The Economy and Economics

johnlocke

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The thread title says it all.



It has taken four decades, but the Federal Reserve has finally shaken off its fear of inflation. The markets are only just waking up to the implications of the shift.

The outlines of the turnaround have been developing for a while as the Fed’s focus has moved from its inflation mandate to a constant emphasis on its goal of full employment. Meanwhile, its measure of rising prices has moved to an average target, allowing inflation to overshoot a 2% goal to make up for past misses.



The shift should prompt a re-evaluation of the dominant market narrative. Up to now, the assumption has been that the Fed will tolerate some short-term inflation created by President Joe Biden’s $1.9 trillion stimulus, but that in the long run the Fed will reassert control or inflation will go away by itself.

In the bond market, this version of the story shows up in heightened inflation expectations for the next five years—a break-even rate of 2.51%, albeit on a measure that typically comes in higher than the Fed’s preferred gauge of inflation. For the following five years, inflation expectations are much lower, just 2.11% on Friday; if right, it would almost certainly mean the Fed’s preferred inflation measure would be below its 2% target.

An alternative narrative is far more political, and has been growing in popularity with investors who look at economic history. It starts with the transformation of the deficit debate. After the Obama stimulus of 2009 even Democrats were concerned about how it would be paid for, and the popular parallel was to troubled states such as Greece.

This time round the mainstream Democrat concern, such as it is, is that spending too much might prompt inflation.


Sure, Congressional Republicans have rediscovered fiscal probity since losing the White House, and the Democrats’ majority couldn’t be more fragile. But in the past decade virtually everyone has come to understand the core tenet of modern monetary theory, that the issuer of dollars isn’t going bust.
Here the story moves to the Fed. A hawkish Fed can counteract a big-spending White House by hiking rates. But Mr. Powell has committed to no hikes until inflation is sustainably at the Fed’s target and the country is at full employment. Most policy makers think that means at least three more years of near-zero rates.
The question is what happens if the target is reached earlier. If inflation picks up fast, say to 3%, will the Fed be willing to hike rates early and risk a rise in unemployment? What about 4%?

Fed policy makers have been emphasizing that reaching full employment helps the marginalized in society the most. The flip side is that pushing up unemployment to restrict inflation will hit that group the most. Politically that makes tighter monetary policy harder to justify.
There are also broader issues pushing toward higher inflation, as Pascal Blanqué, chief investment officer at French fund manager Amundi Asset Management points out. Rising national rivalry, as well as export restrictions on protective equipment and vaccines, encourages companies and governments toward secure domestic supply chains, even if that leads to higher costs.

A synchronized global recovery this year will mean upward pressure on commodity prices, a classic source of inflation. And Covid-related disruption has led to widespread production problems, including shortages of shipping containers and critical parts for cars, which again points to higher prices.


“There’s an ongoing shift from the narrative of secular stagnation to what I call the road back to the 1970s,” Mr. Blanqué says.
I think it is safe to leave the flowery bell-bottoms in the closet. Serious inflation is still very unlikely, albeit now more likely than it was. The jobs market is much more flexible than in the 1970s, making wage-price spirals difficult, while there is still plenty of international competition to restrict the ability of companies to jack up prices. These trends might reverse, but it will take years for unions to build their power and economies to be reoriented to domestic production.

However, everything is in place for at least a bout of market anxiety about inflation.

Inflation is poised to leap higher in the next few months due to a sharp dip in prices a year ago, as Mr. Powell himself pointed out on Wednesday. He said the Fed would ignore what he expected to be merely a blip. The economy is likely to be growing fast, too; the New York Fed’s Nowcast model, for example, predicts 6.3% annualized growth in the first quarter.

Combine that with a commitment to low rates and a president already moving on to his next spending plan, and it makes sense that people would worry more about rising prices.

“Investors are primed for an inflation scare,” says Dario Perkins, an economist at strategists TS Lombard, even though he thinks it is unlikely to last.
The obvious bets to profit from an inflation scare are the reverse of what worked last year: dump Treasurys, dump high-grade bonds, dump growth stocks, buy cheap economically-sensitive cyclical stocks, buy commodities, buy junk bonds.









Powell Says Fed Plans to Keep Inflation Anchored at 2%


Powell Says Fed Plans to Keep Inflation Anchored at 2%

Federal Reserve Chairman Jerome Powell tells WSJ’s Nick Timiraos there is no plan to raise interest rates until labor-market conditions are consistent with maximum employment and inflation is sustainably at 2%. Photo: Eric Baradat/Agence France-Presse/Getty Images.
The market overall might rise or fall, depending on its constituents, as last Thursday showed: The S&P 500 was dragged down by big falls in growth stocks, even as its cheap and cyclical members suffered less and banks rose. In Europe, the same pattern led to a rise in the market, as cheap and cyclical stocks make up a bigger share.

