Western Capitalism Morphs into Socialism

There is an unholy and symbiotic relationship between government and those who benefit from its largess. Those receiving entitlements believe the benefits are holy and guaranteed forever. Those employed by the government become beholden to it. In addition, through crony capitalism corporations become dependent on government for sales and earnings.

The relationship between government and those dependent on it creates a “positive” feedback loop that has the most negative consequences. Those dependent on government continue to vote into power politicians that will increase their benefits, whether entitlements, salary, or government contracts. This then creates still larger government and payouts. It then becomes nearly impossible to stop the cycle until an economy reaches the tipping point where the expenses become too great for income or borrowing to continue the payouts.

Crony capitalism and government dependence growth has been accelerating for decades. Those that believe it will result in bad consequences are now outliers. Still, the results are clear. The United States debt is now approaching $20 trillion, with much greater debt kept off books.

Americans and many Westerners have become immune to one side of capitalism; its inherent ability to ultimately balance supply and demand, as well as assets and liabilities. A recent article by investor Vitaliy Katsenelson explains the efficiency of capitalist markets and specifically its “invisible hand”, as republished below. The markets will have their day!

Whatever Happened to the Invisible Hand of Capitalism? By Vitaliy Katsenelson

When I was growing up in the Soviet Union, our local grocery store had two types of sugar: the cheap one was priced at 96 kopecks (Russian cents) a kilo and the expensive one at 104 kopecks. I vividly remember these prices because they didn’t change for a decade. The prices were not set by sugar supply and demand but were determined by a well-meaning bureaucrat (who may even have been an economist) a thousand miles away. If all Russian housewives (and househusbands) had decided to go on an apple pie diet and started baking pies for breakfast, lunch and dinner, sugar demand would have increased but the prices still would have been 96 and 104 kopecks. As a result, we would have had a shortage of sugar — a very common occurrence in the Soviet era. Continue reading

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Housing Market Showing Weakness

We are now nearly eight years into the great experiment.  Following the economic meltdown of 2008, governments worldwide  embarked on the largest economic interventions ever attempted.  While the central banks and politicians promised wonders from these elixirs, the results have been quite different.

Tony Sagami, editor of the Rational Bear at Mauldin Economics recently published an article titled 4 Signs That the Lights May Be About to Go Out in the Housing Market that paints a disturbing picture of one of the more important parts of the US economy, housing.  Sagami shares the following data:

  • Currently the homeownership rate is back down to 1993 levels.
  • The Wall Street Journal reported that pending US home sales dropped by 2.5% in January, as compared to December, and had a rather insignificant gain for the year of less than 1.5%.
  • New home sales for January dropped by over 9%, according to the Investor’s Business Daily.
  • The medium sales price for new homes dropped by 4.5% in January, following drops of 3.7% and .3% respectively in December and November.

A further indictor of the weakness in the housing market is the return of creative mortgage financing, the same type of gimmickry that helped create the original meltdown.  Equifax reports an increase of the mortgages given to people with credit scores of less than 620.  In addition, during the first nine months of 2015, over $50 billion in mortgages were of the sub-prime variety, a substantial growth in this risky lending practice.

The housing figures are troubling on their own.  However, when taken in the context of the massive governmental interventions of the past 8 years, they are more problematic.  These interventions included a massive stimulus program, running up the US debt to over $19 trillion dollars and keeping interest rates near 0% for nearly eight years (and now threatening to go negative).

Housing is not the only major part of the economy showing weakness.  Sagami reports on weakness in manufacturing, corporate earnings, and restaurants.

It is evident to any with the most basic knowledge in economics that the governmental interventions and central banks fiscal policies have utterly failed to stimulate economic growth, as we were promised when implementing these radical programs.  Now the question turns to whether or not these policies actually have led to economies worldwide heading toward recession. But do not expect the governments or central banks to accept responsibility.  In fact they are doubly down on the failed policies by sending interest rates into unchartered territory, negative.  These are challenging times indeed.

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Government is the Problem

The Left and Right both believe they have the answers to America’s economic downward spiral.  Those on the Left are sure the problems relate to income inequality, racism and/or too much spending on the military.  My friends on the Right are just as strong in their convictions that the problems are caused by an efficient tax system, excess entitlement programs, illegal immigrants, and of course the Left itself.

To this Blogger the cause America’s economic issues, as well as those of the greater world, is government itself, the world’s largest special-interest group.  The video below share some facts proffering the danger of the growing government elites and their minions that includes:

  • During the past 10 years the number of private sector jobs in America has grown by only 1% while during the same period the number of federal government employees has grown by 15%.
  • Prior to the economic meltdown approximately eight years ago, the US Department of Transportation had only one employee earning over $170,000 annually.  That number is now about 1,700.
  • At the beginning of the economic meltdown the US Department of Defense had approximately 1,700 employees making $150,000 or more annually.  That number is now over 10,000.
  • During the first two years after the beginning of the economic meltdown the number of federal employees earning in excess of $100,000 annually doubled.
  • In 2009 the average compensation package including salary and benefits in the private sector was approximately $61,000 per employee.  During that year the average total compensation package for federal employees was over double that or $123,000.

