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By Jeff Harding March 17th, 2010
UPDATED
We think that China is an indestructible economic juggernaut but its economy is very fragile and it is sitting on a property bubble which will burst. What China does in response has major implications for their economy and the rest of the world. This is the third part of a three-part series on this topic
Inflation is on the Rise
I think they will panic if they see western economies weaken. They will panic further if real estate prices start to collapse as a result of tightening policies and western economies weaken. The panic will result in more fiscal and monetary stimulus.
This is right out of the Keynesian playbook and the result will feed the bubble, create inflation, and result in more debt. And, since a substantial part of their official “growth” comes from quasi-government entities (local and regional governments, Red Army and other State-run enterprises) which are highly inefficient as a result of top-down dictates from Beijing, much of this spending is just a waste of capital. Japan tried the same thing and it didn’t work for them either.
It is remarkable that Premier Wen can get up and say that China will have 8% growth this year. In light of poor exports, a financial bubble, poor internal demand, and the severe risk from the quasi-government and local government debt bomb, it is unlikely that China will see real economic growth this year approaching that number. Understand that they can claim to have such growth because of how they measure GDP, but it isn’t real.
And they are already seeing inflation. In February consumer prices rose 2.7% YoY, a 16-month high. Producer prices rose 4.3% in January and 5.4% in February. In light of money supply targets, inflation can only grow. The fact that there is an “output gap” has nothing to do with inflation; idle capacity and high inflation are compatible (remember stagflation). The government’s target is to keep it under 3%. No one believes that.
It is clear that, officially, the CPI won’t exceed 3%, but unofficially? There will be no way to know for sure. I doubt they will announce price controls to achieve their goal, but they have the power to do it unofficially by either fudging the numbers or “jawing” prices down, or both. If they attempt de facto price controls, the evidence of such will be shortages of certain commodities.
The Consequences to China and the World
1. China will lead no one out of the recession. Despite what many commentators tell you, China has weak internal consumption and lives on exports. We cannot look to them to be a leader of the world’s economies because they live off of the U.S., Europe, Japan, and other buyers of Chinese products. The U.S. will lead them out of the recession, not vice versa. The only way they can rapidly spur internal consumption is for them to abandon their wasteful planned economy, fully embrace capitalism, and let those who know how to create wealth and jobs do their thing. … Continue reading China’s Fragile Economy, Its Housing Bubble, and What It Means To Us: Part III
By Jeff Harding March 16th, 2010
Google Inc. appears increasingly likely to shutter its Chinese-language search engine, a step that would remove one of the last major foreign players from the world’s most populous and fastest-growing Internet market.
It is rare that a major corporation subordinates its short-term interests for a moral principle. Google will apparently walk away from a 36% share of China’s internet search/advertising market because it will not bow to censorship.
This event underscores the true nature of China’s ruling Communist Party of China. It is a repressive, oppressive, suppressive and violent organization that is not unlike any mafia.
The fact that Google will not kowtow to Bejing and walk away from the market of greatest potential is to me a commendable act.
China may have liberalized its economy but the Communist Party of China through the People’s Republic of China still rules with a tight oppressive fist. Young Chinese netizens may have access to some information available on the World Wide Web, but China’s rulers do all they can to prevent them from having access to information that is not controlled by the Party.
One must ask about the moral foundations of such a political system. Why would a relatively small group wish to oppress the masses? I am not so cynical to believe that no party members believe they are doing the right thing to help the people. After all the 75 million or so Party members leave room for a wide swath of personalities. But most members are there for one reason: to gain an advantage over their fellow non-member citizens and benefit from the Party’s largess.
China is controlled by a relatively small group of people; about 200 members of the Central Committee hold real power. Of course the Red Army is represented in the Central Committee. These people are China’s royalty and enjoy privileges that come with power. They (i) don’t wish to relinquish power because they like it, (ii) they probably can’t make it on their own absent the Party, and (iii) if they loosen their grip the worker heroes of the People’s Republic of China may just want to kill them.
While its apologists can point to the fact that things in China, economically and politically, are better than before, they miss the point that the ruling class is corrupt, parasitic, and useless. As an example, I urge you to visit the Communist Party of China’s web site to get a flavor of how superfluous they are. At the end of this article you will see an excerpt from President Hu Jintao’s “Theory of Profound Changes” as a good example of how dynamic their intellectual discourse is.
So, in walks Google and takes on its competitor, Baidu who basically ripped off their business model, and takes over 36% of the market. When they balk at the government’s censorship over their search results, they have the courage to say no. And leave.
