Australia Is "Going Down Under": "The Bubble Is About To Burst", RBS Warns

Thanks to a variety of idiosyncratic political crises and country-specific stumbling blocks, Brazil, Turkey, Malaysia, and to a lesser extent Russia, have received the lion’s share of coverage when it comes to assessing the EM damage wrought by the comically bad combination of slumping commodities prices, depressed Chinese demand, slowing global trade, and a “surprise” yuan devaluation. 

Put simply, the intractable political stalemate in Brazil, the civil war in Turkey, the 1MDB scandal in Malaysia (and the fact that the country was at the center of the 1998 meltdown), and the hit Russia has taken from depressed crude prices mean that if you want to pen a story about emerging market chaos, those four countries have plenty to offer in terms of going beyond the generic “falling commodities + a decelerating China = bad news for EM” narrative. 

But just because other vulnerable countries aren’t beset with ethnic violence and/or street protests doesn’t mean they too aren’t facing crises due to falling commodity prices and the slowdown of the Chinese growth machine. 

One such country is Australia, which in some respects is an emerging market dressed up like a developed economy, and which of course has suffered mightily from the commodities carnage and China’s transition away from an investment-led growth model. 

Out with a fresh look at the risks facing Australia is RBS’ Alberto Gallo. Notable excerpts are presented below.

*  *  *

From RBS

Australia has become a commodity focused economy, with an increasing exposure to China. For the past decades, Australia has been buoyed by the rapid Chinese expansion, which outpaced the rest of the world. Australia benefited from China’s strong demand for commodities given its investment-led growth model. China is Australia’s top export destination and 59% of those exports are in iron-ore. But as China struggles to manage its ongoing credit crunch and continues its shift to consumption-led growth Australia’s economy is likely to be hurt by lower demand for commodities. 

The economy is slowing due to external headwinds. Last quarter, Australian GDP grew at just 0.2% QoQ, its lowest level in the last three years (and below the market consensus of 0.4%). According to the Australian Bureau of Statistics (ABS) the growth rate was driven by higher domestic demand, while lower exports and a declining mining industry continue to present headwinds. Mining’s gross value-added to GDP fell by - 0.3% QoQ in Q2. Despite Reserve Bank of Australia (RBA) governor, Glenn Stevens, citing lower growth as potentially a “feature of the post financial crisis world” meaning that “potential growth is a bit lower”, Australia’s slowing economy is more than just a victim of the post financial crisis world, in our view. Rising unemployment coupled with soaring house prices and vulnerabilities in the commodity and construction sectors are all cause for concern. 

Unemployment is rising, and could increase further, given the high proportion of employment in the vulnerable mining and construction sectors. Unemployment is at 6.2%, just shy of the ten year high of 6.3%.Although the number itself is not worryingly high, unemployment has been rising for the last three years, and is likely to continue in our view. Mining and commodity sectors employ 4.5% of the workforce. With lower demand for commodities from China, unemployment in these sectors could rise. Also, unemployment may rise in the construction sector (8.9% of workforce) given vulnerabilities in the housing market, as we explain below.

There are domestic headwinds, too. The housing market is vulnerable, with overvalued properties and over-levered households. House prices in Australia have risen by 22% in the last three years (according to the Australian Residential Property Price Index), with property prices in Sydney overtaking those in London. House prices have risen faster than both disposable income and inflation in recent years, with the gap between growth in house prices and household income closing by over 40% in the last three years.

If unemployment continues to rise, due to losses in mining and construction, the house price bubble could pop. Rising unemployment in the mining industry, due to its exposure to a slowing China, will create risks in the property market; house prices are likely to fall as the newly unemployed could be forced to sell.

The RBA has less dry powder now. The central bank has cut rates twice this year, from 2.25% in March to 2% now. As the domestic economy slows, accommodative policy is needed to encourage investment, particularly in non-mining sectors, to boost growth and create jobs. However, with rates already at 2%, there is much less headroom for monetary easing to offset a downturn in Australia.

The worst is yet to come, in our view.

