… it sounds like a sober and centrist position. I mean who believes in deficit financing? Well everybody but you’re not suppose to admit it out loud. Like dwarf porn. Many watch but few will say so. What it means in practice is one of two things. If an actual conservative uses the term it means that the public service is getting taken to the tool shed. There being few actual conservatives in politics what it usually means is that we’ll keep spending until someone makes us stop.
That’s when the bond market vigilantes step in. Then everyone blames the bond market for ending the party. The kind politician would love, absolutely love, to spend more money on “X” but those evil Gordon Gekko types won’t let him. In truth the bond market traders are no more responsible for a government going broke than a doctor is responsible for giving an alcoholic DT.
The state, observed Bastiat so many years ago, is the great fiction by which everyone tries to live at the expense of everyone else. Politics is the lie that this can go on indefinitely. Voters complain about the low levels of honesty in politics. But a dishonest political class is the product of a dishonest electorate. If people want something for nothing, they’ll get the lying louses they deserve. Fool me once, shame on you. Fool me a hundred years in a row and the shame is very much on the ordinary bitchin’ voter.
Richard Anderson, “Transparent Lies”, The Gods of the Copybook Headings, 2014-07-28.
July 30, 2014
May 25, 2014
Another discussion that seems to have taken centre stage recently (at least in some US publications) is the argument that reparations are owed to the descendents of African American slaves:
Ta-Nehisi Coates has an excellent essay about the historical treatment of African Americans over the centuries, the legacy of slavery and Jim Crow and all that. And more specifically he addresses the problem of what African Americans have had stolen from them over that period of time. All of which leads various economist types to try to put a value on the theft of that labour. Tyler Cowen thinks that non-slaves have lost as much (or, given their greater number, cumulatively) or more thus there is no amount of reparations possible. For slavery itself means that current society is poorer than it would have been without slavery. If we leave that argument aside there’s another way of calculating what reparations might or should be. And it has been done rather cleverly here. However, I think we still end up in roughly the same sort of place. Which is that even if reparations for slavery are logically or morally due, the actual amount is still going to end up being pretty much nothing.
Thus today’s value of what was stolen from the slaves is that $1.75 trillion. Which is, when you look at it, a formidable sum of money. Except, actually, it isn’t. The net wealth of the entire country is around $80 trillion or so. So it’s a trivial percentage of the national wealth. Or we could look at it another way. There’s 42 million or so African Americans (defined as having some possibly slave and black antebellum ancestry) so the capital sum would be some $40,000 for each of them. Which, while a nice enough sum to receive isn’t the sort of life changing sum some might think might be due in reparations.
And we can also break it down another way. Think of that as the capital sum and then apply that 4% return to it. That would be an extra $1,600 in income per year to each and every descendant of slaves. Or, in total, something like $70 billion a year. Which, in the context of a $15 trillion economy is pretty much next to nothing. About, in fact, the size of the food stamp or SNAP program.
Even if slavery reparations are righteously due they would amount to around and about the current cost of food stamps. Which is, as I say, around and about nothing given the size of the entire economy. And, I would also wager, not an amount that anyone at all thinks is going to fix the problems that beset parts of American society today.
April 13, 2014
Published on 10 Apr 2014
“It’s kind of a weird thing that’s happened with American society — this idea that you have to have a college degree to be a respectable member of the middle class,” says Glenn Reynolds, professor of law at the University of Tennessee and purveyor of the popular Instapundit blog. Reynolds’ latest work, The New School: How the Information Age Will Save American Education From Itself, looks at the higher education bubble and how parents, students, and educators can remake the education system.
Reynolds sat down with Reason TV‘s Alexis Garcia to discuss why Americans are spending more for a college education and how students are responding to increasing tuition costs. “Given how expensive it is to go to college, there has to be a return sufficient to make it worth the time and especially the money,” Reynolds states. “You’re seeing declining enrollment in some schools and you’re seeing much more price resistance on the part of both parents and students.”
