The horizon is not so far as we can see, but as far as we can imagine

Category: Economics Page 2 of 85

Why Economists Are Wrong About How Good The Economy Is, And Regular People Are Right

Practically every day I read an economist like Paul Krugman or Brad DeLong talking about how the economy is the best ever, but ordinary people just don’t get it, and must be idiots influenced by propaganda.

Someone’s an idiot on this subject, but it’s not ordinary people.

Mish Shedlock had a good article on medical inflation. Here’s two charts from his article. First, costs:

Second, CPI for medical:

You might be noticing a—slight disconnect. The cost of medical care services (which is what you care about as a patient) are dropping, according to the Bureau Of Labor Services (BLS).

Mish has the extended explanation, and you should read his whole post.

Now, back in 2010 I wrote an article on how inflation statistics are bullshit. One example was automobile costs. Here’s the chart from that.

Yeah. right.

The inflation statistics, at the this point, are complete bullshit. Absolutely worthless in entire categories.

When it comes to how good people feel two things matter: how many people have a job, and how much money they’re making. When economists look at wages, they look at “inflation adjusted wages.”

How much your money buys. So, since the inflation numbers are garbage, the inflation adjusted wages are garbage.

A long time ago Stirling Newberry gave me a rule of thumb, which is that people are fooled in generalities but not in specifics. Which is to say, people know what hurts or feels good in their own lives, though may be completely clueless about the generalities. But when you take a survey asking people how the economy is doing, what you’re really asking is “how does it feel for you and people you know.” The answer is “shitty.”

I’ve personally seen, in Toronto, Canada, foodprices increase at least two-thirds. If I buy the shopping basket I bought for $30 in 2020, it now costs me about $50. A lot of things have doubled in price. Rent is way up for most people.

And when I talk to other people, no matter where in the US or Canada they’re from, I hear the same thing. So I’ve never believed the BS talk about the “best economy ever.”

Back in the 90s, there was a rather good book titled, “Economists are bad for your health.” Economists are clueless. North of 99% of them missed the 2000’s housing and financial bubble, for example. The advice they give on how to run economies is almost always not just bad, but terrible, at least for 96% or so of the population.

The most important requirement to understanding the world is accurate perception. Truth, if you will. If you don’t know the truth, you’re going to draw the wrong conclusions. Economists believe BLS stats, so they’re full of it. Add to that the fact that Economics as a discipline is mostly wrong about almost everything macro, and economists are out to lunch in a very dangerous way.

(Note that I predicted the financial crisis, publicly, in advance and spent years before that writing about the bubbles. All the necessary information was available, if you didn’t think nonsense like markets being self-regulating and housing prices always going up. A correspondent once did a search to find out how many people predicted the crash in advance. He found 39. Where were all the economists, who are supposed to understand the, well, economy?)

Anyway, ordinary people are right. Their wages haven’t increased enough to make up for the increases in key prices. You can skip on a lot of things, but not food and shelter, and skipping on medical services is bad too. As for autos, well, most people need them or they can’t get to work or go shopping.

We have late imperial disconnect: the elites live in a world where everything is great, while ordinary people live in the real world, and it sucks.


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One Relatively Bloodless Way To End The Genocide In Gaza

I’ve mentioned before the possibility of military defeat, but there’s a better way.

Simply have OPEC do another oil embargo to the West and its enablers until the situation is resolved, with a two-state or one state solution and significant restitution. Yeah, the US and Canada produce a surplus, but it’s not enough of a surplus to support all their allies.

And if all OPEC members don’t agree, it really doesn’t matter. Russia, Saudi Arabia, Iran, Iraq and the Gulf States are enough. Since Russia’s already already under various sanctions…

 

That would, of course, require Saudi Arabia and the Gulf States to do more than cry crocodile tears about the Palestinians, and actually do something, which is unlikely. But it’s worth remembering that it is possible and putting it on the table.

Besides, the lion should show its teeth occasionally anyway.


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The Absolute Disaster Of Losing Dollar Privilege

Most of the world’s trade is done in dollars, even for trade that never goes to the US.