Some folks don’t think they should do that:
John Palfrey, a professor at Harvard Law School who studies the Internet, says Google’s China situation has broader relevance for how other technology companies manage their overseas operations. “Because [the Chinese market] is the largest Internet market in the world, it is impossible for a large technology company to ignore,” Mr. Palfrey says. “The outcome of this dispute is going to be enormously important for information technology companies elsewhere in the world operating in China.”
Perhaps if Professor Palfrey had Google co-founder Sergey Brin’s perspective as a former Soviet citizen whose family fled Soviet oppression and racism, he may have felt differently. This isn’t like Coca-Cola leaving an apartheid South Africa, as worthy as that was. China represents a huge market for Google and the loss of this business will hurt its bottom line and future revenues.
Google did the right thing. I will be a loyal fan and supporter of Google. … Continue reading Google: A Moral Company
By Jeff Harding March 16th, 2010
We think that China is an indestructible economic juggernaut but its economy is very fragile and it is sitting on a property bubble which will burst. What China does in response has major implications for their economy and the rest of the world. This is the second part of a three-part series on this topic.
China’s Government Tightens Credit
The government is very worried about this bubble and in November they announced new rules to reign in developers:
The new rules … include a minimum down payment of 50% on land purchases from the government. Local-level governments previously asked developers to put down 20%-30% of the value of the land in such deals, analysts said.
The new policy also requires developers to completely pay off land purchases from the government within one year of a sale agreement, with a one-year extension allowed for certain “special projects.”
Developers won’t be permitted to buy new land if they fail to pay off a land purchase in time, according to the statement, which was jointly issued by the Ministry of Finance, the People’s Bank of China, the Ministry of Land and Resources, the National Audit Office, and the Ministry of Supervision.
The new rules also require local governments to fully reflect the proceeds of land sales in their budgets and forbid them from giving discounts to developers or allowing developers to delay payments. …
“Land auctions by local governments will be conducted in a more strict manner than before to meet the central government’s new rules,” said Johnson Hu, an analyst at UOB Kay Hian. “It may not have a direct impact on housing prices, but it sets a tone that shows the government wants to rein in the property market to deter speculation.”
And these moves will hit the economy hard, especially developers:
At the end of August [2009], liabilities exceeded 90 percent of assets at more than 160 developers that have borrowed at least 50 million yuan ($7.3 million) each from banks, the person said. New loans for real-estate development surged 121 percent from a year earlier in the first half to 403.9 billion yuan, according to the People’s Bank of China’s latest quarterly report.
The housing market is starting to cool, but in Chinese proportions:
… Continue reading China’s Fragile Economy, Its Housing Bubble, and What It Means To Us: Part II
By Jeff Harding March 15th, 2010
 In my research for my series on “China’s Fragile Economy,” I came across two blockbuster statements from the very top of China’s ruling structure: Premier Wen Jiabao and He Keng, vice chairman of the Financial and Economic Committee of the National People’s Congress. Both were to the effect that they feared a global double-dip recession.
[Wen] continued to take a cautious view on prospects for the world economy, saying there is a risk of a “double dip” global recession given continued risks in financial systems and high jobless rates in many countries.
I’m just wondering where he is getting his information because the preponderance of economists predict a recovery is already underway and that GDP will gradually improve. There are a few of us who stubbornly stick to our double-dip views.
I point out in my articles (Part III) that this is a significant departure for the Chinese and gives credibility to my idea that they won’t cut back on fiscal or monetary stimulus.
So, since I know I have some followers in China, maybe Wen’s advisors are reading The Daily Capitalist?
If not, I’d like to talk to their analyst because getting to that conclusion takes some rather bold free market theory.
By Jeff Harding March 14th, 2010
We think that China is an indestructible economic juggernaut but its economy is very fragile and it is sitting on a property bubble which will burst. What China does in response has major implications for their economy and the rest of the world. This is the first part of a three-part series on this topic.
We are told that China has huge housing needs, that demand will continue for decades, and that prices have nowhere to go but up. But that’s not how economics works for housing or for any other product. It may be true for China’s long term, but the short run can kill you.
Having been in that business, we were told here that America’s long term growth potential was almost limitless, that new family formations, immigration, and abundant financing would continue to drive the housing market higher. And remember, they said housing prices had never declined on a national basis in the last 60 years.
“They” were wrong as it has now been painfully revealed to us. There are many factors affecting the supply of and demand for housing. And prices do go down, dramatically. So, when you hear that China’s housing market will grow in a linear direction and that its economy will not be impacted by a housing bubble, you can evaluate that statement in light of recent history.
