Free Markets, Free People

Monthly Archives: November 2011


Kimberly Webb Joyner RIP

The wife of one of our own, James Joyner of Outside the Beltway blog, passed away over the weekend.  Her death was obviously untimely as she was only 41.  James started OTB about the same time QandO started and has been a friend to this blog and many others over the years. 

We here at QandO want to express our most profound sympathies and condolences to James and his family.  Kimberly leaves behind two young daughters.   Please include the family in your prayers.

~McQ

Twitter: @McQandO


Observations: The QandO Podcast for 27 Nov 11

This week, Bruce Michael, and Dale record talk about the implications of Germany’s failed bond auction.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.


How can government help the economy? End the corn ethanol subsidy

The fixation of government on “alternate fuels” and its use of taxpayer money to subsidize some of them is, at least in one case, having a very negative effect on markets.  Again we have government market intrusion to hold responsible for rising food prices in an era of high unemployment and economic turmoil.

Again, this is Econ 101 stuff.  For a government so full of experts who feel they have the right (based one assumes, in their superior intellect … or something) to decide what we should be using for fuel rather than letting markets decide, they sure have screwed this one up.

Corn is a major food crop.  And, for the most part, markets have kept corn relatively cheap and plentiful.  Enter government and the mandate that ethanol be produced and mixed with gasoline in an effort, one supposes, to reduce the amount of oil consumed.

The result, however, has been to drive up the price of corn and the price of other commodity foods instead. 

Here’s how it works.  The set up:

Powerful agribusiness interests collect a 45-cent-per-gallon tax credit to convert this food crop into ethanol, an unnecessary and sometimes harmful additive to gasoline. Another 54-cent-per-gallon tariff is imposed to keep Brazil’s sugar-cane-based ethanol from entering our shores. Nor does the folly end there. The Food and Energy Security Act of 2007 mandates a massive increase in the production of ethanol by 2022 even though there is no demand.

While there’s no demand, there’s plenty of your money to be had.  And what do producers react too?  Incentive.  So what provides the best return on investment right now?   Corn.  Not for the consumer, but for the producer.  So what do producers of other commodity foods do?  They switch from growing wheat and soybeans to corn.   The result is inevitable:

The lure of free government money reduces the amount of corn available for other uses, primarily as feed for animals. This has a cascade effect, increasing prices down the food chain and for crops unrelated to corn. Farmers might switch from growing, say, soybeans, to corn to get hold of the extra subsidy. That makes soybeans scarcer and drives up their cost. This year, the price of wheat has increased as farmers have switched to corn to take advantage of high corn prices. In either scenario, the price of food increases, and that’s the last thing we need right now.

When the price of feed grain increases, what do you suppose happens to the price of meat?

Want ethanol?  Feel it is a necessary and good thing?   Drop the mandate, drop the subsidy and drop the tariff.   Let the market decide.  If it actually does what its champions claim and actually provide an additive to gasoline that increases performance (a dubious claim at best) and lessens our dependence on oil, that ought to be an easy idea to sell.

The fact is, without the subsidy and the mandate, the market would most likely reject ethanol completely.  And that would conflict with the ideologically driven agenda that our government has put in place – namely it has the responsibility to decide what we should or shouldn’t use to power our vehicles.  Each administration has its own take on how this should be done but make no mistake, this has been something which has survived both Republican and Democratic administrations.

It is another, in a long line of examples, of government intrusion, market distortion and wasting taxpayer money for a product with no demand.  It also has the effect of driving up prices in food in an era of high unemployment.  It is a disastrous policy and the proof is in the distorted markets.

Time to end the whole program and rescind the foolish government mandate.  The effect?  Food prices would again react to market pressures instead of government mandates.   And taxpayer money wouldn’t be used to distort those markets any longer.

Win win as I see it.

~McQ

Twitter: @McQandO


Libya–Welcome to the Post-Gaddafi era

Seems to me to be much like the Gaddafi era minus Gaddafi:

Thousands of people, including women and children, are being illegally detained by rebel militias in Libya, according to a report by the Secretary-General of the United Nations. Many of the prisoners are suffering torture and systematic mistreatment while being held in private jails outside the control of the country’s new government.

