Relations between the neighbors have hit a low point following accusations of an economic blockade against Nepal.

India also stands accused of meddling in Nepalese politics following New Delhi's reaction to the introduction of a new Nepalese constitution last week, writes Ross Adkin for Reuters.

Southern Nepalese protest new constitution, blocking trade routes

The Nepalese cable federation threatened to end broadcasts of Indian TV channels and protesters carried an effigy of Indian Prime Minister Narendra Modi through Kathmandu as anti-India sentiment erupted. The new constitution introduces a federal structure that has left some southern minority groups fearing that they will be marginalized.

Since August there have been over 40 reported deaths in Nepal due to protests. Trucks of oil from India have not been crossing into southern Nepal because of the unrest, and authorities have been encouraging citizens to cut down on their use of cars and fuel.

Overland routes to China have been blocked since earthquakes in spring which killed almost 9,000 people, leaving Nepal almost completely reliant on supplies from its southern neighbor, India.

India criticizes constitution, accused of economic blockade

At the same time the new constitution has drawn criticism from New Delhi, which thinks that it was rushed through. This Monday a handful of trucks of fuel, vegetables and building materials were seen crossing the India-Nepal border, but Nepalese officials say hundreds more are being held up on the Indian side.

Sunil Kumar Lama, general secretary of the Federation of Nepal Cable Television, said the organization will suspend Indian channels from 10am Tuesday. "This is to protest against the blockade," Lama said. He did not say how long broadcasts would be suspended.

Protesters in the Nepalese capital of Kathmandu could be seen with an effigy of the Indian premier, shouting: "Down with Indian expansionism! Down with Modi!" Police later confiscated the effigy and dispersed the protesters.

"We are asking India 'Please, please open up the border and stop interfering in Nepal's internal issues'," said nursing student Amrita Baral, who took part in a 130-strong march on the Indian Embassy in Kathmandu.

A spokesman for India's Ministry of External Affairs did not make any comment.

Customs officials blame India for truck traffic jam

India denies carrying out an economic blockade, maintaining that its trucks have stopped entering Nepal because of security concerns and blockades by protesters. India is Nepal's largest trading partner and any slowdown in trade has a huge effect.

Nepalese officials have asked China to accelerate work to reopen border crossings affected by the earthquakes. In the meantime fuel rationing has been introduced after cross-border trade with India slowed to a trickle, said Nepal Oil Corp spokesman Deepak Baral.

Those who oppose the Nepalese government have blocked the passage of trucks from India, sitting on the road to prevent them from passing. At the Sunauli-Bhairahawa border crossing, some trucks had started to pass on Monday, but over 1,000 were backed up in India.

"(Indian customs officials) are telling me, 'We're giving permission, there's no problem,' but we are still seeing a huge decrease in the number of trucks passing through," said Lawanya Kumar Dhakal, Bhairahawa's chief customs official.

Who is really to blame?

Southern Nepalese minorities are considered to be close to Indians, and are worried by the structure of the new constitution. Protesters are demanding that the population be granted greater political power, and are preventing supplies from reaching the capital as a result.

“The reported obstructions are due to unrest, protests and demonstrations on the Nepalese side, by sections of their population,” said Vikas Swarup, India’s foreign ministry spokesman.

Some say that a blockade of Kathmandu would not need to be done at the border zone, but rather at the entrance to the valley where the capital city lies. Narayan Man Bijukchhe, head of the Nepal Workers and Peasants Party, accused India of declaring a “communal war” with Nepal, while former attorney general Yubaraj Sangraula said that the blockade was “an act of aggression.”

Shortages bring back bad memories for many Nepalese who remember the official economic blockade that India imposed on the country in 1989. India closed its border crossings and denied access to an Indian port following a trade dispute. Nepal suffered terrible shortages of essential goods until the blockade was lifted 13 months later.

As Nepal struggles to rebuild following the devastating earthquakes it suffered earlier this year, it needs full cooperation from its neighbors and major trade partners. The political crisis is hindering rebuilding efforts, especially given the fact that crossings to China remain closed.

If Nepal cannot placate the protesters in the south, it must do more to reopen trade routes with China.

The post Nepal Protests Against India After Fuel-Rationing appeared first on ValueWalk.

As the rivalry between China and United States continues to develop, all eyes have been on the recent visit of Xi Jinping. In particular, Jinping’s sojourn to the White House was especially interesting, as the Chinese leader took a particularly bold tone with regard to the military ambitions and plans of the world’s most populous nation.

Tougher Obama desired

Many geopolitical analysts within the United States had hoped to see a tougher President Obama take on the Chinese directly, particularly with regard to the behaviour of the nation in the South China Sea region. With the Chinese premier having taken the time to visit the United States, the more aggressive and hawkish of geopolitical analysts suggested that Obama could take the opportunity to denounce Chinese military buildup in the region. Instead, the US president struck a conciliatory tone, symptomatic of the creeping influence of China in US strategic areas of interest. Some of the more pronounced observers suggested that the United States had effectively bowed to China.

The history of the South China Sea region is a complex one, encompassing numerous nations to believe that they have a stake in the territory. Support from the United States in the region to those countries being overrun by China has been lethargic, or in fact bordering on non-existent. Obama has instead concentrated on replacing US military capabilities overseas, accommodating international rivals, and focusing on domestic policy agendas and legacies.

With the United States taking no discernible action in the South China Sea region, it was predictable that the country with arguably the second most powerful military on the planet would take advantage of the situation. ValueWalk has reported on numerous occasions recently that China is steadily building up its own military capabilities, and in some areas China and Russia have even exceeded US military capabilities, at least according to intelligence reports. This does suggest that the ability of the US to act is being compromised for the first time in living memory, but the behavior in the South China Sea region of China, and the lack of response from the United States, does nonetheless represent something of a climbdown from the US administration.

Since Xi Jinping landed in the United States, the focus of the Obama administration has been on cooperating and building a collaborative relationship with the Chinese government. There are two possible perspectives on this particular conduct. On the one hand, critics of the Obama government will suggest that it is a tangible sign of weakness. Many that believe in the importance of American primacy will suggest that that United States should be adopting a tone of condemnation to the conduct of the Chinese, particularly with regard to the South China Sea region.

US economic context

Conversely, it has been suggested that the lack of activity of the Obama administration with regard to China is more reflective of the overall position of the nation. Although there has been something of an economic recovery in the United States, it is largely accepted by economic observers that the overall position of the country is far from certain. Although America remains the most important economy on the planet, despite the fact that it has been displaced by the Chinese as the largest economy in the world, the amount of debt and deficit that is endemic in the contemporary American experience means that room for manoeuvre is not as great as it once was for American presidents.

The US is already ardently extended overseas in a military capacity beyond that which would be ideal, let alone is the nation in a position to expand its activities to somehow deal with China militarily. And if the US was to condemn Chinese actions, and then be unable to follow it up with  a military response, that not only could make Obama look rather weak in the eyes of the international community, but it could also seriously compromise security in the region.

The economic position of the United States is certainly entwined with China, but in addition to this aspect of the contemporary US economy, it is also notable that spending on the military has been significantly reduced. Again critics have sometimes characterized this as being part of a weak liberal agenda, but the reality is that generating further income to divert into military endeavors when that United States already has a huge amount of unfunded liabilities for everyday programs on which the population relies, is extremely difficult if not utterly reckless.

al-Qaeda plan symptomatic

Perhaps the economic position of the United States, and its existing military position, is best exemplified by the fact that ISIS is being fought in the Middle East by the United States openly funding Al Qaeda. Militants that the US was opposed to in the recent past are now receiving overt US funding and support, as the United States is simply too overextended in multiple theaters in order to be able to act against ISIS in the way in which it would choose in an ideal world.

And China certainly holds some valuable cards in its relationship with the United States, considering the large amount of US debt that is held by the Chinese. It has been suggested that the two countries have a symbiotic relationship for this very reason, but a negative view of the situation would be that China has the potential to do serious damage to the dollar should it choose to do so. Of course, the Chinese economy is far from secure either in the delicate Global economic situation that exists at present, and indeed the renminbi was recently devalued by the Chinese government in light of these difficulties.

As the relationship between China and United States develops, it seems clear that China is taking a hawkish attitude towards its military endeavors. Already there is talk of the Chinese expanding into Africa, and the economic and demographic position of the country will make such manoeuvers more feasible in the future. Although that US administration may come under criticism for bowing to such pressure, Washington and the American public may have to accept that the geopolitical situation is evolving as these two powers occupy shifting positions in the world order.

The post Have Obama And The US Effectively Bowed To China? appeared first on ValueWalk.

Tensions between China and the United States continue to escalate after the Washington administration stated it would send military vessels to the South China Sea region. The United States has been concerned about the activities of the world’s most populous nation in the region for some time, but this is the first indication that the Obama administration is ready to act decisively.

US navy sets sail for South China Sea

United States navy vessels are currently being prepared to sale through a 12 nautical mile zone around the disputed Spratly Islands. China has claimed the region as its own territory, despite the fact that numerous other nations also have a stake in the area. There has been concern in Washington about the hawkish strategy of China, as the two countries jockey for geopolitical supremacy. Now it seems certain that the United States is ready to act decisively on the matter, and this can only surely have a negative impact on the relationship between the two nations.

It is only recently that the Chinese premier Xi Jinping travelled to the United States for a major state visit. The rhetoric that emanated from Jinping during the visit was surprisingly defiant, with the president of the People’s Republic of China strongly defending the right of the Chinese to develop militarily.

There will be some debate among geopolitical analysts as to whether Washington is responding to China in kind, or simply attempting to protect its privileged position of geopolitical dominance. The United States certainly hasn’t been challenged militarily for many years, arguably since the decline of the Soviet Union at the end of what is colloquially referred to as the Cold War.

