Stagflation coming

 OIL IS UP 10% LAST 5 DAYS    Saudis are blamed but actually there has been a developing dearth of oil in the last 6 months.  The bigger problem is gov’t spending.  Budget deficit for fiscal 2023, ending end of Sept., is $1.74 Trillion= 6.5% of GDP.  That’s the highest percent GDP deficit since WW II.  Reagan presided over 5.9% but that was fighting the 1978-1982 recession.  This one is happening when the economy should be in recovery and unemployment is 3.6%.  There is no justification for such a deficit unless it’s WW III or a Great Depression. Thus fuel will rise from low supply and an inflating dollar.  And when that happens, inflation elsewhere will re-arise, unless we fall into a  nasty recession where no one has money to buy. Because of our fiscal madness that I hardly trust R’s who passed the omnibus porkulus last December along with the dysenterial spending D’s.  It even worries me about Trump and several of the other R’s running.  You can rah-rah a new program all you want but economics and numbers don’t lie. Get ready for stagflation—good to run against politically—but hell to pay when the bill comes due,, and wicked to stop for whoever gets to be President. Are there any real men and women to stand in the gap?

China and rare earth metals

 

RARE EARTH METALS.  I am not an astrophysicist but they rubs elbows with us nuclear physicsts.  And the nuclear reactions of stars tells why we get rare earths and why they are rare and where found. 

            In most normal type-M stars like the sun, hydrogen nuclei (only a proton) undergoes fusion into the element helium (2 protons, 2 neutrons).  Think of the process as the nucleons (protons and neutrons) sticking together and organizing themselves into a more stable configuration.  A proton can change itself into a neutron by spinning off a positron and a weird little particle that doesn’t react with hardly anything called a neutrino. The new neutron is lighter than the proton.  You still can’t account for all  the loss of mass by the positron and neutrino.  The excess loss is energy by mass conversion, E=mc². Forming Helium is the next  and even more stable step.  The result of a 3 part reaction  of 6 total protons in stages then yields a Helium nucleus (2 protons, 2 neutrons) and releases 2 free protons and a huge amount of energy in the way of gamma rays.  The rays smack around a lot of gas ions on the way out of the sun and so emerge as mostly visible light plus a few gammas and X-rays plus infrared and radio waves—all different wavelengths and energies of light.  The helium of the sun is like a bunch of ash left from this process.  The present sun is 20% helium and the rest mostly hydrogen. 

            So what happens when the hydrogen protons are all burned into helium nuclei? The helium-4’s all start smacking into each other and the star becomes a red giant.  Forming carbon-12, 3 Helium’s can become more stable and more energy is shot off.  Then Carbon undergoes a process that makes Oxygen-16. A further process takes O-16 nucleii into Ne-20.  Another takes Ne-20 into MG-24. Then another process takes Mg-24 into Fe-56.  Notice how all the numbers of nucleons is divisible by 4?  It’s like a periodic chart for nuclei where every 4 nucleons forms a more stable group.  Each successive  reaction gives off more gamma ray energy.  But when a star transforms totally into iron, it has arrived at the most stable kind of nucleus.  There are no further reactions.  But the star then condenses rapidly by gravity until the high pressure and density is unstable and it explodes into a supernova.  That ultra high-energy event causes a couple more reactions to take place jumping and jamming more nuclei together, but in less stable groups.  These are the heavy elements above iron in the periodic table and most are rare earth metals. The time for these formative reactions is minuscule as the star collapses to the max.  That’s why there are so few rare earths or the radioactive trans-bismuth elements (like uranium).  Once the explosion blasts out to about the size of the Sun,  temperatures fall to 4 X 10⁹ degrees Kelvin, and all this heavy element formation quickly stops.  The explosion sends the debris of iron and all the heavies out to the heavens and become raw material for new stars.

            When stars form, they start as a ball of gases under gravitational attraction, much of it hydrogen but also a bit of heavier elements,like iron left from supernovae. Mostly iron in fact.  Inner planets form as they capture of hydrogen, oxygen and this heavy stuff.  But the heat of their environment and the new star’s solar wind drive off a lot of the light gases, leaving a rocky planet.  Out farther, there are colder planets forming and the gases remain-- Jupiter, Saturn, Neptune and Uranus.  Gravity and radioactivity made earth hot and molten in the early days, and heavy elements sank towards the center core due to weight. Earth had the rare event of a Mars-sized planet that smacked into it very early when both planets were hot and molten.  The collision spewed out a molten blast of lighter, earth-crust elements (Si, Ca, Al), but the earth left over was heavy with excess iron as its core. (and surface of early earth was super iron-rich too)The moon collected from the explosive debris of lighter molten crust rocks.  Moon rocks look stunningly like very very old greenstone rocks of the Canadian Shield and thus show their common origin with earth. But Moon, has had no magnetic field from early on—no big iron core.  Earth got all the core iron. With circulation of molten iron, this yields a strong magnetic field which repels asteroids and other interplanetary debris.  Hence earth is protected from many collisions, but Moon is not, and has lots of craters to show for it. 

            Now how do we get rare earths out of the core?  Volcanoes often spew circulating molten magma that is 35 miles down from the crust. This cools and hardens in old volcanic dikes and tunnels which finally get exposed by erosion.  This is all the fun stuff like gold and silver and lead. So where would you go to find most of these deposits?  Himalayas. That’s the biggest upheaval mountain range. Hence China has most of the rare earth mines.  Africa is also a source, especially the ancient volcanics of South Africa.  But there are other places. That’s the dilemma of finding and using rare earths for making batteries—you have to deal with China who have made themselves the smelter/refiner of rare earths.  And it takes years to develop this industry. The mining waste is toxic and pollutes.  Lithium, on the other hand, is a light element but found almost exclusively in the Atacoma desert (s. America) which is extraordinarily dry.  Lithium reacts violently with water, so in a wet place it quickly reacts and dissipates into the earth.