The document, seen by The Independent, states that while political prisoners being held by the Gaddafi regime have been released, their places have been taken by up to 7,000 new “enemies of the state”, "disappeared" in a dysfunctional system, with no recourse to the law.

Now I know the apologists for the “new” government will say this is all part of the transition from one era to the next.  But in fact it is not.   It is Libya.  It is now completely dysfunctional, not partially.   And there are no wonderful democratic traditions and institutions to pull it out of the morass either.

Instead, it has devolved into a land area in which tribal feuding is in full swing and armed militias now rule.

Ban Ki-moon also presents a grim scenario of the growing power of the armed militias that control of the streets of many towns, including those of the capital, Tripoli, and the settling of internecine feuds through gun battles resulting in deaths and injuries.

Meanwhile the lawlessness has resulted in the vast majority of the police force not being able to return to work. In the few places where they have been back on duty under experienced officers, such as Tripoli, their role has been restricted largely to directing traffic.

[…]

The scope of escalating strife, inside the country as well as the wider region, is highlighted by the caches of weapons abandoned by the regime and subsequently looted. These include shoulder-launched surface-to-air missiles, known as Manpads, capable of bringing down commercial airliners.

[…]

The report says that “while political prisoners held by the Gaddafi regime have been released, an estimated 7,000 detainees are currently held in prisons and makeshift detention centres, most of which are under the control of revolutionary brigades, with no access to due process in the absence of a functioning police and judiciary.”

Of particular worry was the fate of women being held for alleged links with the regime, often due to family connections, sometimes with their children locked up alongside them.

“There have also been reports of women held in detention in the absence of female guards and under male supervision, and of children detained alongside adults,” says the report.

A number of black Africans were lynched following the revolution following claims, often false, that they were hired guns for the Gaddafi regime. The city of Tawerga, mainly comprised of residents originally from sub-Saharan countries, was largely destroyed by rebel fighters from neighbouring Misrata. The port city had withstood a prolonged and brutal siege in the hands of the regime forces during which, it is claimed, fighters from Tawerga were particularly aggressive and brutal.

The report says that ”sub-Saharan Africans, in some cases accused or suspected of being mercenaries, constitute a large number of the detainees. Some detainees have reportedly been subjected to torture and ill treatment. Cases have been reported of individuals being targeted because of the colour of their skin.”

The document continues: “Tawergas are reported to have been targeted in revenge killings, or taken by armed men from their homes, checkpoints and hospitals, and some allegedly later abused or executed in detention. Members of the community have fled to various cities across Libya.”

Wonderful stuff.  Just gets your freedom and liberty loving bones stirring doesn’t it?  Loaded with weapons and with scores to settle, militias are now out and about carrying out whatever orders the tribal leaders have decided are necessary. 

That’s democracy, right?  Not to mention enough weapons looted to threaten regional security even more than it already has, many of which will most likely reach the hands of Hezbollah and Hamas.

Well done, NATO.

~McQ

Twitter: @McQandO


Happy Thanksgiving QandO readers

Happy Thanksgiving to all.  We here at QandO want to thank our loyal readers (and listeners to the podcast) and make sure you know we appreciate you more than you know.

We hope you and your loved ones have a wonderful day.

A way you can share your thanks for this great nation is giving to programs that support our wounded troops and their families.  A great one is Cooking with the Troops who do wonderful things for the wounded through their various programs such as their food events at military hospitals like Brooke Army Medical Center, their Home Front program where they teach our soldiers and their families how to cook delicious and healthy food on a budget or their culinary transition program where they help those wounded warriors getting out of the service to transition into culinary careers if that’s their desire.

Your donations go a long way in helping them fulfill their desires.

Recently Cooking with the Troops was tapped for a great honor.  Here’s how CwtT’s CEO, Blake Powers describes it:

I imagine that few who read this will not know the name Richard D. “Dick” Winters. While the movie Band of Brothers made him famous, he was already well known within the military community for his outstanding leadership. His accomplishments make him an excellent exemplar for all the outstanding leadership shown on D-Day and beyond by those who led men in combat, which is the basis for the Richard D. Winters Leadership Project of the WWII Foundation.

