Inflation vs. Deflation

The extremely low interest rates we have these days in the U.S., Europe and Japan are part of the continuing effort by central banks to avoid deflation and promote economic growth.  During the financial crisis that began almost a decade ago now, the Federal Reserve took what would previously have been considered extreme measures to avoid deflation and depression.  Massive deficit spending by the Federal government was another measure designed to stimulate the economy. 

Whether it was because of those measures or just by luck, we did avoid what some people had been saying would be the worst economic disaster in history.

Those measures were the opposite of the response to the 1929 stock market crash and the deflation that followed it.  During that time the Federal Reserve kept a tight clamp on the money supply, and until Franklin Roosevelt and the New Deal came along there was no increase in spending in the Federal budget.

A great many economists have studied the effects of the Federal Reserve’s actions during the 1930’s, and the consensus of opinion is that the Fed did the opposite of what it should have done.  Thus, this time they did the reverse.  We have to admit that the results have been much better.  Rather than the end of the world as we know it, we have had relatively minor and brief discomfort.  We have to say, however, that the full history of this event has yet to play out.

It sometimes seems that there is an excessive phobia on the part of the Fed about deflation and almost a desperation to bring about at least a low level of inflation.  For many of us who had become accustomed to fearing inflation, the desire to have it seems counterintuitive.  Why can’t we have a little deflation?  Give the consumer a break.

Nevertheless, the economy does continue to be anemic and apparently fragile.  If the continuing stimulus provided by the Fed were to go away, the result might not be good. 

However, there are other things going on besides the stimulus by the Fed.  There are continuing deficits in the Federal budget.  There is a continuing torrent of red tape coming out of Washington, the general effect of which is to have a dampening effect on business activity.  The tax code is counterproductive.  There are endless and continuing trade deficits (although economists differ on whether this is good or bad).  Our European trading partners have been weakened by financial and economic problems of their own.  The total effect of all these things is probably too much for any economist to calculate.  Certainly you can find any opinion you want in this so-called science.

It may be that future economic historians will pronounce that the Federal Reserve’s fear of deflation in these times has crossed over into the territory of being an overreaction caused by fear of repeating the 1930’s.  For us consumers, investors and business people, we can only proceed, as usual, without the benefit of hindsight, and try to make the best judgements we can in our personal, investment and business decisions.

Who's a libertarian?

I finally read Atlas Shrugged.  It was a good read.  I wanted to see how the story came out.  I liked the protagonists, but they were a little bit on the superhuman side, like comic book heroes. 
     The bottom line is, the book preaches a philosophy, and that philosophy apparently continues to have an influence on social and political debate today, particularly amongst libertarians, including the libertarian wing of the Republican Party.
     The book makes some excellent points, but its major premise--that one's own self-interest is the only legitimate motivation--is about 87.5 per cent wrong, in my opinion.
     Self-interest is indeed a legitimate motivation, and the author is correct to defend it as such.  But people are legitimately motivated by other things as well.  Most people would lay down their lives for their children, and many do give their lives for their country.  Policemen and firefighters risk their lives for total strangers. We could argue about what they should be motivated by, but the fact is that people do have various  motivations, and the mixture of motivations varies from one person to the next.
    A problem arises, in a socio-political context, with a common human motivation: to help others.  Ayn Rand, the author of Atlas Shrugged, believes this is a bogus motivation that has been drilled into us by pernicious moral preachers over a period of centuries.  However, many people actually do want to help others, and it is not because it has been drilled into them.  It is their actual motivation.  That's just how they are.
     Nevertheless, Ms. Rand correctly points out a number of serious problems that can arise in connection with this simple desire to help.
     The human condition is complicated and often difficult.  We all need help from time to time, and some of us need more help than others.  The difficulty arises in figuring out what actually does help and what just makes things worse.
     There is also the question of the actual motivation of some of those who say they want to help.  This is an often-overlooked factor of human motivation.  It has something to do with the "smiling faces" factor.  You know that song: "smiling faces sometimes, they don't tell the truth." 
     Politicians are notoriously bad on this subject.  They will say anything to get elected.  Do they care about the people who are looking to them for leadership?  Some do, some don't.
     There seems to be a lot of talk lately about income inequality.  It seems to be generally assumed by everyone that it is a bad thing if some people make a lot more money than others.  Why?  Is it written somewhere that everybody should make about the same amount of money?  Oh yeah: "All men are created equal."  Are we to take that to mean that everybody is literally the same as everybody else?  Is it supposed to translate into income equality as well as equality in the eyes of the law?
     Some people say that it is just basic fairness that people's incomes should be somewhat close to each other.  But who is it fair to?  It seems fair to those who have their incomes supplemented.  But is it fair to those from whom money is taken?
     You say, oh well, they can afford it.  But a lot of money is also taken from people who can't afford it.  And you say, well, we should take more money from those who actually can afford it.  Sounds easy, right?
     The question is, who does it help?
     Are we making the government the brokerage house of help?  Do we really think that the government is the best arbiter of who needs help and for what?  Are there no other sources of help?  What about the vast network of charities that exist in our society?  What about neighbors, family, friends?
     You may say, well those things are puny compared to the vast needs.
     But the point is, first of all, no one is going to starve.  Secondly, we have voted voluntarily (though I would say misguidedly) to redistribute some of our wealth.  The vast majority of people are pretty generous.  If we decided on a method of help that cut out the government as the middle man, we could make it work.
     First of all it would be much more intelligent. Bureaucracies are notoriously stupid and blind. The way our government distributes money is often arbitrary and unfair.  People who don't deserve money get it, and people who do deserve it often don't get it.
     How much better it could be, for example, if folks in need were helped by people in their own neighborhoods who knew them and could see first hand whether their need was real?  Come to think of it, so much help does come in that way.  Despite all the governments' largess, local resources step in when the big shotgun in the sky misses the mark with the money it spews out.
     Secondly, how much harm does it do to the society and the economy when we remove resources from the control of people who know how to use them and put them into the hands of people (i.e., bureaucrats) who don't understand them and don't know how to use them?  The government certainly doesn't understand the vast resources placed at its disposal, and it does not use them well.
     Thirdly, if we help one set of people, does it necessarily follow that in order to do that we have to harm another group?  I.e., are "the rich" a mean, greedy bunch of oppressors from whom we need to be set free?  Are they selfishly keeping too much of their "ill-gotten" gains, and are we justified in tapping a little of it for ourselves?   
     This opens up another can of worms (so to speak).  Shall we consider that a whole group of people is uniformly bad?  This is an error (unless we were talking about the mafia, prison populations or other groups that are obviously primarily criminals). 
     Are all rich people bad?  Are all corporations evil?  Even bankers--are they all bad? I think if you were to go on a case by case basis, you would find that these postulates are incorrect.  Do they perform a needed social service?  I think they do.
     In Atlas Shrugged, Ayn Rand makes a very persuasive case in favor of the social value of people who invent things and lead corporations.  In political debates, this is often short-handed to: they create jobs.  They raise everybody's standard of living.
     How much more would living standards rise if such leaders were not fettered by confiscatory income taxes, onerous regulations and general hostility?
     Of course, it is obviously true that there are some bad apples.  There is no doubt about that.  The intelligent thing to do would be to identify and appropriately punish the bad apples and let the good ones thrive.  Our current approach, on the contrary, is to assume that white-collar crimes committed by a few are common to the whole group, and to pass laws that are supposed to prevent the crimes form happening.  However, criminals always find ways to commit crimes; thus the whole cycle keeps repeating itself.  We end up with endless laws and regulations that excessively hamper law-abiding and honest people without doing much to prevent crime.
     And of course to prevent people from having money we can vote to take it away from them.  But as time goes by, and inflation puts us all in higher tax brackets, eventually the vast majority of the population is being sucked dry.  The government has vast resources to dispose of, and it does a bad job of it.  And we are trillions of dollars in debt!

