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  • Archive for the 'Economics & Finance' Category

    When Texas DUCs Go Quack, Quack, Frack

    Posted by Trent Telenko on 26th May 2016 (All posts by )

    The “DUC” in this case being _D_rilled but _U_n_C_ompleted shale oil & gas wells

    I ran into this article by Seeking Alpha energy analyst Gary Bourgeault over on Real Clear Energy which gave a figure for how many drilled but ‘unfracked’ wells are available for the new extended oil flow fracking technique I mentioned in May 15th 2016 post Texas Fracking and the Death of Big Oil.

    The key passage from “U.S. Shale Oil Boom Over Says CSMonitor – Hahahahaha” below —

    DUC wells waiting in the wings
     
    Another major reason the shale boom isn’t over is the large number of drilled but uncompleted wells waiting to be brought into production. There is an estimated 5,000 in the U.S. which can be quickly brought to market when the price of oil is high enough to reward it. Some companies have been completing them for some time, and more are being completed in 2016.

    There are a lot of implications in that number. Starting with the fact that new oil & gas rig counts are going to be minimal for some time. And the hard economic fact that major politically event driven oil price spikes are going to be extremely short and will drop below 50 dollars a barrel within weeks to three months, given how fast these North American “DUC” wells can be fracked to bring product to market.

    This new age of “banked” cheap oil plays, and the resultant oil price stability, will see off both the “Big Oil” economic model and the political/corporate elites that live by it.

    Update May 27 2016:

    It looks like Zerohedge has come to the same set of conclusions about the “Big Oil” economic model with his post “Peak Petro-State – The Oil World In Chaos”

    Posted in America 3.0, Business, Economics & Finance, Energy & Power Generation, USA | 14 Comments »

    The Breakdown of the Social Contract and the Rise of Geopolitics

    Posted by Michael Hiteshew on 19th May 2016 (All posts by )

    Dr. Pippa Malmgren, founder of DRPM Group, former US Presidential Adviser and alumna of the London School of Economics, makes some very insightful connections between the breakdown of responsible economic policy in the USA and the increase of global warfare, from China and the South China Sea to Russia in the Ukraine.

    She also explains that things like inflation don’t just happen like bad weather or something, they’re choices made by policy makers as a method of defaulting on debt.

    Some quotes:

    If you people in emerging markets are experiencing knock-on effects from our (inflationary) policy, that’s your problem…It’s our dollar, and your problem! …They’re view is, I’m taking enough pain, you can’t expect me to ask my people to take even more pain by dealing with a global financial crisis and now demand has collapsed..you can’t ask me to inflict more pain. What is the end result? When central banks are trying to create inflation, a normal side effect is that hard asset prices go up…we’ve seen record all time prices for stock markets, for property, we actually seen record all time prices for things like proteins, which are particularly important in an emerging market context. Emerging market workers are spending 40%-70% of their income for food and energy, so price movements in this area matter.

    Suddenly, all these pressures, all these problems are bearing down on these few smart people sitting in the West Wing who we think can solve this. And they’re speaking in a language that is highly technical, highly mathematical, it makes it very difficult for the general public to engage in the question. They’re told, Don’t worry about quantitative easing, it’s all in your interest! And they’re going, Yeah but my Cadbury Creme Egg, I’m getting less of those, and my rent is going up, and I can’t get a job still. But there’s a mismatch between the language the public wants to speak to engage in these issues and the language in which the policy discussion is conducted. And that a gap exists in understanding, What are the consequences of the choices that being made on our behalf?

    A highly worthwhile use of an hour or so of your time.

    Posted in Big Government, Civil Society, Economics & Finance, International Affairs, War and Peace | 18 Comments »

    Book Review: Little Man, What Now?, by Hans Fallada (rerun)

    Posted by David Foster on 17th May 2016 (All posts by )

    (I posted this review four years ago…given the continued economic difficulties faced by many Americans, and the political implications thereof, this seems like an appropriate time for a rerun)

    I’ve often seen this 1932 book footnoted in histories touching on Weimar Germany; not having previously read it I had been under the vague impression that it was some sort of political screed. Actually it is a novel, and a good one. The political implications are indeed significant, but they’re mostly implicit rather than explicit.

    Johannes and Emma, known to one another as Sonny and Lammchen, are a young couple who marry when Lammchen unexpectedly becomes pregnant. Their world is not the world of Weimar’s avant-garde artists and writers, or of its risque-to-outright-degenerate cabaret scene. It is far from the world of a young middle-class intellectual like Sebastian Haffner, whose invaluable memoir I reviewed here. Theirs is the world of people at the absolute bottom of anything that could be considered as even lower-middle-class, struggling to hold on by their fingernails.

    When we first meet our protagonists, Sonny is working as a bookkeeper–he was previously a reasonably-successful salesman of men’s clothing, working for the kindly Jewish merchant Mr. Bergmann, but a pointless quarrel with Bergmann’s wife, coupled with a job offer from the local grain merchant (Kleinholz) led to a career change. Sonny soon finds that as a condition of continued employment he is expected to marry Kleinholz’s ugly and unpleasant daughter, never an appealing proposition and one which his marriage to Lammchen clearly makes impossible. Lammchen is from a working-class family: her father is a strong union man and Social Democrat who sees himself as superior to lower-tier white-collar men like Sonny.

    When Sonny and Lammchen set up housekeeping, their economic situation continually borders on desperate. Purchasing a stew pot, or indulging in the extravagance of a few bites of salmon for dinner, represents a major financial decision. An impulsive decision on Sonny’s part to please Lammchen by acquiring the dressing table she admires will have long-lasting consequences for their budget.

    The great inflation of Weimar has come and gone; the psychological damage lingers. Sonny and Lammchen’s landlady cannot comprehend what happened to her savings:

    Young people, before the war, we had a comfortable fifty thousand marks. And now that money’s all gone. How can it all be gone?…I sit here reckoning it up. I’ve written it all down. I sit here, reckoning. Here it says: a pound of butter, three thousand marks…can a pound of butter cost three thousand marks?…I now know that my money’s been stolen. Someone who rented here stole it…he falsified my housekeeping book so I wouldn’t notice. He turned three into three thousand without me realizing…how can fifty thousand have all gone?