The discussion also includes Reynolds’ take on school choice, the upcoming elections, the current state of the blogosphere, and whether or not both political parties are necessary. Nearly a decade after Reynolds published An Army of Davids: How Markets and Technology Empower Ordinary People to Beat Big Media, Big Government, and Other Goliaths, the blogfather still remains optimistic about technology’s ability to empower the individual and inspire grassroots movements.
March 29, 2014
Tim Worstall looks at the occasional claim that if Lehman Brothers had actually been “Lehman Sisters” (that is, an organization with much higher female participation), then they would have taken on less financial risk and therefore not have been the trigger to the financial meltdown:
… there’s very definitely an element of truth to this: but the final story is rather different from what is commonly assumed. It’s only if financial organisations are completely female, or completely male, that risk is reduced. Adding more of either gender to an organisation actually increases risk.
Mixed gender environments increase risk tolerance in both men and women. So adding women to an all male institution increases, likely, the risk that organisation will tolerate. And so does adding men to an all female one. Not just because the men sway the average but because both men and women become more risk tolerant in the presence of the other sex.
Thus it would be correct to say that Lehman Sisters would have been less risk tolerant than Lehman Brothers. But the reality of what there actually was at the firm was that it was a mixed gender environment and so more risk tolerant than either of the single gender hypotheticals would have been. It is gender diversity itself that increases risk tolerance, reduces risk aversion.
Which leads to an interesting thought. Everyone generally agrees that banking as a whole has become more risk tolerant, and thus more fragile, in recent decades. These are also the decades when women have made significant inroads into that area of professional life. Which leaves us with something of a conundrum. We generally believe that fragility in the banking system is a bad idea. We also all generally believe that gender equality is a good idea. But that gender equality of women going into finance and banking seems to increase the fragility of the system given that rise in risk tolerance from a mixed gender environment.
February 24, 2014
The Argentine government has announced it will be increasing spending on their armed forces by a third in the coming year. While this report in the Daily Express takes it seriously, it fails to account for the overall sorry state of the Argentinian economy … it’s not clear if there’s any actual money to be allocated to the military:
Buenos Aires will acquire military hardware including fighter aircraft, anti-aircraft weapons and specialised radar, as well as beefing up its special forces.
The news comes months before drilling for oil begins in earnest off the Falkland Islands, provoking Argentina’s struggling President Cristina Fernandez de Kirchner.
Last month she created a new cabinet post of Secretary for the Malvinas, her country’s name for the Falklands.
Meanwhile, Defence Secretary Philip Hammond has refused to confirm that Britain would retake the Falklands if they were overrun by enemy forces.
The extra cash means Argentina will increase defence spending by 33.4 per cent this year, the biggest rise in its history. It will include £750million for 32 procurement and modernisation programmes.
They will include medium tanks and transport aircraft and the refurbishment of warships and submarines. The shopping list also includes Israeli air defence systems, naval assault craft, rocket systems, helicopters and a drone project.
As reported earlier this month, the economy is suffering from an inflation rate estimated to be in the 70% range, the government has expropriated private pensions and foreign-owned companies, and is unable to borrow significant amounts of money internationally due to their 2002 debt default. Announcing extra money for the military may well be the economic version of Baghdad Bob’s sabre-rattling press conferences … just for show.
On the other hand, military adventurism is a hallowed tradition for authoritarian regimes to tamp down domestic criticism and rally public opinion. Being seen to threaten the British in the Falkland Islands still polls well in Buenos Aires.
February 1, 2014
In Forbes, Ian Vasquez looks at the plight of the Argentine economy:
Argentina’s luck is finally starting to run out. It devalued its currency by 15 percent last week, marking the beginning of a possible economic crisis of the kind Argentina has become known for. Argentina’s problem is that it has followed the logic of populism for more than a decade and President Cristina Kirchner is showing no interest in changing course.