Late January

   The stock market is not off to a great start so far, but one month does not make a trend.  The prognosticators I trust say the future looks bullish for stocks.  (But of course, with stocks anything can happen.)
   The declining price of crude oil continues to be a talking point in economic circles.  Is it a watershed event?  The US has come back from being an import-dependent nation to being once again one of the top producers of energy.  Will this take power away from OPEC nations?  Some of their less-stable members are certainly in for some rough going because of the low oil prices.  Saudi Arabia continues to produce and export as usual, adding to the global oversupply and putting more downward pressure on prices.  On the demand side, China's economy has slowed, and Europe is hovering around zero growth.  Thus they use less oil, putting more downward pressure on prices.
    Can the new US producers of oil who came into being in a high-oil-price environment cope with a prolonged period of lower prices?  Is Saudi Arabia continuing its usual production in hopes of driving some of the new players out?
   So far the story has been of US innovation, technology, private property rights, etc.  We have the potential now of becoming almost energy independent.  It will be interesting to see what shakes out from these changes.
   A final point is that the Federal Reserve may be on the verge of letting interest rates rise again.  There is usually an effect on the stock market from such a move, but it could be that it will be gradual enough that it will not be significant.  However, it could be a nerve-wracking transition.
   Is the economy strong enough to withstand higher interest rates?  Should we take it as a good sign that the Fed thinks thinks the economy is that strong?  Are we turning the corner towards "normalcy"?