        Much of the research into battery technology has gone into trying exotic materials, rare earths.  Batteries are needed for EVs.  Big batteries. If the world begins to use massive numbers of EVs it means the price of rare earths will skyrocket, perhaps as much as 20 X higher.  That would make an EV a rich man's toy and would make the price of all those gadgets and home tools which use batteries prohibitively expensive.  China has gone all over the world with their Belt and Road foreign aid which in turn demands a share of that country's production of any rare earths found.  It's the foreign policy equivalent of "cornering the market" in the commodities business. Of course, some third world country who is so taken advantage of will still be behind, using gasoline and diesel.  It also explains why, if you are a liberal who wants green energy vehicles, you are in bed with China they way the Biden syndicate is.  

How to fix the economy

8 points to raise us back to 4%+ growth per year—by Larry Kudlow

1.     Extend the Trump tax cuts perpetually adds 1+ % per year by giving certainty to business, incentives to do research, bring business home to USA by lower corp taxes.

2.     Or do modified flat tax +2% per year.

3.     20% cuts in discretionary spending adds 1/3%

4.     Open up oil production and drilling to add 2-3M bbls per day adds 1/3%

5.     Put workfare back into welfare benefits.  People find jobs and add to growth. 1/3%

6.     Repeal most Biden regulations that are killing small businesses adds 1%

7.     Reach M2 goals by Fed policy to bring inflation to 2% adds ½% and much certainty to business.

8.     Index capital gains 1/3%

None of this repeals the green stuff directly but by spending and regulation cuts. 

Explaining the economy to kids (or yourself)

 

HERE’S HOW TO EXPLAIN ECONOMICS TO YOUR KIDS

Not hard, here’s a graph

I
I    government revenue ^
I

I                               5

I                             x        6

I                      3                 x

I             2       x  

I            x

I1                                                          4

x-------------------------------------------------x

0       tax rate>                                      100%   

 

We are going to plot various tax rates and see how much government revenue is gotten. Start with an empty plot. Now ief the tax rate is zero how much money does the government get? Where shall I put an ‘x’?  Well it is at zero%, zero revenue, right? But it the rate is raised to a little there’s more revenue and it comes out at 2.  Higher tax rate and it comes out at 3.  Going up! Well, suppose the tax rate is 100%, where do I put my x? Well, that’s confiscation!  Nobody will willingly show any income so they don’t get taxed. We are at point 4, essentially zero revenue.  But the graph, 1,2,3 is going up, yet ends at 4, back down to zero.  That means it must have a peak somewhere and then go down.  Thus we might run an experiment of tax rates going up and start seeing a plot like 5 and 6.  If the government wanted to maximize their money they would tax at rate giving 5.

     This is the research done by Arthur Laffer.  He noticed that the Swedes kept raising and raising rates until the tax system broke down raising less and less with each increase. The maximum of the curve was surprising—at about 20%.  So he came back to USA after doing this analysis in 3 European countries and started looking at our tax rates. We were on the far side of the curve. So he told Reagan to lower tax rates and we’d get more revenue. It didn’t raise more the first year and every Democrat started hooting.  But the 2^nd year and thereafter the government revenue rocketed up to double by his 8^th year in office. And the economy grew like gangbusters. Why was that? Well when government taxes a lot most of it goes into redistribution, “robbing Peter to pay Paul.” But if you tax Peter more, does he have more or less incentive to work harder? Less! He just grumbles about paying so much tax and he looks for ways to work around paying more. And does Paul have more or less incentive to work harder? Less! He is taking it easy. Less work=poorer economy.

     Now another graph.  We are going to plot economic growth and national debt.

 

I

I

I                                      x

I                              x                         Economic growth rate^

4%     x     0  x       x         0         0

I  x            x                      x         x

I

I      x                 x

I

I                                                   x   x

I

I

I                                                             x          1          x

I                                                                          x                         2

1%                                                                                                 x                               3

I                                                                                                                                       x

 I

I
0%----------------------------------------------------------------------------------------------------------------

    National Debt as a % of GDP>  90%                                                                         200%

 

This is something of a scatter plot you would get if you plotted how much each country’s debt was compared to their GDP vs. how much they grow. (sorta schematic) 0’s are USA when the debt was 40%, 60%, then 80% of GDP when Clinton and W. Bush were President. So can you just keep increasing the debt without consequence? 1 is when Obama and now Biden was/is President, 2 is Italy.  3 is Japan. You can easily draw a line through the general trend.  Countries without much debt grow about 3-4% each year. But if the debt is 100% growth declines.  At very high amounts, the country is almost moribund.  Why?  When debt is small, it is no big deal to pay the interest, and the rest of the country grows.  When it gets about 90% of GDP, debt service suctions up most of investment monies. When it goes way bigger, default is near.

      There are arguments about this scatter plot.  Some countries had a bad recession during the time period, others didn’t. Nobody’s debt stays the same. And the reason Japan manages some meager growth? Most of the debt is held by their own citizens, not outsiders.  It’s like savings bonds where people do it for patriotism, not so much gains.  This research was Reinhardt and Rogan, then altered again and again by others who thought better methodology.  What both plots say is that too much taxation and deficit spending leads to dysfunctionality.  Government needs to be limited and stay out of people’s way.  As Reagan said, “Govt is not the answer to the problem, Govt is the problem.”  

Inflation is too much money chasing too few goods.  Suppose the government printed twice as much money.  What would happen? Well it would make everything twice as high in price.  But it takes time for this to happen since the businessman says, Well I made money last year so this year I'll just raise prices a little since my supplies went up just a little.  Eventually things will approximately double in several years. Now if we have too much money, we can't take it back.  What can we do to stop inflation? We could raise interest rates so businesses have a hard time borrowing money they need to make more stuff.  But that still leaves too few goods.  So then what? We could double the amount of goods, but that only comes with economic growth.  We can lower taxes, lower regulations to make it easier to produce things.  That's really the only way to solved inflation.    

