Blessings of falling nominal wage growth

Currently, we operate in a word that some would characterize as an infinite paradigm. This means that GDP must grow each year, prices must rise to reflect the fact that the economy is heating up in a positive way and the money supply must constantly grow to foster commerce.

All of these things were taught in college. Every student in economics was taught the above. Like parrots, they repeat the same thing over and over. Each generation from the 30’s onward has looked upon recessions and other “animal spirits” as inexplicable variables that the human being just happens to create. All of this is nonsense, just as the idea that higher nominal wages are a function of productivity.

To clarify things, higher REAL wages are a function of productivity. It’s the ability to have a higher living standard with the same amount of the “generally accepted medium of exchange” is your pocket/bank account/vault.

I couldn’t care less if my paycheck was 100 dollars, but I could buy all the amenities of life and have something left over. But if my paycheck was 100 dollars, and each subsequent month, the REAL value (not face value) went down, I would demand an explanation. (In the short run, it is true that the certain fluctuations might impact wages that they fall nominally; but only because of the frictional transition of employment from one industry to the other.)

In a fixed money supply environment, money would just shift through different stages of production, impacting the NOMINAL levels throughout the process, making them smaller in nominal terms. The goal is to have the funds/money/savings invested in higher order goods (furthest from consumption) to create a situation of lesser scarcity in the consumer goods industry later. The funds are tied up in the higher order sectors, leading to a DROP in consumer prices (goods not sold after fund transfer) and to a RISE in wages.

In a free market, there would be possibly increases in the money supply, as people’s preferences would shift and the demand and supply of money would change, bringing to an increase or decrease in the money supply. The difference between that system and this one we have now is the entrepreneurial possibility of foreseeing these changes in advance in a freely priced market, while in the current system, the market does not convey such information, but a bureau of government officials (university professors).

In my opinion, a general rise in wages is indicative of a bubble in a certain sector of the economy. As additional created credit flows to wage earners, they bid up the prices of consumer goods (a bottleneck effect occurs due to funds being wrapped in higher order goods along the productive line), forcing the acceleration of wage increases to match the increases in the prices of consumer goods. This, unfortunately, never happens, as wage earners are always a step behind the price increase.

Work in progress resumes

While browsing thorugh various linkedin profiles, one thing came to particular attention to me that relates to resumes the people put up.

One of the striking things that I saw was the apparent "abundance" of skills and knowledge some individuals have. From this basin of knowledge the most appauling is the " language" section. In this section, you have choice to write which languages you know without stating the LEVEL of knowledge that you have obtained. This however isn't the only section where you have a choice to write freely. The other relates to the "skills" section.

This usually includes people citing multiple language knowledge together with other "skills" they acquired. Knowledge of far east languages or other European languages are usually stated without any reference to level or certificate of knowledge.

The same applies to skills. In this section you can "endorse" an individual who has stated a skill and if you deem fit, you may confirm this skill. Since skill endorsement can only be done when you have be-friended someone, there is a more than apparent bias when endorsing someone.

From personal experience, there are no rules to "skills" and "knowledge" when you are asking for employment opportunities. The employer looks for skills that a person might have that will increase his marginal revenue in excess of marginal costs expensed for employing you.

So, people may feel free to write what they want, its the employer who determines what is really of value in your resume!

The marginal employer and the Croatian IRS

It has been promulgated that over the past couple of years, entreprenuers have been cheating the government by not paying their fair share of taxes. This would include tax avoidance and tax evasions.

Therefore, the new Croatian governement has implemented the so-called fiscal sytems, where all bills for provided goods and services have to be printed out, carrying a unique code. The seller has to give the bill to the customer, and the customer has to take it, with a THREAT OF BEING FINED IF HE/SHE DOESN'T. This way, the government decided to crack down on those who have not been paying taxes orderly and have been "taking to much for themselves" on the side.

The ludacrious part of the entire scheme is the matching of funds in the sellers treasury with the billing amount. This means, that if an entreprenuer has just a dollar in excess of the amount as per the billing documentation, the Croatian IRS swoops in, closes the business, strikes you with a fine and if you make a hassle about it, they start picking through your financial records, just like the ilk in Brussels seems fit to crack down on wealthy individuals who take care of their money and places it in tax havens, where they are not progressively taxed to a marginal rate of over 50%.

Lets make two assumptions regarding the tax avoiders/ evaders:

1. The people who fail to pay taxes out of the incapability of making the payments, due to the tax burden.

2. People who fail to pay taxes, by keeping more money for themselves.

We will prove that both entreprenuers are doing a GOOD thing for the economy.

Point one: The government in the first assumption clearly does not understand the marginal entreprenuer. This individual functions at the margin, by barely making breakeven, or a slight profit without the taxes. If the taxes were there, the businessman would have to close his shop and discharge his workers due to the the fact that the generated revenue does not cover overhead, fixd costs, insurance, maintenance etc. If he were to pay no taxes, we would actually GROW his business, and make his products CHEAPER for the average consumer, which may also complain on the businessman's apparent lack of "patriotism" by not paying taxes.

Point two: Funds aren't going to the government and to boondoggle projects (such as city water fountains and failed gymnasiums). Or even better, to the military (which has won a heroic war a decade ago and proved their worth), when there is no clear foreign threat to our borders.

If anyone decides to come to Croatia for a vacation, please be aware that you might be fined for not taking the bill (lets be honest, if you budget DURING your vacation, you souldn't be on vacation) up to 500 kunas and illegaly ask for your personal ID in the process. They may FORCE you as a TOURIST, out of a hotel you're staying at, because the hotel manager failed to pay a substantial VAT tax.

And alas, just to make a point, if you DID OVERPAY YOUR VAT obligations to the State, but you have a difference of THREE DOLLARS between your treasury and printed bills, THE GOVERNMENT WILL CLOSE YOUR BUSINESS!!

As the old saying goes: Buyer beware (of the lackies at the Croatian IRS).......

The Friedmanite Corruption of Capitalism

I have decided to post a short essay by Professor Thomas J. DiLorenzo from mises.org. This essay should be read and understood by many today's so-called free market experts that adhere to monetarism, which in my opinion is nothing more than Monetary keynesianism. The following text can be originally read at mises.org:

All throughout his new book, The Great Deformation: The Corruption of Capitalism in America, David A. Stockman is critical of the Chicago School, especially its intellectual leader during the last half of the twentieth century, Milton Friedman. He captures the irony of the so-called free-market Chicago School on the very first page of his introduction, where he writes of the “capture of the state, especially its central bank, the Federal Reserve, by crony capitalist forces deeply inimical to free markets and democracy.”
This is a deep irony because it was Chicago School economists such as George Stigler who wrote of the “capture theory of regulation” when it came to the trucking industry, the airline industry, and many others. That is, they produced dozens of scholarly articles demonstrating how government regulatory agencies ostensibly created to regulate industry “in the public interest” are most often “captured” by the industry itself and then used not to protect the public but to enforce cartel pricing arrangements.
This was all good, solid, applied free-market economics, but at the same time the Chicago Schoolers ignored the biggest and most important regulatory capture of all — the creation of the Fed. The Chicago School simply ignored the obvious fact that the Fed was created as a governmental cartel enforcement mechanism for the banking industry — during an era when many other kinds of regulatory institutions were being created for the same purpose (i.e., “natural monopoly” regulation).
Not only did the Chicago School ignore this glaring omission from its “capture theory” tradition of research on regulation; it also ignored the realistic, economic analysis of political decision making that was an important part of the research of the two most famous Chicago School Nobel laureates next to Friedman — George Stigler and Gary Becker. Stigler and Becker published some important articles in the field that is better known as public choice, or the economics of political decision making. Friedman himself had long been an advisor to Republican politicians, so no one could credibly argue that Chicago School economists were naïve about the realities of politics.
However, if Friedmanite monetarism was anything, it was naïve about political reality. The fatal flaw of Friedman’s famous “monetary rule” of constant growth of the money supply in the 3-4 percent range was premised on the assumption that a machine-like Fed chairman would selflessly pursue the public interest by enforcing Friedman’s monetary rule. According to Friedman, Stockman writes, “inflation would be rapidly extinguished if money supply was harnessed to a fixed and unwavering rate of growth, such as 3 percent per annum.” This was the fundamental assumption behind monetarism, and it flew in the face of everything the Chicago Schoolers purported to know about political reality. In other words, Friedmanite monetarism was never a realistic possibility, for as Friedman himself frequently said of all other governmental institutions besides the Fed, a government institution that is not political is as likely as a cat that barks like a dog. Friedman’s monetary rule, Stockman concludes, was “basically academic poppycock.” He mocks the idea of a“monetary rule” as the “idea that the FOMC [Federal Reserve Open Market Committee] would function as faithful monetary eunuchs, keeping their eyes on the M1 gauge and deftly adjusting the dial in either direction upon any deviation from the 3 percent target.” This was “sheer fantasy,” says Stockman, and an extreme example of “political naivete.”
Stockman also takes Friedman and the Chicago School to task by writing that “Friedman thoroughly misunderstood the Great Depression and concluded erroneously that undue regard for the gold standard rules by the Fed during 1929-1933 had resulted in its failure to conduct aggressive open market purchases of government debt.” Stockman debunks the notion that the Fed failed to pump enough liquidity into the banking system by merely noting that“there was no liquidity shortage” during that period and “commercial banks were not constrained at all in their ability to make loans or generate demand deposits (M1). “Friedman thus sided with the central planners,” writes Stockman, in “contending that the ... thousands of banks that already had excess reserves should have been doused with more and still more reserves, until they started lending and creating deposits in accordance with the dictates of the monetarist gospel.” As a matter of historical fact, Stockman points out, “excess reserves in the banking system grew dramatically during the forty-five month period, implying just the opposite of monetary stringency” (i.e., Friedman’s main argument). Thus, “there is simply no case that monetary stringency caused the Great Depression.”
The current Fed chairman, Ben Bernanke, based his academic career on the false Friedmanite theory of the Great Depression, Stockman writes. Bernanke’s“sole contribution to this truly wrong-headed proposition was a few essays consisting mainly of dense math equations. They showed the undeniable correlation between the collapse of GDP and money supply, but proved no causation whatsoever.” Thus, the old saying about “how to lie with statistics” was matched by “how to mislead with mathematical models.”
Stockman makes the case that the Austrian business cycle theory is a far more reliable source of understanding about the Great Depression. “[T]he great contraction of 1929-1933 was rooted in the bubble of debt and financial speculation that built up in the years before 1929,” he writes, and “not from mistakes made by the Fed after the bubble collapsed.” Friedman’s monetary theory, in other words, was not based on “positive economics” or historical reality, but was assumed to be “an a priori truth” merely because it was the “great” Milton Friedman who authored it. In any event, Friedman’s entire theory of the Great Depression has been “demolished” by his intellectual disciple, Ben Bernanke, who increased the excess reserves of the U.S. banking system from $40 billion to $1.7 trillion as of 2012 with little or no recognizable effect on the real economy.

 

 

Perhaps Friedman’s biggest sin, according to Stockman, was being the “brains” behind Richard Nixon’s executive order in 1971 that removed gold standard restraints on monetary printing. Friedman therefore assisted in the institutionalization of “a regime which allowed politicians to chronically spend without taxing,” he writes. Ironically, “the nation’s most famous modern conservative economist became the father of Big Government, chronic deficits, and national fiscal bankruptcy.” “For all practical purposes ... it was Friedman who shifted the foundation of the nation’s money supply from gold to T-bills.”
Stockman describes Friedman’s political naivete as mind boggling. “Friedman never even entertained the possibility that once the central bank was freed from the stern discipline of protecting its gold reserves, it would fall into the hands of monetary activists and central planners” and that the Fed would“become a fount of rationalizations for incessant tinkering and intervention in financial markets.” Printing dollars with reckless abandon, the Fed fueled commodity booms in the 1970s, followed by busts and crashes, and then did the same with stock and real estate markets in the succeeding decades. 

GDP Drops in Croatia again...Recovery in sight or more pain to come?

The business portal: poslovni.hr, just released news that Croatia will continue with more negative data in respect to the GDP.

The GDP will continue falling, but moderately, as the report claims. As per the report: (the report has been translated using Google Translate, for a more thourogh view of the report please see the originial):

"The economic downturn in the first quarter is attributable to personal consumption, regardless of the slightly earlier date of Easter. Negative impact on the growth of GDP as compared to previous periods could come from net exports, in accordance with fluctuations in foreign trade, "said one of macroeconomists in the survey Hine.

Due to the recession in the eurozone, our largest trading partner, weakens the demand for exported goods, which badly affects the Croatian exports. In the first three months of this year, exports fell by 7.9 percent compared to the same period last year.

"A slight increase in industrial activitiy and construction work can hardly compensate for the decline in private consumption and exports in the first quarter," says one of ht emacroeconomists in the survey of Hine."

Of course, just as all reprots go, the main problem has been and always will be exports. It is somehow impossible that we can never get any export growth (even though there are mouths to feed in our own country). And we have the dreaded GDP figure collapsing again.

The reason why mainstream economists missed the crisis is due to the fact that they consider GDP growth to be a positive thing. I beg to differ. Remember, GDP consists of consumption, invenstments, government spending and net exports.

First of all, and pardon my logic, how is it possible that consumption and investment go on the samre axis? When constructing a GDP curve, as taught in mainstream 101 macro classes, the GDP is created by combining the nominal values of the governet spending curve (which is always in ascension), the investment curve and the consumption curve. Adding all of these, get the GDP.

As long as the belief holds that investment and spending are located on the same axis, we will continue to have recessions and bubbles in various markets. That is why I believe that if the monetary system is reformed, and we have the "peoples money" (which is nothing else but the peaceful choice among individuals to choose an object with which trade will be conducted) and a 100% reserve banking system, the GDP will not matter as yardstick of economic health. The only body that prints these figures is the governmet, a source of high competence.

The fall in GDP in Croatia might be a sign of a recovery, the washing away of excess malinvenstments that occured during the previous bubble years. But due to the fact that the government has increased their role in the economy, ballooned their public debt and used the banking system to inflate their way out of their mess, I believe that there is more pain to go.

Over the past quarters, the nations stock index (CROBEX) has shown emmence volatility, ralling and dropping (bottoming out in the current  period). This can be attibuted to the inflow and outflow of money provided by the banking system. There is no reason that the CROBEX would rally. There are no good news, no new manufactuing firms, the national debt hasn't gone done, the structural unemployment issue still remains and the governent has expanded.

The only reason that the index would rise would be to nominaly money supply growth. The fall, relates to the destuction in the money supply. That is why the GDP figure is such a horrible indicator. It doesn't take into inflation (even though it is deflated for the "official core number") and capital missalocation that it creates. The figure contains government outlays - a drag to the econmoy, or better put: expenditures that don't go in line with consumer preferences). And finally: Any GDP growth with rising consumption and investment sums up to bogus growth. Or growth that is financed by money expansion and not real savings.

So, we may conclude that there is a recovery in sight somewhere in the economy, probably being reinflated as we speak, and yes there is more pain to come - as long as the government keeps the productive economy in a strangelhold with the assistance of the banking sector, there will be more pain.