China responds with rhetoric

Certainly China has already indicated its displeasure about the plans of the United States. Hua Chunying, a Chinese foreign ministry spokesperson, commented on the US scheme, requesting for an objective viewpoint of the region from US forces. “We hope the United States can look upon the current situation of the South China Sea from an objective and fair perspective and play a constructive role together with China in keeping the peace and stability in the South China Sea,” Chunying stated.

However, the politically significant publication Foreign Policy has already suggested that Washington is ready to play hardball in the South China Sea region. Quoting an anonymous defence official, it is stated in the publication that it is not a question of if, but when, the United States will demonstrate a show of military might in the disputed Spratlys.

It was expected that the South China Sea conflict would be a major source of discussion during the aforementioned state visit of Jinping. However, whatever negotiations took place during this highly publicized event, it seems that no satisfactory resolution was ultimately found. Indeed, many geopolitical analysts are already suggesting that the relationship between Washington and Beijing has reached the lowest point in many years.

The South China Sea region is only one pillar of these declining relations. There has been a significant friction between China and the United States over several other issues, including cybercrime, currency manipulation and human right perceptions.

Economic war

This can perhaps be considered a natural phenomena considering that China is the first country to challenge the predominance of the United States in the world for many years. Already the East Asian superpower has eclipsed the United States economy in terms of total GDP, and the potential for fiscal growth in a nation of well over one-million people is quite obvious.

Of course, no-one is suggesting that China is more economically significant than the United States just yet. In terms of the relative GDP per capita of the two nations, there is absolutely no doubt that the United States remains vastly superior. And the huge economic infrastructure that has been built up by the United States, and indeed the existing global economic institutions, are unquestionably still very much in favour of a US-led world order.

It is perhaps due to this natural enmity that US military officials have been strongly urging the White House to take a more robust approach to Chinese aggression in the South China Sea region. There have been numerous military reports in recent months that have suggested that Chinese capabilities are beginning to rival, and even in some cases exceed, that of the United States. The US has invested in and relied on the ‘guns over butter’ approach to economics in order to cement its position in the world, so such murmurings are certainly of concern to the Washington administration.

China responds

China has already demonstrated an emboldened attitude to military endeavors, and has predictably responded strongly to the US plans. The hierarchy of the nation has stated that it will not allow any country to violate what it perceives to be its territory in the South China Sea, and this could certainly lead to a stand-off between the two superpowers.

Meanwhile, the Chinese Foreign Ministry has requested the United States to refrain from provocative words and actions, and to play a responsible role in the peace and stability of the South China Sea region.

China has already claimed more than 80 percent of the South China Sea region, causing considerable conflict, with counterclaims registered from the likes of Vietnam, the Philippines, Malaysia, Brunei and Taiwan. It will be interesting to see what the US policy is in the region, and whether it will support the claims of these lesson nations, or merely offer a geopolitical buttress against Chinese expansion.

With this in mind, the United States has already committed to a $100 million financial aid program to the maritime law enforcement agencies of Philippines, Vietnam, Malaysia and Indonesia.

In May, Ashton Carter, the US Defense Secretary, stated that China’s actions were increasing “the risk of miscalculation or conflict” in the South China Sea region, which is a key global shipping lane. It now seems that the US has finally decided that the time is right to act. The consequences of this have yet to be seen.

The post Tensions Escalate As U.S. Sends Vessels To South China Sea appeared first on ValueWalk.

President Vladimir Putin has called for greater use of the ruble in Russian oil deals and criticized continued use of the U.S. dollar.

The Russian leader spoke out on Tuesday and proposed the move which appears to be aimed at strengthening the severely weakened Russian currency while also reducing the country’s dependence on the dollar, according to RT.

Putin tries to end reliance on dollar in trade deals

Due to tumbling world oil prices the ruble has lost almost half of its value against the dollar in the past 12 months. Oil is Russia’s main export, but the country has also suffered due to Western sanctions imposed after the Ukraine conflict and a sharp economic downturn at home.

The idea that oil deals should be paid for in rubles and other non-dollar currencies such as the Chinese yuan have been proposed by Russian officials in the past. The idea is to reduce Russia’s reliance on the Western financial system.

“I would like to mention one crucial issue in the development of the energy industry, and the economy as a whole. It is a question of finally stopping the use of foreign currency in internal trade,” said Putin at the fuel and energy presidential commission on Tuesday.

Government ministers ignoring dollar deals in internal trade

On Tuesday Putin had some harsh criticism for government officials he accused of willfully ignoring continued payments in dollars in the domestic oil trade.

“Mr. Siluanov (Russian Finance Minister), aren’t settlements in foreign currencies prohibited by [Russian] law? And what do we have in practice? Fees for shipment of oil products and crude oil in the Russian ports of Novorossiisk, Taman, Ust-Luga, Kozmino, Primorsk and others – are either directly priced in US dollars, or denominated in US dollars on online trading systems, practically in real time,” asked the President.

The post Putin Wants U.S. Dollar Banned From Russian Trade appeared first on ValueWalk.

Narendra Modi arrived in Britain on Thursday to discuss a number of valuable trade deals, but was met by a crowd of protesters angry at the treatment of minorities in India.

The visit is the first time that an Indian Prime Minister has been to London in over 10 years, as the nation has favored relationships with other countries instead of Britain. However British officials are hoping to regain some influence over India and sign trade deals worth billions of dollars, writes Lisa Barrington for Reuters.

Trade talks overshadowed by protests

Modi is expected to buy 20 BAE Systems Hawk trainer aircraft, which would be built in Bengaluru. He is trying to drive further investment and growth in India following his Hindu nationalist party’s defeat in Bihar state elections on Sunday.

It is thought that trade deals worth 8-12 billion pounds are on the table, which offer benefits to both India and the UK. British PM David Cameron has tried to foster closer ties, even visiting India three times since his election in 2010, and these talks offer a chance to profit from a rapidly growing economy.

The visit has so far been overshadowed by protests from members of the Indian diaspora angry at the Modi government’s treatment of minorities. “Our main concern is that minorities are not safe in India,” said Sikh protester Kuldip Singh.

Modi stands accused of presiding over a period of increased intolerance, with protesters waving placards  reading “Modi you are killing Indian democracy” and “Stop religious persecution in India.”

Indian government accused of human rights abuses

India’s human rights record could be put up for debate in Parliament following the signing of a motion by 45 MPs, including Labour party leader Jeremy Corbyn. That did not stop Modi receiving a grand welcome from government, including a guard of honor. He was also scheduled to lunch with Queen Elizabeth.

Modi will address a mass rally at the United Kingdom‘s national stadium on Friday, which will be attended by around 60,000 supporters. However a large group of activists made up of Sikhs, Kashmiris and Indian Christians will be protesting outside the event.

A spokesperson for an organization known as Dal Khalsa told London24: “We have joined as Sikhs, Kashmiris and Christians to have a united front against Modi and his ideology. We are protesting against Hindu fascism, known as Hindutva. It is inspired by pure race ideology and all minorities are being oppressed by it under Modi. We are being forced to do certain rituals and to be subservient to the majority.”

Patchy human rights record leaves Modi open to criticism

Modi is accused of doing nothing to prevent the rise of Hindu extremism which seeks to impose its beliefs on other ethnic groups. However there are millions of Indians who support his rule, including those who will attend the rally in Wembley stadium.

Siddhesh Govind Kabe, who plans to attend, said of Modi: “He is the coolest thing to happen to India since independence. A proactive PM better than the previous 40 years of corrupt, unimaginative and reactive government.”

India is divided in its opinion of Modi and he is also a polarizing figure internationally. The UK government refused to do business with him following race riots in the Gujurat province which left hundreds of Muslims dead. Modi was chief minister of the province at the time and human rights organization Amnesty UK is pressurizing David Cameron to “raise some human rights concerns” during Modi’s visit.

The post Indian PM Modi Visits London Amid Protests appeared first on ValueWalk.

As the prominence of China in the geopolitical arena continues to increase, recent naval activities have intensified tensions with Japan. According to reports, Japan is currently monitoring waters near islands that are disputed with China in the East China Sea. This has resulted from a naval vessel rom the world’s most populous nation operating in a new area in the region for the first time.

East China Sea tensions

Japan has acknowledged the existence of the Chinese ship, and indicated that it continues to assess the situation. The Defense Ministry of Japan has made an official statement on the subject, indicating that late on Thursday a Japanese P-3C patrol aircraft observed the Dongdiao-class intelligence vessel near territorial waters of the Senkaku Islands.

These waters are currently administered by Japan, but China does not share its opinion on the subject! China claims this region as the Diaoyus, and Chinese activities in the region suggest that the nation is becoming increasingly hawkish. According to observations of this activity, the Chinese vessel moved back and forth in the area on a repeated basis during Thursday evening. It eventually departed and never breached the 12-nautical-mile territorial waters belonging to Japan, but is clearly a source of concern for the East Asian nation.

Although Japan cannot specifically accuse China of inappropriate behavior over the incident, the official response has nevertheless being cautiously critical. The Japanese defence Minister, Gen Nakatani, has already spoken out about the incident, describing the movement of the vessel as unusual during a press conference. Nakatani explained it to reporters that the vessel made “repeated eastward and westward moves in one day”.

As the situation unfolds, Japan has stated that its defense ministry will continue to monitor the Chinese navy, in an attempt to protect its own waters. Nakatani stated that the Japanese navy will continue to “make utmost efforts in patrolling the sea and air surrounding Japan”.

Despite the somewhat critical tone that Japan has taken over the subject, China has both defended its actions and the right of its navy to engage in the reported operations. Beijing indicated that it believed the actions of the ship to be merely standard, and that Japan had no cause for concern whatsoever, or indeed reason to be defensive.

Hawkish China

Whether this position is believable is debatable, as China has already indicated in the South China Sea region that it is willing to engage in a policy of expansionism. The general activity of the Chinese navy would seem to indicate an emboldened policy from the superpower, in line with the fact that it is now the world’s largest economy.

