Category: Government

The United Nations Doesn’t Understand Wealth Creation

U.N._LogoThe United Nations is wrapping up their latest summit with the approval of a new 15-year plan, containing 17 audacious Sustainable Development Goals, which include everything from eradicating extreme poverty and hunger to providing everyone with work, clean water and affordable energy. While evidently well-intentioned, none of these goals will be achieved through expensive top-down U.N. programs. Instead, only institutional reforms and economic growth will be able to bring about the kind of prosperity that the poorer nations should be able to enjoy.

The latest 17 goals are similar to, and an extension of, the Millennium Development Goals that were adopted as a U.N. initiative in 2000, with a goal end-date of 2015. The fact that these are 15-year plans already hints at what is intrinsically faulty with the U.N. perspective: that growth and prosperity can be centrally planned and socially engineered. The former Soviet countries and the current Chinese government also have 5 and 10-year plans.

The biggest error underpinning these varied U.N. goals is the fanciful notion that governments and U.N. programs can provide sustainable solutions to these problems by transferring wealth from one country to another. The cost is already estimated to be at least $175 trillion over the 15-year period. There certainly are goals which aid programs can attain, especially measurable and short-term projects such as delivering food to a disaster-struck area or vaccinating a specific population. But no program can engineer long-term economic growth, which is ultimately the only way to eradicate poverty.

If this seems unconvincing, consider that up until just a few hundred years ago, the entire world had lived in poverty for thousands of years (save for a handful of kings and nobles.) If redistributing wealth from rich countries to poor countries really fostered economic growth, then how did poor countries become wealthy to begin with, when there were no rich countries around at the time to help them? How did the ‘hockey stick’ of growth happen?

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Fed Caves to Pressure, Leaves Rates Unchanged

Pressure gaugeThe Federal Reserve concluded their two-day meeting on Thursday, announcing that rates will remain unchanged. Traders and investors were not expecting a rate increase, so the announcement was no surprise. Although for some time now the Fed has been hinting at starting on a path of increasing rates, Thursday’s announcement actually shows they are not likely to start this anytime soon, with more excuses ‘not to raise’ being added to the list.

The Fed has been talking a big game this past year of getting interest rates back to more normal levels, since they have been near zero since December of 2008 (almost seven years ago!). Therefore, it was previously thought that by the end of 2015, the Fed would start raising rates and that this September meeting – or at the very latest, December – would be the start of rate increases.

But as I have previously noted, the Fed has everything to lose and not much to gain by raising rates. Their preferred measure of inflation is still low, below their 2% target level, and the economic ‘recovery’ has continued to look pretty weak. So if they raise rates, they risk crashing the economy in the near-term and getting all of the blame. Leaving rates low will cause asset inflation, or maybe even price inflation eventually, but this won’t happen until much later, at which time those things can be blamed on a host of other factors.

While the Fed likes to say they are data-dependent, pretending they are completely objective, it is obvious their decisions on interest rates are completely discretionary and largely arbitrary. With unemployment now at 5.1%, we were supposed to have had rising interest rates long ago, but the Fed abandoned those guideposts, and it became clear they didn’t want to raise rates yet.

The Fed has added another factor they can use to delay further rate increases: global economic and financial developments. The WSJ has a tool that compares the Fed’s latest statement with their last one in June, so we can see they have now added the following lines (in italics):

Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. The Committee continues to see risks to the outlook for economic activity and the labor market as nearly balanced, but is monitoring developments abroad.

The Perils of Purchasing a Lottery Ticket in Illinois

 

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My former home state of Illinois is in awful shape. Known for it’s long history of corruption, cronyism, and fiscal irresponsibility the state is now billions in the hole. Perhaps the most tragic part of all of this is that of the state’s last 7 governors, 4 have served prison time for improprieties.

Not a pretty picture.

On the heels of this current financial armageddon, my friend John who lives in Chicago called me the other evening to deliver some shocking news that nearly sent me to the nearest bar for a stiff cocktail. His breaking news:

That Illinois is so far in the toilet fiscally that they are now unable to pay their state lottery winners.

That’s right. Disbursements of Illinois Lottery winnings of $25,000 or more have come to a screeching halt becuase the state is without a budget. Several winners have been issued IOUs in the interim with assurances that they eventually receive their money once a budget is in place.

Oh, what a joy!

This comes on heels of growing media buzz about the perilous state of the Chicago Public Schools–a school system that is on the edge of bankruptcy.