Year End 2014

Stock Market
     December is always (with very few exceptions) a good month for the stock market.  Next month might not be as good (but you never know).  The Federal Reserve intends to keep interest rates low.  That means investors will continue to have an incentive to keep their money in stocks rather than in interest bearing accounts, for the simple reason that the dividend yield on stocks is much higher than the (practically non-existent) interest yields.
The Economy
     Rising stocks usually go together with a growing economy.  There are exceptions to that, too, but that is the usual rule of thumb.
     Low interest rates tend to boost the economy.  Business and consumer loans are cheaper, saving money for everyone.  The down side is that retired people who hoped to live on interest income are getting practically nothing.
     The fall in oil prices also saves money for consumers and businesses.  The result should be more disposable income, which should lead to more growth.
     Europe is once again a drag on the international economy.  Growth rates there are hovering around zero.  China's growth has slowed from its former double-digit pace.  Russia's economy is on the brink of a free-fall, because it depends so much on selling oil at high prices.
     The fact that the Federal Reserve is still keeping rates so low indicates that they are still concerned that our economy could relapse into recession.  One wonders what their approach will be if the fall in oil prices leads to falling prices in the economy in general.  They believe that falling prices indicate economic weakness.  However, it is possible for the supply of commodities to rise, and manufacturing efficiency to increase, even in a growing economy, leading to declining prices. Still it is true that there is plenty of economic weakness in the world.
     The continuing large Federal budget deficits and the spiraling national debt are causes for concern.  Most of us have been putting off thinking about them till later on down the line.  However, at some point the US economy will have to stand on its own and stop relying on deficit spending and interest rate subsidies.  The fact that those things are still going on indicates that the economic disruptions of the previous decade are not actually over yet, despite the growing economy.  The crisis will not really be over till the Fed's interest rate policies are back to normal and budget deficits are at least back to pre-crisis levels.
     Two things need to happen for that to occur:  (1) economic growth, and (2) the will to cut the deficit.
     Economic growth is occurring, but it is not strong, and it suffers from various drags and hinderences, many of which arise from policies of the current administration in Washington.  Of primary concern is the torrent of new red tape spewing out of various bureaucracies.  Included in the regulatory orgy are attempts to regulate carbon emissions and assaults on traditional sources of energy, especially coal and oil, which are basically regarded as evil.  We certainly want to find cleaner ways to fuel our economy, but probably cold-turkey is not the best way to do it.
     Tax policies, also, could be better, to say the least.
     There is a definite anti-business bias in the policies of the current administration.  Sometimes the administration seems to show signs of recognizing some economic realities, but its political base goes crazy every time that happens.
     In regard to cutting the deficit, that is a deep-seated problem.  It currently seems to be divided along party lines, but we have only to look back to the Bush administration, during which there were times when Republicans controlled both Congress and the White House, to see that the pressures to overspend are very pervasive.  However, we can hope that if the party that currently talks loudly about cutting the budget gets the power to do so, things will at least get a little better in that area.
     All-in-all, there is hope but continued need of caution.
   

Bull Session

[The following are hypothetical opinions of imaginary characters, for your amusement.]

               “With all your prating about democracy, you know full well that it is a bundle of lies.  Real democracy, full democracy, can never work,” said Fal Ban Oh, the Chinese sophomore.

                “Certainly it can work.  If the people are really empowered, they will make the right choices,” said Charles Orson, law student from Vermont.

                “Bullsh**,” said Sal Gregory, the business student from Ohio.  “’The people.’  What a crock.”

                “Oh, so you think we’d be better off if we were run by a communist politburo?”

                “It’s working well for us,” said Oh.

                “You can’t call them communists,” said Charles.  “They’re exploiting their own people, like the capitalists did here 100 years ago.”

                “So what are you then,” Sal said, jabbing an index finger towards Charles, “the true communist?”

                “No, I’m not a communist.  I believe people should be free, and if they are they will rise to their true potential.”

                “Ha!” Sal retorted.  “What a bunch of la-de-da pie in the sky.”

“Well, it’s never really been tried.”

“What?  What have we been doing here for the past 200 years?”

“You think they’ve been free?  They’ve been slaves to low-paying jobs.  They haven’t had health care, and the education they get is crap.”

“Who’s this ‘they’?  The people?  The masses.”

“No, not the masses.  Just regular people.  Like us.”

“Hey, I’m just a regular person as much as anybody else, but I know that if I want anything decent in life, I’ll have to work for it.”

“F*** everybody else?”

“No.  They can work, too.  They’re welcome to work as much as I am.”

“Flipping burgers? Picking grapes?”

“They don’t have to settle for sh** like that.”

“Oh don’t they?  You think the economy is so great, they can just put on a tie and walk into corporate headquarters and get a $100,000 a year job?”

Sal pressed his lips together and blew a raspberry at him.

“I mean, the point is…” Charles paused and regrouped.  “There’s millions of unemployed people who would love to not have to settle for flipping burgers.”

“Tell ‘em to go to North Dakota.”

“Yeah, sure.  Just pack up and move to some crazy boom-town and live in a dormitory?”

“Life ain’t always easy or fun.”

“So, f*** ‘em?”

“Ahh, bullsh**.  So what are we supposed to do?  Just give everybody everything, then nobody will have to work if they don’t want to?”

“They’ll work if they can get a decent job.”

“Why should they if they have everything given to them?”

“Well, obviously they wouldn’t get everything.  Just enough to have a minimum standard of living.”

“Oh, sure, and how much is that?  And who’s going to pay for it?  Me, I suppose, with sky-high taxes!”

“Well, if you’re making good money, you could afford it.”

“Oh, yeah, and I’m working and slaving away, and half my income goes to people who are sitting on their asses.”

“They wouldn’t just sit there if they could get a decent job.”

“Wanna bet?”

“You have no faith in people, do you?  Ya gotta believe they would want to do better than a minimum standard of living.”

“Lots of people would.  Not everybody.”

“Most people.”

“So that leaves only a few million, I suppose, sitting on their asses.  Just a few billion dollars drained into their fat, lazy mouths.”  Charles sat back and took a few gulps of his beer.

“You Americans are so closed-minded” said Oh, who had been sitting back watching the two.  “You can’t see past your little political arguments.  In China we are looking towards the future of our country.  We are part of something greater than ourselves.”

“That’s nice,” said Sal.

“You should try it, you Americans.”

“We believe in America, of course,” said Sal.  “At least I do.”  He smirked and raised his beer can towards Charles, who gave him a half-hearted sneer.

“You say you believe in America.  First of all, I don’t know how you can, except that you don’t know any better.  You were born here, you were raised here and have been fed American myths all your lives.  You don’t appreciate the fact that from our viewpoint and that of most of the rest of the world, you have done terrible things.”