Why inflation won't go away soon

MILTON FRIEDMAN published his classic paper on inflation in 1978.  He described 3 prior inflationary go-rounds that only led to higher inflation.  It goes like this.  Government initially inflates due to deficit spending (Vietnam and Great Society) followed by too much money chasing too few goods—inflation.  But the price increases cause consumers (70% of the economy) to cut back. This brings recession (1969,1973).  Politicians get cold feet at the sight of unemployment and overspend again.  This creates more inflation. It’s a cat-rat cycle.  You put a bunch of cats and rats in a cage.  Cats eat the rats and rats gang up on cats and eat the cats.  You get a lot of free skins.  In the case of inflation, govt and the bureaucracy gets the free skins of cheapened currency and lessened burden of debt.  But the people see their standard of living decline, jobs lost, and life savings shrunk.  Businesses see productivity declines, price controls, more regulation to try to curb prices, unions demanding big pay raises and govt demanding onerous taxes.  The whole country declines in malaise. But the bureaucrats find it easier to increase budgets (there is inflation!) and cheap currency means the real cost of national debt lessens.  Politicians say they can’t help further deficit spending because the Fed has raised interest rates and national debt must be serviced at higher interest costs much more. How much pain are the voters willing to take to tame inflation?  This likely drags on for years.

            Solution.  Fed creates tight money to reduce the “too much money” part. New blood in the politicians radically de-regulates business and lowers business taxes to increase the “too few goods”.  Productivity increases.  And it probably has to happen during a recession so that unions are scared to make high demands on wage increases. Meanwhile Reagan & Thatcher realized what many economists did not.  That if you cut taxes, govt actually gets increased revenue in a couple years. People and businesses stop fervently hiding their income from taxes, and actually pay more at the new lower rates. Plus the economy booms and they make more and pay more in taxes in subsequent years. (Laffer’s supply side economics). Caveat: This takes a number of years.

            We are just at the beginning of this long, hard road where Dem pols refuse to believe that deficit spending caused this and fantasize that more deficit spending will actually cure it. They’ve made enemies out of petroleum, gas, and coal, the 3 products necessary to make about 90% of all manufactured goods.  They are trying to remake social order by running off the police, border control, and military recruitment.  One of the great lessons in economics is that businesses die in a kleptocracy, central planning or an anarchy.  And it will take two more years to get Republicans into power.  But will they have the will to enact the solution? 

Democrats explain how bad Republican initiatives on the economy are.

 

Dems critique of Republican economic proposals. 

Well for one thing, R’s don’t have punishments for oil company price gouging.  Has anyone explained how the oil industry works to D’s? Maybe we should try.  Producers, like farmers, produce a certain amount of petroleum and gas. That plus speculators set the market rates.  If God by the weather provides less raw farm commodities or govt by edict reduces drilling, we have less production.  It’s not the farmer’s fault there’s a food shortage or the oil producer’s fault oil is scarce.  Then the crude is refined by refiners who add about 25 cents per gallon to take raw crude to gasoline and diesel. They have little control over what they buy the crude for.  Gas stations sell gasoline for 0-5 cents profit and make their real money when you buy a Slurpie or coffee, which has 200% to 800% markup.  You want chips with that drink?

            Second D bitch (I’m talking gripe, not Pelosi) is that R’s want to defund the police.  Don’t scratch your head, here’s their logic. The IRS is the tax police and R’s want to limit auditing, therefore R’s want to defund the police.

            Third hair-on-fire proposal of R’s is to deregulate and lower taxes on the middle class, which helps small businesses enormously. Trickle Down Economics! the D's say. Here's an example on how the two sides differ. A Dem proposal before Congress right now is to make all businesses report the carbon footprint of those who use their products.  Thus farmers would have to report on the packing house that they sold the steer to, the processor who cut the steak and the consumer who ate it (stop farting!).  Farmers have almost no way to report such things and it would be an onerous bookkeeping requirement. Really what D’s hate about deregulation is that regulation is how govt controls people’s behavior.  Taxes too. Where oh where did the founding fathers come up with this idea that people should live the kind of life they want to live free of government controls?

            Meanwhile the R’s say that inflation is too much money chasing too few goods.  If the govt circulates 40% more money and things produced hardly change, expect 40% inflation over several years.  D’s counter, “You started it! Trump deficit spent $2T in 2020!"  True.  But that was to keep businesses solvent, people paid for lost wages during a pandemic we’ve not seen for 100 years—a national emergency. It had overwhelming bipartisan support. So having survived and swelled the money supply, it was time to step on the brakes in 2021, rather than add another $4T like Biden did. Put it this way.  I drive fast.  But when a corner comes up, I slow down.  Only a fool speeds up by double.

What's happening with European conservatives winning?

 

Liz Truss replaced Johnson in UK and Giorgio Meloni elected in Italy. Both are conservatives stressing family, faith, and free enterprise—the Reagan and Trump Republican values.  This came just a week after the Sweden Democrats, another conservative party, suddenly became the 2^nd largest party in Sweden and a year after Marine Le Pen, a conservative won 41% against Macron.  It’s a strong conservative trend sweeping Europe.  So why are Truss’s fellow British Tories wringing their hands and all over Europe they denounce faith-family-freedom parties as the latest Nazis? 

            Consider Brits first.  London dominates the UK with wages in the metro about $50,000 a year while $30,000 is common elsewhere.  Big international banks do this.  The Reaganomics method of getting USA out of stagflation was to lower regulations and taxes together with Fed tight money.  Tight money makes the dollar strong compared with other currencies, lowering costs of imports, reducing inflation.  De-regulation stimulates business, reducing their burden of compliance costs.  Tax cuts put money in pockets of consumers and businesses.  All 3 boost the supply side (production) of goods and services. Meanwhile tight money (high interest rates), while it fights business borrowing, tames inflation by reducing demand and overindulgence. But bankers hate tight money.  High interst makes them pay depositors more. A strong currency makes it more expensive for foreigners to borrow and harder for them to pay back as their own currency declines in value. The more the govt lowers taxes, the more people have to spend which makes the central bank (Bank of England, BOE) tighten.  What bankers love is for people to keep paying them back and lots of easy money to loan out.  Plus, as corporate lap dogs of the popular culture, they have bought into wokeism, climate change, etc. So when a conservative shows up spouting faith and family and freedom, it sounds like a moral threat. Thus half the Tories distrust Truss.