As part of this effort, a statue of Dick Winters is being dedicated on 6 June 2012 in Sainte-Marie-du-Mont, Normandy, with a reception afterwards at the Utah Beach Museum. It is an honor and a pleasure to tell you that Cooking with the Troops will be providing the refreshments at the reception. Our goal is not just to provide tasty and appropriate food and drink to those attending, but to involve as many veterans-to-chefs and troops/vets interested in culinary/hospitality careers as possible.

We will not be able to do this without your help. Please help us help the current generation even as we honor those who served before.

Give them a hand if you’re able. The donate button is on the left.   It’s a great way to say thanks.

~McQ

Twitter: @McQandO


The North South Divide

Fundamentally currency unions without fiscal union are flawed. Shoehorning the northern and southern countries of Europe into one (with our without fiscal union) made no sense at all (The Economist)

The economies of southern and northern Europe make strange bedfellows

SINCE bond investors began to discriminate between the euro-zone economies, pushing yields on Spanish, Irish, Greek, Italian and Portuguese government debt soaring, much of the talk in northern Europe has been of profligate governments in the south. As these indicators show, the euro zone’s problems go rather deeper than that. A large chunk of the single-currency area has a chronic competitiveness problem, with a horrible mixture of high unemployment, low productivity and low investment. One unsolved mystery is why all this ought to have some correlation with latitude. Answers to the Bundesbank, please.


Will Eurobonds Work?

(Originally posted at Risk and Return)

I have been skeptical and so is James Bianco:

The problem in Europe is simple – they created a common currency – the euro. For years, the market erred. It thought that meant that every sovereign debt had the same rating as Germany. I was buying Greek bonds. I was buying Irish bonds. I was buying Italian bonds. But I thought I was buying German bonds. Then, a couple of years ago, I had an epiphany – no, I was not buying German bonds; I was buying Greece, Italy, and Ireland, or whatever, not Germany.

Those countries, recognizing that they could borrow into infinity because everybody thought they were lending to Germany, pretty much did that and expanded their welfare states to the point where they cannot pay their debts.

Germany has disappointed everybody with its intransigence, its unwillingness to “get with the program,” and endorse massive ECB bond buying and Eurobonds. Their reason? They believe they will be stuck with the bill. Of course, they are right, they will be:

If a Eurobond market comes with with strict discipline/rules on borrowing and paying debt back, it might work.  Unfortunately no one will agree to a Eurobond market with strict discipline/rules.

If a Eurobond market comes with no discipline/rules, then it is just another way to trick the market into thinking they are buying German Bunds.   It will “work” for a while as the crisis will ease until everyone borrows too much money and then comes back much worse.

I am not even sure it will work more than a few days at this point, but maybe. Either way it is not a solution, but a stop gap at best. It is also a stop gap that should not be attempted unless an actual endgame is in sight:

So how do you fix the Euro crisis?  Unfortunately there are only three solutions and all are distasteful:

  • Call off the union and go back to legacy currencies.  This destroys the banking system who will be paid back with devalued/nearly worthless currencies.
  • Massive austerity.  This option is very unpopular among the electorates and will cause a bad recession/depression.
  • Fiscal union.  This is a nice way of saying Germany finally wins WW2.  Is the rest of Europe now ready to take orders from Berlin?  Didn’t they fight two wars to prevent this?

The only reason ECB printing keeps being mentioned is because the three options above are untenable and money printing is the only other thing they can think of.  Money printing does NOT fix anything, it just makes the problem better for a while until it comes back worse than before.

This dovetails with my analysis in The German Dilemma that their are no good options from the German perspective, and in fact fiscal union is far more problematic than commonly realized:

Full Fiscal Integration: Since all other solutions put in place circumstances that are unstable and merely kick the can down the road, the fundamental flaw in the Euro needs to be addressed. That is the lack of a unified fiscal policy. The answer then is the end of sovereignty, the creation of a US of Europe. An obvious objection is that Germany wants to be a sovereign nation. We’ll skip this niggling little detail, but even if they didn’t want to remain sovereign do they want to harmonize laws and economic policy with Greece and some of the other PIIGS? West Germany just  integrated with East Germany and the experience was traumatic featuring massive transfers to East Germans. The PIIGS will still not be competitive with Germany. That means internal adjustments (internal devaluation or austerity) to allow them to become more competitive for the PIIGS’ or massive transfers. Thus unifying the Eurozone under a single fiscal policy means massive transfers from Germany to the PIIGS to harmonize the welfare states and unify the debt and avoid austerity throwing the entire Eurozone into depression. Germans will pay for the debt in one fashion or another.