Continue Reading...

zerohedge.com/Tyler Durden/October 2, 2015

Read More

Central Banks Don't Dictate Interest Rates

According to mainstream thinking, the central bank is the key factor in determining interest rates. By setting short-term interest rates the central bank, it is argued, through expectations about the future course of its interest rate policy influences the entire interest rate structure. (According to expectations theory (ET), the long-term rate is an average of the current and expected short-term interest rates.) Note that interest rates in this way of thinking are set by the central bank, while individuals in all of this have almost nothing to do and just mechanically form expectations about the future policy of the central bank. (Individuals here are passively responding to the possible policy of the central bank.)

Time Preference Is the Driving Force

But Carl Menger and Ludwig von Mises suggested otherwise and concluded that the driving force of interest rate determination is not the central bank, but an individual’s time preferences.

As a rule, people assign a higher valuation to present goods versus future goods. This means that present goods are valued at a premium to future goods.

This stems from the fact that a lender or an investor gives up some benefits at present. Hence the essence of the phenomenon of interest is the cost that a lender or an investor endures. On this Mises wrote in Human Action,

That which is abandoned is called the price paid for the attainment of the end sought. The value of the price paid is called cost. Costs are equal to the value attached to the satisfaction which one must forego in order to attain the end aimed at.

For instance, an individual who has just enough resources to keep himself alive is unlikely to lend or invest his paltry means. The cost of lending, or investing, to him is likely to be very high — it might even cost him his life if he were to consider lending part of his means. So under this condition he is unlikely to lend, or invest even if offered a very high interest rate.

Once his wealth starts to expand, the cost of lending — or investing — starts to diminish. Allocating some of his wealth toward lending or investment is going to undermine, to a lesser extent, our individual’s life and well being at present. From this we can infer that anything that leads to an expansion in the real wealth of individuals gives rise to a decline in the interest rate (i.e., the lowering of the premium of present goods versus future goods). Conversely, factors that undermine real wealth expansion lead to a higher rate of interest.

Time Preference and the Demand for Money

In the money economy, individuals’ time preferences are realized through the supply and the demand for money. The lowering of time preferences (i.e., lowering the premium of present goods versus future goods) on account of real wealth expansion, will become manifest in a greater eagerness to lend and invest money and thus lowering of the demand for money.

This means that for a given stock of money, there will be now a monetary surplus.

To get rid of this monetary surplus people start buying various assets and in the process raise asset prices and lower their yields. Hence, the increase in the pool of real wealth will be associated with a lowering in the interest rate structure.

The converse will take place with a fall in real wealth. People will be less eager to lend and invest, thus raising their demand for money relative to the previous situation. This, for a given money supply, reduces monetary liquidity — a decline in monetary surplus. Consequently, this lowers the demand for assets and thus lowers their prices and raises their yields.

What will happen to interest rates as a result of an increase in the money supply? An increase in the supply of money means that those individuals whose money stock has increased are now much wealthier.

Hence this sets in motion a greater willingness to invest and lend money. The increase in lending and investment means the lowering of the demand for money by the lender and by the investor. Consequently, an increase in the supply of money coupled with a fall in the demand for money leads to a monetary surplus, which in turn bids the prices of assets higher and lowers their yields.

As time goes by the rise in price inflation on account of the increase in the money supply starts to undermine the well being of individuals and this leads to a general rise in time preferences. This lowers an individuals’ tendency for investments and lending, i.e., raises the demand for money and works to lower the monetary surplus — this puts an upward pressure on interest rates.

Monetary Policy and Real Wealth

In a market economy within the framework of a central bank, the key factor that undermines the pace of real wealth expansion is the monetary policy of the central bank.

It is loose monetary policy that undermines the stock of real wealth and the purchasing power of money. We can thus conclude that a general increase in price inflation — resulting from an increase in the money supply and a consequent fall in real wealth — is a factor that sets in motion a general rise in interest rates. Meanwhile, a general fall in price inflation — in response to a fall in the money supply and a rise in real wealth — sets in motion a general fall in interest rates.