In the 1990s Argentina combined far-reaching but sometimes flawed market-reforms with irresponsible fiscal policies, culminating in its 2002 default on $81 billion in debt — the largest sovereign default in history. The country delinked its currency from the dollar, experienced a severe economic crisis, and initiated its current period of populist politics.
Those policies included price controls on domestic energy, reneging on contracts with foreign companies, export taxes, more pubic sector employment and vastly increased spending. When you don’t pay massive debts, you get temporary breathing room, so growth resumed. High commodity prices and low global interest rates that lifted demand for Argentine exports also helped produce Argentine growth.
But the government’s appetite has consistently grown faster, and, with little ability to borrow abroad, it has turned to other sources of finance. In 2008, Kirchner nationalized private pension funds worth some $30 billion, and has since nationalized an airline and a major oil company. As it drew down reserves, the government turned to printing money to finance itself, falsifying the inflation rate it says is about 11 percent, but which independent analysts put at about 28 percent. Economist Steve Hanke estimates it is much higher at 74 percent
January 13, 2014
Robert Peston examines the question of whether a post-referendum Scotland would be debt-free or would have a share in the existing debt obligations of the United Kingdom:
This morning’s statement from the Treasury that the UK will stand behind all its sovereign debts, whether or not Scotland’s people vote for independence, is in a way a statement of the bleedin’ obvious.
That debt, all £1.4 trillion of it, is an obligation of the National Loans Fund.
And nothing can change that — whether Scotland were to decide to secede (or, to pick an unlikely corollary, in the event that the People’s Liberation Army of West Sussex, miffed about fracking, were to declare UDI).
So why has the Treasury chosen to say that the UK will honour its debts, whatever Scotland does?
Well, it is because investors — whom we may think of as sophisticated and informed (ahem) — have been increasingly asking the Treasury and the Debt Management Office for clarification of the status of the UK’s financial obligations in the event of a fracturing of the United Kingdom.
Who would not vote for independence if an autonomous, separate Scotland would be set free from the burden of UK debts currently equivalent to 76% of GDP or national income (on the latest estimates by the Office for Budget Responsibility)?
Except that even Alex Salmond and the Scot Nats don’t believe that an independent Scotland could, in practice, walk away from its fair share of the UK’s debts — even if they would have the legal ability to do so.
January 5, 2014
The Wall Street Journal has an excerpt from The New School: How the Information Age Will Save American Education From Itself, the latest book by the Instapundit himself:
Though the GI Bill converted college from a privilege of the rich to a middle-class expectation, the higher education bubble really began in the 1970s, as colleges that had expanded to serve the baby boom saw the tide of students threatening to ebb. Congress came to the rescue with federally funded student aid, like Pell Grants and, in vastly greater dollar amounts, student loans.
Predictably enough, this financial assistance led colleges and universities to raise tuition and fees to absorb the resources now available to their students. As University of Michigan economics and finance professor Mark Perry has calculated, tuition for all universities, public and private, increased from 1978 to 2011 at an annual rate of 7.45%. By comparison, health-care costs increased by only 5.8%, and housing, notwithstanding the bubble, increased at 4.3%. Family incomes, on the other hand, barely kept up with the consumer-price index, which grew at an annual rate of 3.8%.
For many families, the gap between soaring tuition costs and stagnant incomes was filled by debt. Today’s average student debt of $29,400 may not sound overwhelming, but many students, especially at private and out-of-state colleges, end up owing much more, often more than $100,000. At the same time, four in 10 college graduates, according to a recent Gallup study, wind up in jobs that don’t require a college degree.
Students and parents have started to reject this unsustainable arrangement, and colleges and universities have felt the impact. According to a recent analysis by this newspaper, private schools are facing a long-term decline in enrollment. More than a quarter of private institutions have suffered a drop of 10% or more — in some cases, much more. Midway College in Kentucky is laying off around a dozen of its 54 faculty members; Wittenberg University in Ohio is eliminating nearly 30 of about 140 full-time faculty slots; and Pine Manor College in Massachusetts, with dorm space for 600 students but only 300 enrolled, has gone coed in hopes of bringing in more warm bodies.
