Thursday, February 16, 2012

The Failure of the Euro and the Way Forward

In a past life I campaigned against the creation of the Euro because I believed that the countries in Europe were too different for a one-size-fits-all solution in terms of monetary policy.

A British politician from the UK Independence Party called Nigel Farage had very similar ideas 13 years ago when the Euro was created. Yesterday in the European Parliament, he gave a fiery speech on the situation in Greece, the Euro and the erosion of democracy. Greece's current Prime Minister, Lucas Papademos, is not an elected politician, and some EU officials are currently trying to get Greece to delay elections scheduled for April, so that more austerity measures can be put in place without the say of those pesky voters.

Papademos is currently trying all he can to appease the EU so that the Euro can be saved, which is why Farage is referring to him as "Puppet Papademos" in the video below:

Farage is one of the very few voices in Europe and the world who are speaking plainly and honestly about the situation of the Euro. What he is saying is in essence this: it's the euro's fault that the immense European crisis came about and the Euro must be broken up if the situation is going to be resolved.

I believe that he is completely right.

The current situations in Greece, Portugal, Ireland, Spain and Italy are very similar. These countries now all have very high unemployment, plunging real estate prices and soaring debt. They all also have suffering populations and no options in terms of monetary or fiscal policy to improve their situations.

So how did the Euro create this crisis? It's quite simple:

These weak countries have a currency that is massively overvalued. That makes them uncompetitive in the global market place. The overvalued currency made it so that they could borrow much more money than before they were in the Euro, which created bubbles in real estate, stock markets and many other sectors.

A very high level of debt was discovered in Greece in 2010, which sparked the crisis. The debt-fueled bubbles burst and unemployment went up. Unemployment reduced tax revenue, which increased the debt. The austerity measures increased unemployment even more, further eroding the tax base, increasing the debt, and the vicious cycle we see today was started.

It was actually pretty easy to see that all this was going to happen if you knew anything about economic history (which is a taboo subject for Wall Street-loving politicians, how could stock market speculation possibly be bad for the economy???). Having the Euro as a currency is essentially the same thing as having your currency tied, or pegged, to another, bigger country's currency. When smaller countries have tied their currencies to the U.S. dollar, the result has often been declining international competitiveness, real estate bubbles and unemployment. Just a few examples:

Thailand, 1997: The country had fixed its currency to the dollar, which enabled it to borrow more, creating multiple bubbles, which all popped and threw Thailand into economic crisis.

Latin America crisis, early 1980:s: This crisis, involving multiple countries defaulting on their loans was caused by something that also leads to the same situation as Greece and the other weaker countries are in now: countries such as Mexico and Ecuador took loans in U.S. Dollars instead of their own currencies. This, again, created much more borrowing, asset bubbles and so on.

So, the common factor here is that smaller countries have had their currencies linked to the currency of a much bigger and more powerful country. The short analysis of this is: that doesn't work.

Every country needs its own currency so that its competitiveness and ability to borrow can be adjusted according to the country's economy. Would it make any sense for my creditworthiness to be determined by my neighbor's credit history?

So how do you solve the crisis?

The way that countries have almost always come out of these crises is to remove the peg to the bigger currency, which is the same thing as leaving the Euro. So, you have to break up the Euro and forget that the experiment was ever attempted. For a country like Greece, the resolution of the crisis in Thailand provides an excellent example of the way forward. Both countries are very dependent on tourism, and when your currency becomes cheaper, more foreign tourists will come.

When Thailand got rid of the peg to the U.S. Dollar, it experienced a big increase in tourism from foreign countries. If Greece left the Euro, it would immediately cost half as much to go on vacation to Greece for most foreign tourists. Most of the tourists in Greece are only looking for a holiday in the sun, and don't care whether they go to Greece, Italy or Spain. If, all of a sudden, a holiday in Greece costs $500, versus $1,000 in Spain, where do you think those beer drinking German and British tourists are going to go?

Another aspect of bringing back Greece's old currency, the Drachma, is that imports would become more expensive. That is obviously a problem for Greece, but it could also boost production in Greece itself. There will be things that Greeks can produce themselves instead of importing, and that will create new jobs in Greece. When Thailand got rid of the Dollar peg, manufacturing and exports increased.

Monday, October 19, 2009

U.S. Recovery Plan - Turning the Chinese into Americans

There have been many stories in the news lately, detailing statements from the U.S. government about the dollar. Statements known as “talking up the dollar” have been coming very frequently from Geithner, Bernanke and Obama. This, of course, is meant to make people around the world believe that, even though they’re doing nothing about it (and are actually making things worse every day), effective policies to keep the dollar strong will come in the future.

However, this strategy goes deeper than that. The U.S. government has now embarked on some pathetically futile strategy to try to change other peoples’ behavior to suit American economic needs. This is very evident in this recent speech by Bernanke, as reported by the NYT:

The problem, in essence according to Bernanke, is that people in Asia, and especially China, don’t spend money like drunken sailors, as is the custom in the U.S.. If the Chinese started consuming their own goods instead of selling them to other countries (and getting rich in the process), then the U.S. could become more competitive on the international arena.

It’s like asking the sports team you’re playing against to bench its best player, in order to make the game more fun for everyone else. How quaint.

The average person might not think much of a statement like “the trade imbalances on the world market are too large, and should be reduced by increased domestic consumption in China”. But it is in its core, a pathetic, vain and useless attempt to deal with the economic crisis in the U.S. by trying to take a non-existent shortcut.

Geithner, Bernanke and Obama know that the U.S. can’t export its way out of the crisis, because American goods cannot compete. If the dollar were to implode, American exports probably would be competitive for a while based on price alone, but the larger implications would unequivocally be irreversible, long-term economic stagnation. So again, the only way to take this shortcut is to tell others to change their ways. Now, how likely is it that that will happen?

Bernanke goes on to say that China should increase its social protection for citizens as a way to increase domestic consumption. Now, I’d be the first to agree with such a policy, but alas, China does not care about its own citizens. China is simply the authoritarian political/economical system it has always been. It doesn’t matter if the country calls itself communist, capitalist or imperial: the outcome is the same (the same goes for Russia, by the way). Much like the United States, whoever grabs the power has the power.

The much criticized “Asian values doctrine” can actually be helpful in this context. This doctrine, much favored by the Chinese government, is influenced by Confucianism and other eastern philosophies, but as applied to modern society, it proclaims that individual considerations, be they materialistic or human rights related, should be sacrificed for the good of the authority. I have myself met many Chinese students who have defended this doctrine vigorously.

Where does that leave the Chinese consumer? When, at any time, your house might be bulldozed for a new dam project, your farm taken away because a local politician sold it, or your salary might be cut in half, what is the most rational thing to do in order to protect yourself from catastrophe? You save money!

American politicians seem to think that Asian people save money as some kind of old, funny habit. In fact, they are just being rational, and Americans should obviously be doing the same thing, considering the fact that there is no social safety net in the U.S., and that we have a casino economy.

The Chinese will probably increase their own consumption eventually, but in order for that to be of any help to the U.S. they would have to start buying lots of American goods, and I don’t see that as very likely.

If the Chinese do increase their domestic consumption of domestic goods, I’m sure that won’t be at the expense of exports to the U.S.. They’ll just make up for that by building more factories and enlisting more unemployed people from the countryside to work in them.

Moving on to those who actually control things in China. Why the hell would they try to export less?? In 2007, George W. Bush asked Hu Jintao if they couldn’t please let the Chinese currency appreciate against the dollar. Jintao simply responded: “Why?”.

Embarking on a policy to export less, when exports have taken China out of the dark ages and into the light, would be something that not even a retarded Chinese equivalent of George W. Bush would attempt.

Advocating that the Chinese should be turned into Americans is so pathetic, I’m almost out of words.

Wait, I have a suggestion: if China actually were a communist country, exactly as described by Marx, then it would export almost nothing. So, the plan is simple: invade China, overthrow the authoritarian capitalist government, and install a philosophically pure communist rule! Then America can have its wonderful bubble/casino economy back on its feet!

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Wednesday, October 14, 2009

Why Does the World Need the Dollar?

Earlier this year, I wrote a lot about inflation, and whether or not it would occur. I now believe that the dice has been thrown, that there’s no turning back: there will be large-scale inflation soon enough. The reason: the U.S. has spent almost $12 Trillion in an attempt to re-inflate the economy artificially.

To put it bluntly, the U.S. economy should no longer be described as being on a “sugar rush”. A more accurate analogy would be a cocaine high. What else could account for a 60% surge in stocks while the real unemployment rate is 20%?

