One of my favorite economists to read. He has a very simple way to explain complex issues so that even I am able to understand them. Sowell is a senior fellow at the Hoover Institution at Stanford University. Sowell at one time was extremely liberal in his views, but as he matured and continued to learn, he became perhaps the most conservative voice in economics since Milton Friedman. Sowell points out that trouble in the economy led to the financial collapse, and not the other way around. He is able to put into perspective China’s economic boom, and what it actually means to us versus what we are being told. He even does some discrediting of tariffs, and discusses why monetizing the debt is so destructive. He also discusses many other worthwhile subjects. All in all, this is well worth the 30 minutes to watch, if you can spare them. It will be on the front page probably for about a week, and then it will be part of the archives.
Posts Tagged ‘economics’
30 Minutes With Thomas Sowell
by Flyovercountry ( 213 Comments › )Filed under Academia, Economy at February 1st, 2011 - 8:30 am
Food Inflation as a Trigger for Revolution
by coldwarrior ( 118 Comments › )Filed under Economy, Middle East at January 31st, 2011 - 6:30 pm
As we have discussed on The Blogmocracy, one of the major reasons for these ‘revolutions’ in the Middle East is the spike in food prices, I would like to expand on this here and do a post mortem on this trigger of the revolutions. Food inflation and corruption were the main triggers in Tunisia, then the revolution spread. The area already had decades of most of the long term prerequisite foundations for revolution: zero development, high birth rates without job growth for new workers, high unemployment especially among young males in the urban space, a radicalizing force in this case called islam, and abusive regimes.
A successful revolution rarely comes from the countryside. There is a reason for this. A subsistence farmer has to spend many hours a day scraping together enough calories to feed him and his family. That is tiring work that will beat the revolutionary zeal right out of you, its too hard to ‘take to the barricades’ when you have spent all day stooping in the fields to gather the evening meal . The urban unemployed, on the other hand, have plenty of time on their hands and the calories usually comes from money handouts form the government or whatever they can earn doing informal day work or from criminal activities. Its easy to be an urban revolutionary when you can go to the cafe for some tea and listen to fellow revolutionaries regurgitate the tripe of the day.
The Middle East, as stated above, already had the triggers in place for revolution in the streets, the food price trigger was the one that got pulled. But what caused the trigger? It certainly wasn’t supply and demand, there is plenty of food to go around. I would argue that a good portion of the pull was a result of the Quantitative Easing and printing of Dollars by the United States and the resulting actions that occurred in the markets afterward. The commodity markets got flooded with new dollars that should have been lended out to individuals and businesses. But because the US economy is so fouled up, there is no lending because there is no way banks can predict the rules that the economy will be operating in.
When the US prints all of this money, it goes out into circulation in the international markets. This can have disruptive consequences like commodity inflation OR the perception of commodity inflation. In this case, the perception of coming inflation causes futures speculation upward in the markets. This drives prices for food upward (regardless of supply or demand). It is kind of like what mass hoarding would do. In fact, several countries that are ripe for revolution did just that and purchased tons and tons of grains in a rush and paid higher than normal prices as a ‘hoarding fee’ driving prices even higher. Algeria purchased 800,000 tons of wheat last week to secure enough food to prevent riots. Indonesia has ordered 820,000 tonnes of rice so as to plug in a price to avoid the riots they had over food in 2008. Other vulnerable countries are in line to secure grains even at these inflated prices to avoid what is happening in the Middle East. If you live in a non-vulnerable country, the price of your loaf of bread went up and you shrugged and complained a little and then you got distracted by that phone call and forgot about the bread price. If you live in a vulnerable country, you riot over the price increase of the staples of your diet (and the corruption and lack of jobs, et cetera)
While food inflation is not the main cause it is a trigger that got pulled. We flooded the market with dollars to stimulate our economy. Lending that was supposed to happen did not. the money flowed into commodities. International commodity contract are paid in dollars, this causes inflation and more dollars in the commodities market starts a vicious cycles of speculation raising the prices beyond what normal inflation would have done on its own. By monetarizing our debt, and because contracts are paid in US dollars, we exported some of our debt through the international markets into the pockets of already angry would be revolutionaries. Whether they like it or not, those street rioters helped the US debt load. I just wonder if this was a feature or just an effect of Quantitative Easing.