Cullen Roche points out that in the US we don’t worry much about the need for internal transfers between states to keep the system sound.  Today that is true, though it has led to large conflicts in our past, playing a role in civil unrest, uprisings, the conquest of a continent and near destruction of its former inhabitants and the Civil War. Our unity was easier to envision and still born of blood and tragedy.

I am not saying unification of Europe would lead to such tragedies and conflicts. However, we need to ask if Germany (or really all the countries) want to make the internal transfers that make such a system work? Germans would pay a great deal, Greece and the other PIIGS would suffer internal austerity to the extent that they contribute to the economic re-balancing. Do Europeans, or most importantly the Germans, view themselves as a people who will be responsible for paying all the bills to integrate the Greeks and others?

Are Europeans ready to think about their home countries in the same way Texans think of Texas? Their state, but completely subordinate to the US? Will they be able to secede? We answered that question in the US with a war of incredible savagery and destruction. My guess is a unified Europe would be far less stable. They will not choose a civil war comparable to the US, but instead countries leaving over time as well as never entering the union. That leaves us with all the problems we have now still being there. Without a European populace overwhelmingly in favor of a true union this will not work. We would be faced with a PIIGS like crisis with every election and the possibility of secession in each of the former countries.

The necessity of creating a union where there is no possibility of secession, where citizens are more loyal to the European sovereign entity than their own countries is incredibly unappreciated. Half measures will not work. If Texas were to get upset about staying in our own Union it would not matter how overwhelmingly popular the idea of leaving was in the Texas legislature, the US military will ensure that Texas stays a subordinate state. We decided that issue in 1865 at the cost of well over 600k casualties.

If a similarly firm enforcement of Eurozone union is not agreed to (and setting aside a war to force union) then why should the market assume the system will remain intact? Why consider the bonds issued by the various states, or the Eurozone as a whole, deserve a AAA rating?  My belief is that eventually the Eurozone will suffer other crises as states face local elections that wish to leave for one reason or another. Critically Eurobonds and fiscal Union make it easier for countries to leave, since the debt will be the Eurozone’s, not theirs. They can leave and stick the remaining members with the bill. That is an incentive which virtually ensures instability.

Treaties don’t matter if there is no enforcement mechanism, and all enforcement mechanisms at the end of the day have to have a credible belief in military force behind them to matter. Otherwise those who wish to exit can just thumb their noses at whoever stays behind. Has there ever been a successful union where the underlying members could leave? Not that I am aware of.

There are no good options, only more or less realistic ones.


Economic Statistics for 23 Nov 11

Today’s economic statistical releases:

The Mortgage Bankers’ Association reports that mortgage applications fell -1.2% in the Nov 18 week, with purchase apps up 8.2%, but re-finance apps down -4%.

Weakness in the transportation sector led durable goods orders down -0.7% last month, but up 7.5% from last year. Ex-transportation, orders were up 0.7% for the month, and 11.7% for the year.

Personal spending and income both rose last month, with spending up 0.1% and income up 0.4%. On a year-over-year basis, income has risen 3.9$, but spending rose faster, at 4.7%. The Price Index rose by 0.1% for the month, and 1.7% year-over-year.

Initial unemployment claims rose to 393,000 from last week’s revised 391,000. The 4-week average fell from 396,750 to 394,250.

The Bloomberg Consumer Comfort Index was -50.1 last week, from -50 a week earlier. The index has hovered at -50 for 9 weeks.

The Reuters/University of Michigan Consumer Sentiment index fell slightly, to 64.1 from 64.2 last period.

Manufacturing growth in the Kansas City Fed’s district eased slightly, with the KC Fed Index falling from 8 to 4. Future expectations remained solid, though.