    Inflation is no longer the problem, unemployment is. There are millions of unemployed, and those who do hold jobs are desperately afraid of losing them and will do anything to keep them.

    Read the rest of this entry »

    Posted in Book Notes, Civil Society, Economics & Finance, Germany, History | 3 Comments »

    Texas Fracking and the Death of Big Oil

    Posted by Trent Telenko on 15th May 2016 (All posts by )

    It isn’t often you see the death of a major worldwide industry. Last week I saw the death of the “Big Oil” economic model. It just died at the hands of Texas oil frackers who have developed a new “disruptive technology” that has made obsolete all the pillars of technology underpinning large, vertically integrated oil companies. More importantly, the same is true of all the petro-states that nationalized Big Oil’s assets in the 1960s to make all the state oil companies around the world today.

    I found this out doing my day job last week as a Defense Department quality auditor visiting a mid-sized oil service company diversifying into federal contracts. The meeting was about issues with the contract they won and touched on others they have bid on. As a side bar at lunch the following points about their main business came up:

    1. Oil field spending has died. Rig count in the USA is the lowest it has been since 1940.
     
    2. One oil rig controller company these folks worked with saw a year over year drop of 72% in its business.
     
    3. Another company they supplied had their “Cap-X” budget drop from ~$400 million for 2015-2016 to little over $30 million for 2016-2017.
     
    4. One drilling company they supplied went from 120(+) new wells last year to _12_ this year.
     
    5. This supplier sold a lot of copper tubing for “frack-log” drilling. That is the drilling of holes in good oil-bearing rock without fracking rock for oil immediately — and here is the new part — to take advantage of a new long-flow fracking technique.

    While most of the points above are due to the Saudis’ oil price war on Texas frackers. An ex-Big Oil geologist I know put it this way —

    The entire reason for the price drop was because the Saudis wanted to destroy fracking in the United States in order to keep us dependent upon them in order to keep them getting a free defense. The Saudis will have to diversify and start spending money on defense before the price goes back up, or they will be in serious trouble.

    The technique in Point #5 above marks another “fracking revolution” that is of growing importance to the USA. This new fracking energy revolution will upend the world order as we know it. Political winds willing, America may well be a net hydrocarbon exporter in five to eight years.

    Explaining why that is requires some background in Texas oil fracking.

    Read the rest of this entry »

    Posted in America 3.0, Big Government, Business, Capitalism, Economics & Finance, Energy & Power Generation, Miscellaneous, National Security | 42 Comments »

    “THE 30-SECOND GUIDE TO GOVERNMENT SPENDING”

    Posted by Jonathan on 9th May 2016 (All posts by )


    View post on imgur.com

    (Via Dan Mitchell: Milton Friedman, Adam Smith, and Other People’s Money – well worth reading.)

    Posted in Big Government, Economics & Finance, Political Philosophy, Public Finance | 3 Comments »

    April Showers

    Posted by Grurray on 29th April 2016 (All posts by )

    Yesterday, the GDP figures were released for the first quarter of the year, and they showed that the economy is flatlining. We grew at only a pitiful 0.5%. Much of it was caused by a huge decline in business investment, which saw the biggest monthly drop since the recession.

    This is mostly blamed on the troubles in the oil and gas industry, but output in other areas of the economy also showed weakness. Factory orders dropped and have remained flat the past several months. Car sales plummeted 2.1% last month, their biggest drop in a year. With gas prices low this is the one thing we should see rising. The car industry stumbling means there may be some other underlying problems.

    The conventional wisdom, on the other hand, views this as just a blip. The winter season in the post-recession era has usually been the weakest time of year only to be followed by a rebound into the rest of the year. The exception was 2012 where the high hopes at the start gave way to the rising probability of an Obama reelection. The economic shock spread during the year, and the traditional holiday hangover came a little early in the wake of the electoral wreckage. This year, with the jobs market expected to stay strong and the Fed signaling it will put the brakes on further interest rate increases, the economy is seen bouncing back as the rough waters give way to the calm port.

    It may very well turn out that way for all I know. My crystal ball has been a little foggy lately, so I wouldn’t venture a guess either way. However, there may be some other causes for concern further down the road. This week the McKinsey Institute just issued a research report on the stock market, ominously titled, Diminishing returns: Why investors may need to lower their expectations. In it they provide a detailed analysis of why the next 30 years will see lower stock market returns than the previous few decades.

    Now admittedly, most analysts’ forecast for the next 30 days can usually be attributed to luck. A forecast for the next 30 years probably isn’t something you want to bet the whole farm on. A small corner of the barn maybe, but I would save the rest of the homestead to see how things actually unfold.

    The report lays out in detail why the oversized returns between 1985 and 2015 were possible, and the reasons they say are because of four factors: low interest rates, low inflation, high productivity from technological advances, and favorable demographics from emerging markets entering the global economy. Nothing controversial there. The first three elements increased profit margins, and the last one provided cash influxes, which kept interest rates low, which in turn increased the others. Virtuous cycle – wash, rinse, repeat. They also include some calculations, but the self-evidence is apparent enough.

    The wrench in the works is going to be the fact that those elements won’t have the effect that they once had. Interest rates are already rock bottom, and in some cases even below that. Squeezing more out of low yields is going to be tougher and tougher. In 1980 inflation was 13% and interest rates were 20%. Now they’re currently at 1.6% and 0.5% respectively. There’s nowhere to go but up. Sideways is always a possibility, but we’re still in the same boat. That won’t drive future growth either like it once did.

    Demographic growth may still hold up. There’s still a whole lot of world out there with the potential to drive a modern global economy. The question is will they be capable of replicating what we saw in the recent past with hundreds of millions of Chinese rising out of the Maoist ashes and into the middle class? Any new emerging markets will have a lot more work to do. The report points out that the countries with the largest economies have seen slowing population growth, and that will continue to decelerate

    In Western Europe, aging is more striking than in the United States. In France, for example, the share of the working-age population is expected to decline from 63 percent to 58 percent over the next 20 years. In Germany, the fertility rate has exceeded replacement rate in only seven of the past 50 years. Employment has already peaked in Germany, and its labor pool could shrink by up to one-third by 2064. Until the 2015 influx of refugees from Syria, Iraq, and elsewhere, the German population was expected to shrink by as much as 0.3 percent per year over the next 20 years.