Related to this is the U.S. dollar. Inflation hurts the dollar, but that’s far from the whole story. The dollar’s future as the world’s reserve currency is at stake. If everyone who holds dollars or dollar-related assets abroad starts thinking that these dollars will be worth a lot less in the near future, there will be no alternative to a currency crisis.

The fact that the U.S. has the world’s reserve currency enables it to spend far more than it makes. As I have mentioned before, this is the reason why a lot of economists, and especially American economists, are of the mindset that macro-economic models don’t apply to the U.S.. I think there’s some truth to that, because if you don’t HAVE TO ever pay back your loans, you don’t really have to worry about them. However, what happens on the day that you have to start paying?

Some prominent economists, most notably Paul Krugman, are currently claiming that a weak dollar is good for the U.S.. This will help U.S. exports, the theory goes. Also, according to Krugman, the U.S. needs to spend money on stimulus to get the economy going again, in other words through Keynesian spending.

Krugman does not address the potential of the dollar losing its position as the world’s reserve currency, but instead focuses his analysis on the short-term perspective of fighting the crisis and unemployment at all costs. What he does not realize is how real of a danger this is, but I’m sure he realizes the consequences if this were to actually happen. That’s probably why he’s not talking about it.

I believe that it actually wouldn’t take that much for the dollar to lose its position right now. Under the surface, many important international economic players have been discussing replacing the dollar with something else. These players include both wishful thinkers and those who would actually be in financial danger in the short term. If a few of these players were to move away from the dollar, it might set off a chain reaction that could crush the currency.

First this spring, people like Vladimir Putin and Hugo Chavez started talking about the need for replacing the dollar, while barely being able to hide their excitement.

Second, shortly after that, the IMF started dusting off the old idea of international drawing rights, or a basket of currencies. This debate was also helped forward by Joseph Stiglitz and Simon Johnson, both formerly connected to the World Bank and the IMF.

Third, and this is one of the most important ones, China started voicing concerns about the dollar. This time, Geithner had to go to China and give a speech about how great the dollar was doing. China buys a third of U.S. debt on the international market.

Fourth, and this one might turn out to be very important too, Japan elected a new non-conservative government for the first time ever. Japan buys about the same amount of U.S. debt as China does. One of the basic premises of the new Japanese government was that it would stop trying to be the U.S.’s lap dog. We’ll see how that goes, but I don’t think we can expect to see Japan follow Geithner’s every whim.

Fifth, rumor has it that the Arab Gulf states want to get rid of the dollar too. Their incomes are down by more than half since the beginning of the crisis, and they’re getting a little desperate. For the dollar to drop drastically in addition would be disastrous for them.

All these economic players are not dumb, they understand, in contrast to people like Krugman, that there are some very real dangers connected to owning dollars at the present time. They may run the risk of losing their savings and day-to-day incomes at the same time.

The number one question then becomes: Why does the world need the dollar?

The dollar was instituted as the world’s reserve currency at a time when the U.S. was a world leader in production as well as consumption. This meant that the dollar was both “as safe as houses” and “as good as gold”. An advanced economy with a competitive industry would be less likely to resort to irresponsible fiscal practices, and an insatiable, highly materialistic American consumer could keep the smoke in the chimneys in factories around the world. In other words, the U.S. was the economic engine of the world, and that’s why it made sense to use the dollar as the reserve currency.

However, the U.S. is not in the same position either in terms of production or consumption, and definitely not in terms of fiscal responsibility. The American manufacturing industry is not competitive, and the American service industry turned out to be smoke and mirrors on Wall Street. There is no way that the American consumer is going to get back to spending the way they used to, because it was all built on credit.

I believe that there is a shift happening in the world economy right now. In terms of the future developments of the balance of power between the big three blocks, Asia, the EU and the U.S., this is how I think about it:

It is clear to see that China will only continue to increase both its sophistication and volume of trade. The recent crisis has only strengthened the country’s position. The U.S. is no longer China’s biggest trading partner, the EU is. Japan is also increasing trade with China, and so is India.

It seems that the EU will continue to do what it is currently doing: to be competitive in very advanced industries, while not growing or shrinking much either way. I’m basing this on a continued focus on industrial policies, a good access to education and in general a less volatile society.

With respect to the U.S., it is very hard to see what the country has going for it. Where is the growth going to come? What is going to improve? The country has no industrial policy, and will not get one soon. One year at an American University costs as much as a Mercedes E-Class. The political system is deadlocked by lobbyists who bribe individual politicians. Industry resistance to innovation digs the grave of American manufacturing. More importantly: the country is bankrupt.

I believe that the world economy will shift, and that the dependence on the U.S. will have to be lowered. This will mean more power for Asia, and a tighter relationship to that continent on the part of both the U.S. and the EU. This will also mean that the dollar will most likely be given up as the world’s reserve currency.

What will this mean for the U.S.? Simply put: a drastic reduction in material prosperity across the board.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Tuesday, October 6, 2009

Ease of Doing Business at Home - Difficulty of Competing Internationally

“Saturn builds cars that Americans wanna buy!!”

I’ve seen this commercial very often in the last few weeks, but the guy in the clip did not really hit the nail on the head, now that Saturn will be closed. Apparently, Saturn did not make cars that Americans want to buy… (They were supposed to merge with “Penske”. Maybe it was George Costanza’s shoddy work on the “Penske file” that killed the deal…)

The Saturn brand was started as a way for American cars to compete with Japanese and European cars. In the commercial, the message is that what Americans now want in a car is fuel-efficiency, design, reliability and other things that are usually associated with foreign cars. By imitating these foreign cars, Saturn has claimed to also possess these attributes. However, just saying it, doesn’t make it so.

It has become blatantly apparent that the American car industry is uncompetitive. It is, however, not only the car industry that is uncompetitive. The U.S. manufacturing industry, about 7% of the economy, has been shrinking steadily for decades, and the size of it is now almost half of what it is in most other industrialized countries, as a portion of GDP.

There are several reasons for this, but one of the most important ones is that U.S. industrial goods cannot compete in the international trade arena.

It is quite easy to get a grip on the market dynamics of a domestic market; the market within just one country. For instance, if you raise the fuel efficiency standard on cars, cars will become more expensive, and in the short term, fewer people will buy them. That’s the easy bit.

Industrial products, and cars in particular, are for the most part dependent on international trade. When it comes to very advanced industrial goods, it is usually not possible to sell them in a single market and still be profitable; you need more customers, and industrial products almost always fit in to some type of chain of products that are dependent on each other.

For 30 or 40 years in the western industrialized world, a steady stream of legislation and industrial policies have followed much the same path. Legislation with respect to efficiency standards, safety standards, health care, vacation time and much more has followed the same trajectory in most industrialized countries: a significant increase in these standards and rights.

However, the exception is the United States.

As I outlined in my post about circular looting, (in the list to the right on March 19) I believe that the political system which allows large-scale corporate donations to politicians has created a “business-friendly” climate in the United States. This climate has been developing over the last 30 or 40 years, and has led to policies that make it as easy as possible for companies to turn quick profits in the U.S., at the cost of long-term perspectives.

Think of it this way: as U.S. automakers were making money selling gas guzzlers in the U.S. (while not being able to sell them elsewhere), automakers in Europe and Asia were being subjected to ever stricter regulations on efficiency standards, forcing them to develop better engines. In the U.S., on the other hand, the powerful industrial companies have stood in the way of any changes that might hurt their bottom lines in the short term.

This process also applies to a lot of other areas. European and Asian automakers had to deal with higher costs for vacation time, labor rights and taxes. This was by no means easy for these companies, but what this actually does in the long term is to make them more competitive.

The politicians of Europe and Asia developed this legislation because they thought it was the right thing to do. A cleaner environment and 6 weeks of vacation for everybody were simply seen as moral imperatives. They did not think of the eventual side effects.

Because industrial companies in Europe and Asia have had to fight much harder to remain profitable, they have developed better products and improved productivity and technology, while they have also had less of an impact on the environment and created better working conditions.

(Nowadays, it is widely known amongst economists that the previous estimates of American workers being more productive than others are not true. The PC revolution did increase this productivity, but it was later just inflated by Wall Street profits, which later turned out to be an illusion of productivity)

OK, I know what you’re going to say: the UAW has cost the American auto industry so much that they are the reason American cars are not competitive. I agree that there is some truth to that. The UAW is what I would call a “labor aristocracy union”. Such unions are very selfish (in the beginning very racist), and have no concern for society as a whole. That is very different from European unions, which would for instance fight for more vacation for everybody, not just autoworkers.

However, the over-reaching of the UAW does not explain the fact that innovation was stifled, and that such massive lobbying to stop any improvements was undertaken for decades. The auto companies also agreed that they should be the ones to pay for workers’ health insurance, which is something I disagree with. This stance comes from the anti-socialist movement of the early 20th century. Again, the companies chose this path themselves.