A lot of this has already happened, as the same trades benefit from economic reopening. So the scare will have to be big to overcome what’s already anticipated in the price.

Yet, a permanent regime shift clearly isn’t priced into Treasurys. Even after last week’s jump, the 10-year still only yields around 1.7%, and long-term bond market inflation expectations have been stable. Investors, in the main, accept Mr. Powell’s pitch, and think that after a brief period of higher price rises, the Fed will be willing to assert its independence and keep inflation in line.
If the market loses confidence, long-dated Treasury yields should ramp up even faster, the dollar would slide and stocks most reliant on profits far in the future, think Tesla, will be hit hard.
Real inflation scares hurt.
 
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johnlocke

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1/2​

Hot U.S. Economy, Fresh Supply Disruptions Pressure World’s Factories​

The strongest U.S. expansion in 30 years is making for long delivery delays and price increases, exacerbated by Suez disruption, factory fires​



im-315413

Workers assemble camper vans in Jandelsbrunn, Germany. The country recorded its sharpest increase in manufacturing output in decades.​

PHOTO: ANDREAS GEBERT/REUTERS
By
Paul Hannon
and
Gwynn Guilford
Updated March 24, 2021 4:28 pm ET


Resurgent economies, led by the U.S., and a burst of demand for consumer goods are heaping pressure on already strained supply chains, with a series of acute disruptions—including this week’s blockage of the Suez Canal—set to worsen shortages and further push up prices.

The shortages have been most pressing in the automobile industry, where manufacturers have been forced to cut back production in response to limited supplies of semiconductors. But difficulties in securing raw materials and other inputs have recently been worsened by a series of significant disruptions.
The latest of those came with the blockage of the Suez Canal by a grounded container ship Tuesday. That followed a fire on Friday at a factory of one of the world’s leading auto chip makers in Hitachinaka, northeast of Tokyo.




Video: Suez Canal Blocked by Giant Container Ship

Video: Suez Canal Blocked by Giant Container Ship

Footage shows authorities working to dislodge a giant container ship that remained stuck in the Suez canal, blocking one of the world’s busiest trade routes for oil and manufactured goods. Photo: Suez Canal Authority/Associated Press
Last month’s freeze in Texas triggered mass blackouts that closed plants that make up the world’s largest petrochemical complex, many of which remain offline.

The Federal Reserve expects the U.S. economy to recover more quickly than projected by officials a few months ago, anticipating that the Covid-19 vaccination campaign and trillions of dollars of fiscal stimulus will propel the U.S. economy to its fastest expansion in more than 30 years.

That is piling pressure on the globe-spanning supply chains that multinationals rely on to make everything from exercise bikes to furniture.

In a series of surveys around the world released Wednesday, manufacturers reported lengthening delivery times for raw materials and other inputs, rising production backlogs and a sharp pickup in input prices.
In the U.S., there were also signs that shortages were squeezing factories, with output rising at the slowest pace in five months—in part because of a lack of raw materials—while new orders rose at the fastest pace in almost seven years.
Data firm IHS Markit said U.S. executives reported the most severe supply disruptions since it started the national survey in 2007. It also said that firms “commonly reported slower output growth due to a lack of raw materials to fulfill new orders.”
There are some signs that those shortages are modestly slowing growth.


“I wouldn’t say supply disruptions are necessarily a risk for the recovery, just that they will at least temporarily limit how fast the economy can grow,” said Andrew Hunter, senior U.S. economist at Capital Economics.

Economists and central bankers say the shortages are likely to prove short-lived, with makers of semiconductors and other parts that have become relatively scarce increasing their capacity. The reopening of hospitality and other services as vaccination programs progress will likely divert consumer spending away from goods that have been in particularly high demand, such as laptops and other home electronic devices.

“There will be a little bit slower growth and maybe some modest upward pressure on prices,” Federal Reserve Chairman Jerome Powell said in testimony to lawmakers on Wednesday. “But that should be something that is temporary. You know, a bottleneck by definition is temporary as the supply side adjusts.”

The recovery in global factory output from a pandemic-inspired collapse started in May, and output had returned to its pre-lockdown level by December. That rebound was much faster than in the aftermath of the global financial crisis, and the speed of the recovery appears to have caught many manufacturers and their suppliers off guard.

Price pressures have been building in the U.S. for the past four or five months, as fiscal-relief packages supported household income and business investment picked up, said Citi economist Veronica Clark.