    Germany has decided to address their demographic collapse by welcoming in an unproductive culture. Either way they haven’t much left to contribute in preventing the forecasted shortfall.

    McKinsey does hold out hope for some technological breakthroughs which could pick up the slack in productivity. Whatever it may be, they say it will need to have a bigger impact than the previous computer and internet revolutions because of the other headwinds. The best scenario would be in some combination with fast growing emerging market or industry. The problem with that happening is now that taxes and regulation are increasing, companies involved in fast growing sectors will tend to want to stay private, so equity returns will be elusive for only a select few.

    Interestingly, one sector highlighted that will benefit from higher interest rates is insurance companies. The era of low to zero interest rates has made it difficult for them to make any money on annuities. Their annuities pay out guaranteed yields to customers, but ZIRP and NIRP keep profits low. Fixed income annuities in which insurers bear most of the risk will benefit from higher yields.

    However, variable annuities where the customers share the risk have more exposure to equities, so they would be vulnerable to the lower growth/lower returns environment. Providers of variable annuities along with other asset managers will need to adjust their investment strategies:

    To confront this, asset managers may have to rethink their investment offerings. One option would be for them to include more alternative assets such as infrastructure and hedge funds in the portfolios they manage. Such alternative assets already account for about 15 percent of assets under management globally today.

    To chase returns, investors will be forced into riskier assets, possibly with dubious intentions, i.e. government boondoggles otherwise known as shovel ready infrastructure projects. We may already be seeing something like this with the imminent government takeover of financial advisors

    The Department of Labor dealt a bit of a surprise blow to fixed indexed annuities in the final iteration of its rule, issued Wednesday, by lumping the annuities into a more complex and costly regulatory regime than they have presently, representing an about-face from the department’s original proposal.

    Just like Obamacare pushes out the small to medium firms that can provide much needed innovation in order to capture the market, the new DOL fiduciary rules will push out small to medium sized advisors to replace them with automated puppets that will be programed to herd investors into investing in government programs.

    There’s a good reason the Obama Administration is currently fighting so hard to keep these rules. It’s a template for taking over other industries. And with that it’s another impediment to productivity growth and innovation which reinforces the grim forecast of diminishing returns by McKinsey.

    Posted in Business, Economics & Finance, Miscellaneous, Politics | 7 Comments »

    The Federal Takeover of State Debt is About to Begin…

    Posted by Carl from Chicago on 17th April 2016 (All posts by )

    Often people focus on the “loud” items and miss the subtle, important events that really change the world. On the positive side, the 401(k) plan has that obscure name because a financial expert basically “invented” it out of a line in the tax code which enabled tax-deferred savings. And Jack Bogle of Vanguard did the same thing with “passive” investing, which reduced fees and for practical purposes has taken over the investing world (along with ETFs).

    One very subtle item that is about to occur is the nationalization of state debt (and likely debts of individual cities) by the federal government. At the highest level, states and cities have made promises (mainly pensions) to their employees that are un-payable without raising taxes to extortionate rates. Detroit cracked first but since it was a city and there was some state framework they were able to use bankruptcy, but many more are to follow, including Puerto Rico (right now) and soon thereafter likely the City of Chicago or its teachers’ pensions as well as the state of Illinois.

    A very similar event occurred in Europe when the ECB basically put the debts of Greece and Portugal onto the backs of taxpayers in Germany and Holland. The ECB had a moment (several moments, actually) when they could have fundamentally changed how Greece ran their economy, shutting down statist laws and heavy governmental interference in the economy to open up competition and growth, but they blinked and instead just “wired them money in exchange for promises”. The Greeks, of course, haven’t kept their promises, and why should they, given that the ECB continually blinks when the showdown occurs.

    The reason that these states and territories like Puerto Rico are in dire straits is because they

    1. Spend more money than they make every year,
    2. Rely on borrowing to pay for operating expenses,
    3. Have giant, unfunded liabilities on top of this that can never be repaid (pensions, medical bills, etc…).

    This situation is enabled by a governing class that views funds as an opportunity to redistribute wealth to favored constituents and relies on “fairness” as a bedrock of their planning. The apex of this sort of planning can be seen in crony capitalist states like Brazil, where large enterprises like the National Oil Company (partially on the stock market, partially owned by the state) are used to fund politicians and social programs and are systematically diverted away from their core mission (to make money) until the enterprises are bled almost totally dry. Then, ironically, the state has to bail out the very companies that were supposed to provide for the socialistic wealth in the first place.

    The CORE issue is – if you give these sorts of entities money (bailout) without a “root and branch” cleaning of the issues – you will just get more of the same, indefinitely, as their individually painful debts become part of the larger national (or pan-European) debt, which continues the little game of overspending and wasting money on favored political groups for a little longer (maybe a couple years, maybe longer).

    The slippery slope – the trigger – is occurring right now in Puerto Rico. That entire economy is corrupt and ridden with subsidies from electricity to taxes to everything else. For Puerto Rico to thrive, it would need to break down barriers to private enterprise, reduce taxes, levies and bureaucracy, and find some way to bring logical industry into their jurisdiction. However, the more likely course is as follows:

    1. Point out the current individuals suffering from a lack of funding (the poor, kids in school, the elderly),
    2. Note that the debt which was once owned by individuals was bought up by hedge funds for a fraction of its original value – these funds are in a position to fight (legally and politically) for repayment and although they may be termed “vultures” or something else, they really are the last man standing for individuals who lack the means to fight legally for their rights,
    3. Use the political system to “promise” reforms that will never be carried out (because why would you if you can use funds to enable the current system to thrive),
    4. Talk about the retirees, and “promises” made to them over the years that cannot be paid, and how they can’t go back to the work force and earn more money so that they have to be made whole,
    5. Use political or class warfare to point out the groups that run Washington don’t look like the groups that are broke and make it a fairness issue or tied to some century plus grievance.

