Wednesday, August 24, 2016

Will Hillary Clinton Name a Crazed Money Printer to Her Economic Team?

By Robert Wenzel

Jeff Spross in the most recent issue of The Week has identified eight economists that he would like to see as part of  a Hillary Clinton administration.

The entire lot is a very scary group but, even in this, crew one name stands out above the others. It is the first name on the Spross list. He writes:
1. Stephanie Kelton is an economics professor at the University of Missouri-Kansas City. She has served as the chief economist for the Democrats on the Senate Budget Committee, and as an advisor to Bernie Sanders.
Kelton is probably best known for her central work on what's called Modern Monetary Theory (MMT). It emphasizes that debt issued by the federal government really doesn't operate like any other form of debt, because the government (which includes the central bank) can ultimately create all the money it wants. So it can't suffer a debt crisis, but can only create too-high inflation. And finally, that the amount of money the government puts into the economy via spending, versus the amount it takes out via taxes, is a key part of the overall ecology that determines the supply of jobs. And few people have done as much to game out the economic and policy consequences of those simple points as Kelton.
Here is the short explanation of MMT via Wikipedia (my bold):
According to MMT, "monetarily sovereign government is the monopoly supplier of its currency and can issue currency of any denomination in physical or non-physical forms. As such the government has an unlimited capacity to pay for the things it wishes to purchase and to fulfill promised future payments, and has an unlimited ability to provide funds to the other sectors. Thus, insolvency and bankruptcy of this government is not possible. It can always pay"...

MMT claims that the word "borrowing" is a misnomer when it comes to a sovereign government's fiscal operations, because what the government is doing is accepting back its own IOUs, and nobody can borrow back their own debt instruments. Sovereign government goes into debt by issuing its own liabilities that are financial wealth to the private sector. "Private debt is debt, but government debt is financial wealth to the private sector."

In this theory, sovereign government is not financially constrained in its ability to spend; it is argued that the government can afford to buy anything that is for sale in currency that it issues (there may be political constraints, like a debt ceiling law). The only constraint is that excessive spending by any sector of the economy (whether households, firms or public) has the potential to cause inflationary pressures.
Bottom line; MMT holds the absurd view that government debt is the creation of wealth. It further holds that there should be no restraints on such debt creation other than when it causes price inflation because the government can pay off the debt by printing more money.

Thus, it ignores the fact that such government spending crowds out private sector spending. It is a theory that justifies a massive debt fueled expansion of  non-productive government bureaucracies. Think government cafeterias versus private sector dining options.

Such theory implemented would suffocate the economy and cause the American standard of living to crash. And, at the same time, it would grow central planning.

Let's hope the Spross list is just that and that Kealton is nowhere on a Hillary list.

Robert Wenzel is Editor & Publisher of  EconomicPolicyJournal.com and Target Liberty. He also writes EPJ Daily Alert. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics and on LinkedIn.

Tuesday, August 23, 2016

Treasury Secretary Lew Headed to Hangzhou Sitdown

The U.S. Department of the Treasury today announced that Secretary Jacob J. Lew will travel to the G-20 Leaders Summit in Hangzhou, China from September 2-5, 2016.

In Hangzhou, Secretary Lew will join President Barack Obama at the G-20 Leaders Summit.

 -RW

Should We Fear Apple Picking Robots?

By Andy Kessler

Is it time to bow to our robot overlords? Last week analysts at Morgan Stanley, using data from an Oxford University study, predicted that nearly half of U.S. jobs will be replaced by robots over the next two decades. Ouch. Maybe we should build a wall.

Cars that drive themselves? Waiters you don’t need to pay (or tip)? Self-folding clothes? Are we headed toward a post-job future? Signs are certainly there. Abundant Robotics, a company spun from the same Stanford Research Institute that brought us the mouse and networked computing, has begun testing a robot that picks apples. Red Delicious, not iPhones. Napa Valley vineyards are using vision systems to sort grapes.

According to a 2013 Stanford University study, some manufacturing robots now cost the equivalent of about $4 an hour—and they keep getting cheaper . . . and better. This month scientists at MIT have sampled a silicon chip-based LIDAR—light detection and ranging—like radar but much higher resolution, though it covers a shorter distance.