            The faith part of the equation is tiny in Britain where only 4% of the public goes to church even minimally.  But Italy has 40+% rate, like USA, the most Christian country in Europe. Italy has tons of debt, 150% of GDP, and the other EU countries are choking at her desire to cut taxes.  Italy, as part of EU is like a state in USA. A common euro is their currency. But what if a state cuts all its taxes and deficit spends? This inflates the euro. Worse,it draws businesses and more so with promise of de-regulation. [understand how regulated Europe is.  If you are a hog farmer and want to switch to cattle, you can’t simply do this as in USA. A county planning board will consider your application and maybe ten years later grant you a permit to change your farming.] Horrors! What would happen if French and Spanish companies fled to Italy.  To keep the euro where the EU wants it, a country that has run up debt (Italy) has tax policy somewhat dictated to keep that country from deficit spending (euro stable, they say). No consideration of how much lower taxes will spur the economy is accounted for. Nor is de-regulation. Meloni sees it more like good policy of TX and FL draw people away from CA and NY.  And faith!? Most of Europe is areligious, see themselves as citizens of the world (albeit with unique cultures), want lax borders, and have bought into the pop culture and wokeism.  Hence Meloni is a religious fanatic, a possible fascist and threat to the rest!

            Bottom line: people (voters) want jobs and a good economy.  But the bankers and neighbors want control.    

Productivity produces wealth

 

If one studies conquests and the clash of civilizations it has been popular to label the conquerors as exploiters.  Their morals are condemned and their causes explained to show why (corruption and exploitation) one society is rich and another poor.  But despite the popularity of these exploitation theories, in the actual historical record they are rare.  Usually the mundane reality is that productivity produces wealth. 

            Exploitation theories have condemned European imperialism and colonialism.  But when the Europeans left Africa, instead of the continent becoming richer, the nations there saw national incomes and living standards fall significantly. The same was true when Romans left Britain and when every Chinese dynasty fell.  The overlords brought labor skills and abilities that the natives lacked.   Conversely, slavery, the ultimate exploitation, has never made slave-owning regions more prosperous. This was true comparing the antebellum North with the South in USA.  Northern Brazil with lots of slaves, was poorer than southern Brazil, populated with free Italian, German, and Japanese immigrants. So why do people choose to believe such bunk? Anger is the motivator. The true answer is that there are often great differences in productivity and wealth. It’s easy for the loser or their sympathizer to blame poverty on someone else’s malfeasance. But envy of someone rich is precisely what the last 2 of the 10 Commandments warn Christians against.

            Changes of productivity of the conquered can often be traced to transfers of cultural capital.  The English had laws, banking and improved agriculture that they transferred to the Scots. Henceforth,18^th century Scots had an explosion of prosperity. Western Europeans brought the industrial age to Eastern Europe.  China transferred a great deal to Japan and Korea. The Cowboys married the Oklahoma Indians and today we see Oklahoma rising from a poor state into the middle. Human capital, as it is transferred is often a boon to the lesser developed party, whether they be conquerors like the barbarians who invaded Rome (or the Hebrews who invaded Canaan) or conversely, Germans who brought industry to Brazil and transformed Argentina into an agricultural breadbasket. The Italians have been winemakers from California to Australia, transforming dry pastureland into wealth-giving vineyards.  The dominance of overseas Chinese who pick up ideas and teach production is stunning.  In 1994 the 36 million overseas Chinese had a higher GDP than all of Communist China.

            Perhaps no country has had more success in spreading productivity and culture than USA.  It derives wealth from a free market of goods and ideas of many immigrants. Its notion of Liberty and republican democracy has spread to nearly 70 countries in 200 years. Evidently free men work harder and smarter. John Locke, father of modern psychology, derived six principles from the Bible that he insisted people would thrive under—Liberty, Equality, Tolerance, Natural Law, Separation of Powers, and Rights—especially property rights.  Dinesh D’Sousa is an author and film maker. When he was an Indian exchange student at Dartmouth, said that people would come up to him and say, “Oh, you’re from India. I love India!” And he would say, “What part do you love? That the electricity works only 3 days a week—you just don’t know which days?  Or is it the constant riots between Muslims and Hindus that claim thousands of lives?  Wife burnings? Or is it 400 languages where no one can understand his neighbors unless they use English?”  Dinesh said he never asked if they admired the malnutrition. His dream of coming to America started by watching a socialist propaganda film in India in grade school where the narrator said that USA was a horrid country.  There were lots of food lines.  Indeed the film showed some poor Americans standing in line getting food. Another kid next to Dinesh gave him the elbow and whispered, “They are all FAT! I want to go to a country where even the poor people are FAT.” And so D’Sousa came to America, studied economics and began to understand that a system based on Christian liberty principles is superior.  This then led to the Christian faith and a spiritual walk that he claims has transformed his life. Truly the Holy Spirit will set up circumstances in your life, uniquely aimed at your heart, to bring God’s faith!