Nonetheless, commenting on the activities of China in the East China Sea region, spokesman Hong Lei suggested during a regular press briefing that the Chinese vessel was merely conducting normal activities. Lei was also at pains to point out that China has not broken any legislation, and was complying with any legal requirements related to naval activity. “It is in line with international law,” Lei stated, “there is nothing disputable about that.”

Due to their geographical proximity, Japan and China are natural rivals, and have frequently come to diplomatic blows over the ownership of the uninhabited islets in the East China Sea. Anyone who has been following the activities of China closely will realise that the situation in the East China Sea is extremely reminiscent of the policy China has been adopting in the Spratlys.

On several occasions already, Chinese ships, mostly coastguards, and aircraft have approached the islands in the East China Sea to test the response of the Japanese. Clearly China believes that it should lay claim to the islands in the region, and there are obvious similarities with several other aspects of Chinese foreign policy.

For example, China has repeatedly refused to acknowledge the sovereign status of Taiwan, claiming the nation as Chinese Taipei. China has claimed sovereignty over Taiwan since the end of the Chinese civil war in 1949, and insists that nations cannot have official relations with both China and Taiwan. Considering the increasing economic and diplomatic power of China, this ensures that Taiwan is only able to maintain diplomatic relations with a handful of countries.

China-Japan Relations

In recent years, the relationship between Japan and China has declined considerably, particularly since the Japanese government moved to nationalize some of the islands in the East China Sea. This was initiated in September 2012, and met with a chilly response from Beijing, which believes that it ought to have claim over the territories.

Yet despite the political, territorial and diplomatic quarrels between the two nations, the economic ties between China and Japan cannot be denied. This is an equally natural situation to the rivalry between the two nations, as China and Japan are the two largest economies in Asia by some distance. In many ways, Japan has charted a course that China should follow naturally, having established itself as a very Westernised and contemporary economy before the rapid expansion of China’s fiscal progress. Japan indicated how ancient culture can modernize to succeed in the modern world, and China has certainly learned lessons from this process.

However, distrust and tension remain a significant part of the relationship between the two nations considering their completely differing views on the control of this region. China is wary of moves by the Japanese government to raise the military profile of the nation, while Tokyo is concerned with the increasing regional and global assertiveness of Beijing.

This latest incident represents the first time that a Chinese naval ship has operated in the area between the disputed islands and the populated southern Japanese island of Miyako. This is not only a significant moment for the region, but also indicative of the increasing confidence of China and its military.

Nakatani declined to comment on the motives of the vessel, but did comment that the Chinese military “is rapidly boosting their activities at sea and in the air”. There has been no response from the United States yet, but this is a further indication that China is playing an increasingly important role in geopolitical issues.

The post China Ship Threatens Japanese Waters In East China Sea appeared first on ValueWalk.

Disposable Income – Today’s Personal Income figure came in at 4.4% today (year-over-year).  The consensus-meeting figure is decent, although down from the recent 5% peak in July of this year.

In addition to the top-line Personal Income figure, the Bureau of Economic Analysis releases a number of sub-estimates and related figures, one of which is Personal Spending.

Personal Spending came in at a fairly weak 3% (year-over-year).  The incredibly weak Personal Spending compared to moderate Personal Income has economists wondering – why?

Why is spending not growing as quickly as income?

Perhaps individuals are nervous about their job outlook, and are therefore saving some money for a rainy day.

Or, perhaps low inflation and technological innovation has consumers purchasing everything they want and need for less (and thus, don’t need spend all their earnings to get what they want).

Or perhaps there’s something else going on, but whatever it is, there’s something happening.

What is your guess is the main reason spending isn’t keeping up with income? Disposable income

Disposable Personal Income (DPI) Vs Personal Income

The answer lies in Disposable Personal Income.  Here’s a look at Personal Income (PI) and DPI.

Over the past few years, the difference between the two has been widening.  Today’s all-time high figure is $1.809 trillion.

What is the $1.809 trillion?

Taxes.

Taxes are eating up a larger share of the income pie.  And, the expansion in the tax burden is eating at spending.

Some Politics …

The fact that taxes explains why spending isn’t keeping up with income leaves the door open to some politics.

Out of interest, here’s a look at Disposable Personal Income by president throughout a given presidency.

(Chart explanation: the horizontal axis is the number of months a given president was in office.  The vertical axis is the percentage change in DPI during the given president’s administration.  Each line represents a presidential administration.)

Interestingly, the best DPI president was Reagan at 33%.  The worst DPI president is Barack Obama at just 13%.

Perhaps Obama’s political agenda of raising taxes on the rich was good politics, but doesn’t look like it was very good economics.

Interestingly, Reagan had just the opposite political agenda – help out the rich through tax cuts and hope that rich people’s spending and investments trickle down.

It’s not hard to see which president won the economics battle.  What’s more interesting is that the political sphere ignores such clear evidence.  Gotta love class warfare.

Disposable Income – Conclusion

Interestingly, a cautious consumer is probably not the main reason Personal Spending is not keeping up with growth in Personal Income.

Instead, the more reliable explanation for why spending isn’t keeping up with income lies in Disposable Income.  This measure accounts for taxes.

When looking at Disposable Income (which is really weak compared to Personal Income) and the all-time high taxes paid figure, it is unsurprising that taxes paid to all levels of governments accounts for the weaker-than-expected spending figures.

It’s not really all that surprising that higher taxes, mostly imposed on the higher income individuals in the past few years, start to show up in reduced spending.  It just took a little time to show up materially.  Like most everything in economics.

The post Why is Spending Not Keeping Up with Income? It Is Not Because Of Cautious Consumers appeared first on ValueWalk.

Economics Is Like A Religion – Just Faith In Theory by John Mauldin, Mauldin Economics

Everyone is missing the serious problem that ultra-low interest rates have created for retirees.

Pension funds are still assuming that future returns will be in the 7½–8% range. And as people get older and have no practical way to go back to work, pension funds that are forced to reduce payments in 10 or 15 years (and some even sooner) will destroy the lifestyles of many.

So what made Europe and Japan agree that negative rates-with all their known and unknown consequences—are a solution to our current economic malaise?

I have been trying to explain this by comparing economic theories to a religion.

Everyone understands that there is an element of faith in their own religious views, and I am going to suggest that a similar act of faith is required if one believes in academic economics.

Economics and religion are actually quite similar. They are belief systems that try to optimize outcomes. For the religious, that outcome is getting to heaven, and for economists, it is achieving robust economic growth-heaven on earth.

I fully recognize that I’m treading on delicate ground here, with the potential to offend pretty much everyone. My intention is to not to belittle either religion or economics, but to help you understand why central bankers take the actions they do.

The No. 1 Commandment of a Central Bank

Central bankers are always-and everywhere-opposed to inflation. It’s as if they are taken into a back room and given gene therapy. Actually, this visceral aversion is also imparted during academic training in the elite schools from which central bankers are chosen.

This is our heritage; it’s learning derived not only from the Great Depression but also from all of the other deflationary crashes in our history (not just in the US but globally).

When you are sitting on the board of a central bank, your one overriding rule is never to allow deflation to occur on your watch. No one wants to be thought responsible for bringing about another Great Depression.

And let’s be clear, without the radical actions taken in 2008–09 to bail out the banks, drop rates to the zero bound, and institute quantitative easing, we would likely have been facing something similar to the Great Depression.

While I don’t like the manner in which we chose to bail out the banks, some form of bailout was a necessary evil.

Whenever we enter the next recession, we are going to do so with interest rates close to the zero bound. Most of the academic research both inside and outside the Fed suggests that quantitative easing, at least in the way the Fed did it the last time, is not all that effective.

If you are sitting on the Federal Reserve Board, you do not want to allow deflation to happen on your watch. So what to do? You try to stimulate the economy. And the one tool you have at hand is the interest-rate lever.

Since rates are already effectively at zero, the only thing left is to dip into negative-rate territory. Because, for you, allowing a deflationary malaise to set in is a far worse thing than all of the potential negative consequences of negative rates put together.

It’s a Hobson’s choice; you see no other option.

Different Schools of Economic Thought

There are multiple competing economic theories on the government’s role in monetary policy making. The operative word is theories.

Each is an attempt to describe how to manage a vastly complex modern economy. Some see too much debt as the cause of our current malaise. Others think that lowering taxes would allow consumers and businesses to keep more of their income and hopefully spend it.

In the not too distant human past, shamans and soothsayers conjured theories about how the world worked and how to predict the future. Some examined the entrails of sheep, while others read meaning into the positions of the stars (or whatever their prevailing theory dictated) and told leaders what policies they should pursue.

An astute priest would pretty quickly figure out that the best route to priestly job security was to foretell success for the politician’s/king’s/tribal chief’s pet policy course.

In today’s world, economists serve exactly the same function. They skry their data sets—a latter-day version of throwing the bones—and then, based on the theory by which they believe the data should be interpreted, they confirm the orthodox policy choices of their political masters. And so their careers prosper.

This is not to disparage economists—not at all. They really do try to come up with the best possible policies—but the range of policy alternatives is constrained by the economists’ (and the general society’s) belief system.

If you believe in a Keynesian world, then you will prescribe lower rates and more fiscal stimulus during times of recession. If, however, you believe in a competing model, such as the Austrian theory postulated by Ludwig von Mises, then you believe that smaller government, far less fractional reserve banking (if any at all), and a gold standard are appropriate.

There are also other competing theories, each with its own model of how the world works, but I think you already got my point.

There’s No Right Answer in Economics – Just Faith in Theory

If we had adopted, for example, an Austrian model in 2008–09, we would have had a much deeper recession, and unemployment would have risen higher. The recovery, on the other hand, would theoretically have come more quickly as prices cleared and debt was resolved.

However, that period of time before the recovery began would have been devastating to the millions of families who would have faced even more crippling unemployment than we saw. That is an experiment we did not conduct, so we will never truly know whether that path might have been less painful in the long run.

Austrians are willing to face a series of small recessions as part of the price of maintaining a free economy, rather than postponing recession and trying to fine-tune what is supposedly a free market economy by means of monetary and fiscal policy.