Rising consumer prices and expectations of continued increases could contribute to a broader inflation pickup that could prompt the Fed to raise rates. However, many economists expect the Fed to pay little notice to pricing pressure created by recent supply-chain disruptions.

“They’re not looking for excuses to tighten—right now they’re looking for excuses not to tighten,” said Joshua Shapiro, chief U.S. economist at consulting firm Maria Fiorini Ramirez Inc. “So to the extent you can point to whatever driving inflation as being temporary, it feeds into that.”
 
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johnlocke

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2/2

U.S. auto dealerships are already running thin on trucks and cars because of a parts shortage that has interfered with production. Buyers as a result are paying more, waiting longer and have fewer models to choose from. Meanwhile, U.S. consumer spending on goods was up nearly 10% in January from a year earlier, according to the Commerce Department. Surging demand has left U.S. ports suffering backlogs of ships carrying tens of thousands of containers and long delays unloading freight.

“Producers were increasingly unable to keep pace with demand, due mainly to supply chain disruptions and delays,” said Chris Williamson, IHS Markit’s chief business economist. “Higher prices have ensued, with rates of both input cost and selling price inflation running far above anything previously seen in the survey’s history.”
In Germany, one of the world’s manufacturing powerhouses, the survey of purchasing managers recorded the sharpest increase in output since the series began in 1996. That is good news for the European economy, which continues to be held back by rising coronavirus infections and a faltering vaccination campaign.

Over the past six months, Europe’s economy has moved at two speeds. While manufacturing has expanded at an increasingly rapid pace, activity in the larger services sector has declined. Overall, in the previous five months the result was a contraction in output that likely saw the eurozone slide into recession during the final three months of last year and the first three months of this year.

But to the surprise of most economists, that changed in March, with manufacturing proving so strong that it more than offset the decline in services, setting the stage for overall growth.

That return to growth may not be sustained, since both France and Germany have imposed new restrictions on consumers and businesses in recent weeks and there are few signs of an imminent pickup in vaccinations.
For much of the rest of the global economy, the recovery is less lopsided. But in most places, manufacturers have rebounded more strongly than service providers, reflecting the fact that most goods can be consumed with relatively little risk of infection, while a range of services led by hospitality and entertainment remain risky.

As the pace of vaccinations ramps up around the world, supply chain logjams will gradually dissipate and related price pressures will likely fade, said Oren Klachkin, lead U.S. economist at Oxford Economics.

“These disruptions are likely to persist in the immediate term, and won’t meaningfully dissipate until we move past the Covid crisis at the global level,” he said.

In Australia, manufacturers reported the sharpest rise in import prices in the survey’s history, and attributed that to bottlenecks in their supply chains.

Across the eurozone, factory managers reported the fastest rise in input prices in a decade, and reported the longest waiting times for inputs to be delivered in the survey’s 23-year history. In particular, German manufacturers highlighted lengthening waiting times for supply from Asia.

In the U.S. and Europe, manufacturers have responded to increased demand by recruiting additional workers, which should help aid the services sector’s recovery when businesses are allowed to reopen fully. But the rise in raw-materials costs points to higher prices for consumers over coming months, a problem central bankers see as short-lived for now.
 
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johnlocke

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This not going to fly for long or end well. It's been discussed here in the states is well by both sides and Trump as well.

Disaster waiting to happen.

What motivation will banks have to give loans if they lose money?

With Negative Rates, Homeowners in Europe Are Paid to Borrow​

Covid-19 pushes benchmarks deeper into negative territory, widening the pool of mortgage holders who receive interest​



im-315185

In Lisbon and elsewhere in Portugal, some borrowers are receiving interest from their banks.​

PHOTO: RAQUEL MARIA CARBONELL PAGOLA/LIGHTROCKET/GETTY IMAGES
By
Patricia Kowsmann
March 25, 2021 5:30 am ET


LISBON—Paula Cristina Santos has a dream mortgage: The bank pays her.

Her interest rate fluctuates, but right now it is around minus 0.25%. So every month, Ms. Santos’s lender, Banco BPI SA, deposits in her account interest on the 320,000-euro mortgage, equivalent to roughly $380,000, she took out in 2008. In March, she received around $45. She is still paying principal on the loan.

Ms. Santos’s upside-down relationship with her lender started years ago when the European Central Bank cut interest rates to below zero to reignite the continent’s frail economy in the midst of a sovereign-debt crisis. The negative rates helped everyone get cheap financing, from governments to small companies. It gave an incentive to households to borrow and spend. And it broke the basic rule of credit, allowing banks to owe money to borrowers.

