Emanuel Questions Keynesian Economists

On Jan 15, 2011, at 1:33 PM, Emanuel wrote:

Hi John,

For some time, I've been studying the Austrian Economics literature, and it explains a lot about the business cycle, the price of goods, the Fed, etc. However, there's one thing I don't understand. How can economists and economics professors teach Keynesian economics? How can they believe that central planning works, that the government can stimulate the economy or that tariffs should be imposed to "level the playing field" for competition? Now, I don't believe that they are fools or that there's a conspiracy or that they are paid to lie. I think a lot of them are really believing what they are saying.

***Emanuel,

Well, theya re able to repeat the arguments the system makes.  Keep in mind, we all love a system that feeds us.

I think it gets back to security over freedom.  The archetype is in 1 Samuel 8, wherein a free people, the Israelites, demand they have a king over them, like the other nations.  This is not unique to Jews, just the bible is the first reported instance. The last election is the most recent reported instance. The vast majority want security over freedom.

Second, once the powers that be come to power, they need a system, a philosophy, to rule by.  Socrates refused to recognize the state gods, and was anti-democracy.  His students overthrew the democracy, but failed to recognize property rights.  What a mess! 

They got rid of Socrates, but Athens fell anyway.

Up to the Han dynasty China was entertaining the competing ethical systems of Mo Tze and Lao Tze, with Mo Tze’s the more popualr for a while, but Lao Tze’s system, now called Taoism, became the dominant system.  Why?  It is better for running an empire.  

The powers that be get to decide the system we will live under.***

Are they shallow in thinking, choosing to focus only on specific aspects of economics such as labor or tariffs? Don't they see the entire image? How can Austrian Economics have any opposition?

***The only jobs in economics are government jobs.  Whether working for the government, teaching, or some sort of banking position interacting with the government, economics largely has to do with relations with the government.  If you want to get paid in economics, you better be a keynesian (or lite versions, such as chicago. )  Alan Greenspan was a hard money gold bug and Ayn Rand acolyte that Reagan appointed, and he immideiately went Keynesian.  

There are exceptions:  keynesian economics cannot measure or track anything, so government data is usually bad.  When airlines lost money depending on government statitistics, John Williams made a killing correcting statisitics for the airlines.  he now has a booming business just reporting reality.  http://www.shadowstats.com/ .  Also, there is  cottage industry tachign austrian economics.***

Another thing is the following. In your blog, you briefly said that business don't go overseas for cheap labor but for cheap management. Could you please elaborate this? Wouldn't cheap labor or cheap management be the same since they both result in lower costs for American businesses?

***I agree we go overseas for lower costs, which is different that saying we go overseas for cheap labor.  The distinction matters because if you go looking for cheap labor, you will end up at the wrong source.  If you go looking for the best source overseas, it will never be the cheapest labor source, but the cheapest management source.  Does thins make sense?***

John

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Sunday Fun

I enjoyed the originals before the gang of four went down...  but these are very good edits,

Madonna

and

Some French Song...

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You Need To Know This

How your pictures can tell everyone too much about you...surprising.

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Food Renaissance

Seems our younger generation is steeping out of the rat race with food as an escape...  wish them well, but hope they expand into other fields...  I wonder why food alone is such a draw?

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CJ Spots a Good Video

Steve Wozniak giving impromptu views for a few minutes on innovation, after the first minute or so... his off-hand comment that nowadays all processes are on one chip, and to innovate you might need to go back to several chips, is pure Von Mises on innovation...  innovators introduce a complex system, which conservator eventually simplify, which lowers cost and widens access.

The home brew computing club was a free market in ideas.  Silicon Valley took the lead in Computers from Massachusetts I95 corridor (according to Boldrin Levine) because of NDAs and NCAs.

What I wished the interviewer asked was what was the spark that launched apple over all the others?  (Jobs?)

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New Word - Redback

With the Communist Yuan moving up in the world, it is taking on a nickname... the Redback, I suppose, as opposed to the Greenback.

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Tunisia Moves Closer to Free Markets, إن شاء الله

A few weeks ago I referred to Tunisia wishing to become another Hong Kong.  And it may be getting closer.  You see, Hong Kong has tremendously wealthy people, but no one with political power concentrated in his hands.  In Tunisia, the president and his family are accused of being heavy-handed, by rioters who are bringing down his government.