I love watching a BBC version of “House Hunters”, "Escape to the Country"—especially when the buyers use slang.  One guy, told a very favorable price, smiled and said, “That certainly put the cat among the pigeons.” Asked why she wanted to move out of London, an expecting  wife said, “I don’t want to be a mum in a flat.” (mother in an apartment)  Another couple wanted a home in the country to run “a holiday let or glamping.” (vacation rental/B&B and glamour camping like Americans do when they own an RV.) When a bedroom is big it is a “double” or small, a “single” and if there is no closet it needs a “bespoke wardrobe” (bespoke=’manufactured’. Means an armoire) 

But why the heck are there no new houses? The answer is what we will enjoy if Democrats take over and tax houses federally.  Building new means a big federal tax. So it is better to convert the barn or chicken house built in 1584. Plus the crown or state often owns the land thus you can’t fully own.  You pay Ground Rent to the queen or an earl or whomever owns the land.  The proclivities of Brits are humorous.  Houses come with ducks--doors only 4 ½ feet tall that even a small woman has to duck for. Many houses have 7 foot ceilings and only 5 or so windows—there was once a tax on number of windows.  All this adds up to a property market when country homes go for a national average of 300,000 pounds ($400,000) for a typical stucco-sided, thatched roof, 'front door opens on the sidewalk or street' abode.  Old houses had a boiler tank that was also hot water tank in the attic (no basements), often open air so rats could die in the water.  Thus faucets come in pairs.  Hot water is not potable, but cold is.  The only amenity is that the garden (yard) is green with their glorious climate.  Brits have little 13” TVs like we used to have and spend a lot of time growing flowers, reading books and driving under 5000 miles a year because they are poor. This and national healthcare that leaves everyone with bad teeth and a waiting list for a gall bladder operations is as the Dems aspire to.

Exploitation rarely explains riches

If one studies conquests and the clash of civilizations it has been popular to label the conquerors as exploiters.  Morals are condemned and causes explained to show why one society is rich and another poor.  But despite the popularity of these exploitation theories, in the actual historical record they are rare.  Usually the mundane reality is that productivity produces wealth. 

            Exploitation theories have condemned European imperialism and colonialism.  But when the Europeans left Africa, instead of becoming richer, the nations there saw national incomes and living standards fall significantly. The same was true when Romans left Britain and when every Chinese dynasty fell.  The overlords brought labor skills and abilities that the natives lacked.   And slavery, the ultimate exploitation, has never made slave-owning regions more prosperous. This was true comparing the North with the South in USA.  Northern Brazil with lots of slaves, was poorer than southern Brazil, populated with free Italian, German, and Japanese immigrants. So why do people choose to believe such bunk? Anger. The true answer is that there are often great differences in productivity and wealth. It’s easy for the loser or their sympathizer to blame poverty on someone else’s malfeasance. But envy of someone who has more is precisely what the last 2 of the 10 Commandments warn Christians against.

            Changes of productivity of the conquered can often be traced to transfers of cultural capital.  The English had laws, banking and improved agriculture that they transferred to the Scots.  Western Europeans brought the industrial age to Eastern Europe.  China transferred a great deal to Japan and Korea. The Cowboys married the Indians and today we see Oklahoma rising from poor state into the middle. Human capital, as it is transferred is often a boon to the lesser developed guys, whether they be conquerors like the barbarians who invaded Rome or the Hebrews who invaded Canaan or conversely, Germans who brought industry to Brazil and transformed Argentina from a wheat importer to a large wheat exporter. In The Italians have been winemakers from California to Australia.  The dominance of overseas Chinese who pick up ideas and teach production is stunning.  In 1994 the 36 million overseas Chinese had a higher GDP than all of Communist China.

            Perhaps no country has had more success in spreading productivity and culture than USA.  It derives wealth from a free market of goods and ideas of many immigrants. Its notion of Liberty and republican democracy has spread to nearly 70 countries in 200 years. Evidently free men work harder and smarter. John Locke, father of modern psychology, derived six principles from the Bible that he insisted people would thrive under—Liberty, Equality, Tolerance, Natural Law, Separation of powers, and Rights—especially property rights.  Dinesh D’Sousa is an author and film maker. When he was an Indian exchange student at Dartmouth, said that people would come up to him and say, “Oh, you’re from India. I love India!” And he would say, “What part do you love? That the electricity works only 3 days a week—you just don’t know which days?  Or is it the constant riots between Muslims and Hindus that claim thousands of lives?  Wife burnings? Or is it 400 languages where no one can understand his neighbors unless they use English?”  Dinesh said he never asked if they admired the malnutrition. His dream of coming to America started by watching a propaganda film in India in grade school where the narrator said that USA was a terrible country.  There were lots of food lines.  Indeed the film showed some poor Americans standing in line getting food. Another kid next to Dinesh gave him the elbow and whispered, “They are all fat! I want to go to a country where even the poor people are fat.” And so D’Sousa came to America, studied economics and began to understand that a system based on Christian liberty principles is superior.  This then led to the Christian faith and walk that he claims has transformed his life. Watch out!  The Holy Spirit will set up circumstances in your life, uniquely aimed at your heart, to bring God’s faith!

Alice in Coronavirusland

 I’ve been watching the coronavirus Covid19 news like everybody but the news coverage has been unreal.  Gloom and doom and we’re all going to die! 5 weeks ago it was indeed quite uncertain and dumb me, thought it might be time to stock our pantry in case a pandemic caused disruption.  Spent $200 at Sams I probably didn’t need to.  But then I learned ‘coronavirus’ is the name for the common cold.  This new strain will be hard on us since no one has immunity, but the body works fast and we survive. Then someone in the media figured out it was a great new opening for the Democrats to attack Trump and so they have been piping this thing like it was Armageddon. (And of course the Prez hasn’t handled it right.) The Republican State Committeman part of me gets frustrated.  The teeth-grinding side of politics is when your opponent sneaks a win by accusing you of something that looks circumstantial or that is not at all true, but by repetition or some other skullduggery, manages to fool some of the people some of the time.  Well, this time they did it big.  When China closed the city of Wuhan and some of the factories and told all the people to quarantine, (That is what a dictatorship does), it was represented as news that this might happen everywhere-- the only hope to save humanity.  Side Effect: it kills the economy! So the stock market plunged in panic.  The media moved in for the kill, spotting things Trump said that weren’t exactly what his experts were saying and proclaiming that, therefore, we had no idea how to solve this.  Then the talking heads called for a “cure”.  Of course with a virus there is no such thing.  And so the Task Force strove to tell us that it was going to get worse before it was going to get better and we’d eventually have vaccine. Don’t get on a cruise.  More panic and more market crash and more glee by the media and D’s trying to take down Trump. USA had 1 million test kits and 8 million would be produced the next week.  But the Dems glomed onto this with Biden and Bernie demanding that everyone in the USA Had a Right to be tested any time they wanted to and people, thinking that they couldn’t even find out if they had it, bought all  the darned toilet  paper and cleaning fluids.  Then some knothead in the NBA was phoo-phooing the coronavirus and swiped his hands over all the mics of the media in a presser.  Luck would have it, next day he tested positive. Sports world went zonkers, cancelled all the fans and then the games and so now ESPN looks like endless sports commentary about coronavirus and poker competitons.  Have we gone bat guano insane?

