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Currency Manipulation

US and Chinese currencies

from the editors of the Wall Street Journal, Emerging Market Rip Tide:

The destabilizing effect of QE threatens global growth at a moment when none of the major economies is firing on all cylinders. By encouraging overinvestment in developing countries, it may have created new deflationary pressures. China built massive steel-making capacity that will now drive down the global price and lead to protectionist pressure in the U.S. This dislocation and wasted investment should make policy makers reconsider their faith in the power of monetary policy to stimulate growth, and put the emphasis back on pro-market reforms.

There has often been a tension between the Fed’s roles as regulator of the U.S. domestic economy and custodian of the world’s reserve currency. The QE era shows what happens when it ignores the latter responsibility. Bond-buying allowed the U.S. to pump up asset values, even as it has failed to stimulate the real economy.

U.S. presidential candidates have been quick to jump on China’s recent small devaluation as proof of currency manipulation aimed at stealing American jobs. The irony is that the Federal Reserve has been guilty of the biggest currency whipsaw the world has ever seen. And it has beggared its neighbors in the process.

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Austerity and Reality in Greece

from The Wall Street Journal, Greece and the Flight From Reality by Bret Stephens


But maybe rules isn’t quite the right word. The larger issue is reality—and Greece’s flight from it. Greece’s debt-to-GDP ratio is 177%, which sounds like an abstraction but means that this year Greece will produce barely half as much as it owes. This is what the Greek government and its fellow travelers call austerity.

As of 2008, on the eve of the meltdown, Greece had no fewer than 133 public-pension funds, each administered by its own little bureaucracy. (Under pressure from creditors, the number was supposed to come down to 13.) Greeks retire earlier and live longer than most of their eurozone peers, which means they spend close to 18% of GDP on public pensions, compared with about 7% in Ireland and 5% in the U.S. Pension fraud is pervasive, but nobody can put an exact figure on it because record-keeping is notoriously, and probably deliberately, spotty.

Privatization of state-owned companies was supposed to bring in €50 billion. Five years into the crisis, successive governments have only sold off €2.5 billion of assets. Greece has more lawyers per capita than the United States. As of 2010, Greek labor costs were 25% higher than in Germany. A liter of milk in Greece costs 30% more than elsewhere in Europe, thanks to regulations that allow it to remain on the shelf for no more than a week. Pharmaceuticals are also more expensive, thanks to the cartelization of the economy.

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Words Matter


In 1941 Senator Harry Truman made a comment in The New York Times, “if we see that Germany is winning we ought to help Russia, and if Russia is winning, we ought to help Germany, and that way let them kill as many as possible.”

It may have been reasonable to dismiss that comment as a flippant remark at the time, but Truman ended up four years later as the VP to Roosevelt. When Roosevelt died, the reluctant VP became president. One of his first tasks was to negotiate with Churchill and Stalin on how the post war world would be divided and administered.  This momentous meeting was held at Potsdam, Germany  just outside of Berlin.

The story is this transformative meeting is the subject of Potsdam- The End of WWII and the Remaking of Europe, by noted historian (and my nephew)  Michael Neiberg.

In the west our weak understanding of history has understated the outsized roll the Russians played in defeating Germany.  According to Neiberg the British suffered 383,800 battle deaths and the Americans lost 416,800. Devastating as these numbers are they paled in comparison to the Russian losses of  8.8 to 10.7 million.

The civilian death rate showed an even wider variance.  The British lost 67,100 civilians, the Americans 1,700,  and the Soviets lost an estimated 14.6 million civilians.   “Stalingrad, which had a prewar population of 850,000, had just nine children with both parents still alive at the end of the war.”

When Truman sat down to negotiate the fate of nations with the Russian foreign minister, Vyacheslav Molotov, Truman’s comment from 1941 was not deemed flippant. Molotov was aware of the comment and this made him less tolerant and trusting of the new president.  It made Truman’s demeaning tone difficult to tolerate. That comment stood to affect the state of the world, in some way.

Leaders are a slave to their words, and know to choose them carefully. By this measurement Trump is no leader. Threatening to nuke enemies, and billing Mexico $100,000 per illegal immigrant may seem like flippant, ‘tell-it-like-is’ comments to his populist sycophants, and it may gin a crowd motivated by frustration, but if in our worst nightmare such a man became president these words would have consequences.

A man who is fast and loose with his words is not presidential material.  If he constantly has to explain what he really meant, if he is constantly complaining that he was quoted out of context, then he is not ready to play in the arena he is seeking.

Trump is to this campaign like the loose women a man dates in college before he settles down.  Have your fun, but sooner rather than later you need to get serious. This is not a hotel chain or a casino he is attempting to run.

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Illusions of Grandeur


from The Wall Street Journal, Greece and the Flight From Reality by Bret Stephens


What’s more remarkable is how Greece’s flight from reality persists. Since Athens defaulted on its IMF loan last week, the Greeks have gotten a taste of what their future holds: shuttered banks, ATM withdrawal limits, pensioners lining up for their €134 weekly allowance. And yet they voted overwhelmingly for a government that is leading them, almost inevitably, to a swift exit from the euro and possibly the European Union, their only lifelines. Pride goeth before destruction, goes the proverb. So does stupidity.

Perhaps in a few weeks, the Greeks may notice that their vote has put them at the mercy of Mrs. Merkel and other European overlords as never before. Or they might not. If the demagoguery of the Syriza government has worked, it’s because the Greeks were a people who wanted to be demagogued.

The conceit of democracy is that people will eventually learn from their mistakes—even if they must first make those mistakes—and that experience is the ultimate teacher. But suppose it is not? Argentina shows that people can get it wrong generation after generation; that illusions of grandeur can sustain a politics of failure.

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Wealth Without Work


from The Wall Street Journal, Greece and the Flight From Reality by Bret Stephens


These and other details give the lie to the claim that Athens’s woes are somehow the product of powerful and indifferent economic forces beyond its control: the value of the euro, or the machinations of high finance, or the mood swings of Angela Merkel. Greece wanted to be prosperous without being competitive. It wanted to run a five-star welfare state with a two-star economy. It wanted modernity without efficiency or transparency, and wealth without work. It wanted control over its own destiny—while someone else picked up the check.