China’s real estate bubble.

I am predicting that Asia will enter a recession in 2011.

Recessions are the necessary outcome of loose monetary policies that create bubbles. China has been inflating its economy at a rate of 20% or more per year for several years now.

Clear evidence of this is found in China’s real estate market. To really grasp the magnitude of this, I have embedded the video below. This is not a new video, but it is very worth watching. Sometimes seeing is believing.

The one thing you CAN say about China’s waste though… at least they are building STUFF. Whereas when you think about the pure waste created by America’s military which exists to blow things up and kill people, it doesn’t seem like such a bad misallocation in the end…

Jim Rogers, Andrew Schiff, and some economic ignoramus named Doug Henwood talk about TBTF and taxes.

Listening to this Doug Henwood fellow on taxes is truly unbearable. Have fun.

This is an entertaining discussion but it is pretty boisterous and a lot of cogent points get lost. The group talks about the Too Big To Fail policy as “socialism for the rich,” which is a legitimate given the policy of bailing out big, insolvent financial institutions. There is no dispute with any of this.

Socialism for the rich should be rejected, but Schiff makes a valid point that, insofar as bailing out financial institutions was intended to keep credit flowing liberally to borrowers whose credit-worthiness was otherwise inadequate, the TBTF policy was “socialism for the poor” as well. American consumers are addicted to debt and low interest rates.

Rogers and Schiff are apparently opposed to socialism in principle, but Henwood is only against “socialism for the rich.” He likes other forms of economic interference, such as that which distorts interest rates, or that which taxes the rich.

Henwood thinks it is perfectly justified to say that higher taxes can possibly help economic growth. This is untrue, and the economic case against it is probably irrefutable. I will summarize:

If economic actors exchange property voluntarily, then it is implied that both actors are better off than they would be in absence of this trade. If both did not expect to benefit from the trade, they would not take part. The matter is quite different in the case of taxation. With taxation, the producer’s supply of goods is reduced against his will to a level below what it would be absent the taxation. In addition to this reduction of present goods, the supply of future goods is reduced as well. For taxation is not unsystematic and random, but systematic and expected to continue in one form or another. Therefore, it implies a reduced rate of return on investment and produces an added incentive to engage in fewer acts of production in the future than one otherwise would. Overall incentive to be a taxpayer decreases, and incentive to become a tax-consumer increases.

This is always true. But Mr. Henwood would disregard economic science and make his inferences based on a shallow analysis of empirical data. Of the US, he says the Clinton years saw a period of great economic growth, and tax rates were higher than they are now. So, he infers, higher tax rates contribute to economic growth.

This doesn’t make any sense. If Henwood were an economist, I would call him a crank. But he is not an economist, he is an English major. He does not have a background in economics, but he likes to write about it. There is no evidence that he is capable of applying formal theory to reality and interpreting it.

In addition to being completely fallacious, the above argument for higher taxes is only credible on the most superficial analysis. If Austrian business cycle theory is correct, then one could easily argue that the much-heralded ‘growth’ of the Clinton years was just phony wealth created by economic bubbles brought about by artificially low interest rates.

When Reagan was elected in 1980, short-term rates were 11.4 percent. When Bush I lost to Clinton in 1992, the rate was 3.4 percent. Rates moves upwards over the course of the Clinton years, and in 2000 the average Treasury bill rate was 5.8. The manipulation of interest rates created economic dislocations — the dot-com bubble, among other things — and the inevitable crash.

Doug Henwood doesn’t know what he is talking about.

Gold and silver versus paper promises.

Head on over to this site and take a look at the tables presented. The data speaks for itself.

What will happen to commodities in 2011?

First, consider the following:

Commodities are up across the board, in some cases quite dramatically. This boom is international — manufacturers are bidding up prices and there are strains on available supplies.

Yet consumer prices are not rising significantly. Canada currently has a higher official inflation rate than the US, but not much more. Commodity prices have been bid up in anticipation of rising consumer demand, a prediction which is not panning out.