4 Important Things to Know About China
Before I go into the details of what is happening in China right now, there are four things about China to consider.
First, most economic statistics from China are inaccurate. This is the result of state, top-down driven economic planning. The nice thing about a planned economy is that they can pretty well dictate what GDP will be because of the way they calculate it. What they mean by “GDP” is very different than what other countries mean by GDP.
China counts the funds that are distributed from Beijing to local governments and entities as spent when distributed. Retail goods are calculated as sold when factories ship goods, not when they are purchased by consumers. This is an artifact of communist central planning that brought them the ruinous Five Year Plans and the Great Leap Forward (Backward) of Mao Zedong.
Local or regional bureaucrats responsible for allocating resources or implementing policies are often corrupt, inept, and lie about the results of their efforts. What comes to mind is the school in Sichuan province (the so-called “tofu-dregs schoolhouse”) that collapsed during the earthquake in 2008 because local officials were bribed, paid off, colluded, whatever, by the contractor who was responsible for the shoddy product. You can multiply that ten thousand times. No one knows what is really spent and what goes into the pockets of corrupt officials.
Second, local and regional governments and state-run enterprises are in serious financial trouble because of the real estate bubble. A big revenue source for local and regional governments is from land sales to developers. We’ve all heard the stories of landowners and tenants getting kicked off their land to make way for a new block of homes or condos. Their compensation is small, and you can guess where a lot of the money goes. The local entities borrowed lots of money to finance developers. Beijing is so worried about the financial solvency of local governments that Premier Wen Jiabao announced at the National People’s Congress last week that it will issue 200 billion yuan worth of bonds on behalf of local governments.
In a “worst-case scenario,” the non-performing loans of local-government investment vehicles could climb to 2.4 trillion yuan ($350 billion) by 2011, Shen Minggao, Citigroup’s Hong Kong-based chief economist for greater China, said yesterday.
“The most likely case is that the Chinese government will engineer a massive financial bailout of the financial sector,” said [Northwestern University Professor Victor Shih] who spent months researching borrowing by about 8,000 local government entities. …
Su Ning, a deputy governor at China’s central bank, said March 8 that a “fairly high proportion” of total lending last year went to the funding vehicles. Chinese banks extended a record 9.59 trillion yuan of new loans in 2009. Su sees “a big risk” from local-government guarantees for money borrowed to fund infrastructure projects that may not generate returns, he said in Beijing.
… Continue reading China’s Fragile Economy, Its Housing Bubble, and What It Means To Us: Part I
By Jeff Harding March 12th, 2010
By Jeff Harding March 10th, 2010
I wrote my legislators opposing health care “reform.” Here is my letter:
Dear Senator Feinstein:
I oppose the proposed health care legislation because I do not believe it is real “reform.” I do not believe it will deliver the best health care to the most people at the lowest cost.
I believe that our current system has deteriorated because of the passage of Medicare. The rigged tax code, the prevention of competition, the lack of control by consumers of their health care dollars, meddlesome regulation, and the burden of Medicare costs being borne by non-Medicare privately insured consumers, have lead to our current mess.
The claims that this proposal is fiscally responsible is contrary to the evidence. A look at similar systems throughout the world reveal that they are all losing money and are resorting to more market based solutions as a fix to their problems.
I recommend a few simple reforms as the start of real reform to our health care system:
- Give Medicare enrollees a voucher and the freedom to choose any health plan on the market.
- Reform the tax treatment of health care with “large” health savings accounts to give workers control over their health care dollars.
- Allowing consumers to purchase health insurance licensed by other states could cover one-third of the uninsured without any new taxes or government subsidies.
- Reform Medicaid and the State Children’s Health Insurance Program by Block-granting those programs the way it reformed welfare in 1996.
These simple acts would contain costs, increase consumer choice, increase competition, and cover most uninsureds without government mandates.
Sincerely,
Jeffrey Harding
I had no illusions that Senator Feinstein would write back and say, “Mr. Harding. Thank you for your wonderful suggestions as I was not aware that government controlled health care systems were so inefficient. From now on I’m going to suggest more free market solutions for health care.”
Here is what Diane Feinstein wrote back:
Dear Mr. Harding:
Thank you for writing to me to express your concerns about healthcare reform. I appreciate the time you took to write to me, and I welcome this opportunity to convey my opinions on how we should reform our health care system.
I support reforming our healthcare system. The key is to find a healthcare plan that will provide coverage to the millions of uninsured Americans and keep premium costs affordable, while not adding to our nation’s unsustainable federal budget deficit. On December 24, 2009, I joined 59 of my colleagues in voting to pass healthcare reform legislation. The “Patient Protection and Affordable Care Act” passed by a vote of 60-39.