    It is very likely that these tactics will “work” and that the debts of Puerto Rico will be backstopped by the US government. While this technically isn’t a “bailout”, it absolutely is, because Puerto Rico can’t borrow one dollar on their own anymore (who would lend money to someone who says they won’t pay you back?), and we know that without major reform (which won’t happen) Puerto Rico will just continue to bleed money indefinitely (and fall back on fairness arguments and the above listed tactics to ensure that this keeps happening).

    Then soon after this subtle bailout (and likely before Puerto Rico fails AGAIN, which will happen again as it will with Detroit), entities of Illinois or the state itself will drive straight through this loophole and federalize their debt, too. The state and entities will make lavish promises about change that will never occur, because this is the lifeblood of the Democratic Party (patronage workers and the public sector) and all of the clout / featherbedding / etc… will continue on indefinitely, without any of the sorts of laws that enable competition.

    Watch the headlines… see this occur… it will be seismic in its long-term nature, because it will fundamentally change the nature of the US government, since the debts of the states and cities will become everyone’s debt and we don’t have any “real” tools to govern their behavior or fix the long-term promises that destroy competitiveness and economic growth.

    This is the real story, it is happening under our noses, and instead of paying attention we are following these idiotic presidential campaigns of pure vapor.

    Cross posted at LITGM

    Posted in Big Government, Chicagoania, Economics & Finance, Illinois Politics | 13 Comments »

    Paying Higher Taxes Can be Very Profitable (rerun)

    Posted by David Foster on 15th April 2016 (All posts by )

    (originally published in 2010 and now an April perennial)

    Chevy Chase, MD, is an affluent suburb of Washington DC. Median household income is over $200K, and a significant percentage of households have incomes that are much, much higher. Stores located in Chevy Chase include Tiffany & Co, Ralph Lauren, Christian Dior, Versace, Jimmy Choo, Nieman Marcus, Saks Fifth Avenue, and Saks-Jandel.

    PowerLine observed that during the 2008 election season, yards in Chevy Chase were thick with Obama signs–and wondered (in 2009) how these people were now feeling about the prospect of sharp tax increases for people in their income brackets.

    The PowerLine guys are very astute, but I think they missed a key point on this one. There are substantial groups of people who stand to benefit financially from the policies of the Obama and company, and these benefits can greatly outweigh the costs of any additional taxes that these policies require them to pay. Many of the residents of Chevy Chase–a very high percentage of whom get their income directly or indirectly from government activities–fall into this category.
    Read the rest of this entry »

    Posted in Big Government, Economics & Finance, Leftism, Taxes, USA | 3 Comments »

    Government, the things we do together.

    Posted by Michael Kennedy on 6th April 2016 (All posts by )

    cal

    Barack Obama is fond of describing government this way.

    As President Obama said the other day, those who start businesses succeed because of their individual initiative – their drive, hard work, and creativity. But there are critical actions we must take to support businesses and encourage new ones – that means we need the best infrastructure, a good education system, and affordable, domestic sources of clean energy. Those are investments we make not as individuals, but as Americans, and our nation benefits from them.

    That was a reaction to Romney’s criticism of his silly comment.

    I prefer the quote attributed to Washington.

    “Government is not reason, it is not eloquence,—it is force! Like fire, it is a dangerous servant, and a fearful master; never for a moment should it be left to irresponsible action.”

    Now, we see a new imposition.

    The Department of Labor says its so-called fiduciary rule will make financial advisers act in the best interests of clients. What Labor doesn’t say is that the rule carries such enormous potential legal liability and demands such a high standard of care that many advisers will shun non-affluent accounts. Middle-income investors may be forced to look elsewhere for financial advice even as Team Obama is enabling a raft of new government-run competitors for retirement savings. This is no coincidence.

    Labor’s new rule will start biting in January as the President is leaving office. Under the rule, financial firms advising workers moving money out of company 401(k) plans into Individual Retirement Accounts will have to follow the new higher standards. But Labor has already proposed waivers from the federal Erisa law so new state-run retirement plans don’t have the same regulatory burden as private employers do.

    Read the rest of this entry »

    Posted in Big Government, Capitalism, Economics & Finance, Public Finance | 7 Comments »

    Omsk & Arkhangelsk (Archangel)

    Posted by Michael Hiteshew on 2nd April 2016 (All posts by )

    Communism followed by oligarchy:

    Omsk   (Map)

    Arkhangelsk  (Map)

    These are obviously depressed areas. Interesting, however, the number of comments along the lines of ‘Same here!’ I have no idea how representative this is, though I’ve read that things are very bad in Russia these days. Sanctions are currently biting in making things even worse. Remember to be grateful for where you live and what you’ve inherited.

    (My browser auto-translates to English with the Google Translate for Chrome plugin.)

    Posted in Current Events, Economics & Finance, Photos, Russia | 29 Comments »

    Unions and Robots.

    Posted by Michael Kennedy on 30th March 2016 (All posts by )

    port

    California has now decided to impose a a $15 per hour minimum wage on its remaining business economy.

    Denial of consequences is an important part of left wing philosophy.

    “California’s proposal would be the highest minimum wage we have seen in the United States, and because of California’s sheer size, it would cover the largest number of workers,” said Ken Jacobs, chairman of the UC Berkeley center. “This is a very big deal for low-wage workers in California, for their families and for their children.”

    Implicit in all the assumptions is the belief that employers will not adjust by reducing the number of minimum wage employees they have.

    The UC Berkeley estimate also includes some who earn slightly more than the lowest wage and stand to benefit from a ripple effect as businesses dole out raises to try to maintain a pay scale based on experience, Jacobs said.

    If Brown’s plan passes, 5.6 million low-wage workers would earn $20 billion more in wages by 2023, according to the UC Berkeley analysis. It assumed no net jobs would be lost as businesses look to trim costs.

    The experience in other places has not been positive.

    Even a former chairman of President Obama’s Council of Economic Advisers, Alan Krueger, has cautioned recently that “a $15-an-hour national minimum wage would put us in uncharted waters, and risk undesirable and unintended consequences.”

