Friday, August 26, 2016

Shocking! NIRP causes savings not spending

The whole point of negative interest rates (NIRP) in Europe and Japan was to force people to spend by punishing them for clutching their cash. The rationale goes deep into the middle ages before modern economics: the economy is sluggish because people are saving too much instead of spending. Good economists thought they had buried that monster by the 1930’s, but Lord Keynes resurrected it and gave it a title of nobility. That’s how medieval economics came to dominate mainstream academics and central banks for 90 years. If you don’t believe in zombies, you haven’t followed mainstream economics for long.

Saturday, August 20, 2016

The rich are getting richer - Baptists and bootleggers

Hillary and Bernie dusted off and hoisted aloft the old medieval standard “the rich get richer while the poor get poorer” during their primary contest. Republicans tended to respond with, “So?” During the Olympics, Hill promised to make the rich pay their fair share in her TV ads. Hill and Bernie imply that the rich have become wealthy at the expense of the rest of us, another medieval economics principle.

Attacking the wealthy always inflames envy, draws a crowd and extorts campaign contributions. That’s why politicians use it so often, as Helmut Schoeck noted in his masterpiece, Envy: A Theory of Social Behavior.

The truth is that Bernie and Hill are half right: inequality is growing. They're just wrong about the reasons. However, free marketeers do a lot of damage to the cause by ignoring the issue or denying that anything is wrong. Worse, some even defend growing inequality. 

Sunday, August 14, 2016

Where's the growth?!!!

Decades ago an old lady yelled, “Where’s the beef?” when handed a burger in a fast food commercial. It became a catch phrase for occasions when people wanted to advertise that an idea lacked substance. So while the media proclaims the virtues of the current economy, many economists are asking, “Where’s the growth?”

The Bureau for International Settlements (BIS), the central bankers’ bank, recently issued a report card on the efforts of their client central banks to boost growth since the last recession and given them a failing grade. In the report “Unconventional monetary policies: a re-appraisal,” the BIS economists wrote:
We reach three main conclusions: there is ample evidence that, to varying degrees, these measures have succeeded in influencing financial conditions even though their ultimate impact on output and inflation is harder to pin down;

Sunday, August 7, 2016

Free trade can't help a socialist nation

Good economists, that is, free marketeers, are appalled by Republican nominee for President Donald Trump’s attacks on free trade. All of us have examined and approved David Ricardo’s theory of trade and comparative advantage. Trade is not a form of war. Exports do not enrich a nation any more than imports impoverish it. It does not matter if the trading partner isn’t playing “fair.” Trading even with a communist country will benefit the home nation.

As Mises wrote in Omnipotent Government, “...the inference from Ricardo’s free-trade argument was irrefutable. Even if all other countries cling to protection, every nation serves its own interest best by free trade. Not for the sake of foreigners but for the sake of their own nation, the liberals advocated free trade (OG 75).”

Saturday, July 30, 2016

Trump wins election, not that it matters

For someone who despises politicians as much as I do it’s really hard to avoid political news lately. But there is a nexus between the presidential election and economics: most voters think the president controls the economy. The evidence for that is the fact that economic models predicting the winners of presidential elections are the best forecasters, far superior to the myriad of polls, except the exit polls, and vastly superior to the legions of political pundits in the media. On the superiority of simple regression models over that of experts for forecasting anything, even the price of wine, read Super Crunchers.

One economic model predicting presidential elections using just GDP growth shows that the economy must grow at an annual rate of 2.5% in the second quarter of the election year in order for the incumbent party to win. Based on the latest release showing Q2 growth at an annual rate of 1.2%, Trump has virtually won.

The model created by Ray Fair at Yale University agrees, according to a story on NPR: "It's based on economic growth per capita in the four years before the election. According to Fair, because of the sluggish growth in this recovery, his model now predicts the Republican candidate will win. Fair's model has picked the winner in all but two elections since 1916."

Sunday, July 24, 2016

What the market has in common with Trump

Watching this market is like watching Trump’s candidacy. Everyone is waiting for both to crash and burn but they keep climbing to greater heights. Even Fox News appears to oppose Trump without much effect just as the stock market sets new records in the midst of gloomy economic news all around.

The market has set new records even as profits are expected to have fallen for the fourth consecutive quarter. Earnings season is upon us and we will soon understand how bad the damage in the second quarter was. Thomson Reuters has predicted that profits in Q2 will be down about 5% from the same quarter last year. Revenue will have fallen 0.8%. It blames oil prices, low interest rates, and a saturated cell phone market.

Thursday, July 14, 2016

How long can low rates last?

The charging of interest on loans is one of the most hated and worst understood concepts in human history. Aristotle claimed that money cannot beget money because it is dead, so charging interest on loans is immoral. Moses’ law forbid Israelis to charge interest on loans to the poor, but the Church interpreted that prohibition according to Aristotle’s economics and made charging interest on loans one of the worst sins that Christians can commit. Aristotle’s writings had almost equal weight with the Bible in many matters until Copernicus and Galileo trashed his astronomy.

But kings, nobility and popes needed to borrow money occasionally in order to keep up their conspicuous consumption, so Jews were allowed to commit the sin of usury. That gave Christians an excuse to persecute them regularly.

The church didn’t reform its economics until the 17th century when theologians from the University of Salamanca abandoned Aristotle for common sense. A letter from John Calvin to a friend on the topic may have helped. Calvin wrote that interest on loans was no different from charging rent on land, which everyone could understand.

Recently, an investing newsletter increased the confusion over interest rates for its readers. It claimed that interest rates have fallen naturally from roughly 50% in 5000 BC. “Fast-forward a bit and we see the Greeks expanded the credit system. In 600 B.C., they paid rates of around 16% in a quickly modernizing monetary system. By 100 B.C., though, a typical loan came with a rate of just 8%. And then things got interesting...”