Even elite institutions haven’t been spared, as schools such as Haverford, Morehouse, Oberlin and Wellesley have seen their credit ratings downgraded by Moody’s over doubts about the viability of their high tuition/high overhead business models. Law schools, including Albany Law School, Brooklyn Law School and Thomas Jefferson Law School, have also seen credit downgrades over similar doubts. And now Democrats on Capitol Hill are pushing legislation to give colleges “skin in the game” by clawing back federal aid money from schools with high student-loan default rates. Expect such proposals to get traction in 2014.
October 23, 2013
In Maclean’s, Stephen Gordon provides an updated look at the Harper government’s ongoing “starve the beast” policy:
As I’ve written before, the Conservatives have applied the “starve the beast strategy“: First, cut taxes; second, cut spending in order to match lower revenues; third, obtain a balanced-budget for a smaller government. As the red line in the chart shows, the Harper government was temporarily thrown off this past by the financial crisis, which required emergency stimulus spending. They are, however, back on track.
Once again though, we need to be careful to see that the government’s revenues are back above expenditures (so the yearly deficit has been reduced over time), but the government’s outstanding debts are still quite substantial: $892 billion for 2012-13. As long as interest rates stay low, the debt should start to decline, but if-and-when interest rates rise, so will that big pile of accumulated debt.
October 21, 2013
Jon Gabriel has put together a clear, understandable way to show the relationship between the US government’s revenue, deficit and debt numbers:
When Washington raised the debt ceiling this week, the Beltway media breathlessly reported that the fiscal crisis had ended. Lawyers danced in hallways, bureaucrats twerked on the Metro, congressional aides kissed strangers in the streets — the Tea Party has been defeated! It was like VJ day for wonks.
As our political class exchanged high fives and reporters praised a return to “sanity,” I wondered how these odd creatures defined insanity.
America’s fiscal crisis is not that our debt ceiling was too low, the fiscal crisis is that our debt is too high. When I mentioned this to left-leaning folks, they seemed indifferent. “Obama lowered the deficit.” “I think Bush spent more.“ “It’s Reagan’s fault!”
So I made this infographic:
Since most graphs look like this, I focused on just three big numbers: Deficit, revenue and debt.
The analogy is imperfect, but imagine the green is your salary, the yellow is the amount you’re spending over your salary, and the red is your Visa statement. Then imagine your spouse runs into the room and shouts, “great news honey, our fiscal crisis is over. We just got approved for a new MasterCard!” Your first call would be to a marriage counselor or a shrink.
H/T to Nick Gillespie:
What is it that Hemingway always used to say? That thing’s not loaded? Or something about how the “dignity of movement of an ice-berg is due to only one-eighth of it being above water.” Yeah, well, the horrors of federal finances is pretty undignified just looking at the amount of spending versus revenue we do and then it gets really sloppy when you look at the huge amount of debt below the waterline.
September 25, 2013
At Coyote Blog, an illuminating comparison of “austerity” measurements, responding to a piece in Mother Jones by Kevin Drum:
He uses this graph to “prove” that our fiscal response to this recession is weak vis a vis past recessions. The graph is a bit counter-intuitive — note that it begins at the end of each recession. His point is that Keynesian spending needs to continue long after (five years ?!) after the recession is over to guarantee a good recovery, and that we have not done that.
I took roughly the same data and started each line two years earlier, so that my first year is two years ahead of his graph and the zero year in my graph is the same as the zero point in Drum’s chart. His data is better in the sense that he has quarterly data and I only have annual. Mine is better in that it looks at changes in spending as a percentage of GDP, which I would guess would be the more relevant Keynesian metric (it also helps us correct for the chicken and egg problem of increased government spending being due to, rather than causing, economic expansion).