Furthermore, an increase in the growth momentum of the money supply sets in motion a temporary fall in interest rates, while a fall in the growth momentum of the money supply sets in motion a temporary increase in interest rates.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

mises.org/daily/Frank Shostak/ September 24, 2015

Read More

Aussie Property Market Collapse Looms As Chinese Flee Amid Capital Controls

Given the recent admission by the Australian Central Bank that property prices "have gone crazy," it appears new Chinese 'regulations' may just kill Australia's golden goose of 'weath creation' as Aussie's largest trade partner sees its economy collapse. While the Aussies themselves proclaimed a "war on cash," it appears, as AFR reports, thatChinese purchases of Australian property have dropped significantly in the past month, according to agents, as buyers struggle to shift money out of the country following Beijing's move to tighten capital controls. With Chinese banks now limiting any overseas transfer to USD50,000 - in an effort to control capital outflows - and with China dominating the Aussie housing market, one agent exclaimed, "it has affected 70 to 80 per cent of current transactions and some have already been suspended."

To date Chinese investment has been overwhelmingly focussed on the most familiar capital city property markets of Melbourne and Sydney, with around 80 per cent of foreign investment hitting Victoria and New South Wales. As PeteWargent shows, China dominated the foreign buyer of Aussie homes...

As Bloomberg notes, Chinese buyers were approved to buy A$12.4 billion ($9.9 billion) of Australian real estate in 2013-14, the Foreign Investment Review Board said in its annual report, without differentiating between commercial and residential property. China's total approved investment in Australia was A$27.7 billion over the period, compared with the U.S.'s A$17.5 billion.

And Q1 2015 showed no signs of a slowdown in that flood of capital to Australia...

But now, as AFR reports, China's capital controls will kill that flow of money into Aussie property...

Chinese purchases of Australian property have dropped significantly in the past month, according to agents, as buyers struggle to shift money out of the country following Beijing's move to tighten capital controls.

One Chinese agent said the latest efforts by the central government to avoid large capital outflows werehaving a "significant impact" on his business.

"It has affected 70 to 80 per cent of current transactions and some have already been suspended," said the agent who asked not to be named.

The tighter foreign exchange rules are also set to impact the federal government's relaunched Significant Investor Visa (SIV), which provides fast-tracked residency for those investing at least $5 million into Australia.

"I think it will be big, big trouble for the SIV program because the amount of money is just too large," said one Shanghai-based adviser, who sells Australian property and advises wealthy clients on their migration plans.

Only seven SIV applications have been submitted since the new rules were introduced on July 1, which require investors to put their money into riskier assets such as venture capital and emerging companies.

China has previously tolerated significant capital outflows via so called "grey channels", but has tightened up enforcement in recent weeks as the economy slows and fears over capital flight put downward pressure on the currency.

The crackdown from Beijing has seen Chinese banks setting up watch lists for unusual transactions, according to one bank manager, who asked not to be named as he was not authorised to speak about the policy.

He said the operation was aimed at cracking down on a practice whereby family and friends of those wanting to purchase a property overseas all transfer US$50,000 into an overseas account. That's the limit each Chinese individual is allowed to move out of the country each year.

The purchaser then pays back his friends and family in China and uses the money from the overseas account to put down a deposit on the property.

However, banks are now tracking the source of funds for overseas bank accounts that have received more than US$200,000 within 90 days, according to the bank manager, who works in Shanghai for one of the major state-owned banks.

"We have always had this policy but now it has been restated and is being enforced more strictly," he said.

"In the past we could find a way around these rules but now all those ways have been blocked."

"I'm sure this would be having an impact on overseas property purchases," he said.

And here is the punchline!!

The tighter rules in China come as Sydney recorded its lowest auction clearance rate for the year this past weekend, while Melbourne has now recorded two weekends below the same time last year, according to Corelogic RP Data.

*  *  *

Finally, as we have noted previously,

The problem is that Australia, after decades of effort to diversify, is looking ever more like a petrodollar economy of the Middle East, but without the vast horde of foreign currency reserves to fall back on when commodity prices fall.

Instead, Australians must borrow to maintain the standards of living that the country has become accustomed to, which even some Greeks will admit is unsustainable.

Continue Read...
zerohedge.com/Tyler Durden/ September 15, 2015

Read More

Markets Brace Themselves for First Rate Hike Since 2006

The first line of The Economist's article puts it this way: "The last time the Federal Reserve raised its benchmark interest rate, there was no one to tweet about it."

That's because there was no such thing as Twitter in June 2006, when the Fed raised the Federal Funds Target rate from 5 percent to 5.25 percent. MySpace was still popular then, too, and YouTube was only 18 months old.

