Category Archives: Finance

Brexit – A Return to Normalcy

In ancient Rome they called it Portorium. As goods poured in and out of Rome a tax was put on the importation of foreign products. Around the time of the American Revolution there were only two sources of government revenue:

  • Taxes on booze
  • Import duties (tariffs).

This was essentially true right up to the 20th century when we made income taxes permanent. Everyone for millennia have plainly understood a simple truth:  One should favor the products made by your neighbor over those produced by someone outside your community or country. I need my neighbor to prosper so he can buy my stuff and I want him to pay taxes towards the school that our children attend and the roads we both use. If he’s gainfully employed, then I don’t need to worry about him having to borrow from me or rob me at the local Seven Eleven.

It’s true – that makes me a bad citizen of the world but I assume that they’ll all act the same way. Take a look at local Mexican or Chinese policies and you’ll see a huge structural preference for locally made goods,  There have been quid pro quo tariffs on all goods traded throughout the world forever until two things changed:

  1. Economists started to argue that we would be richer if we screwed our neighbors and bought stuff from people on the other side of the world (even if they never buy anything we produce).
  2. People started to desperately seek any savings they could get so they abandoned their preference for local products.
  3. Companies stopped worrying about how their ex-employees would be able to buy anything after they fired them en masse. They became the government’s problem. A short term earnings gain matters far more than weak sales far into the future.

Brexit is about to put England back into a position that previous generations would recognize well. Mercedes cars will cost more and domestically made textiles and food will become more competitive. France thinks this is hilarious – Mon Dieu! How backward! France has bought into the idea that massive German and Chinese imports are marvelous and perpetual economic stagnation – no problem. France had a trade balance in 2001 – now it has an 85bn Euro deficit.

Yes I know all those theoretical economists will say there will be huge costs to not getting oceans of cheap junk from China but apparently they haven’t been following the British current account:


Mon Dieu!  One could argue that a drastic measure like Brexit was necessary to save Englishman from their import crazed insanity. All those well to do bankers who must now decamp seemed to be good at only buying foreign goods and going on holiday anywhere but in the UK.

“Free” trade is so profoundly un-free that the USA, like the UK , has become a dumping ground for luxurious Audi’s and tons and tons of Chinese steel. Sadly it’s the biggest economic issue of our day and the message deliverer is a moronic narcissist. The first half of the debate was won by Trump because every sane person sees the logic in his argument. Hillary is and should be embarrassed by the position of her party on this issue. That’s how she acted on stage. It wasn’t until we got into Donald’s crazy tax plan and his record of hypocrisy and racism that Hillary took over.

I can only hope that the sting she felt at the beginning made enough of an impact that it affects her policies when she becomes President.

The Generational Gap in Wage Expectations

Both the Brexit vote and the Trump related polls show a consistent pattern. Young people are OK with globalization, immigration, economic integration. Older(er) people are not. The presumption or implied conclusion is that old people can’t adjust to the new world. Perhaps thy are racists or just nostalgic for a time that never existed. They need to get with the program and accept the free flow of ideas and people.

What if those old people know something the younger ones don’t. Perhaps their recollection of a better economic time is not just nostalgia. Thirty years ago an unskilled laborer made $9/hour vs $20/hr today but houses cost seven times  more (now). Fifty percent of the workers in America earn less that $12/hr. today. Thirty-two percent of millennials live in the basement of the house of the parent who used to make those high(er) wages. For the first time ever, more millennials live at home than live on their own! They are economic failures, by any measure. I don’t mean to blame them. It’s just that such failure has produced quiescence rather than fury. They have accepted their fate like a prisoner on death row condemned unfairly yet condoning the system nonetheless. Is their opinion on trade and immigration superior to that of the older people who know that there was a better time, when there was a growing and large middle class.