Ms. Santos’s case was supposed to be rare and mostly over by now. After the ECB cut interest rates to below zero in 2014, economies in the eurozone improved and expectations were that rates would rise in a few years. But the coronavirus pandemic changed all that.


As economic pain in Europe drags on, the negative rates remain—and they are getting lower. As a result, more borrowers in Portugal as well as in Denmark, where interest rates turned negative in 2012, are finding themselves in the unusual position of receiving interest on their loans.

“When I took the mortgage, I never imagined this scenario, and neither did the bank,” said Ms. Santos, a 44-year-old business consultant.

Deco, a Lisbon-based consumer-rights group that in 2019 estimated that rates had turned negative on more than 30,000 mortgage contracts in Portugal, said the figure has likely more than doubled since then.

Many European borrowers have variable-rate mortgages tied to interest-rate benchmarks. Like most in Portugal, Ms. Santos’s is tied to Euribor, which is based on how much it costs European banks to borrow from each other. She pays a fixed 0.29% on top of the three-month Euribor rate. When she took out the mortgage in 2008, three-month Euribor was close to 5%. It has been falling in recent months and is now near a record low, at minus 0.54%.

Portugal’s state-owned Caixa Geral de Depósitos SA said about 12% of its mortgage contracts currently carry negative rates. The number of such contracts rose by 50% last year, according to a person familiar with the situation. Ms. Santos’s bank, BPI, said it has so far paid €1 million in interest on mortgage contracts to an undisclosed number of customers.

Spain, where most mortgages are also linked to Euribor, faced a similar situation. But the country passed a law that prevents rates from going below zero. Portugal did the opposite, passing a bill in 2018 that requires banks to reflect negative rates.
“In the event that the decline in interest rates exceeds the mortgage spread, the client would not pay interest, but in no case [would the bank] pay in favor of the borrower,” said a spokesman for Banco Bilbao Vizcaya Argentaria SA, BBVA -1.07% one of Spain’s largest lenders.

There are no official figures available on how many mortgages are currently carrying a zero interest rate in Spain. Banks have declined to disclose their numbers.

In Denmark, more borrowers have seen their rates turn negative, although in most cases they are still paying their banks because of an administration fee charge.
There, mortgages aren’t directly financed by the banks, which don’t set their terms. Instead, they serve as a type of intermediary, selling bonds to investors at a specific rate, lending the same amount to the borrower for the same rate.

Nykredit, Denmark’s biggest mortgage lender, said more than 50% of its loans with an interest period of up to 10 years have a negative interest rate before the fee. That proportion is rising because mortgages tend to have their rates adjusted every few years.

That is the case for Claus Johansen, 41, who works in Nykredit’s mortgage department. In 2016, he took on a five-year adjustable-rate mortgage for 1.2 million Danish kroner, equivalent to roughly $190,000, to buy a house north of Copenhagen. His interest repayments for the first five years were set at 0.06%. In January of this year, the rate was revised to minus 0.26%, which is subtracted from a 0.6% administration fee he has to pay the bank.

“It’s odd, but negative rates have been around for so many years, we just got used to it,” Mr. Johansen said.

A flip side to borrowers receiving interest from their lenders is that banks in Denmark and elsewhere have started charging customers for their deposits, saying they can no longer absorb the negative rates their central bank charges them. Mr. Johansen said he keeps his account balance under the threshold at which his bank would start charging him.

In Lisbon, Ms. Santos said that while it is great to receive interest from her bank, her situation overall isn’t better off because BPI has sharply cut the interest it offered on her business deposit account in recent years, to close to zero, from around 3%. Her plans to buy a new house are on hold because BPI is now charging a much higher spread on new mortgages, to avoid falling into the negative-rates trap again.

“We wanted to move out of the city center, but it is hard to leave such a good mortgage deal behind,” Ms. Santos said.
 
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President Biden is preparing to go to the mat for four tax increases worth about $1.8 trillion to help pay for his infrastructure and social safety net plans, advisers tell Axios.

Driving the news: Biden will outline an array of tax proposals beginning on Wednesday — an opening bid ahead of months-long negotiations mostly within the Democratic Party — but these are his priorities.

By the numbers: The biggest-ticket item would raise the corporate rate from 21% to 28%. That's worth $730 billion over 10 years, according to the Tax Policy Center.

The other three would:

  • Impose a global minimum tax on profits from foreign subsidiaries: $550 billion.
  • Tax capital gains as regular income for the wealthy and tax unrealized capital gains at death: $370 billion.
  • Return the top individual rate for those making more than $400,000 to the pre-Trump rate of 39.6%: $110 billion.
 

