneries’ intricacies, but it would appear that gold has a habit of dropping violently on options expiry dates, when extraordinary quantities of the stuff seem to enter the market.  Adding to the sense of Something Very Awry, the CFTC may apparently drop a four-year investigation into price-fixing in silver futures, without publishing their findings.

Still, for all of that, it would seem the precious metals will continue to be a reasonably good investment class, at least until stocks’ P/E ratios reach “end of bear market / start of bull market” territory.  After all, if years of possible manipulation can’t stop a five-fold rise, how likely is it to prevent further increases going forward?

The to-may-to, to-mah-to of economic statistics

(written June 28, uploaded July 16)

There was an alarming report out a couple weeks ago alleging that China was vastly underreporting its emissions, because the coal consumption reported by the Chinese national government was smaller than the sum of consumption totals reported by various Chinese provinces. Purportedly, the Communist Party didn’t want to reveal to the outside world just how much pollution it’s emitting, trying to raise the country’s standard of living.

This was followed the other day by a report that coal inventories in Chinese ports are at record highs (in other words, it’s not being burnt as fast as it’s being imported). The theory is that Chinese provinces have been overreporting electricity production to meet national targets for economic growth. If this is the case, then the national government is correct to apply a “fudge factor” and report lower production totals than the sum total of the numbers they’re given!

In light of the high coal inventories, I’d side with the national government on this one, and assume China is slowing down. And since China consumes so much of everything (urbanizing thirty million people per year takes a lot of material!) a slowdown there would drag down prices of most of the resources Canada is so good at exporting raw and unfinished — lumber, metal ores, bitumen, and so forth. Sigh — it’s as if we suffer from a lingering “economic colony complex”…

>

A Chinese slowdown would exacerbate the problems our Albertan friends are facing: the price of oil is already sagging to levels which threaten the economic viability of (some) new tar sands projects. This Globe article lists a consultant study saying $80 per barrel is needed for a variety of projects to break even. As I write this, the price of the West Texas Intermediate Crude (“WTIC”) benchmark is $79. And as the Globe article notes, our countrymen aren’t even getting this much, since oil from North Dakota is clogging south-flowing pipelines in the US, forcing Albertans (who are upstream) to sell at a discount. Selling unrefined bitumen would incur a further discount.

And it just gets worse for our Calgarian cousins/rivals: US oil consumption peaked six years ago, and is set to keep falling. Not only are fewer teens getting licenses, and fewer total miles being driven per year, but those miles are being driven in more fuel-efficient vehicles, as the gas guzzlers of the cheap-oil-era early 2000’s get traded in for more fuel efficient ones. And while electric cars won’t displace much oil demand in the near term, some truck fleets are beginning to switch to natural gas — and trucking represents a huge 12% of US oil consumption! Not all of them will switch, and natural gas will get more expensive again, but the net effect will be that US oil consumption is likely to keep… on… falling, like a Japanese stock market index. (Incidentally, kudos to our friends at Westport for persisting in that natural-gas-vehicle market long enough to get to this tipping point; it’s a good lesson for us fuel-cell folks to learn from.)

Without a path to Asia, Alberta would be stuck selling its oil into a declining market — and that would make it impossible for them to shift the heart of Canadian power westwards, as has been their dream for decades. It’s a 180-degree turn from the message everyone has told our neighbours for the past several years, namely that they faced unprecedented wealth. With stagnant US and European demand, the only way for the oil patch to keep those dreams alive is to force pipelines through BC. Which is what the Prime Minister is agitating for, with the determination you’d expect from the son of an Exxon accountant. (Harper’s dad worked for Exxon’s Canadian arm, Imperial Oil / Esso.)

If we assume those coal mountains in China mean the country is slowing down, the oil price is likely to drift lower in 2013 (commodity trader group-think suggests a bounce up in the near term; not sure what Nostradamus’ take is). A lower oil price would probably mean further gnashing of teeth and scapegoating of “BC radicals” in Calgary* though the root cause would of course be that the market is a fickle god: it giveth, and it taketh away. Not infrequently taking its cues from those godless communists. ;)

—————

* Misplaced anger also applies to the 1970s’ National Energy Policy. While Trudeau reduced the oilpatch boom, he didn’t actually cause the bust; in fact, when oil prices dropped in the early 80’s, Alberta got more-than-market-rates for its oil. The guys who caused the real pain in Calgary were the Saudis, who turned the spigots on enough to drive the price of oil so low, they were basically the only ones making money. (They were punishing other OPEC members for exceeding their production quotas. Every other oil producer in the world, became collateral damage.) More recently, Alberta’s Wildrose Party seems convinced that over-regulation is what caused a slowdown in bitumen development in the past few years, neatly overlooking the Massive Financial Crisis of 2008/09 that caused the oil to drop to about $40 per barrel, before gradually floating back to the low $100’s, from which it has resumed sagging.