I voted for the legislation because I believe it makes several important improvements while preserving the parts of our system that work well. Some important changes will occur immediately and others will be phased in. It will provide immediate assistance, including tax credits for small businesses and $5 billion to help subsidize coverage for some people who have been denied due to preexisting conditions. And the legislation would shrink the Medicare prescription drug coverage gap by $500. As these health reforms take place, Congress will be able to assess and adjust the programs to improve healthcare for all Americans. All of this is accomplished in a fiscally responsible manner, reducing the budget deficit and preserving the solvency of Medicare.
On February 22, 2010, the President released a new healthcare reform proposal, and on February 25th, the President held a Health Care Summit that was televised nationally. At the Summit, Democratic and Republican Members of Congress discussed the proposal, the issues they agree and disagree on, and openly worked on a way to reform our healthcare system.
On March 3, 2010, President Obama asked Congress to deliver a final healthcare reform bill to his desk by the end of this month. The President believes that this legislation deserves an up-or-down vote. Please know that I will keep your comments in mind as I continue to work with my colleagues to pass a health reform bill that makes healthcare affordable for all Americans.
Again, thank you for writing. If you should have any further comments or questions, please feel free to contact my Washington, D.C. office at (202) 224-3841. Best regards.
Sincerely yours,
Dianne Feinstein
United States Senator
By Jeff Harding March 10th, 2010
My favorite party boy economist, Nouriel Roubini, just came out with his analysis for the second half and he notes that wemay be heading toward a double-dip recession. Too much negative news, he frets. I have been saying this for some time. The difference between me and Roubini is that he believes in the necessity and efficacy of fiscal and monetary stimulus whereas I don’t. He went to Mises University but, apparently, only took Austrian Econ 101, not 201.
Here is his research note:
V, U and W
A slew of poor economic data over the past two weeks suggests that the U.S. economy is headed for a U-shaped recovery—at best—in 2010. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic levels of growth which RGE forecast for H1. The U.S. faces continued challenges in H2—particularly as historic levels of fiscal stimulus fade—and appears far too close to the tipping point of a double-dip recession.
This is not the conventional wisdom. Heated debate continues to rage in the United States on whether the economic recovery will be V-shaped (with a rapid return to robust growth above potential), U-shaped (slow anemic, sub-par, below trend growth for at least the next two years) or W-shaped (a double-dip recession). The V camp includes distinguished research groups and individuals such as Ed Hyman’s ISI, Larry Meyer’s Macroeconomic Advisors, the research group of JP Morgan, Michael Mussa and others. The U camp includes—among others—Roubini Global Economics, Goldman Sachs’ U.S. economic research group, PIMCO and Ken Rogoff. As early as August 2009, I worried in a Financial Times op-ed about the risk of a double-dip recession even if our RGE benchmark scenario characterizes the risk of a W as still a low probability event (20% probability) as opposed to a 60% probability for a U-shaped recovery. Others concerned about the double-dip risk include also David Rosenberg, Gary Shilling and John Makin. … Continue reading Party Boy Roubini Worries About Double Dip
By Jeff Harding March 9th, 2010
March 1 (Bloomberg) — The U.S. Transportation Department will lay off 2,000 employees today, halting construction projects, reimbursements to state governments and highway safety programs, according to a statement.
Employees will be furloughed without pay because a funding measure stalled in Congress, the department said in a statement today. The affected workers are in the Federal Highway Administration , the Federal Motor Carrier Safety Administration the National Highway Traffic Safety Administration and the Innovative Technology Administration.
According to Keynesian theory, once government fiscal stimulus works its way through the economy, it will create real jobs and cause lasting economic activity. Maybe Paul Krugman and Joe Stiglitz are correct: they just aren’t spending enough. Maybe we haven’t allowed enough time. Maybe we aren’t spending it on the good government projects that really do create economic activity. Maybe …
Let me think about that … nope. It just doesn’t work. Again. And again. And again.
By Jeff Harding March 9th, 2010
I watched George Papandreou last night on PBS being interviewed by Judy Woodruff. He lied the whole time. She did a pretty good job of trying to get him to admit that the Greek economic system is screwed and the Papandreous in particular had the most to do with it. Instead he just kept up with his rant against “speculators” who are conspiring against Greece.
This is nothing but a crock. Yesterday at Zero Hedge where I am a contributor, my co-blogger, “Tyler Durden” pointed out an article from Dow Jones yesterday that said:
German market regulator BaFin said Monday that so far, it doesn’t see any sign of massive speculation in credit default swaps against Greek government bonds, despite some recent press reports suggesting this.