The short-term perspective of the American industrial sector which has involved fierce resistance to any environmental, safety or labor-related reforms, has brought the sector to its knees. In economic boom times, the American model works. In economic recessions, the weak will be taken to the slaughter.

This is the perfect example of what the Freiburg school of economics is all about: we need capitalism, but the framework within which capitalism exists can make it stronger, and make it function much better.

A “Freiburgian” would say: Saturn didn’t make cars that Americans wanted to buy, because the economic and societal framework surrounding the auto industry promoted a hunt for short-term profits.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Friday, September 25, 2009

Secret: No More Money Market Fund Protection - The Illusion Continues

This is just a quick note on the state of the market and the economy right now. I am very bothered by the false spin that has been coming out of almost every media outlet and the government ever since this spring. The absence of reasonable economic analysis is almost complete.

The government and the media are currently putting ordinary people at risk by not telling them that certain guarantee programs are ending. As of last week, September 18, the Treasury Department’s ” Temporary Guarantee Program for Money Market Funds” HAS ENDED.

Click to view: (note that this only says that the program will end on September 18, there is no announcement that it has actually ended, which it has)

They obviously don’t want anyone to know this, because they don’t want anyone to withdraw money from these funds. If you remember, this program was started last autumn, because the withdrawals that were seen during the most chaotic days could have absolutely destroyed the stock market. The program was initiated not out of concern for ordinary people who had money in these funds, but as a way to support stock prices. The consideration is the same today.

I have not seen a single media entry, except one mention on the CNBC website, telling this story. The problem with these funds is that people see them as savings accounts. In fact, a lot of the money is invested in stocks, and although the fund will not swing like stocks, there is a much higher risk of losing all your money. There is no FDIC protection. A lot of people in Britain and The Netherlands lost money in this way last year.

There are a few people who seem to be keeping an eye on things though. The government is about to hit its debt ceiling of 12 Trillion Dollars soon, and the word is that Geithner is about to ask for it to be raised. In other words, the government has spent so much money bailing out anything and everything, that the $700 Billion last year is now like a spit in the bucket. The question will soon become: who will bail out the government? The situation is really serious now. Please take a look at CNBC's Heidi Moore's article on that:

The absolute surge in stocks over the summer was not something that I foresaw. I am flabbergasted at it. Then it came to me; this is the same pattern as during the depression. Here’s what happened back then:

- 1929: crash

- Early 1930: stock market up by 50%

- Late 1930: stock market down 50%

A lot of things are different now, but I wouldn’t be surprised if the same thing happens within 4-5 months. By this I mean, of course, that the crash and the 50% surge has already happened, and we're just waiting for the 50% drop. After that, all the terrible mistakes that the Treasury, the Fed and Congress have made will become very apparent. They have essentially done everything wrong in the handling of this crisis.

This is my basis for this accusation: this crisis has been dealt with as if it were a smaller, cyclical crisis, but the medicine has been administered on a massive scale. I believe that this is a structural crisis, and that none of the cyclical theories apply. Now we will only get debasement of currency, more unemployment, and a downward-spiraling trend.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Thursday, September 10, 2009

Manifesto for a U.S. Parliament - 2009 Update

In light of recent political developments, I am, to my great surprise, no longer alone in calling for an overhaul of the way decisions are taken in this country. So far in the year 2009, we have seen more starkly than perhaps ever before how far away the U.S. is from being a democratic country.

The healthcare debate in particular has raised a lot of questions regarding the decision-making process. More specifically, the role of the Senate has been put into question. The media makes it seem as if any healthcare reform hinges on a small group of senators, lead by Max Baucus from Montana. They may in fact be right, and considering the fact that this man represents roughly 0.15% of the population (90% of which are white), it is easy to see why such a situation might be called into question even in the U.S..

In an excellent article in the Washington Post called The Gangs of D.C., Alec MacGillis explains the strange power of the Senate and the impact this has on democracy at large. Also, focusing on procedural issues, Eric Etheridge of The New York Times writes about the Senate, filibusters and democracy.

I obviously agree with what these writers are saying about the Senate; it is an unbelievably undemocratic institution even before taking into account the tens of millions in corporate “donations” that these individual senators receive. However, neither of these issues can hold a candle to the fact that voters in the U.S. never have any real choice to begin with, because there is no proportional representation.

Before I continue, let me just reiterate what proportional representation is. First of all, it is the system of choice of the vast majority of advanced countries in the world. If a party receives 15% of the votes, it receives 15% of the seats in the legislative body. This inevitably leads to more parties, and a range of views being represented. If 10% of the population is environmentally conscious, there will be a green party, and if 10% of the population are libertarians, there will be a libertarian party in the legislative body. Neither of these things could ever happen in the U.S. because there is no proportional representation.

Instead, the U.S. system has evolved into nothing short of a corporate state. It is clearer than ever that citizens actually have very little say in what happens in their country. This would never happen in a system with proportional representation.

Here is my suggestion for bringing democracy to the U.S.: The U.S. Parliament

The Inception of a U.S. Parliament

The idea behind a bicameral system (the current system) where one body can overrule the other is, in reality, an idea of permanently limiting political change. The result is that it becomes almost impossible to bring about fundamental political change as society changes, and the fundamental situation that existed at the time of the creation of the bicameral system will, in essence, be preserved indefinitely. At the time of the creation of the American political system, wealthy, white, older men were the only citizens who were allowed to, and were ever supposed to be, involved in the political process. That is largely unchanged to this day, all things considered.

In my suggestion, the two houses of Congress would be merged into one unicameral Parliament, with a fixed number of seats, perhaps 501 (in order to prevent a deadlock). Elections would be held every 4 years. Each state would be awarded a number of seats based on population size, in the same way as the present electoral college awards votes for President based on population size. Each vote in the Parliament would be decided by means of a simple majority, with the exception of a vote of no confidence in the President or the governing party or coalition, which would be decided by a two-thirds majority. Filibustering and other abusive tools would be removed entirely.

The fact that all states have an equal voice in the Senate is frankly absurd. I completely understand the need for regional considerations, but the legal independence of U.S. states more than makes up for potential negative effects of populous states being more influential on a federal level. U.S. voters must realize that there is a time and place for everything. The U.S. Senate is not the place to discuss the construction of a local playground, and The Montana Senate is not the place to discuss the moral implications of abortion.

For Montana with 0.3% of the population, to have equal power to California with 12% of the population, is beyond absurd, and deeply undemocratic.

Proportional Representation

What makes the American political system different from most other political systems (save for some other Anglo-Saxon countries) is the lack of proportional representation. If 49% of voters in a given constituency vote for a certain party, those voters could receive 0% representation in the legislature. This is not an anamoly either; it happens all the time.

In a system with proportional representation, if 49% of voters vote for a certain party, that party receives 49% representation from that constituency in the legislature, no more, no less. How could anyone seriously say that proportional representation is unfair, unjustified, or in any way unsuitable? It directly transcribes what the voters want!

The votes would be counted according to the D’Hondt method, and a party must receive at least 8% of the national vote in order to be represented in Parliament. That rule ensures that extremist parties are not represented in Parliament.

The Bill of Parliament

The concept of a “Bill of Parliament” would be very different from a “Bill of Congress”. The problem with bills in the U.S. today is that they lead to corruption through earmarks and lack of coherence. Earmarks obviously lead to corruption by individual Congressmen, when money is being appropriated to corporate donors by the recipient Congressmen. However, the sprawling nature of American bills of Congress also further weakens the small aspects of democracy that do exists in the U.S..

If a bill about, for instance, construction safety is being held hostage by means of a provision about space exploration in the same bill, it amounts to making a mockery of the political system. For a political system to work for the voters, bills must be philosophically coherent and earmarks as we know them must be abolished. It must be this way in order for the most rational, efficient solution to converge with the will of the people.

The Usage of a Mixed Personal and Party Vote – The Party-List Ballot

One of the common objections to a political system that is based on political parties, as opposed to individual politicians, is that such a system takes away the ability of the voter to vote for a politician that he or she particularly likes. This problem can be remedied by the party-list ballot. In such a system, the voter takes a ballot for the party that he or she likes, and on that ballot, the party has listed the politicians that it considers best suited for the job of being a member of Parliament.

The party lists politicians in order, 1, 2, 3, and so on. Any politician on the list can be ticked off, and the vote would go to that party, and that specific politician who has been ticked off. If the voter chooses not to tick an individual off, the vote goes to the party, and the person who is number 1 on the party’s list. When all the votes are counted, the voters may have defied the choices of the party, and number 1 and 2 on the list, may have been exchanged for number 5 and 12 as the party’s representatives in Parliament.