Why would an auditor miss a bank run?

I have decided to write on this topic because I currently work as an auditor. I have been up to this date in many firms where i conducted audits of the firm's financial statements and through various ways have "tested" the company's balance sheet's to determine any wrongdoing.

The thing that caught my eye was the fact when an auditor approaches a bank, the audit procedures in my opinion somehow breakdown. This is due to the fact that manufacturing firms have to sell a product and pay off suppliers to remain in business. A bank creates money from loaning out demand deposits and captures a spread.

The main difference when going about on audit of a mancufacturing company and a bank, is the perception of the person conducting the audit. The primary focus on a manufacturing firm is the ability to generate cash flow and the unbiaseness of the accrual process. When auditng a bank, most of the itme is focused on bank product of the bank - its' loans (for traditional markets this is the case).

If the loan receiver has a hard time paying of the loan, the auditor will quesiton the vaildity of the asset and request an impairment of th asset. The auditor however never questions the origins of the loan. By this I mean the systemic imbalance of borrowing short and lending ex nihilo long. The auditor is never concerned of any bank run due to the modern nature of the banking system.

I found this particularly odd. The only logical conclusion that I come by is the perception of the participant doing the audit, and the repetitiveness of the process. The participant views the fractional nature sound because a supranational (central bank) is stranding behind the Entity making sure that the diminishing reserves to cover the deposits is in line with "historical practices", or in line with industry and economic wide conditions.

This can be clearly seen at the examples in Cyprus a month ago, when the banks run ensued. I am sure that each bank that went under in Cyprus had an auditor. The auditor went through their books and determined no material misstatements of the banks' balance sheets. The other problem that would arise is the going concern basis: If the bank was unable to honor it's depositors for withdrawl on demand, then the bank would have been prepared for a banckruptcy filing. This hasn't occured as well. It is if the auditors were fooled or something; unable to see that the bank is always insolvent and can be brought to it's knees with a run.

The bottom line is this: An auditor can't see a bank run, because he is not interested in one, nor do most of them have any knowledge of economic theory underpinning their analysis. If they did have knowledge of economic cycles they would have made an adverse opinion of the statements during the boom faze, when the percentage of NPL's (non performing loans) is at a low in the cycle.

Unfortunatley, the common practice is to follow the mainstream approach and give a green light. Anyone that stands out will be attacked as reactionary and insance. Just as the rating agency Egan-Jones was called to b mad when they downgraded US debt and other debt for that matter.

There should be first of all an overhaul of the banking practices, and then an auditor will be able to make decent calls just as they do for manufacturing firms.

Why capital accumulation is important and how it effects the price structure

 

The title of this blog post is directly related to a key tenant in Austrian economics, which says that the joy of consuming wealth is derived from the self evident supply of given good or rendered service X,Y,Z.  We shall skip the semantics regarding resource transformation to fulfill this desire.

The primary goal of creating any supply of capital is to sustain the individual for a lengthy period of time in order for him to complete other tasks he deems satisfactory or necessary to bring him in a state that he strives to. Capital accumulation in a free market is a wonderful process because it is based on voluntary compliance of a mass of individuals, each seeking its own end.

This process is disturbed when a self appointed entity with a monopoly on the judiciary system can appoint how and what resource may be effectively employed in a certain endeavor. This entity compounds the problem when it, through the banking system, legalizes the counterfeiting of the currency through fractional reserve banking, creating an artificial boom in the capital goods industry and subsequent inflation.

According to business.hr, the inventory of the manufacturing industries fell 12,3% YOY. While this may be a bullish sentiment for commodity broker dealers, who may just take a long position in a certain commodity and with the same demand dynamics that prevail YOY expect to profit from a spike in inventory products, this is bad for the average consumer, because it will eat away a part of his income when purchasing the final product.

Unfortunately, this is what happens when the economy is shaking of the addiction of cheap credit from the banking system. When the boom faze is over, the manufacturers are forced to dump their inventory onto the market at deep discounts in an attempt to salvage themselves from insolvency. Sometimes, they go under. The subsequent step in this process, is the curtailing of expansion, brought by lower inventory levels.

Some of this inventory had to be sold at a deep discount, as some inventory, due to the artificial boom, have been used in an accelerated manner as the boom faze continued, as more often in industries where day were wasted in suboptimal projects. So, now, it will take time for these stocks to be replenished.

If the government stays out of this process, the recovery will happen sooner than later. If the government interferes in this process through subsidizes of purchases or outright price controls, there will be even less inventory numbers YOY.

The market has to clear. The malinvestments must be liquidated and capital must be freed in optimal projects. If the government inflates it will only lead to more resource consumption and with that lesser inventory numbers.

To reiterate what was said at the beginning, capital formation makes economies tick. A greater unused level of inventory that is known to satisfy future demand in certain industries boosts the economy. Artificial credit gives a artificial boost and excess inventory consumption.

The government better let the market clear and make it easier for producers to sell their products in lines of production which are most profitable for them. Until that happens, expect more inventory volatility…

Cracking Krugman on Croatia

 

Princeton Professor of Economics Dr. Krugman was interviewed by Jutarnji list newspaper a couple days ago regarding the way Croatia should get itself out of an economics rut it has been it for the past couple of years.

The headline reads: “Spend, spend, spend!”

Now, I am sure that Krugman doesn’t spend all of his salary on consumer goods and therefore surely “deepening” the depression in The US, lets just briefly skim across the interview and make some short assessments of what he said.

The following unbiased short excerpts are:

“In a recent manifesto, which tries to primarily to summon economic reason in TheUS - hence the title "Manifesto for Economic Sense" - Krugman and his collaborator on the project is Richard Layard of the London School of economics,  put forward the thesis that the assertion of the majority of today's politicians and economic policymakers that the main cause of the present crisis is irresponsible borrowing countries is completely wrong. Krugman and Layard exception is Greece, which broke all reasonable limits long before the catastrophe that has happened to her.”

So according to Krugman, it is the “level” of “excess” spending that is to blame for Greece’s mess, but not for Spain’s nor Italy’s mess. Too bad he couldn’t specify what “level” of spending this is.

Next, no mention of a credit expansion in these countries, that manifested itself in the capital goods market that brought on a subsequent boom. But, before we dive into that, the following line is also intriguing:

- If you save your income so you do not buy from me, you destroy my income and my sinking jointly deepen the crisis.

Again, what magical level of personal consumption is sufficient to satisfy Krugman? Which level won’t worsen the crisis? 20%? 60? 130?

I ask the question, why do I have to save then? Lets look at the 100% option. I spend all my resources on consumer goods. I cannot purchase durable consumer goods, which qualify as capital goods, because an automobile (a durable consumer good) is purchased with a lot of resources. So, with my salary, I am priced out of this market. To buy a car I will have to lever up. I will have to go into debt. OK. Cool. So, someone will have to give me funds, WHICH ARE SAVED SO I CAN PURCHASE THIS VECHILE. Nope, can’t do that, everyone else is also spending all of their funds on consumer goods as well.

Hmm, I really hope that factories that produce consumer goods will able to keep up with all this demand. I wonder, how will factories that produce machinery which, sell them to other consumer producing factories be able to obtain funds, if all the funds that directly hit the consumer goods industries bid for factors of productions for their immediate disposal (selling clerks, janitors, new corporate automobiles, computers etc.)? They have a choice (the consumer producing industries), to bid for resources (even outbid) to satisfy the demand for their products, or save the funds and investment them in PP&E. THEY CAN’T HAVE BOTH AT THE SAME TIME.