A significant reason behind widening CDS spreads is the increasing demand for insurance against Greek risk, BaFin said in a statement, adding that it closely watches the government bond and credit derivatives markets for selected euro-zone countries.
In other words, the Greeks are fiscally incompetent and the markets are responding to this in a rational way. So George wants his fellow sovereigns to regulate these speculators so they can’t drive up the cost of the debt that Greece must sell to try to stave off default. In other words, the Greeks shouldn’t be punished for their fiscal stupidity.
Tyler Durden in an accompanying piece summed up Papandreou’s speech on this perfectly, and hilariously: … Continue reading Greece Cries Wolf, Again
By Jeff Harding March 9th, 2010
I republished the “Government Health Care Kills” article on ZeroHedge where I also publish (same stuff as here at The Daily Capitalist). It had about 3,000 reads and 120 comments. The comments were mostly negative, especially from Canadian and UK readers who defended their systems and denigrated the U.S. health care system. Many comments were in the nature of a screed. Here is a response I made to their comments that you may find interesting.
The proper way to analyze the delivery of health care is to understand how and why our system is flawed. I would argue that the free market delivers any product or service better and more efficiently than any government system. I think most of you would agree in general with that statement, but you don’t see it applying to health care.
The U.S. health care system is highly regulated. We have no real free market health care system. As a result the delivery of health care is highly distorted by the government and the result has been an expensive and often burdensome system. This has been going on since 1965 with the passage of Medicare. The rigged tax code, the prevention of competition, the lack of control by consumers of their health care dollars, meddlesome regulation, and the burden of Medicare costs being borne by non-Medicare privately insured consumers, have lead to our current mess.
Yet I don’t see similar problems in the delivery of other goods and services, say food for example, because the government does not regulate and control it. Yet food is more necessary to sustaining life than health care.
With all of these flaws, almost all (but not all) innovations, new tools and drugs come from the U.S. That is only because of the profit system that can bring big rewards to innovators and entrepreneurs.
I have studied the health care systems of other countries that have some form of government universal health care and they are all losing money, resort to rationing (cutbacks in services), and have a shrinking population base with which to support an aging population. From Cato: … Continue reading Government Health Care Kills, Part II
By Jeff Harding March 9th, 2010
I wonder if these two headlines have something in common:
FDIC Bracing for a Wave of Failures
and
Failed Banks May Get Pension-Fund Backing as FDIC Seeks Cash.
The FDIC is running out of money, is expecting many more bank failures this year, and is looking for “creative” methods of financing the mop-up.
With bank failures running at their highest level in nearly two decades, the F.D.I.C. is racing to keep up with rising losses to its insurance fund, which safeguards savers’ deposits. On Tuesday, the agency announced that it had placed 702 lenders on its list of “problem” banks, the highest number since 1993.
Not all of those banks are destined to founder, and F.D.I.C. officials said Tuesday that they expected failures to peak this year. But they also warned that the fund might have to cover $20 billion in additional losses by 2013 — a bill that could be even greater if the economy worsens. …
[W]ith so many banks failing, the federal deposit insurance fund has been severely depleted. At the end of 2009, it carried a negative balance of $20.9 billion.
The insurance fund is in better shape than such numbers might suggest, however. Officials estimate that bank failures would drain about $100 billion from the fund from 2009 through 2013. But of that amount, a total of roughly $80 billion in losses were recognized last year or projected for 2010. By that math, the agency is expecting an additional $20 billion of losses over the next three years.
Here is one of the creative ways they will finance the clean-up of failed banks:
The Federal Deposit Insurance Corp. is trying to encourage public retirement funds that control more than $2 trillion to buy all or part of failed lenders, taking a more direct role in propping up the banking system, said people briefed on the matter.
Direct investments may allow funds such as those in Oregon, New Jersey and California to cut fees for private-equity managers, and the agency to get better prices for distressed assets, the people said. They declined to be identified because talks with regulators are confidential.
Oregon’s retirement fund may contribute $100 million as regulators seek “the support of state pension funds to solve the crisis surrounding ongoing bank failures,” Jay Fewel, a senior investment officer at the Oregon State Treasury…
Private-equity managed funds typically promise they’ll return funds to their investors in about 10 years. Pension funds are aiming to fund retirements that are decades away and thus can hold on to investments longer, which would help ease the FDIC’s concern, said one of the people.
But wait, there’s more:
FDIC guarantees may soften the risk of investing public pension money in distressed banks, Whalen said. When the FDIC sells a failed bank, it typically shares a portion of the loan losses.