Economic Cracks in China?
by coldwarrior ( 210 Comments › )Filed under China, Economy at December 1st, 2010 - 2:00 pm
This Fund Manager is putting his money where his mouth is, again;
Hedge fund manager Mark Hart bets on China as the next ‘enormous credit bubble’ to burst
Mark Hart, an American hedge fund manager who has made millions predicting the crises in US sub-prime market and European debt, has launched a fund to bet on the imminent implosion of China.
Mr Hart, who runs Corriente Advisors from Fort Worth Texas, has told potential investors in a presentation that China is in the “late stages of an enormous credit bubble”.
When this bursts, the financier said he expects an “economic fall-out” that will be as “extraordinary as China’s economic out-performance over the last decade”.
“Complacency among market participants regarding China is eerily similar to the complacency exhibited prior to the United States sub-prime crisis and European sovereign debt crisis.”
Well, he has a great track record…and it’s a million dollars to get into the fund…so waht data is he basing this bet on? From the article:
In the presentation, which amounts to a devastating attack on the prevailing belief that China is an engine for growth, the financier argues that “inappropriately low interest rates and an artificially suppressed exchange rate” have created dangerous bubbles in sectors including:
Raw materials: Corriente says China has consumed just 65pc of the cement it has produced in the past five years, after exports. The country is currently outputting more steel than the next seven largest producers combined – it now has 200m tons of excess capacity, more that the EU and Japan’s total production so far this year.
Property construction: Corriente reckons there is currently an excess of 3.3bn square meters of floor space in the country – yet 200m square metres of new space is being constructed each year.
Property prices: The average price-to-rent ratio of China’s eight key cities is 39.4 times – this figure was 22.8 times in America just before its housing crisis. Corriente argues: “Lacking alternative investment options, Chinese corporates, households and government entities have invested excess liquidity in the property markets, driving home prices to unsustainable levels.” The result is that the property is out of reach for the majority of ordinary Chinese.
Banking: As with the credit crisis in the West, the banks’ exposure to the infrastructure credit bubbles isn’t obvious because the debt is held in Local Investment Companies – shell entities which borrow from Chinese banks and invest in fixed assets.
Mr Hart reckons that “bad loans will equal 98pc of total bank equity if LIC owned, non-cashflow producing assets are recognized as non-performing.
As a final blow, Mr Hart says that the market belief that the Chinese government has “ample resources” to bail out its banks is flawed.
Corriente’s analysis of the ratio of China government debt to GDP comes out at 107pc – five times higher than official published numbers. The hedge fund says this number uses “conservative assumptions” and the real figure could be as high as 200pc.
The result is that, rather than being the “key engine for global growth”, China is an “enormous tail-risk.”
He is so convinced by his arguments that he has warned investors that the fund, called the China Opportunity Master Fund, is prepared to “burn” 20pc of their cash each year until his theories are proved.
Well, Mr Hart is calling the Chinese a pack of liars more or less. I can’t say that i disagree with him on this topic. If his debt/GDP analysis is correct, the Chinese are not only in really big trouble, they would also then be rather hypocritical in bashing the US for the same thing…debt. The above factors will be well worth watching as the Chinese economy unwinds.
Breaking…The Contagion in the EU.
by coldwarrior ( 132 Comments › )Filed under Economy, Europe at November 30th, 2010 - 11:30 am
The Sovereign Debt contagion continues in Europe. The bond investors in Europe are not buying the EU/IMF Irish bailout. These investors rightly see the issue of sovereign debt as so risky that they are losing confidence rapidly in the sovereign debt (aka bond) markets.
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When this occurs, yields on the bonds rise to attract investors, this gives the investor an incentive to risk his money. The riskier the debt is, the higher the yield hast to be to attract investors. The higher the yield the higher the interest rate. The higher the interest rate, the more expensive it is to borrow for everyone, the state and businesses (this causes inflow of foreign capital that might be chasing higher interest rates than in their domestic market). The more expensive it is to borrow, the more costly the sovereign debt. The more costly the sovereign debt, the more money is needed for the economy to pay it back. The more money used to pay debt is less in the actual economy creating wealth.