An analogy would be the theory that allowing small and controllable forest fires today might prevent a large, utterly devastating forest fire in the future.

Nassim Taleb’s important book Antifragile makes a strong case that businesses, markets, and whole societies are much better off if they allow relatively minor random events, errors, and volatility to correct as quickly as possible… rather than continually patching them over to avoid short-term pain.

Decentralized experimentation in the economy by numerous complex actors capable of taking risks works better than a directed economy that encourages the buildup of excessive risk throughout the entire economy.

The problem is, there really is no one clearly right answer as to which economics belief system is best. I know what I believe to be the correct answer, but that belief is based on the way I understand the world—and the world is vastly more complex than anyone’s theory can be.

No theory allows for a perfect solution for all participants. Rather, each theory picks winners and losers, with the overall objective of creating an economy that has maximal potential to grow and prosper.

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The post Economics Is Like A Religion – Just Faith In Theory appeared first on ValueWalk.

Just a couple of days removed from a report that announced that the U.S. life expectancy had dropped for the first time since 1993 owing to drug overdoses, liver disease and suicide, a new study released today shows a dramatic rise in suicides especially among middle-aged women.

Dramatic rise in U.S. suicide rate

With the exception of older adults, suicide has seen a massive surge across all demographics. While suicide among middle-aged Americans had been falling since the 1950s, that group is most responsible for the rise according to the National Center for Health Statistics which posted a 24% overall rise in suicides between 1999 and 2014 in a study released today. The suicide rate for middle-aged women, ages 45 to 64 rose a staggering 63% to account for much of the overall rise. Men in the same age range saw a rise of 43% over the same time period.

With the increase the nation’s rate is now 13 per 100,000 people, the highest it’s been since 1986. To look further at the plague and problem that is suicide, 42,773 people died from suicide in 2014, compared with 29,199 in 1999.

Not surprisingly, the reason for the increase is being linked to work stress and concerns over money.

“It’s really stunning to see such a large increase in suicide rates affecting virtually every age group,” said Katherine Hempstead who has studied the increase in suicides as it relates to personal finances and work concerns.

The only positive to take out of these new numbers is the fact that one racial group’s suicide numbers were down, black men. While the only age group that saw a decline was men and women over 75.

And that truly is the only positive as the suicide rate of girls 10 to 14, while low comparatively, tripled. In 2014, 150 girls in this age range took their own lives compared to 50 in 1999.

Unlike this week’s numbers that pointed out that drug overdoses, suicide and liver disease are disproportionately affecting white people with only a high school education, this study did not look at the education levels of those that committed suicide.

“This is part of the larger emerging pattern of evidence of the links between poverty, hopelessness and health,” said Robert D. Putnam, a professor of public policy at Harvard.

Suicide prevention funding stays the same

“We have more and more effective treatments, but we have to figure out how to bake them into health care systems so they are used more automatically,” said Dr. Jane Pearson, chairwoman of the National Institute of Mental Health’s Suicide Research Consortium. The group is responsible for distributing the National Institutes of Health’s funding for prevention research. “We’ve got bits and pieces, but we haven’t really put them all together yet.”

While suicide rates have seen a dramatic increase, funding from the N.I.H. has largely remained static.

If this wasn’t morbid enough for your morning….about one in four suicides in 2014 were by hanging or strangulation compared to less than one in five in 1999. The rise is attributed to the availability of materials to kill yourself be it a belt, rope or plastic bag or other readily available household item. Gun use in suicides went down to 37% of female suicides to 31%, while men also used guns less often but remained the preferred means with firearms being used 55% for men in 2014 compared to 62% in 1999.

You don’t have to be a statistician to put together these numbers and the country’s economic outlook.

“There was a consistent pattern,” said Dr. Alex Crosby, an epidemiologist at the Centers for Disease Control and Prevention, which held for all ages between 25 and 64. “When the economy got worse, suicides went up, and when it got better, they went down.”

The post Suicide Rates In The U.S Surge To Highest Levels In 30 Years appeared first on ValueWalk.

Government Spending needed for growth?

First, an Overview of What We Saw Recently

Also see  Which President Wins? Looking at Some Politics Connected with Today’s American Labor Market

Before addressing the topic of govt spending and the performance of the economy and equity markets, a brief review of recent GDP figures seems in order.

GDP came in at 0.5% annualized Q/Q growth, below expectations of at least 1.5% growth.  The weakness confirms what we’ve been seeing out of housing, retail sales, and a host of other indicators – the first quarter of 2016 was weak.  Quite weak.

Also see Do American Workers Have Anything To Complain About?

The Main Drivers Behind the GDP Figures

The two main triggers behind the weakness include business investment and a decelerating consumer spending.

Also see Personal incoming and spending by President

Addressing business investment first, businesses spending on items that have long-term potential for increased economic output declined for a third consecutive quarter, coming in at -5.9%.  The third and fourth quarters of 2015 saw growth of -4.4% and -1.9%, respectively.

On consumer spending, the picture is also quite perplexing.  Year-over-year growth in Personal Consumption expenditures came in at just 1.9%, marking the third consecutive month of decelerating growth.  Spending peaked in the second quarter of 2015 at 3.5% and has since lost about half of that momentum.

Also Initial Claims Say We’re in Something Deeper than the Tech or Housing Bubbles

Overall, the economy was weak in the first quarter of 2016.

Now, to Government Spending

With the background established, here’s a look at the government sector.

Why is Spending Not Keeping Up with Income? It Is Not Because Of Cautious Consumers

Overall, government spending is coming back after a few years of years of recession-induced ratcheting back of spending.

Since bottoming in the first quarter of 2014 at $2.828 trillion, government spending is up $47 billion to $2.879 trillion (annualized rate).

Traditional, left-leaning economic theory (the beloved Keynesians) would suggest that the increase in government spending should start to have a positive effect on economic growth.

Interestingly, we’re seeing the opposite.

Why is The Stock Market So Tough on the Fed This Time Around?

When government spending was declining following the global financial crisis in 2008, equity markets were just then starting to gain some positive momentum.

That momentum has held through the past seven years, even though government spending has been held in check.

Hmmm.  Remember the times academics told us the economy would collapse without boosts from government spending?

Sure looks like that was a bunch of bull.

Here’s the evidential view.

What Gives?

So, what gives?

How did the equity markets perform so well with government spending subdued?

The answer lies in business investment and an incredibly dovish Federal Reserve.

Since 2009, the business investment component of GDP has been the darling, up about 61%.  By contrast, Personal Consumption is up just 16% and Government Spending/Net Exports are down 5%/3%, respectively.

It Kind of Looks Like the American Consumer is Dead

Hmm.  Now that business investment is weak and government spending is coming back, we’ll see how markets like this situation.

Any bets on which situation the markets like best – high business investment/low government spending or high government spending/low business investment?

Hmm.

Government Spending – Summing Up

The recent GDP figure came in at 0.5% Q/Q annualized growth.  The subpar performance was largely due to weak business investment and consumer spending.

The real question addressed here is on the performance of equity markets and the economy as a whole without strong govt spending.

Remember when left-leaning academic economists (almost all of the academic economists are left-leaning) used to tell us that the economy would collapse without strong govt spending.

Well, in looking at the strong performance of the equity markets over the past seven years and the relatively subdued govt spending over the same time frame, it appears that such economic advocacy from the academic economists was just a bunch of gibberish.

Everyone pretty much already knew that.  last week was just another confirmation.

The post Remember the Times Academics Told Us the Economy Would Collapse Without Government Spending? appeared first on ValueWalk.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (May 2, 2016). Subscribe on the right side of the page for the complete text.

Boom, boom, boom…it keeps going…and going…and going…

You’ve seen the commercials: A device operating on inferior batteries dies just as a drum-beating, battery operated Energizer bunny comes speeding and spiraling across the television screen. Onlookers waiting for the battery operated toy to run out of juice, instead gaze in amazement as they watch the energized bunny keep going and going. The same phenomenon is occurring in the stock market, as many observers eagerly await for stock prices to die. The obituary of the stock market has been written many times over the last eight years (see Series of Unfortunate Events). Mark Twain summed up this sentiment well, when after a premature obituary was written about him, he quipped, “The reports of my death are greatly exaggerated.”

With fears abound, stocks added to their annual gains by finishing their third consecutive positive month with the S&P 500 indexes and Dow Jones Industrial Average advancing +0.5% and +0.3%, respectively. Skeptics and worry-warts have been concerned about stocks plummeting ever since the Financial Crisis of 2008-2009. We experienced a 100 year flood then, and as a consequence, scarred investors now expect the 100 year flood to repeat every 100 days (see also 100 Year Flood). Given the damage created in the wake of the “Great Recession,” many individuals have become afraid of their own shadow. The shadows currently scaring investors include the following:

• Negative Interest Rates: The unknown consequences of negative interest rate policies by central banks (see chart below).
• U.S. Monetary Policy: The potential continuation of the Federal Reserve hiking interest rates.
• Sluggish Economic Growth: With a GDP growth figure up only +0.5% during the first quarter many people are worried about the vulnerability of slipping into recession.
• Brexit Fears: Risk of Britain exiting the European Union (a.k.a. “Brexit”) will blanket the airwaves as the referendum approaches next month

For these reasons, and others, the U.S. central bank is likely to remain accommodative in its stance (i.e., Fed Chairwoman Janet Yellen is expected to be slow in hitting the economic brakes via interest rate hikes).

Source: Financial Times. Central banks continue with attempts to stimulate with zero/negative rates.

Climbing the Wall of Worry

Despite all these concerns, stock prices continue climbing the proverbial “wall of worry” while approaching record levels. As famed investor Sir John Templeton stated on multiple occasions, “Bull markets are born on pessimism, and they grow on skepticism, mature on optimism, and die on euphoria.” It’s obvious to me there currently is no euphoria in the overall market, if you consider investors have withdrawn $2 trillion in stock investments since 2007. The phenomenon of stocks moving higher in the face of bad news is nothing new. A recent study conducted by the Financial Times newspaper shows the current buoyant bull market entering the second longest advancing period since World War II (see chart below).

