money

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More Government, Less Wages

Wages and salaries as a proportion of GDP in blue, contrasted with government expenditure as a proportion of GDP in red:

Yes; correlation does not prove causation. Yes; there are lots and lots and lots of other factors involved — the end of Bretton Woods, globalisation, deindustrialisation, the birth of the computer and the internet, financialisation, the United States’ growth into a global imperial power and more recently the beginnings of a decline.

But whatever the exact causality this does not make happy reading for those who lean toward the idea that more government involvement in the economy translates to a bigger share of the pie for the working class.

Quite the opposite — while wages have just hit an all-time low, corporate profits have just hit an all-time high:

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The Origin of Money

Markets are true democracies. The allocation of resources, capital and labour is achieved through the mechanism of spending, and so based on spending preferences. As money flows through the economy the popular grows and the unpopular shrinks.  Producers receive a signal to produce more or less based on spending preferences. Markets distribute power according to demand and productivity; the more you earn, the more power you accumulate to allocate resources, capital and labour. As the power to allocate resources (i.e. money) is widely desired, markets encourage the development of skills, talents and ideas.

Planned economies have a track record of failure, in my view because they do not have this democratic dimension. The state may claim to be “scientific”, but as Hayek conclusively illustrated, the lack of any real feedback mechanism has always led planned economies into hideous misallocations of resources, the most egregious example being the collectivisation of agriculture in both Maoist China and Soviet Russia that led to mass starvation and millions of deaths. The market’s resource allocation system is a complex, multi-dimensional process that blends together the skills, knowledge, and ideas of society, and for which there is no substitute. Socialism might claim to represent the wider interests of society, but in adopting a system based on economic planning, the wider interests and desires of society and the democratic market process are ignored.

This complex process begins with the designation of money, which is why the choice of the monetary medium is critical.

Like all democracies, markets can be corrupted.

Whoever creates the money holds a position of great power — the choice of how to allocate resources is in their hands. They choose who gets the money, and for what, and when. And they do this again and again and again.

Who should create the monetary medium? Today, money is designated by a central bank and allocated through the financial system via credit creation. Historically, in the days of commodity-money, money was initially allocated by digging it up out of the ground. Anyone with a shovel or a gold pan could create money. In the days of barter, a monetary medium was created even more simply, through producing things others were happy to swap or credit.

While central banks might claim that they have the nation’s best democratic interests at heart, evidence shows that since the world exited the gold exchange standard in 1971 (thus giving banks a monopoly over the allocation of money and credit), bank assets as a percentage of GDP have exploded (this data is from the United Kingdom, but there is a similar pattern around the world).

Clearly, some pigs are more equal than others:

Giving banks a monopoly over the allocation of capital has dramatically enriched banking interests. It is also correlated with a dramatic fall in total factor productivity, and a dramatic increase in income inequality.

Very simply, I believe that the present system is inherently undemocratic. Giving banks a monopoly over the initial allocation of credit and money enriches the banks at the expense of society. Banks and bankers — who produce nothing — allocate resources to their interests. The rest of society — including all the productive sectors — get crumbs from the table. The market mechanism is perverted, and bent in favour of the financial system. The financial system can subsidise incompetence and ineptitude through bailouts and helicopter drops.

Such a system is unsustainable. The subsidisation of incompetence breeds more incompetence, and weakens the system, whether it is government handing off corporate welfare to inept corporations, or whether it is the central bank bailing out inept financial institutions. The financial system never learned the lessons of 2008; MF Global and the London Whale illustrate that. Printing money to save broken systems just makes these systems more fragile and prone to collapse. Ignoring the market mechanism, and the interests of the wider society to subsidise the financial sector and well-connected corporations just makes society angry and disaffected.

Our monopoly will eventually discredit itself through the subsidisation of graft and incompetence. It is just a matter of time.

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The Non-Paradox of Inactivity

The Paradox of Thrift states:

If everyone tries to save more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy.

It is in many ways a microcosm of Keynesian economics — mostly right, but in a few details spectacularly and outlandishly wrong

(A small detour: In many cases, these few details matter — big time. Austrian economics, of course, is the inverse of this — mostly wrong, but in a few details spectacularly and outlandishly right. I remain unsure as to which set of ideas gives more insight; although I am deeply impressed by some insights of Austrian economics, I generally think the only sensible economic outlook is to scavenge for whatever explanations fit the facts.)