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A degree of any kind isn't needed to understand this.


Bus Driver Economics​

by Jeff Thomas
Bus Driver Economics

Subscribe to International Man
Economics should not be an especially difficult subject to understand. In essence, it’s simply the study of how money functions. However, academics, theoreticians, politicians, and financial leaders all stand to benefit if they can manage to complicate the basic principles and muddy the waters of economic comprehension.
No individual has been manifestly more successful at this than the economist John Maynard Keynes. Educated at Cambridge, a bastion of Socialist thinking, Mister Keynes famously published The General Theory of Employment, Interest and Money in 1936, forever changing the world’s perception of economics.
This was quite an amazing feat, especially as Mister Keynes’s goal was not to explain economics, as had traditionally been the object of the subject; his goal was to distort the study of economics—to confuse economic principles in order to promote socialist concepts.
Socialism had, since its beginnings, been unpopular with many people, as it clearly did not work economically. So, in order to make socialism more broadly acceptable, Mister Keynes, in his book, suggested essentially that, although 2 + 2 = 4, with socialism, 2 + 2 could somehow equal 5.
Mister Keynes recommended that governments control the economy, saying that, in good times, they could tax and regulate the people so that government held the money. Then, in bad times, they could pour that money back into the economy in order to revitalise it. In saying this, he ignored the fact that, historically, free markets tend to be self-regulating—that supply and demand invariably create their own balance.
Of course, his concept gained the instant approval of all the world’s governments and has held it ever since, as every government would like to control all the money, if at all possible.
Interestingly, just before his death in 1946, Mister Keynes confessed that, in reality, governments, ever dependent upon election cycles, will collect money through taxation and regulation during good times, then immediately spend all of it, then borrow more.
Then, when bad times arrive, the government will not only be broke, but in debt. And, instead of then relieving the economy by going out of business, as any failed business would do, they increase taxation, to keep their own nests feathered. Thus, in bad times, government becomes a country’s greatest detriment to economic recovery.

Present-Day Keynesianism

Back to the present day, we observe both the EU and US governments (and a host of other economically troubled governments) actively pursuing Keynesian economics. As much of the world is presently in the midst of the (still unacknowledged) Greater Depression, politicians in each election cycle, trot out yet another promise for prosperity, always based upon governmental control of the economy—the very same Keynesian concept that created the economic calamity in the first instance.
One year, the promise will be “green shoots.” When that fails to materialise, the next promise will be “shovel-ready jobs,” which also fails to materialise—in every case, because the premise itself was fundamentally, economically unsound.
During downswings in each of these jurisdictions, any government prides itself on declaring, at intervals, that a small percentage of new jobs has been created, in an effort to suggest recovery. They do this in the face of the fact that government employment numbers are skewed to not include those who have given up looking for work.
In addition, anyone who has insufficient work to support himself and his family, but is still employed even one day a week, is counted as “employed.” In the US alone, if all the people who are not fully employed were acknowledged, the present percentage of unemployment would be above 20%.
When an economy is in decline, there are few new real jobs to be had, whilst others continue to disappear. And here is where Keynesianism really comes to the rescue. Since the actual take-home pay of an individual is less important to government statistics than new-job creation, one socialist solution is simply to divide up the existing jobs.
By creating shorter work-weeks—say, thirty hours—many ten-hour jobs open up, and these can be claimed to be “new hires.” Of course, they are improvements only in a statistical sense, as both the thirty-hour employee and the ten-hour employee see diminished standards of living than if a free-market economy had prevailed and both employees may have had the opportunity for forty-hour employment.
As previously stated, this condition, whilst simple to understand in principle, is hopelessly confused and muddied in practise—a situation that allows it to prevail.