    Read the rest of this entry »

    Posted in Big Government, Business, Economics & Finance, Politics | 27 Comments »

    Who’s More Fascist: Presidential Candidate Donald Trump or Former Federal Reserve Chairman Ben Bernanke?

    Posted by Kevin Villani on 19th March 2016 (All posts by )

    How Economists Facilitated the Transition of Erstwhile “Market” Economies to Fascism

    The Left calls Donald Trump a fascist invoking the memory of Hitler and Mussolini, to which Trump might reply: “they were losers; I’m no loser.” Fascism is in essence the political control of the private economy, historically justified by democratically elected leaders to defend against perceived or orchestrated external threats. Progressive war politicians from Presidents Wilson and FDR to Johnson and Obama and now candidate Clinton have pursued this same goal in the US as has the social democratic European Union.

    At the recent meeting of the G20 leaders and central bankers political responsibility for and control over their respective economies was assumed, but their Alfred E. Newman “what, me worry” smiling faces belie the fragility of the current global economy. The political distortions to both the financial and real economy have arguably never been greater, to which politicians and their economist enablers prescribe more of the same mostly wasteful public spending financed by money printing, a cure reminiscent of medieval bloodletting.

    Having never been of much use to business, economists mostly followed “Say’s Law” that supply creates its own demand (for academic economists). They got their first pervasive shot at political power when President Wilson – an academic who chafed at constitutional constraints – created the Federal Reserve which helped US bankers fund the Allies until he could mobilize a war economy, making the first WW “Great.” The unprecedented death and destruction of the Great War knocked the global economy off kilter and the massive international war debts made stabilization politically difficult. As the creditor and least damaged victor, the US economy boomed in the roaring ’20s, followed by a bust.

    Purveyors of the “dismal science” had previously counseled that politicians had to own up to the cost of war until the private economy recovered. While the “arts” of manipulating the value of currency and public spending financed by coercive taxes and often uncollectable debt as well as coercive regulation were as old as politics and war itself, post WW I economists became noticeably less “dismal” and purportedly more “scientific,” believing that such “macroeconomic” interventions could be calibrated to “tame business cycles” in part by transferring or defaulting on war debts. This was complemented by “microeconomic science,” the recent objective of which has been to prove that individuals aren’t always perfectly rational (and by inference in need of paternalistic political protection and direction). Macroeconomists contend that this psychological defect is contagious, conjuring irrational mobs running on banks (or attending Trump rallies).

    Read the rest of this entry »

    Posted in Big Government, Crony Capitalism, Economics & Finance, Public Finance, Trump | 5 Comments »

    “Washington’s war against short-term stock traders”

    Posted by Jonathan on 9th March 2016 (All posts by )

    From an excellent column by J.W. Verret:

    The government policy of promoting long-term profits is bad economics, and even worse, it is engineered to favor incumbent firms and stifle innovation. When the government gets to decide the proper term of your investments, it constitutes the same form of cronyism as when campaign donors are directly given sacks of cash by the government officials they donated to when they were candidates.
     
    A guiding principle in our economy is Joseph Schumpeter’s theory of “creative destruction.” Just as some forests need to burn in order to clear away brush and make way for more robust growth, economic innovation also requires that old and outdated companies be broken up for new replacements to take root. Recently, Americans have received an education in this principle by watching Uber’s challenge to the taxi cab incumbents.
     
    The American capitalist economic system is at its best when guided by the principle that no firm is too big or special to fail. While corporate executives may feel such a jungle atmosphere is harsh and unforgiving, don’t forget that customers who buy products and investors of capital are at the top of the food chain in this jungle. Wall Street banks and corporate executives are the prey! Protecting failing companies and subsidizing politically powerful incumbent firms, under the false guise of promoting long-term value, is simply un-American.

    A couple of other points:

    -Short-term trading adds market liquidity, which reduces bid/offer spreads. Because of short-term trading, long-term investors pay less to buy and receive more when they sell.

    -Liquidity buffers volatility. Wild market swings happen when liquidity dries up. Any trading restriction that reduces market liquidity will increase market volatility.

    This stuff is basic. It’s a shame that many people never learn it and are credulous about fairy tales involving evil speculators and high-speed traders in dark alleys. When someone in a position of authority tells you that a particular type of free exchange is bad, it’s usually safe to assume that he has a stake in some crony enterprise that benefits by restricting your choices.

    (Via Instapundit.)

    Posted in Crony Capitalism, Economics & Finance, Markets and Trading | 5 Comments »

    Disruption – Part Four – The US Airline Industry

    Posted by Carl from Chicago on 6th March 2016 (All posts by )

    I have been considering “disruption”, including what is hype and what is real. Here is one on the cab industry where it occurred, in the electric and gas utility industry which has proven resilient in its current business model, and retail which is in the process of being disrupted.

    My theory under these posts is that increasing supply (broadly defined) has been the key to whether or not “disruption” is truly real or not occurring. I don’t know if it will play out that way or not in the end but this is a starting point.

    I have been interested in the airline industry for decades… in high school for my statistics class I built a model which correlated the profits of United Airlines with the price of oil. As an auditor and consultant I spent hours every week on a plane crossing the country serving utilities. And ever since I have traveled at least ten times a year for business or pleasure. So perhaps I would not consider myself an expert on the airline industry but certainly an interested observer.

    The airline industry famously de-regulated in 1978. From 1978 to 2010 the airline industry added myriad new entrants and saw them fail along with much of the old guard. Wikipedia summarized this era here. In recent years, through bankruptcy and mergers, the US airline industry consolidated into four major carriers – American, United, Delta and Southwest. These four carriers control the vast majority of gates at major cities and effectively operate as an oligopoly. Now these four carriers are in rude health, as you can see in the stock chart below. Their stock prices have increased between 135% to 355% over the last 5 years. As an investor I bought Southwest after 9/11 and held on to it for years as the price languished; unfortunately I exited the stock before they became today’s oligopoly.

    Another contributor to these gains is the collapse in oil prices. During the “peak oil” era, the airlines profits were strangled by the high cost of fuel – today they benefit immensely from today’s commodity price crash. This article describes how lower fuel costs saved them $4.3B in the third quarter 2015 alone and these lower costs have generally not come through to end users as price decreases – the airlines have banked the money or used them for dividends and capital improvements.