The Tesla Model S currently uses one radar sensor and one front-facing camera as vision for its Autopilot. Neither, sadly, picked out a white tractor trailer against a bright sky before a May 7 collision that killed a Tesla driver. LIDAR would. Current LIDAR can cost up to $70,000. The new chip? Maybe $10. At that price, they’ll probably be standard in every new car, “self-driving” or not.

And now we have thinking robots. Editors at the Associated Press claim robots write thousands of articles a year for them. So it’s over? The robots win? This certainly fits a certain world view for a bigger welfare state and universal basic income and other services to coddle displaced workers. See the May 26 Fortune magazine article “What Governments Can Do When Robots Take Our Jobs.”

But not so fast. The arena of prognostications is littered with the wrecked utopian dreams of leisure living—recall geodesic domes—and Skynet nightmares of roving robot armies. Both are bunk. Instead this is progress.

Technology always creates more jobs than it destroys. JFK worried how to “maintain full employment at a time when automation . . . is replacing men.” Employment was 55 million in 1962. It’s 144 million today. We’ve come a long way, baby.

This time will be no different. Steam engines destroyed jobs—OK, mostly for horse handlers—but enabled an explosion of manufactories, never imagined jobs and the Industrial Revolution. Cars killed trolleys but enabled hundreds of millions of new jobs. Vacuums and washing machines destroyed jobs for “domestic engineers” (though I will never admit to knowing how to operate either) but freed women to enter the much more productive paid workforce. Computers killed jobs for those with rulers and exacto knives who were laying out magazines or constructing physical spreadsheets. Now media and Wall Street don’t exist without Microsoft Office. In each case, technology augments humans, rather than replaces them.

Even Chinese workers shouldn’t fear robots. The coming global demand for manufactured goods will swamp a robot-deprived manufacturing economy. Robots will solve China’s looming logistic problems.

Simply put, jobs that robots can replace are not good jobs in the first place. As humans, we climb up the rungs of drudgery—physically tasking or mind-numbing jobs—to jobs that use what got us to the top of the food chain, our brains.

Read the rest here.

My Exchange With an Austrian-Lite

The following exchange took place between me and Black Noir in the comments section of the post, BOOM, BOOM: Austrian-Lites Nuked:


I understand your perspective. I'm still of the opinion you are ignoring the forest for the trees. In a few short months, the narrow measurements of your boom will be gone.
  1. Based on what? You have no analytic framework. Why a few short months? What is your theory and how does it fit in with Austrian business cycle theory?

  2. Based on present trends of just about every other economic measurement. I could very well be wrong and the economy could lift off again and invalidate the trajectory. The stock market has been manipulated for some time and does not reflect the underlying economy. Corporate earnings have been trending down for quite a while. Labor stats are a lagging indicator and are also manipulated to a significant degree. Mine is a forest for the trees argument. Business inventory to sales high, federal tax receipts slowing, factory orders declining, retail sales sluggish, multiple regional fed surveys poor, and on and on.

  3. With all due respect, you don't know what the hell you are talking about. The business cycle is about a boom and bust in the capital goods sector and a readjustment in employment. Stocks and real estate are soaring that's the capital goods sector. Unemployment has collapsed.

    Charges of "manipulation" are the last refuge of a bad theorist.

    Or are you somehow really buying housing at collapsed 2009 prices?

Bill Gates’s Net Worth Hits $90 Billion


The net worth of the world’s richest person Bill Gates hit $90 billion on Friday, fueled by gains in public holdings including Canadian National Railway Company and Ecolab Inc. Gates’s fortune is now $13.5 billion bigger than that of the world’s second-wealthiest person, Spanish retail mogul Amancio Ortega, according to the Bloomberg Billionaires Index. At $90 billion, the Microsoft Corp. co-founder’s net worth is equal to 0.5 percent of U.S. GDP.

(via Bloomberg)

BOOM, BOOM: Austrian-Lites Nuked



Just a few short months after the December 2015 Federal Reserve rate hike, when Austrian-lites claimed the hike wouldn't hold and that the Fed would have to reverse the hike because it would send the economy into crash mode, the latest numbers out  and stock market  activity show the exact opposite.