            Years before I got involved in politics, I was a saver and investor, even though I kept getting in trouble financially and draining my savings.  But you learn skills.  There are times when the market has gone too high with Tulip Mania or worse, a Credit Crisis.  There are a few times when it just panics for no worthy reason, as in 1987 and now.  Makes a comeback easily. So I was watching all last year as stock prices rose thinking there has to be an end at some point.  When the price to earnings ratio gets above 20 that is warning of price too high.  (and when it goes down to 12 then it is BUY BABY BUY!!) January, the average P/E had gone to 19.5, yet US personal savings rate is highest it has been historically and lowest personal debt.  People are in good shape, a total flip from 2007 when everybody was in la-la-land about their houses. They’ve learned a hard lesson. But  if we had a recession, they would be in pretty fair shape. Yesterday the market plunged hideously again, Democrats all joyously cheering the news.  Those devils have no concern whatsoever for your life savings.  They would cheer complete demise of the US economy if they could get into power by it. But now the average P/E is down to 14.  Trump has a new conference today.  He is declaring a National Emergency.  More bad news.  Yet, strangely, the market kept going up.  There is an old saying, ”A market that neglects bad news is destined to go higher.”  I called my broker.

            My broker is my son, a 20-year veteran certified financial planner. He’s been harried by clients full of worry and he came home last night, wife says, you haven’t watched TV for 2 weeks.  So he sat down and tuned CNN and Rachel Madcow.  “I could’ve slit my wrists!” he said.  “It was that gloom and doom, we’re all going to die.” He told about younger brokers worried what to tell their clients.  They haven’t been through this sort of crash.  He had sage words. Prices after a crash are cheap. The deeper you push a beech ball into the water, the more force it wants to rise.  Well, your father is aching to put some of his bond money in stocks, I laughed.  And if the average P/E goes down with another rough day, I’m going to be cagey as a loon to buy stocks.  One gets about one chance per generation to see this sort of idiocy--empty shelves, no sports, market crashing over nothing, daily press conferences--and all because of a new strain of the common cold?  Buy on the cannons!

            Bottom line, it is fulfilling to see your side win politically.  Nice to make money.  But when you have a chance to make a killing off the lunacy of the Dem Fools…

Free Trade?

Has trade ever been free?  I’m serious.  I farmed the first 26 years of my life and read extensively about Ag tariffs.  Seems that Europeans and Japanese (whose farmers aren’t efficient as Americans—no big tractors and large farms—have a lot of people still on the land, hence many voters) get squeamish about lowering Ag tariffs while we beg for it.  In the end, we charge no taxes and they continued to load taxes on.  That ain’t fair!  Taxes on autos are 2.5% incoming into USA.  They are about 25% on average on US cars going to foreign ports. Trump knows this chicanery well and embedded in his tax on aluminum and steel was the proviso that if any other country would simply adjust tariffs down to equal US (level the playing field) they’d be exempt on exporting to us.  Or bring your plants to this country.  Or lower your trade surplus. Exemptions can be had in a variety of ways.

            But here’s the reality.  The Economist, a European mag, has been seething with Trump-hate long before he was elected.  Why?  Many in this country were pointing out that he is more of a moderate than an arch-conservative. Wuropeans should love this!  But they hated him passionately because he spoke about the trade deficit and unfair trade that he vowed to change.  Scared them spitless.  Importing into Uncle Suckerville with no taxes while protecting your own products in Lower Slobovia is the heart of their game. 

            So will Trump create a trade war and sink our economy?  Not likely since trading partners can still get an exemption by simply playing fair. Mexico and Canada may get exemption simply by making some other adjustments.  But don’t trade wars hurt us?  Time for a personal story.  When I went to college in the 60s, you could ask econ profs what caused the Great Depression.  Why did 12 pitiful years happen here but recession was soon over in Europe/Orient.  You couldn’t get a similar answer from any two profs.  That, for a 19-yr-old, was a red flag that adults didn’t know Jack.  But beginning with the Monetarist School of Economics in the 80s, it was proven that the G.D. largely happened because a normal recession was turned into a long-term depression when USA killed off international trade.  Congress passed the Hawley-Smoot tariff that rocketed tariffs from 17% to 68%.  Fast forward to the 1990s when I was teaching elderhostels for OU.  We had a class on the 20s and 30s.  One day I noted the recent proofs that FDR’s tariff caused, not alleviated, the Depression. The class of 70 and 80-aged people, many of whom thought FDR was God, couldn’t believe it!  Even when I invited a guest lecturer from OSU to talk about the evidence, they refused to believe. 

            The short answer: If we quadruple or even double tariffs on All Goods, we risk economic troubles.  But simply demanding fair trade is a much smaller game. And consider, what if Trump wins? Then USA will come out a big winner.  Those R’s who steadfastly defend Free Trade must be reading a different financial report than the ones Trump and I do.  Or they are just standing up for a theoretical free trade while having approved many trade deals which are anything but. They mean to change nothing.  Since I’ve come to appreciate just how entrenched the Swamp is, I suspect this later.

About that growth

  4% growth may be difficult because of what Obama’s Fed has done.  A little history. 