Most of the world’s money transfers at some point go thru the western banking system, and quite often an American bank, even if both parties are not in America. This is how the US justified its’ anti-FIFA case: the bribes, though at never point involving any Americans or going to America, at some point went thru a US bank on their way to their target.

Everyone needs (or needed) dollars, and everyone needed the Western banking system. There was no real alternative, and to a large extent there still isn’t.

But that has been changing. Russia (SFPS)  and China (CIPS) built their own interbank messaging and transfer systems to replace the West’s SWIFT. They have started to connect them together. Since the Ukraine war in particular, China and Russia have been encouraging countries to settle trade in local currencies, and oil has been sold in rubles and yuan (previously, with a few rare exceptions it was always in dollars.

This is called dollar privilege. It has disadvantages, but because everyone needs dollars and because a ton of world debt is denominated in dollars and because the interbank transfer system is controlled by the West (SWIFT is actually located in Europe), America has been able to command far more of the world’s resources than it otherwise would have been able to. Of course this is backed up by US and allied military power, and it was possible to create it because after WWII the US was both the greatest military power and the largest industrial power.

Still, while it was definitely abused during the cold war period, and more than once, it was after the collapse of the USSR that America really went wild with sanctions.

But the most important thing about dollar privilege is not the ability to sanction, it’s the ability to settle all debts in dollars, which everyone needs.

What happens when everyone doesn’t need them? What happens when the US actually has to pay, somehow, for what it consumes?

Though losing dollar privilege is second order, downstream from losing industrial and military dominance, and has been moved forward by the abuse (and failure) of the sanctions system, it will still be a massive blow to America. Put simply (and with some exceptions), America will have to live on what it can actually make and grown and what it can trade for with what it makes and grows. Well, and what it can steal with its still strong military.

This will be a massive blow.

It will also be an opportunity of sorts. Dollar privilege let the US command more of the world’s resources than otherwise, but it also made the dollar worth far more than it should have been, and thus increased costs in America. In principle (though hard to do in practice) the US dollar collapse caused by the end of dollar privilege would make American goods and services much cheaper overseas and improve the US terms of trade, allowing more manufacturing in the US.

In principle. In practice, the collapse in ability to command resources is likely to lead to economic collapse, and only a very savvy leadership class will be able to navigate the issue, at least in a timely manner. In the longer run, America is still a continental power and if it doesn’t split up, the country has significant advantages which may allow it to survive and even be moderately prosperous.

But when you see moves by the BRICS to create their own multinational interbanking system, and moves away from the US dollar, understand that what you’re seeing are attempts to end US hegemony; attempts which will have shattering effects on the US economy.


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German Dependence On China

So, the German central banks noted that 29% of German companies import essential parts and materials from China.

Multiple industries. Germany, much like the US, but even more so, let China pick up, among other things, much of the tool making industry, especially those related to auto manufacture.

 

Ouch.

When you consider this is an absolute terms and not relative, it’s even worse.

This comes on top of anti-Russia sanctions and the sabotage of the Nord Stream pipelines cutting off Germany’s access to cheap energy.

Germany is a relatively small country without a lot of natural resources. To be wealthy it needs to produce high value goods, and to do that it needs inexpensive inputs for its industries, or it needs to have much higher industrial productivity than everyone else.

Outsourcing so much of the supply chain for its manufacturers was an understandable mistake: it made those inputs cheaper.

But if you’re a small country without a lot of resources, you have to keep your supply chains and trading relationships stable. German leaders at the start of the Ukraine war expressed the most doubts about massive sanctions and they were right.

Germany is, as predicted at the time, in real trouble. Their model had flaws, and was a mean one, impoverishing and de-industrializing other EU nations, so there’s a certain irony to EU consensus Russia policy now screwing them over, but at this point if Germany goes down it’ll take the entire EU’s economy with it.

Germany cannot afford to follow the US into a cold trade war with China.

Moreover, this is a demonstration of something simple: what is good for Western EU countries and what most Eastern EU countries want (anti-Russia policies and NATO expansion) are two different things. Germany needs good relations with cheap resource suppliers and the only practical one was Russia.