It will be interesting to see of Tunisia is able to move to a freer market, without the chaos that often attends revolutions.

As an aside, I wrote a book review on an Islamic nonviolent movement based in the Walidom of Swat, that coordinated with Gandhi.  The Tunisians will get to a free market through nonviolence the fastest and cleanest, insh'Allah.

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What Tragedy?

Why is a crowd-murder referred to as a tragedy?  Where is the hero brought low by a flaw or unfair overwhelming circumstances?  To refer to the Tucson murders as a tragedy is to excuse murder.

Is Jared the Accused a hero? Absolutely not.  A main character? Again no, just a bit player, acting out.  The main stream media has stopped noting the chemical straightjackets most of these people are wearing, but in time we'll learn he was off his meds.  As I've argued before, the problem is not that these people were off their meds, the problem is they were put on meds.

Are the people who died heros, coming to a tragic end?  No, they were murdered.  That is not a tragedy, it is murder.

It is reported Jared was expelled from school until he could get a medical evaluation.  Why not expel him until he behaves himself?  Why excuse his behavior by calling it a medical condition?  Hold people accountable.

We no longer expect people to be responsible for their actions.  Add entitlement mentality to no consequences and meds, then you have a lethal combination.

We are all facing stress, but we do not shoot up a crowd.  What Jared the Accused did was murder, plain and simple.

An armed citizen was a first responder, coming out of Walgreens, after hearing the shots, and seeing the carnage, he put his hand on his gun and let off the safety.  But he did not draw. Seeing a man holding a gun he elected to tackle that man rather than shoot him.  This is the typical citizen with a gun: highly trained, highly motivated, but with no sense of entitlement.  Responsibility, yes, entitlement no.  Just because you have a gun does not mean you use it, even in a gun fight.  Good thing the citizen elected not to shoot, since the man holding the gun had just disarmed Jared the Accuser.  The crowd shouted an explanation, avoiding another killing.

Jared the Accused is not crazy, he is a criminal.  If we had more citizens, highly trained, motivated and armed, Jared would have been stopped sooner.  In fact, stats show armed citizens stop such carnage faster with lower tolls then when the police are first responders.  The criminals head to schools and post offices where guns are banned, so they can make the crime bigger.

We need a free market in violence, to deal with criminals who operate behind "mental illness."

Read Thomas Szasz on "mental illness" vs. organic brain damage.

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Correct Me If I Am Wrong - Mortgage Division

Mish Shedlock is flogging the point that if someone is in delinquency, then they deserve to be processed out of their home.  In general, true.  But these are unusual circumstances, in which right order is simply not possible.  The sheer volume of loans in trouble is mind-boggling, and therein the problem assumes its own logic.

The boom allowed many people into homes they could not afford.  Each person who overbought, malinvested, could have as easily as anyone else studied a bit and figured out such a false economy was going to go bad.  So on one side we have wicked predatory lenders, and on the other side wicked predatory borrowers.  They deserve each other.

The problem is so big, to keep An economic system going, the powers that be bailed out the banks, and continue to do so in every way shape and form.  The bad part is since their system has not yet failed, the better system cannot emerge, yet.  The longer we wait, the more we bail, the worse the results.  It's like  sinking sailboat being blown offshore.  The longer you bail, the farther out you go, the more tired you get, the deeper the water, the lower the boat.  And hour ago you could have waded in to shore safely.  Keep this up and even the Coast Guard cannot find you, like a Kennedy.

Since the problem is so big, the banks and lawyers used robo-signing to process foreclosures. An industry is growing that figures out how to game the system to stay longer paying no rent ina house you can own.

The flipside is some people are not paying, strategic default, because they do not want to live in the house, get stuck with home in a rapidly deteriorating neighborhood.  Free rent for a year or two, and disappear.

Either way, each of these mortgages, which were sliced and diced into complex financial instruments, represents a very tough superior court case.  If you take ten years of legions of mortgage industry people, perhaps 100 times the size (likely more) of the superior courts in USA, writing massive amounts of contracts, which wee then rendered impossibly complicated, the result is there is simply no way the legal system can address the problem, especially since ten years volume needs to be addressed today, in like one day.  Correct me if I am wrong on this.