We haven’t even discussed the effects that new money entering the economy has on the capital structure. Again, lets postpone this question for a little later. Lets assume that there is no new money in the economy. The money supply is highly inelastic.

Nobody can consume above the level he earns, unless there are individuals that refrain from immediate consumption. So, how does a factory get built? Can people chill on the beach and drink a pina colada from the pina colada factory if there is no factory? Well, I don’t think so. So, what do they have to do?

They will have to sacrifice a confortable time at the beach and drinking the colada for working on the factory. But since that they haven’t got a product (colada) to drink, their consumption level is zero. (Their consumption level is also zero if they stay on the beach, the colada doesn’t magically appear out of nowhere. I am sure that there is a demand for the colada, but without supply, good luck drinking one!). So these people will have to SAVE (refrain from consumption that doesn’t exist due to a lack of supply) whatever resource they can to sustain themselves while building the factory! This may be, for simplicity’s sake, dirt that grows on trees. They will have to use their own labor and time to accumulate dirt that grows on trees, to be able to sustain themselves while building the pina colada factory. What if they eat all their accumulated dirt that grows on trees before they finish the factory? They will have to USE THEIR TIME TO COLLECT MORE, WHICH COULD HAVE BEEN USED TO COMPLETE THE FACTORY! Again, they cannot make the cake and eat it too.

Enter credit expansion. According to ABCT, credit expansion creates the Cantillon effect and the subsequent reverse Ricardo effect that impoverishes the capital structure which is A MUST to maintain a certain level of consumption. If new money enters the economy in the capital goods industries, a boom will occur, if it enters the consumer goods industry, it will impoverish the capital structure, setting inflation, high nominal wages, and no capital structure to produce these goods.

Krugman gives no mention of what these effects have on the economy. He of course doesn’t even consider what occurs when you run out of loanable funds (present supply of resources that sustains you through the investment process). He acknowledges a need for a minimum level of inflation, of around 3%. Why not 5%? It is only marginally higher. Why not 30%? Things would really take off then.

Professor Krugman is confused of how economies function. He adheres to John Law and other monetary cranks and fiscal charlatans, such as John Maynard Keynes.

The art of spending money must not be confused with the art of creating wealth. Because, according to Krugman, people who are stupid enough to save  during the boom years, are at fault at causing the present crisis. Which means, under consumption is to blame for a depression, and not consuming more what you don’t have. That is, consuming capital to create false GDP growth.

The logical argument of Krugman’s assertions fall on the first pillar of growth. How does he get around the notion that if you wake up on a desert island, or if you are dropped of in the jungle, HOW ON EARTH, CAN YOU CONSUME SOMETHING IF THE RESOURCES HAVEN’T BEEN ACCUMULATED (SAVED)  TO SUSTAIN YOURSELVE THOUGH THE PRODUCTION PROCESS?

Professor, I encourage you to go to a location where there isn’t a trace of modern civilization (you can bring your co-author as well) and try to build up the skyscrapers as in New York, by spending your way to prosperity. 

Until then, go brake a window, since you will be helping the economy by creating demand for a window manufacturer…

Supply in a market will always find demand

 

Ina free market economy, in which the rule of private property is sacrosanct, and individuals are free to engage in any and all forms of competitive entrepreneurialism, any product that finds its way in the market will be sold in the market. Unlike the classical economists and todays neomercantilists  who suggest that cost determines price, the demand for a good will pinpoint its price through the aggregate subjective wishes of market participants in the form of an objective market price.

Due to recessionary trends across Europe, young people have decided to travel light and spend as little as possible on accommodation. This is best seen through cheap accommodations that have sprung across Zagreb, Croatia this past year.

According to business.hr:

“Opening of cheap accommodation for backpackers has become the most lucrative tourist industry in the metropolis, […]just this year opened seven hostels. Fierce competition from some 19 hostels in Zagreb will not survive even in the first six months of this year, 41 854 nights, nearly 4,000 more than the same period last year.

Instant business has become a popular tourist branch in the capital, according to latest data of Zagreb Tourist Board, according to which only the first half of the 2012th Open seven hostels, mostly in attractive locations in the city center.”

I have seen these “resorts” pop up and it is a brilliant way for youth who are on their way to the Adriatic coast to stop in Zagreb and get a feel of Zagreb during the summer as well. Since the unemployment rate of youth is morbidly high across Europe as well as escalating living costs, the market economy has adjusted in such a manner to bring about the best possible solution in such troubled times.

I believe cheaper prices will be expected in the future from these hostels, as more demand brings about greater competition and more square meters per guest with more attractive venues and business activity between the hostels and tourism outlets.

Unless the government decides to bump in and set hostel prices, as well as mandatory insurance coverage (government insurance coverage), young people should have no problem coming here and being afraid that they might be priced out due to higher prices. If anything, this sort of business activity should be encouraged, as well as quick capital mobility in case of shifting demand for hostel services in different locations.

10 Reasons Why Austrian Economics Is Better Than Mainstream Economics

 

BY: JAKUB BOŻYDAR WIŚNIEWSKI (Original Post)

1. Austrian economists make it their priority to make sure that the theorems they formulate are derived from self-evident axioms and constructed according to the proper rules of logical deduction. These considerations are at best of secondary importance to their mainstream colleagues.

2. Austrian economists make it their priority to make sure that the assumptions they base their theorems on are thoroughly realistic, i.e., corresponding to the state of the world as it is. Mainstream economists, on the other hand, admit that their hypotheses are based on deliberately false assumptions.

3. Austrian economists make it their priority to make sure that the theorems they formulate elucidate exact causal connections between economic phenomena, rather than deliberately assuming away their existence or importance by falling back on the physics-inspired notion of mutual determination.

4. The predictive track record of Austrian economists is incomparably superior to that of their mainstream counterparts (see, e.g., here and here).

5. The theorems and conclusions of Austrian economics are perfectly comprehensible to every intelligent layman, which cannot be said about the mathematical puzzles of mainstream economics.

6. In terms of their views on the method and aims of economic theorizing, Austrian economists have a much better claim than their mainstream colleagues to being the heirs and successors of the classical economists, such as Smith, Hume, Say, and Bastiat.

7. Austrian economists never tire of emphasizing the strictly value-free character of their discipline. Thus, unlike their mainstream counterparts, they never presume that the existence of any non-voluntary extra-market institution is justified, and, a fortiori, never make any “public policy recommendations” based on such presumptions. On the contrary, they confine their scholarly research to investigating the logical origins and outcomes of various economic processes and phenomena as they are, not as they would like them to be.

8. Identifying the concept of demonstrated preference as the keystone of economic analysis allows Austrian economists to avoid the twin pitfalls of behaviorism and psychologism, which their mainstream colleagues cannot navigate in any principled and methodologically robust manner.

9. Austrian economists reject academic and professional hyperspecialization in their discipline, thus stressing the holistic, integrated nature of the science of economics. In the words of F. A. Hayek, “the physicist who is only a physicist can still be a first-class physicist and a most valuable member of society. But nobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nuisance if not a positive danger”.

10. Austrian economists cannot retreat into the safe haven of epistemological nihilism when the logic of their arguments turns out to be faulty. Mainstream economists, on the other hand, when the facts fail to correspond to their hypotheses, can always claim that “this time things are different”, which is a straightforward implication of the fact that any given set of sufficiently complex empirical data is compatible with a number of mutually exclusive empirical (but not logical) interpretations.

Does a novice entrepreneur need to understand the quantum mechanics of a product he is selling?

 

I have been pondering on an idea of late, and have decided to put it on paper. It coalesces around the idea of absolute knowledge from the side of the entrepreneur in every day business activities.

