Friday, April 29, 2011

Confucius Analect of the Week, April 29, 2011

Confucius is in London attending the royal wedding.  As a gift to the newlyweds, he offered the following advice.

“Tuan-mu Tz’u asked about Great Man.
‘First he sets the good example, then he invites other to follow it.’” (James R. Ware, Chapter II, Verse 13)

Tuesday, April 26, 2011

Bernanke’s First Press Conference: Whither QE II?

Fed Chairman Ben Bernanke will hold his first press conference following Wednesday’s Fed meeting.  His press conference is the first in a series of four annual press conferences the Fed will hold to provide greater transparency in its decisions.

What will Bernanke say?

Will QE II (the Fed’s second round of quantitative easing totaling $600 billion, due to end June 30, 2011) end early, on schedule, or be extended?

Is there a QE III in Ben’s future?

Given the excitement over Will and Kate’s royal wedding), does Bernanke control the British throne?  If QE II ends as planned on June 30, and there is little to no chance of a QE III, is this a sign that Queen Elizabeth II should give way to her first-born son, Charles III?

Monday, April 25, 2011

Scorecard on U.S. Involvement in the Muslim World, 2001-2011

It’s been ten years since the U.S. removed the Taliban from power in Afghanistan.  Perhaps this is a good time to review American involvement in the Muslim world.  I assign letter grades in each case.

Israeli-Palestinian peace process: F.  Every U.S. president takes office pledging to give priority to the Israeli-Palestinian peace process.  Every president has failed to resolve the issue on leaving office.  The best thing a new president can do is to downgrade the peace process and leave the parties to settle their differences by themselves.

Gaza: F.  Hamas was voted into power with 70% of the vote, more than double the 30% projected by U.S. officials.

Lebanon: F.  Hezbollah, an ally of Iran, holds the presidency following the most recent election.

Iraq: D.  Muqtada al-Sadr, former arch enemy of U.S. forces in Iraq, is a member of Iraq’s governing coalition.  Those who praise the U.S. overthrow of Saddam Hussein and the establishment of a democratic coalition government in Iraq should wait a year or two to see if the country holds together after U.S. military withdrawal, or if it fragments into separate political units with the Shia majority in closer alliance with Iran.

Egypt: D.  Long-time ally Mubarak was thrown overboard.  The post-September election is likely to show greater influence of the Islamic brotherhood.  Mohamed ElBaradei , with more than 150,000 followers on Twitter and having expressed interest in becoming Egypt’s new president, has stated his desire for tearing up the Egyptian-Israeli peace treaty.

Yemen: INC.  Who knows what pro- or anti-American policies a post-Salleh government will adopt?  Projected grade: D or F.

Libya:  D.  It’s hard to imagine a worse leader than Colonel Qaddafi, but greater influence of Al-Qaeda and other radical Islamic factions is likely in Eastern Libya.

Syria: F.  No comments necessary.

Afghanistan: F.  Karzai government probably hopeless.

Pakistan: D.  Unpredictable, unreliable “ally.”

Iran: F.  No comments necessary.

Not a pretty picture.  During the past ten years, costs have exceeded two trillion dollars, thousands dead, and thousands more maimed and wounded.  In a fiscal sense, U.S. military involvement in Muslim countries contributed to the transformation of large annual budget surpluses into massive annual budget deficits and a huge public debt.

Sunday, April 24, 2011

How to Pay Off the National Debt and Solve Other Economic Problems


The competing deficit reduction proposals of President Barack Obama and Congressman Paul Ryan depend on long-run assumptions about economic growth, unemployment, and other economic variables.  Growth is clearly the most important factor.  Sustained high growth increases tax revenues more rapidly than planned expenditures (assuming no new major spending programs).

Therefore, the quickest and least painful way to eliminate deficits and pay down public debt is to project growth of 6% over the next 10-12 years.  If inadequate, raise the projection to 7%.  Learn from China!

A second problem is growing inequality in the distribution of income and wealth in America.  The top 1% has gained an increased share of national income and wealth in the past few decades.  One way to solve this problem is to change how we think about it.  We should consider the benefits going to the top 1% as a very powerful incentive for everyone to try to rise to the top 1% of income earners.

A third problem is to improve educational outcomes, especially in inner cities, so that America can win the future.   A quick solution is to lower the standards for success.  In that way, an increasing number of students will graduate with successful academic records.

Are these solutions any more absurd than what you hear from politicians and read from their supporters in the media and from some of the more ideological in the academy?

Friday, April 22, 2011

Confucius Analect of the Week, April 22, 2011

Confucius is on Holiday for Passover and Good Friday.