In the UK the unemployment rate is 5.4% but the youth rate is 16%! Shouldn’t they be protesting against unlimited labor immigration rather than voting to stay in Europe. Ah but perhaps the EU isn’t the problem and they get this, just like bad trade deals have nothing to do with abysmal wage growth in the US. Unfortunately this equation is too simple and powerful to overcome: An excess of global labor in low income countries will destroy local wages unless you protect against its inflow (either from immigration or outsourcing). Half of all the new jobs created in the EU over the last seven years have been in the UK and yet wages have been stagnant. The countries of the EU that have not produced new jobs, have youth unemployment at 25-40%. How did the intellectuals of England fail to see the scale of the problem?

The question has to be changed to: What matters more – labor substitution through migration that destroys wages or a possible reduction in exports to the EU by virtue of elevated post Brexit tariffs? The answer is simple – stop the migration and work relentlessly to get good trade deals with rich countries and no deals with poor ones. England should become the low regulation, low tax haven in Europe – like Ireland, and Switzerland combined but with better labor, food, and (more) housing. It’s time for UK trade representatives to earn their keep.

The younger generation has given up on prosperity – why should we listen to them?

Should workers be free to roam?

A key principal behind the European Union is the idea that all citizens of member states are free to relocate to other countries inside the union just like in the United States. That sounds great for economic efficiency right? It did when the union consisted of a set of countries with similar labor market conditions, i.e. wages. You have to pay a Frenchman a lot of money to move from his beloved Paris to evil rainy London so not many were expected. Along came the internet which boosted the value of English so many more people learned it. Suddenly a lot more workers became qualified to work in the UK (and the US for that matter). How many Middle Eastern refugees speak Dutch or German?

Then the union expanded to include such places as Latvia and Poland – countries whose GDP/capita is a fraction of the core countries’ of Europe. Poland’s average is less than 1/3rd of Britain’s. This expansion set it up for disaster. If you work in the UK and you’re not a rocket scientist, a Pole can replace you because he will work for half what you were paid. The Economist’s answer: Get more education! It’s like a new mantra for theoretical economists everywhere. If you’re a house painter or a car repairman you are supposed to go back to college and study big data analysis using Python.

So what’s the policy supposed to be when these conditions guarantee the destruction of your middle class? Aside from blocking labor migration, all you can do is send these poor people a check taken from the wages of a banker or technology worker, every month until they die. If you have other suggestions I’d love to hear them. Then you must stop the poor from having children.

The US case is no different. Our immigrants have a slightly darker skin tone but the effect is identical. When the Democratic party speaks up for illegal aliens, it is supporting the same destructive force that tore up the UK. Does Hillary have a plan to save our middle class? Trump may be a racist but his policy may be the only rational one unless you’re OK with huge tax transfers.

The UK abhorred and mocked the EU for a set of very good reasons but it needed to figure out a way to gently breakup. It’s not you, it’s me … I still want to be friends and visit your children to sell them banking services. England wants low tariffs and they must protect their labor force. They can just ask (beg) politely for the same status as Norway or Switzerland.

UK diplomats will finally get a chance to earn their pay.

Why do millennials love socialism (aka Bernie)?

We all know the saying: “If you’re young and conservative you have no heart; If you’re old and liberal you have no money.” Millennials are not doing some of the things that previous generations of young people used to do – they (virtually) don’t get married, they don’t buy houses, apartments, or cars and they don’t save any money. We can reasonably blame all this on their paltry incomes.

If I were 25, single, and had few prospects with respect to marriage or significant income then I too would be in favor of high marginal tax rates, free education and free health care. It’s all free to me because I don’t pay taxes. If house prices fall – great, maybe then I could buy one. If the stock market falls -whatever.
The young me would hate big corporations because they are devoted to finding the cheapest workers in the world, not providing me with training or a career path. That’s why I only stay at a job for 2 years max. Loyalty is so last-century. This economic system doesn’t invest in me so I don’t feel invested in it. What’s wrong with socialism anyway? Isn’t that what they have in those nordic utopias?
Bernie may have virtually no foreign policy ideas but my millennial self doesn’t read newspapers online or off. I know nothing of international affairs. I read Twitter and follow celebrities through social media. I sometimes read news headlines but never an actual article. I don’t read books, I play computer games.
It makes sense that when you destroy the feedback loop between unemployment and wage growth, you also destroy the workers engagement with the old system that put workers in the middle class – fifty years ago.
The Repubs have a similar problem but their answer is to double down on the same system. Like a religious fundamentalist they assert that the problem with capitalism is that we haven’t been devout enough. We have drifted toward socialism and lost our way. If we just close our eyes and pretend it’s 1960 then everything will be fine. This argument will never succeed with Millennials who relate to 1960 as much as they do to 1860, (apparently) social media doesn’t include much history. I’ m happy to see economic fundamentalism fail on both sides but both sides need to see that unfree trade has rotted the ship for young workers/voters. It has exploded income inequality so it’s easy to find wealthy political patrons but very hard to appeal and relate to voters unless you go outside normal boundaries.