It’s all very well to say, as many have, that this is the price of standing up for “freedom”, but if Germany goes down, so does the EU.

Likewise, what is “good” for the US, is not good for most European countries, and especially not good for Germany. (Ironically, Macron is the only major EU leader to be honest about this.)

The EU, if it continues on this course, will be reduced to an even weaker American satrapy than it was is the cold war period, and one with a lot worse living conditions.

China’s moving up the value chain. Sanctions against China, rather than slowing this down are speeding it up. Correct industrial policy would have been to negotiate with China about what industries or segments of industry each country is going to specialize in.

Incorrect policy is to have a cold war against both your cheapest energy supplier and the country that is now the world’s manufacturing floor.

Damn near suicidal policy, in fact.

Europeans need to get thru their heads that the European/American near monopoly on tech and high productivity is broken and that Europe, in particular, is coasting on legacy industry, without a great number of natural advantages. It was a backwater for most of history, and is reverting. The job of European leaders is to keep that reversion from happening for as long as possible and to slow down whatever reversion occurs.

Now, it could be that full commitment to a “US and Europe+Anglo countries” trade block, with full re-shoring would be a viable policy, if aggressively pursued, but that’s not what’s happening, the US is, instead, taking advantage of EU and German weakness to grab up high energy cost industries.

As for Europe’s elites, they should remember that owning overseas resources is dangerous. Britain’s “hidden empire” — its overseas investments, was a huge part of its strength, and essentially liquidated in WWI. Germany’s chemical patents and electrical patents were broken by the Allies in WWI and they didn’t reinstate them after the war was over.

Anything you own in another country doesn’t really belong to you unless you have the troops and willingness to occupy that country and the ability to then administer the country.

Germany in specific, and Europe in general, if they don’t change their policies and their commitment to being American satrapies, are on the path to ruin.

(Oh, and as I said at the time, most of the Eastern European countries should never have been let into either NATO or the EU. They offer little but vulnerability; are economic soaks, and have interests contrary to those of Western European countries. The only way they could have been absorbed effectively was if the EU decided to become a real federal nation with former countries reduced to provinces at most, and in most cases divided into multiple provinces.)


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Money Is Not Wealth

Money is something you can (sometimes) exchange for wealth, but it’s not wealth itself.

When I say sometimes I mean that there are things you can’t buy: what those things are change from place to place and time to time. The classic formulation of the preconditions for capitalism includes the ability to buy land, labor and capital. In most places and times you couldn’t actually hire most people to work–they were bound to the land, their clans, or whatever or they could support themselves and sure didn’t want to work for someone else.

Likewise most land was inherited or in the commons and definitely not for sale. You couldn’t buy it.

Wealth is what you control (not own, control) that can be used to make something, grow something or support violent people.

Violent people are what enable you to retain control, and this is as true now as it was in feudal times or ancient Sumeria. Property law and contracts and taxation and so on are all ultimately backed by the fact that if you don’t obey, unpleasant men with guns will show up and do horrible things to you.

In the dark and middle ages, those with a lot of money had sharp limits on how much power they had. The King of France famously destroyed the Knights Templar to get out of his debts to them and to steal their wealth. Henry the Eighth of England dissolved the monasteries and stole all their lands and wealth. Rich merchants regularly had their noble or royal patrons default on their debts and often wound up dead as a result.

Nor could they buy much in the way of land, or hire too many people. Right up to the middle of the 19th century, the standard pattern for a rich merchant was to either marry their heirs into the nobility or buy a patent of nobility, then get some land, and become a noble and give up most of their mercantile enterprises. These were sharp customers, they did this because they felt it was the only way to be secure and truly take care of their descendants.

In the modern world, when new money is created without an increase in actual productive ability (goods, resources, improvements in land, improved real productivity) wealth hasn’t been created. Wealth is only created by increases in money if there is unused productive capacity and that capacity is being held back by lack of money (i.e. it’s available, but not being used by the people who would use it productively) and that money gets to the people who would use it productively AND those people then get control of those resources and use them productively. (That’s a lot of “ands”.