All 10 sectors of the S&P 500 were up this morning trading and the NASDAQ hit a new all-time high.

Meanwhile, new home sales climbed to the highest level in nearly nine years.

The Commerce Department said that new home sales surged 12.4 percent to a seasonally adjusted annual rate of 654,000 units last month, the highest level since October 2007.

This is not what a recession looks like.

 -RW

Eurorintelligence Disses Renzi/Merkel/Hollande "PR Stunt"

The leaders of the three biggest euro-area economies met aboard the Giuseppe Garibaldi on Monday.

At a summit aboard the aircraft carrier docked in Ventotene, Italy, German Chancellor Angela Merkel said the European Union needs to show it can prosper without the U.K.

“We respect Britain’s decision but naturally also want to make it clear that the other 27 are working for a prosperous, safe Europe,” said Merkel, standing alongside President Francois Hollande and Prime Minister Matteo Renzi on an Italian aircraft carrier to show resolve in mastering the continent’s crises. “We need results,” she said.

Eurointelligence, created specifically to cover such EU events, dissed the show:
We had hoped to kick off today's newsbriefing with an account of the Renzi/Merkel/Hollande with an account of the Renzi/Merkel/Hollande summit in Ventotene, but the results were so shallow that we decided to ignore it. It was a PR stunt to boost Renzi's flagging reputation in his own country.
But, back in Deutschland, there was Neandrethal anti-Brit firebreathing.

Michael Fuchs, deputy parliamentary leader of Merkel’s party bloc, said Prime Minister Theresa May’s government must recognize that U.K. access to the EU’s free movement of goods, workers, capital and services won’t automatically carry over into any new relationship.

“If you’re member of a club you have certain benefits, but if you’re out, you will not have the benefits any more,” Fuchs said in a Bloomberg Television interview on Tuesday.

 -RW

(via Bloomberg)

Naive, Scientistic "Analyses"

Don Boudreaux writes:
Bonus Quotation of the Day…

is from page 218 of the 1990 Transaction Publishers reprint of W.H. Hutt‘s 1936 book, Economists and the Public (original emphasis):
It has been possible for historians, statisticians and ‘sociologists’ to support the most appalling errors by attempting to deduce conclusions from crude summaries of facts, such as are contained in Index Numbers, without the aid of the apparatus of abstract analysis.  Frankly, we believe that if these critics of orthodox theory have attained any success and power it has been mainly due to the scope that their method has given to students to hold, within a range limited only by the most obvious absurdities, whatever views or opinions they have wished.
Indeed so.
My list of the least justifiable conclusions that are today regularly drawn from such naive, scientistic ‘analyses’ includes (1) the false notion that minimum wages do not necessarily reduce the employment prospects of at least some low-skilled workers, and (2) the false notion that ordinary Americans have stagnated economically over the past 35 or 40 years.
The above originally appeared at Cafe Hayek.

More on Trans-Pacific Partnership Supporters and Detractors

Yesterday, I wrote a post, The Team Obama Has Assembled to Push the Trans-Pacific Partnership.

As part of the post I wrote:
Always, always, be suspicious when former military men and union groups form an alliance to promote anything. They are both big government  opportunists.
A commenter to the post wrote:
You write: "Always, always, be suspicious when former military men and union groups form an alliance to promote anything. They are both big government opportunists."
But the way I read the excerpt, these groups -- the article refers to "labor" rather "union groups" -- are on opposite sides of this (complex) issue.
This is partially correct, it should have read "be suspicious when military men and the Business Roundtable form an alliance."

Labor is against the bill according to the referenced NYT story, but when labor is mentioned, it really means unions.

There is little to no "labor movement" currently in America that is not union organized.

But more important, it must be understood  what is in TPP in relation to labor.