If many people in the economy cease economic activity and hoard their capital, of course the economy will slow down — both in nominal (GDP) and generally also in real terms. Satisfying supply and demand requires a constant and continuous flow of productivity, and goods, and services and money.

Of course there is no paradox there: lowered economic activity is almost always deleterious (the exception being the rare cases when a type of economic activity is itself deleterious to the health of the economy.)

But here is where the paradox of thrift really falls down: saving is not necessarily the same thing as hoarding. Hoarding is saving without investment. And there’s a good chunk of evidence to suggest that more saving with investment is correlated with stronger economic health.

From Lawrence Kotlikoff:

Facts reinforce the idea that spending is no cure-all for what ails America. Most countries experiencing full employment and rapid growth do so while saving at very high rates. China is growing like crazy with a saving rate of more than 30 percent. Japan also saved at very high rates when it was booming. Since then, both rates have plummeted.

The U.S. has also done better when saving was high. In the 1950s and 1960s, saving averaged 14 percent of national income, which grew at 4.4 percent a year in real terms. In the 1990s and 2000s, saving averaged 5.1 percent and national income increased only 2.4 percent.

The connection between saving and growth runs through domestic investment. Countries that save invest not only by building inventory for tomorrow; they also invest in physical capital that makes workers more productive.

U.S. saving is highly correlated with domestic investment; when we save, we primarily invest here at home in starting businesses, buying equipment, and building factories.

In reality, Keynes (and his antecedents) identified an important economic eventuality — a slowdown resulting from hoarding. However, associating this with saving — and subsequently tilting policy toward consumption — is really a misidentification. Societies need investment to grow, and investment requires saving.

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Steve Jobs, Jobs and Reincarnation

Readers will know that my feelings toward Apple are profoundly mixed.

As I wrote back in July:

The notion of well-oiled blue-shirted brigades of lanyard-wielding corporate minions dancing, speaking and thinking in line to the beck and call of Steve Jobs goes beyond running an efficient operation. It’s obsessive-compulsive, and downright creepy. In my view, the sooner a competitor arises that delivers minimalist, solid and sleek computers at a similar price and without all this peculiar control-freakery, without the backdoor surveillance, and without the cultlike undertones, the better. I will jump ship as soon as I possibly can. But right now? Apple has no real competitors.

But there is no doubt Apple has a vast array of good qualities beyond having great products. There are three crucial ones: value creation, job creation and innovation.

From Sovereign Man:

While people like Warren Buffet are pleading with the government to raise their taxes and give away their wealth to sycophantic bureaucrats, Jobs showed time and time again that the best way to improve people’s lives is to create value and be productive.

Steve Jobs was one of the most productive human beings to have ever lived; he started several successful companies which directly employed tens of thousands of people. Indirectly, his businesses improved the livelihoods of millions across the globe, from Chinese factory workers to iPhone app programmers to Apple shareholders.

In building an empire and unimaginable wealth for himself, Steve Jobs enriched the lives and livelihoods of others by creating value. Not by forced redistribution. Not by giving things away. By creating value.

Ironically, just as I write this I am watching President Obama on Bloomberg Television trying to explain how many jobs his new plan will create– 1.9 million in his estimate:

“We’re just going to keep on going at it and hammering away… until… something gets done. I would love to see nothing more than Congres act… so aggressively.”

Politicians would do themselves and their constituents a great service by comparing their own track record for enriching people’s lives against Steve Jobs’ performance, and then kindly stepping out of the way. The path to prosperity is not paved in votes, but rather in freedom: the freedom to create, produce, risk work hard… and be rewarded for your efforts.

Well, amen to that. Our markets sorely need new value, new innovation and new jobs, and the answer to that conundrum — as I painstakingly pointed out here — is creating new wealth, not new taxes as many currently seem to advocate.

In my view, Jobs greatest contribution to the philosophy of economics (and something I have hammered on in recent months) is the importance of failure:

If you can’t succeed or fail, it’s really hard to get better.

The story of Jobs’ life, and the story of free market capitalism is very much one of trying and trying and trying again, learning from experience, and gradually improving. Look at the difference between a Power Cube G4 and a Mac Mini. The difference between a first-generation iPod and the new iPhone. Lisa and Mac OSX.