Before we start, lets make a few assumptions that we will delve into and therefore try to answer the question in the heading. Lets assume that person “A” decides to open a bakery (I wanted to give an example of a sofa manufacturer, but since I ate a nice bun this morning, lets stick with whole grain products shall we). Before he even considers opening a bakery, he must ask himself one crucial question: According to my time preference, am I able to generate a return higher than or at least equal to the opportunity cost of a similar investment? If the answer is “Yes”, he will ask subsequent questions and make further assumptions.

We will assume that person “A” will need idle retail space for his bakery. He will need to hire staff for production, sales, accounting, maintenance. He will need to find suppliers, a customer base etc.

Lets assume also, that he can hire skilled bakers, people that have been employees in other firms or idle workers with knowledge in the craft of baking bread.

Lets further assume that he has a vision of a product but doesn’t have any background in design or mechanics of designing a product (the input tools, shapes, special ingredients). He can than hire someone that does know.

And to keep this mental exercise short, we shall also assume that he understands that he may fail and lose everything, and that he may also succeed and reap the benefits of his endeavor.

Does the novice entrepreneur need to understand how bread rises in the oven? Does he need to know how long does it takes for the bread to be baked? Does he need to know the chemical processes taking place in the oven? Does he need to know how the alarm system at the front door using motion sensor technology detects burglars during the night? Well, frankly, not necessarily.

You see, the market has an ingenious built-in system of solving problems that require fine tuning and specialization. Entrepreneurs, that are seeking for the next best thing to satisfy desires and consumer wants, “paste” together various resources and makes assumptions on those actions. He is either rewarded or punished for his actions. Punishment might seem rather harsh in the form of bankruptcy, but it the “invisible mechanism” that gives out signals if person “A” is doing something right or wrong. If person “A” manages to put together correctly the pieces of the puzzle, he will get the correct picture – a profit, which is nothing more than a time component of receiving additional future goods, that would not have been created if not for the entrepreneurs efforts.

Without person “A” and without this “signal” (profit), nobody would really know for sure if certain human actions of resource usage were productive or not. Person “A” is rewarded for taking risk, providing employment and indirectly, accomplishing the goals of his employees in the process in the form of salaries and their own time preferences.

So, unlike in todays world, where person “A” is thought of as being an exploiter, and a social pariah, he is the social champion, the provider of goods and bearer of good news.

Government run sport events, aka The Olympics

 

I wanted to write a post concerning the current Olympic games that are being held in London, but before I did, I wanted so see if there was any economics, reasonable to comment on and maybe give a positive or a negative response. SO, instead of giving my own thoughts regarding the games, a 2002 article from mises.org will suffice, and I will give my own comment for the current games.

This article was written by Christopher Wesley:

“I didn't watch any of the Winter Olympics that recently concluded in Salt Lake City, but it was hard not to hear of the controversies that defined them.  Early in the games, the tempest over the judging of the figure-skating competition dominated the news, after gold medals were awarded, first to the Russian pair, and then to the Canadian pair two days later.  Similar controversies arose in speed skating, skiing, and hockey.

The question is whether judging is actually as impartial as possible or whether pressure is being placed upon judges to effect specific results that are in line with the desires of both image-conscious politicians and revenue-conscious Olympic organizers, be they on Olympic committees or television network boards.

Needless to say, no one is happy with the situation.  The Russian team has threatened to boycott the 2004 Olympic Games to be held in Athens, Greece.  Winners now wonder if the metal in their medals has been debased, given the uncertainty implied in the judging process.  While everyone concedes that there must be some element of subjectivity in refereeing any sport, the very notion that every effort to allow results to be determined in the field of play are not being taken threatens to delegitimize future Olympics competitions for an entire generation.

The hullabaloo created by this turn of events is heartening.  It illustrates the inherent attraction of the human person to competition, and the disgust felt when the results of competition have been determined in an a priori manner, showing that the best efforts of egalitarians over the course of several decades to squash this spirit through reeducation have failed.  

The free-enterprise system is based in part on this characteristic of the human person.  It focuses the drive to compete in a way that maximizes the benefits derived by consumers in the form of better products offered in a wide variety and at ever lower prices.  

This explains why, just as many are outraged at the suggestion that judges may have been taking cues from network executives or bribes from home country bureaucrats, so many were sickened byreports that, in 1996, Enron executives received a $1-billion, taxpayer-subsidized loan to keep the firm in business for an extra year or two.  Absent this intervention in the competitive process, the market very well may have shut down Enron sooner than later, before it could do any more damage.  

In the same way, the average sports fan would rather have the competitive process, as much as possible, determine whether Country A's hockey team proceeds to the next level and whether it is told to unlace its skates and go home.  If Country A benefited from any other factor, then its continued presence in the games calls into question the results of other forms of competition as well.  

Of course, this situation is nothing new to an economist.  Since people are self-interested, it is essential that no one person, firm, or state be allowed to set the terms under which competition takes place, whether the competition is in the marketplace or the sports arena.  To allow otherwise would be to allow the reappearance of mercantilism.

Mercantilism describes state intervention in the competitive process in order to bring about specific results that support its goals.  This system defined global trade patterns at least until the end of the eighteenth century, after which time the classical liberal economists of the 1800s--the champions of individual freedom and private property--did their best to crush mercantilist doctrines.  However, neomercantilist thought had emerged by the end of the late 1800s, and in the twentieth century, the continued acceptance of this doctrine complemented the growth of the nation state.

In other words, some bad ideas just won't go away, especially if belief in them supports the expansion of state power.  

When mercantilism is practiced successfully, it serves to expand the power of the state while smashing the incentives of the human person to express any creativity and ingenuity outside of any non-state-approved venues.  Why would anyone have wanted to compete with Enron in the late 1990s for the loyalty of consumers, knowing that the state was actively pursuing a strategy that forbade the firm from failing?  For that matter, why would anyone from a politically insignificant country want to compete in the Olympics if he thought that the results of competition were biased in favor of rivals from other countries?  

In the sports industry, fixing outcomes is detrimental to the bottom lines of the firms that finance competition, and efforts are made to provide a sufficient amount of private regulation to minimize problems resulting from the desire to predetermine outcomes.  None of us will watch the Super Bowl, or any of the Super Bowl-related commercials, if we think it is likely that the result has been previously decided.  Such beliefs directly effect revenues.

Unfortunately, the same analysis can't be said to apply to the Olympics, which is largely a state-sponsored, mercantile event.  When the state heavily finances any project, including the training of Olympic athletes or the staging of Olympic games, its efforts seem foolish or wasteful when its intended results do not come about.  This applies as much to taxpayer funding of curling events as it does to both the corrupt AmeriCorp and the FreedomCorp programs, none of which would receive much attention from private investors in a truly republican society.

The solution to these problems is to remove state influence from all aspects of Olympic competition.  Let private clubs compete among each other for the right to represent their countries, and let private firms stage the events.  Until the Olympics becomes a completely private enterprise, we can expect many years of such controversies, as well as a waning interest in the results of Olympic competition.”

I would have to agree on Mr. Wesley’s points. No games in modern times are unbiased against the competing athletes, or against host nations. In 1980, The USA boycotted the games in Moscow, and the Soviets retaliated four years later. I am no expert in these matters, but the question that pops to mind is: Who decides which sports are going to be represented by the games? What is the quota per country per discipline. I can guarantee that because of this quota, not all athletes, even if they made the “norm” get into the discipline they wanted. Such crazy things happen, as individuals that have learned how to swim a couple months prior the Olympics, are allowed into the games, because it goes along the line of “it is important to be a part of the games, medals are a bonus”.

I wonder, how people of an impoverished country feel, if some individual was granted a pass to the Olympics and gifts funded from tax payer money?