The end game we already know.  Uncle Sam will declare all default and bank owned property assets of the USA taxpayers.  (In essence, this has already been done with fannie mae and freddie mac and bank bailouts). The music has stopped, so where ever you happen to be, you will be means tested for rent (eventually rent to own) so that the backlog will be cleared in one fell swoop.  It is not a question of right or wrong, it is a matter of cleaning up a mess for which there is no other solution.

I think Mish misses that people are not fighting to save their homes, they are fighting for free rent, to pay down credit cards, to remain flexible come what may, and getting a back-door bailout, like a bank.

Mish also notes banks are booking fees on delinquent loans as profits. This is huge, and shows that the banks still experience not the slightest concern regarding soundness of operations.

The unfortunate part of all this is when it is sorted out by fiat, the taxpayer will realize that the USA criminal justice system is nonfunctioning; the us courts system is nonfunctioning.  Neither law enforcement nor our court system work.  We'll need to develop another legal system, one that takes into consideration how people really are.  Hint: free markets in protection and enforcement.

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USA World Trade

The October 2010 trade reports are out and imports are steady and Exports up slightly.
For more information on trade data go here....

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Eminent Domain In China

 In USA they wear uniforms...  but here in Shanghai they use different means...

I believe it was ancient Greece where property taxes were based on the valuation you set on your own property.  What you valued you home at is also an offer for sale:  anyone willing to buy it at that price could do so.  No eminent domain, but all property for sale.

It is actually a brilliant system:  no assessor, since each parcel is priced exactly right.  If someone thinks they can do better with the property, let him buy it at exactly the price the seller says so.

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An Email From A New Fashion Designer

I by happenstance was in an atelier when a designer was trying on a new creation...  I said the obvious: the dress needed a belt.  So I tied on a judo belt, and the designer was intrigued.

Today she sent me the message

"you need to be in fashion you're psychic! martial art belts on dresses!"

& forwarded an image from the top designer publication, WGSN:

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Autism

Here is a doctor, Dr. Robin Bernhoft, who skips referring to any controversy over source, and just gets to the science and a therapy.  Of course, being an independent clinic, he does not have to engage in any politics.

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Shostak Does It Again

Frank Shostak is a scholar and gentleman who does yeoman work explaining the Austrian Business Cycle Theory (ABCT) to the real world.  Here is his current offering, well worth a read.

And here is my comment on his essay:


A couple of tweaks to this argument:

The ABCT-wise house builder sees what is happening, and understands it is a false economy, but it is tradable.  So eyes wide open, in he goes, with a view to bailing out before the bailouts happen.  It is a timed trade, but as Kennedy said, only a fool waits for the top.  Another way to manage this is with a incorporation of LLC, and simply bankrupt the firm that had been the conduit for all profits in the house building.

The other aspect is a bit more subtle.  ABCT refers to credit boom/bust, but that does not happen in a vacuum.  Regulations, building codes, loan to value and other attendant factors in a boom decide the design of what will be built.  In order to stay in business, one whose passion and joy is house building finds he has to build the same junk as everyone else, for the customers to get the financing like everyone else, in order to pursue his calling.

Of the two the latter is the common scenario, and it applies not just to house building, but any field from clothes to food to animal breeding business.

It is not a matter of falling prey to ABCT, it is a matter of coming to play soccer and finding it is raining.  Well, buck up and play ball.

In USA Presto refused to play ball, and were prosecuted for financial crimes.  Knowing a bust was coming, they held on to cash to buy up busted companies.  In USA, acting on what you know is a crime.

http://www.fool.com/investing/general/2004/05/12/presto-stays-its-course.aspx

In USA Beal Bank refused to play ball, and were prosecuted for financial crimes.  Knowing a bust was coming, they held on to cash to buy up busted companies.  In USA, acting on what you know is a crime.

http://www.forbes.com/2009/04/03/banking-andy-beal-business-wall-street-beal.html

In USA, if a businessman does not play at risk in the ABCT, he very well may go to prison.

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Hong Kong #1 Freest Again

For the 17th year in a row, Hong Kong is the number one freest economy in the world.  Since Hong Kong is under Communist control, we necessarily have to praise the Chinese Communist Party for freedom in Hong Kong.

I hope someday USA will permit that level of freedom, again.

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Matthew Has A Question

As you know companies use different pricing strategies between geographic markets.(Ex. We are Belgium citizens and we know there is a premium above cost on Belgium candy in the US) How could we determine the best way to take advantage of that premium. Would you take and attempt to become a wholesaler in Belgium (or if you could buy at retail) and market your products directly to consumers or to perhaps smaller businesses? Obviously, anyone could do this but there is a lot of work involved, weeding out most people who would try it. 