“Oh, and I suppose Mao tse tung and Stalin were your favorite philanthopists,” said Sal.

Oh ignored that and went on.  “And you say you believe in America, but you are all just ‘me, me, me.  What can America do for me, and why should I do anything for it?’ Both of you.  You don’t know what it means to serve a greater cause than yourselves.”

“Hmm, the greater good, and all that,” said Sal.  “Well, you know, in America we believe that if individuals follow what’s good for them, in the end it turns out that it benefits America as a whole.  Anyway, we are all about the individual—rights, freedoms, etc.”

“Me, me, me,” Said Oh.

“Well, you guys have been doing much better since you started going our way a little bit.  More free markets, free trade and all that.”

“Of course.  But we never stopped believing in our country.  We will always believe in it and that everything we do is for its greater glory.”

“Everything?  So people who move from the country to the cities don’t think about finding work to feed their families?”

“Listen, let me tell you something about all that,” said Oh.  He was sitting on the edge of a plain old wooden straight-backed chair.  He took a gulp of his Amstel Light.  “Whatever we do, we do for China.  What we were doing before was not working.  So we are doing something different.  Our leaders were smart enough to see that some of your cut-throat ways gave you great power.  We need power.  We need it to defend ourselves against you.”  He poked his finger towards Sal.  “And you, too.”  He poked it at Charles, who looked offended.

They all sat there a minute considering Oh’s comment.  Oh sat back in his chair, looking a bit uncomfortable with his outburst.

“Well,” said Charles, “it’s true we have offended you...”

“You have no idea!” said Oh.

“Wait a minute,” said Sal.  “It wasn’t us.  We fought the first revolution against colonialists.”

“Then you became just like them!”

“Listen,” said Sal.  “The world would be a much more f***ed-up place without America.  We’re like George Bailey—you know, in ‘It’s a Wonderful Life?’  What would the world be like without America?  The world might be shocked if they could find that out.”

“You are right about one thing: the world is f***ed up, and as a Chinese citizen I know that China cannot continue to be weak.  It has to become strong to keep from being a pawn in the game.  It is a great country with a great heritage, and it deserves to be great.”

“Cool, I’ll drink to that,” said Charles.

"Here, here,” said Sal, and drained his can.

Some hope

                Although our current political scene is the cause of much despair for many, one can visualize it as (hopefully) a temporary phenomenon which may improve as we continue to recover from the financial and economic traumas of the last few years.  There is a passion on both sides of the political debate which may be fueled in part by a fear of what the future may hold.  If the traumatic events and the dangers continue to recede in our rear-view mirrors, the passion and fears may subside. 

                On the other hand, we cannot be so sure, and we have to be ready to defend common sense, the rule of law, basic rights, human decency and all the things that make us (somewhat) civilized.  And let’s do it in a civil and communicative way.  Let’s not believe rumors we may hear about how bad the other side is.  Listening to rumors is a sure road to mayhem.

Speculation

                Pressure from shareholders seeking dividends and capital gains is a potentially troublesome thing that seems to be at the heart of many of the difficulties with capitalism.  Shareholders want dividends, or they want stock price appreciation, and many of them do not care what companies’ managers have to do to deliver it.  If they have to keep employees skittering along the precipice of poverty, that’s what it takes.  Many shareholders don’t even know what is going on.  They just want their dividends and capital gains. 

                Of the various ways of financing a company, selling shares of stock is not even the most cost-effective method.  It is generally more expensive than selling bonds or simply getting a loan from a bank, especially in today's low-interest environment.  It is also fraught with peril.  The shares go onto markets, where they go out of the control of the company itself.  If somebody with deep pockets wants to go on a campaign of buying up a controlling interest in the company’s stock, he can do it.

The long history of capitalism is littered with examples of stock being sold based on nothing but blue sky.  Today, stock offerings must by law be accompanied by endless disclosures and proofs of its reality.  Nevertheless, scams are still perpetrated.

                Despite all these problems, stock is still a legitimate mode of financing.  It has advantages for the company that sells it.  For example, there is no set time by which the shareholders have to be paid back, whereas a loan or a bond must be paid back on a specified schedule.  It is a proven way of raising lots of capital for expansion and for other purposes (including enriching the company’s founders or its venture capitalists.)

                Unfortunately, for many people buying and owning stocks is like gambling, like the lottery, like playing the horses.  It represents the hope of getting something for nothing—easy money.  Investing in a sensible manner in the expectation of growth and profits of a company is one thing.  Investing in desperation to save oneself from poverty is quite another thing.  There are always people around who will take advantage of someone’s desperation or greed. 

                There are always a few people who can “beat the market.”  They can make a lot of money by “playing” stocks.  It raises false expectations for the rest of us whose only role in the game is to lose money at the expense of the few winners in a speculative game.  For despite all the efforts of governments to regulate the markets, there is always room for manipulation, for empty hype and for playing on greed and desperation.  The many become the prey of the few who know the game.  It happens on a broad scale once in a while, but it happens on a small, single-stock scale all the time.

The Great Depression and the recent “Great Recession” were preceded by periods of excessive speculation.  In the 1920’s, it was stocks.  In the years leading up to 2007, it was real estate.  The mentality develops that prices can only go up, never down.  Until the market proves us wrong.  Whether the speculative excesses actually were the fundamental cause of the hard times that followed is not certain, especially in the case of the 1930’s Depression, but they were a factor.