End the Role of Money in U.S. Politics

The financial aspects of U.S. politics are alien and preposterous to most non-Americans. The idea of both local and national politicians going around the country begging for money from wealthy people, corporations and organizations is simply unbelievable. Most U.S. politicians don’t even try to claim that they have guiding principles for the benefit of their voters, naturally because that would be too transparent in light of billions of dollars in campaign donations. In ancient Rome, votes could be bought openly, and it is frankly not much different in the U.S. today. That U.S. voters continue to accept this is beyond me.

As a result of the government in general receding since the days of Reagan, a power vacuum was created. Slowly but surely, aided by both Republicans and Democrats, the U.S. actually turned into something that is very much like a “corporate state”. In some ways, this state can eventually turn almost as bad as a “failed state”, since it may lead to a form of anarchism (a sort of Ayn Rand-style unregulated economy).

All money contributions to politicians must be made illegal immediately. Period. Political advertising on TV and elsewhere must also be ended, and campaigns should be conducted purely through debates in the media. Each political party would be given a set amount of money from U.S. taxpayers, end of story.

Decrease the Power of the President

A U.S. President is the head of state, the head of government and commander-in-chief. No other modern country has this configuration, and for very good reasons. To give one individual such vast powers is simply dangerous, and as we have seen during the last 8 years, it can have truly disastrous consequences. However the role of the President would be changed, at least one of the three roles would have to be given to someone else in order to safeguard the country against a semi-dictatorship. It should be easier to fire the President through a vote of no-confidence.

It is definitely possible to have a significant President, elected in a separate election, as well as a Parliament with proportional representation. Finland is one country that has this.

Homogenization of Voting Cycles - Avoid The Do-Nothing Government

In the current system, as a result of not holding elections for the House and Senate at the same time, those two houses of Congress tend to go to different parties, as the ruling party usually gets punished by voters after a while in the majority. As a result of this, every piece of legislation that politicians try to introduce will be either shot down, watered down or changed beyond recognition. Result: a do-nothing government. In a unicameral system, like the one I'm suggesting, this could not happen, but there could nevertheless be harmful effects of voting cycles via the interaction between local and federal elections.

In a system with a U.S. Parliament, there would obviously still be local elections, with proportional representation of course. Those elections must be held at the same time as the Parliamentary election in order to avoid the situation with the do-nothing government, where local elections are unfairly impacted by national politics, for instance. The goal should be to have as vibrant a political discussion as possible, with the merits of different policies at center stage at all times.

Increase Voter Participation by Practical Means

The United States has, by far, the lowest voter participation out of the OECD countries

This is, of course, a testament to a non-working system. Most U.S. voters obviously feel that there is no point in voting, and many of them are consistently and strongly prevented from voting, legally and illegally. Voter suppression is so rampant that it is worthy of a banana republic. Here are some numbers of voter turnout in OECD countries between the years 1945 and 2005:

The Netherlands: 84.8% (proportional representation)

Sweden: 83.3% (proportional representation)

Israel: 80.0% (proportional representation)

Germany: 80.0% (proportional representation)

Great Britain: 73.0% (fundamentally the same voting system as the U.S.)

Canada: 66.9% (fundamentally the same voting system as the U.S.)

United States (midterm): 40.6%, (presidential) 55.1%

As you can see, the three countries with the lowest numbers all have one thing in common: they all have the winner-takes-all voting system in which very large parts of the population are shut out of the political process completely.

There are a number of practical measures that can be taken to make it easier for people to vote, such as:

- conduct all voting on Sundays

- automatically register every U.S. citizen as a voter on the person’s 18th birthday

- create a national ID card which is sent to every U.S. citizen when the person turns 18

- allow mail-in ballots in every election

- End all electronic voting and create completely uncomplicated, nationally standardized paper ballots

Tuesday, September 1, 2009

Low-Hanging Fruit

Over the last few months the American media has been reporting that the economy seems to be recovering across the board. The stock market has risen almost 50% on these news, anticipating a full-blown recovery.

I have argued before that the supposed recovery is only an illusion, and I will continue to explain why below. I would also like to remind readers that this year’s pattern in the stock market is actually very similar to the pattern during the Great Depression (I won’t go into that further right now, but I recommend reading John Kenneth Galbraith’s “The Great Crash of 1929).

News stories tend to be self-reinforcing. Journalists feed on each other’s sentiments and the reactions from readers. That is why you get news cycles that eventually peter out, while others take their place. In yesterday’s New York Times, Robert Schiller makes the connection between news cycles and the stock market in the article An Echo Chamber of Boom and Bust.

In my view, what Schiller argues is a somewhat exaggerated view on the impact of news cycles on the stock market, but I think the Schiller’s thesis is nevertheless relevant at this point in time.

Journalists in the mainstream media are generally painfully ignorant of economics as a subject. On the CNBC website, I went through all the profiles of the journalists that I regularly see on the network, and only ONE person, Michelle Caruso-Cabrera, has any sort of degree in economics (she is, by the way, a border-line fascist, so her “insight” should be taken lightly). The so-called “chief economics reporter”, Steve Liesman, seems to have no education whatsoever in economics.

Without really knowing what they’re talking about, journalists have over the last 6 months or so all jumped on the recovery story bandwagon. I’m not sure how it started, but it might have been because of the stimulus money, the supposed optimism of the Fed and other government officials, but the recovery story in its essence is this:

The economic crisis is leveling out

“Leveling out” is a term that usually implies that the worst is over and that a change in direction is about to come. However, I would argue that it definitely does not have to mean that, and in the case of this crisis, does not mean that.

By far the most important measure of how well an economy is doing is employment. The “real unemployment rate” in the U.S. is currently between 16% and 18%. That is basically the percentage of people of working age who don’t have jobs (and who don’t study, are housewives or are on disability). That is in my mind the only relevant figure. One of the most important factors in the “recovery story” is that job cuts are leveling out. In other words, companies are currently cutting jobs at a slower pace.

As the economic crisis has been going on for over a year, this makes perfect sense. What companies have been doing is that they’ve been picking low-hanging fruit. They’ve been laying off staff-members without whom they can still function, in order to preserve cash. They’ve gotten rid of an extra secretary, some superfluous salesmen, and they’ve stopped having donuts delivered every morning.

When companies have gotten rid of all their non-essential spending, they couldn’t possibly get rid of more spending at the same pace without drastically changing their business model and becoming an entirely different company (although this has happened as well). That job cuts are leveling out is an economic inevitability.

To illustrate this, I would ask you to think of the U.S. economy as a regular guy. This guy loses his job. This is what he will probably do:

1. He’ll stop going as much to restaurants

2. He’ll stop taking expensive vacations

3. He won’t buy a new car

What this guy is doing is picking low-hanging fruit. He is cutting down on non-essential things, but, for now, he won’t do something radical like selling his house. As a result of cutting down on expenses, he now has more money than he would have had if he had kept going as if nothing happened, but that does not mean that he is on his way to recovering his old life-style. He has not gotten a new job.

In order for our guy to keep cutting down on expenses, he would have to do something more radical, like selling his house and moving into an apartment. He’s very reluctant to do that, because that would radically change his life-style.

Just like the guy has not gotten a new job, and keeps cutting down on expenses, U.S. companies don’t have any new or improved revenue streams. Demand is not up, domestically or abroad. U.S. exports are not very successful, judging by the trade deficit. For U.S. companies to start hiring again, and for the guy to get a job again, the money has to come from somewhere. you can’t just will it to happen, or magically create it.

The important thing to remember is that companies are still cutting jobs, at a pace that would have been utterly frightening only three years ago. This means that, if anything, demand for goods and services will keep going down and down and down. This will force companies to cut even more jobs, and the cycle continues.

So I ask again: what has improved? A leveling out is not an improvement. This is the basic thing that U.S. journalists do not seem to understand. Journalists have been jumping for joy, saying that the car industry is coming back as a result of the “cash for clunkers program”. But again, where’s the money coming from? It’s coming directly from the government, so the “improvement” is just an illusion.

When the government hires someone, it is not “job creation”, and when the government spends money, it cannot be counted as economic improvement. Government spending can do all sorts of things, but it is a type of economic activity that must not be confused with the market. With respect to the “clunkers” program, government spending is a zero-sum game.

In conclusion: how do you know when the economy is improving? Let me present a few alternatives:

1. You export your way out of the crisis, like Sweden and South Korea did in the 1990s. You sell more abroad than you buy from abroad = more money for the country.

2. You inflate a new bubble of some asset class and try to convince people that the price of this asset class will continue to go up forever. It seems to work for about 5 years and then do a lot of damage, while the elite has gotten richer. This is the traditional approach in the U.S., and the one that seems to be in the works right now.