And that, my friends, makes for some very sweet deals.
By Jeff Harding March 7th, 2010
This was a busy week. A lot of data came in with conflicting indications.
In addition to the raw data I get (from the same sources as everyone else), I review reports from other economists and commentators as well. Some of them I know I will always disagree with, others I highly respect. While I like to keep track of conventional wisdom, I always read the data first and come to my own conclusions before I read what others think. It helps me stay “honest” if you will. Then if I’ve missed something, I can think it through a bit more.
The reason I am saying this is that one of the economists I respect is David Rosenberg at Gluskin Sheff. His last report (Friday, March 5) was so good that I’m going to quote from it quite a bit. It mirrors a lot of what I have been saying, and he says it quite well and we will all benefit from his analysis.
But first, here’s a reprise of recent data:
Residential Real Estate:
[New home] sales dropped 11.2% in January from a month earlier to a seasonally adjusted annual rate of 309,000, the Commerce Department said Wednesday. The decline brought sales to their lowest level since the government began tracking the numbers in 1963. Sales were 6.1% lower than in January 2009. …
The drop in sales in January triggered an increase in the backlog of unsold new homes on the market, pushing it up to the equivalent of what would normally be sold in 9.1 months versus eight months in December. And the abundance of homes on the market continued to bring prices down. The median sales price for new homes fell 2.4% to $203,500 in January, compared with a year ago.
Prices are the lowest since December, 2003. … Continue reading Are We in a Recovery?
By Jeff Harding March 5th, 2010
By Jeff Harding March 5th, 2010
They probably misplaced a decimal point.
The nonpartisan Congressional Budget Office said Friday that based on the Obama administration’s budget proposal, deficits over the next decade would be $1.2 trillion higher than the White House estimated.
A preliminary analysis of the president’s budget by the CBO forecasts a $1.43 trillion deficit for fiscal year 2011, $75 billion higher than the White House projection. The CBO also estimated deficits from 2011-2020 would be more than $9.7 trillion, compared with $8.5 trillion projected by the administration.
Notably, over the same period, the CBO revised downward the savings estimates from legislation that would reduce subsidies to student-loan lenders, to $67 billion from $87 billion.
The total estimated cost of the Treasury Department’s Troubled Asset Relief Program increases to $109 billion, compared with an earlier estimate of $99 billion, due largely to a revised assessment for providing tax-free funds to American International Group Inc.
The CBO said it couldn’t analyze what the administration projects to be $743 billion of revenue from health-care legislation, but “assumed that the policies would have the effect set forth in the budget.”
The most startling revelation was about the health care proposal:
The proposal that would raise the most revenues, relative to the baseline, is health insurance reform. The President’s budget includes a placeholder of $743 billion in related revenues between 2011 and 2020. Because the Administration did not provide the details of the underlying legislative proposal, for the purposes of this analysis CBO assumed that the policies would have the effect set forth in the budget.
In essence, the CBO punted. You can’t trust these guys. They always lie.
By Jeff Harding March 5th, 2010
Liberals and Progressives have religious faith in government-run health care systems. I am sure, if left to their own ends, they would much rather prefer we adopt a single-payer system similar to the systems in the UK and Canada. Political necessity only permits a foot-in-the-door policy that mandates health care insurance for everyone. While these systems aren’t as inefficient as the top-down single-payer systems (such as Medicare), the current bills passed in the House and Senate impose the heavy hand of the State into almost every dark corner of the health care system in America.
These government fundamentalists march to the canon and cry of the efficiency of government-run systems and mock for-profit systems for being inefficient and wasteful. Yet there is no area of economic activity that the government operates efficiently precisely because of the lack of discipline present in for-profit ventures. The USPS just announced they lost $238 million in 2009. Fedex and UPS were profitable.
The shibboleth of the inefficiency of capitalism has so often been proven wrong by economists on all sides of the spectrum that one can only conclude that these free market deniers are worse than ignorant: they choose power over efficiency. And that is what Hayek called “The Road to Serfdom.” After all, it was the Marxists and Socialists who proved by their failures that the free market works.
It is useless to appeal to reason to these fundamentalists. Their quest for power is an end in itself and they won’t relent.
What to do?
My suggestion is that we should use scare tactics and create an environment of fear and doubt about government health care plans. This is fair since Liberals and Progressives have been spreading falsehoods about the free market system for a hundred years. We have an advantage: we don’t have to lie. The truth is scary enough.
Here are two frightening and disgusting articles that demonstrate what I am talking about. Don’t tell me it couldn’t happen here.