A Practical Lesson

Perhaps it would be helpful to offer, for comparison, a more transparent version of the same condition. From the 1960s through the 1980s, Cuba’s primary export product had been sugar. The USSR was Cuba’s principle customer, paying more than four times the going rate to Cuba for its sugar, in exchange for being a loyal Russian ally.
When, after the collapse of the USSR, the Russians pulled out of Cuba, the Cuban economy, having been based on an inflated product value, virtually collapsed. Large numbers of Cubans, previously employed in the sugar industry, were simply no longer necessary, and Cuba had a problem on its hands.
One attempted solution was the “sharing of jobs” (essentially the same “solution” that is now developing in the US). In the years following the sugar debacle, if you were on a bus, travelling from, say, Havana to Santa Clara, you would have two bus drivers on board for the entire round trip.
One would drive to Santa Clara, whilst the other sat in a seat behind him. On the return trip, the second driver would take over. A pointless exercise that only resulted in a divided paycheque.
Yes, both drivers were now “employed”, but each earned less than he might have in a less socialistic economy. Understandably, nothing improved in any real sense for the Cuban people.
The lesson here is that a socialist government first degrades the free market through over-taxation and over-regulation. Once it has done so and the system is beginning to break down, a socialist government never reverses its policies in the face of failure, it instead redoubles the failed policies.
Having made the pie smaller overall, it then divides up the slices in an effort to maintain the perception that everyone still has his piece of the pie. Unfortunately, that sliver may not be enough to sustain the recipient.
But of course, in socialism, as in governments in general, perception has always been regarded as being more important than reality.
As a footnote to the Cuban comparison, it’s instructive to note that, when the Cuban government launched policies like the above-described Bus Driver Economics during the economic crisis that it euphemistically called the “Special Time,” another policy was to limit the expatriation of its citizens to other countries.
As the Special Time grew worse, the penalties for exiting Cuba became more severe. This is another classic symptom of major economic decline—an effort by the government to trap the population from exiting. And not surprisingly, we’re seeing the early stages of this in the EU/US.
As Doug Casey might say, the chances of a people changing a country’s direction from within are “Slim to none… and Slim is out of town.” Socialism, historically, has never ended with a gentle reversal to a free-market system. It invariably ends with further deterioration until the point of economic collapse.
When a country is clearly on the road to socialistic oblivion, the wisest decision might be to get off the bus.
Editor’s Note: Misguided economic ideas are advancing rapidly in the US. In all likelihood, the public will vote itself more and more “free stuff” until it causes an economic crisis.
 

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A degree of any kind isn't needed to understand this.


Bus Driver Economics​

by Jeff Thomas
Bus Driver Economics

Subscribe to International Man
Economics should not be an especially difficult subject to understand. In essence, it’s simply the study of how money functions. However, academics, theoreticians, politicians, and financial leaders all stand to benefit if they can manage to complicate the basic principles and muddy the waters of economic comprehension.
No individual has been manifestly more successful at this than the economist John Maynard Keynes. Educated at Cambridge, a bastion of Socialist thinking, Mister Keynes famously published The General Theory of Employment, Interest and Money in 1936, forever changing the world’s perception of economics.
This was quite an amazing feat, especially as Mister Keynes’s goal was not to explain economics, as had traditionally been the object of the subject; his goal was to distort the study of economics—to confuse economic principles in order to promote socialist concepts.
Socialism had, since its beginnings, been unpopular with many people, as it clearly did not work economically. So, in order to make socialism more broadly acceptable, Mister Keynes, in his book, suggested essentially that, although 2 + 2 = 4, with socialism, 2 + 2 could somehow equal 5.
Mister Keynes recommended that governments control the economy, saying that, in good times, they could tax and regulate the people so that government held the money. Then, in bad times, they could pour that money back into the economy in order to revitalise it. In saying this, he ignored the fact that, historically, free markets tend to be self-regulating—that supply and demand invariably create their own balance.
Of course, his concept gained the instant approval of all the world’s governments and has held it ever since, as every government would like to control all the money, if at all possible.
Interestingly, just before his death in 1946, Mister Keynes confessed that, in reality, governments, ever dependent upon election cycles, will collect money through taxation and regulation during good times, then immediately spend all of it, then borrow more.
Then, when bad times arrive, the government will not only be broke, but in debt. And, instead of then relieving the economy by going out of business, as any failed business would do, they increase taxation, to keep their own nests feathered. Thus, in bad times, government becomes a country’s greatest detriment to economic recovery.

Present-Day Keynesianism

Back to the present day, we observe both the EU and US governments (and a host of other economically troubled governments) actively pursuing Keynesian economics. As much of the world is presently in the midst of the (still unacknowledged) Greater Depression, politicians in each election cycle, trot out yet another promise for prosperity, always based upon governmental control of the economy—the very same Keynesian concept that created the economic calamity in the first instance.
One year, the promise will be “green shoots.” When that fails to materialise, the next promise will be “shovel-ready jobs,” which also fails to materialise—in every case, because the premise itself was fundamentally, economically unsound.
During downswings in each of these jurisdictions, any government prides itself on declaring, at intervals, that a small percentage of new jobs has been created, in an effort to suggest recovery. They do this in the face of the fact that government employment numbers are skewed to not include those who have given up looking for work.
In addition, anyone who has insufficient work to support himself and his family, but is still employed even one day a week, is counted as “employed.” In the US alone, if all the people who are not fully employed were acknowledged, the present percentage of unemployment would be above 20%.
When an economy is in decline, there are few new real jobs to be had, whilst others continue to disappear. And here is where Keynesianism really comes to the rescue. Since the actual take-home pay of an individual is less important to government statistics than new-job creation, one socialist solution is simply to divide up the existing jobs.
By creating shorter work-weeks—say, thirty hours—many ten-hour jobs open up, and these can be claimed to be “new hires.” Of course, they are improvements only in a statistical sense, as both the thirty-hour employee and the ten-hour employee see diminished standards of living than if a free-market economy had prevailed and both employees may have had the opportunity for forty-hour employment.
As previously stated, this condition, whilst simple to understand in principle, is hopelessly confused and muddied in practise—a situation that allows it to prevail.