The thing gets worse, as they are in these games, when athletes allegedly from Greece got to spend insurmountable amounts of money at the governments expense. (I have seen this news update, but cannot find the news feed, I will post when I finds it). The Olympics are usually touted as a being a huge boost to the country's’ GDP and an investment for the future. New aquatic centers, gyms will be built for the young to qualitatively fill out their time. If this were the case, Greece should be booming.

They did host the 2004 summer Olympics didn’t they?

Regulated leverage, or imposing endogenous market regulation?

Before I start writing todays post, I am glad to announce that I have successfully mastered a milestone in the CFA program, and passed the Level I exam. Due to future career prospects I may get with having passed this exam, I have decided to enroll in the second leg of the curriculum.

The former chairman and CEO of Citigroup appeared on CNBC to share his views on the ailing economy and about prospects for future reform concerning the banking industry. Since I am unable to embed the video file in this blog post, I will write out the main tenants of his monologue.

Sandy Weill said:

- break up investment and commercial banking

- manage a system that will not allow excessive leverage, somewhere in the 15 to 18x debt to risk adjusted capital

- force banks to book derivatives on their balance sheets and not manage risks off balance sheet

- protect taxpayer funds from having to bailout TBTF banks

Now, with all due respect to Mr. Weill, who also stated that the biggest banks were also the main providers of capital and growth in the global economy in the past two decades, he is putting the cart before the horse on some of these issues.

To be fair, he did state that investment and deposit banking should be broken up. I put commercial because in the mainstream, the two coincide with one another. But the problem with this reasoning is that somehow deposit taking and making commercial loans will make the investment banking business much to tied up with the former and the latter will be in a constant conflict of interest which will force the government through regulatory measures to force financial institutions to construct “Chinese” walls between departments so no kickbacks may occur and no hefty commissions be generated. To Mr. Weill’s point, it is not the commingling between these activities that cause the problems, but the fraudulent nature of loan origination that occurs in todays economy through secondary deposit creation.

His second point deals with leverage. Leverage as an instrument of magnification, may boost returns that may not be generated without the debt standing behind it. But capping this somewhat arbitrary number will again not solve the problem. Especially when banks, in response to a low yield environment must be forced to generate returns sufficient enough to satisfy customer needs, as well as not losing their revenue base to alternative investment vehicles or pools of funds. Also, on this point, different industries operate on different degrees of leverage. (To make a point, there is a difference between operating leverage, which shows the effect of fixed assets and gross profits on revenue, as well as financial leverage, which shows the difference that operating profits have on net income).  

Now, in respect to derivatives, I do agree that these instruments, as like any other that abide to commercial law, must be placed on the balance sheet as a source (asset) and flow (income) to the company. The problem with derivatives, is that, any change in price stemming from the contract (variation of the instruments fair value), and especially if the instrument is booked as AFS under IFRS, doesn’t show as an unrealized gain or loss in the income statement, but rather as a change in the OCI component at shareholder’s equity. That is point one, and point two, if companies, wish not to keep it on their books, in the form of a SPE, they can do whatever they want; but if there are guarantees and contingencies, they ought to be represented as a liability when calculating financial ratios.

And finally, to protect taxpayer funds, why bailout anybody? Why the need for this made up TBTF notion? They are a drag to the economy and should be allowed to reorganize and selloff unsound units and business ventures.

But all in all, someone that sat at a ranking position should have had the courage to speak out regarding these problems in foresight, and not in hindsight.

Gun control–a logical a priori or a posteriori by Karl Denninger

 

Even though I like writing my own thoughts, I feel that sometimes, the best thing to do is just paste an article from a fellow blogger because it gets into a more in-depth and solid view of a subject that maybe I lack thereof.

Karl Denninger, from market-ticker.org, wrote a article regarding the recent gun violence in Colorado, USA which ended in the death of more than a dozen and injured considerably more. Here is his blog post:

“I was not going to comment in a political context on this tragedy until I saw the following:

New York Mayor Michael Bloomberg, a long-time advocate of gun control, called on both candidates to address what they would do to help prevent such tragedies.

“No matter where you stand on the Second Amendment, no matter where you stand on guns, we have a right to hear from both of them concretely, not just in generalities --specifically what are they going to do about guns?” Bloomberg said today on WOR Radio. The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

Gun control is why this murderous assailant managed to kill 20 people and nobody had a crack at shooting him, as they were unarmed.

Let's look at the facts of this event.  Metal detectors and searches would have done nothing to prevent this, but would have treated every patron as a felon.  The assailant came in through a back door, which means he tampered with a crash-bar equipped exit at some previous time or had "help."  Those exits are necessary for fire safety purposes.

Reports are that the assailant was wearing body armor.  This would have made him much more difficult to shoot and stop for an armed citizen, but body armor is not "bullet proof"; it is bullet resistant, and if you take a round in the chest while wearing it the energy is still dissipated on your chest -- it just doesn't make a hole.  Continuing to shoot people while being punched in the chest (pretty much what the shooter would be experiencing) would be difficult -- but not impossible.

The presence of a bunch of openly-carried or concealed weapons might have done nothing.  A pistol against a guy toting a rifle or shotgun is not a "fair fight" but it beats nothing, which is what the victims had.  The option to fight back is better than no option at all, whether you can or do choose to use it or not.  Oh, and let's not forget that it appears that Cinemark, the company that owns the theater, appears to prohibit by policy law-abiding citizens carrying concealed weapons.  If the assailant knew this (and it is, apparently, posted on signs at the ticket counter of at least some of their theaters) then he knew that every patron in the place was literally a walking target unable to defend him or herself as law-abiding citizens are disarmed by signs -- but criminals are not.

We do not know what the shooter's beef was with the theater or the people in it.  We will likely learn at least some of that in coming days and weeks.  The alleged shooter is in custody and reportedly has no prior criminal record, so clues are not to be found there.

The simple fact of the matter is that there is a tiny percentage of people who are cracked in the head.  Walking into a theater armed to the teeth and carrying incendiary devices to intentionally drive people to where you can more-easily shoot them is the act of a depraved mind and evidences obvious premeditation and intent.  The criminal justice system will mete out the punishment it is able for this circumstance, which will be wholly inadequate as you can only take a murderous thug's life once with capital punishment.

The Second Amendment and fully-recognized Constitutional Carry is the only means available to mitigate these sorts of events.  Firearms and smoke bombs are neither difficult to acquire nor can they be made difficult to acquire or even construct for someone with murderous intent, and as such the idea that "gun control" will ever do anything other than disarm law-abiding citizens is the worst sort of crap argument from ethically and morally-bankrupt fascists who themselves employ armed security around them at all times.

Mayor Bloomberg can pontificate on whether Constitutional Carry should be prohibited and the Second Amendment amended, which is the only lawful means to alter it, if and when, and only if and when, he dismisses all of his own armed security and turns over his own firearms -- all of them.”

Bashing a company to help expropriate funds to the government

Microsoft is in the headlines again. This time the fuss is regarding its operating system Windows 7. In the following report from WPCentral, the EU commission is looking into punishing Microsoft for the apparent breach of customer service when selling their software. The following bellow is the full article:

“The European Commission announced plans today to open an investigation to determine whether or not Microsoft has failed to comply with its browser choice commitment, which was applied in 2009. The commitment saw the software giant presenting customers of its Windows operating system with a screen listing available alternatives to Internet Explorer. This was put in place due to Microsoft being found guilty of abusing its dominant position with IE in the browser market.

