Category Archives: Economics

How the Global Trade Contraction Begins, by MN Gordon

Like almost all financial measures, global trade doesn’t proceed ever upward, a straight line on a graph from lower left to upper right. From MN Gordon at economicprism.com:

The world grows increasingly at odds with itself, with each passing day.  Divided special elections.  Speech censorship by Silicon Valley social media companies.  Increased shrieking from Anderson Cooper.  You name it, a great pileup’s upon us.

From our perch overlooking San Pedro Bay, the main port of entry for Chinese made goods into the USA, facets of the mounting economic catastrophe come into focus.  These elements, even for the most untrained of eyes, are impossible to miss.

To meet the relentless expansion of international trade, berths have been widened, and channels have been deepened to accommodate the definitive absurdity of perpetual credit creation: The CMA CGM Benjamin Franklin.  This mega container ship, if you’re unfamiliar with it, is over 20 stories tall, the width of a 12 lane freeway, and longer than four football fields.  It has enough cargo space to hold 90 million pairs of ‘Made In China’ shoes.

The secondary distortions of this mammoth – next generation – cargo ship will provide historical evidence to future generations of a political economy that went seriously awry.  For example, at the Port of Long Beach the Gerald Desmond Bridge replacement is currently being constructed at a cost of $1.5 billion.  With two towers stretching 515 feet into the sky, this will be the second tallest cable-stayed bridge in the United States.

The purpose of the bridge replacement is to provide greater clearance into the Port’s Inner Harbor for mega container ships.  As the new bridge deck goes up, it dwarfs the prior edifice like some futuristic motorway traversing up to the heavens.  We’re certainly eager to drive it when it’s complete in late-2019.

Episodes of Global Trade Contraction

The general philosophy of the bridge’s proponents appears to be that global trade expands in perpetuity.  Hence, more and more space will be needed for more and more next generation container ships.  There’s even 50-years of data to support this belief.  But that doesn’t mean what is will always be.

To continue reading: How the Global Trade Contraction Begins

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Federal Deficits Are Worse than You Think, by Mark Brandly

Here’s a surprise. The federal government and its media henchpeople tend to put the deficit in its absolute best light. From Mark Brandly at mises.org:

Voters tend to be rationally ignorant. Since a single vote does not matter, for most potential voters the cost of being politically well-informed is greater than the benefit of being knowledgeable about political affairs. Therefore it’s rational for most voters to be ignorant regarding political issues.

A main reason for the high cost of being well-informed is that government officials may not want the public to be well-informed. They purposefully conceal their schemes to reduce the opposition to their policies. A well-informed body politic would be a threat to the welfare and warfare state.

This obscurantism is on full display regarding the government budget.

Let’s start with the annual deficit. You may have noticed that the stated annual deficit is less than the increase in government debt. In order to explain this, consider a small scale example. Assume that you were $20,000 in debt at the beginning of 2017 and you earned $3,000 and spent $4,000 during the year. You borrowed $1,000 to cover this spending so your total debt increased to $21,000. A sensible reading of this situation would be that you had a $1,000 deficit in 2017 (multiply these numbers by a billion dollars to roughly approximate what is generally asserted to be the federal budget).

However, if you followed the federal government’s method, you would claim a deficit of, say, $600. According to the feds, the official deficit is less than the increase in total debt. How do they do this? Well, some of the borrowed money is simply not included in the deficit. For example, in fiscal year 2016, they claimed a deficit of $587 billion even though the total debt increased $1,422 billion and the debt held by the public (the total debt less the intragovernmental debt) increased $1,049 billion. They hide some of the deficit by simply declaring that some of the increased debt is not part of the deficit.

But this deception is of little consequence compared to the government’s claims about their spending habits.

According to the “Economic Report of the President,” government spending (outlays) over the twenty year period from Fiscal Year 1998 to FY 2017 more than doubled from $1,652.5 billion to $3,981.6 billion. In real terms, using the implicit price deflator as our measure of inflation, this was a 67% increase in spending.

To continue reading: Federal Deficits Are Worse than You Think 

When the Freaks Run Wild, by MN Gordon

You can get used to almost anything that’s freakish, bizarre, or ridiculous, so much so that it becomes almost normal. From MN Gordon at economicprism.com:

The unpleasant sight of a physical absurdity is both grotesque and interesting.  Only the most disciplined individual can resist an extra peek at a three-legged hunch back with face tattoos.  The disfigurement has the odd effect of turning the stomach and twisting the mind in unison.

After repeated exposure, however, the shock of an absurdity is reduced to that of vanilla ice cream.  Somehow, even the extremely preposterous becomes commonplace after a while.  For example, a panhandling Batman doesn’t get a second look in Hollywood.  That persona comes a dime a dozen.