This is an old story with a new extreme twist. It’s actually very European. What made us different was our ever growing middle class It made political extremism  inappropriate. When you get radical extremes in income you should expect to see extremes in political choices.

The Apple Window is Closing

I’ve described the Apple Computer method of generating extraordinary profits:

  1. Make everything in the third world.
  2. Sell everything you can in the first world.
  3. Depend on other entities to pay those buyers first world wages.
  4. Pay your own first world workers as little as possible, regardless of profitability.

This has worked like a dream and was adopted by everyone from IBM to Walmart. Eventually though the strategy only works if most firms don’t use it. After all we need somebody to pay the first world consumers well enough so they can afford cars and smartphones. If no one does then we depend on governments to do so but their subsidies (unemployment insurance, food-stamps etc) are too meager to sustain the game.

As they watch it all come to an end they tell shareholders that lost revenue will be made up by sales to Chinese peasants and the third world elite. Economists marvel at the ever increasing skew in income distribution and propose tax changes to fix things. Raising the taxes of Apple computer will not make them change their strategy! Raising any CEO’s taxes won’t make him hire a first world worker. Tax policy treats the symptoms, not the problem. We have a global (peasant) labor glut and Chinese wages are spreading like a plague.

We have a chance to get two ugly outcomes at the same time:

  1. A profit slump as first world consumers run out of money.
  2. A permanent decline in wages as they march down toward third world poverty levels – crushing budget deficits and GDP growth along the way.

The Chinese slowdown that comes from all this allows them to devalue their currency locking in a self reinforcing mechanism for the further destruction of wages and (first world) industrial competitiveness. The race to the bottom is accelerating and theFed can’t save us this time because rates are already at zero. The fix is simple. We must cut off the blood sucking parasite attached to our neck.

We have paid for enough skyscrapers in Shanghai.

Corporate Treason

We saw something this week that we have never seen before: GM announced that it will import the first 100% Chinese made car. It’s the Buick Envision.


GM is, as you might remember, the car company that survived the 2008 economic meltdown only by virtue of government money. Now that money is being used to hire Chinese workers and fire Americans. Is there any point at which the US government feels embarrassed about being taken by US multinationals and … China.

The current tariff rate on cars imported into China = 25%. Our tariff is 2.5%. The big point here is that cars are a huge value added product and almost the only one left that employs a large number of Americans. Car companies are like diamonds that every country desperately seeks because high value added = high wages. Has everyone bought into the idea that since T-shirts and TV’s are all made there, everything might as well be made there? Plenty of SUV’s are made (profitably) in the US. Is the government malevolent or stupid (= my favorite question about George W Bush). How did the citizenry become so quiescent or suicidal that it is willing to actually buy an Envision, knowing where it’s made?

People are willing to boycott goods that are made by rogue states or evil corporations (tobacco, big oil polluters) but seem to have no sensitivity to economic sovereignty and the death of the middle class. The (American) left has decided (apparently) that a job in China is just as good as a job in America and the right is in favor of anything that improves multinational profits. Our dysfunctional government is not sitting on the fence here.

It is financing our economic enemy.


Should we fear Chinese economic weakness?

The stock market mess started when China decided to devalue its currency by a paltry 3%. The panic that followed has apparently stopped them from doing more, if they ever had more in mind. Their stock market (if we can call it that) has fallen by 42% after rising spectacularly over the preceding year. That “market” is extremely illiquid and composed of odds and sods that hardly represent their macro-economy.