But, since then, the Fed has only decreased the target rate, in spite of multiple claims from the Fed that the economy is "showing signs of strength" and other euphemisms for an economy that's too fragile to endure a rate hike. The effective Fed Funds rate, of course, has been approximately zero since 2008.

So, with nine years between us and the last rate hike, it's understandable that markets may be a bit jittery about a change.

Every time the fed meets, there's speculation that it might raise rates, but this time, there's worry that it might actually happen. After all, the Fed has been threatening to raise rates since at least late last year. But, as David Stockman and others have pointed out, the window for a rate hike may have already closed.  Things may have looked strong enough to justify a hike during the summer, but with recent volatility in the stock market, and August 24's Black Monday, that time may have already passed.

But, the Fed may feel it has to raise rates, at least for a short token period, before it lowers rates again. After all, after nine years, it the Fed has to pretend that a zero rate is not permanent policy.

The consensus among cynics, however, seems to be that the Fed will raise the rates a quarter of a percent, and then quickly lower them against before engaging in fresh rounds of QE. The cynics are probably right.

But even a brief rate hike is way too much for some people. David Stockman writes that "the Keynesian Chorus has launched a full blast trilling campaign, emitting an increasingly shrill cackle of warnings against a Fed rate hike." Stockman incredulously notes that there are economists now out there claiming that the Fed "has become downright restrictive.”

Since 2006, the goal posts have been moved so much that if the Fed simply declines to open the money-creation gates only three-quarters of the way, that's "restrictive." It makes one feel downright old to know one is among those who remember there once was a time when the effective rate might rise above 5 percent. (Fortunately, I'm not ancient enough to remember rates over ten percent.)

But, nowadays, all that matters is QE. There's no need for savings, investment, capital accumulation, or all that old fashioned stuff. We just need more QE, and anything else is "downright restrictive" on the part of the central bank. All of this betrays claims of a strengthening economy of course, since, while we do indeed see numbers — such a job creation and housing starts — that point to "growth," we all know boom is intimately connected to money creation. This is a rickety apple card the Fed doesn't want to upset.

Addendum: For historical perspective, here's an additional graph that shows the target rate back to 1992, so you can see the dot-com bubble years as well. We do find that the Fed, back thebn, was not backed into the corner it is now. There were many factors at work then, including an appetite for dollars and US debt in the developing world.  But there's also reason to believe that there were better economic fundamentals at the time. In any case, there was no need for QE to achieve the levels of growth we can only wish for now.

Graphs by Ryan McMaken. Data source: https://apps.newyorkfed.org/markets/autorates/fed-funds-search-page

mises.org/blog/Ryan McMaken/ September 11, 2015

Read More

Canada's Real Estate Bubble Turns Bust

A report from the Financial Post shows that Calgary in Alberta Canada now has 1.7 million square feet of empty office space, the most in North America with another 5.2 million under construction! After years of booming construction, the natural resource rich country is starting to feel the pinch.

CALGARY – The number of half-empty office buildings in Alberta is projected to spike, as Colliers International predicts an “ill-timed” building boom should push up vacancy rates in Calgary and Edmonton.

In a report released Tuesday, the real-estate brokerage’s chief economist Andrew Nelson said, “the fall in oil prices has had a negative impact on the energy-reliant markets (in Western Canada),” which has contributed to rising vacancy rates and falling rental prices in Alberta’s two largest cities.

Vacancy rates jumped over the course of the second quarter. In Calgary’s case, Colliers reported the downtown vacancy rate rose to 13 per cent from 10 per cent, while Edmonton’s vacancy rate increased to 11.2 per cent from 10.6 per cent.

A glut of new buildings under construction in both cities could push those numbers up even higher.

“Canada is also in the midst of an ill-timed supply surge that caused vacancy rates to rise even in markets with positive absorption in (the second quarter),” the report noted.

There are 5.2 million square feet of office space under construction in Calgary right now, which is the largest amount of new commercial space being built in any city in Canada and could further push up vacancy rates.

Edmonton, a city with a current total of 17 million square feet of office space, is in the middle of its own building boom with over 2 million square feet of space under construction.

But here comes the silver lining!

Some observers see at least a partial silver lining in the numbers.