We’ve been pumping a ton of money into the economy ever since 2008. It mostly, in the West, has not been used to increase production, it has been used either in attempts to gain control of already existing productive resources or to loot said productive resources, burning them to the ground, as with much of private equity. A good example is Toys’R’Us, which was entirely profitable till it was bought and larded up with debt by the buyers.

Money isn’t wealth. Sometimes, in some times and societies, it seems like it, but at best it is a proxy for wealth.


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CEO Honesty About Wanting High Unemployment

I really appreciate CEO developer Tim Gurney’s honesty here:

A lot of people are focusing on the idea that Gurney is a terrible person.

Which he is.

But there are two important facts he makes very clear here. The first is that most bosses like being able to push people around. Money is good, yes, but the real motivation is power and power over other people is what a lot of bosses get off on. Unless you inherited, you rarely get to the top without enjoying making other people do what you want: that’s most of the job of “leaders” and “managers” after all.

The good ones focus on motivating teams in positive ways, but the bad ones, well, they use fear and greed.

The second bit is the honesty about governments trying to increase unemployment. This is something a lot ofpeople won’t believe when a leftist or a Marxist tells them it, but perhaps when a CEO does, they will.

It should be emphasized that this isn’t an “always” situation: for most of the period from 1933-79 US government policy was intended to decrease unemployment. That sub-era of capitalism wanted high wages, in part because everyone’s workers are someone else’s customers. China’s big goal right now is to figure out how to increase wages across the economy, and thus escape the middle income trap. (They’re doing it wrong, because their economy came of age during a global neoliberal age, but they know it’s what they should do.)

But since 79 deliberate policy in most developed countries has been to keep unemployment high to crush wages. That’s how the current capitalism.

This is also a pure example of “job creator” ideology. “We the big bosses create the jobs. All the good things come from us. Without us people wouldn’t have jobs. They should be grateful and obedient and subservient because they are worth something only when being used by us.”

This is specific example of what’s common in almost all eras: the people who have the most power believe that means they are also the best people. “The GodKing makes the rains the flow and the sun rise. All bow to the GodKing.”

From the capitalists come all that is good, therefore government and ordinary people should revere and obey them and do what they say.

So I really do appreciate Tim Gurney’s honesty here: he’s saying the quiet part out loud. He’s not being a hypocrite, like most of his peers. This is who he is and they are. Good for him for being authentic and telling the truth.


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US Chip Sanctions On China Appear To Be Failing Hard

Huawei, the first company to be slapped with sanctions, has announced a phone with 5G capability with domestic 7nm chips.

Huawei Technologies and China’s top chipmaker SMIC have built an advanced 7-nanometer processor to power its latest smartphone, according to a teardown report by analysis firm TechInsights.

Huawei’s Mate 60 Pro is powered by a new Kirin 9000s chip that was made in China by Semiconductor Manufacturing International Corp (SMIC)…

…The processor is the first to utilize SMIC’s most advanced 7nm technology and suggests the Chinese government is making some headway in attempts to build a domestic chip ecosystem, the research firm said…

…Buyers of the phone in China have been posting tear-down videos and sharing speed tests on social media that suggest the Mate 60 Pro is capable of download speeds exceeding those of top line 5G phones.

(Oh, and while it performs better in some ways than the best iPhone or Samsung, it costs about half of what they do.)

When I talked to an expert a couple years ago, he told me it would take many years to really deal with the sanctions because of the difficulty in creating the “tech that creates the tech.”

But that appears to not be true. The West didn’t ban lithography machines until nowish (the Dutch will export them till the end of the year), but…

Shanghai Micro Electronics Equipment (SMEE) is expected to deliver by year-end its proprietary SSA/800-10W, a 28-nm lithography machine, according to a report last week by Chinese newspaper Securities Daily.

This is less advanced than what you can get from the West, and there’s a scaling issue, but the idea that the Chinese won’t catch up is absurd and always has been, and no country can scale faster than the Chinese.

The end result of the chip bans will be that China winds up with the largest chip industry in the world, and I’d bet that in ten to fifteen years (and perhaps sooner, as they keep coming in before forecast) they will be slightly in advance of the West.