Here are the results (I tried to use roughly the same colors for the same data series, but who in the world with the choice of the entire color pallet uses two almost identical blues?)
That second image tells a radically different story to the first one, doesn’t it? Hard to make that fit into the traditional definition of the word “austerity” though…
August 13, 2013
Allister Heath says the catastrophic state of the Greek economy fully merits the descriptor “depression”:
Sorry, but the fact that Greece collapsed at an annual rate of 4.6 per cent in the second quarter, rather than a little bit faster, isn’t good news. It’s terrible, awful, horrible news. Greek output is down by 23 per cent since 2008 and unemployment is at around 28 per cent; no wonder, given the shrinking economy, that gross tax revenues are continuing to undershoot targets.
Hyperbolic economists sometime claim that the UK has undergone a depression, which is nonsense — but Greece’s woes cannot be described in any other way. Its depression has been catastrophic, one of the worst ever recorded for any country in the modern, industrialised era (apart from during or immediately after a war). Its dramatic collapse reminds us that stupid economic policies can destroy a nation; depressions have not been banished from modern civilisation.
It may be, of course, that the collapse is beginning to abate and that the economy may finally stabilise next year. I’ll believe it when I see it; unless Greece’s money supply starts growing again, and demand begins to increase, a recovery is impossible. But Greece is just a tiny part of the Eurozone, so achieving such an outcome is even harder than in a country like the UK, especially given that the Greek financial crisis hasn’t really gone away. There is no way that Athens will meet its bailout targets and its debt burden is utterly unsustainable.
July 27, 2013
The South China Morning Post on the economic troubles of the provincial, municipal and local authorities in Jiangsu:
The nightmare scenario for China’s leaders as they try to wean the country off a diet of easy credit and breakneck expansion is a local government buckling under the weight of its own debt. Few provinces fit that bill quite like Jiangsu, home to China’s most indebted local government.
Hefty borrowings through banks, investment trusts and the bond market by Jiangsu’s provincial, city and county governments have saddled the province north of Shanghai with debt far higher than its peers, public records show.
Many of the province’s mainstay industries, including shipbuilding and the manufacturer of solar panels, are drowning in overcapacity. Profits are dwindling, and the government’s tax growth is braking hard.
Little public information is available on the total debt of Chinese local governments. Indeed, earlier this month China’s Vice-Finance Minister Zhu Guangyao said Beijing did not know the precise level of their debts either.
But from what ratings agencies and think-tanks can piece together, Jiangsu may be the standout debt risk among China’s 31 provinces.
Looking at bank loan books, they can see that China’s eastern provinces including Jiangsu have the highest concentration of government debt. Jiangsu then looms large because of its reliance on costlier and alternative forms of financing, which they said suggested that cheaper bank loans and land sales are not giving the authorities the funding they need.
The risk that Jiangsu might pose to the Chinese economy in a crisis is clear. On its own, the province would be a top 20 global economy with GDP greater than G20 member Turkey. Its 79 million population tops that of most European countries.
In the US, municipal bonds — bonds issued by city or other municipal governments — have been widely viewed as “safe” investments. Detroit may cause that view to change drastically. Reggie Middleton has been sounding the alarm for a few years:
Following up on my timely post “Here Come Those Municipal Defaults That Everyone Said Couldn’t Happen, Pt 2“, I comment on Meredith Whitney’s OpEd in the Financial Times. If you remember, she — like I — warned of municipal defaults years ago and was ridiculed for such. Ms. Whitney is quoted as saying:
“As jarring as the reality may be to accept, Detroit’s decision last week to declare bankruptcy should not be regarded as a one-off in the U.S. municipal market.” she said.
“There are five more towns like Detroit in Michigan alone. There are many more municipalities across the country in similar positions.”