In recent years, Calgary Chamber of Commerce director of policy and research Justin Smith said, commercial real estate costs downtown Calgary were “going through the roof” and “accelerating at a pace far beyond the Canadian average.”

He said those escalating costs made it difficult for some companies to stay in downtown Calgary and noted that even large companies like Imperial Oil Ltd. and CP Rail Ltd. moved their head offices to the suburbs.

The uptick in vacancy rates, he said, could provide some relief to smaller companies looking to do business downtown, as rental rates are projected to fall as vacancies rise.

However, the numbers in Calgary may understate how much office space is sitting empty as a result of a phenomenon called ghost vacancies, where companies that have cut staff hold onto more office space than they need.

Colliers executive vice-president and partner Jim Rea said that ghost vacancies mean that, even if employment levels rise, vacancy rates may hold steady.

“The ghost space may never come to market, but those companies that currently have excess capacity of office space, as they continue to staff up, you can’t assume that they’ll be back in the market looking for more space,” Rea said.

Weakening demand for office space in both Calgary and Edmonton has resulted in large quantities of commercial real estate coming back on the market this year.

The report showed that 1.7 million square feet of office space has become available in Calgary’s downtown core, thanks in part to thousands of layoffs in the oil patch and a decline in the need for commercial space.

That is the largest quantity of newly empty space in any downtown in North America, including Houston, an oil and gas town where 1.6 million square feet have become available this year.

 HT: RW

mises.org/blog/Mark Thornton/September 10, 2015

Read More

What’s Coming Unglued Now in Canada?

Canada lumbered through the first half of 2015 in a “technical recession,” Statistics Canada confirmed this week, as GDP shrank in both quarters. Among the culprits: the swooning energy sector and an investment slump.

Now everybody is lining up behind the hope that a sudden acceleration will put the economy back on track in the third quarter, despite oil that has re-crashed and despite the ongoing collapse – and that’s what it is – of the all-important energy sector.

To get to this acceleration, the once booming residential and commercial construction sectors have to hold up, or else Canada’s economy is in real trouble. Alas….

“Canada is also in the midst of an ill-timed supply surge that caused vacancy rates to rise even in markets with positive absorption” in the second quarter, warns a new report by commercial real estate firm Colliers International cited by the Financial Post. It paints a picture of an epic office boom turned into an even more epic office glut, particularly in Calgary and Edmonton, Alberta, the epicenter of Canada’s oil patch.

This office glut comes on top of Calgary’s housing meltdown. For the first eight months, total home sales in Calgary plunged 25%, according to the Calgary Real Estate Board. Condo sales collapsed 39% in August and 30% year-to-date. Inventory sits a lot longer on the market before it sells, if it sells. And pressures are building on prices: the average condo price was down over 10% in August from a year ago.

Commercial real estate is heading in a similar direction. Only worse. Calgary was a boom town. Office towers have been sprouting like mushrooms. In recent years, commercial real estate costs downtown were “going through the roof” and “accelerating at a pace far beyond the Canadian average,” Calgary Chamber of Commerce director of policy and research Justin Smith told the Financial Post. But it takes years to plan and build office towers, and now no one can just turn off the flow.

With 5.2 million sq. ft. of office space under construction, Calgary ranks eighth in North America and first in Canada, ahead of mega-city Toronto with 4.8 million sq. ft. Houston, the epicenter of the US energy boom and bust, crowns the list with 12.3 million sq. ft.

In downtown Calgary alone, there are 3.4 million sq. ft. of office space under construction, almost as much as in downtown Toronto (3.8 million sq. ft.) and 28% of the 12.3 million sq. ft. under construction in downtowns across Canada!

In relationship to the size of the market, Calgary ranked third in North America, with office space under construction amounting to 7.8% of existing inventory.

It’s behind only Silicon-Valley boom-and-bust-town San Jose, whose 7.8 million sq. ft. under construction amount to a breath-taking 10.1% of existing inventory, and Edmonton, the capital of Alberta, whose 2.2 million sq. ft. under construction amount to 8.3% of existing inventory.

“With seven new office towers under development and coming to the market between now and 2018, it is no surprise that Calgary is leading the way in new construction in North America,” Joe Binfet, managing director at Colliers International in Calgary, told the Calgary Herald. “The new developments will add an additional 12% of new inventory to the downtown market.”