3. A massive technological leap forward radically improves productivity, like it did during the industrial revolution, and to a smaller extent, in the 1990s with the PC revolution.

4. You permanently re-align the economy at a lower place with lower amounts of consumption compared to before, as Great Britain had to do when the empire slowly crumbled over a few decades. This is also a possibility for the U.S..

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Friday, August 14, 2009

Genocide in America

Please click on the graph for a clearer picture.

What is a genocide? Usually the matter is related to an ethnic conflict with active use of force by one group against another. According to the definitions in international law, however, a genocide can also be perpetrated by denying a group of people access to adequate living conditions, causing large-scale loss of life. Factors that decide these living conditions are obviously things like food, shelter, access to clean water, medicine and health care.

Contrary to what the debate in the American media would have you think, the issue known as “America’s health care crisis” is not merely some actuarial difficulty causing inflated prices;

Literally hundreds of thousands of Americans are dying because they are do not have access to health care.

A widely published and cited figure is one that states that between 20,000 and 30,000 Americans die every year because they don’t have access to health care. Indeed, both domestic and international studies repeatedly confirm that the number is in this range. A well-known study on this subject came out from “The Urban Institute” in 2008:

Studies such as this one are usually debated ad nauseam for their methodology (read about the exact methodology in the study by clicking on the link), but the basic premise is this: the study estimates how many uninsured Americans died because they received too little treatment or treatment too late as a direct result of not being insured.

Based on the numbers in this study, I have projected the estimated number of Americans that will have died from uninsurance when this decade is over. The average yearly increase of deaths is around 5%, but if anything, one would expect that number to be higher in the next 2 years.

Please take a look at the graph in the beginning of the article.

The numbers are simply staggering, and to say the least, frightening.

The number of Americans that can be expected to have died by the end of this decade as a direct result of not being insured is 287,000!

The death of close to 300,000 people must surely qualify as a genocide if something is intentionally behind it.

It has been suggested by some people on the right wing that a lot of people who don’t have health insurance are in this situation because they choose to take the risk of not buying insurance. We all know that this theory is pure garbage. I think it’s safe to say that people in general try to strive for a shot at surviving cancer. In other words, everybody wants health insurance.

So what is behind the lack of health insurance among almost 50 Million Americans? Since the days of Theodore Roosevelt, attempts at covering the uninsured have been made, and have failed every time. Every time it’s the same thing: the people who stand to gain from the continuation of the current system fiercely fight and prevent the uninsured from becoming insured through extortion, threats and lies.

These people are currently engaging in, and perpetuating, a genocide on the poorer elements of American society, commensurate with definitions of genocide from the “Convention on the Prevention and Punishment of the Crime of Genocide” from 1948.

The lobbyists and extortioners should be brought to justice and charged with genocide. By the end of this decade, they will have the blood of close to 300,000 Americans on their hands.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Friday, June 26, 2009

The Output Gap - A false and Dangerous Theory

Please click on image to see details.

In my last post, I talked about the likelihood of inflation in the U.S. in the near future and I was trying to debunk some of the theories that claim the opposite. I will continue on that note today and talk about one issue that is supposed to make inflation an impossibility during an economic downturn: the output gap.

The “output gap” is a measure of the difference between economic activity in an economy when times are sustainably good, and when there is a downturn. A lot less goods and services are produced during an economic crisis, for obvious reasons, and that is what accounts for the output gap.

Most economists who are currently advising the Obama administration or who are given time in the media are pointing to this output gap. They are saying that the current level of production in the U.S. economy is “unnaturally low”, and hence there is a lot of “slack” in the economy.

This slack, it is thought, can simply be filled in by printing more money, in order to save the economy. Because of the slack, inflation will not be created because the money printing is simply making up for the consumption which has disappeared, but should still be there, it is thought.

In other words, they are saying that the level of production today in the U.S. is not as high as it’s “supposed to be”.

In reality, they are saying that factories are “supposed to” produce more cars, TVs and clothes, and that people are “supposed to” get more haircuts and eat out more often.

But why should this be? Who says that there’s a “natural level” at which consumption should be? Definitely not me…

Please take a look at the model that I drew up in the beginning. This is an illustration of the U.S. economy. The important thing to see in the model is that both consumption and economic output will very likely be lower in 2009 compared to what they were in 2006. My model explains the very simplest of economic linkages: output follows consumption, or put in other words: supply follows demand.

Since the crisis started, demand has gone down rapidly all across the economy. Demand for houses, labor, haircuts and basically everything else has gone down. Naturally, there would be no point in producing any of those things if nobody wants to pay for them, so production goes down.

In order to find out what happened to the demand, what made it go down, one must look at what was fueling it, where the money was coming from.

Maybe the country had an export good, the price of which suddenly dropped like a rock. This recently happened to Russia and its oil. Consumption in Russia consequently went down because a lot of money disappeared.

Maybe the country had a brain drain of people which made key industries less productive. This happened in Zimbabwe when the country expelled its white farmers. A lot of money disappeared, and, incidentally, the Zimbabwean government tried the trusty method of printing money, with less than fabulous results.

There are many ways in which an economy can get in trouble, but no matter what, during times of crises, consumption and output will go down. Where was the money coming from in the U.S.? The answer is: credit.

Wages in the U.S. have been stagnant for over 30 years, and in order to make up for that, Americans have been taking loans to fuel consumption. Credit is the very thing that disappeared in this crisis, and that is what is decreasing demand.

In order for the output gap to be closed without anything radically changing in the economy, credit would have to come back as an economic force just as strong or stronger than before. We all know that that is not going to happen, so where does that leave us?

If there are no prospects of this gap being closed by new credit, then there is no slack in the economy, and money printing will simply be the futile and devastating activity it was in Germany and Zimbabwe.

The gap would have to be closed by something else, such as a more successful export industry. If, by some miracle, the U.S. export industry were to become extremely successful within a matter of months, so that the trade gap could be closed and turned into a surplus, then maybe the theory of the output gap could be relevant. The U.S. would have to stage an unprecedented economic miracle. Somehow I don’t see that as very likely.

The theory of the output gap can be relevant in normal economic times, when simply analyzing small ups and downs. But this theory is wholly irrelevant in a structural crisis or a depression.

In conclusion: the theory of the output gap is false and irrelevant because it is based on a notion of the imminent return of the credit-fueled good times. Using this theory as a justification to print money has been done before, with disastrous inflation as a result.

The economy is not "supposed to be" anything. It is only what you make it in to!

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Saturday, June 20, 2009

A Regulatory System as a Competitive Advantage

One of the most central themes in how I think about the interaction between economics and politics is the importance of the rules governing capitalism, in order for capitalism to reach its full potential and serve society in the best way it can.

The case for a well regulated economy is quite simple when you look at the alternatives:

Socialism does not work because no one can ever know enough about human economic behavior in order to plan everything in advance, and an unregulated economy does not work because that leads to monopolies, oligarchies and crime, and makes a democratic process impossible.

The economic crisis has now reached a stage where the role of regulation is becoming apparent for the U.S. financial system. More specifically, I argue that U.S. financial companies are now doomed to failure in competition with foreign financial companies because they have not, and will not, be adequately regulated.

A recent article in the New York Times highlights this problem. The article explains that, as a result of the crisis, the influence of British, German, Swiss and Japanese banks is growing on Wall Street and in the U.S. in general. As Eugene A. Ludwig explains, this could have something to do with regulation:

“What worries me is the competitive edge that non-U.S. banks have vis à vis U.S. banks,” said Eugene A. Ludwig, the comptroller of the currency under President Bill Clinton, who now runs the Promontory Financial Group, a Washington bank consultant group. “Non-U.S. banks generally operate under more coherent regulatory structures than U.S. banks do, which creates imbalances that non-U.S. banks can exploit, especially at a time when their U.S. counterparts are operating under extraordinary constraints.”

In short, the U.S. economy has again reached a stage where it is a wild west-style economic system that is essentially unregulated. The little regulation that exists is highly fragmented, where different financial regulators oppose each other and where financial companies can choose their own regulator, invariably picking the one that enforces the least amount of regulation.

By contrast, financial institutions in the EU operate in a much more comprehensive economic framework in general. A lot of this has to do with the work that was done in anticipation of the introduction of the Euro as the common currency. More specifically, Germany refused to go along with the project unless the German brand of stable capitalism became central to the operation of the Euro zone.

Some of the best examples of this are:

- The European Central Bank has a single mandate: to fight inflation ONLY, and not concern itself with economic growth, and to be wholly independent from politicians. A very helpful international comparison of central banks can be accessed here:

- Antitrust laws and fierce enforcements of those laws are meant to ensure that the “too-big-to-fail” problem does not occur.