~
Dale Franks
Google+ Profile
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Defense Analyst: “We’re in a technological race with ourselves”

Reading through a NY Times story about defense cuts led me to one of the most, oh I don’t know, stupid statements it has been my misfortune to read in a while (one of the joys of being a blogger is I don’t have to dress up my comments – stupid is stupid).

And apparently it passes for penetrating analysis.  The thrust of the story, or at least the claim made in the story, is that the Pentagon has made no plans for the sequestration cuts mandated by the failure of the Supercommittee.

To be clear, DoD is working on the first $450 billion in cuts mandated by the Obama Administration.  Those will already cut deeply into its capabilities over the next few decades. 

This new round of cuts will go beyond “fat” and cut into muscle and bone.  An idea of where cuts will have to be made is provided by some defense analysts:

They laid out the possibility of cutbacks to most weapons programs, a further reduction in the size of the Army, large layoffs among the Defense Department’s 700,000 civilian employees and reduced military training time — such as on aircraft like the F-22 advanced jet fighter, which flies at Mach 2 and costs $18,000 an hour to operate, mostly because of the price of fuel.

Other possibilities include cutting the number of aircraft carriers to 10 from 11 — the United States still has more than any other country — as well as increased fees for the military’s generous health care system, changes in military retirement, base closings around the country and delayed maintenance on ships and buildings.

And that brings us to a statement I find difficulty characterizing as anything but stupid.  Perhaps to be less provocative, I ought to characterize it as woefully uninformed.  I’ll emphasize it for you:

Right now, the F-35 Joint Strike Fighter, the most expensive weapons program in history, is the top target for cuts. (The Pentagon plans to spend nearly $400 billion buying 2,500 of the stealth jets through 2035.) Other potential targets include the Army’s planned ground combat vehicle and a “next-generation” long-range bomber under development by the Air Force.

As a result, the military industry is already in full alarm. “The Pentagon has been cutting weapons programs by hundreds of billions of dollars for three years now,” said Loren B. Thompson, a consultant to military contractors. “There’s not much left to kill that won’t affect the military’s safety or success.”

Other analysts argued that the United States had such overwhelming military superiority globally that it could easily withstand the cuts, even to the point of eliminating the Joint Strike Fighter. “We have airplanes coming out of our ears,” said Gordon Adams, who oversaw military budgets in the Clinton White House. “We’re in a technological race with ourselves.” Nonetheless, he said, the automatic cuts make life difficult for Pentagon budget planners and are “a terrible way to manage defense.”

No … we’re not in a “technological race with ourselves”.   And yes, we have lots of airplanes.   Worn out airplanes two or three decades old that have been to war for a decade.  

Right now the Russians are developing a very good 5th generation fighter, the T-50 (also known as the PAK FA).  The Chinese 5th generation aircraft is the J-20.  We, on the other hand stopped a planned buy of F-22s at 180 out of 2,000.   And now we’re talking about cutting the F-35 (a buy of 2400 and supposedly the fighter to fill the gap left by the curtailment of the F-22 buy) as well?  That’s national defense suicide.

If we cut the JSF, in 10 years we’ll have the same 4th generation aircraft we have now as our front line of defense against the newest generation of fighters that you can bet both Russia and China will export.  Ours will be technologically inferior. 

Yes, we enjoy a technological edge now.  But that is because we’ve always made its maintenance a national security priority.  What Gordon Adams is trying to do is wave away the need to maintain that edge with an absurdly simplistic and utterly incorrect “we’re in a technological race with ourselves”.

What we do now will effect our national security for decades to come.  These fighters are planned to be the front line of defense for about 40 years.   And while an F/A 18 is a hot jet in 2011, it will not be a hot jet in 2031 when refined and technologically superior T-50 and J-20 aircraft will command any airspace in which they fly.

For those who don’t understand what that means, it means no close air support for troops on the ground.  It means an enemy having air superiority over a battlefield (or at least air parity) and making our ground troops vulnerable to air attack for the first time since the Korean War.

It means we’ll have lost the technological race that is required to maintain air dominance and will be hard pressed to catch up anytime soon.