“Add to this the new developments in the suburban, retail and industrial markets and it is clear Calgary would be among the top cities in terms of new construction,” he said. The report explained it this way: “The new construction speaks to the long-term vision developers have for the city and the confidence they have in Calgary going forward.”

That vision was perhaps a tad grandiose. Now companies are cutting back on costs and capital expenditures to preserve precious capital, they’re scaling back operations, laying off employees – ConocoPhillips, Nexen, and Talisman recently announced layoffs in Calgary – and reducing or eliminating hours for their contractors. They’re shrinking their footprint.

Companies gave up 1.7 million sq. ft. of downtown office space, the largest quantity of newly vacant office space in any downtown in North America, beating even Houston, where 1.6 million sq. ft. have become available.

So the vacancy rate in Calgary soared to 13% in the second quarter, from 10.6% in the first quarter, according to Colliers International. In Edmonton, it jumped to 11.2%.

“The number of half-empty office buildings in Alberta is projected to spike,” according to the Financial Post.

Tom Dixon, manager of real estate, transportation, and logistics with Calgary Economic Development, remains (sort of) upbeat:

“The best test is have you seen any cranes stop? Have you seen any being disassembled and projects capped? We’ve seen that in other situations. I haven’t seen any this time,” he told the Calgary Herald. “I think the commitments are strong, firm, and people are moving ahead based on the fact that once you start construction it makes sense to just complete it. Who knows? When each of those buildings is completed, maybe oil is back at $60, $80, or $100. We don’t know.”

They’re all waiting for the deus ex machina, the next oil boom.

But as terrible as these vacancy rates are – and they’re bound to get much worse – they understate the problem. As a company sheds employees and contractors, it might nevertheless hang on to the thinly staffed or vacant space. These “ghost vacancies” don’t enter into the official vacancy rates.

“The ghost space may never come to market, but those companies that currently have excess capacity of office space, as they continue to staff up, you can’t assume that they’ll be back in the market looking for more space,” Colliers executive VP and partner Jim Rea told the Financial Post. And so even when the slump ends, and employment rises again, it might not reduce the vacancy rates for years to come since companies will first fill the empty offices they already have.

This is how an epic office construction boom – not just in Alberta but in much of Canada and the US – boosts the economy for years only to run afoul of the eventual business cycle or, as is the case in the oil patch and Silicon Valley, the boom-and-bust cycle.

Businesses get “crunched” in the Canada’s oil patch, consumers lose it, and indexes hit Financial Crisis levels. Read… It Gets Even Uglier In Canada

wolfstree.com/Wolf Richter/September 4,2015

Read More

Why Economics Matters

This article is a selection from a June 19 presentation at a lunchtime meeting of the Grassroot Institute in Honolulu at the Pacific Club. The talk was part of the Mises Institute’s Private Seminar series for lay audiences. To schedule your own Private Seminar with a Mises Institute speaker, please contact Kristy Holmes at the Mises Institute.

First let me say that what we today call “Austrian economics” flows from the great legacy of classical economics, with the very important modification economists now call the “marginal revolution.” Austrian economics is also a term that describes a healthy and vibrant (though often oppositional) modern school of economic thought. It originated with intellectual giants like Carl Menger and Ludwig von Mises, names I’m sure many of you are familiar with. These economists were from Austria, hence the term.

There was a landmark conference at South Royalton, Vermont in 1974, attended by the likes of Murray Rothbard and Milton Friedman, that revitalized the Austrian movement and helped it regain prominence in the latter part of the twentieth century. Milton Friedman was in attendance, and that’s when he famously remarked that “There is only good economics and bad economics.”

And of course that’s true. Schools of thought should not be rigid, or dogmatic, or too narrowly defined. But classifying various economists and theories into groups or family trees does indeed help us make sense of economics. It helps us understand how we arrived at a time and place where Ben Bernanke, Paul Krugman, Thomas Piketty, and Christine Lagarde are viewed as modern mainstream thinkers rather than the radicals they are when compared to the whole history of the field.

Image courtesy of Peter Cresswell.