                The only real way to make money, in the words of the old commercial (ironically, a commercial about investing in stocks), is the old-fashioned way: to earn it.  Once it is earned it can be invested in assets that you hope will not become victim to speculative cycles, and you can take precautions against that happening.  If you want to “play” the market, just be sure you play it with money you can afford to lose.

                The assets you invest in can include stocks if the intention is to invest in the growth and profits of individual companies.  Even then you have to beware of speculative forces and cycles, as well as other potential mishaps that could thwart your intention and turn your investment into a loser.

                Despite all the books and systems about investing in stocks, the best thing to do is just do what you do to make and save money, then let a good investment advisor invest it for you.  (The trick, of course, is finding a good investment advisor.)  And don’t expect him to make you rich; just expect him to get you a reasonable return on your investments.

               An investment advisor cannot ignor speculative patterns if they present an opportunity for profit, but they can carry considerable risk. 

Gettysburg, Part II

                The phrase “all men are created equal” raises certain expectations, among them the expectation that all people will have, eventually, about the same amount of material possessions.  Or at least that there will not be a terrible disparity between haves and have-nots.

                Unfortunately there are all kinds of people, and there are differences among them in their abilities to have, their abilities to handle life, their abilities to lead (or follow) and their capacities to be in charge of things.  The tendency is always for some people to accumulate more than others.

                This is not to say that it must always be that some have things at the expense of others.  Nor does it mean that those who have a lot of material things can’t help those who have less.  It does not mean that the haves are actively trying to prevent the have-nots from having. 

                There are all kinds of people, and this also means that at the highest and lowest levels there are good people and bad people.  It is not healthy for people to think that goodness is represented only in their own social stratum and badness is in some other. 

                It is not true that the so-called rich and powerful are trying to screw everyone else.  (Certainly not all of them!)  Nevertheless it is true that some people amongst the highest social strata are not always acting in the best interests of people other than themselves.  In other words, there are good and bad people amongst the rich, just as there are amongst the poor and the middle-class.

                Finding out who is good and who is bad is among the hardest things in life.  The belief here is that most people are good, and we want to trust people.  The danger we constantly face is that of trusting someone who does not deserve to be trusted. 

                People who can create or run a business are useful because they can create and maintain jobs that enable other people to earn a living.  Some people who have those jobs blame their bosses for not being more generous with their money.  They want higher pay.  There is a fine balance between profitability and generosity.  The survival of a business requires a certain amount of profitability.  Pressure from many quarters puts pressure on the bottom line, among them pressure from competitors, government regulations, taxes and pressure from employees seeking higher pay.  There is also pressure from shareholders seeking dividends in exchange for continued and/or new investment in the company.  This last group will be the subject of our next post.

Gettysburg Redux

                The anniversary of the Gettysburg Address whizzed by us again on Nov 19.  Feeling a bit grandiose, we wanted to start this post off with a tip of the hat to it.

                Two hundred and thirty-seven years ago, our forefathers brought forth on this continent a new nation conceived in liberty and dedicated to the proposition that all men are created equal. 

                (It is a time so far away that our interest in it sometimes verges into the archeological.  A few years ago in Boston someone accidentally dug up some old bottles and such that dated from colonial times.  Scholars carefully combed through the site, wondering what life was like for people back then.)

We are now engaged in a great struggle testing whether that nation, or any nation so conceived, can long endure.

                That struggle is not just about terrorism, and terrorism may or may not be connected to what the basic struggle actually is. 

                The big picture is the worry that Plato might have been correct when he said that the cycle of government goes, in descending order, from monarchy to oligarchy to democracy to tyranny.

                The smaller picture (although still a rather large one) is that, although there are many things required to maintain a society’s health, among the most important is economic growth.  In fact it is something without which we are in deep trouble.  We saw in the mid-twentieth century what happened when growth was reversed during the worldwide Great Depression: the globe convulsed in the violence of World War Two.

                Economic growth is vital for the maintenance of our civic order.  It maintains the hope, for those who want a better life, that they or their children can have it.  Without that hope, there is blame and the impulse to want what others have, to the point of taking it from them.

                For that growth to occur, there are certain basics that must be in place.  Many of these basics boil down to freedom: the freedom of individuals to operate as they see fit, in business as well as in their personal lives.

                Our economic system, besides being labeled capitalist, is also called free enterprise.  The basics of its operation were observed and written down nearly three centuries ago by Adam Smith in The Wealth of Nations.  He spoke of the “invisible hand”—the marketplace--that would automatically regulate business and commerce for the benefit of everyone. 

The question of whether his system should be applied in its total purity is still a matter of debate.  It is generally agreed that its opposite, a total command economy, does not work.  No government is smart enough to know what and how much is needed at all times.  (As a matter of fact, no government is smart, period. Only individuals are smart, and they generally do not think well in group situations.  Especially governments.)  Conversely, a functioning free market will result in needed and wanted things being produced and delivered.

                (To be continued.)