A Cato study of TPP reports:
Labor chapters in trade agreements do
not promote liberalization. They are
designed to increase regulation of
foreign labor practices. While there may
be a political argument for including
them in trade agreements, there is no
economic rationale.
In the TPP, labor protections have been
pushed even further. While much of the
TPP labor chapter simply borrows from
earlier agreements, with commitments
to follow certain rights set out in the
ILO Declaration and an obligation to
“effectively enforce” domestic labor
laws, the TPP goes beyond traditional
labor chapters in a number of ways,
including by requiring that parties
“adopt and maintain statutes and
regulations” with respect to minimum
wages.
This is not pro-labor. It is anti-labor, pro-union regulation that makes it more difficult for non-union labor to compete against union workers. But unions want even stricter regulations than what is coming out of TPP. As far as unions are concerned, TPP does not grant union membership enough protection.  That is why they protest.

It is easy to see that what is referred to are unions and not some other type of labor movement in the NYT story

From  the NYT quote:

Environmental and labor groups have been active, too, holding “Rock against the T.P.P.” concerts in several cities and flying protest blimps outside lawmakers’ offices.
Who exactly are the labor groups supporting “Rock against the T.P.P.” ?

According to the website, the backers include, the Teamsters, the Communications Workers of America and the United Steel Workers.

There are pluses and minuses in the TPP agreement. For free market advocates, TPP should be neither be endorsed or completely disparaged, it should be explained for exactly what it is, a mixed bag.

If military men and the business roundtable is promoting it, you can be sure there is a lot of bad. But if unions are objecting, you know there has to be some good.

 -RW

Monday, August 22, 2016

Silicon Valley Loves Hillary


WSJ reports:
Tech executives say their dissatisfaction with Mr. Trump goes beyond his lack of outreach. His calls for tougher limits on trade and immigration conflict with the industry’s interests, they say, and his controversial comments about various ethnic and racial groups are culturally out of step with Silicon Valley.

A Tax Cut for Being Black?

The Team Obama Has Assembled to Push the Trans-Pacific Partnership

It's a backroom deal that includes some free trade, some crony trade and a lot of anti-free market regulation. In an age of crony capitalism that's what is being sold as "free trade."

And the former community organizer is pushing it hard.

NYT reports:
His successor, whether Democrat or Republican, opposes it, as does most of his party. Delegates at the Democratic National Convention waved signs saying “T.P.P.” slashed by a bold line, while the Republican Party platform opposed any vote on it in Congress this year.

Yet President Obama is readying one final push for approval of the Trans-Pacific Partnership, the largest regional trade agreement ever, between the United States and 11 other Pacific Rim nations. And though the odds may be long, a presidency defined by partisan stalemate may yet secure one last legacy — only because of Mr. Obama’s delicate alliance with the Republicans who control Congress...

Among those who will hit the road [to promote TPP] will be Secretary of State John F. Kerry; Secretary of Defense Ashton B. Carter; retired Admiral Michael G. Mullen, former chairman of the Joint Chiefs of Staff under Presidents George W. Bush and Obama; Admiral Harry B. Harris Jr., commander of the United States Pacific Command; and William Cohen, a former Republican senator and defense secretary under President Bill Clinton....

The Business Roundtable, an association representing the chief executives of some of the largest American companies, has held events in more than 120 congressional districts during lawmakers’ summer recess.

Last week, with families making back-to-school purchases, the lobbying association for footwear companies circulated a report concluding that Americans could save $4 billion on children’s shoes if T.P.P. takes effect and cuts tariffs on imports from Vietnam and elsewhere.

Environmental and labor groups have been active, too, holding “Rock against the T.P.P.” concerts in several cities and flying protest blimps outside lawmakers’ offices.
Always, always, be suspicious when former military men and union groups form an alliance to promote anything. They are both big government  opportunists.

   -RW

The Number of People Per State That Receive Some Form of Cash Welfare


The Ultimate Breakdown Likely To Be Surprising, Sudden, Intense, and Large

By Simon Black and  Tim Price

On January 30, 2000, the 88+ million viewers of Superbowl XXXIV were treated to a commercial featuring a now infamous sock puppet.

The advertisement was from a company called Pets.com, founded just two years before in 1998 at the height of the dot-com bubble.

Pets.com went public on the NASDAQ just weeks after the Superbowl with the symbol IPET.

And just 270 days later it was out of business, its stock price having fallen from $11 to just 19 cents in the interim.

The autopsy showed that Pets.com was selling its products at nearly 30% below cost, giving rise to the old mystifying dot-com logic, “We lose money on every sale but make up for it in volume.”