Matthew,
Yes, USA pays the highest price for things it imports.
First you are assuming that no one else has tried to arbitrage the difference.  I'd first try to figure out how come nobody else is beating the system.
You can test either scenario you mention above.  Simply take samples to people you would expect to buy and say "I believe if I import these chocolates, you will buy them from me, am I right?"  Listen to the response...  you'll get an honest answer back on your honest easy question.  Then proceed based on what you learn from several questions at target retailers.
What weeds people out is passion... do you have a passion for fine chocolates?  In Seattle a woman who is doing well with chocolates with rock salt on top.  Actually surprisingly good.  You can mail order some.
My guess is if you get into chocolates, you'll end up designing your own.

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Iceland Recovers Fast

Although Iceland was the worst case, Iceland refused to make their taxpayers cover the debts of insolvent private companies, and their economy is well on the mend.  Now Ireland is considering the same.  If all countries refused to tax citizens to keep billionaires in their billions, then the result would be prices would start falling faster than wages, and productive society would benefit from the action.  The malinvestment would be wiped out and the decks clear to recover. Econ 101.

There is another way that Ireland could pay off the debt, using the bad guys own policies...

Mish Shedlock reads this and says, buy up as much gold as Ireland can with unlimited credit at 1%, and then repudiated their debts.  Here is a salient quote:

Under pressure from investors to lead the charge against the spreading sovereign debt crisis, Trichet said the ECB will keep offering banks as much cash as they want through the first quarter over periods of up to three months at a fixed interest rate. ... Trichet told reporters after the ECB’s Governing Council left its benchmark interest rate at 1 percent today. “We have tensions and we have to take them into account.”

OK... here is a plan...

Borrow 10 billion a month, and buy gold and silver...  go as far as Ireland can with the offer...  the very buying volume will jack the price up...  but in any case every time the price of gold and silver goes up, goes up 10 %, sell 10%,  paying back principal of the new loan and paying down the old.  Since gold will easily go to $4000 in the next couple of years, the debt will be wiped out in a year of two.  I wonder if someone can spreadsheet this for me... it would be a fun graph to update...  call it the Free Ireland Scheme...

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Using Buyer Agents

A reply to an inquiry about using a buyer agent to work on design and source...:

In essence every supplier will to some degree design, manufacture and ship the product.  The balance is the more USA-based design the better, the better the supplier the more reliably they improve if not perfect your design.

One idea I challenge in my courses is that importing is about exploiting cheap labor.  It is not, never has been, never will be, but that is something for the course.  What we do exploit is cheap management.  Long story, but given those premises, a USA managed source in Shanghai seems doubtful to me.  

To quote their website:

"Direct Source is a western-owned and managed international trading company headquartered in Shanghai, China. Over the years DSC has developed a local team of factory auditors, QC engineers, and supply chain management specialists with the expertise and experience to enable our company to cater to the various needs of our customers around the world. As a foreign managed company with an experienced Chinese staff, DSC has the unique ability to find and deliver western-quality goods at China prices.

Unlike many agencies or trading companies you will come across, Direct Source is a licensed exporter and registered trading company with the Chinese government. Our Chinese company was founded with the mission of ensuring that each client’s requirements are met or exceeded from initial enquiry to final delivery.

Our clients range from native Chinese purchasing veterans to first-time importers. No matter your level of experience, sourcing from China will present many challenges, as well as opportunities. We help you to identify these opportunities, manage risk, minimize cost, and optimize your supply chain by removing all intermediaries and delivering you products direct from the source."

Management determines the cost of your goods, and management must cover its own costs.  USA managers in Shanghai sounds about as expensive as it can get, to find suppliers they cannot be optimal, their cost of living in Shanghai cannot be optimal..

I detail how to find the best source (which I do not believe you can farm out) at http://www.johnspiers.com/NTDB.html  . where you can do it yourself, and obviate the need to hire anyone.

Hope this helps...

John

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Sunday Funnies

Very funny mistake on the BBC, a fellow is interviewed on air regarding an issue with Apple Computer.  He was mistakenly ushered to the chair and interviewed.  Very good.  And note at the very end, you can pay to phone the BBC and give them good ideas.  Say what?


Swedish life insurance ad.

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