Tag Archives: political economy

“We Need to Decide”

Posted on by
Reply

So says President Xi Jinping of the People’s Republic of China.

Speaking in Spain while enroute to the G-20 conference in Argentina, Xi said

I think we are at a crossroads. In economic terms we need to decide if we are going to follow the economic globalization and free market or if we are going to choose unilateralism and protectionism.

“Crossroads” may be a bit much.  Certainly, we’re at cross purposes on international trade matters, but I think “crossroads” overstates the case.  The current budding crisis will fade before it breaks, or we’ll recover after it breaks.  In either case, the situation is not at all irrecoverable.  Irrecoverability was a serious risk in WWII.  Irrecoverability was a serious risk during the global depression of the 1930s due to all the government interventions—interferences—into their domestic economies, which badly slowed those recoveries.  We’re not near that today.

The larger question, though, is the falseness of Xi’s remark about globalization vs unilateralism, free market vs protectionism.

We do need to follow free market tenets along with free trade principles and the degree of globalization that will ensue from those freedoms.  It would be good if the PRC followed those tenets and principles, too.  Instead, Xi’s government engages in theft of proprietary material, theft of intellectual property, extortion of those things as a price of doing business inside the PRC.  It requires government backdoors into the software used by companies doing business inside the PRC.

Xi’s government sets trade barriers including requirements to take on a PRC company as equal or majority partner as a condition of doing business inside the PRC (Xi talks of waiving that requirement in a couple of cases; neither of those waivers actually have occurred), heavily subsidizes domestic businesses, blocks economically useful mergers between international companies headquartered in other nations—other continents—for noneconomic reasons, routinely intervenes in its domestic stock “markets,” manipulating its currency value, and on and on.

Xi’s government tried to abuse its monopoly power in rare earth elements by limiting its exports to other nations below economic, free market demand levels.  Its occupation of the South China Sea and the islands—owned by other nations—is for the purpose of controlling the resources on/below the sea bed and the food supplies in the waters.

Xi’s government exports substandard—even dangerous—products like poisoned pet food, plywood sheets laced with formaldehyde, baby formula spiked with melamine powder.  The list goes on.

It would be good if the PRC did join the consensus for free and open trade.  To do that, though, the PRC would have to move away from its current business model, a model of theft and coercion rather than a model of honest markets and freely done international trade.

Volatility in the Market

Posted on by
Reply

Some folks worry about the return of turbulence—their term—to stock market pricing.

Market turbulence is leading some investors to call on the Federal Reserve to halt its campaign of interest rate increases….

No need.  The Fed needs to get its benchmark rates back to levels historically consistent with its goal of 2% inflation instead of its heretofore artificially suppressed rates.  It’s getting close, but the Fed isn’t there yet—it has a couple-three more rate increases yet to go.

Those investors need to understand a couple of things about volatility—or turbulence—in the market.  For short-term traders, volatility presents buying opportunities.  For long-term investors, volatility is just noise in the system, well worth ignoring.  For yield chasers, volatility represents opportunities to go broke in short order, culling the herd for the benefit of the rest of the trading/investing population.

Nevertheless, we get guys like Stanley Druckenmiller, who once ran a George Soros hedge fund and has hectored the Fed to raise rates from those artificial lows, saying

I would pause and see if the market knows something we don’t[.]

It’s almost always the case, though, that the market knows something we don’t.  And I include my august self in that “we.”

The Fed needs to stay the course, or if a change in pace is warranted, the Fed needs to get quickly to those historically consistent levels.  In either case, the Fed then would need to sit down, be quiet, and let the market do what it knows more about than the rest of us.

EU Counterproductive Meddling

Posted on by
Reply

Italy is standing tall on its budget for the next fiscal year, despite the European Union’s disapproval of it.

The EU Commission has again rejected Italy’s proposed budget on Wednesday, paving the way for financial sanctions to be applied in the next few months.

The specific bone of contention centers, mostly, on projected budget deficits as a per cent of GDP.  The Italian budget deficit works out to 2.4% of GDP, the Italians say, which is well within the 3.0% EU limit; however, the EU Knows Better: the Commission claims the deficit will exceed 3.0% by 2020.  Whom to believe….

One indication of integrity is this.  Italy’s debt-to-GDP ratio currently stands at 130% of GDP, which is well above the EU-recommended upper bound of 60%.  In the Commission’s view, though, that recommendation is an EU mandate, and it’s demanding that Italy also act to reduce its debt-to-GDP ratio.

Or there will be consequences.

 [I]f Italy still fails to comply [on the budget deficit matter], the Commission can apply financial sanctions, which can include fines up to 0.2% of GDP….

Another indication. The EU thinks the Italian government is spending too much, so it will punish the nation by making the Italian government spend even more.

Other member nations need to take notice as they contemplate their own future in the EU.

There Goes the Neighborhood

Posted on by
Reply

The EU has decided to put a lid on the cost of phone calls.

The European Parliament has approved new telecommunications rules that will cap prices of intra-EU phone calls….

And those Parliamentarians are proud of themselves for this.  MEP Constanze Krehl, who speaks for the German Social Democratic Party on matters related to telecommunications:

It was high time to cap the sometimes outrageous prices for international calls in the EU[.]

Just like rent controls, though, this will serve only to stifle maintenance and improvement.  Quality will lag and eventually go outright downhill as the cost of providing the service eats more and more into the revenue—now maxed out—gained from providing it.

Ultimately profits will shrink to the point that too few providers will exist and more than just price will be capped, so will capacity be capped.  Just like housing in rent-controlled areas.

No Nation is an Island

Posted on by
1

That’s the concern of The Wall Street Journal in one of its Thursday editorials.

President Trump’s biggest achievement has been the revival of faster US economic growth, but past performance is no guarantee of future results. The White House should be worried about growing economic strains in the rest of the world, and policy makers need to prepare. The US is not an island.

The WSJ went on to note that the Germany economy shrank 0.2% in the last quarter, the Japanese economy shrank by 0.3% in the same quarter, and the PRC’s economy “only” grew by 6.5% year-on-year in the same quarter.  The WSJ particularly worried about the German auto industry.

However.

It’s true enough that the US is not an economic island, but there are many, and serious, factors that are beyond our control and that the WSJ chose to be silent about.

Take Germany, for instance. Its labor laws are almost as draconian as the French and, together with German regulations, leave that economy much less nimble in changing conditions than it needs to be.  And even though the German auto industry wants a zero-tariff trading regime, at least with its products, the German government has shown its disinterest with its lack of action at the EU level.

The Japanese economy also is heavily regulated and inflexible, for all that it’s not a centrally planned one.  There’s no economic flexibility there.

That’s especially true with the especially heavily regulated and overtly, deliberately centrally planned economy of the PRC.

Our other trading partners? The EU as a whole has rejected any concept of a tariff-free environment with the US, it routinely attacks our companies’ competitive success across Europe, it constantly seeks to raise taxes on our companies rather than lowering their own to competitive levels, and on and on.

There’s only so much we can do with trading partners whose government denizens are more interested in their personal political and fiscal powers than they are in the welfare of their citizens.