Thumbnail Update

     "The Economist" opined recently that the US is once again coming into the position of being the most healthy major economy in the world, and as such could be an engine of growth for everyone.
     Being "the most healthy" might be rephrased as "the least unhealthy."  Clearly there are still major difficulties.  However, many of the horrible effects of the "great recession" have been worked out of the economy and the financial system.  The US economy has more flexibility in it than most other major economies.  Innovation is not as stifled, entrepreneurship is more healthy and innovation is somewhat easier or less frowned upon.
     Europe is still bogged down pretty heavily, though it looks now as though the Euro area may survive intact.  One of their major problems is that their labor markets are much more rigid than in the US.  For example there are laws that make hiring and firing more difficult for most Euro area employers as compared to the US.  Such rules are a drag on growth, productivity and profitability.
     The "fracking" revolution in the US is the prime example of the fruits of greater flexibility.  The US leads the world by far in this new way of extracting natural gas and oil from the ground.  It has provided previously almost unimaginable quantities of energy; it is projected to so radically reduce our dependence on foreign oil as to re-order world power politics in the energy sphere.  This is big.  How did it happen?  Entrepreneurship, innovation and the freedom to use private property without overbearing government supervision: these are the keys.

China-watching, US-watching

     Economists tend to have some doubt about what is really happening with the Chinese economy; they are not sure if the numbers put out by official Chinese sources are totally legit.  China has been going through a growth slowdown for the past couple of years.  Coupled with the threat of recession in Europe, the Chinese slowdown has led to economic estimates that tend to emphasize the threat of recession in the US.
     However, the latest reading gleaned by some prognosticators has Chinese growth picking up speed again.  This could be good news for trade in the Pacific area, in which the US participates via its "left" coast.
     Some people are under the impression that if China is doing well, it must be bad for the US and that we should hope that they go into a slump.  This is not true unless the terms of trade are so bad for us that we lose money whenever we trade with them.  It is pretty certain that this is not the case.
     We on the other coast sometimes tend to overlook the economic strength of the Pacific rim.  We in the East may be suffering a little more from the crisis in the Euro area than is the rest of the country.  We are on that great Atlantic trading highway that is not in the greatest of health at the moment.
     Nevertheless, trade is truly international these days.  Not all the ships that come from Asia dock in Los Angeles, San Francisco, Seattle, Vancouver, etc.  Some of them go through the Panama Canal and all the way up to New York.
     But in some ways, the strength or weakness of our trading partners are not our primary worry, since so many of our problems are of our own making.  We are still the most powerful economy in the world, and if we could fix ourselves the rest of the world would follow behind us (for the most part).

Short-term ill-health?

     Despite longer-term indicators of economic growth, the outlook for the coming year is not good.  With or without the fiscal cliff, the economy could go into recession caused by recession in Europe and slowdown in China.  Many large US corporations are pulling back on investment in new equipment, software and buildings.
     Whether the large US budget deficits and the Federal Reserve's aggressive monetary policies will help or hurt are subjects of much debate.  Most economists and other such experts feel they are needed.
    Not all signs point down.  Consumer sentiment is up, as is small business sentiment.  Small business capital spending is up.
    The consensus of opinion is that the fiscal cliff could be a tipping point.

Fiscal Cliff Conspiracy Theory

     We all love a good conspiracy theory, and there are a number of possible scenarios available to the imagination regarding the so-called Fiscal Cliff.
     At the witching hour of midnight on December 31, a wide range of taxes will go up and an even wider band of spending will be chopped.  The consensus of opinion is that this is very bad, because it will probably cause a recession.  The most serious effect will probably be that a lot of people who work for the government, or, even more likely, many who work on government contracts, such as employees of defense contracting firms, will lose their jobs.
     The most widely expected alternative to this troubling outcome is that, after much posturing, shouting and fist-shaking, Congress will pass something that will swerve us away from the precipice at the last minute, and the President will sign it.
     But what if they don't or he doesn't?  And, more conspiratorially, what if they have already agreed that they won't?
     Preposterous, you say?
     Well, yes, you're right.  It is preposterous.
     But what if there are some factors in the backs of the minds of the participants that are saying to them, hmm, let's see how we can use this?
     What if, as in the Benghazi cover story, a spontaneous demonstration of partisan bickering is hijacked by some players who have a serious intent to block the process?
     Now, what could possibly motivate such serious intenders of harm?
     First, it has been suggested by some Republican-leaning commentators that President Obama would not mind so much if no agreement were reached, because it would accomplish his objective of raising taxes on the rich.  Then he could blame it on the Republicans.  As for the spending cuts, he could re-establish the chopped spending the following year, after a public outcry against the cuts.
     This seems a little far-fetched, too.  But its logic does have a certain internal consistency--assuming Obama is the kind of cynical strategist it would take to go that route.  (Or is that just politics?)
     But that is just an example, and it is not the point I wanted to make.
     The fiscal cliff was formulated a couple of years ago after failed negotiations on taxes and spending.  The parties agreed at that time that on January 1, 2013 (a lucky year no doubt), taxes would go back to Clinton-era rates and spending would be drastically cut across the board.  This deal kicked the can down the road and, it was hoped, gave the parties an incentive to come up with a more sensible solution before the clock ran out.
     But now we are almost there, with no solution in sight.
     Now, here's the point.  The negotiators put this plan in place.  In the backs of their minds was the thought that the deficit has to be brought under control somehow.  But the participants also knew that the experience of centuries has shown that, in a democracy, budgets can only be brought under control by taking the process out of the people's hands.  Sometimes the people realize they have to put the process into the hands of someone who will just do it.  That is happening in Europe to some degree now.  But it is not happening here.  So, an alternative is: trickery.
     We can't come to an agreement.  Oh, no, we can't do it!  So we will shout and posture and blame, but when the dust clears taxes will go up and spending will be cut.  Oh well!  It needed to be done anyway.
     And what about the economy?  Won't it suffer?
     The interesting thing there is that the economy is showing signs of getting off the mat.  If it wasn't for that factor, there would be very little thought of letting us go over such a cliff.  But the signs of recovery (a real one now, not the wimpy breath of foul air we've seen so far) may give the participants another thought in the backs of their minds that maybe we won't go into a recession.  Or maybe it won't be so bad, and we can blame it on each other, and oh well!  But look, the deficit has been cut!  It had to be done, and maybe everything will be all right in the long run.
     Crazy, huh?  Yes it is crazy, and after all it is just a conspiracy theory, an exercise of imagination.  There are a million of them.  We don't know what goes on behind closed doors.  We just hope that the checks and balances, plus the scrutiny of the press, plus the threat of the next election will prevent anything really wacky from being hatched in the dark.