    Read the rest of this entry »

    Posted in Business, Economics & Finance, Tech, Transportation | 13 Comments »

    Lest We Forget What This Election is About

    Posted by Ginny on 5th March 2016 (All posts by )

    Yesterday, clicking through an Instapundit post, you would find here the source for their “quote of the day,”

    A couple of years ago, [socialist Venezuela’s] then-minister of education admitted that the aim of the regime’s policies was ‘not to take the people out of poverty so they become middle class and then turn into escuálidos’ (a derogatory term to denote opposition members). In other words, the government wanted grateful, dependent voters, not prosperous Venezuelans.”

    Not surprisingly this was followed by the ever useful Reynolds’ reference to the Rainmakers: “They’ll turn us all into beggars ’cause they’re easier to please.

    Anyone who listens to Sanders arguing medical service is a right hasn’t thought twice about Perry’s argument – that access is far more important than insurance and far more likely to produce good medicine. And Hillary’s arguments are more of the same, of course, but she’s already in the doddering, grasping, authoritarian stage of the Castros. Sanders hasn’t had the power before – we just suspect what he will do with it; we know what she will.

    Read the rest of this entry »

    Posted in Economics & Finance, Education, Elections, Miscellaneous, Politics | 13 Comments »

    Macroeconomic Fallacies, Fed Chairman Bernanke’s Delusions and the Rise of Donald Trump

    Posted by Kevin Villani on 2nd March 2016 (All posts by )

    The G20 leaders recently called upon the leaders of the developed nations to employ more massive amounts of debt financed government spending to ward off the current economic stagnation and in some instances the early stages of recession. That fits Einstein’s definition of insanity: “doing the same thing over and over again but expecting a different result”. The pursuit of so-called “macroeconomic (fiscal and monetary) policies” has produced a quarter century of economic stagnation in Japan, a $30 trillion debt bubble in China with little to show, and stagnation and looming recession in Europe and increasingly in the US.

    Einstein was a genius who remains relevant today. Just within the last few weeks evidence was reported of gravitational waves predicted by Einstein almost a century ago. Proving Einstein’s theories has been the focus of physics during the past century, but he maintained that had he been able to get an academic appointment instead of a position at the Swiss patent office he never would have been able to develop and publish his new path-breaking theories.

    In his recently released biography The Courage to Act (2015), former Federal Reserve Chairman Ben Bernanke describes how, initially failing physics, he turned to macroeconomics as an outlet for his mathematical skills. This was auspicious. In physics, when your equations don’t fit the reality it is the equations that must be changed unless there is new evidence to change the understanding of reality. Einstein’s biggest error was rather than waiting for better data when his equations predicted an expanding universe, he fudged the equation (introducing the Max Planck constant) to fit the current understanding of a stagnant universe, then disagreed for most of his lifetime with the next generation of quantum physicists who proved he had gotten it right in the first place. Einstein’s one mistake is the modus operandi of modern macroeconomists.

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    Posted in Big Government, Crony Capitalism, Economics & Finance, Elections, Politics, Systems Analysis, Tea Party, Trump, USA | 29 Comments »

    The Transformation of Economics.

    Posted by Michael Kennedy on 1st March 2016 (All posts by )

    A great piece in the Wall Street Journal today about what has happened to Economics and Economics education.

    I took an Economics class in college in 1957 and it changed me to a Republican. My first vote was for Richard Nixon in 1960. My family was furious as they thought we were related to the Boston Kennedys and they had always been Democrats. I wonder if an Economics class would have that effect today?

    And that political economy and my assessment of it has changed over a career spanning more than half a century. Here are five developments I would emphasize:

    I agree with his appraisal.

    1. Diminishing returns to research. A core economic principle is the Law of Diminishing Returns. If you add more resources, such as labor, to fixed quantities of another resource, such as land, output eventually rises by smaller and smaller amounts. That applies—with a vengeance—to academic research. Teaching loads have fallen dramatically (although the Education Department, which probably can tell you how many Hispanic female anthropologists there are teaching in Arkansas, does not publish regular teaching-load statistics), ostensibly to allow more research. But the 50th paper on a topic seldom adds as much understanding as the first or second.

    This has been characteristic of Medicine, as well as other academic subjects.

    Emory University’s Mark Bauerlein once showed that scholarly papers on Shakespeare averaged about 1,000 a year—three a day. Who reads them? How much does a typical paper add at the margin to the insights that Shakespeare gave us 400 years ago?

    That isn’t all he has shown.

    The attitude touches the President’s favorite pastime. Tevi Troy reported in Commentary how much Obama enjoys television, particularly SportsCenter and the middlebrow series Homeland and Mad Men. The New York Times added Breaking Bad and The Wire in its article “Obama’s TV Picks: Anything Edgy, with Hints of Reality,” and while it warned of the foolishness of “psychoanalyzing” a president based on “the books he reads or the music he listens to or the television shows he watches,” the story mentions not a single book. One would expect Marxists, feminists, queer theorists, post-colonialists, anti-imperialists, and media theorists to chide Obama for his bourgeois, masculinist taste, but as far as I know they have remained silent.

    Obama’s taste runs more to sports and rap music.

    Read the rest of this entry »

    Posted in Academia, Big Government, Civil Society, Economics & Finance, Education, Leftism, Politics | 17 Comments »

    Was the Real Wild West one of “Institutional Entrepreneurs”?

    Posted by Ginny on 29th February 2016 (All posts by )

    I don’t read much lately, but my more libertarian daughter listens to Hoover & Cato podcasts.  She mentioned one on The Not So Wild, Wild West: Property Rights on the Frontier  So I ordered the book. I don’t know much about economics but have come to admire economists because they so aptly describe human nature, and often give arguments for wise institutions. The authors argue that “entrepreneurs of institutions” helped make life relatively orderly on the frontier. For instance, one maximized the profits and minimized the costs by ensuring Abilene was railhead, where the cowboys ended their long contracts of driving the cattle and the railroads took them east. But often it wasn’t a “middleman” as much as the consensus of a group, as they set out in wagon trains or obtained mining rights.
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    Posted in Americas, Economics & Finance, Education, History | 10 Comments »

    Toward Financial Independence

    Posted by Nathaniel T. Lauterbach on 28th February 2016 (All posts by )

    I commented in this post about the consumerist fog that in which I was living as a middle-rank American military officer, and my desire to “fix” or improve my situation by taking command of my finances.