You might find this first article disturbing.
By Fay Schlesinger, Andy Dolan and Tim Shipman
Last updated at 1:45 PM on 25th February 2010
- Up to 1,200 patients died unnecessarily because of appalling care
- Labour’s obsession with targets and box ticking blamed for scandal
- Patients were ‘routinely neglected’ at hospital
- Report calls for FOURTH investigation into scandal
Not a single official has been disciplined over the worst-ever NHS hospital scandal, it emerged last night.
Up to 1,200 people lost their lives needlessly because Mid-Staffordshire NHS Trust put government targets and cost-cutting ahead of patient care.
But none of the doctors, nurses and managers who failed them has suffered any formal sanction. … Continue reading Government-Run Health Care Kills Thousands
By Jeff Harding March 2nd, 2010
When Haiti was devastated by an earthquake, I wrote an article, Capitalism Saves Lives and Haiti is Proof, which some people saw as insensitive. In it I claimed that capitalist countries faced such disasters and came out relatively much better than did Haiti. Commenters pointed out that Haiti just didn’t have very good building codes, and if they had, lives would have been saved.
The problem with such analysis is that that it doesn’t matter what your building codes are if people can’t afford them. Only wealthy, capitalist countries have the luxury of enforceable building codes, good architectural engineering, competent contractors, quality building materials, private property rights, banking and financing, and the freedom to act.
Haiti lacks these requirements. It lacks property rights and freedom, is corrupt, and, as a result, is the poorest country in the hemisphere. Chile went capitalist in the ’70s and has been a success story ever since, now the wealthiest country in South America.
Unfortunately events have borne my idea out because as pointed out in this opinion in the Wall Street Journal (below), Chile’s earthquake was 500 times more powerful than Haiti’s, yet the destruction and death toll is arguably 300 time less than in Haiti, if you calculate the death toll.
Chile is a powerful illustration of capitalism working and saving lives.
This article by Bret Stephens will set you straight on the facts.
How Milton Friedman Saved Chile
By BRET STEPHENS
Milton Friedman has been dead for more than three years. But his spirit was surely hovering protectively over Chile in the early morning hours of Saturday. Thanks largely to him, the country has endured a tragedy that elsewhere would have been an apocalypse.
Earthquake magnitudes are measured on a logarithmic scale. The earthquake that hit Northridge in 1994 measured 6.7 on the Richter scale. But its seismic-energy yield was only half that of the 7.0 quake that hit Haiti in January, which was the equivalent of 2,000 Hiroshima-sized bombs exploding all at once.
By contrast, Saturday’s earthquake in Chile measured 8.8. That’s nearly 500 times more powerful than Haiti’s, or about one million Hiroshimas. Yet Chile’s reported death toll—711 as of this writing—was a tiny fraction of the 230,000 believed to have perished in Haiti. … Continue reading Capitalism Saves Lives, Part II
By Jeff Harding February 27th, 2010
Only 2 banks were closed this week according to the FDIC’s Friday announcements:
Rainier Pacific Bank
Carson River Community Bank
In the Q4 FDIC report:
For the full year, the number of reporting institutions fell from 8,305 to 8,012. Only 31 new charters were added in 2009, the smallest annual total since 1942. Mergers absorbed 179 institutions during the year, and 140 insured institutions failed. This is the largest number of bank failures in a year since 1992. The number of institutions on the FDIC’s “Problem List” rose to 702 at the end of 2009, from 552 at the end of the third quarter and 252 at the end of 2008. Both the number and assets of “problem” institutions are at the highest level since June 30, 1993.
By Jeff Harding February 25th, 2010
UPDATE: GDP rises to 5.9% in Q4 from 5.7%! That makes me an economist.
Today there was a lot of unexpected news.
Unemployment claims increased by 22,000 last week and the culprit is … global warming. This was unexpected.
Orders for durable goods fell 0.6%, the biggest drop since August. This was unexpected.
Here is the report on unemployment:
The number of Americans filing first-time claims for unemployment insurance unexpectedly increased last week …
Initial jobless applications rose by 22,000 to 496,000 in the week ended Feb. 20, Labor Department figures showed today in Washington. The total number of people receiving unemployment insurance gained and those receiving extended benefits decreased. …
Continuing claims rose 6,000 to 4.62 million in the week ended Feb. 13. The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs.