Joaquín Almunia, Vice President of the Commission in charge of competition policy, had the following to comment.
"We take compliance with our decisions very seriously. And I trusted the company's reports were accurate. But it seems that was not the case, so we have immediately taken action. If following our investigation, the infringement is confirmed, Microsoft should expect sanctions"

Competing browsers have previously spoken publicly about the potential antitrust violations Microsoft is dancing around by preventing third party browsers access to the same APIs IE uses in Windows 8. With the down-spiral of IE and the massive increase in users for both Firefox and Chrome, is it worth penalizing Microsoft heavily for a ballot box screen, which arguably adds little value to the user experience?

According to the announcement, the EC believes that Microsoft may have failed to implement the browser choice screen from February 2011 onwards with the release of Windows 7 SP1. It'll be interesting to see the outcome of this investigation, especially from a financial standpoint, with a possible fine of up to 10% of Microsoft's total annual turnover, should it be found guilty of breaching the commitment.”

Now, this is the dumbest case of government expropriation from a bunch of unelected bureaucrats this year. (I am putting aside the shadow banking bailouts, because those concern finance.) 

This “malpractice” coming from Microsoft had to do with an earlier massive fine it had to pay for “monopolizing” the market in browser software. The Commission seized the opportunity to pounce on Microsoft because it violated its commitment to give the option to the customer of choosing an alternative to IE. The Commission is furious because Microsoft neglected making to make this change.

First of all, The Commission should have left the doings of a private company alone. If a customer was dissatisfied with the product he purchased and the service rendered for the amount paid, there are civil courts where these matters are disputed. In my view, I am certain, that the customer couldn’t care less about this option, because Windows 7 allows you to download an alternative to IE.

And even if Microsoft did promise to make this change, and it failed to comply with this regulatory statement, any customer could have complained. I haven’t heard of any complain against Windows for not installing an optional step in the installation process of its software.

The part of the article that struck me most was the following:

“Competing browsers have previously spoken publicly about the potential antitrust violations Microsoft is dancing around by preventing third party browsers access to the same APIs IE uses in Windows 8. (italics added)

It seems that the competition wants a free ride on the back of Microsoft and is using the government to do their bidding. According to Wikipedia:

“An application programming interface (API) is a specification intended to be used as an interface by software components to communicate with each other. An API may include specifications for routines, data structures, object classes, and variables. An API specification can take many forms, including an International Standard such as POSIX or vendor documentation such as the Microsoft Windows API, or the libraries of a programming language, e.g. Standard Template Library in C++ or Java API. (italics added)”

The competing vendors are complaining because Microsoft’s API language doesn’t allow for competing vendors API to be successfully integrated into Windows.

My answer is: And, so what?

Microsoft, as a private company doesn’t need to comply with the whims of the competition. If individuals didn’t enjoy the service provided by Microsoft, it would leave Microsoft and buy a different software provider. Now, the case comes, where Microsoft is accused of being a monopolist. It is too massive and too expensive to compete against them. But this surely is not the case.

Google Chrome, Firefox and others have successfully pummeled IE into the ground. They have successfully integrated their browsers to work with Windows. They have therefore worked around this supposed stranglehold that Microsoft has.

But, to a bigger issue. If Microsoft is fined 10% of yearly turnover, which amounts to about 20*4 billion= 80 billion dollars of revenue according to Microsoft Investor Relations, the fine would be around 8 billion dollars Now, where is this money going to go to? Is it to the competition? Is it to the EU coffers?

In any way, Microsoft will later be forced to contract business, as well as the inability to possibly fund this request by the EU Commission.

This next image is also a revelation that IE cannot be charged of being a monopoly product: Google Chrome has overtaken IE, with Firefox close behind IE. Even if Google or Mozzila had to pay a license to Microsoft, it still managed to create a better product, forcing Microsoft to rethink IE and make itself a better browser.

This would be the equivalent as Apple suing Microsoft for on being able to run their OS Leopard or Lion on any other hardware other than on Mac’s. Which is absurd, because Apple designed their OS specifically for Mac’s.

This is just another attempt for the government to rake in a substantial amount of cash for their dwindling budget. And, since the EU is giving away money to shore up the bankers reckless behavior, they would probably be able to bailout Cyprus with this money:

“The little island of Cyprus became the fifth European country to request a bailout for its struggling banking sector, and the estimated 10 billion euros needed to set things right would amount to more than half its total economy.”

I am sure to get the remaining 2 billion, the ECB will just lower some reserve requirement and get the desired excess liquidity. Wouldn’t it be interesting to see the possible statistical correlation of this possible expropriation and the bailing out of Cyprus? Wouldn’t be surprised if it brought on a p-value < 0,0001 in the tails of the distribution.

President Obama’s speech shows the person behind the Presidency

 

The following quote has been taken from Zero Hedge, which cites the President at a rally who knows where in The US. It clearly shows what’s wrong with the Presidency at the current moment and the feel of politics in America.

“There are a lot of wealthy, successful Americans who agree with me -- because they want to give something back.  They know they didn’t -- look, if you’ve been successful, you didn’t get there on your own.  You didn’t get there on your own.  I’m always struck by people who think, well, it must be because I was just so smart.  There are a lot of smart people out there.  It must be because I worked harder than everybody else.  Let me tell you something -- there are a whole bunch of hardworking people out there.  (Applause.)
 
If you were successful, somebody along the line gave you some help.  There was a great teacher somewhere in your life.  Somebody helped to create this unbelievable American system that we have that allowed you to thrive.  Somebody invested in roads and bridges.  If you’ve got a business -- you didn’t build that.  Somebody else made that happen.  The Internet didn’t get invented on its own.  Government research created the Internet so that all the companies could make money off the Internet.
 
The point is, is that when we succeed, we succeed because of our individual initiative, but also because we do things together.  There are some things, just like fighting fires, we don’t do on our own.  I mean, imagine if everybody had their own fire service.  That would be a hard way to organize fighting fires.
 
So we say to ourselves, ever since the founding of this country, you know what, there are some things we do better together.  That’s how we funded the GI Bill.  That’s how we created the middle class.  That’s how we built the Golden Gate Bridge or the Hoover Dam.  That’s how we invented the Internet.  That’s how we sent a man to the moon.  We rise or fall together as one nation and as one people, and that’s the reason I’m running for President -- because I still believe in that idea.  You’re not on your own, we’re in this together.  (Applause.)”

So, if you did something, it was through the collective spirit, not through the profit seeking motive of the individual.

Brilliant.

Using other peoples money to finance projects of grandeur

 

I am happy so say that after a week of absence (summer vacation), I can resume writing my blog and continue to comment on everyday economic events.

There hasn’t been word of the late “Peljesac” bridge project for some time, so I have decided to touch on this subject for a bit. Browsing through todays online business news, I stumbled upon an article concerning this government project. It was the idea of the previous administration to solve the problem of Croatia’s territorial discontinuity by building a massive bridge that would connect Croatia’s mainland with the Peljesac peninsula, thus enabling Croatians and others to get to Dubrovnik and the rest of the south of the country, and not having to go trough the city of Neum, Bosnia and Hercegovina.

As, the article reads: “HSP Ante Starcevic against the construction of the Peljesac Bridge - The solution for the Peninsula is immersed tunnel”. The HSP Ante Starcevic political party wrote an open letter to the government requesting a tunnel, rather than a bridge, be built to connect the Croatian territory.

Now, I am sure that the political party has good intensions in mind, and they even give the plan a technical feel to it by elaborating that the same practice has been implemented by other nations as well. It would also benefit the domestic construction industry.

Now, not once (at least in the news article) is it mentioned the source of financing for such a venture. How will the government open the bidding for the construction companies is also a mystery, coupled with the fact that, are there sufficient funds in the government coffers to spend on a wasteful project and subsidize the construction industry as well.

