Archive for the ‘economics’ Category

The financial crash

Sunday, September 21st, 2008

Brad de Long looks at the financial crisis, and concludes that the wise and good hand of government is necessary.

Third, the market fundamentalists in other sectors will need to be quiet for quite a while. We have just seen financial markets rife with moral hazard, agency, and adverse selection problems crash spectacularly. Is this a situation in which we should move health care–also rife with moral hazard, agency, and adverse selection problems–toward a free market configuration? No. Market regulation needs to be smart.

He gives us a wonderfully clever explanation about multiple financial equilibria. The good hand of the wise and superior technocrat is needede to hold the market at the good equilibrium, and keep it away from the bad equilibrium. Eventually, however, he gets around to mentioning that this explanation is completely irrelevant,for the various financial intermediaries were in fact stony broke.

The cause of the crisis was nothing to do with market failure. Rather, the problem was business failure – businesses made lots of very bad loans, and accounting failure – accounts were prepared in faithful compliance to Sarbanes-Oxley, as the government commanded in excruciating detail, thereby completely obfuscating the fact that these businesses were insolvent.

The success of globalization

Tuesday, August 12th, 2008

Massive globalization — a major move towards free market capitalism — has brought over a billion people out of poverty, while sixty years of socialist chaos and violence has failed to convince most of the world that central planning is a very bad way to run any economy.“Ruble” symbolizes pretend money, unconvertible into goods, much as “Finland” symbolizes submission to a hostile power, and “Peso” symbolizes inflation.

Globalism has done what socialism promised to do and failed to do: It has lifted those parts of the third world that adopted it out of poverty. If you have been shopping for a subnotebook, this should be obvious. Globalization means that if you are using a subnotebook, you are using a subnotebook designed and built in a country that recently used to be third world and used to be socialist, but which has moved substantially towards free market capitalism.

Socialism aimed to create an alternative to normal economic transactions, an alternative that would avoid such banes of capitalism as business cycles, windfall profits, and unemployment. Socialists expected to that their benevolence, wisdom — and absolute power backed by the most brutal extremes of savage violence — would bring the poor out of poverty, but instead chained the poor into serfdom and slavery.

Socialist transactions usually involved crises, shortages, unfullfillable quotas, and the continual threat and frequent reality of violence.

To do what they were commanded to do, administrators under socialism had to do what they were forbidden to do — the plan functioned, in so far as it did function, through an illegal underground black market economy. To enable the military plan to be fulfilled, troops lurked on the road to intercept and seize goods planned for other purposes. Civilians substituted the black market for the plan, and the military substituted pillage for the plan.

The Soviets created a Potemkin village of normality, thinly concealing a chaotic and violent reality that people were forbidden to notice.

Socialists interpret trade and business as fraud and violence, which gives them continual cause for war, especially war on their disarmed and frightened subjects. The failure of socialism was and is blamed on internal and external enemies. Somehow, capitalism was continuing, so more violence was required. If poverty is caused by wicked capitalists, and poverty continued, then obviously capitalism must be continuing, and must be hunted down and crushed.

“Globalization” is that Walmart and China are entwined, that American business phones are manned by Indians in India, and as a result of globalization, a major part of the third world, most importantly India and China, are now becoming first world.

Globalization is a success, a success as obvious and spectacular, as socialism was a spectacular and dreadful failure.

Lots of planning and state intervention remains — and lots of violence and chaos remains. But to the extent that do we have globalization, it has succeeded spectacularly. Its crises are the crises of success. If Chinese were still trudging around barefoot in the mud and snow, we would not have the present energy crisis.

There is still a lot of state intervention and state owned enterprises, in China and elsewhere, but there is now a lot less of it, and what there is accepts capitalism, rather than trying to fix capitalism. No more “iron ricebowl” in China.

China still has extensive state owned enterprises, but they no longer have monopoly privileges – they are subject to competition, and required to make a profit. If they lose money, the management is fired. If they continue to lose money, everyone is fired – which is one hell of a lot less socialist than America’s Amtrack, and features business cycles, windfall profits and unemployment, all the things that socialism and state intervention was justified as remedying. The resource crisis has led to huge windfall profits by Chinese resource businesses, and of course lots of Chinese state owned enterprises have shut down for inability to turn a profit, leading to unemployment, plus the whole economy is coordinated through just in time contracts organized by firms run from outside China, through private contracts with global businesses, not through a government plan. The Chinese economy is run through virtual private networks managed by overseas servers, the servers largely located in places such as Bermuda, which virtual private networks and servers are the nerves and sinews of globalization.

And to the extent that such intervention has been dramatically reduced, and transformed in ways that make it less disruptive of capitalism, transformed in ways that accept the unpredictable outcomes of free market competition, and the winners and losers that such competition produces, the poor have become vastly better off.

 

Explanations of the oil price rise

Thursday, August 7th, 2008

My explanation for high oil prices is the collapse of oil states. Arnold Kling argues that instead the problem is that investors fear the collapse of advanced states, so are reluctant to take their money.

My explanation is that oil states are increasingly short of the competence to pump oil, the ability to provide security to people pumping oil, and the credibility to make deals with people who are competent to pump oil — for example it is difficult for foreign companies to pump oil in Nigeria, because there are too many different bandits and terrorists to pay them all off, and difficult for foreigners to pump oil in Venezuela or Mexico, because the government cannot credibly promise not steal everything, and difficult for the Venezuelan government to pump oil, since it could not run a pie stand, plus the security situation in Mexico, though better than Nigeria, is deteriorating.