- Bank capital requirements are higher, and additional credit rating standards are imposed on complex financial products such as mortgage-backed securities.

In addition to these rules, several countries in the EU have other regulatory advantages over those that U.S. companies have, such as:

- A single financial regulator with clear, often internationally harmonized rules (such as Basel I and II, and multiple EU agreements)

- Unlimited liability instead of limited liability. In many countries in the EU, financial executives are personally liable for what happens in their companies. This obviously creates a different risk-taking climate.

- The right of the government to take over non-banking institutions such as mutual fund companies and hedge funds in order to protect investors, much like the FDIC takeover authority in the U.S..

What I have listed above under the heading of “regulatory advantages” may seem like a not so coherent list of issues, but what these things lead to in terms of the role of financial institutions in the economy is one central thing:

A focus on long-term profits instead of short-term profits

It would be very hard to argue that a focus on short-term profits is a good thing from a societal economic perspective, or indeed from any perspective other than that of the individual financiers.

A focus on short-term profits, I argue, leads to large-scale “looting”, which I explained in
this blog post on circular looting.

Needless to say, the focus that American financial institutions have on short-term profits, as a result of the inadequate regulatory framework, is the explanation as to why U.S. companies are being challenged by foreign ones now. U.S. companies are simply not equipped to compete in the long term. When the looting is done, the companies have nothing to show for.

What we are seeing right now is a failure of the central functions of capitalism. Because the system has been under-regulated, if not unregulated, the good dynamics of capitalism where efficiency, choice, competition and innovation are central components have been shoved aside, in favor of outright looting.

Presently, U.S. financial companies appear to be doing better, but make no mistake, this is only an illusion. The suspension of the mark-to-market rule has enabled them to grab numbers out of thin air and make it look like they’re profitable again. Also, because the federal government is lending money to them extremely cheaply, on a highly unsustainable level I might add, these companies are currently experiencing some short-term gains.

As soon as the government realizes that the enormous subsidies cannot go on anymore, U.S. financial companies will start to tumble once again. My guess is that that will happen within 1-2 years.

The New York Times article gives the example of the U.S. auto industry not being able to compete with the Japanese auto industry, which I think is an excellent example. Because the U.S. government failed to implement proper standards for automobiles there was seemingly no need to change anything, you just keep churning out new cars for quick profits.

One day, though, the confidence of the public was used up, and the U.S. auto industry as we knew it died. In a not so distant future, Bank of America will be the new GM, and Deutsche Bank will be the new Volkswagen.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Wednesday, June 10, 2009

The Inflation Riddle

The single most important discussion in economics at the moment is whether or not there will be inflation in the U.S., and if so, when that will happen. The Bush and Obama administrations along with the Fed and the Treasury have made their positions crystal clear: they believe that inflation is a near impossibility in this economic environment.

The government, the Fed and the Treasury have for months now been trying to tell the world that things are getting better and that the measures they have taken to ease the crisis are working. Geithner even went to China and gave speeches telling everyone how much confidence the Chinese still had in the U.S. economy, even as the Chinese sold long-term U.S. Treasuries and bought short-term U.S. Treasuries instead (which is a clear sign of a loss of confidence).

Governments around the world are currently engaging in what they call “quantitative easing”, otherwise known as money printing. The most famous example of this is probably Germany after World War I. Germany had a huge war debt to pay, and that debt was strangling the German economy. The Germans decided to simply print more money and be done with it. After that policy was implemented, people started using money to light fires in their furnaces because it was worth so little.

Nowadays, even the Bank of Switzerland is printing money. The U.S. government is the worst offender, and is currently flooding the U.S. economy with money. In a matter of months, the Fed has suddenly expanded its balance sheet 40 times, after having stuck to a policy of stability for six decades. This is truly revolutionary and truly disturbing.

Take a look at the recent expansion in the Fed's monetary base:

Why are governments doing this? It has to do with the theoretical approach to the creation of inflation.

For people who are unfamiliar with a range of theories in economics, such as the entire economic team of the Bush and Obama administrations, there is a dogma concerning inflation:

Inflation can only be created by a wage and price spiral

This is what the government believes, or at least is strongly hoping for. In other words, for inflation to start growing, people would have to start demanding higher salaries (which is not exactly easy in a country essentially without unions or labor laws) and people would have to start consuming goods and services to a much higher degree. So, all of a sudden, we would have higher salaries, more consumption and the good times would again start to roll. The government sees this as an unlikely scenario. On that point, I absolutely agree.

So, if you believe that the preceding scenario is the only scenario under which inflation can be created, printing money might make sense for a while. However, I, and many others, do not believe that this is the only scenario under which inflation can occur.

You can look at the problem of what inflation actually is in 2 ways:

1. inflation is ONLY a wage and price spiral where too much money is chasing too few goods and services, OR

2. inflation is an excess of money in the economy

In order to find out which of these two statements is true, a simple theoretical model can be constructed. If statement 1 were true, there would be no examples in history where inflation was created without a wage and price spiral. Is that so? The answer is unequivocally: NO.

Inflation has been created without a wage and price spiral countless times in economies around the world. Some examples are: Argentina at the end of the 90:s, Zimbabwe currently, Germany in the 1920:s and 1930:s, and so on and so on.

However, what these countries do have in common during the abovementioned crises is money printing. For different reasons, these countries have been printing money in order to get out of a crisis, and that has created massive inflation. This is exactly what the U.S. is doing today, so why should the U.S. be different?

The statement that inflation can only be created by a wage and price spiral is most certainly untrue. It has no basis in empirical evidence, and in fact, much evidence to the contrary exists.

I believe that inflation is simply an excess of money in the economy. Is an excess of money being created by the Fed right now? You would have to be some sort of lunatic to answer "no" to that question.

People tend to focus too much on microeconomics when thinking about inflation, which is what makes them believe in the wage and price spiral theory. They believe that consumers tend to steer the economy with their spending. This does not have to be true in many cases, though.

If a central bank such as the Fed starts printing money and flooding the economy with it, that money is going to go somewhere. It does not have to go to consumption of goods and services, it can go to the financial markets and spur speculation.

That this happened in the last few months would be a good bet, because the recent attempts to save the economy has mainly been a huge bailout of financial companies, transferring massive amounts of wealth over to them.

If all this money had been transferred to American citizens in the form of living allowances or something like that, we might have had some sort of price spiral, but that didn’t happen. When Wall Street got all the bailout money, it started to push up prices of stocks again in the early spring, and a massive stock rally occurred.

So, I believe that the rise of the stock market has to do with an inflation of prices brought on by the financial bailout. This will most likely put additional upwards pressure on inflation. This is a kind of price spiral too, and this taken together with the excess of money in the economy makes inflation even more likely.

To sum up: the U.S. will experience massive inflation soon as a result of the money printing activities and the recent stock rally is an illusion brought on by the financial bailout.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Monday, May 11, 2009

A Job That Doesn’t Need Doing - The Structural Crisis of 2009

A structural economic crisis is very different from normal economic crises. With an astonishingly accurate history, they come around just about once every 40 years. When a country slips into a structural crisis, it means that there is really nothing that can be done about it, except to plan for a new future when the crisis is finally over.

Put more simply, a structural crisis means that the way in which a country has previously built its prosperity has come to an end. This is because the country has become dependent on a certain type of industry that has become obsolete, unable to compete or can no longer grow.

The following is a timeline of structural economic crises in America over the last 120 years:

1890 - The Long Depression

For a few decades, the U.S. economy had been growing rapidly as a result of the development of natural resources and huge investments in infrastructure, most notably railroads. This ultimately made the entire economy dependent on the continuation of this rapid growth, because so much money had been invested the driving forces behind it. When the crisis came, mines, railroads, factories and farms closed on a large scale, and unemployment eventually reached close to 20%.

Fast forward 40 years:

1929 - The Great Depression

In my view, the Great Depression was caused by a combination of a tech bubble and a real estate bubble. These bubbles were inflated with the help of too much credit and speculation with borrowed money. The U.S. economy had become dependent on the continuation of these bubbles, and the high value of the stock market, and when that was no longer sustainable, everything came crashing down. The outcomes are well known: unemployment of 25%, bread lines and lost savings.

Fast forward 40 years:

Early 1970s - Oil, Gold and Manufacturing Crisis

Another classic type of structural crisis is when an industry becomes completely unable to compete, seemingly over night. This happened all over the Western world in the early 1970s in the apparel sector. Huge numbers of people used to be employed in this sector prior to this time, but Asian competitors took over the market completely. This was only a part of a series of Asian manufacturing takeovers that continues to this day.

The 1970s crisis was multifaceted, and not as severe in the short term, although it could be argued that it partly set the stage for the next crisis. The 1970s crisis also involved the end of the Bretton-Woods system and the oil embargo.