Big changes in energy

    The International Energy Agency (IEA, based in London) released a report today that projects that the United States will become the world's largest energy producer by the year 2020.  By that year it is expected to be a net exporter of natural gas.  By 2035 it is expected to be "almost self-sufficient" in energy.
    The common belief in the 1970's that the world was running out of oil now appears to have been a bit premature.  One wonders in hindsight (which is always 20-20) how we could get so worked up over something that was so far off base.  And what else are we far off on today, one wonders?  Now we can say, well, we have to run out of oil soon at this rate, don't we?  Apparently we have a few more years left.
    This development has profound implications for the balances of international economics and power.  While the Middle East will continue to be important for oil--and indeed Saudi Arabia is projected to re-take the lead from the US in the 2020's--the US, and North America in general, will be in a strong position.  North America is expected to become a net oil exporter.  Most international flows of oil are expected to go to Asia, with China being the largest recipient.
    This also points out the benefits of our entrepreneurial system, which has been able to lead the way, through innovation and risk-taking, to re-inventing the entire energy sector.  Despite obstacles erected by government agencies the efforts of private companies and entrepreneurs have resulted in solutions that were, to say the least, unexpected.
    It also means that while the future may still (eventually) be in renewable energy, that future appears to be much further off than we thought.  Most reports indicate that we have enough natural gas to last 100 years.  It is also probably very premature for our Federal government to invest in such things as solar and wind energy, because these technologies would seem to have a much longer runway to self-sufficiency than is currently practical.  (There are markets for such things, but a lot of it has been subsidized.)
    But this new vision of the future does merit a grain of salt and a word of caution, for, as with the estimates so poorly performed in the 1970's, these projections are not guaranteed to come true.  Nevertheless, some of these trends have already been gathering steam for a few years and will probably continue for at least a few more years.
     The report also says that gains in energy efficiency are expected to be another important factor in the use of energy in the coming years.

Future :-) or :-( ?

Economic predictions are all over the compass these days, from rosey to totally catastrophic. In regard to the catastrophic side, there are always people predicting the end of the world, and all we can say about that is, we are still here. (At least so far.) People who have a lot of assets to protect generally understand that they need to diversify sufficiently to cover all scenarios, or at least as many as possible. Many of them, depending on where they fall on the optimism/pessimism scale, forget to provide for the possibility of an unexpected spurt of wild growth, which is one of the possibilities--albeit not a high percentage one. Many persuasive voices are calling for sustained gloom. A few pollyannas see housing getting off the floor, the fracking revolution leading to lower energy prices, and they even point to some states that are getting their budgets under control. Hope springs eternal. Whatever happens, probably somebody will have guessed right and will try to claim credit for it. As for the fate of the nation, it has been a popular phrase for generations to say that the country is going to hell. But, just as the world has not ended yet, neither have we arrived in hell yet. We did go through hell in the mid-20th century, and we came out of it. What we have gone through recently is nothing like that, and with any luck, things will continue to improve. Nothing is certain, but we are keeping our fingers crossed.

Mass real estate sales on the rise

Single family home sales have been rising steadily for about a year now, according to statistics released by the Massachusetts Association of Realtors. Prices have shown some stability as well.

More Signs

                May’s 6% jump in signed contracts to buy existing homes is a welcome sign of returning blood flow to the housing market, which has been on death’s door for a few years now.  It may be too early to say “the recovery is nigh,” but since I am basically a Pollyanna, I will say it:  “The recovery is nigh!”

                In case you are not up on your archaic English, nigh means near or almost.  So you can still take it with a grain of salt if you wish, but it is my fond wish and belief that it is nigh.

                You can also take note that the archaic definition of “fond” is foolish or silly.  Be that as it may, a number of signs and portents point in the direction of recovery.  New home sales are up, affordability is up, mortgage rates are at record lows and inventories are down to a point where home builders may actually have to increase production to keep up.

                Signed contracts were up 14.5% in the West, driven in large part by investors buying distressed properties.  Many will convert them to rentals.  The rental market is strong.  Many investors, no doubt, hope to have a capital gain in the future, figuring prices will rise.  This is known as the “bottom-feeding” play.

                Difficult days are still ahead for real estate.  But it is my fond assessment that the worst is behind us.