“The bill for promises past is now so large for some cities and towns that it is crowding out money for the most basic of services — in the case of Detroit, it could not even afford to run its traffic lights,” she said.
“Will [lawmakers] side with taxpayers, unions or the municipal bondholders? If they back residents, money will be directed to underfunded public services at the expense of pensions and bondholders. If they side with the unions, social services will continue to be cut and the risk to bondholders will increase considerably. If they side with bondholders, social services and pensions are at risk.”
In the case of Detroit, elected officials, for the first time in a very long time, are siding with residents, Whitney said. This is a new precedent that boils down to the straightforward reality of the survival and sustainability of a town or city, she said.
“After decades of near-third-world conditions in the richest country in the world, the city finally stood up and said enough was enough,”
Well, this is the problem. Defaulting on revenue bonds where the underlying asset (ex. a housing project, utility, or infrastructure project) is not generating the sufficient cash flows is part and parcel of the risk of investing in said class of bonds. This is widely accepted and understood, which is likely why those bonds have a slightly higher yield.
For some obscene reason, defaulting on the general obligation bonds which purportedly carry the “full faith and credit’ of the municipality as a back stop is deemed as wholly different affair. The reason? Who the hell knows? This is a point I tried to drive home in the original “Here Come Those Municipal Defaults That Everyone Said Couldn’t Happen” article in 2011. Backing by the full faith and credit of a public entity does not make an investment risk free. To the contrary, if said entity is fundamentally insolvent, the investment is actually “riskful” as opposed to risk free.
Treating these bonds as unsecured in the bankruptcy is essentially the way to go. If you don’t want to do that, well you can still consider them backed by the full faith and credit of the insolvent municipality, which is essentially unsecured — and move on anyway — particularly as many potential collateral assets of value would have likely been encumbered by agreements with a little more prejudicial foresight.
July 23, 2013
Simon Black contradicts the media narrative that Iceland has “recovered” from the melt-down of their banking sector:
It was a spectacular collapse. And the first of many. Ireland, Greece, Cyprus, etc. were soon to follow.
Yet unlike the bankrupt countries of southern Europe, Iceland dealt with its economic emergency in a completely different way.
Politicians here are proud that they never resorted to austere budget cuts that are so prevalent in Europe.
They imposed capital controls. They let the banks fail. And, as is so commonly trumpeted in the press, they ‘jailed their bankers and bailed out their people.’
Today, Iceland is held up as the model of recovery. Famous economists like Paul Krugman praise the government for rapidly rebuilding the economy without having to resort to austerity.
This morning’s headline from The Telegraph newspaper sums it up: “Iceland has taken its medicine and is off the critical list”.
It turns out, most of these claims are dead wrong.
Meanwhile, the government ended up taking on massive amounts of debt in order to bail out the biggest bank of all – Iceland’s CENTRAL BANK.
This was a bit different than the way things played out in the US and Europe.
In the US, the Fed conjures money out of thin air and funnels it to the government.
In Iceland, since the Kronor is not a global reserve currency, the government had to go into debt in order to funnel money to the Central Bank, all so that the currency wouldn’t collapse.
As a result, Iceland’s state debt tripled, almost overnight, in 2008. And from 2007 until now, it has increased nearly 5-fold.
Today, the government is spending a back-breaking 17.3% of its tax revenue just to pay interest on the debt.
And this is real interest, too. Iceland’s central bank owns very little of the government debt. The rest is owed to foreign creditors… putting the country in an extremely difficult financial position.
At the end of the day, the Icelandic people are responsible for this. They were never bailed out. They were stuck with the bill.
Meanwhile, although unemployment in Iceland is low, wages are even lower. And the weak currency has brought on double-digit inflation.
So while people do have jobs, they can hardly afford anything.
This is most prevalent in the housing market, most of which is underwater. Interest rates have jumped so much that many Icelanders are now on negative amortization schedules, i.e. their mortgage balances are actually INCREASING with each payment.