    How did we do it?

    It was simple, but not easy.
    Read the rest of this entry »

    Posted in Book Notes, Economics & Finance, Human Behavior, Miscellaneous, Personal Finance, Personal Narrative, Taxes | 14 Comments »

    Could iPhones be built robotically in the USA?

    Posted by Michael Hiteshew on 24th February 2016 (All posts by )

    What if someone were to apply the computer-controlled logistics system of an Amazon.com type business with robotic manufacturing? At Amazon, parts are stocked and retrieved robotically, inventories are updated, parts ordered, payments made, payments received, all with a minimum of human intervention. Humans manage the system, the system does the grunt work. Everything that can be automated is.

    Combine that with robotic assembly, robotic inspection, robotic test, robotic packaging and shipping, and it seems one could easily compete with China for manufacturing a product like an iPhone. If something seems obvious yet does not occur, then one has not accounted for some key thing.

    From my perspective, the key engine of economic growth is manufacturing; taking raw or less valuable material, applying know-how and capability, and creating something with greater net worth than the sum of its raw material worth. It is the foundation of wealth creation. And wealth creation is the foundation of a healthy economy, a high standard of living, social stability and opportunity.

    Are we so tangled up in taxes and EPA and OSHA regulations we simply cannot manufacture anything competitively in the United States any longer, even with robots? If so, what is the solution, realistically? Is it possible to reform the regulatory state or does it need to be discarded, starting fresh? Can the tax system be fixed or should it burned and rebuilt? What is required to get manufacturing back on track in the United States?

     

    Posted in Business, Economics & Finance, Tech | 26 Comments »

    Negative Interest Rates! What A Great Idea!

    Posted by Jonathan on 23rd February 2016 (All posts by )

    Japanese Seeking a Place to Stash Cash Start Snapping Up Safes (WSJ, subscription required):

    TOKYO—Look no further than Japan’s hardware stores for a worrying new sign that consumers are hoarding cash—the opposite of what the Bank of Japan had hoped when it recently introduced negative interest rates.
     
    Signs are emerging of higher demand for safes—a place where the interest rate on cash is always zero, no matter what the central bank does. Cash languishing in safes could thwart the Bank of Japan’s move to get money circulating more vigorously in the economy.
     
    Shimachu Co., which operates a chain of stores selling hardware and home products, said Monday that sales of safes in the week that ended Sunday were 2½ times higher than in the same period a year earlier.

    Of course the Fed would never be so foolish as to institute a negative-rates policy in the hope of getting investors to prop up weakening securities markets. Right?

    (Via T. Greer on Twitter)

    Posted in Big Government, Economics & Finance | 12 Comments »

    Disruption – Part Three – Retail

    Posted by Carl from Chicago on 20th February 2016 (All posts by )

    I have been considering “disruption”, including what is hype and what is real.  Here is one on the cab industry where it occurred and in the electric and gas utility industry which has proven resilient in its current business model.

    While “retail” is a nebulous category, it is one that touches virtually everyone in the USA. Let’s start with the definition of retail:

    the sale of goods to the public in relatively small quantities for use or consumption rather than for resale.

    My experience with retail has been that of a consumer, although I live in an area near Michigan Avenue which features a huge variety of stores of all types, from mass market to high end “showcase” stores. I also have a long history with e-commerce, having been involved in a variety of businesses helping them to go “online” and “digital” from the earliest days of the web. Since the primary threat to modern retail today is from e-commerce, this experience is relevant.

    This chart above is from a recent Business Insider article on retail. The graph clearly shows how shopping is moving from the physical retailer to the online retailer, and it is being accelerated by the adoption of mobile technologies (which enable you to shop and research while on the move, not just when you are in front of your computer at a desk).

    Read the rest of this entry »

    Posted in Business, Economics & Finance, Tech | 17 Comments »

    Meanwhile, In Europe

    Posted by Michael Hiteshew on 17th February 2016 (All posts by )

    Who does one call to get Europe on the phone? What is causing all the economic problems?

    And what is happening in Ukraine and why?

    And what should the USA be doing in all this? And is the USA an empire?

    Posted in Business, Crony Capitalism, Current Events, Economics & Finance, Entrepreneurship, Europe, International Affairs, Politics | 10 Comments »

    The Pursuit of Freedom

    Posted by Nathaniel T. Lauterbach on 17th February 2016 (All posts by )

    Greetings, all.

    I’ve posted on Chicago Boyz and other blogs before, but it was a long time ago. Most of it was my work on the Clausewitz Roundtable. I’ve commented here and there, too. I’m happy to count Zen Pundit and Lexington Green as close blog-friends of many years.

    I’m back. Some has changed, but not much. I’m still an active-duty US Marine Corps Officer. I’m a major now, not a captain. I’ve been to the sand box a few more times since I last posted an actual blog here. I’ve deployed more than most for my time in service, but less than some. I’m not complaining, just saying.

    One thing did happen on my last deployment, in the end of 2014. Toward the end of deployments it’s not uncommon for things to slow down–lots of waiting for things to happen. So you have time to think. In that thinking I started to really question what the hell it is that I’m doing. Why am I fighting? What is it for? I suppose it’s connected to the fact that I was rounding out my fourth deployment to Afghanistan, and doing my small part to assist the Marine Corps with the turnover of Helmand Province to the Afghan National Army 215th Corps. I had deployed to Afghanistan in 2004, 2010, 2012-2013, and then 2014. Throw in an Iraq deployment, some time at sea with the Navy, and some other exercises, and you start to see the makings of a military career in early 21st century America. In any case, I was leading a unit and had a good amount of responsibility. But why? Why had the US come here, made the decisions it did, and why was it now trying to leave? And likewise, why was my Marine Corps doing the same thing? And me? Why was I a part of that?