A Practical Lesson

Perhaps it would be helpful to offer, for comparison, a more transparent version of the same condition. From the 1960s through the 1980s, Cuba’s primary export product had been sugar. The USSR was Cuba’s principle customer, paying more than four times the going rate to Cuba for its sugar, in exchange for being a loyal Russian ally.
When, after the collapse of the USSR, the Russians pulled out of Cuba, the Cuban economy, having been based on an inflated product value, virtually collapsed. Large numbers of Cubans, previously employed in the sugar industry, were simply no longer necessary, and Cuba had a problem on its hands.
One attempted solution was the “sharing of jobs” (essentially the same “solution” that is now developing in the US). In the years following the sugar debacle, if you were on a bus, travelling from, say, Havana to Santa Clara, you would have two bus drivers on board for the entire round trip.
One would drive to Santa Clara, whilst the other sat in a seat behind him. On the return trip, the second driver would take over. A pointless exercise that only resulted in a divided paycheque.
Yes, both drivers were now “employed”, but each earned less than he might have in a less socialistic economy. Understandably, nothing improved in any real sense for the Cuban people.
The lesson here is that a socialist government first degrades the free market through over-taxation and over-regulation. Once it has done so and the system is beginning to break down, a socialist government never reverses its policies in the face of failure, it instead redoubles the failed policies.
Having made the pie smaller overall, it then divides up the slices in an effort to maintain the perception that everyone still has his piece of the pie. Unfortunately, that sliver may not be enough to sustain the recipient.
But of course, in socialism, as in governments in general, perception has always been regarded as being more important than reality.
As a footnote to the Cuban comparison, it’s instructive to note that, when the Cuban government launched policies like the above-described Bus Driver Economics during the economic crisis that it euphemistically called the “Special Time,” another policy was to limit the expatriation of its citizens to other countries.
As the Special Time grew worse, the penalties for exiting Cuba became more severe. This is another classic symptom of major economic decline—an effort by the government to trap the population from exiting. And not surprisingly, we’re seeing the early stages of this in the EU/US.
As Doug Casey might say, the chances of a people changing a country’s direction from within are “Slim to none… and Slim is out of town.” Socialism, historically, has never ended with a gentle reversal to a free-market system. It invariably ends with further deterioration until the point of economic collapse.
When a country is clearly on the road to socialistic oblivion, the wisest decision might be to get off the bus.
Editor’s Note: Misguided economic ideas are advancing rapidly in the US. In all likelihood, the public will vote itself more and more “free stuff” until it causes an economic crisis.
Great post.

I am curious what the lefties here have to say in rebuttal.
 

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We need to quit calling DC a swamp. A swamp is a place with an amazing ecosystem. We need to call DC a sewer. A place that is a full of rats and disgusting smelly bacteria.
 
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How Bidenomics Seeks to Remake the Economic Consensus​

Declaring end to neoliberalism, new thinkers play down constraints of deficits, inflation and incentives​



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Joe Biden after speaking about infrastructure investment on Wednesday.​

PHOTO: BRENDAN SMIALOWSKI/AGENCE FRANCE-PRESSE/GETTY IMAGES

By
Greg Ip
Updated April 7, 2021 9:03 am ET


If you studied, practiced or wrote about economic policy in the past few decades you probably absorbed certain rules about how the world worked: governments should avoid deficits, liberalize trade and trust in markets. Taxes and social programs shouldn’t discourage work.
This canon came to be known globally as the “Washington consensus” and in the U.S. as neoliberalism. The latter label has always been more popular with its critics than its adherents. Nonetheless, by fusing the free-market foundations of classical liberalism with some redistribution and regulation, the term broadly described the economic policy of western leaders from Ronald Reagan and Margaret Thatcher through Bill Clinton and Tony Blair to George W. Bush, Barack Obama and David Cameron.