I am not going to go into the technical aspects of such a project, since I am not a construction engineer, nor geologist, nor by the look of things (as this political party advocates) a maritime engineer, I am an economist and the economics just don’t work out. Usually, governments build bridges, roads, social infrastructure as a necessity. These projects are placed into the “natural monopoly” category, are deemed as such, because conventional wisdom states that such projects are too large for the private sector to complete.

What is really meant, is that the government can easily and with no trouble expropriate by force (taxation) the funds necessary to build such a project. Why the government doesn’t think that a private contractor and later owner can manage to bridge at a profit, is beyond me.

I do know is that if a study is done on the feasibility of the project, and this usually includes discounting cash flows, finding similar projects that carry proportional risk to arrive at the desired discount rate (delevering asset beta of similar project and relevering project equity), payback periods, WACC estimates and project duration, it will be excepted or rejected. The component leg would include checking for viable materials, natural geological movements which include geological shifts, sea level changes, wind resistance, corrosive elements, and so on.

If massive companies can finance massive constructional endeavors such as the Burj Khalifa, Tokyo International Airport, Wal-Mart, Apple and so on, why such clearly political motivated economic prevail? The largest boondoggle in history must be the interstate highway system built in The US under the auspice of boosting aggregate demand. This system hasn’t been maintained in over forty years. Just in moments of economic recession, the government calls for more public works. It didn’t occur to them that maybe a level of savings had to be generated to maintain such a vast system?

Running a perpetual budget deficit doesn’t really help in such a situation.

An attempt to soak the rich on the global level

 

The United Nations, as reported by Reuters, and rereleased by index.hr, has committed to a massive redistribution plan to “aid” the most poorest countries. It is asking for a global tax on billionaires (some 1226 of them) to pay for this “aid”.

Well, the IMF has given a trillion or so more to sub-Saharan countries in the past decades and nothing much has changed. The only thing that might have changed is the debt level of these countries. How is this money really lent out? Who gets it first and for what endeavors? We may be inclined to ask the simplest of questions: Why are the poor, well, poor?

Even tough this may seem as an easy question which contains an even simpler answer, the mass science of modern “new” economics has dumbfounded analysts, researchers and the rest to explain why such poor performance persists in the presence of such grandiose ventures. Reading von Mises, it is easy to unlock the answer of wealth creation versus wealth destruction. A poor country is one which has a low capital base. I.e., it doesn’t have sufficient savings to bring forth a larger and more roundabout capital structure. The individuals living in some of the remotest areas, are unable to accumulate capital because their time preferences are so high, that they survive by living day by day.

Now, it is true, that some regions of the planet are more abundant in resources, than others and the know-how isn’t capable of delivering sufficient results, but that doesn’t negate the fact that, in order to be wealthy, one has to sacrifice and sustain form present consumption. In the “Third World”, if there is capital formation, there is no real system of private property to ensure a viable and peaceful exchange of goods and services. Europe, nor America weren’t rich in the 1100’s as they are today, but the natural resources were still there, people still lived, technology improved and so forth, but the absence of a cohesive legal and economic structure, the “Third World” can resort to nothing but barbarism.

Taxing the wealthy will just mess up,in the margin,time preferences between their wishes and consumption/investment patterns with one of coercion and anti-entrepreneurialism. If the tax is marginally high, why keep the capital structure intact? Why not consume present goods, as they will bring about a lesser tax burden. Let socialism prevail and all we be well. Not to mention, the ability to  create fake “aid” through inflation and redistribution to the privileged few.

A global tax won’t fix the problem, it will only aggravate current unsound financial positions, wherever they may be located, whether geographically or on an industry basis. Soaking someone with aid, rises the price of those goods at home and creates a disincentive to produce on your own and built up a viable capital structure in the process.

This is however, not the first call, for such a feat. There has been, over the past few years, of a global derivatives tax, dubbed the Tobin tax. Instead of recognizing that the problem of a massive global derivative position, notionally, many times larger than the GDP of planet Earth, is a function of rapid credit expansion and fractional markets in the stages furthest from the initial expansion taking place at the commercial banking level, as well as the negative real interest rate loans provided by the central banks, subsidizing the very originators of fraudulent debt.

If the UN wants to help, it should start by looking itself in the mirror and explaining why their employees are exempt from paying income taxes in their home districts, as well as special subsidies for housing and medical costs…

How the privileged few have access to a massive subsidy

 

Remember, how in life, people say: “it’s the little things that make life great”. In this case, it’s the little things that make life a complete clusterf*ck. If the next picture is so blatantly shown to the public, just what happens behind close doors?

The next list shows bus fares from the city of Zagreb to the town of Novalja on the Adriatic Coast.  The foremost right numbers are the prices represented in the local currency – HRK (1$ = 5,5 HRK). The “J” stands for the price in one way, while the “AR” stands for a return ticket. 202 HRK is a one way ticket to Novalja, while students, the blind pay 134 HRK and small children 104 HRK for one way. 202 HRK, 300 HRK and 241 HRK are paid by children, adults and students and the blind respectively. The bus ticket purchased for a return trip is valid for 180 days.

This is all fine, if not for the yellow bolded part I highlighted. The highlighted part reads: Parliament members pay 6 HRK= 1,2 dollars. And this was decided by the Parliament.

So, I wonder, in the aggregate and in at the margin, how much am I subsidizing these royal individuals? Well, it depends on the average price on the average bus fare for all citizens. And, since its law, all carriers are FORCED to subsidize these passengers. This means an explicit marginal loss for the carrier.

Brilliant.

0     Rezervacija.     6,00
1     Karta za 1 SMJER     202,00
1000     ZASTUPNICI u HRV.SABORU ! ( odluka Sabora )     6,00
1035     J / 35% / STUDENTI, +65 god., SLIJEPE OSOBE!     134,00
1072     J / 50% / DJECA 5-10 g.     104,00
5072     AR / 50% / 60 D/ DJECA 5 -10 g.     202,00
5329     AR / 25% / 60 DANA     300,00
5330     AR / 40% / 60 D/ STUDENTI,+ 65 go.,SLIJEPE OSOBE !     241,00
LEGENDA: J - Jedan smjer, AR - Povratna karta, 180 D - Vrijedi 180 dana, X-ica - Studentska iskaznica

Unemployment in Europe as a precursor for more stimulus

 

BRUSSELS (AP) — Unemployment in the 17 country euro currency bloc hit another record in May as the continent continued to be buffeted by its debt crisis, official figures showed Monday.

Eurostat, the EU's statistics office, said unemployment rose to 11.1 percent in May from 11 percent the previous month. That's the highest rate since the euro was launched in 1999, and compares badly with an unemployment rate of 8.2 percent in the United States and only 4.4 percent in Japan.
In total, 17.6 million people were out of work in the Eurozone in May, 1.8 million higher than a year earlier.

Unemployment has been edging higher for over a year as concerns over the debt crisis and the future of the euro currency itself have weighed on economic activity.
There are huge disparities across the Eurozone. The labor markets of those countries at the front line of the debt crisis, such as Greece and Spain, are suffering in the wake of stringent austerity measures and recession. The highest unemployment rate across the Eurozone was recorded in Spain, where 24.6 percent of people were out of work in May. Even more dramatically, 52.1 percent of the country's youth were unemployed.

Other countries in the Eurozone are faring fairly better. Germany's unemployment rate, for example, stood at only 5.6 percent. However, a raft of surveys in recent weeks have pointed to tougher times ahead in Europe's biggest economy.

Across the wider 27-country European Union, which includes non-euro countries such as Britain and Poland, unemployment edged up to 10.3 percent in May from 10.2 percent the month before.