    I have no real regrets about the service rendered for my country. The cost has certainly been steep, personally, though. The family, with each deployment, goes through a great deal of stress, and after about three such deployments, they get harder, not easier, for the family and the soldier to handle. I’ve also lost more friends than I care to count (I can count them out for you, I just don’t want to). There are other costs which are borne, too. But the remuneration has been decent, I suppose. We always managed to be somewhat comfortable. Maybe that was the problem…the comfort?

    Part of the expression of gratitude the country has for its military is the pay. For an officer, especially, the pay is quite good. I’m not going to tell you the amount of pay and allowances–that’s publicly available elsewhere. But suffice to say that the military has been quite shielded from the fears and losses of the great recession. Enlisted men and women do well, too, and can occasionally do very well when it comes times for reenlistment in specific occupational fields. Expenses have always been reasonably less than income, on average. There’s been no pressure from the economic environment to really think about my family’s financial situation today, let along 10 or 20 years from now. Yet something just wasn’t right. I didn’t feel out of control, but I didn’t feel like I was in charge, either. I had a bit of a feeling of being adrift. The military side of things was very much in control of the situation–I always knew precisely how many people were under my charge, their individual strengths and weaknesses, their state of training and discipline, and their morale. I knew the capabilities of my equipment. I always strove to understand the mission, to lead with vigor, and to “own” my position. I was good at that. But personally and financially? I barely had a financial or a personal life. That had to change.

    So I decided to get a handle on things. I started to track every penny–even the pennies I don’t see because they’re “pre-tax” and given to the government for safe keeping until I claim my share back at tax time. I located all of my accounts. I found all of the debts, the interest rates, the amount of interest I was paying. I started tracking expenses, and then cutting them. I’ll be honest–the wife wasn’t exactly thrilled by me looking at things with such magnification. I started to read up on personal finance, investing, and life-planning in general. I read blogs and books, listened to podcasts, and talked with others about how to really order finances these days. And I began to radically alter our financial course. We paid all our debts, we bought a house (so, in actuality, we have one mortgage now). We’ve rented out our basement to a tenant. And we now save about 40% of all our pre-tax income. We’re not where I want to be yet, but we’re getting there. I’m not leaving anything to chance any longer, unless it’s a calculated chance intentionally taken. Every expense is now deliberately taken.

    I also decided to look for some hobbies. Being a military man has a way of becoming an all-encompassing experience. Your friends are basically military colleagues. Your work is military work. Military people know about “mandatory fun”–those obligatory nights spent with comrades and often with superiors. Your wardrobe is decided for you. Where you live is decided. My task was to carve out a bit of this life and make it mine. I had to get new friends and do new things with different groups of people. That would add richness to my life. I’ve done that, and I’m still doing that.

    I’ve been working on the above things–redirecting our financial life and reordering how I spend time–for a bit over a year now. The changes have been pretty dramatic. Looking back, I realize that up until I took command of my life I was living in a bit of a fog. With all of the turmoil of military life, the American people do much to make finances reasonably tranquil. This financial tranquility is both a blessing and a curse. You’re never really forced to grapple with the default decisions the consumerist economy makes for you. Nor are you forced to grapple with the reality that politics is not really national. It’s local. Your political power begins with you and those you immediately affect. You need to reclaim that power for yourself. Take charge of the fruits of your labor. Own your day to the extent you can. If you want to descend into the cesspool of national politics, fine–but do it intentionally. In fact, live your life intentionally. A life, intentionally lived, taken to the logical extreme, is the very definition of freedom. That is why I fight, happily, for my country.

    I’ll be blogging about my financial journey here, as well as on other things as I see fit.

    Cross-posted at Warrior In the Garden (my personal blog, which is in its infancy. Bare with me as I get it set up.) I also maintain a ham radio blog at the N0PCL Radio Site.

    Posted in Afghanistan/Pakistan, Blogging, Civil Liberties, Civil Society, Commiserations, Deep Thoughts, Economics & Finance, Entrepreneurship, Iraq, Military Affairs, Morality and Philosphy, National Security, Personal Finance, Personal Narrative, Politics | 16 Comments »

    Disruption – Part Two – Electric and Gas Utilities

    Posted by Carl from Chicago on 16th February 2016 (All posts by )

    I started a trend of posting on disruption with the taxicab industry being walloped by Uber. While disruption is everywhere in the press, the question is – when is disruption truly real and where is it a distraction? Let’s move on to the electric and gas utility industry.

    The electric and gas utility industry is the “exact opposite” of the classic “disruption” thesis… although disruption and revolution have been promised many times over the years, they have failed to materialize. Let’s look at the characteristics of this industry and find the salient facts that either “enable” or “defeat” disruption.

    I worked in the electric and gas utility industry throughout all of the 90’s. I traveled to over 100 public, private and municipally owned utilities (there aren’t that many left today because there have been many mergers in the industry space). Since then I have followed them through business publications and public sources of information.

    The electric utility industry has 4 main components:
    1. Generation – the generation of power through nuclear fuel, coal, natural gas, hydro or solar / renewable
    2. Transmission – moving power via high voltage lines from where it is generated (remote) to the cities where people live
    3. Distribution – the local city with overhead and underground wires and substations and physical trucks
    4. Customer Service – who you call and how they dispatch crews and respond to incidents

    The electric utility industry also is characterized by “real time” surges and the fact that power can’t be stored (yet) on a large scale; thus peaks occur on the hottest days or the coldest days and power is needed exactly at that moment at your particular location. These peaks can results in demand far higher than during a “typical” day.

    The natural gas utility industry is conceptually similar to the electric energy industry with two main differences. Generation isn’t handled by them (exploration companies find natural gas and get it to their system through their own processes and methods) and natural gas is much less “peak sensitive” and can be stored near the point of demand and injected into the system.

    Broadly speaking, there have been many attempts to “de-regulate” the electric and gas utility markets over the last THREE decades. Let’s start with natural gas.

    Read the rest of this entry »

    Posted in Business, Economics & Finance, Tech | 11 Comments »