Neoliberalism has since fallen from grace under former President Donald Trump and now President Biden. But where Mr. Trump’s populism was never grounded in economics, Mr. Biden’s embrace of bigger government is: not the economics of the establishment but of left-wing thinkers in academia and think tanks and on Twitter.

Their views aren’t unified or entirely original. They lean heavily on ideas first advanced by Britain’s John Maynard Keynes in the 1930s, Democratic presidential advisers Walter Heller, James Tobin and Arthur Okun in the 1960s and Larry Summers in the 2010s—who, ironically, is often branded as being the embodiment of neoliberalism. All considered fiscal policy critical to achieving full employment.

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John Maynard Keynes.​

PHOTO: GORDON ANTHONY/GETTY IMAGES
So while the successor to neoliberalism lacks a label, Bidenomics will do for now. Here are some differences between the old and new thinking, though this doesn’t capture the breadth of views across both camps and in the Biden administration itself.

Growth​

Old view: Scarcity is the default condition of economies: the demand for goods, services, labor and capital is limitless, their supply is limited. Over time the economy tends to operate at potential, i.e. full employment, so faster growth requires raising potential by increasing incentives to work and invest. Macroeconomic tools—monetary and fiscal policy—are only occasionally needed to deal with recessions and inflation.

New view: Slack is the default condition of economies. Growth is held back not by supply but chronic lack of demand, calling for continuously stimulative fiscal and monetary policy. J.W. Mason, an economics professor at John Jay College of Criminal Justice whose writing is a sort of handbook of post-neoliberal thought, explained on Twitter: The “economy doesn’t operate at potential on average, but is normally (at least in recent decades) somewhere well below it.” That suggests, he said, that “‘depression economics’ applies basically all of the time.”

Inflation and Fiscal Policy​

Old view: Fiscal policy shouldn’t push unemployment below the level that causes inflation to rise, which would force the Federal Reserve to raise interest rates.

New view: Fiscal and monetary policy should push unemployment as low as they can because low unemployment doesn’t cause inflation and if eventually it does, that’s socially much less costly than persistent unemployment.

Debts and Deficits​

Old view: Because savings are scarce, government budget deficits push up interest rates and crowd out private investment and should be avoided except during recessions.

New view: Low interest rates globally show that savings are plentiful and demand is chronically weak, so deficits aren’t harmful and may be necessary. Mr. Summers has labeled this secular stagnation. “Modern monetary theory”—which few economists, even on the left, embrace—goes further, arguing deficits never crowd out private investment or raise interest rates.

Social Programs​

Old view: Aid should be targeted to those who need it most because money is scarce. Aid should encourage work because that raises gross domestic product and confers dignity. Thus, unemployment insurance is better than rebate checks and support for the poor should be linked to work.

New view: Because money isn’t scarce—see above—aid can and should be universal so that no one falls between the cracks. GDP and paid work are overrated because much of what makes life worthwhile, such as caregiving, is generated outside the market. This is the rationale for universal basic income and, to some extent, Mr. Biden’s expanded child tax credit.

Markets and Incentives​

Old view: High tax rates on income and profits discourage work and investment while high minimum wages reduce employment for the low skilled. Market mechanisms can achieve social goals such as lower greenhouse gas emissions more cheaply than fiat regulations.
New view: Monopoly power and barriers to market entry are pervasive, enabling the rich and corporations to accumulate far more wealth and profits—and pay workers less—than a truly competitive market would permit. Higher tax rates have little effect on incentives and higher minimum wages have no effect on employment. Market mechanisms like carbon prices perpetuate existing inequities.

Bidenomics in part reflects what economists have observed in the past 20 years: government debt rose sharply while interest rates fell and unemployment hit historic lows without unleashing inflation. New research found policies like minimum wages and tax cuts affected behavior much less than textbooks predicted.

But Bidenomics is more a political movement than a school of economic thought. The Democratic base has moved left, energized by inequality, climate change and the coronavirus pandemic, as well as by Mr. Trump and the Republican Party’s rightward shift. That base now seeks, through Mr. Biden, to reshape the economy and society for years to come.
The problem with economic policies subordinated to political imperatives is that they have no limiting principle: if $3 trillion in stimulus is OK, why not $6 trillion? If a $15 minimum wage is harmless, why not $30?

Mr. Biden can ignore limiting principles for now for one reason above all: interest rates are near zero. In fact, Fed Chairman Jerome Powell is the single most important player in Bidenomics. But low rates and the Fed’s relaxed attitude toward inflation are products of today’s circumstances, not permanent new features of the economy. The longer Bidenomics proceeds as if limits don’t exist, the more likely it is to hit them.
 
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