Sadly, as American Presidents heap praise on Jobs and his innovations, they’re not exactly heeding his advice. As I point out on an almost-daily basis, the highly interconnected global financial system has experimentally shown itself to be fundamentally flawed, and systematically broken. The establishment response — at both a national and global scale — has not been to put failures to one side and try new systems (hopefully ones that allow for less interconnection, less leverage and less risk — and subsequently less fragility) but to pump money and bail out failures to make the same mistakes all over again on a bigger scale.

So as Steve Jobs’ body begins its journey back into nature, back into the oxygen, carbon, nitrogen and hydrogen cycles — to be reborn, as we will all be, as new organisms — perhaps it is time governments started listening to his advice? Perhaps it’s time for the global financial system to die and be reborn…?

Farewell.

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The Housing Bubble Priced in Gold

In the United States, the post-sub prime housing crash has meant that consumer spending has stagnated. People are simply not remortgaging their homes to buy boats or other such consumer goods anymore, because there is no longer the expectation that price rises will pay for the boat. This is because prices are slumping due to excess supply built during the peak years. For people who don’t own property in the United States, this price crash has allowed them to get a foot on the property ladder, which is broadly a good thing. Keynesians might argue that the slump in consumer spending is broadly a bad thing, but it’s not: it was never sustainable in the first place. Boosting GDP through unsustainable spending is a short recipe for bubbles.

In the United Kingdom, the story is different. Property prices haven’t really crashed:


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Obama: Class Warfare Against the Poor

Obama claims that his administration and his tax policy is not class warfare against the rich.

From CBS:

Taking a defiant tone against Republicans unwilling to raise taxes in order to close the deficit, President Obama today unveiled a $3 trillion long-term deficit reduction plan that relies heavily on raising taxes on the wealthiest Americans.

“This is not class warfare — it’s math,” Mr. Obama said from the White House Rose Garden, addressing GOP critiques of his plan head on.

“The money has to come from some place,” he continued. “If we’re not willing to ask those who’ve done extraordinarily well to help America close the deficit… the math says everybody else has to do a whole lot more, we’ve got to put the entire burden on the middle class and the poor.”

The policies of his administration are not class warfare against the rich. They’re class warfare by the Obama administration, the establishment, and the military-industrial complex against everyone else.

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Israel: In War, Even the Winners Are Losers

If anyone needed further proof that high weapons spending creates and propagates social problems, one need not look to the United States (the most preposterous example) or Great Britain. Look to Israel: a nation defined in the international spotlight by its commitment to war, weapons, and building walls as a means to solving disputes. The cost of the IDF amounts to almost 7% of Israeli GDP, far more than most other nations. Israel’s economy is bent toward weapons development: The IDF uses several technologies developed in Israel, many of them made specifically to match the IDF’s needs, such as the Merkava main battle tank, the Iron Dome, Trophy countermeasure, and the Galil and Tavor assault rifles. But — as we well know — spending on guns, bombs, walls and military technology is money, time and effort that is not spent on agriculture, energy, housing, medicine etc. From the Guardian:

Hundreds of thousands of Israelis took to the streets on Saturday night in Israel’s biggest ever demonstration to demand social justice, a lower cost of living and a clear government response to the concerns of an increasingly squeezed middle class.

About 430,000 people took part in marches and rallies across the country, according to police. The biggest march was in Tel Aviv, where up to 300,000 took part. There was an unprecedented 50,000-strong protest in Jerusalem, and 40,000 marched in Haifa. There were smaller protests in dozens of other towns and cities.

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China’s Monetary Endgame

Last week we brought you a window into China’s geostrategic endgame: buying up as much of the world as it can get out of its dollars. Now thanks to Wikileaks we have an insight into where China is going monetarily: a gold-backed yuan.

From Wikileaks:

“According to China’s National Foreign Exchanges Administration China ‘s gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.”

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Is Gold High or Low?

Have you been buying gold and silver? Lots of people, businesses and countries have — yesterday gold shot to a record $1880, on concerns about just about everything. Buyers clearly think they must be getting a good deal — but so did that those who bought at the apex of the dot com bubble and who then watched their investments crash into a heap. So is gold high or low? Certainly it is higher than it has been — gold has shot up over 500% since 2001. But if it went up another 500% prices today would seem pretty cheap.

Sticking your neck above the parapet often means you get splattered by tomatoes, whether you’re right or whether you’re wrong. I greatly enjoy getting attacked by those who resort to name-calling, but being misquoted is very annoying. A recent dispute regarding Paul Krugman had an adversary accuse me of saying that “gold is high”. Really? Gold is high? Compared to what?


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