We supplied some photocopies that roughly trace the history of economic thought. Notice the split in the 1930s, not coincidentally during the Great Depression, between Mises and John Maynard Keynes. Up until then, from about 1850 forward, Austrian economics was mainstream economics. But as you can see, most of today’s mainstream economists fall somewhere under the umbrella of Keynes, and they tend to focus on variants of Keynes’s ideas about aggregate demand.

But at least they focus on something!

Ignorance of Economics Is not Bliss

Which leads me to my topic today: “Why Any Economics Matters.” I say “any” because at this point the entire subject appears to be lost on the average American. Economics is not a popular topic among the general population, it would seem. When economics is discussed at all, it’s in the context of politics — and politics gives us only the blandest, safest, most meaningless platitudes about economic affairs.

Bernie Sanders or Hillary Clinton simply are not going to talk much in economic terms or present detailed economic “plans.” On the contrary, they — will assume rightly — that most Americans just don’t have any interest beyond sloganeering like “1%,” “social justice,” “greed,” “paying their fair share,” and the like.

Candidates on the Right won’t be much better. They’d prefer to talk about other subjects, but when they do broach economics they’re either outwardly protectionist like Donald Trump or deadly dull.  Who is inspired by flat tax proposals?

Americans simply aren’t much interested in the details, or even the accuracy, of the economic pronouncements of the political class. We want bread and circuses.

Consider what people talk about on Facebook: lots of posts about family. Lots of posts about celebrities, and sports. Lots of posts about food, health, and exercise. Some posts about politics, culture, race, and sex, but usually only to support one side or bash the other.

Not much, ladies and gentlemen, in the way of economics. And I submit that might be a very healthy thing. After all — we’re rich! Only a wealthy society does not have to focus on the subsistence-level concerns of adequate food and shelter, hot running water, clothing, electricity, and the like.

So let’s not be too hard on people for not spending their free time reading economics. Leisure itself is a very important activity, and represents a form of economic trade-off.

But economics matters very much, and we ignore it at our own peril. Economics is like gravity, or math, or politics — we may not understand it, or even think about it much, but it profoundly affects us whether we like it or not.

Economics as a subject has been captured by academia, and academics like Krugman are not so subtle when they imply that lay persons should leave things to the experts. It’s like team sports — we may be introduced to it when we’re young, but only the professionals do it for a living as adults.

Yet once we understand that all human action is economic action, we understand that we can’t escape or evade our responsibility to understand at least basic economics. To think otherwise is to avoid responsibility for our own lives.

While we shake our heads when twenty year olds can’t read at the college level or do simple algebra, we don’t worry much whether they never take economics. We would be alarmed if our children couldn’t perform basic math to know how much change they should get at a cash register, but we send them out into the world far more susceptible to being cheated by politicians. Why do we want our kids to learn at least basic geography, chemistry, and physics? And grammar, spelling, literature, history, and civics? We want them to know these things so they can navigate their lives properly as adults

But somehow we’ve come to believe economics should be left to academics and policy wonks. And worse yet, we don’t protest when kids grow up to become adults with little or no knowledge of economics, yet still have strong opinions about economic issues.

Ignorance of basic economics is so widespread that we ought to have a specific word for it, like we have for illiteracy or innumeracy.  

The aforementioned Murray Rothbard had this to say: 

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a “dismal science.” But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

I’m sure we’re all familiar with this phenomenon on social media, which seems perfectly suited to vociferous unfounded opinions.

Let’s consider the minimum wage issue, as one example that’s been in the news lately:

Wages are nothing more than prices for labor services. When the price for something rises, demand drops — and you have more unemployed people than you otherwise would. Pure and simple Econ 101.

Yet what percentage of Americans today have even seen a downward sloping demand chart in a high school or college class?

It is this great and widespread ignorance of economics that plagues our ludicrous political landscape. It allows politicians to attack capitalism, and make demagogues out of entrepreneurs. It allows politicians to blame free markets for the very economic problems caused by the state and its central bank in the first place — like the dot com implosion, like the housing bubble, like the Crash of 2008, like the unsustainable equity prices commanded by US stock markets today.

In short, ignorance of economics allows some very big falsehoods to be accepted as fact by large numbers of people. And it’s only going to get worse as the presidential election of 2016 unfolds.

Read the full text here.

mises.org/mises daily/Jeff Deist/ September 3, 2015

Read More