Archive for May, 2010

The illusion of recovery

Wednesday, May 26th, 2010

Let’s play connect the dots.

USA Today, 5/26/10:
Private pay shrinks to historic lows as gov’t pay rises
(private salaries fall to 41% of personal income;  public assistance reaches 18%, up 50% in 10 years)

Bloomberg, 5/24/10:
FHA volume signals ‘very sick system’
(95% of all new home mortgages are government-sponsored.)

WSJ, 4/19/10:
Rising personal consumption attributed to homeowner strategic defaults
(Chief economist of [Moody's] attributes rising personal expenditures to the fact that 5 million households now live in homes they are not paying for.)

WSJ, 5/7/10:
U-6 unemployment still over 17%, near postwar high

Marketwatch, 5/12/10:
Tax receipts still falling
(Federal gov’t runs loss even during tax month — 4/09 and 4/10 are the only two months it’s ever happened.)

Treasury Dept:
Public debt 88.9% of GDP, rising at ~10% of GDP per year
(Fastest increase in peacetime US history, similar rate to World War II)

The dots form this picture:  epic public borrowing substitutes for normal economic activity, with no end in sight. We are witnessing a titanic battle between deflationary economic conditions and inflationary federal policy. Anything could happen. Hope it doesn’t.

Dead euro walking

Thursday, May 20th, 2010

I’m going to call it now.  The euro area as we know it today is finished, and will survive only among stable, highly industrialized EU economies — DE, FR, IT — while dying in most of the Mediterranean.

Most econ commentators now admit this is a possibility, but Nostradoofus foretells that it is a near certainty, and sooner than we think.  Single digit years at most.

The reason is simple self-interest.  Peripheral EU states joined the euro to borrow more cheaply.  If they can no longer do so, and if the price of membership is now fiscal agony, then the euro has nothing to offer them but deflation and 20% unemployment.

Greece’s leadership has a long tradition of acting in its own short-term interest:  profligacy, excessive borrowing, etc.  We have no reason to expect a change in that culture, so at this point, what is in Greece’s short-term interest? Default on the euro debt and leave the currency union.  Hence that is the most likely result.

Once that door is open, other heavily indebted hangers-on are likely to leave, e.g. Portugal.

I’m looking forward to a brief window of inexpensive vacations in Santorini.

The real trouble with Keynes

Thursday, May 20th, 2010

Forget, for a moment, the debate over whether Keynesian policy “works,” however one wants to define that. Forget the adverse incentives, the moral hazard, the misallocation of capital. There is actually a bigger problem.

The real problem is that Keynes places unrealistic demands on a capitalist democracy.  When you encourage currency debasement, mass redistribution, interest rate distortion, et al — even briefly — you open a populist door that is very hard to close. Giveaways are the politician’s crack, almost impossible to put down once taken up.

The possible exception to this is monetary stimulus, if the central bank is sufficiently independent.

Charlie Munger discusses emigration

Thursday, May 6th, 2010

Yesterday, at the 2010 annual meeting of Wesco Financial Corporation, chairman Charlie Munger (better known as Warren Buffet’s vice-chairman at Berkshire Hathaway) held forth on a variety of business and investing topics.

Munger spent a great deal of his opening monologue singing the praises of Lee Kwan Yew, who, as Singapore’s rather ironfisted “prime minister” from 1965 to 1990, led this tiny, resource-starved, ethnically divided, malaria-infected island nation to become one of the wealthiest, most prosperous, best educated, most stable, most peaceful and least corrupt places on earth.

Munger later commented that, while he personally liked the California climate and would not consider leaving the US, he could certainly understand the logic of emigrating to Singapore.

Anyone who has followed 86-year-old Munger over the years knows him to be a conservative Republican, steadfast patriot, supporter of the Iraq invasion, and (until recently) perennial optimist about America;  but also rational and willing to change his views. When this man says “Basically, It’s Over” for America, and that he understands the logic of leaving the US for Singapore, one should sit up and take notice.

Healthcare bill deepens regulatory morass

Thursday, May 6th, 2010

One of the biggest, least-understood problems with US economic policy is a lack of attention to the costs of regulatory complexity, including tax preparation.  America has traditionally been an easy place to do business, so the recent Gordian knot of basic compliance has arisen almost unnoticed.

Compliance costs are regressive, falling disproportionately on small businesses that lack a full-time accounting and compliance staff.  Since small businesses are the biggest source of US employment, it is logical to conclude that increasing regulatory complexity measurably increases total unemployment (expanded thoughts here, here and here).

Weeks after healthcare reform passed, reporters are still trying to figure out the ramifications of the 2400-page law.  Here’s an ominous one from CNN:

Health care law’s hidden tax change to launch 1099 avalanche (ht Eric)

Some choice quotes from the article:

…in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services…

While this sounds almost exactly like existing law, the subtle addition of “corporation” and “goods” makes it vastly broader:

…under the new rules, if a freelance designer buys a new iMac from the Apple Store, they’ll have to send Apple a 1099.

So apparently every business will soon be generating 1099s for the office landlord.  The web hosting provider.  The local restaurant where sales meetings are held.  The airline.  The travel agent.

This is just the latest straw on the camel’s swayed back.  With each new sheaf of regulatory paper, the small businessperson increasingly asks himself two questions:  ”Could I offshore this?” and “Should I leave the country?”

Of course, not everything will be offshored, and not everyone will leave.  But these are not questions America’s entrepreneurs should even be asking.