Granted, Pets.com did not have the benefit of a printing press, monopoly over the money supply, or worldwide intransigence in the existing financial system, so they couldn’t kick the can down the road too far.

But it remains yet another hallmark of one of the most important lessons in financial history: sooner or later, bubbles correct.

That goes especially for our current bond and debt bubble, for which Elliott Management’s Paul Singer succinctly projects:

“The ultimate breakdown (or series of breakdowns) from this environment is likely to be surprising, sudden, intense, and large.”

By comparison, investors in Pets.com were being almost downright conservative when compared with today’s bond investors.

At least early stage technology venture have the potential to generate eye-popping returns.

Dell Computer, for example, delivered total returns to shareholders of 91,863% during the 1990s.

Yet anyone buying 5-year Japanese government bonds today and holding to maturity will be guaranteed a loss of -0.2%, not including the impact of inflation or the prospect of default considering Japan’s 230% debt-to-GDP ratio.

Owning Japanese government bonds makes about as much sense as Pets.com in 2000.

And yet if market size is any indication, these Japanese government bonds remain among the more popular investments in the world.

What could possibly be driving major institutional investors to such madness?

Remember that the traders and bankers who work for the big institutions are all human beings… human beings who see their colleagues raking in huge bonuses for following the rest of the herd into these garbage investments.

This provides a huge disincentive to step boldly in the direction of sanity.

In many respects, job security and incomes of the individual cogs who make up the big machines of institutional finance depend on conformity.

They have every motive to maintain that the Emperor is fully clothed even though a child can see that he is totally naked.

Make no mistake, most major market participants have an enormous interest in maintaining the status quo. It’s impossible to overstate this.

No one wants to see the system fail, so the big money will keep buying and keep propping up the market up until the final moment.

As a result, it’s entirely possible (and likely) that markets continue an upward trend. Until they don’t.

This serves as a dangerous feedback loop to reinforce a false narrative that everything is awesome and under control... prompting cautious smaller investors to feel like they’re missing out.

Beware FOMO, the fear of missing out.

If the price of something seems unsustainably high, don’t try and benefit by speculating (short or long).

That’s too dangerous.

When it’s clear the game has become rigged, it’s easier and less risky to stop playing that game, and go play a different game somewhere else.

We continue to identify three specific games elsewhere--

One area is systematic trend-following funds, which offer the potential for meaningful portfolio insurance in a world where systemic risk is rising.

Systematic trend-followers perform very well when there’s extreme volatility and exogenous shocks. But it requires incredible, unemotional discipline.

As legendary trader Jesse Livermore put it,

“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the man of inferior emotional balance, or for the get-rich-quick adventurer. They will die poor.”

Another area we’d point out is gold and silver.

If you believe that policymakers will continue to print more money, indebt their citizens, and make foolish decisions, then having a universally-recognized, real asset money-substitute is a sound choice.

Finally, consider “defensive value”.

Shares of fantastic businesses that are managed by talented people of integrity tend to make excellent investments, especially when you can purchase those shares at a discount to the company’s long-term intrinsic value.

If you can find extreme value, like buying a great business for less than the amount of cash it has in the bank (which does happen from time to time), even better.

Simon Black is Founder of SovereignMan.com.

Tim Price is a London-based wealth manager and co-manager of the VT Price Value Portfolio.

The Fed Raising Its Price Inflation Target Rate, Who Would Have Thunk It?

Paul Krugman comments on a new paper by San Francisco Federal Reserve Bank president John Williams:
 [A] new paper by John Williams at the San Francisco Fed, which is noteworthy because Williams is the highest-placed Fed official yet to suggest that maybe the inflation target should be higher
The possibility of the Fed raising its target price inflation rate comes as no surprise to EPJ Daily Alert readers. In May, I wrote:

 They will play these games of when to make the next rate hike and get away with it while inflation remains relatively subdued, but when the inflation is significantly over the 2% target, they will at first, as Fischer is starting to do, make excuses as to why the climbing inflation can be allowed to run a "little" hot.
The Fed will increase interest rates slowly, but nowhere near enough to battle the price inflation that is coming.

The idea that the Fed is going to go to negative rates anytime soon is absurd.