The most notable long-term outcomes in the U.S., though, was a decline in manufacturing of apparel, steel, ships and many other industrial goods, because American companies were unable to compete with imported goods. This crisis permanently changed the make-up of American employment in general, as manufacturing jobs kept getting lost (in relative terms) even after the crisis had passed.

Fast forward 40 years:

2008 - Subprime/Derivatives/Credit Crisis

Out of the three structural crises I have briefly described, the current crisis is certainly the most similar to the Great Depression. The similarities keep adding up every day, but the most striking similarity is the fundamental causes: a real estate bubble (preceded by a tech bubble), built on too much borrowing and speculation with borrowed money.

Put in other terms, the dependence on Wall Street in particular really unite these two structural crises. Speculation with borrowed money, the government’s vested interest in the continuation of the bubble, ordinary people’s reliance on the bubble itself: the situation today is almost exactly the way it was in the 1930s.

What I'm actually saying by giving the example with the 40-year cycles is that it seems that it takes 40 years for an economy to develop different types of imbalances. These imbalances can take different forms, but all lead to the same thing: a structural crisis.

For a polticial discussion, imbalances that lead to structural crises are very helpful tools in trying to figure out the best way forward for an economy. There are distinct imbalances that can develop both on the left and on the right. Today's crisis is one that developed on the right, and the crisis in the 1970s was a crisis on the left.

Put simply, when an enormous accumulation of capital occurs in the financial sector, or in an oligarchy, a severe imbalance in the economy has developed. That was the case in the 1930s as it is today. This leads to a structural crisis.

Conversely, when the government tries to steer the economy too much in an artificial way, the industry usually becomes uncompetitive. This was the case with the British auto industry in the 1970s and the Swedish shipping industry in the 1980s. This also leads to a strucutural crisis.

What we see in this pattern is another example of a political pendulum swinging back and forth. Judging by this pendulum, the next structural crisis in the U.S. will occur in 2050, and it will be a structural crisis coming from the left.

When an economic system becomes reliant on speculation alone, which is the case now and in the 1930s, I believe that the crisis will be more severe.

Before the Long Depression and the crisis of the 1970s, the U.S. had overextended itself in particular industries, but there was at least something to show for it at the end of the day. There were goods and infrastructure available that people legitimately needed, but a crisis which has Wall Street speculation as its main feature leaves only a black hole.

Financial speculation is a job that doesn’t need doing. It benefits no one in the long run. Speculation inflates bubbles that in the end do a lot more harm than good, particularly to ordinary people who don’t see them coming.

Speculation doesn’t provide a good source of funding for businesses and their new ventures, both venture capitalists and businesses can attest to that. Most importantly, as we have seen now, it can bring down an entire economy if it goes on for long enough.

Whether you are on the left or on the right, financial speculation is your enemy. I believe that the U.S. will fall into a depression either this year or in 2010. History is screaming it from the roof tops.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Friday, April 24, 2009

Geithner's Lies - A Preview

The famous “bank stress tests” are in their final stages right now. On May 4, Geithner is going to present the results, and those are certainly rather predictable.

The tests were created in order for the Treasury to be able to paint as rosy a picture as possible, of the situation that the country’s banks are in. This has not been denied, and in fact, it has been confirmed, although using different words.

The point of doing this is to avoid a panic, not cause one”, said Geithner recently.

What happens if the government finds something that is worthy of a panic (which it probably has)? That’s where Geithner’s lies and acting skills come in.

Early this week, results of the tests started to leak out. The rumor on Wall Street is that 16 of the 19 major banks are actually insolvent. If that shouldn’t cause a financial panic, I don’t know what should.

I don’t know if this is true, but it certainly could be. Like I said, it’s a rumor.

The government released the details of how the tests were conducted today. This is how the stress test works:

The banks have to figure out what would happen to them if:

1. unemployment went up to 10.3%,

2. home prices fell an additional 22%, and

3. the economy contracted by 3.3% and remained flat in 2010.

Note that the banks are conducting these tests themselves, and it is not exactly in their interest to tell anyone that they’re insolvent. Supposedly, if the government does not find the information coming from the banks to be credible, the banks will have to explain themselves.

In short, there is no independent auditor, only two vested parties who both want to paint a rosy picture and reveal as little as possible.

So, Geithner’s speech on May 4th is rather predictable, no matter what the government finds. In fact, I can give you the short version right here right now, so you won’t have to spend time listening to it on May 4th.

Dear members of the press, (this is Geithner speaking)

For three months, the U.S. government has been conducting stress tests on the nation’s major banks. I’m here today to present the findings of these tests.

The tests were conducted in the most stringent of ways, in order to make sure that the nation’s banking system can hold up in our current economic times. We tested the banks under fictitious, harsh economic scenarios that are very unlikely to become a reality.

Our findings show that despite continuing difficulties in our economic system, and even under a scenario of significant further deterioration, our nation’s banking system remains safe and well capitalized.

In recent months, the banks have taken unprecedented steps to shore up their liquidity positions by writing down legacy assets and by attracting new capital. This, along with an apparent improvement in the overall economic condition of the country, makes it clear to us that our financial system is on the road to recovery.

Blah, blah, blah, banks are great and Wall Street should love me…

Thank you, and no questions please.

I have a strong feeling that the actual speech that Geithner will give, is going to consist of absolute rubbish. Everybody on Wall Street knows he’s lying, but they don’t care, they only care about how convincing his lies are, because that is what will move the market in the weeks to come.

For ordinary people, all this means that even more vital information is being swept under the rug in order to preserve the financial oligarchy, which is the mission that Geithner seems to think that he was given by the American people.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Tuesday, April 21, 2009

Wall Street Calls Bank of America's Bluff

On Monday, Bank of America presented a fantastic first quarter result with a profit of $4.2 Billion! In the face of insolvency, losses that amount to 20 years of profits, and purchases of Merrill Lynch and Countrywide that very likely doubled the bank’s exposure to toxic assets, how is this possible??

With such great news, Wall Street must have gone crazy, because Bank of America’s stock went down by 24% the same day. What happened??

The answer is as simple as it is predictable: Bank of America’s report is utterly fraudulent.

I looked at the SEC report myself, and found that a little over $2 Billion of the “gain” is a result of the fact that Bank of America has decided, with no basis in reality, that its toxic assets are now worth a hell of a lot more than what they were only a few weeks ago. They can do this because the rule known as mark-to-market has been repealed.

Also, Bank of America makes reference to other new GAAP rules (rules that govern accounting), which apparently (according to them) enables them to put assets in “special purpose entities”, away from the balance sheet. This is what Enron pioneered, and it is what eventually brought down that company.

I could find no numbers concerning how much had been hidden away from the balance sheet this time, but the bank obviously doesn’t want that to be found. This makes me believe that the real number is very big.

Think of Bank of America as a regular guy. This guy has a yearly salary of $30,000. He has a credit card debt of $2,000. He also owes a loan shark a further $10 Million, and he lives in his aunt’s house.

The guy prepares a loan application to buy his own house, and in it he states that his income is $100,000, that he has a credit card debt of $2,000, and that he already owns his own home.

The only thing that’s accurate in his application is the credit card debt. The reason for that is that it can be checked by the bank. Everything else is pure fantasy.

It is the same way with SEC filings. You can bend the rules so much that SEC reports hardly mean anything anymore. You can’t trust ratings agencies or auditors either, because they get paid by the companies that they are supposed to be scrutinizing.

All this makes Wall Street look at a certain metric: quality of earnings.

“Quality of earnings” is not mentioned very often in financial journalism, probably because it seems to suggest that not all profits are actually a reflection of a company doing well. Quality of earnings describes to what degree the earnings of a company can be attributed to actual sales, as opposed to accounting wizardry.

I have over the last year argued that there has been an alliance between politicians, Wall Street, banks, regulators and the media to cover up the true extent of the financial crisis in order to preserve the financial oligarchy. By doing this, they have been able to uphold the illusion that everything is fine.

Even though Wall Street traders are not saying it out loud, they seem to be breaking ranks. They can no longer push up the prices of bank stocks and other financial stock in the face of such obvious and rampant fraud.

Expect stock markets to go much lower in the coming months.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Tuesday, April 14, 2009

What Actually Caused the Great Depression?

During times of economic crises, wacky theories concerning the origin of the crisis tend to spread like wildfire. That was the case during the great depression, and that is the case now. Some people might include my theories in that category, but that is, of course, purely based on ignorance.

At present, there are literally hundreds of theories about the crisis out there, and discussions about the great depression have also resurfaced.

With respect to the great depression in relation to the current crisis, almost all the arguments can be boiled down to the following question:

Was the great depression caused by the easy access to cheap money?