Arnold Kling, however, argues that the problem is the increasingly scary on book and off book debt levels of the advanced nations, in particular the US. Investors fear hyperinflation. Where to put their money? Answer: Buy commodities that are underground, and leave them underground.

US Chamber of commerce protests junk science

Wednesday, August 6th, 2008

The second national climate assessment predicts that the United States will “very likely” experience rising sea levels and increasing droughts, heat waves, intense storms and resulting illness and premature death over the next century as climate change intensifies.

But, as is the usual practice with climate “science” , the report fails to make available the evidence that supposedly leads to this conclusion, a gross and flagrant violation of normal and proper scientific practice.

And so, the US Chamber of Commerce, not academia, not any scientific body, has demanded that normal scientific standards be upheld.

Bernanke explains what he is doing wrong

Tuesday, July 22nd, 2008

In his speech Governor Ben S. Bernanke observed that if inflationary expectations rise, and the Fed fails to raise interest rates correspondingly, this is unstable. He failed to make the reason for this clear, but the reason is that real interest rates are nominal interest minus expected inflation – so a rise in inflationary expectations causes a fall in real interest rates, causing massive real borrowing – as for example the housing boom and flight from money into real things, such as oil, which causes actual inflation, which increases inflationary expectations.

Which is of course exactly what has been happening. Inflationary expectations have escalated, as shown by the price of gold that international value of the US dollar, and Bernanke failed to raise interest rates correspondingly, leading to a vicious cycle, which is still under way as I post this.

Bush rolls back oil prices, MSM in denial

Friday, July 18th, 2008

Political correctness is that we should not drill for oil, for more oil will not solve the problem of high and rising fuel prices. Which political correctness the mainstream media firmly endorse.

There are multiple bans on oil drilling. Bush ended one of them, which had no immediate effect on oil drilling, for other bans in place. But it had immediate psychological effect. Oil prices immediate dropped about eighteen dollars, a huge drop, which the press is frantically trying to explain away with any explanation other than the glaringly obvious one.

If the politicians suspended enough bans that drilling actually became legal again, we would therefore see an immediate and considerably bigger drop in the price of oil, even before any actual drilling takes place, for sellers of oil, expecting competition to cut their prices in future, would sell oil right now, to take advantage of present high prices.

The price of oil is absurdly high, because sellers of oil observe that the high price is not leading anyone to go out and get more oil, from which they conclude that oil can only go higher still, so they might as well sit on it.

Solution to the energy crisis

Sunday, June 29th, 2008

Newt
tells it how it is: This crisis was caused by politicians. He tells how
to reduce fuel costs in the short run, and the long run. “you want
energy now” he tells us. And then he tells us how to get it.


How do we solve the energy crisis? Answer. Let businessmen extract oil. Drill here. Drill now. Pay less.

Roots of the energy crisis

Monday, June 16th, 2008

The energy crisis happened because of optimistic projections – that gas to liquid and coal to liquid would not be needed until the technology had been improved and the cost brought down, that the dramatic growth in China and India could be accommodated by rapidly expanding conventional oil production.

The political elite, unable to introduce a carbon tax because it would directly and visibly hurt people, proceeded to block coal and oil developments, thus invisibly and directly hurting people. The plan to develop America’s vast shale oil reserves was shot down a few weeks ago by the Democrats. At the same time, various oil states suffered partial, and in the case of Nigeria, near total collapse, making it difficult to extract oil without employing old fashioned imperial methods which are politically unthinkable in this day and age.

I wish I could end this by saying “so the solution is…”. But there just is not a solution. Energy is best produced in big, large scale projects. In a world of insecure property rights, where corporations are unpopular and disarmed, big projects are no longer feasible. The general world trend is any big project is going to be unworkable without a correspondingly big bunch of guys with guns who have the right, and feel they have the right, to do what it takes to protect that project. As I have said before, underground coal gasification followed by gas to liquids conversion is the technological solution, but that technological solution requires a political solution, and that political solution is nowhere on the horizon.

I wish I could end this by saying “so the solution is…”. But there just is not a solution. Energy is best produced in big, large scale projects. In a world of insecure property rights, where corporations are unpopular and disarmed, big projects are no longer feasible. The general world trend is any big project is going to be unworkable without a correspondingly big bunch of guys with guns who have the right, and feel they have the right, to do what it takes to protect that project. As I have said before, underground coal gasification followed by gas to liquids conversion is the technological solution, but that technological solution requires a political solution, and that political solution is nowhere on the horizon.

Rational Oil Prices

Friday, June 13th, 2008

It seems that Arnold Kling has been in Afghan cave during the past six months. He does not seem to think that there has been any bad news on oil supply over the last six months.

The recent run-up in oil prices represents a similar puzzle. I think that it’s difficult to tell a story for the rise in crude prices for the last six months that is based on the rational digestion of news. Either six months ago folks were overly optimistic about long-term supply and demand conditions or now they are overly pessimistic about those conditions. I don’t think that what changed in the last six months was the ews about supply and demand.

I have been watching the news, and over the past few months it has been quite horrifying, particular with the Democrats and both major party presidential candidates shooting down Shell’s plan to develop shale oil, which pretty much guarantees extraordinarily high oil prices for at least the next two decades. Indeed, the political majority in most of the developed world seem to intend to block all carbon extraction.

Will DME save us from the oil crisis?

Saturday, June 7th, 2008

To satisfy world demand, as former third worlders become first worlders, and want cars and air conditioning, the world needs to increase production of oil and oil substitutes about three million barrels per day each year. Equivalently, the world needs to increase production one hundred and fifty million tonnes per year per year. (more…)