There are currently about 21 million government employees in the United States, approximately 16% of potential voters.  This is a huge voting-block, especially considering how few votes often separate winners and losers in important elections. However, add to this number families of government workers and the potential influence this voting-block rose enormously.

There is a growing anger and disillusionment among American voters that has not been seen in many decades.  On the Left this is expressed by the surprising strength of Socialist Bernie Sanders in the Democratic primaries.  On the Right this is seen through the strength that Donald Trump has within the Republican primaries, even though his views have historically been in conflict with basic Republican ideology.

The electorate’s growing disillusionment has occurred during a time of historic growth in government power and spending.  Those who believe that giving more power to government or allowing them to spend more money change this direction ignore historical precedent.

Many Democrats are on enthused by their likely candidate, Hillary Clinton.  Similarly, many Republicans are aghast at the thought of Donald Trump being their party’s standard-bearer.  Here’s a consolation for both: Not to worry, the special interests groups, including those who make a living on the public payroll, will ensure that the Country continues in the same direction that it has been taking for the last 50 years no matter who is president.  Yikes!

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Bernie Sanders and Wealth Redistribution

Much has been made by the fact that the second most popular candidate running in the Democratic presidential primary is not even a Democrat, but instead an admitted Socialist.  While some moderate Democrats may be troubled by this, the fact is that the Party has morphed from being merely Progressive to supporting Socialism long ago.

Socialism, and for that matter crony-capitalism from the Right, are a natural progression of a corrupt political system.  The political class in essence buys votes by taking money from certain members of society and handing it out to others, their constituents.  As time goes on the amount of payouts grow as involves embraces more constituents that will then vote for one political party or the other.  Socialism is the natural end to this progression where everybody supposedly becomes economically equal (except for the political elites), although at the aggregate level, society becomes much poor.  This tune has been played many times in countries that tried this utopian experiment.

During a recent interplay (video posted below) between Fox Business host Stuart Varney and Erin Bilbray, a supporter of Sen. Bernie Sanders, the goal of Socialists is unveiled.  Ms. Bilbray indicates her belief that when some in society encounter hard times, it is the government’s job to resolve their problems.  That feel-good approach to problem resolution does not work in nature, parenting, education, or economics.  So why do Socialists promote this agenda?  In the case of some, it is naivety and it is likely that Ms. Bilbray falls within this category.  For others including the political elites, it is but a method to gain power and wealth.

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Federal Reserve is Getting Nervous

President Barack Obama often touts his administration’s achievements relating to the economy. Often the President uses the decreasing unemployment figure and the strength of the equities’ markets as proof statements.  Both are red herrings.

The unemployment figures are ginned-up by the government to back a chosen narrative.  In recent years of this rate has been reduced mainly by Americans dropping out of the workforce and therefore not counted as unemployed.  In addition, Americans have been forced to take less than full-time work.

As stock prices have shown in recent weeks, what goes up will come down.  The Dow Jones Industrial Average is down this year by 1,800 points or approximately 10%.  This significant drop has occurred even though the Federal Reserve has maintained historically low interest rates for nearly 8 years.

The Federal Reserve today released a statement indicating that it too was concerned with the direction of the economy.  In a statement released today, the Fed said: “The [Fed] is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”  This typical Fed gibberish that in simple English means the economy is shaky.

The Federal Reserve’s near zero interest rate policies created an economy that is out of balance.  Cheap interest rates have not fueled real economic growth, but instead created financial bubbles, as exemplified by equity valuations.  This has placed the Fed in a quandary.  If the economy weakens, the Federal Reserve will either have to allow the forces of supply and demand to correct the imbalances; i.e. a significant recession, or use even more radical easy money policies to keep the party going.  Realistically, the only ammo left in the Fed’s arsenal is negative interest rates.  The implications of banks requiring payments from depositors for savings deposits are hard to imagine.

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House Nixes Obama’s Trade Bill

The Wall Street Journal reported on the stunning defeat for President Obama with the US House of Representatives rejecting his request for fast tracking a trade deal.  This deal had the strong backing of the President, as well the Republican leadership in the House.  Obama expended significant capital on getting a positive vote, including a visit to the House Democratic Caucus the morning of the vote, but to no avail.  The final tally for a procedural vote required for passage of the bill showed only 126 in favor and 302 voting against it, including many Democrats.  Even his old buddy Nancy Pelosi voted against the bill.

The fact that President Obama and House Speaker John Boehner on trade bill might seem odd at first glance.  However, there are significant special-interest groups in favor of the bill, including large business interests.  These special interests have done quite well over the years, irrespective of whether the Democrats or Republicans control the White House.  This is further evidence that Beltway special-interests have no political affiliation.

