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How Do You Make Governments Behave?

May 19, 2010 1 comment

Business vs. Government

Just like there are diseases of the rich, there are economic malaises peculiar to wealthy countries. One of these is a high level of government involvement in the economy. In the UK for example, government spending is set to become half of GDP. Similar numbers characterize much of Europe and the OECD.

The implications of this are interesting. It means that our notion of how economies work- firms produce goods and services, consumers buy them, and efficiency is guaranteed by the forces of competition- is only 50% of how rich countries’ capital stock is being deployed.

The biggest player in the economy is a gigantic monolith with the power to tax. It has no incentive to be efficient, because it cannot go bankrupt. It has no competition. When it spends too much, it can simply raise taxes. When these built-in incentives to fiscal profligacy result in massive government debt and deficits, it simply waits for its neighbours to bail it out.

The frightening reality is, there is no-one to regulate the regulator, to watch the watcher and prevent him from dragging the whole economy down in a sea of red ink. This is why the IMF is now plaintively begging the world’s governments to behave.

Of course, we need more than begging. Rich countries have got used to gigantic governments and high taxes. This is unlikely to reverse. The next best thing is to devise rigid mechanisms for regulating the fiscal behavior of governments. Elections clearly don’t work. The answer to this mighty challenge will be the big economic question of our time.

Bailout for Business Bloggers

April 20, 2010 1 comment

Help!

Why are there no atheists in foxholes? For the same reason there are no free-marketers in a recession: in desperate times, we lose nothing (but our consistency) by crying to a higher power for help, whether that higher power be the God we want to protect us from enemy bullets, or the government we want to save us from our own financial irresponsibility.

And that’s one of the many reasons government intervention in a correcting market is an insidious idea: it lets people get away with putting themselves in bad situations. Which means of course, that they’ll go ahead and do it again.

During the mass panic that was late 2008, all manner of business cried unto the government for salvation, like a people unto their God. Free marketers like us warned that giving money to failing industries was a slippery slope to the kind of massive fiscal deficits we’re seeing now. We were ignored.

It took Larry Flynt, radical purveyor of porn, to point out the silliness of using public money to bailout the auto and banking industries. He duly demanded a bailout for the porn industry. And why not?

Today, we see that such facetiousness was not entirely far-fetched, as airlines are now demanding a bailout in recompense for their losses due to the Icelandic smoke belch. If this continues, we might as well shut down all industry and just all collect our living wage directly from the government. But in the meantime, on behalf of business bloggers everywhere, I hereby demand a bailout. And why not?

Interest Rates: In Preparation for Pain

April 12, 2010 1 comment

Arrgh! The APR!!

The financial crisis and recession were the consequence of a decade-long spending spree by consumers in the US and Britain. As reprobate banker Alan Greenspan made money cheap, consumers responded to the incentive and went to town with car loans, mortgages and credit card debt. In contrast to thrifty China, the West plunged itself into a ravenous mire of debt.

The rest is history, as is the era of cheap money. Yes, the Bank of England recently voted to keep interest rates at their artificially low current levels. This kid glove policy designed to support economic recovery may have stemmed the bloodletting in late 2008, but it has not forced consumers to face up to their own financial profligacy.

That will change- and for governments too. As the New York Times points out, interest rates will rise- and they will continue to do so for a very long time. Governments will have to borrow massively to plug their fiscal holes, and their demand for debt will push rates up. Incipient inflation will have to be contained. Existing mini-bubbles in stocks, housing and gold will have to be pricked in their infancy.

The burden of higher interest payments on debt-burdened consumers will administer well-deserved doses of pain. Many will learn the bitter wisdom of living within their means. Their lessened profligacy will mean lower house and stock prices, less borrowing and less spending.

The bailouts of 2008-2009 tried to avoid the pain of economic correction. The doldrums of the next few years will show they merely postponed and protracted it.

The Only Banker You Should Hate

March 23, 2010 1 comment

The Devil wears glasses

Did you see your financial investments decimated by the credit crunch? Is your mortgage underwater or your house in foreclosure? Are you mired in credit card debt or unemployed?

If so, you are undoubtedly looking for someone to blame. Being human, you’re unlikely to attribute your plight to your own financial irresponsibility in over-borrowing, buying a house you couldn’t afford, living beyond your means or investing unwisely. To blame oneself is not human. We need scapegoats.

This is why we have settled on the world’s bankers as the objects of our righteous anger. Alas, the grey-suited men of Wall Street and the City were only acting on the incentives created by the world’s most powerful banker- The Federal Reserve Chairman. And the incumbent at the time the bubble inflated was none other than Alan Greenspan.

Greenspan is now tentatively accepting some responsibility for the excessively  low interest rates that made money cheap and plentiful, credit easy and asset prices easy to inflate. Of course, being human, he also attributes most of the blame to someone else (Chinese fiscal surpluses flooding the US with cheap money, etc).

But at least, he’s helping us out by his (however limited) mea culpa. So if you’re still angry at your lot in life, go ahead and excoriate him with the fires of wrath and blame. You’ll feel better.

Yo Ho Ho

December 24, 2009 Leave a comment

 Happy Holidays to all Amusis readers. Amusis is on holiday for Christmas.

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Categories: The Economy

2009: Annus Miserabilis

December 15, 2009 Leave a comment
No money, no job, no wife, no angina, no problems

No money, no job, no wife, no angina, no problems

One disturbing aspect of modern Economic Man is how closely his emotional well-being correlates with his financial fortunes. This being the case, it is no surprise that for many, 2009 is the worst year of their lives.

The survey supports previous research showing that the primary sources of human stress are relationships, health, money and work. What is interesting is the common thread linking them: our jobs and earnings.

Merely going to and from work is a travail that takes its toll. Work itself is an inherently stressful activity, requiring effort beyond one’s comfort zone, repression of one’s true feelings and thoughts, compulsory conformity, yielding to the authority of others, and the fear of unemployment.

But work problems don’t end in the office. Stressed workers, unable to bash the boss, frequently take frustration out on family members, straining relationships. Unemployment creates money problems which fracture families, and work and financial stress cause health problems like insomnia, eating disorders, substance abuse and heart disease.

2009 reminds us that the happiest person is one with no relationships, career concerns, health woes or financial needs. In other words, a Shaolin monk. So if you’re having a bad year, never mind the job centre: head for the nearest monastery.

Why You Shouldn't Fiddle With the Price of People

December 14, 2009 Leave a comment
New Bank CEO

New Bank CEO

Who is worth more to society, a banker or a cleaner? Well, according to this ‘think tank’ -which apparently does very little thinking- cleaners are worth more, and so should be paid more than bankers.

The mind boggles at this brutal rape of economic logic. There is a market price for workers, set by the demand and supply of their skills. Their wages must reflect their true worth, because no rational employer will pay more than a worker is worth, and no rational worker will accept less than he can earn elsewhere.

This is why skilled brokers from the City are fleeing the UK to escape the shameful climate of high-earner persecution. It’s also why GM is finding it hard to attract CEO candidates. You get what you pay for.

If for political reasons you set the price of bread less than the equilibrium market price, bakers will simply produce less bread. The scarcity will result in greater consumption of bread alternatives.  So if this wage persecution continues, those who want to see cleaners replacing bankers in the halls of finance may just soon get their wish.

Categories: The Economy