The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at 3.5 percent in the week ended Feb. 13, today’s report showed. Nine states and territories had an increase in claims for that same week, while 44 had a decrease. …
A Labor Department spokesman said part of the reason for the increase in weekly claims was the processing of a backlog of applications in mid-Atlantic states and New England, where snowstorms hit earlier this month. …
Economists forecast weekly claims would fall to 460,000, from a previously estimated 473,000 for the week ended Feb. 13, according to the median of 43 projections in a Bloomberg News survey. …
“Strong manufacturing is not enough to support the labor market as a whole, it seems,” Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York, said before the report. [Ya think, Mr. Shepherdson?]
Then durable goods orders decreased:
Orders for durable goods excluding transportation unexpectedly fell 0.6 percent, the most since August, while a measure of bookings for business equipment showed its biggest decrease in nine months, the Commerce Department in Washington said. The Labor Department said new claims for unemployment insurance rose to a three-month high. …
Factories may be taking a pause to gauge demand after boosting production in the second half of 2009 to replenish inventories. …
Orders for motor vehicles and parts dropped 2.2 percent in January after a 5.5 percent gain. …
Economists forecast orders for durable goods excluding transportation equipment, which tends to be volatile month to month, would rise 1 percent, according to the median of 42 economists surveyed by Bloomberg News. …
“There’s no reason to think this is the start of a double- dip — some back and fill is standard operating procedure in recoveries,” Chris Low, chief economist at FTN Financial in New York, said in an e-mail to clients. “ [Wait, if it's SOP, then why didn't the economists expect ...]
You may wish to ask yourself why we even listen to economists’ forecasts. I read them because I need to be entertained. Maybe I should take Nassim Taleb’s advice and just ignore the news. But then I couldn’t get filthy rich writing this blog and entertaining you.
But, I pose a serious question. Why do we listen to these guys?
Last April I wrote an article “Why You should Ignore Economists.” I gathered housing forecasts for the past five years from The Daily Capitalist’s Research Vault, and showed why the NAHB fired David Seiders too late and why the NAR fired David Lareah too late. In my opinion they guys were pimps for the industry. Let it not be said that I think all economists are pimps. But for the most part their method of analysis is flawed because their basic economic theories are flawed (neo-Keynesisn, econometrics, Monetrarism).
What most economists do is read all the reports of the other economists, get a feel if the trend is positive or negative, and then extrapolate last month’s data into a prediction for the future. As I said in the article:
Economists like these operate on historical data. The idea is that by looking at the past you can predict the future. They failed to look at what was happening right in front of their eyes. They failed to see that massive money pumping by the Fed created a classic boom in housing that went bust when money supply declined.
If they are right they are just lucky. If they are wrong, they are unlucky.
Hayek and Mises taught us that you just can’t sit down with a hunch and see if the data fits. If you have billions of economic actors, it’s hard to know which data are the correct data. So, you’ve got to start with a theory, test it with logic, reason, and the general law of economic, and then look at data. Even then you can only paint with a very broad brush. Please read Hayeks Nobel speech, or my article on this subject.
I have the luxury of being a writer about economics and not an economist. Since you’re not paying for my forecasts you probably don’t think highly of it. Which you shouldn’t. But I am going to make a forecast. The GDP preliminary numbers for Q4 2009 are coming out tomorrow (Friday). These numbers will replace the advance report which showed a 5.7% increase. The final number come out on March 26.
I predict the preliminary GDP will be lower than 5.7%. Let me say that I have the luxury of being a writer on economics not an economist. Since you’re getting my forecasts for free you should, rightly so, consider the value of something that’s free.
If I’m right I’ll be considered smart (lucky). If I’m wrong I’ll be an economist.
By Jeff Harding February 24th, 2010
Somehow Comptroller of the Currency John Dugan didn’t get the message from Team Obama about encouraging consumers to spend. As you know the Administration’s economic advisers see vigorous consumer spending as the solution for overcoming our recession. Consumer spending formerly represented 70% of the economy.
Apparently the consumers are getting the message without Mr. Dugan’s help since personal savings have been increasing since the economy tanked:
I agree with Mr. Dugan that we all ought to be saving more in order to protect our personal financial well being:
WASHINGTON — Comptroller of the Currency John C. Dugan today issued the following statement in recognition of America Saves Week, February 21 – 28, 2010:
Encouraging and increasing saving is important to both consumers and financial institutions. Opening a savings account is the first step in helping a consumer achieve his or her financial goals, such as purchasing a home, creating a college or emergency fund, or retirement. Over time, saving allows consumers to accumulate assets, build wealth and feel financially secure.
I commend the Consumer Federation of America for its ongoing efforts with the America Saves Week campaign. I also want to recognize the commitment of national banks across the country to encourage saving as a way to create economic stability and to expand financial services in their communities.
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