Yet just because an absurdity’s been watered down to the seemingly ordinary, doesn’t mean it has become any less ridiculous.  Rather, the viewer has become conditioned to the absurdity.  The abnormal has been calibrated to a feigning normal.

Extreme market intervention by central planners has been going on for so long that the distorted conditions it produces are considered normal.  The Cyclically Adjusted Price Earnings Ratio (CAPE Ratio) of the S&P 500 is currently more than double its historic average.  But no one, save a few grumpy old farts, are alarmed by this.  Like a freak at a freak show, it all seems perfectly normal.

Diapers, soda pop, beer, chocolate, and chicken, are all rising in price.  At the same time, the federal government is aiming for a $1 trillion deficit.  Still, U.S. consumers haven’t been this fired up about the economy since February 2001.  You see, in the year 2018, spending more and getting less is perfectly normal.

Cancer and Crackpots

The destructive absurdity of modern fiscal and monetary policy is only matched in nature by the insidious replication of cancer cells.  As these cancerous cells are replicated and divided, and then replicated and divided again and again, their uncontrollable growth flows into lumps and tumors.  Sometimes these cancerous growths go undetected for years, as if the body is perfectly normal.

To continue reading: When the Freaks Run Wild

Macroeconomics Has Lost Its Way, by Alasdair Macleod

Macroeconomics took an ill-advised detour into Keynesianism and has never found its way back. From Alasdair Macleod at goldmoney.com:

The father of modern macroeconomics was Keynes. Before Keynes there were macro considerations, which were firmly grounded in human action, the personal preferences and choices exercised by individuals in the context of their own earnings and profits. In order to give a role to the state, Keynes had to get away from human action and devise a positive management role for central planners. This was the unstated purpose behind his General Theory of Employment, Interest and Money.

To this day, his followers argue that macroeconomics is different from individual actions, and the factors that determine the behaviour of individuals are not the same as those that determine the wider economy. This article explains why it cannot be true, why modern macroeconomic beliefs are fundamentally flawed, and why interventionism has not only failed to produce overall benefits for the wider public, but has been at an unnecessary economic cost.

The basic fallacy

Last week, Martin Wolf (the FT’s chief associate editor and chief economic commentator) presented a programme entitled Economics 101 on BBC Radio 4, in which he raised the question as to whether a democracy can function when voters have little idea of how the economy works and why there has been so little effort to teach economics in schools.[i] The independent economists interviewed, Larry Summers and Joseph Stiglitz, and Wolf himself are strongly pro-Keynesian, and the programme made no mention of the fact that there are different schools of economic thought. The question as to what information should be given to the public and crammed into the minds of schoolchildren was never addressed, and it was clearly to be the Keynesian view.

Wolf is probably the most senior economic commentator in the British media, and one can therefore understand why the BBC, a state-owned broadcaster whose specific mandate is to be unbiased in matters of opinion, thought that by getting such a senior figure to present the programme, and for him to invite well-known economists to be interviewed, that there was no bias. The vast majority of listeners were similarly likely to be unaware of any bias. Furthermore, Wolf himself, being Keynesian, probably thinks that any other economic theory is simply wrong.

To continue reading: Macroeconomics Has Lost Its Way

How Inflation Destroys Civilization, by Nick Giambruno

Nick Giambruno connects the dots between inflation and the desire for socialism. From Giambruno at internationalman.com:

Yesterday I told you about the unstoppable trend towards more socialism in the US.

I think inflation is the primary factor driving this trend. Americans feel squeezed because the cost of rent, medical insurance, and tuition, as well as other basic living expenses, is rising much faster than their wages.

This creates very real problems for ordinary people. In response, more and more turn to Santa Claus politicians that promise supposed freebies, like a $15 minimum wage or universal basic income.

Why the Cost of Living Has Exploded

This is all a predictable consequence of the US abandoning sound money.

By every measure—including stagnating wages and rising costs—things have been going downhill for the American middle class since the early 1970s.

August 15, 1971, to be exact. This is the date President Nixon killed the last remnants of the gold standard.

Since then, the dollar has been a pure fiat currency. This allows the Fed to print as many dollars as it pleases. And—without the discipline imposed by some form of a gold standard—it does precisely that. The US money supply has exploded 2,106% higher since 1971.

The rejection of sound money is the primary reason inflation has eaten up wage growth since the early 1970s—and the primary reason the cost of living has exploded.

The next chart illustrates this dynamic. It measures US hourly wages priced in gold grams (the number of gold grams the average person’s hourly income could buy).