For more on the larger context of this issue, check out these two recent Anthem Vault articles about Chicago, arguably the epicenter of all of this fallout.

Chicago Schools Debt Crisis

City of Chicago Debt Crisis

In the meantime, if you’re pondering purchasing an Illinois lottery ticket, you might want to reconsider. Employing the power of delayed gratification through the purchase of gold is a far better investment in my estimation.

Michael Scott is a freelance journalist specializing  on the intersection between free markets and economic freedom.  His regualr updates can be found on Twitter @biz_michael

Currency War Rages on as China Devalues Yuan

PBOCChina’s central bank has caught the markets off-guard by unexpectedly devaluing the yuan by nearly 2 percent against the U.S. dollar, roiling stocks as a result, especially those that sell to China. The central bank of China has tried to brush aside the magnitude of the move, calling it a ‘one-off depreciation’ and saying the change in policy will help drive the currency toward more market-driven movements. However, this is just another chapter in the worldwide currency war we are experiencing, and it should not come as a surprise at all.

First, it is helpful to examine more closely what China actually changed. The yuan has been pegged to the dollar for many years now, with Chinese officials allowing the yuan to trade 2% above or below a midpoint they set called the daily fixing. Officials can look at the daily trading when setting the midpoint, or they can arbitrarily set it higher or lower as they please.

The central bank has now changed its policy, saying it will base the midpoint off of the previous day’s closing price as well as market-makers’ quotes. As a result, it set the midpoint 2% lower than the previous day’s. This was the biggest devaluation of the yuan since 1994 when they let it fall by one-third as part of a breaking away from Communist state planning.

Because the rules are now more ‘market based’, it will be interesting to see if this really will be a one-off devaluation or if China will let the currency slide further. They could also continue to influence rates by entering the foreign exchange markets themselves with their reserves.

In the end, the mechanism or specifics are minor details compared to the real reason for the devaluation; participation in the global currency war. Almost nobody doubts that China is now fully engaged in the same game that developed countries have been playing for years now. Each one is devaluing their national currency as a last-ditch effort to stimulate more growth.

Myths of Inflation (and Deflation) with Christopher Casey [Interview]

Top highlights from the interview. Five of the ways that inflation is misunderstood in today’s world:

1. “Demand pull” inflation (Keynesian concept) a.k.a. an “overheated economy”

2. “Cost push” inflation (Keynesian concept) e.g., increase in the price of oil can spark inflation.

3. Velocity can exacerbate or mitigate inflation (when it reality it does not exist and is a poor proxy for monetary demand).

4. Demographics directly impacts the price level (e.g., an aging population is “deflationary” per people like Harry Dent), the impact is really indirect and only results from the nature of fractional reserve banking

5. The Federal Reserve can not successfully control inflation, it can only contribute to the price increases with its ability to print money at its leisure.

Thanks, WindRock Wealth.

Greek Bartering Reveals The Essence of Money

Barter-Chickens_for_SubscriptionThe Greek fiscal crisis has receded from the 24-hour news cycle, but unfortunately for Greek citizens, their problems are far from over, especially with strict capital controls still in place and likely to remain so for months. We previously noted how the capital controls were suffocating economic activity and giving rise to parallel currencies such as private scrip. Now many Greeks are resorting to barter as well. It is a very unfortunate situation, but one where we can observe what money is and how it evolves.

We are all familiar with barter, and it may even be something we do from time to time in our daily lives, trading a few small services and goods with friends and family without using cash. It was also this way in Greece until the capital controls arrived. As Reuters notes:

“In the past, [barter] was mostly on a family and individual level, but now it is expanding due to the developments in the banking sector and capital controls. Now it is a more structured and organised phenomenon.”

In fact, it has become so organized that citizens are formalizing it and increasingly using websites to facilitate barter:

Tradenow, a website started three years ago to facilitate barter of everything from food to technology, says the number of users and the volume of transactions have doubled since capital controls came into effect on June 29.”

Examples of those using the website range from car repair shops exchanging tires and a burglar alarm company trading services for advertising. Another internet company that operates barter on a larger scale is Mermix, which allows farmers to share heavy machinery in return for cash or cashless transactions.

All of this is certainly a step backwards for the Greeks as it slows the gears of exchange. When bartering, it takes longer to calculate what is a fair exchange; it also takes time and energy to find someone who is willing to trade. Economists call this the “double coincidence of wants problem.” Not only do you have to locate the person who has the thing you want, but you also have to make sure you have something the other person wants.