As President Obama has noted, the discussion about the great depression is far from over. The factors behind that crisis are very complex, and far beyond the understanding of most politicians. Obama recently spoke in disbelief about the continued disputes over this.

There are a few things that I believe are beyond discussion:

- The stock market crash set off the depression because so many had so much invested in the market.

- The stock market crash was caused by overly inflated values of stocks.

- The overly inflated values of stocks were caused by an unprecedented amount of speculation with borrowed money.

Following this line of reasoning, the question remains: what causes speculation? If we can nail down what causes large-scale speculation, we might be able to answer what causes depressions.

More specifically, circling back to my initial question, “was the great depression caused by the easy access to cheap money?”, the question becomes:

- Does easy access to cheap money cause large-scale speculation which in turn causes depressions?

The answer to this question can be found more easily than one would think. If you can identify periods of time in history when money was cheap and abundant, and ascertain that rampant speculation always occurred during such times, you have your answer.

A quick look back in history tells us that this is not so. There have been many periods in history when borrowing money was cheap, but when speculation was minimal. This is noted in what is widely considered to be a standard work on the depression, “The Great Crash”, by John Kenneth Galbraith.

During several periods in the 19th century, cheap money was available, but without the result of large-scale speculation. This was also the case in the 1950s and 1960s. So, to say that cheap money alone causes large-scale speculation would be erroneous from a scientific standpoint.

I tend to believe that speculation can trace its roots to something far more basically human. I believe that speculation does not occur just because it CAN occur, but because there seems to be a reason to for people to speculate.

Greed is a human emotion that can never be extinguished. Everyone is guilty of it, and when a human sees an opportunity to make a quick buck without effort, whether this is prudent or not, he or she often takes that opportunity.

The most classic example of speculation is the tulip bulb speculation in Holland in the 16 Hundreds. This business went so far that a single tulip bulb could be worth an entire year’s salary at the time. What this speculation frenzy also featured were contracts with rights to buy bulbs in the future, trading fictitious bulbs that had not yet been grown, and all the other classic speculation behaviors that we see again today.

We may think we’re so advanced today, but greed, this inescapable human emotion, has already conjured up the complicated schemes of speculation many times before in the history of man.

If you can buy a tulip bulb and sell it the next day, and then not have to work for the rest of the year, who wouldn’t do that? If you can buy a house in Florida, sell it within weeks for a comparable profit, how could you resist?

In short, humans need a reason to start speculating, and in the case of the great depression, people got excited about mainly two things which will sound familiar to everyone today: real estate and new technology.

People started buying second homes to be resold shortly afterwards, and stocks in new technologies like radio and automobiles.

Speculation frenzies will probably always exist, but when such a frenzy gets out of control, it can shake the very foundations of society. When too many people start getting in to the frenzy, perhaps even the government (by relying on the stock market to provide basic public services, such as pensions, infrastructure and, of course: jobs), the country becomes utterly dependent on the continuation of the speculative bubble.

A speculative bubble can never be upheld forever, and it can never be re-inflated, so when a bubble of sufficient proportions is created, a country will not be able to avoid a depression.

In the decade before the depression, President Coolidge repeatedly praised the wonders of the stock market. In addition, most of the powerful politicians in Washington, and the members of the Federal Reserve Board, were themselves highly vested in the stock market, and were hence not at all interested in reining it in, even though they could see ominous signs.

It seemed at this time that all of America could become prosperous without any effort on the part of Washington politicians. This is extremely similar to how the Reagan, Clinton and Bush Jr. administrations operated. Hands off, hope for the best and leave the provision of American prosperity to private corporations.

Then as now, the United States was utterly dependent on the upholding of the inflated values of the stock market.

The question then becomes whether the current speculative bubble is large enough to cause a depression. I believe that the answer is, unequivocally: yes.

Moreover, I advise that the winner-takes-all voting system should be destroyed

Wednesday, April 8, 2009

What the People Want - Crisis Management and Proportional Representation

One of the central premises of this blog is that the will of the people, the voters, is not at all realized in actual political policies in countries, such as the United States, that don’t have proportional representation.

One of the clearest examples of this in history can currently be seen in the differences in the economic crisis management between countries that have proportional representation and those who don’t.

The voters in The United States and Great Britain (which both have the winner-takes-all voting system) are outraged and disgusted by the taxpayer give aways to the financial oligarchy, whereas voters in countries with proportional representation, such as Germany and Sweden, are generally pleased with the political handling of the crisis, even though they suffer greatly in this crisis too.

The winner-takes-all voting system excludes all those voters, often more than 50% of the voters, who do not subscribe to the specific beliefs of the two only parties that exist in this country. By contrast, a system with proportional representation counts every single vote, and if a party gets 10% of the votes, it gets 10% of the seats, hence incorporating the will of all the voters, as opposed to a small number of them.

In addition to this, the United States allows huge political donations to individual politicians in a scheme that can only be described as a “policy purchasing program”. Money for policy; it’s as simple as that.

The Handling of the Economic Crisis in The United States and Great Britain

Since the current economic crisis began last year, the handling of it has been strikingly similar in The United States and Great Britain. It has been based on one central premise alone:

Protect the current financial power structure, and the individual players within it, at any cost to the taxpayers and no matter what the long-terms consequences to the economy are.

It really is as simple as that, because there is virtually no evidence to the contrary. With bailouts, loans, guarantees to AIG, Citigroup, Bank of America, Bear Sterns and many more, the U.S. taxpayers are on the line for over $10 Trillion at this point!

Enormous bailouts of Royal Bank of Scotland, Barclays Bank and many more in Great Britain will eventually cost British taxpayers Trillions of dollars too. All the while banks and other financial companies in both countries are continuing to pay enormous bonuses while successfully opposing financial regulation.

The American and British economies are at this point essentially unregulated. The people in both countries are outraged, and I personally don’t know anyone, nor have I heard anyone outside the corrupt media elite, voice support for the bailout and support of the financial oligarchy.

I don’t have any exact numbers for this, but if I, as a resident of Manhattan working in the financial industry, don’t know anyone who thinks that this is a good idea, I can only imagine what people around the country think about it.

Protesters in Britain have repeatedly smashed the windows of banks, and bank employees have had to hire body guards, so I don’t think the outrage is any smaller there.

The Handling of the Economic Crisis in Germany and Sweden

Although there have been bank bailouts recently in Germany and Sweden, it has been done on a much smaller scale. Banks in both Germany and Sweden had been over extending themselves in lending to Eastern Europe while that part of the continent was trying to re-join Europe after communism.

Both the German and Swedish governments have repeatedly stated that it would be immoral to throw away large amounts of taxpayer money, both for the immediate purposes of taxpayers and the long-term consequences to the economy.

The internal economies in Germany and Sweden were already sufficiently regulated, so in no way are the banks there causing as much of a domestic problem. One could instead look at an industry that is vital to the U.S., Germany and Sweden: the auto industry.

The U.S. has simply given away billions of dollars to companies that are clearly not competitive. Germany’s car companies are very competitive, but the car market in Germany is extremely slow nevertheless. Germany was creative in dealing with this, and gave taxpayers a few thousand dollar to scrap their old car and buy a new one. Sweden will most likely follow this idea.

Sweden refused to bail out SAAB, noting that the company had only been profitable for a handful of years during its 50-year existence. How would Sweden be able to turn around a car company when the biggest automaker in the world could not? It must be noted that the Swedish government in general is not opposed to state-owned companies.

The Swedish government owns many companies that it runs for profit, and created and maintained one of the most successful brands in the world: Absolut Vodka. Who said the government couldn’t run a business?

The Swedish and German governments have, throughout the economic crisis always had the taxpayers’ interests and the future of the country as their first and only priorities.

Small bailouts have occurred, and stimulus in the form of aid to local governments that have run short on cash because of job losses have been paid.

The public outrage that has occurred in Germany and Sweden has largely concerned bonuses, but the big difference is that those bonuses were paid by the companies themselves, not the taxpayers, as in the case of the U.S. and Great Britain.

The policy response to the economic crisis from the winner-takes-all countries has been disastrous, and I personally disagree with almost 100% of what the response has consisted of. The policy is based on the premise that the financial oligarchy must be preserved, taxpayers and country be damned.

The policy response to the economic crisis from the proportional representation countries has been deliberate, responsible, thoughtful with a long-term approach. I agree almost 100% with what has been done in those countries, even though I would not vote for any of the parties currently in power in either country.

This fact describes clearly that the will of the people is not translated into policy in the United States and Great Britain. These two countries are undemocratic and both need vast constitutional overhaul.

Obviously, I advise that the winner-takes-all voting system should be destroyed.