The old term “penny wise and pound foolish” comes to mind.  We’re about to validate that saying.   And the lack of leadership from this administration in outlining priorities concerning national defense and our future is terrifying.   Instead of making national defense a priority, this administration would spend elsewhere.

The technological edge we’ve maintained over the decades is a perishable thing.   There are other countries out there actively trying to steal it from us.

And we have so-called defense analysts like Gordon Adams making stupid – yes there’s that word again – statements like “we’re in a technological race with ourselves”.

We make further cuts, such as those demanded by sequestration, at our peril.  One of the primary functions of government, as outlined in our Constitution, is to provide for the national defense.  It should be one of, if not the primary focus of any national government.  To say we’re playing with fire with deeper cuts than those already contemplated is an understatement.  If you’re comfortable with your grandson or granddaughter flying 40 year old jets in the near future against technologically superior enemies who we are getting ready to abandon the field too in 2011, then you’ll be happy to support cutting defense to the bone now.

~McQ

Twitter: @McQandO


OWS: Let’s disrupt Black Friday

For a group trying to garner support from the public, this is the grand daddy of all bad ideas:

Some demonstrators are planning to occupy retailers on Black Friday to protest "the business that are in the pockets of Wall Street."

Organizers are encouraging consumers to either occupy or boycott retailers that are publicly traded, according to the Stop Black Friday website.

The goal of the movement is to impact the profits of major corporations this holiday season.

It’s one of those “it sounded good on paper” ideas that fall flat upon execution and, in fact, ends up being detrimental to the group trying to pull it off.  

How many stores have Black Friday Sales?   A lot more than there are protesters.   And what are these stores?  Private property.   So what do the stores have every right to do?  Eject those from their property who are being disruptive.  That, of course, will result in a cacophony of unfounded claims that the protesters “rights” have been violated.  

Meanwhile, who do you suppose will not be impressed?  Any potential supporters who also enjoy Black Friday deals and are inconvenienced by these boobs.

As for impacting corporate profits this holiday, seriously?  They couldn’t if they tried.  They don’t have the numbers and besides there are literally millions of outlets and ways to do shopping on Black Friday to include on-line.

This is simply another in a long line of tantrums by those who Billy told us about in his post the other day. 

We have two generations that have been raised to believe that, ultimately, someone else is responsible for the essentials of their lives. They believe they are supposed to retire in their fifties or early sixties, with a pension followed by Social Security. They believe they are supposed to relinquish concern for healthcare costs when they turn 65. They believe that if things get bad enough in their lives, unemployment, and later welfare, will keep a roof over their head and food on the table. They’ve been trained to believe this by a ruling class that has been assuring them since the 1930s that they have the fundamental right to a soft life.

They’re the folks who think money simply exists (or grows on trees), belongs to the government and should be doled out according to need and that it is the evil corporations who run the world.

So they come up with brilliant ideas like this.

Here’s a partial list of those companies these yahoos want to see occupied or boycotted (parenthetical remarks theirs):

- Abercrombie & Fitch

- Amazon.com (yes, we have to stay away from Amazon, too!

- AT&T Wireless

- Burlington Coat Factory

- Dick’s Sporting Goods (I was surprised, too!)

- Dollar Tree

- The Home Depot

- Neiman Marcus

- OfficeMax

- Toys R’Us

- Verizon Wireless

- Wal-Mart

I wonder if this means they can’t use their AT&T and Verizon phones that day to communicate and coordinate?  Of course, only some of those companies will have Black Friday sales (yeah, Home Depot is a hot spot for shoppers on the Friday following Turkey Day).  The list is only an example with the group calling on OWS to hit all publicly traded companies. 

They toss in this little disclaimer too:

"Keep in mind that we are not occupying small businesses or hardworking people—we must make a distinction between the businesses that are in the pockets of Wall Street and the businesses that serve our local communities.

We are NOT anti-capitalist. Just anti-crapitalist.

Ye gods … save us from the economically challenged and politically unhinged.  Clever, no?

No.

Enjoy Black Friday and be sure to hit some of the stores mentioned above.

~McQ

Twitter: @McQandO

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