Source: Financial Times

There will never be a shortage of concerns or bad things occurring in a world of 7.4 billion people, but the Energizer bunny U.S. economy has proven resilient. Our economy is entering its seventh consecutive year of expansion, and as I recently pointed out the job market keeps plodding along in the right direction – unemployment claims are at a 43-year low (see Spring Has Sprung). Over the last few years, these job gains have come despite corporate profits being challenged by the headwinds of a stronger U.S. dollar (hurts our country’s exports) and tumbling energy profits. Fortunately, the negative factors of the dollar and oil prices have stabilized lately, and these dynamics are in the process of shifting into tailwinds for company earnings. The -5.7% year-to-date decline in the Dollar Index coupled with the recent rebound in oil prices are proof that the economic laws of supply-demand eventually respond to large currency and commodity swings. With the number of rigs drilling for oil down by approximately -80% over the last two years, it comes as no surprise to me that a drop in oil supply has steadied prices.

The volatility in oil prices has been amazing. Energy companies have been reeling as oil prices dropped -76% from a 2014-high of $108 per barrel to a 2016-low of $26 per barrel. Since then, the picture has improved significantly. Crude oil prices are now hovering around $46 per barrel, up +76%.

Energy Bankruptcy & Recessionary Fears Abate

If you take a look at the borrowing costs of high-yield companies in the chart below (Calafia Beach Pundit), you can see that prior spikes in the red line (all high-yield borrowing costs) were correlated with recessions – represented by the gray periods occurring in 2001 and 2008-09. During 2016, you can see from the soaring blue line, investors were factoring in a recession for high-yield energy companies (until the oil price recovery), but the non-energy companies (red-green lines) were not anticipating a recession for the other sectors of the economy. Bottom-line, this chart is telling you the knee-jerk panic of recessionary fears during the January-February period of this year has quickly abated, which helps explain the sharp rebound in stock prices.

After a jittery start to 2016 when economic expectations were for a dying halt, investors have watched stocks recharge their batteries in March and April. There are bound to be more fits and starts in the future, as there always are, but for the time being this Energizer bunny stock market and economy keeps going…and going…and going…

The post Energizer Market… Keeps Going and Going appeared first on ValueWalk.

Is There a Link Between Ethnicity and Economics?

Does ethnicity influence economics? Knowledge@Wharton investigates this issue with Derek Penslar, professor of Israel Studies at Oxford University and also professor of Jewish History at the University of Toronto. He has written a book about the history of the Jewish people and the group’s strong association with commerce, Shylock’s Children: Economics and Jewish Identity in Modern Europe. Penslar argues that there is no monolithic “Jewish economy.” Rather, certain forms of economic behavior persisted throughout the Jewish world that tended to repeat themselves in many situations, enhanced by a sense of unity among Jews from different regions.

An edited transcript of the conversation follows.

Knowledge@Wharton: What do you think of pairing ethnicity with economics and looking at the two together? Because that can be a controversial idea.

Derek Penslar: It can be very controversial. No matter how you approach it, it is sensitive. The fact is that until the 1930s, 1940s, it was very common for scholars, including Jewish scholars who were really embedded in their communities, to write about the relationship between the Jewish religion or Jewish nationality and Jewish economic behavior. Nothing wrong was attributed to it.

Anti-Semites were making outrageous comments about Jewish economic behavior or domination but Jews considered it a completely acceptable thing to do. And then came the horrors of the 1930s, 1940s — Nazism, the Holocaust. And in the wake of that, a lot of the language that had been used to talk about Jews as a kind of an ethnic unit and an economic unit was discredited. It was considered no longer appropriate to talk about Jews that way.

Knowledge@Wharton: Even by Jews?

Derek Penslar: Even by Jews. And so, scholarship on the history of the Jews tended to focus on anything but economics. Religion was okay. Politics was okay. Culture was okay. But economics was taboo. Very few people wrote about economics — and just every now and then. In the last, decade or decade and a half, we now see young scholars two generations removed away from the Holocaust who are beginning to take the subject up again. After all, you can’t understand any kind of group behavior without economics.

“There’s not a monolithic thing called ‘the Jewish economy’ that marches across space and time.”

Knowledge@Wharton: So, enough time has passed it would seem.

Derek Penslar: I think enough time has passed. Although there are people who still are nervous about it because of the way that anti-Semites have made use of economic arguments to demean the Jews.

Knowledge@Wharton: Let’s get into what some of these characteristics or features of the Jewish approach are and how they may differ from other cultures or other countries.

Derek Penslar: There’s not a monolithic thing called “the Jewish economy” that marches across space and time. But there are certain forms of economic behavior or economic culture throughout much of the Jewish world that seem to repeat themselves in many different circumstances.

It’s hard to know how far back to go. But certainly, by the time we get into the later Middle Ages up through early modern times — 20th Century — the most important thing really is this one sentence, which is that Jews throughout most of history have not been peasants or aristocrats. Throughout most of human history, most people, until recently, were peasants. They worked the land. They often couldn’t leave the land. And that doesn’t encourage economic innovation. It doesn’t encourage literacy. It doesn’t encourage numeracy. It doesn’t encourage entrepreneurship. And aristocrats are lords of the land. And they tended to be a warrior elite. And that also does not encourage innovation.

So, who innovates in a society? The middle classes, the townspeople, the bourgeois or the burghers. Well, Jews have been for millennia primarily a people of townsmen. It might be a small town; it might be a large one. And they’ve worked in a mixture of crafts but also in commerce. When people are doing that generation after generation, they develop certain comparative advantages, whether it’s literacy or numeracy. And let’s not forget the fact that Jews are connected with each other across space. The Jew in one town in Poland has Jewish distant family from another part of Poland or from somewhere in Germany and so on.

Knowledge@Wharton: But the Israeli economy has changed a lot over the last 30 years. It’s gone from largely taking a socialistic approach to the economy to a much more capitalistic approach. Can you talk about that change and how it came about, why it came about?

Derek Penslar: The Jewish world in Central Eastern Europe primarily was just overwhelmed by the possibility of revolution in the 19th Century. Capitalist revolution, transformation of economic relations, but also socialism, Communism, various movements on the left, and national movements. Zionism is, after all, a classic form of Jewish nationalism.

“Scholarship on the history of the Jews tended to focus on anything but economics. Religion was okay. Politics was okay. Culture was okay. But economics was taboo.”

We’re caught up with this idea of a revolutionary change in the Jewish people. So, Zionism, when it realized itself in the [formation of the] state of Israel in 1948, was very strongly dominated by — I wouldn’t say a socialist ideology as such, but one that had socialist elements where the state played a very major role in the development of the country and in the promotion of the nation. There was a lot of state-owned industry. There were severe limits on wages. So, for example, wage differentials between workers and say, physicians or professors, in the early state of Israel were quite minimal. There was this egalitarian ethos, not socialism per se, but social democracy.

And that was one kind of Jewish economy in that it was influenced by the very strong role Jews had played in the revolutionary movements in the early 20th Century. But that was Israel of one era –1950s, 1960s. It already began to loosen up in the 1970s and the 1980s. Israel becomes an industrial powerhouse, manufacturing textiles, developing medical technology [and others.] It was no longer making money selling oranges and grapefruit alone. There was a lot more to the Israeli economy. And then comes the privatization wave that began in the 1980s and has really continued to this day. State-owned industries are sold off and there’s a neo-liberal economy where Israel is now one of the world centers for investment from abroad and of economic innovation.

Knowledge@Wharton: It’s seen as a world center for high tech innovation in particular, but also of all kinds of innovation. … I’m wondering to what extent the military in Israel has played a role in that development of high tech. How closely related are those two?

Derek Penslar: They’re very closely related [as] they are in pretty much any country. Take aerospace. It was developed in California in the United States from World War II on. … The internet came, after all, out of the U.S. military. So, that kind of connection is not unique to Israel.

The difference is that the United States has this massive economy. As big as the military is in the U.S., there’s also an enormous consumer-driven, business-driven economy. Israel’s a smaller country with a smaller economy

A couple weeks ago, Tadas Viskanta of Abnormal Returns ran a series of links to posts he described as “criminally overlooked.”  It was a great idea as it gave new life to older posts that may have been overlooked at the time they were written, but that still have much to offer to a new audience or second-time readers.

Lombard Street:  A Description of the Money Market

Written in 1873 by British financier and writer, Walter Bagehot, Lombard Street offers timeless insights into the role of banking and finance in modern commerce.  It is unfortunate that the book was not more often revisited during and after the financial crisis in 2008 because the lessons the book teaches would have been very useful.

Here’s Bagehot on credit:

“Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone:  but what we have requires no proof.”

On stockbrokers:

“The natural effect of this state of things was that a crowd of projectors, ingenious and absurd, honest and knavish, employed themselves in devising new schemes for the employment of redundant capital.  It was about the year 1688 that the word stockjobber was first heard in London.”

And, finally, on the futility of bailouts:

“If the banks are bad, they will certainly continue bad and will probably become worse if the Government sustains and encourages them.  The cardinal maxim is, that any aid to a present bad Bank is the surest mode of preventing the establishment of a future good Bank.”

Fifty Years in Wall Street

Originally published in 1908, Fifty Years in Wall Street is a collection of the wisdom and experiences of Henry Clews who, in the mid-19th century, emigrated from England to the United States to work in finance.  Over his career, Clews was instrumental in many landmark events, among them helping to sell government bonds to finance the Civil War, and also as an adviser to President Grant.  Clews also had front-row seats to many of the booms and busts that seem to have characterized the post-war United States.

Here’s Clews on the economic necessity of recessions:

“These periods of the breaking-down of unsound enterprises and of the weeding out of insolvent debtors and of liquidation of bad debts can be never be wholly averted, nor is it desirable that they should, for they are essential to the maintenance of a sound and wholesome condition of business.”