But even if it were the perfect cap-weighted index with every major company included, why should I care if it fell 42%? Do western banks lend to Chinese companies? No. Do western investors invest in their stocks? No.

If it’s indicative of a Chinese economic collapse, I still don’t care! China buys (virtually) nothing from the west so our companies would lose no orders. Sure Australia would sell them less iron ore but is that what we are so worried about? The question is, how does a decline in an irrelevant economy – spread to the west? What is the transmission mechanism?

Perhaps investors in Japan will get scared by a decline in that market and then we get scared by a decline in the Nikkei -etc etc but that sounds more like a limited decline. Oil prices will fall since China is a huge buyer and anyone with oil stocks or stocks of banks that lend to oil companies will get hurt. There is of course a benefit on the other side- we are all richer since we will save money at the pumps.

There are clear losers: Canada, Russia, Venezuela, Australia, Saudi Arabia etc. but can they cause fear to spread and explode. How much do we care about Toronto real estate or negative Venezuelan GDP? The answer is murky since transmission lines are often opaque so I don’t want to get too cavalier. Perhaps Chinese economic weakness is a symbol of weaker US import demand. China may just be the leech in the coal mine simply telling us that our own growth is flagging.

Wage growth has completely stalled as I predicted it would years ago. No wage growth -> no consumption growth -> no import growth. Competition from Chinese peasant labor has killed the glorious US consumer who they (the Chinese) depend on for work. The cycle is almost complete.

The parasite has sucked too much blood from the host.

Searching for A New Vein

Test Question: Can you name one Asian country that relies on domestic demand to fuel its growth?

I can’t.

China has failed for obvious reasons- poverty and corruption. You just can’t get enough spending from $4500/year laborers to generate new domestic production and tax revenue. Even the upper middle class has nothing left to spend after they save 30% (!) of their earnings. The script was written in Singapore and played over and over again in Taiwan, Tokyo, Hong Kong, Vietnam and South Korea. It created the economic miracle of China.

So when growth slows – what do you expect China to do? Devalue! The problem is that most first world production is already there and (therefore) first world workers’ earnings are utterly stagnant – which makes sense due to the commodification of labor from offshoring. It’s getting harder for the parasite to extract a quart of blood.

These circumstances explain why we shall never have inflation and we shall never see worker wages rise to any significant extent. The largest Chinese export is global economic stagnation. Every new devaluation exposes our policies as absurd and our policy makers as corrupt. Is Obama merely the President of cheap flat screen TV’s? A trade war is raging and all our politicians carry a white flag.

We can’t blame the Parasite – it has only one way to survive.


Death by China

What would Keynes do?

President Obama released a new budget plan last week that raises taxes on the wealthy to pay for infrastructure. It does nothing to reduce the current budget deficit In fact he predicted it would rise by 20% next year). The President continuously believes that one more magical fiscal push will get us over the hill. He also thinks that allowing in more poor immigrants, who would easily find work, would boost social security tax revenue enough to offset big increases in spending from entitlement programs. (Is he serious?)

The US budget deficit has shrunk from $1.4 trillion in 2009 to a mere $480 bn now so everyone is relieved. The fall in interest rates has reduced the cost of servicing the outstanding debt. I guess I should be happy but I have a problem…

The recession ended in 2009 so we have had six years of growth and the deficit is still about 3% of GDP. The entire logic of running active fiscal policy (Keynsianism) is that a country must run surpluses in good times to pay for stimulus in bad times. We have forgotten the first part. Politicians seem very sensitive to the flawed recovery since median incomes are not growing and the proper measure of unemployment (U6) still shows that good jobs are scarce. This rather unsatisfying bounce-back has kept them in spending/borrowing mode.

We have record levels of tax revenue and a steady 3% growth rate so politicians need to adjust government spending to suit our current state. Yes, wages are stagnant so  revenue will persistently fail to cover poverty programs caused by lingering un and under-employment: Medicaid, Foodstamps, UIC, and low taxable income. There is only one way to fix this huge (circular) mess (free the Yuan!) and neither Obama nor the Republicans have any intention of doing it. Yet they apparently can’t reconcile themselves to the economic climate that they have created. Every day they whistle on their way to work in a state of denial as though magic will intervene. Perhaps we will grow forever at a faster and faster rate in spite of the economic stagnation in the rest of the world.