Diverging paths

While we are wondering if Europe will become an economic black hole, devouring the world economy, let us also take note of some interesting developments in the US. 1. A revolution in the production of natural gas which offers the promise of relatively cheap energy for, they say, several decades at least. 2. Signs that the housing slump is turning the corner and may be on the mend. For example, the Wall Street Journal reports today that there is an unexpected increase in the building of large new homes. Also, relative to rents and affordability factors, US housing may actually be underpriced right now. 3. Healthy trade in the Pacific region, which continues to grow and is already more important than the Atlantic trading area. 4. Several important US states are making good progress on returning to fiscal health, perhaps providing examples to other states on how it is done. 5. South Dakota is experiencing an oil boom, growing so fast it can hardly cope with various problems that growth creates. The natural gas revolution is something that could spread to other countries, but according to The Economist, there are some factors of the US marketplace that may be so unique that other countries may be unable to follow it in this field for some time. There are more independent operators here, less government interference and other factors. US companies are preparing to export large quantities of liquefied natural gas to other countires. Will these factors provide a powerful impetus for growth? Is our economy on the verge of blasting off? On the other hand, will these things be enough to offset the drag of Europe? Tune again this time next year; we may know more by then.

Health Care and Economics

                As a general rule of thumb, the reason a problem seems insoluble is that the actual anatomy of the problem has not been figured out.  Lacking an understanding of the problem, we heap “fixes” on top of it.  The result is that the problem gets worse. (Credit where credit is due: a talk on the anatomy of problems, by L. Ron Hubbard, circa 1961)

                Even before Romneycare was enacted in Massachusetts, the state had a highly regulated health insurance market.  And guess what, it also had the highest health insurance premiums in the country.  Is it any better now?  No, premiums are even higher.  With all due respect to the current Republican presidential candidate, maybe he could have tried looking into WHY the insurance market was so heavily regulated. 

                The free market may not seem, to some people, to be appropriate for health care.  But to what extent have we actually had a free market for it?  Are there bottlenecks, restrictions, undue influence from a dominant group, excessive regulation? 

                With all due respect (again) to the American Medical Association, maybe someone should have a serious talk with them to see what they can do to take responsibility for their own industry.  Not to impose on them what we think they should do, but perhaps to find out if they are doing anything to skew or restrain the freedom of the health care market.  (Just a thought.)

                It is a multi-level, multi-faceted, extremely complex problem.  But hey, we’re Americans, right?  What happened to our can-do spirit?  Let’s find out what’s really going on.

                Let’s solve it.

Chinese Considerations

If I may be permitted to ramble on this subject, perhaps some people who know more than I do about it can correct me where I am wrong or misinformed. And I am sure I am wrong and misinformed quite a bit on this subject. China was deeply humiliated by the Western incursions into their country during the colonial era. Certainly the Chinese have not forgotten, and undoubtedly it will be a long time before they do forget. According to the novels of James Clavell (Tai Pan, Noble House and others), Chinese culture prizes something which can be succinctly described as covert hostility. If you are going to plot against an enemy, do it secretly and show a smiling face in the meantime. This mode of behavior is not unknown in the West of course, but according to Clavell, the Chinese can take it to quite an art form. Does this mean anything in regard to our future dealings with China? European countries learned long ago not to trust each other—and with good reason. Governments seem to believe that all forms of international relations can be added to the list of things in which all is fair. Americans sometimes show a quaint tendency to trust people. That is all very nice, and can work between individuals, but in international relations we should always have our eyes open and should always prepare for the possibility that the trust could be betrayed. On the other hand, international trade gets countries locked together in relationships that theoretically benefit both sides. This is especially true when governments are less involved. Governments may be scheming against each other, but private companies, while they try to get the best deal for themselves, usually have to accept deals that allow the other side to make some money, too. Sometimes they even build up relationships in which some trust begins to creep in. In this world-wide economy, no country can stand alone. We buy, we sell with all people on earth. It is not sensible to wish that the Chinese economy would break down and we could remain number one. Of course we would like to be number one, but if other large parts of the world economy were to go into decline, that would make us weaker and poorer, too. If we are to remain number one, it should be in an environment in which all the players are doing better and better and we are simply doing the best. Theoretically, it doesn’t really matter who is number one. What matters is that everyone is moving closer to prosperity. Now, it could very well be that China has been using its industrial production as a weapon to inundate the United States with cheap products to drag down our wages and our standard of living and to build up a huge surplus of dollars that could be used against us financially. Anything is possible. Logically speaking it is stupid for countries to try to bring each other down. But that does not mean they do not do it. People who behave that way in private life—trying to sabotage and make less of the people around them—would properly be called criminal or insane. They can make life hell for the people around them. And by golly, that’s what governments so often try to do to the countries around them. At least it has happened far too often in the past. China’s history does not show the type of overseas imperialism that Westerners showed in the colonial period. They gradually expanded their land area. The Chinese believe (I have read) that they represent civilization, and all people will eventually want to join them. Many Westerners, including Americans, have found much to admire in Chinese culture. The Chinese may not realize that we, as barbarian as we are, have a considerably complex and persistent culture of our own: a barbarian civilization, as it were—something that is not going to go away. We may wonder what the Chinese are aiming for with all their growth and their increasing military spending. One good guess, I believe, is that they want to get to a point where no one can ever push them around again. They are very proud and probably believe they were treated very badly by the Western barbarians. And it is true, they were.