On the importance of bank lending during a financial crisis:

“In every panic very much depends upon the the prudence and self-control of the money lenders.  If they lose their heads and indiscriminately refuse to lend, or lend only to the few unquestionably strong borrowers, the worst forms of panic ensue; if they accommodate to their fullest ability the larger and reasonably safe class of borrowers, then the latter may be relied upon to protect those whom the banks reject, and thus the mischief may be kept within legitimate bounds.  Everything depends upon rashness behind held in check by an assurance that deserving debtors will be protected.  This is tantamount to saying that all depends on the calmness and wisdom of the banks.”

The Seven Fat Years:  And How to Do It Again 

Written in 1992 by former Wall Street Journal editor, the late Robert Bartley, The Seven Fat Years is dated in its specific examples, but not in its wisdom.  Similar to Wanniski (the two were close friends), Bartley ascribes the economic success of the economy and the stock market during the 1980s to a return to classical economic policy such as a reduced tax burden, a focus on taming inflation, and reducing the regulatory burden on the economy.  The topics on which Mr. Bartley touched were many, but they still have application today.

Here’s Bartley on the role of floating exchange rates on stock market and economic volatility, which seems relevant today:

“Just as Irving Fisher conceived an inflation premium as part of the interest rate, in today’s world I suspect there is an exchange-rate premium as well, incorporating the risks of a floating dollar in an integrated world economy…The biggest cost, though, is the rise of protectionism around the world.  When exchange-rate swings can open and close factories, companies and their workers naturally look for ways to insulate themselves from these seemingly arbitrary shocks.  Import protection, as well as ‘beggar-thy-neighbor’ devaluations, were hallmarks of the Great Depression, also singularly an international event.  World trade imploded, and prosperity with it.”

And on the cost-of-capital effect of debt subsidization:

“The leverage preoccupation has not, however, led to any serious attempts to level the playing field between how equity is taxed and how debt is taxed.  Bonds, whether junk or investment grade, have an important advantage over stocks.  Under the U.S. tax code, corporations can deduct interest paid to bondholders before calculating the corporate tax, but dividends paid to shareholders are not deductible…It does mean that debt is a cheaper source of capital than equity, a point to be pondered every time you hear talk about ‘excessive debt.'”

The Way the World Works 

Written in 1978 by former Wall Street Journal writer, Jude Wanniski, The Way the World Worksis considered by many to be the gospel of supply-side economics which became prevalent during the Reagan Administration and is credited with bringing about a return to economic growth after the stagflation of the 1970s.  The ideas presented in the book are not revolutionary; in many ways, The Way the World Works is simply a recasting of classical economic ideas such as Say’s Law, the gold standard, the importance of capital formation, and the primacy of the entrepreneur in economic growth.

Here’s Wanniski on the various forms of capital:

“Capital is the wealth available to the global electorate for the production of goods and services.  Capital exists in two forms, physical and intellectual.  Physical capital includes all of the planet’s natural resources, animal, vegetable and mineral, including the bone and sinew of mankind.  This form of capital is fixed, broadly speaking, in the sense that matter cannot be created or destroyed…[I]ntellectual capital is…for all practical purposes of limitless potential.  Intellectual capital arranges the fixed capital stock in a way that produces net benefits to the global electorate.”

On the stock market as the collective wisdom of countless individuals:

“The market is the most accurately programmed computer on the planet, the closest expression of the mind of the electorate itself.  It places a value on each company within it, based on its calculation of that company’s future income streams.”

And, finally, on why economic models are worthless:

“Why is it that economics can build elegant, mathematical edifices atop a foundation of illusion?  The simple answer is that they examine the world a piece at a time in trying to fathom how it works when

FOMC Interest Rates and Their Impact on the US Economy: Part 2

Introduction

To me, interest rates and their future direction seems to be obsessively discussed and debated by many investors.  So much so, that I often get the impression that many investors believe that interest rates coupled with Federal Reserve policy are the primary drivers of our economy.  From my perspective, interest rates and Federal Reserve monetary policy are contributing factors to economic growth and stability.  However, I would stop short of considering them of primary importance.

The Most Important Factors of Economic Strength

The true strength of an economy is fundamentally related to its capacity to produce sufficient goods and services in order to meet the needs and wants of its people.  Strong economies are highly productive, and production is the true source of wealth.  In order for an economy to be productive it must possess the resources required to produce goods and services.  In economic terms these are referred to as factors of production.  Under modern economic theory there are four factors of production, they are land, labor, capital and entrepreneurship.

Importantly, the reader should notice that money is not included in that list.  Money is simply a medium of exchange, and as such, it has no intrinsic value in its own right.  Its only value comes from the product (goods and services) that buyers or sellers are willing to accept in exchange for the goods and services they want or are offering.  There is an excellent series on the Federal Reserve Bank of St. Louis website titled “Economic Lowdown Podcast Series” that I highly recommend to readers interested in learning more about how the economy works.  Here’s an excerpt from Episode 2-Factors of Production:

“You will notice that I did not include money as a factor of production. You might ask, isn’t money a type of capital? Money is not capital as economists define capital because it is not a productive resource. While money can be used to buy capital, it is the capital good (things such as machinery and tools) that is used to produce goods and services. When was the last time you saw a carpenter pounding a nail with a five dollar bill or a warehouse foreman lifting a pallet with a 20 dollar bill? Money merely facilitates trade, but it is not in itself a productive resource.”

At this point, the reader might ask what is my point?  This is a good question that deserves a rational response.  My point is that the Federal Reserve’s role and/or mandate deal with the supply of money as a method to maintain economic stability.  In this sense, it is attempting to control the medium of exchange called money; however, money does not directly produce anything.  Instead, it is the vehicle that allows us to divide and share the productivity that our economy produces.  The role of the Federal Reserve was described in Episode 14 of the series cited above titled “Getting Real about Interest Rates” as follows:

“In the United States, the Federal Reserve System has been charged by Congress to maintain price stability and maximum employment. Price stability means a low and stable inflation rate, and the Fed uses monetary policy to achieve this goal.”

“More specifically, the Fed’s goal is to maintain a 2 percent inflation rate over the longer run.

Savers, borrowers, and lenders all benefit when inflation remains low and stable—they can conduct their transactions without having to consider whether a high or rapidly changing inflation rate might impact their finances in real terms.”

However, the reader should also understand that changes in interest rate policy by the Federal Reserve are not analogous to flipping a switch.  The truth is that changes in Federal Reserve policy take time to have an effect or impact on the economy or inflation.  According to a report titled “How does monetary policy affect the US economy?” on the website of the Federal Reserve Bank of San Francisco they had this to say:

“HOW LONG DOES IT TAKE A POLICY ACTION TO AFFECT THE ECONOMY AND INFLATION?

It can take a fairly long time for a monetary policy action to affect the economy and inflation. And the lags can vary a lot, too. For example, the major effects on output can take anywhere from three months to two years. And the effects on inflation tend to involve even longer lags, perhaps one to three years, or more.”

Episode 9 of the series on Economic Education in this article is titled “Functions of Money” found here.

I believe it’s worth a read for anyone that wants to understand more about interest rates and their relationship to the economy.  However, the primary point that I am attempting to get across regarding interest rates is that they affect the money supply more than they do the economy.  On the other hand, this can have a positive or negative long-term effect on the economy relative to the willingness of people to make purchases.

This is why I referred to interest rates as a contributing factor rather than a driver of economic growth.  Furthermore, the effects that changes in interest rates and/or monetary policy have are never immediate as pointed out above.  Therefore, I’m not suggesting that interest rates are not important.  Instead, I’m simply trying to offer a rational perspective of the role that interest rates and Federal Reserve policy play.

Entrepreneurship (Technological Advances)

When I was initially studying economics in the late 1960s, I was originally taught that there were only three factors of production – land, labor and capital.  Today, as previously stated, entrepreneurship has been added and generally accepted as a fourth factor of production.  I bring this up, because I believe that investors’ attention would be better served by focusing more on what truly drives economic growth and strength rather than obsessing with interest rates and/or what the Federal Reserve might do at the next FOMC meeting.

Episode 15 of the Economic Education series I have been quoting titled “Economic Growth” discusses the importance of entrepreneurship and technological advancements and their importance and contribution to economic growth and strength.  This is an area that I believe investors should really be paying attention to and thinking about.  Here is an excerpt from this episode:

“But what specific factors lead to economic growth?

Now, let’s connect what we’ve learned about production with what we’ve learned about growth.

For the economy to grow over time, the market could employ more factors of production—more, land, labor, and capital. But, the quantities of these factors are limited, and they need to be balanced. More inputs don’t necessarily translate into more output. Imagine a tiny restaurant with 50 waitresses all clamoring to take your order—not very productive.

The biggest driver of economic gain—the force that sustains long-term economic growth—is technological progress. Technological progress increases labor productivity—that is, it increases how much work can be done in the same amount of time. Technological progress occurs when an innovation becomes widely used. Innovations include things such as new products, scientific discoveries, and improvements to management and work processes. Going back to our restaurant, how could it increase its productivity? Well, it could have better recipes—that is, better recipes for how the chefs prepare the food and how the customers pay for the food.

The money multiplier and velocity of money are two metrics that used to be highly informative measures for economists to monitor a country’s level of economic growth.

Goldman Sachs’ Favorite Books List – Options/Derivatives

The velocity of money or income velocity of money is the frequency at which the average unit of currency is used to purchase newly domestic produced goods and services. The money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money. As the central bank prints money, the money multiplier measures how much broader money aggregates change while the velocity of money relates money aggregates to overall economic activity.

Criminally Overlooked Books on Finance and Economics

In theory, these two economic concepts should be highly relevant to today’s monetary policy environment. In the years before the financial crisis, monetary policy became all about changes in interest rates and broader financial conditions, but since we’ve entered the new era of QE, the money multiplier and velocity of money should have become key concepts used by economists to monitor changes in the money supply.