In the 1900 to WW I era, there were 3 very hard recessions.  JP Morgan had to be called upon to be the lender of last resort.  That would be equivalent to the President calling Warren Buffet and saying , “Hey get some of your friends together and we need all your money right now!”  Without such a lender of last resort a major credit collapse would plunge the country into a long, dire recession.  Why the need for LOLR?  Well, you and few of your drilling buddies couldn’t pay their oil patch notes to a local bank in OKC.  Because of this, the OKC bank couldn’t pay a larger note they owed to a big Chicago bank.  The Chicago bank in turn couldn’t pay other mega banks in NYC and the country’s entire credit structure and ability to loan was brought down.  I’m telling the story of the failure of Penn Square Bank of OKC in 1984 that led to the failure of Continental Illinois. But CI was seized by FDIC which gave rise to the expression, “Too big to fail”.  And the Fed, our LOLR gives patch-up loans to that bank you couldn’t pay which went into default itself.  Otherwise, default/bankruptcy brings distrust and no one lends for years--Peru, Poland, Argentina give recent examples.

In the Panic of 1907, Morgan was barely able to be the LOLR.  Panic of 07 still ranks as nearly equal to the Great Depression.  In the wake of this near collapse of our economy for years, Congress established a Federal Reserve as LOLR.  It not only has the power to lend but to manipulate interest rates so that the little guy doesn’t face astronomical “payday loans” rates after a crash.  Recently, Ron Paul and a few others have politicized the issue of the Fed saying we don’t need it.  Auggh! Are you going to call Buffet? However, Trump’s notion of an audit of the Fed is good transparency idea.

The politicians of the 1930s were in the era of Progressivism’s bloom and wanted to do big gov’t things.  John Maynard Keynes, 1936 came along with reasoning that justified their power grab.  Keynes said economically shocked people were too tight, wouldn’t spend and that is why the market wouldn’t restart.  So Government should be the stimulator with big spending that would save us all.  Deficits don’t count.  Gleeful advocates of big gov’t said, “Just stimulate continuously and utopia will occur.”  It did not.  When gov’t piles up debt, it can pay it only with turn-on-the-printing-press money, worthless money, and inflation occurs.  Happened in Weimar Germany, Argentina, Brazil and everywhere else it was tried.  But the dream of jiggering some monetary measures and insuring eternal bliss, lives on among central bankers. 

The Fed has 3 tools to control short term rates—overnight bank loans, discount rates, and Fed Funds rates.  They can make the short term interest rise or fall.  If they make it go way, way down, the economy temporarily blooms as businesses can borrow easily.  But long term rates, like 30 year loans remain high and this yields or reflects inflation.  Plot this.   Plot bonds on a graph of “years to maturity” versus rate, you see short term bonds as low rates and long term loans at the other end of the graph as higher. (Lenders want more return if they lend for a long time versus a short duration when they can get their money back.) If the Fed upsets this normal curve by forcing short term rates way down, the economy booms with inflation but the easy money may go into some asset mania, followed by recession.  On the other hand, if the Fed raises short term rates, so they actually exceed long term rates,( “inverted yield curve”) then money is tight, borrowers can’t borrow and we usually get a recession or slowdown.  So central banks like the Fed, have always been held back from extreme behavior by reality of what investors and businesses see and how they react.  Alas, for the Keynesians, there’s No free lunch.  Inflation occurred during the seventies when the Fed tried to stimulate around the oil shock but then Carter wanted to decrease the value of the dollar to help US trade. The Fed complied.  Then came a bad recession.  Millions of investors (Wall Street) react  when they perceive that a credit crunch is coming if the Fed raises interest. 

In the recession of 2007, housing/real estate was the commodity that collapsed.  Since this is most of the nation’s wealth, it was a bad credit collapse.  Obama and the Keynesians wanted to stimulate colossally.  So they tried something new.  The Fed would buy bonds in the open market, in particular, long-term gov’t bonds. Those who held the bonds would have sudden cash and would have to spend it somewhere else.  Many bought stocks and the stock market soared.  By buying long-term bonds the Fed could now lower long-term interest as well as short.  And the yield curve could be held ‘normal’ by lowering short-term interest as well. For the first time, Fed could control interest entirely, thus the lowest interest rates in history have occurred.

No free lunch--it didn’t stimulate much.   And government debt doubled.  Many held their breath that hyperinflation would occur but it didn’t.  To explain this consider: if government (the Fed) owns a bunch of gov’t (its own) bonds, is it really a debt?   The Fed could just say, “Debt is forgiven. That was just money we owed ourselves.” True, but if this debt has no inflationary effect it won’t stimulate either. Result was pitiful growth.  Thus the economy grew at 1.6% for 8 years.  Now comes Trump who might get tax reform, will surely get regulatory reform, will likely get health care reform.  This will help the economy.  But will it last?  With a huge $4.5T gov’t bonds in the Fed’s account, these have to be either forgiven or sold back into the market. Selling bonds means higher interest implies economic slowdown. That may or may not happen. We don’t have much experience with this.  Often raising rates when rates are under 5% works out without a credit crunch. But not always.  Getting 3% long term growth may be hard for Trump and Fed as they try to undo the damage. 

There’s no such thing as a free lunch.  And central bankers the world over have the foolish prejudice that they can create nirvana by jiggering a few indicators.  In Europe the latest rage is bonds that pay negative interest. Why would you invest in something that takes your money rather than putting the cash in a sock? Like the mortgages in 2006 which were “zero down, interest only” (borrowers didn’t create any equity,) unsustainable things can’t go on for long. The mortgage people just abandoned the houses when they lost jobs.  It was in effect a rental owned by the sucker banker. We enter unknown territory.

Is "New Normal" bad economy permanent

In the 30s John Maynard Keynes, Brit economist, created a big following among the big government advocates.  In his attempt to explain the long recession, he suggested that people were too saving.  They needed to spend more.  Spending causes the economy to grow and all we had to do was to get governments to invigorate spending, not saving.  Gov could call for a lot of infrastructure spending, could soak the saving rich so that Gov had more to spend. And Central Banks could lower interest rates until savings made less sense and free-spending happened more.  This was music to the ears of FDR and other pols who loved the justification of their big Gov plans. And the theory ruled econ for 30 years.