Wednesday, April 20, 2011

Liveblogging the Future: July 1, 2037

On July 1, 2037, Standard & Poors issued its 16th consecutive downgrade of U.S. sovereign debt, from AAA in 2012 to CCC+.  Interest rates on U.S. Treasury bills, notes, and bonds surged well past 100%, making it impossible for the federal government to meet its obligations.  The U.S. dollar had lost its reserve currency status a decade earlier.  The government could no longer print money to borrow in its own currency without catastrophic inflationary consequences.  China’s renminbi had become the world’s reserve currency, along with Swiss Francs, Brazilian Reals, Canadian and Australian Dollars, and several others of fiscally-sound countries.

U.S. currency was no longer accepted abroad.  Foreign currency had to be bought in U.S. black markets if anyone wanted to travel overseas.  U.S. merchants preferred cash payments in foreign currencies or precious metals.  The once-upon-a-time, good-as-gold greenback had become like the Revolutionary currency, which depreciated so badly during the war giving rise to the phrase “not worth a continental.”

The U.S. had run out of financial assets to sell to foreigners to sustain federal spending on retirement benefits, health care, unemployment benefits, public education, and infrastructure.  It had already privatized its property holdings.  All that was left was land, pure and simple.

In a last ditch effort to stay afloat, the federal government put American land up for sale.  The sovereign states could not object because they were no longer sovereign, surviving entirely on federal transfers.

The federal government initiated a series of one-on-one negotiations to sell chunks of U.S. land to the original foreign colonial powers, who had heeded Standard & Poors warnings.  These sales became known as “Land for Survival.”  As in the Northwest Ordinance of 1787, U.S. settlers residing in the new foreign domains would enjoy their customary rights for one generation, after which they and their successors would become citizens of the new foreign realms.

United Kingdom - New Jersey, Maryland, the Carolinas
Canada - Northern New England
Spain - Florida
France - Louisiana and other portions of the Louisiana Territories as required
Mexico - Southern Arizona and New Mexico (reverse Gadsden Purchase)
Netherlands - Manhattan and New York
Delaware - Sweden
Denmark - Virgin Islands
Russia - Alaska
China - California as a Special Administrative Region of China
Japan - Pacific territories

Historical Note: Each successive downgrade of U.S. sovereign debt was met by presidents and Members of Congress as a call to action, but invariably they resorted to politics as usual a short while later.

Monday, April 18, 2011

Fiscal Follies

There has been much caterwauling over $38.5 billion in what big spending liberals call draconian painful budget cuts as the price of a budget deal to avoid a government shutdown.

If spending cuts of $38.5 billion are draconian, what adjectives will be used to describe the targeted $4-6 trillion over 10-12 years as the politicians squabble over the competing Obama-Ryan deficit reduction proposals, not to mention the trillions in borrowing and hundreds of billions paid in interest?  Monstrous?  Unfathomable?  Inconceivable?  Catastrophic?  Gigantic?  Colossal?  Stupendous?  Staggering?  Humongous?  Astronomical?  Galactic?

“Paying Their Fare Share.”  What does it mean for the rich to pay their fair share in taxes?  Is there a once-and-for-all-time definition of “fair share” that does not change every two or four years?  Which tax-rate schedule of the last 90 years best approximates the rich paying their fair share?  President Wilson?  Harding?  Coolidge?  Hoover?  Roosevelt?  Ike?  Kennedy?  Nixon-Ford?  Carter?  Reagan?  Bush 41?  Clinton?  Bush 43?  Obama?  Pick one and justify that choice?

Over the last 20 years, President Clinton’s years look the best for growth (annual average 3.3% real growth 1992-2000), employment, and deficit reduction.  Does that make the Clinton tax rates the presumptive first choice?  If the Bush tax cuts were necessary to spark growth (2.2% annual average real growth 2001-08), why did the economy’s performance under his watch lag the Clinton years?  How were Clinton’s surpluses transformed into Bush’s deficits and debt?

Just asking...

Friday, April 15, 2011

Confucius Analect of the Week, April 15, 2011

“Great man is sparing in words but prodigal in deeds.”  (James R. Ware, Chapter XIV, Verse 27)

Talk is cheap.  Action speaks louder than words.

In political parlance, watch what politicians do, not what politicians say.  Judge them not by their eloquent talk and self-praise, but by their constructive deeds.

Thursday, April 14, 2011

REALCON

Conservatives and conservatism have been given a black eye.  Neocons erred by invading tribally and religiously divided Arab countries at a cost of over $1 trillion, five thousand dead, and thousands more maimed, with the intent of establishing democracies in places with little or no tradition of civil rights and civil society.  Compassionate conservatives erred in using government to implement programs that expanded public spending.  Together they turned surpluses into staggering deficits and brought liberal Democrats to power.