   -RW

I'm With Tyler (My personal tech ecosystem)

Tyler Cowen writes on his personal tech ecosystem:
Now I know how to text, sort of, though I hardly ever do it.  It strikes me as the worst and most inefficient technology of communication ever invented (seriously).  It’s not that fast, and it’s broken up into tiny bits of back and forth.  I don’t see how it makes sense beyond the “What should I get at the supermarket? — Blueberries” level.  There is intertemporal substitution, so just, at some other point in time, spend more time talking, writing longer letters, making love, whatever.  Not texting.  It is never the best thing to be doing, except to answer some very well-defined question.
I rarely text either. In fact, I have two or three friends that text me regularly. They don't know it but I use Google voice so in addition to getting their texts on my phone, I get a copy on a web page.

I almost always answer their texts from my desktop computer as if it were just an email. If I am out, they are going to have to wait.

Cowen goes on:
Except for the occasional Uber ride, I don”t use apps and hate reading news sites through the apps, I won’t do it.

Same with me. Although I will check  my websites, their traffic and comments if I am out.

I have thought about ditching my smartphone but Uber, and my websites prevent me from doing so---along with having instant access to camera capabilities, And I do read my Twitter feed if I am in line waiting somewhere. But, I don't generally like to even check my emails on my phone.

I almost never listen to music on my smartphone. In fact, I hardly ever listen to music. I almost always consider it annoying unless I am doing a very menial task. I'm not a music guy.

Cowen again:
I use my Kindle less over time.  It remains in that nebulous “fine” category, but I prefer “real books.” 
Same here. I only read hard copies. Occasionally, someone will send me  a Pdf advance copy  of some book. I will either print it out or, much more often, send a note back saying  "Thanks but I only read hard copies." Almost always, they print it out and send me the printout.

I carry a Kindle with me when I travel, but more as a writing tool so that I can quote accurately.

More from Cowen here.

  -RW

Why There Are Relatively Few Skyscrapers Between Downtown and Midtown New York City


Urban folklore that there are few large skyscrapers between Downtown and Midtown Manhattan because of New York’s geology: the bedrock in that part of town, the story goes, cannot support tall buildings. Not so.

According to Building the Skyline: The Birth and Growth of Manhattan’s Skyscrapers.By Jason Barr (via Economist)
A better explanation is New York’s economic history. Mr Barr argues that the area between Downtown and Midtown historically had low land values. In the 18th century the rich lived in Downtown areas close to the port and the seat of government. The poor lived just outside. The wealthy reacted to the gradual introduction of public transport in the 1820s and 1830s by moving far out, eventually as far as Midtown, a less-developed area which could be built to their tastes. The in-between zones thus left behind were undesirable, and few people thought it profitable to build skyscrapers there. The spatial economics of the 19th century continues to shape Manhattan’s skyline today.
   -RW

"Every time I hear the phrase 'political correctness' I think of the people in the Soviet Union who were killed because they said something that was not politically correct."

A Soviet immigrant whose father was killed by the KGB reveals what life was like under Stalin

By David Choi

The year was 1938. Joseph Stalin manned the helm of the Soviet Union, and all of its implications, such as the unforgiving purges, were in full effect.

Anatole Konstantin, who was ten-years-old at the time, found his father had been taken from Stalin’s secret police in the middle of the night. Without any explanation of why he was taken, his family assumed that it was because of the contact they made with their parents back in Romania, during a time when any contact with a foreign nation was suspected to be an act of espionage.

Shortly afterwards, his family was labeled as an enemy of the state and was evicted not only from their home, but the town as well. After they were forced to leave, they settled in a collective farm in Kazakhstan as refugees. It was there his mother struggled to raise two boys by taking on menial tasks, such as stacking bricks and bootlegging.

Konstantin, who ended up finding his way to the United States in 1949, wrote several memoirs of his struggles as a boy who lived during Stalin’s reign, and his life as a “displaced person” trying to attain the elusive American Dream.

He held a Reddit AMA, with the help of his grandson, to shed light on these experiences. During the online Q&A session, he recounted the excruciatingly long process of what it was like to discover his father’s outcome:

Read the rest here.