Saturday, February 27, 2010

Beware of Greeks Bearing Bonds

Economic and financial crises can hit virtually overnight, leaving planners unprepared to cope with the consequences. Between early January and early February 2010, the two-year yield on Greek government bonds rose from 2.8 percent to 6.2 percent, thereafter fluctuating between 4.4-6.1 percent. The immediate fate of the Greek economy hangs in the balance of its ability to sell bonds in the coming weeks. Ditto, though less so, for the euro, Spain and Portugal.

Much as America’s officialdom treated the subprime mortgage problem in 2007 as a small matter, which escalated into a near meltdown of the entire financial system, so too maintaining unaffordable social market economies in Europe was seen to pose a small fiscal and economic threat. Disregard by European officialdom, expressing supreme confidence in the social market (big government), now threatens to scald millions. Even if Greece gets immediate help from Germany, France, and other eurozone countries, its fiscal crisis will only be papered over, waiting to explode with greater force in the near future, perhaps with even less warning than Chile’s early morning devastating 8.8 earthquake (February 27, 2010).

Thursday, February 25, 2010

More Stimulus and Sustained Loose Money

Many leading economists, businessmen, and politicians want more stimulus (jobs) spending and sustained easy money on the grounds that the economy is operating below potential and that inflation poses no near-term risk. They contend that inflation won’t pose a risk until hundreds of thousands of new jobs are created every month and the unemployment rate falls back to its previous lower level of 5-6 percent.

There are many reasons why the economy operates below potential. Among them are distortions due to the federal tax code, the burden of complying with thousands of federal regulations, government subsidies that misallocate capital, failing public schools and students in central cities, which total over a trillion dollars of costs imposed on the economy’s operating potential. Why are these issues largely absent from the economic policy debate? Evidently, it is easier to create and spend more money than reform the tax code, eliminate harmful regulations, improve public schools, and say no to subsidies for special interests.

Instead of fixing the big problems and others (I’m sure readers can add others to my brief list), we are going down the path of more and more debt, as if we can borrow our way to prosperity.

Wednesday, February 24, 2010

Old Europe Has Some Strikes, Eeyii Eeyii O!

Why do North and Latin Americans and Asians visit Old Europe? Mainly to see Museums, Monuments, Churches, and Castles. But it’s hard to see these cultural attractions (relics?) if airlines, taxis, trains, and buses are shut down or disrupted by strikes by civil servants and union members objecting to cuts in pay and benefits to reduce gaping, unsustainable fiscal deficits.

How to solve the Greek situation and similar budget problems in other Old European countries? Easy. Set up separate accounts for the payment of wages, health care, and retirement benefits dedicated to civil servants and union members. Use the proceeds in these accounts to meet all current compensation and retirement benefits to these individuals. Advise civil servants and union members that if they fail to accept lower wages, longer working hours, and later retirement, the money is these accounts will not be sufficient to pay retirement and health benefits in later life. When funds are exhausted, these individuals will have to depend on the poorhouse, transforming "social" justice into "reality life."

Tuesday, February 23, 2010

Shakespeare in Washington, D.C.

In Richard II, for want of a nail a kingdom was lost. In Bush II, for want of a (good) model, an economy was lost. And, with it, sweeping Democrat gains.

Can anyone in Bush II provide evidence of a memo or phone conversation in which he or she warned the president or secretary of the treasury in advance that the financial system was going to crash and push the economy into deep recession? If not, why not? Should taxpayers get a refund on the taxes that paid the salaries of Bush II economic advisers?

China is to Blame?

For what is China to blame? Most critics point to its exchange rate, linked at a fixed rate to the U.S. dollar. The critics want China to float its currency, or revalue it upwards to reduce its trade surpluses and global imbalances.

But currency is not the real problem. Rather, it is that China is enabling the U.S. government to run massive deficits and pile up an enormous public debt. If China were to announce that it would cease buying U.S. government securities and, further, begin to sell or fail to renew $10 billion of government securities every month until the U.S. gets its fiscal house in order, the federal government would be compelled to cease proposing spending programs and begin to curtail existing ones.

Is anybody listening in Beijing?

Friday, February 19, 2010

Economics in Disarray: To Stimulate or to Tighten

Several joint letters have appeared in the past few days, signed by Nobel Laureates and distinguished professors of economics in the leading universities in the U.S. and U.K.

One set recommends further stimulus spending to create jobs and restore growth, while maintaining loose monetary policy. The other recommends halting stimulus spending, paying down public debt, and gradual tightening of monetary policy.

What’s a political leader to do in the face of conflicting advice and claims from the economics community, especially since neither group of signers is particularly humble in their academic claims and advice?

Saturday, February 13, 2010

The Coming End of Paper Money

On all Federal Reserve Notes appear the words "This note is legal tender for all debts, public and private." FRN notes are bearer notes. Using them does not require personal identification (although some establishments, such as McDonalds, will not accept $100 notes).

Although euro notes do not state legal tender status, the legal framework of the euro specifies its legal tender status. However, national laws in eurozone countries may restrict the maximal amounts that can be settled by coins or notes.

To address the problem of tax evasion, on February 9, 2010, the Greek government announced its proposal to limit tender status for euro notes to 1,500 euros in transactions between persons and businesses and between businesses. Transactions above that amount will have to be done through debit or credit cards, which can be traced to the individual or business and thus taxed.

Imposing a low limit on the legal tender status of euro notes in financial transactions could prove an attractive approach to reducing tax evasion throughout the eurozone. Watch for Portugal, Spain, and Italy to impose similar limits in the months ahead.