It’s time to replace neocon and compassionate conservatism with Realcon.  Realcon means constitutional government, limited spending, low taxes, balanced budgets, sound money, and resort to military measures only to defeat real threats to U.S. security.

Wednesday, April 13, 2011

The Great Budget Deal, Part 2

The Great Budget Deal of April 2011 promises $38.5 billion in spending cuts for the balance of Fiscal Year 2011-12.  We’ll see if the reductions materialize.

The deficit for the current fiscal year is estimated around $1.4 trillion dollars, which must be met with net new Treasury borrowing.  The Treasury auction schedule for 2011 reveals a mix of durations, from 4-week bills to 30-year bonds.  The schedule does not indicate the amounts of funds to be borrowed at each auction, so there is no way to estimate the interest cost of the current fiscal year’s borrowing.

How much interest will the Treasury have to pay on the current fiscal year’s net new borrowing of $1.4 trillion to finance the budget deficit.  At 1%, the cost is $14 billion.  At 2%, it is $28 billion, and so on.  Interest rates have fluctuated for the 5-, 7-, 10-, and 30-year notes and bonds in the past six months, which makes new borrowing costs difficult to forecast.

In 2010, net federal interest outlays totaled $197 billion.  Federal debt held by the public (excluding Social Security and Medicare) totaled $9 trillion.  Each trillion in debt averaged $21.9 billion in interest outlays.  On this ratio, assuming no change in interest rates throughout  2011, the $1.4 trillion deficit would entail $30.7 billion in additional interest.\, vitiating most of the spending cuts in the Great Budget Deal.  Big Deal!

Tuesday, April 12, 2011

The Great Budget Deal of April 2011

Assuming all goes as planned in the week of April 11-15, 2011, a government shutdown will have been averted as a result of the Great Budget Deal of April 2011.  All parties agreed to cut $38.5 billion from the remainder of the Continuing Resolution of the current fiscal year 2010-11.

President Obama’s statement specifies the cuts.  By far the single largest, almost half, is for the Department of Defense.  In the president’s words:  “we were able to identify $18 billion in cuts deemed unnecessary by the Pentagon.”  No specific Pentagon cuts were identified, nor have I been able to find specific cuts in the print or electronic media, including the Defense Department’s website.

If the $18 billion is deemed unnecessary by the Pentagon, why was the $18 billion in the budget in the first place?  What exactly does the $18 billion of cuts include?  Is the $18 billion simply an accounting reduction, e.g., procurement costs were $18 billion lower than originally projected?  If real, will the $18 billion be added back in a supplemental bill before the fiscal year ends on September 30, 2011?  These and other questions merit answers.  We’ll see.

Monday, April 11, 2011

China’s Inflation Problem

Catastrophic inflation in China undermined President Chiang Kai-shek’s Nationalist government, abetting the Chinese Communist Party’s ascension to power in 1949.  Since then, China’s leaders have remained wary of inflation.

To minimize the appearance of inflation, the largest denomination banknote issued by the People’s Bank of China (China’s central bank) is Renminbi (RMB) 100.  At current exchange rates (US$1=RMB 7.53), RMB 100 is worth US$15.32.

Wages and prices in China are rising rapidly.  It is becoming increasingly inconvenient to carry thick stacks of RMB 100 banknotes for purchases of goods and services.  Accordingly, it is time for China to recognize the reality of its fast-growing middle class and issue larger denomination notes.

In that regard, it is time to give the late Deng Xiaoping, the man who opened up China’s economy and set it on a path of sustained high growth, an extra honor.  I have done this below in the design of a possible RMB 500 banknote, which places Deng’s portrait on the obverse side.


(HT:  Ellen Santiago)

Friday, April 8, 2011

Confucius Analect of the Week, April 8, 2011

“Let the other man do his job without your interference.”  (James R. Ware, Chapter VIII, Article 14)

Sounds a lot like “getting government off our backs.”

Thursday, April 7, 2011

Market Forces Slowly Alter China’s “One Country, Two Systems” Policy Towards Hong Kong

China has largely honored its promises to Hong Kong, spelled out in Hong Kong’s Basic Law, the territory’s mini-constitution, since it resumed sovereignty over the former British Crown colony on July 1, 1997.

Chapter V (Economy), Article 111 states “The Hong Kong dollar, as legal tender in the Hong Kong Special Administrative Region, shall continue to circulate.”  Subsequent paragraphs in Article 111 require that “the issue of Hong Kong currency must be backed by a 100 per cent reserve fund”...”with the object of maintaining the stability of the currency.”  So far, all Hong Kong currency is backed by several hundred percent holdings of foreign reserves, largely in dollars (but the Basic Law does not specify which currencies are required in Hong Kong’s foreign reserves).  The Hong Kong dollar is pegged to the U.S. dollar at a rate of US$1 = HK$7.80.