The changing face of economics

According to Bank of America Merrill Lynch’s Global Economist Michael S. Hanson, the two money measures don’t really have much to say about the world’s current monetary policy.

Dark Side Of IRR – Leverage, Wealth Destruction

Research note sent out to clients today, Hanson explains that, “in the textbooks, a drop in the money multiplier is typically seen as a bad sign: either households are hoarding cash (and not depositing it into banks) or banks are not lending (and thus not “multiplying” the notional amount of deposits among them).” However, in the real world, this economic theory isn’t playing out as expected. While the money multiplier (ratio of M1 (currency plus demand deposits and other checking accounts) to the monetary base (currency in circulation plus bank reserves)) has dropped since 2009, growth rates for M1 have been positive. Hanson believes the drop in the multiplier can be blamed on central bank QE programs:

“Whenever a central bank engaged in asset purchases, the money multiplier declined. That dynamic reflects the fact that increases in bank reserves were a consequence of central banks’ asset purchases rather than a policy objective themselves.”

“Put another way, QE programs are really misnamed: the central bank’s goal is not to increase the money supply in the hope that banks will lend more. And banks don’t base their lending decisions on how many reserves they have. Rather, both are looking at interest rates: banks look at the expected rate of return on a loan relative to holding other yield-bearing assets, and make a lending decision based on that comparison. Central banks buy assets in order to bring down yields more generally to entice borrowers — and to make it less enticing for banks and other lenders to just tie up funds in safe, low-yielding assets instead of lending to help expand private activity.”

The velocity of money is also falling, although rather than this being an adverse economic signal, it should be interpreted as a misleading data point. Innovations like automatic teller machines and cashless transactions reduce the average amount of cash a consumer needs to hold. Furthermore, liberalised capital markets are helping connect investors with companies that need capital. So, more transactions are financed for any given amount of money in circulation, regardless of central bank policy.

The world of economics is changing rapidly, and it seems as if economists are struggling to keep up with the new standard.

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6 Things Your Harvard Economics Textbook Won’t Tell You

If you are taking Econ 101 this fall, you will likely encounter Principles of Economics , Gregory Mankiw’s best-selling college text, now in its 7th edition. Professor Mankiw is the Chair of the Department of Economics at Harvard University, and he served as chairman of the Council of Economic Advisers under President George W. Bush.

Economics is fundamentally the study of human behavior whenever choice is involved. The book is a dramatic improvement over many previous best sellers, such as Paul Samuelson’s textbook (for decades, it predicted Soviet production would exceed the US). Mankiw provides a solid presentation of technical topics to prepare students for future study. However, it is weak in an area where it should be strongest: foundational principles that constitute the very core of the economic way of thinking.

The omission of these six essential concepts does real disservice to students hoping to make better economic decisions.

1. Only individuals choose, and only individuals act.

Professor Mankiw introduces economics as “the study of how society manages its scarce resources.” This definition treats economics as the science of engineering collectivist solutions to technical resource allocation problems. In doing so, he leaves out much of what makes the study of economics so rich.

Economics is fundamentally the study of human behavior whenever choice is involved. Only individual people make decisions, and only individual people act on those decisions. In bypassing the underlying principle that economics is rooted in individual choice, the Mankiw text misses an opportunity to make the study of economics personally relevant to students. Few students will go on to plot another demand curve, but everyone benefits from having a toolkit for making better decisions in business, politics, and life. Economics is especially valuable when taught as a set of tools for better understanding the choices real people face and the decisions they make.

2. Economic value is subjective.

What’s more valuable: College football tickets or a textbook? An undergraduate student in Cambridge might have little interest in football and prefer spending money on an economics principles textbook so she can pass her class. I prefer spending money on tickets to The Game this fall for a novel experience. The economic resources we value are only valuable to us as part of our plan to satisfy some goal relative to available alternatives. In short, value is in the eye of the beholder.

Or, in other words, economic value is subjective . Unfortunately, the Mankiw text does not provide any explanation of economic value. Instead, it immediately jumps to treating economics as a resource allocation problem to be solved by smart economists.

Mankiw is careful to explain that economists may disagree about how resources should be distributed, but he entirely ignores the notion that resources only have value to a person based on his or her unique thoughts and plans at a point of time amidst ever-changing circumstance. One can see how students might think economics is indeed the “dismal science” when the most human components are omitted.

3. Knowledge Problem

No person or group of people can possibly have sufficient knowledge to make a pencil, much less plan the actions of millions of people; each with their own unique, subjective valuations of resources in a world that is constantly changing. The knowledge of the resources most urgently needed to meet the needs of people is dispersed in tiny, localized bits throughout an economy. This knowledge is always and constantly changing in response to changing circumstances.

Nobel laureate F.A. Hayek emphasized how it is quite literally impossible for a central authority to collect, aggregate, and use this kind of situational knowledge to effectively plan and engineer society. One of the first lessons for a student studying the social sciences should be to differentiate actual knowledge from what Hayek called the mere pretense of knowledge . The practical advantages that stem from genuine humility in acknowledging the limits of human reason is a beautiful insight .

Sadly, this insight does not once appear in the Principles of Economics text.

4. The Seen and Unseen

Good economists must look at both the seen and the unseen . People are keen to notice results that are easily seen. When a government stimulus program creates a job, we see a man and his shovel. Fewer people ever become aware of the unseen effects of such policies. As resources are diverted to government programs, alternative wealth-creating jobs never come into existence. Policies not only produce immediate, direct impacts on identifiable groups but also have long-term effects on less visible groups.

French economist Frédéric Bastiat taught one of the simplest yet most profound lessons in all of economics: Good economists must look at both the seen and the unseen . You may think this all sounds obvious, but the persistence of popular arguments for everything from $15 minimum wage, to welfare state policies, to government stimulus suggests otherwise. Henry Hazlitt thought Bastiat’s insight was so important for combating popular economic fallacies he made it the central theme of his book, Economics in One Lesson . Unfortunately, this lesson remains unseen in the Harvard text.

5. Entrepreneurship

The real world is dynamic and changing. Not mentioned once in this 880-page introduction to the principles of economics are the words “entrepreneurship” or “entrepreneur”. Economic value creation is a process, and the entrepreneur plays a key role in this process. Entrepreneurs create wealth by moving resources into more productive uses. They do this by innovating new products or processes to replace old ones and by discovering unnoticed opportunities to profit and acting on those opportunities.

Channeling Israel Kirzner’s conception of entrepreneurship Steven Horwitz explains , “Entrepreneurship is about seeing possibilities not given by the data. It is the act of seeing a new means-ends framework rather than optimizing based on a given one.” The real world is dynamic and changing. Regrettably, there is no room for explaining the role of entrepreneurial value creation in a textbook that treats existing wealth as a given and points to allocation and distribution as economists’ primary concerns.

6. Government actors are not angels.

Entire sections of Mankiw’s text are devoted to explaining market failure. He is quick to offer how governments can theoretically improve market outcomes. Mankiw explains, “…tension between market success and market failure is central in microeconomics.” Additionally, Professor Mankiw peppers anti-market sentiments throughout the text with comments such as, “…asymmetric information gives us new reason to be wary of markets.”

However, there is little more than a brief paragraph in the first chapter that warns about the possibility of government failure. Government intervention in the market often makes things worse than before; where the cure is somehow worse than the disease . James Buchanan, Gordon Tullock, and others have taught us to analyze politics without romance by using the economic lens to observe how public policy works in the real world.This useful framework for future policy advisers is absent from Mankiw’s college textbook.

Beyond Ivy League Education

Mark Twain once quipped, “It ain’t what you don’t know

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‘Economics is for everyone’, argues legendary economist Ha-Joon Chang in our latest mind-blowing RSA Animate. This is the video economists don’t want you to see! Chang explains why every single person can and SHOULD get their head around basic economics. He pulls back the curtain on the often mystifying language of derivatives and quantitative easing, and explains how easily economic myths and assumptions become gospel. Arm yourself with some facts, and get involved in discussions about the fundamentals that underpin our day-to-day lives.

RSA Animate: Economics Is For Everyone!

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And The Nobel Prize In Economics Should Go To…

The Nobel Prize in Economics will be announced, for 2016, this Monday. Economists during this season get giddy with predicting who will, and in opining on who should, win. Despite my conviction that the Nobel Prize in Economic Science is every bit as legitimate and justly respected as is any other Nobel Prize (even though it’s not one of the original Prizes established by Alfred Nobel himself), over the past eight or so years my interest in the Prize has diminished. This fact is due chiefly to the Nobel committee’s inexplicable failure to award the Prize to the late Armen Alchian and to my late colleague Gordon Tullock before each died having lived well into his 90s.

Nobel Prize

Two of the most creative, productive, and finest economists of the last century failed to receive the premier prize for economists.Both Alchian and Tullock were among the most creative, productive, and finest economists of the past century – indeed, of the past two centuries. Each of these men forgot more economics than at least one fifth of the Nobel laureate economists ever knew. And yet neither Alchian nor Tullock was awarded what has become the premier prize for economists.

Still, the Nobel for economists retains much significance. My emeritus colleague Vernon Smith (’02) and my late colleague Jim Buchanan (’86) were indeed worthy recipients. Of course, I believe that the same is true for Hayek. And for Friedman. And for Coase and Becker and Stigler and North and Ostrom and Williamson and Schultz and Schelling and Hicks and Modigliani and Arrow and, yes, Samuelson – and, indeed, for a number of other recipients. But I still am unable to get my head around the fact that Alchian and Tullock each was denied this Prize. It’s inexplicable. And this failure diminishes, for me at least, the luster of the Nobel in economics.

So here’s my wish: I hope, sincerely, that the 2016 Nobel Prize in Economic Science is awarded to Harold Demsetz. No living economist who is without the Prize is more worthy than Demsetz to receive it. And – at most, and all things considered – only a small handful (Baumol, Bhagwati, Harberger, Higgs, Kirzner, McCloskey, Plott, Sowell, and Yeager) are even plausibly as worthy. But among all non-Nobel-laureate living economists, none is more worthy to receive the Prize than is the 86-year-old Demsetz, whose writings on property rights, competition, industrial organization, law, and regulation are unfailingly brilliant and important and, often, downright pioneering.