Scale matters. The West sent the world’s manufacturing floor to China, and just as when it moved to the US the Americans took the overall tech lead (with Germany the only real competitor at the time), China will take the tech lead.

These sanctions should have been used only a couple years prior to a war. (A war with China would be horrific, and the West is not ready for one, especially right now with the massive equipment and munitions draw down for Ukraine.)

Chinese aren’t stupid, the West is no longer special, having sold its patrimony and the idea that the Chinese were somehow incapable of catching up in tech if sanctioned was always ludicrous.


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The Good & The Bad In The Future of Labor

On this Labor day it seems like a good time to discuss what labor in general and unions in specific have to look forward to.

There’s been some very good labor news recently, for example, the UPS strike:

UPS Teamsters have won their biggest wage boost in decades: at least $7.50 an hour over five years for every current UPSer, and more for the lowest-paid. Even the 1997 strike only boosted part-time wages 50 cents (equivalent to 95 cents today) over five years.

The agreement would also end the forced sixth workday for drivers, create seventy-five hundred new full-time inside jobs, and eliminate the second tier of drivers — reversing the infamous concession in the 2018 contract.

UPS drivers could make as much as $170K in pay and benefits (which sounds better than it is, full time wages are about $120K, but is still good.)

There is also a desperation effect: there has been a lot of inflation, often higher than reported (I’d judge food inflation at the check-out where I live to have been about 66% over the last 3 years and rent inflation c.40% or so.)

A lot of unions have been having successful strikes and many non-union businesses have had to raise wages to attract workers. Anti-worker forces are fighting back, with variable success. In Britain striking is likely to be near-illegal soon, and this is something Labor agrees with the Conservatives on. Laws in some US states allowing younger teenagers to work in food processing plants and so on are also an attempt to break the power of workers.

This power is based on Covid. Covid killed a lot of “essential” workers (with restaurant workers in particular taking it on the chin) and Long Covid has moved a pile more workers off the table and will move more workers over time.

This leaves those who remain in a stronger position: in a market economy without strong pro-worker laws wages are almost entirely based on the supply of workers versus demand. This can be specific, where particular types of skilled workers are short, but for non-skilled workers its mostly aggregate.

From about 1979 Federal Reserve and ECB policy has been to raise interest rates to crush the economy any time workers began to make wage gains, but this time it isn’t working: both because the shortage is real and because the West is, though marginally, trying to decouple from China, meaning China’s mitigating effect on goods inflation is decreased. There aren’t a lot of truly cheap places left where you can easily move production because most remaining cheap places aren’t politically stable and pro-US.

In Europe the news is more mixed because Europe is shedding industry due to anti-Russia sanctions. England, having de-industrialized is now losing its developed nation status.

The pressure on the workforce will continue: Covid is still around, Long Covid and sub-perceptual organ damage will continue to increase and will continue to have an effect on the labour force, not just reducing it from what it would have been, but making a lot of people, while not disabled, less able and worse at their jobs.

There are, of course, things the ruling class can do about this. In Canada we’re bringing in about a half-million new immigrants a year (which has caused a housing crisis), in a nation of 40 million. There’s the child labor law changes and the anti-union laws.

The right is going to make some hay on this, because immigration does increase the work force and thus put downward pressure on wages. If the right were simply to stop being anti-union and anti-worker in other ways, they’d clean up. Up here in Canada, I despise the conservatives, but I have friends who are now homeless because of the housing crisis caused by the Liberals immigration policies.

In the further future, immigration will continue to be the big issue. Climate change refugees will be massive in number and hard to stop (I full expect so many machine-gunning refugees stories by 2035 that it’s “dog bites man.) Elites will want to let enough in to crush local efforts to raise wages.

So we have a window to do the best we can to improve wages. After that, things will become more difficult. Inflation will continue to be an issue (there’s a small chance of deflationary depression) because climate change will lead to real shortages of raw materials, especially food and water.

Of course, if climate change were treated as the emergency it is, there would be a ton of work available, a WWII style mobilization. And that’s the best possible future at this point: a mobilization to deal with climate change properly.

We’ll see if we do, and do it while we still can, before too much civilization collapse.


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