Free trade in its most basic form is a good for economies, including America’s.  However, the positive effects only occur if all parties to the agreement play by the same rules.  That is not the case with the free trade recent decades.  The current bill backed by Obama and Boehner involves Asian countries including developing one’s such as Vietnam.  While most often disparities between countries focus on currency manipulations and wages, there are more significant impediments to real free trade, including differing regulatory environments. Continue reading

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US GDP Figures Go Negative

The New York Times reported that the US Commerce Department has revised downward the country’s first quarter Gross Domestic Product (GDP) from a paltry plus 0.2% to a minus 0.7%.  Downward revisions have become too common in recent years and bring into question the science behind the government’s numbers.

In an attempt to soften the bad news the government and some economists blame the winter weather and other one-time factors for the decline.  However, given history and the trajectory of the GDP figures in recent quarters these explanations are not credible.

Some of the causes of the economic slowdown are obvious.  The significantly increased value of the US dollar hurts exports by American companies.  In addition, the energy market has become an important part of the US economy with the increased oil and gas production.  Depressed prices have curtailed exploration and other activities in this market.

Digging deeper into the figures indicate more systemic reasons behind the slowdown.  For example the Times reported that while personal consumption, a key ingredient in the US economy, increased by nearly 4.5 half percent in late 2014, it has since dropped down to less than 2%.  GDP growth was near 5% in mid-2014, but has gone negative in last quarter. Continue reading

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Chicago’s Credit Downgraded to Junk Category

Given the recent Amtrak crash and lengthy problems in Baltimore, there has been little news bandwidth remaining for financial issues. This dearth does not indicate a lack of serious issues.

During the past couple weeks the bond markets have been in turmoil. With rapid and nearly daily increases in interest rates, values’ have dropped by about 9% wiping out hundreds of billions of dollars of wealth. Should this continue it places substantial risk for financial institutions, money market funds, pension funds and other investors who stand to incur losses.

Another important financial “happening” occurred Tuesday when Reuters reported that Moody’s Investor Services downgraded Chicago’s bond rating to Ba1, “junk” status. In making the downgrade Moody’s announced that America’s third-largest city has an unfunded pension liability of $20 billion. Illinois has mandated that Chicago must pay in $550 million additional during 2016 to the fund. Chicago’s plan to meet their obligation; borrow it. However, that plan is now in jeopardy due to their credit rating downgrade.

Rahm EmanualChicago has the dubious distinction of having the second worst credit rating of any American city, only bested by Detroit who recently emerged from bankruptcy. Instead of addressing the problem of Chicago’s financial and political incompetence, its Mayor Rahm Emanuel attacked the messenger stating: “This action by Moody’s is not only premature, but it is irresponsible to play politics with Chicago’s financial future.”

If Emanuel had his way he would have Moody’s misrepresent Chicago’s actual financial condition so that unsuspecting investors will get burnt when the City is forced to ultimately declare bankruptcy. How about forcing that Emanuel, Pelosi, Reid, Obama and the rest of the Progressives who created Chicago’s problem to purchase the bonds at better than junk status; i.e. lower interest rates? Continue reading

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Meaningless Unemployment Rate Drops to 5.4%

Last week the US Department of Labor released April’s unemployment figures that indicated the US economy added 223,000 jobs, decreasing the unemployment rate a notch to 5.4%. This would be good news if the Labor Department’s figures realistically represented the US employment situation. Unfortunately, it does not.

The Labor Department’s unemployment figures only include Americans who indicate they are searching for employment. Those that have dropped out of the workforce, for example due to an inability to find work, are not counted as unemployed. This ludicrous accounting practice shows a low unemployment rate while at the same time the more meaningful labor market participation rate remains at multi-decade lows, according to the New York Times.

It is telling that while the Labor Department releases optimistic, yet unrealistic employment figures, the Federal Reserve leaves the benchmark interest rates at historic lows. The Fed’s action indicates the irrelevance of the Labor Department’s figures.

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Australian Central Bank Cuts Interest Rates to Record Low

The Wall Street Journal reported on Australia’s central bank cutting its benchmark interest rate from 2.25% to a record low of 2.0%. The bank justified the cut due to a weakened Australian economy, the result of decreasing demand and prices for its commodities, such as iron-ore.

The Australian central bank has announced that it hopes the lower interest rates will increase economic activity in other Australian industries, such as construction. However, it is likely that Australia is also seeking to decrease the value of its currency to make its products more competitive in the world market. This might be a viable strategy except that other countries are also debasing their currencies through low interest rate policies.

It has been about eight years since the 2008 financial crisis that led to the worldwide economic recession that is ongoing. Since then governments and central banks have used record deficit spending and low interest rate policies in an attempt to invigorate economic growth. History has shown such policies to be a failure. Not only has economic growth been anemic, but the gap between rich and poor has increased with economic policies that mainly benefit the wealthy who own equities whose values have been inflated.

The Australian rate cut will likely not be its last. It will also be joined by rate cuts in other countries, as each tries to gain advantage in the ongoing currency war. This story has played out throughout history and it is outcome has not been positive.

Continue reading

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