If a Democrat is a believer in active fiscal policy he must buy into counter-cyclical budget adjustments, not perpetual stimulation and the buildup of debt. If he can’t then he must become a Republican and advocate a balanced budget – even during horrible recessions. Our anemic economy did not come from tax policy or (too) big government and it won’t be fixed by loose fiscal policy or smaller government.

Keynes had a reasonable idea and exchanging debt for Chinese-made clothes was not part of it.


Globalization’s Evil Stepchild

Everyone seems to ask repeatedly: How can the stock market set new records when there is all this global turmoil? Are investors not watching the mess in the Middle East, the bankruptcy of Russia, the instability in Brazil and Argentina, Euro-sclerosis, narco/government crime in Mexico, and Ebola?  Perhaps it’s all Fed created liquidity that just fuels an infinite rally. After all, the only alternative to stocks are bonds with no yield, so lets just go all in and roll the equity dice.

But maybe there is another logical explanation. It used to be that we would have bilateral trade – we would buy goods from specific countries where they had a geographic or technological superiority. Even more importantly, they would buy our stuff. Proximity was an advantage. Lower transportation costs and similar consumer tastes gave our neighbors significant advantages even if their labor costs were high. On the other hand i f they got hit by an earthquake or a revolution then we would have to find new buyers and suppliers. For now intra – European trade is still huge just like trade between the US and Canada.

Things are changing – fast.

We suddenly introduced an entity that can produce anything at a cheaper price. Egyptians now import twice as much stuff from China than from Turkey. China is the number one importer into Russia, Syria, and Brazil. It’s even passing Holland as the biggest importer into Germany! Virtually every country can now buy all its consumer goods from China at vastly lower prices than anything made regionally (or locally) – if they have sufficient US dollars… and therein lies the rub.

Since China buys nothing from anybody (except some raw materials from the Third World), Russia, the European Community and the UK have to borrow (US) dollars, endlessly to get all this fabulous stuff, that they used to make at home (or get regionally). The result is a crash in economic interdependence (and GDP growth) and a rise in borrowing to finance trade deficits.  No one cares if Russia dies because no one sells anything in Russia. Libya, Iraq, Syria, Brazil, Venezuela, Mexico, Turkey, Greece, Spain, and France can all implode – you can get everything you need from China so everyone else can go on permanent vacation; just don’t buy stock in a bank that lends money to these places.

It turns out that “globalization” was a fraud. Yes,we can now read tweets from Jordan and follow the Ebola crisis in West Africa thanks to new phone apps. But the economic connections that were flowering in the 90’s thanks to lower tariffs and floating exchange rates are dying. If everyone just buys everything from China then who needs their neighbor’s goods. For that matter, why do I care about the guy four states or four hundred miles away? As long as the economic implosion next door doesn’t cause people to invade then it’s all good. Japan has been in an economic quagmire for 20 years and it has hurt nobody other than Japan. If you had predicted that in 1988, people would have thought you were crazy. Now everyone is just like Japan.

In the end, it’s all about imports. As China takes up a greater share of every countries’ imports, other countries drop out of everyone else’s economy and out of their lives. They are seen and heard on the news but not in our portfolios (unless you are crazy enough to invest in them). Putin is a social media sideshow. We are economically invincible – feel free to ignore political or economic failure in South America, the Middle East, and southern Europe. Welcome back to the 1950’s when TV brought us news about far away places but everyone understood that none of it really mattered – unless we were stupid enough to send our army there. (or substitute “banks” for “army” to update this rule.)

All this freedom we now have, to ignore the world, comes at a huge price. We too, are part of the evil bargain. We have allowed Chinese imports to infect us as well so we wallow in debt and our wages stagnate. This is one huge trade-off: We have accepted a slow grinding economic death but are appeased by the lack of blow-back when other countries suffer more than us.

Unfortunately schadenfreude doesn’t pay the rent.