Remember the insight of Austrian economics — consumers set final prices, not producers. Consumer spending is weak. Unemployment remains high. Without a surge in consumer spending, these prices are unsustainable. If there is a recession in Asia, and I think there will be (probably next year), then these prices are likely to tank.

Western banks are stockpiling excess reserves. If this money does not get lent out, unemployment will remain high and consumer spending will continue to suffer. There are no signs that bankers will suddenly become optimistic. China is slowing down. Same with South Korea and Japan.

What about gold? Gold follows a different set of rules. Central banks buy and sell gold. It is a hedge against the currency crises and mass inflation, rather than recession, where currency appreciates. China is encouraging its citizens to buy gold. When Austrian business cycle theory bites back at China’s bubble, there may be less drive to build shopping malls where no one buys or sells anything, but people will still yearn to preserve their savings with the precious metal as their government devalues money like its going out of style.

Bank of America: WikiLeaks next target?

While the US government does damage control on recently leaked State Department cables, rumors are flying that Wikileaks next target is Bank of America. Wikileaks’ founder, Julian Assange, recently told Forbes that their next target is “a major American bank.

In 2009, Assange told Computer World:

At the moment, for example, we are sitting on 5GB from Bank of America, one of the executive’s hard drives,” he said. “Now how do we present that? It’s a difficult problem. We could just dump it all into one giant Zip file, but we know for a fact that has limited impact. To have impact, it needs to be easy for people to dive in and search it and get something out of it.”

I am pleading with Assange to release this information ASAP, before the US assassinates him. Do it in a big cumbersome Zip file, if you must. The impact will not be limited, I promise!

Is Bank of America: confusing and confused.

Bank of America is suffering bad publicity over bad foreclosures and bad finances over bad mortgages.

In a confusing PR move, they send their “Senior Economist” over to Bloomberg to discuss the economy. This video is a few weeks old now, but you should take a look. The videos from Bloomberg cannot be embedded, so you will have to visit their site.

This Senior Economist looks like she is 16 years old. Eighteen, tops. She does not speak with confidence and gives mostly what sounds like canned, rudimentary answers. She does not instill confidence that her analysis is cogent.

Consider for a moment Bloomberg’s main audience: Middle-aged men with money. I imagine such people look at this young woman like their old buddy’s daughter who has just come back from first year at university with an A+ in Economics 101, and now has the the pretense to offer genuine insight.

If I were BoA, I would have sent an old man to Bloomberg who exuded reams of wisdom with something interesting to say. BoA is the biggest bank in the United States and this makes them look silly.

Canadian university budgets: standing at the edge of the abyss.

The Globe & Mail reports that Canadian universities face a budget nightmare brought on by pension shortfalls. Article highlights:

… Most faculty and staff have defined benefit pensions, which promise a set retirement income based on service and salary. But those funds suddenly cratered when markets crashed in 2008, most losing 15 to 30 per cent of their value. …

Two years ago, Dalhousie University’s $726-million pension plan lost 16 per cent of its value, leaving a $129-million solvency deficit – the amount that needs to be added so that if the university suddenly folded, it could honour the plan. …

The University of Toronto’s pension fund was the hardest hit, losing 29 per cent in 2008. As a result, the school expects to owe an extra $50-million a year on top of $100-million it already contributes from a $1.5-billion operating budget. Since an arbitrator recently ruled against a proposed premium hike for faculty and librarians, cuts to services are the likely solution again. …

Saskatchewan is in the midst of a three-year moratorium on solvency payments, while Manitoba and Quebec universities already enjoy permanent exemptions. So does Alberta’s UAPP, which the employers and employees run jointly, making employees “part of the problem, part of the solution,” Mr. Gupta said. But because UAPP lost 20 per cent in 2008, its employees now fork over nearly 2.4 per cent more of their salaries than they did two years ago.