A dramatic change has taken place in customer deposits in Hong Kong banks in the past year.  Renminbi (RMB) deposits in January 2008 amounted to RMB 40.4 million, rising to RMB 54.4 million in January 2009, RMB 63.9 million in January 2010, and RMB 370.6 million in January 2011.  Year over year RMB deposits in Hong Kong banks in January 2011 grew 580%, of which time deposits rose 1,071% and demand deposits 309%.

RMB deposits as a share of Hong Kong dollar deposits have grown from a fraction of less than 1% to 15.3% (converting RMB into HK$), or 5.3% of all currencies (including HK$, US$, and non-US$ foreign currencies).  Given the expected appreciation of the RMB, this trend is likely to continue.  Perhaps in the short span of a few years, RMB yuan will displace Hong Kong dollars as the de facto currency of Hong Kong, even if it does not enjoy the legal tender status of the Hong Kong dollar.  As RMB deposits rise and the yuan become fully convertible, perhaps as soon as 2015, Hong Kong people will likely pressure the Hong Kong Monetary Authority to switch reserves from dollars to RMB.

Wednesday, April 6, 2011

Worried About Inflation? Skip Europe and Stay Home This Summer

Over the course of two weeks in August 1967, TBBW (The Beautiful Brilliant Wife) and I visited the capitals or leading city in Greece, Italy, Austria, Switzerland, France, Belgium, Netherlands, and Denmark.  Our average daily expenditure was $22, which covered hotels (all en suite bathroom), meals, entertainment, and local travel (including to and from each airport).  The CPI Inflation Calculator puts the 2009 value of $22 at $141.31, an increase of 642%.  (Using 2009 data permits easy comparison with German Marks, French Francs, Swiss Francs, Austrian Schillings, Belgian Francs, and Danish Kroner, based on conversion values into Euros for eurozone countries from 1999).

How far will $141.31 go in Europe this summer?  Not very far.  (European currencies have appreciated against the dollar in 2010 and early 2011, further reducing dollar purchasing power.)  Maybe dinner for two with house wine at a decent restaurant.  Slum accommodation.  Plan on lots of walking, public transportation, and search out free museums.

What happened to King Dollar?  Between 1967 and 2009, the German Mark (followed by equivalent euros) appreciated 65%, Swiss Franc 75%, Austrian Schilling 62%, Belgian Franc 42%, Danish Kroner 23%, and Norwegian Kroner 12% against the greenback.

The dollar doesn’t buy what it used to buy overseas, at least in places one might want to travel on vacation this summer.  So stock up on charcoal and spend days and nights watching the travel channel.  (Thanks to all Members of Congress and the Federal Reserve Board for encouraging us to stay home by debasing our money.)

Monday, April 4, 2011

Burning the Koran and Other Provocations

The First Amendment has limits.  Yelling fire in a crowded theater is not protected by the First Amendment.  Although burning the U.S. flag is protected free speech, perhaps burning the Koran, which causes loss of innocent lives in Muslim countries, should not be protected.  Maybe some public interest law entity can bring a case to the Supreme Court and urge the “fire” doctrine to incorporate burning the Koran.  And, for that matter, cartoons about Islam and any other expression that insults Islam.  If, after ten years in Afghanistan, the action of an obscure American cleric can incite murderous acts against innocent international aid workers, will any amount of military and civilian assistance  put Afghanistan on the path to a peaceful, stable democracy?  Just asking....

In keeping with Islam, any American president who orders U.S. forces to commence hostilities against an Arab Muslim country should first watch Khartoum and Lawrence of Arabia.

P.S.  This is funny budget week, with the Ryan deficit reduction plan, threat of a government shutdown, and other machinations.  Asking the Congress to reduce the deficit and curtail the long-term growth of entitlements is akin to lecturing rats on the benefits of proper hygiene to eliminate the plague.  (I’m not equating Members of Congress with rodents, only the impact of asking each nicely.)

Friday, April 1, 2011

Confucius Analect of the Week, April 1, 2011

“If an urn lacks the characteristics of an urn, how can we call it an urn?”  (James R. Ware, Chapter VI, Verse 25)

Is “honest politician” an oxymoron?

Are self-interested politicians and government officials serving the public interest?

Richard Darman, George H. W. Bush’s Budget Director, knew how to distinguish between an urn and a non-urn when he proclaimed “If it looks like a duck, walks like a duck, and quacks like a duck, it meets the duck test.”