Again, that is my sincere hope – although, alas, not my prediction.

This first appeared at Cafe Hayek.

Donald J. Boudreaux

Donald Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, a professor of economics and former economics-department chair at George Mason University, and a former FEE president.

This article was originally published on FEE.org. Read the original article.

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Why contract theory won Hart and Holmström the Nobel economics prize

Arnab Bhattacharjee, Heriot-Watt University and Joseph Byrne, Heriot-Watt University

Harvard’s Oliver Hart and Bengt Holmström from the Massachusetts Institute of Technology have won the Nobel Prize for economics for their research into contract theory. Their contributions have helped our understanding of the often conflicting incentives that operate in the contracts that enable cooperation between individuals, between employers and their workers, between governments, and which affect all of our lives.

The Royal Swedish Academy of Sciences, which decides the winners of the economics prize, said the pair had developed:

A comprehensive framework for analysing many diverse issues in contractual design, like performance-based pay for top executives, deductibles and co-pays in insurance, and the privatisation of public-sector activities.

Contract Theory – Risk sharing

Holmström, from Finland, developed research on optimal design of contracts from the perspective of an employer and their arrangements with a worker. This is work in the area of the “principal-agent problem”, where the employer is the principal. Here, there is potentially an issue in designing the best contract since there are competing incentives for the principal and agent, although they would still like to cooperate.

Risk sharing is an important part of this relationship, since workers would rather not have to bear all the uncertainties a firm experiences with variable revenue and profits. Firms would rather pass on some of these risks to workers, such that their costs are aligned with revenue. Holmström developed the informativeness principle, setting out how optimal pay should be linked to performance.

In our post-financial crisis world, we would all probably now agree that we should probably not reward the chief executive of a company with a large bonus for outcomes that are random. Further, career path matters for optimal contracts, for example we should pay different bonuses to younger or older workers, because younger workers can be rewarded with potential promotion in the future.

In the context of insurance contracts, problems can arise because individuals can become more careless after the contract has been agreed. Specifically there may be a conflict of interest between the less-than-moral contract holder or issuer. Indeed, the fact that it is difficult to measure compliance with a contract, and who was responsible for violations, can also present a challenge. Some key contributions in Holmström’s work in these areas were developed in collaboration with Stanford’s Paul Milgrom and Nobel Laureate Jean Tirole.

Contract Theory  – Complete the following…

Hart’s work made substantial progress on so-called incomplete contracts. Not all elements of a contract can be specified. Therefore there is a question about what should happen if an unexpected event occurs which has not been specified in the agreement. This means that decision rights are important. Whoever has the right to make a decision on the unspecified elements of the contract consequently has more bargaining power.

The right to decide allows you to take a bigger reward under certain circumstances and can impact upon incentives. Decision rights can also be seen as an alternative to performance related pay.

Hart’s ideas can be applied to several areas including the relationships between a firm and its suppliers, as well as welfare enhancing approaches to public ownership of schools and hospitals. The lack of specified elements in contracts could encourage greater integration within a production chain and one individual owning the other elements of the chain. For instance, the researcher in a company could have the most unspecified contract. That is to say you won’t know the R&D innovation before you see it, hence it’s inherently unspecified. One solution to this contract problem is to give the researcher decision rights and ownership of the complete production chain.

This was developed in work with Sanford Grossman and John Moore, who were key collaborators of Hart.

Another example of Hart’s ideas is in public sector services and whether the state should own the providers of basic services. The main issue is how to reconcile quality and costs, and the incentives of government and private ownership of these services, since these can represent a trade-off.

Simply put, if cost cuts hurt the quality of service then governments should provide the services. Hart’s work with Andrei Schleifer and Robert Vishny indicates that private contractors’ incentives for cost reduction are typically too strong. Moreover, if competition is ineffective the government should also provide basic services. Hart’s work can be generalised to other fields in the social sciences in which contracts matter.

Contract Theory – Relevance

The Nobel Prize in Economic Sciences was not in the original list of awards included in Alfred Nobel’s 1895 will. It was established in 1968, thanks to a bequest from Sveriges Riksbank as a way to mark the bank’s 300th birthday. Prominent winners have included Friedrich von Hayek, Milton Friedman and John Nash.

The award award tends to reflect the world’s economic preoccupations, rewarding work which sheds light on areas which have demanded, and perhaps confounded, financial and political attention. Last year’s award to Angus Deaton was a nod to his work on consumption, poverty and welfare. Jean Tirole’s 2014 win came on the back of studies into market power and the role of regulation.

Hart and Holmström’s work has made a significant contribution to age old questions and new issues in economics. They can resolve some of the competing incentives in contract design while allowing cooperation. In many ways, their contributions are fundamental to modern ways of thinking in economics, but also have substantial cross-overs with many other areas of society and policy where contracts are very important.

In deciding to award the prize, the Royal Swedish Academy of Sciences have perhaps emphasised the point that the applications of these methods and theories are pervasive, and anyone interested in contracts may benefit from an understanding of the key principles behind their contributions. In some ways, that probably includes almost all members of society and the economy – individual households, workers and firms, the government and multilateral agencies.

Arnab Bhattacharjee, Professor of Economics, Heriot-Watt University and Joseph Byrne, Professor of Economics, Heriot-Watt University

This article was originally published on The Conversation. Read the original article.

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Why Does Mike Rowe Love This Economics Book?

They say that authors are not the best judges of their greatest work. Only the wisdom of time can determine that. This seems especially true of Henry Hazlitt. Seventy years after he wrote Economics in One Lesson , the book is still going strong. Most recently, it was recommended by Mike Rowe:

Spend a few hours every week studying American history, human nature, and economic theory. Start with “ Economics in One Lesson. ” Then try Keynes. Then Hayek. Then Marx. Then Hegel. Develop a worldview that you can articulate as well as defend. Test your theory with people who disagree with you. Debate. Argue. Adjust your philosophy as necessary. Then, when the next election comes around, cast a vote for the candidate whose worldview seems most in line with your own.

Or, don’t. None of the freedoms spelled out in our Constitution were put there so people could cast uninformed ballots out of some misplaced sense of civic duty brought on by a celebrity guilt-trip. The right to assemble, to protest, to speak freely – these rights were included to help assure that the best ideas and the best candidates would emerge from the most transparent process possible.

Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics by Henry Hazlitt

Just last week, I heard Mike speak. He loves the real world – and I can understand his conviction of the sheer fakeness of the world imagined by politicians. Hazlitt shared that same view, and this comes through in the text.

This brings to mind one of the special moments in my life. Before his death in 1993, I sat in the back of a limousine on the way to dinner with Henry Hazlitt and discussed the book. I asked him if he felt pride that his book was still a best seller. He said that he did not, since he didn’t think it was very good. A book he felt genuinely proud of was Foundations of Morality – probably one of his least known works.

Mike Rowe – Pushed Out by the New York Times

Before starting his next job, Hazlitt decided to take a few weeks to write a primer on basic economics. His attitude is understandable when you consider the context in which Lesson was written. For twelve years, he had been writing daily editorials, mostly unsigned, for the New York Times. He was also writing book reviews under his own name for the Sunday paper. He was aware of the ideological conflicts at the paper. There were many partisans for the New Deal. He was not among them. But his status was protected there because of the desire for diversity of opinion.

But as the war was ending, the paper had to make a choice. Powerful elites had gathered to cobble together a post-war planning apparatus that included a world bank and a new system of monetary management. It was the new dollar standard – one not entirely divorced from gold, but the US dollar would be the only currency tied to gold. The rest of the developed world would tie their currencies to the dollar.

Hazlitt knew that it couldn’t work. The US was not in a position to determine the fiscal policies of other nations. They would not feel the discipline that gold would impose and would be incentivized to spend freely without facing downward currency pressure. This would ultimately cause gold outflows from the US as the demand for gold would rise, even as its dollar price was fixed. This would prompt unsustainable gold outflows. The imbalances would cry out for correction and the whole system would collapse.

Mike Rowe – Fired (Sort of)

Hazlitt explained this day after day. But as time went on, it became ever more clear that the Bretton Woods system was a foregone conclusion. The paper would have to adjust. The editor brought Hazlitt in and told him to stop editorializing against it. Hazlitt complied but also began to tidy his desk to prepare his resignation. He left in 1946.

His next job was writing for Newsweek, while also helping Leonard Read get the newly formed Foundation for Economic Education going. He had also become good friends with Ludwig von Mises, and eagerly anticipated serving as his literary champion.

It is doing for us in 2016 what it did for people in 1946: teaching the fundamental truths.But before starting his new job, Hazlitt decided to take a few weeks to write a primer on basic economics. After all, it was what the world needed now. He wrote it in a white heat, putting on paper all the apparatus he carried in his head. He avoided hard theory but jumped straight to the large lesson: economics is about the effects of policies on all groups over the long run, not isolated groups in the short run. He applied it as broadly as possible to all existing political and economic controversies.

Why does a book become a wild best seller? The title. The timing. The clarity of content. The benefit it provides to the reader. There are many reasons, and, for whatever reason, it all came together for Hazlitt in this one book. It would secure his reputation. To his private dismay, it would be the text that would define his legacy.

Since Rowe recommended it, FEE.org has been blowing up with hits and downloads of the book. Good. It is doing for us in 2016 what it did for people in 1946: teaching the fundamental truths. And given the way things are going in this election, which has provided frequent occasions for head-slapping for many months now, it is once again serving its intended purpose.

Economics must be taught anew in every generation. Hazlitt continues to be the world’s teacher.

Bretton Woods is long dead. But this book lives on.

Jeffrey Tucker

Mike Rowe article was originally published on FEE.org. Read the original article.

Mike Rowe

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