Canadian universities are public institutions. The bloated pensions in the public sector are the product of the bubble mentality. When times were good, fund managers did not anticipate anything but steadily rising returns. They did not anticipate 2008. Now all the lavish promises of myriad pension plans seem unrealistic, to say the least. To keep these generous promises, universities will have to cut services for students who are already paying too much for their schools.

The article mentions about $2.06 billion pension deficits among select plans. And this is merely a snapshot of nine different institutions. In a small country like Canada, $2 billion is serious money. The final price tag will ultimately be much higher. And university pensions are just a snippet of a more general problem — unrealistically generous pensions in the public sector will become a cancer on Ottawa’s budget.

As with most western democracies, Ottawa is bound to obligations that it will be unable to meet without default, either through repudiation or Bank of Canada money printing. Ottawa is on the hook for $208 billion in public pensions, which is $65 billion more than Ottawa’s crony accounting previously suggested. This says nothing of the CPP, which will not withstand future demographic burdens, and is made up of 33% per cent fixed income, mostly government bonds, which will be decimated by the mass inflation that is sure to come. Then there are the obligations of individual provinces to various unions which are likewise unsustainable.

When the private pensions of Chrysler and GM were bust, governments intervened. University staff do not have the votes that inefficient auto workers have. But over time, as more pension funds are threatened, Ottawa’s nationalization of different retirement accounts is a very real possibility. This would be done in the name of the general welfare, of course. A government guaranteed return, say at the rate of Canada’s long-term bond, would be more reliable than the ups and downs of capital markets.

This is already reality in some parts of the world. This radical idea even gets serious consideration in the US.

Why would a government want to do this anyway? Two reasons: 1) It can help defer the bankruptcy for the CPP and federal employee pensions; 2) it confers control over Canadian capitalism because common stock carries voting rights. Think about how the US government got the president of GM to step down.

These dangers are not immediate, but they must be considered as you prepare for the future. The main lesson — whether you are a government employee sucking blood from the economy, or a productive worker whose blood is getting sucked — you cannot count on government promises for retirement.

 

Committed to Canadian capitalism.

Here at Canadian Market Review, we believe the world changed in 2008. Now, the global economy is in the midst of a crisis that has see century-old financial firms and sovereign nations alike go bankrupt. Our position is that this crisis is really only beginning to unfold. We want to better understand the implications for Canada as this happens.

Canadian Market Review is meant to be an information service only, not an investment advisor. You will lose all your money making investment decisions based on something you read on some website. Instead, read Canadian Market Review to get a Canadian, “hardcore” free-market capitalist perspective on the complex world of economics and finance.

When we say hardcore, we mean it. On economics, our closest alignment would be the MisesianRothbardian branch of the Austrian school of economics. On politics, we are Hoppean. We support capitalism — private ownership of the means of production. But we take this position to its logical conclusion. We do not accept the myth of Canada and other western democracies that private ownership and markets are fine for some things, but not “really important” things like healthcare or schools. Instead, capitalism — like truth — is best when pure. Capitalism, a social order based on private property and markets, is the harmony of people working together, communicating and exchanging. It is natural, efficient, and just.

Government interference with markets, i.e. socialism, is unnecessary and destructive to wealth, without exception. The market allocates resources to serve consumers. When there is government intervention, resources are allocated based on political decision-making. These are distortions in the market that do not serve consumers. There is taxation, regulation, and inflation. There are boom-and-bust cycles and wars.

These positions might be deemed “extreme right-wing” in regular Canadian political parlance. Canadian Market Review rejects this distinction as shallow and pedantic. For principled commitment to capitalism must reject any government interventions favored by the “right” as much as it does those on the “left.”

Many Canadians are absolutely convinced that government intervention is fundamentally good. We are not writing for these sorts of people. But for those who see something wrong with this position, Canadian Market Review will provide a valuable alternative view.

 

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