The other side of the same coin is capital flight, that’s when the money just up and leaves the market. In this case, the money is leaving the EU (and Asia after the NORK incident) and piling into the American bond market. This drives bond yields down in the US, as investors see US sovereign debt as a better risk than Europe and Asia. Lower yield means less expensive debt…the opposite of the above cycle.
Lets look at Monday’s headlines (this is an excellent and very concise article):
Contagion strikes Italy as Ireland bail-out fails to calm markets
The EU-IMF rescue for Ireland has failed to restore to confidence in the eurozone debt markets, leading instead to a dramatic surge in bond yields across half the currency bloc.
Spreads on Italian and Belgian bonds jumped to a post-EMU high as the sell-off moved beyond the battered trio of Ireland, Portugal, and Spain, raising concerns that the crisis could start to turn systemic. It was the worst single day in Mediterranean markets since the launch of monetary union.
The euro fell sharply to a two-month low of €1.3064 against the dollar, while bourses slid across the world. The FTSE 100 fell almost 118 points to 5,550, while the Dow was off 120 points in early trading.
“The crisis is intensifying and worsening,” said Nick Matthews, a credit expert at RBS. “Bond purchases by the European Central Bank are the only anti-contagion weapon left. It needs to act much more aggressively.
“The EU rescue fund cannot handle Spain, let alone Italy,” said Charles Dumas, from Lombard Street Research. “We we may be nearing the point where Germany has to decide whether it is willing take on a burden six times the size of East Germany, or let some countries go.”
Or let some countries go? The cracks in the EU continue to build. Can the EU collapse? Given what happens to any country that leaves the EU, it probably wont.
Some now see the eurozone as effectively operating at two speeds, with Germany, its biggest economy, leading the pack of stronger countries, and the weaker periphery nations failing to keep up – to an unsustainable degree. Having a “one size fits all” monetary policy means stragglers cannot devalue their currency to boost exports and stimulate growth, unlike, say, Iceland…
“Not only do we find it difficult to imagine how a nation could disentangle itself from the single currency (unscrambling the omelette) but we also take seriously the fact that the Maastricht Treaty envisioned entry into the euro as being irrevocable,” says Mr Derrick.
However, he says it is not impossible that a country could withdraw, should the attractions of leaving outweigh the penalties, such as the “inevitable” restructuring needed to offset the sharp fall in the value of the reintroduced currency, since the debt overhang would stay in euros.
That would mean the departing country would face exclusion from the international debt markets for years, he predicted.
And now the Euro is falling against the dollar (part of QE2 was to devalue the dollar, remember…).
The currency fell to $1.2997 against the dollar during trading on Tuesday morning, its lowest point in two months.
Concerns are now focusing on other debt-laden countries, with Spain and Portugal under the most scrutiny.
The agreement of a €85bn emergency aid package for Ireland, felled by the costs of bailing out its banks, has failed to allay market fears over the health of the eurozone.
Is there enough cash to bail out all of these countries?
That’s because the rescue fund is financed by issuing bonds and in order to secure a AAA rating, governments agreed to set aside a pool of cash, depleting the total amount available to pump into economies. The rest of the bailout pool consists of 60 billion euros from the European Commission and 250 billion euros pledged by the International Monetary Fund.
“There isn’t enough official money to bail out Spain if trouble occurs,” Nouriel Roubini, the New York University professor who predicted the global financial crisis, said yesterday in Prague. While it’s “quite likely that Portugal” will be next in line for financial assistance, “the big elephant in the room” is Spain, he said.
At 9.3 percent of gross domestic product, Spain will have the largest budget deficit in the euro area this year after Ireland and Greece, the European Commission forecast yesterday. Portugal’s shortfall will be 7.3 percent of GDP.
When Roubini speaks, listen He is very, very good at seeing well over the economic horizon.