            But Keynesianism wasn’t all it was cracked up to be.  Democrats argued that the economy should be kept in a constant state of stimulation with big Gov spending and low interest rates.  Yet we had just as many recessions as ever, not fewer.  And then in the 70s as Keynesianism grew popular worldwide, it resulted in a huge spasm of inflation.  What was needed, said the Monetarist school of thought, was a consistent money supply, not the erratic fluctuations brought about by booms and busts. Thatcher/Reagan proved that to grow an economy, you need to concentrate on freedoms needed by businessmen, and a stable lendable supply of money.   And so, for 30 years, Monetarism ruled.  The idea of central banking was to stabilize both the supply of money, and balance the savings (supply) and investment (demand) by lowering interest when too many people saved.

            Not all Keynesians are social liberals, but you can see the partnership. To a small biz guy like me, the Economic Freedom of Reagan made a lot more common sense.  Then in March 2000, there came a crash that led to recession in 2001.  When the economy gets stressed, all sorts of theories get promoted.  When times improve, we forget most of them. The Keynesians, out of hegemony, had to have an explanation that things were now permanently bad, Secular Stagnation.  Simply put, Secular Stagnation happens when there are too many savers and Central banks can’t lower interest rates enough to balance against the need for investment.  There is chronic economic weakness; low growth, low inflation, low interest rates and constant threat of recession.   Well maybe the population is getting old and all they want is to save, not invest (spend).  Government needs to start a massive spending plan on such things as infrastructure.  Or maybe there has come an era of income inequality when the rich have all the money and free-spending poor don’t.  Gov should start soaking the rich and redistributing the wealth.  See why this appeals to Obama? And why he had that weird way of talking about government spending as “investment”.  The most pessimistic aspect of secular stagnation is that just because times are good, doesn’t indicate economic health.  There may be booms--bubbles of financial excess from time to time--but the chronic weakness returns after a disastrous bust. 

            So, Trump gets a boom.  Will it end the calamitously as the 2007-2009 housing bust? We will soon see.  If the secular stagnation idea is correct, the Fed will soon (after a recession) be stymied with zero interest and  paltry growth (the “new normal”).  But the businessmen like me and Trump think, we can undo much of the regulations and poor policies of Obamacare and taxes.  Free the people and they will achieve. An economy consists of dozens of factors working on each business multiplied by millions of businesses.  Free the businesses and they will make growth.  So will Economic Freedom win the argument or Secular Stagnation?  It won’t be too many years and we’ll know.  My guess is that the conceit of central bankers thinking they control economies leads to stuff like secular stagnation. 

           

Trumponomics and side effects

International economists are scared stupid over Trump.  In some ways correctly, in some they are blind to the Obamabull we have had the last 8 years which has killed growth.  That’s what they have at home--low growth, much social welfare.

            Yet they rightfully raise many pitfalls.  Trump’s plan is lower taxes, cut regulations, draw corporate money home by less business taxes, protect US manufacturing while reworking trade to our advantage.  Much of this will work, though the protectionism is controversial and if overdone, will cripple US trade.  My hope is that he’ll leave the trade stuff until later.  US growth is suffering from Obama’s over-regulation.  Everything from haze( humidity and dust) in the atmosphere being declared a pollutant, to puddles being called navigable waters, to Obamacare is killing business and raising the prices of what we buy.  Highest corporate taxes in the world and being virtually the only country which tries to reach out and grab taxes of Americans overseas, makes companies flee to other shores and try to re-incorporate in foreign countries.  High personal taxes sap small biz growth which is the main creator of new jobs. 

All this is Reaganesque, and exactly what the internationals fear.  For a strong US economy means growth means higher interest rates.  This draws foreign capital, especially when somebody overseas fears their home politics or markets.  Foreigners with dollar denominated loans get killed when US interest rises and the dollar goes up to boot.  In 1992 this caused a debt crisis among foreign governments who had borrowed in the US to support their deficit spending habits.  It badly hurt Slovenia and places as close as Mexico. The ensuing recession (a lot of it was foreigners defaulting to US banks) spread but was mild in USA.  Bush and Congress intervened to help Latin America.  If this kind of thing develops again, look for foreign governments to invoke capital controls.  That will make our borrowing costs go higher still. Then if interest doubles or triples, federal debt service on all that $20T Obama ran up, will crowd out other spending in the budget. 

Secondly, a high dollar with good US growth means imports get cheaper and our trade deficit gets larger.  But Trump can’t just slap on tariffs the way we could do in the olden days.  Supply chains are sprawled out all over the globe.  An American made car has 75-90% of its parts made elsewhere. Protectionist tariffs mean killed growth in most industries. A battle over exchange rates with China could prove very harmful to the US.  All this is to say the growth might be shorted out, economic instability in some sector (something gets overbought, then crashes) arises and we get recession.

Thirdly, the low tax, low regs boost will likely result in some really wealthy people who play the situation well.  This inequality will just stoke the heck out of the demagoging Democrats.  The key to overcoming this toxic politics is to have more people finding more jobs and better pay overall, new folks re-entering the job market, etc.  That’s what Reagan did in the 80’s and it made the Dems look like crybabies balling about how everybody was making money but them. 

Still, none of this will be easy, especially when you think about how slow the recovery will be.  Businesses won’t instantly close foreign plants and move back to USA.  Businesses will still worry and hedge their bets about future Obamas coming to re-regulate.  Banks will still be nervous about their loans. And Trump wants a big spending binge by Congress for infrastructure and stimulus.  At best, it will stimulate.  At worst, government gives pork that does little to spur growth to friends and supporters. And then protectionism may cause all sorts of problems.  If I were Trump I would go easy on the protectionism and stimulus.

The internationals are worried because they invest all over the world and our spark of growth could light bonfires all over the globe. British (and other) bankers will be holding lots of foreign debt that may default over a high dollar.  If US manufacturing grows and plants in Nigeria or Egypt close, look for revolts, civil wars and jihadism to spring up all over.  Then what?  Let Russia and China take advantage and gobble up territory? Let an ISIS-like movement go wild? We’ll gladly take the pill, but watch out for side effects.