Measured in gold, wages in the US have fallen over 84% since 1971. That’s an astounding drop.

The next chart measures the federal minimum wage in terms of gold grams. Priced in gold, the minimum wage has fallen 87% since 1968.

Note that the federal minimum wage was $1.60 in 1968. It’s $7.25 today, or 353% higher in dollar terms.

But that $7.25 buys 87% less than $1.60 did back in 1968. That’s the story you won’t hear from the mainstream press.

This is why millennials and millions of others are gravitating toward socialism.

To continue reading: How Inflation Destroys Civilization

Two Knockout Blows to US Imperialism: De-Dollarization and Hypersonic Weapons, by Federico Pieraccini

Much of the rest of the world doesn’t take a shine to US notions of unipolar dominance…and they’re doing something about it. From Federico Pieraccini at strategic-culture.org:

Two Knockout Blows to US Imperialism: De-Dollarization and Hypersonic Weapons

In the current multipolar world in which we live, economic and military factors are decisive in guaranteeing countries their sovereignty. Russia and China seem to be taking this very seriously, committed to the de-dollarization of their economies and the accelerated development of hypersonic weapons.

The transition phase we are going through, passing from a unipolar global order to a multipolar one, calls for careful observation. It is important to analyze the actions taken by two world powers, China and Russia, in defending and consolidating their sovereignty over the long term. Observing decisions taken by these two countries in recent years, we can discern a twofold strategy. One is economic, the other purely military. In both cases we observe strong cooperation between Moscow and Beijing. The merit of this alliance is paradoxically attributed to the attitude of various US administrations, from George Bush Senior through to Obama. The special relationship between Moscow and Beijing has been forged by a shared experience of Washington’s pressure over the last 25 years. Their shared mission now seems to be to contain the US’s declining imperial power and to shepherd the world from a unipolar world order, with Washington at the center of international relations, to a multipolar world order, with at least three global powers playing a major role in international relations.

The Sino-Russian strategy has shown itself over the last two decades to consist of two parts: economic clout on the one hand, and military strength on the other, the latter to ward off reckless American behavior. Both Eurasian powers have their respective strengths and weaknesses in this regard. If Russia’s economy can hardly be compared to China’s, China plays second fiddle to Russia’s conventional and nuclear deterrents, and is quite some way behind Moscow in terms of hypersonic weapons. The cooperation between Moscow and Beijing aims to synergize their respective strengths.

To continue reading: Two Knockout Blows to US Imperialism: De-Dollarization and Hypersonic Weapons

Hey, Donald, Trade Is About Economics, Not War, Part 4, by David Stockman

Trump may be raising tariffs to eventually get our trading partners to lower theirs, but that’s a dangerous strategy with a lot of moving parts. From David Stockman at davidstockmanscontracorner.com:

The only carbon units more delusional than the Donald about the distinctively un-awesome state of the US economy are the boys and girls who inhabit the canyons of Wall Street. They are being given every chance to get out of Dodge, but they keep bellying up to the bar for still another swig.

Consider yesterday’s doings. The White House actually confirmed during market hours that Trump is moving towards a 25% tax on Americans who buy goods made in China—-and those are mostly the cheaper goods in the Wal-Mart aisles which represent what Flyover America can actually afford to buy.

Taxing that stuff by 25% is full retard crazy—-even if the White House might argue that people can still order soon-to-be more costly lamps, travel bags, canned tuna, vacuum cleaners and toilet paper on their trusty iPhones, which would remain tax-free under the latest Trumpian demarche.

But if that’s any consolation to the rank-and-file, you’ve got to wonder about Wall Street. The hideously over-valued S&P 500 dropped by the grand sum of 2.93 points (o.10%) at yesterday’s close, and then took off for the races again today as if a potential $50 billionTrumpian war on the American consumer means nothing at all.

Perhaps the Donald will eventually “calm down” as the Chinese government spokesman sensibly urged, and settle for something less draconian. As we explain below, we think that is highly unlikely and that the Donald’s view of trade is so uniquely ego-driven, win-oriented and primitively mercantilist that he means to take his Trade War straight to the brink and beyond.

But even short of that, how in the world can it be held that the risk of a Trade War that would materially disrupt that world economy and financial system is essentially zero— at a time when the Oval Office is occupied by a trade policy madman, who absolutely does have the unilateral power to create mayhem in the global economy under the wide-open authorities of section 301 and section 232 of the trade acts?

That’s right. When the stock market is priced for perfection and then some—-the risk of a major dislocation like a full-fledged trade war has to be close to zero in order to justify standing pat.

To continue reading: Hey, Donald, Trade Is About Economics, Not War, Part 4