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Tuesday, November 23, 2010

China’s State-Planned Economy Is Doomed to Flop: David Pauly

A quick synopsis of his article below.  Follow the link at the bottom to read the whole thing. It is an excellent op-ed piece for those who fear China's economic model will one day rule the world!
The biggest obstacle to China becoming the world’s No. 1 economy is China.
The communist nation’s determination to keep as tight a rein on its economy as it has on its citizens will lead to failure -- just as it has for other countries that embraced central planning schemes.
The nation’s state-owned companies are buying up independent businesses in the auto, steel and energy industries. A government-run company even plans its own Internet search business to compete with Baidu Inc., whose shares trade on stock exchanges.
As it moves away from free markets, China ignores two recent central-planning failures.
Remember Japan Inc.? Thirty years ago, pundits said Japan’s economy would rule the world as its bureaucrats allocated capital to key industries, protecting them from foreign competition. The U.S. railed against Japan’s manipulation of the yen to keep its exports moving -- just as today it moans about China keeping the yuan low.
China won’t collapse tomorrow. Its exports continue to flood the globe, earning it money to make major investments -- and amass political clout -- abroad. But don’t let so-called experts fool you into thinking China has discovered a new and better way to organize an economy. State-run capitalism is an oxymoron.
(David Pauly is a columnist for Bloomberg News. The opinions expressed are his own.)
To contact the writer of this column: David Pauly in Fort Myers, Florida,

James Carr - At the dark end of the street

With Thanksgiving coming up I thought I would share some of my favorite soul songs. A beautiful music and one I wish was more often heard on the radio. Soul does not seem to get it fair due in my mind some of the greatest American music in my opinion. I hope you all enjoy and have a wonderful Thanksgiving!

James Carr - At the Dark End of the Street

Monday, November 22, 2010

Banking regulation good/bad?

When I started the research for this post I believed I would find that there was a positive correlation between the amount of banking regulation and the number of bank failures.  What I ended up finding was the exact opposite. Now being a rational person I must accept that my first, small government inclination, was wrong at least as far as this data is concerned.

Now keep in mind that the pre-great depression period was unique in that it was really a wild west scenario.  That said, I looked back to into the data from 1890 up until 2010 for the below chart.  The data was hard to come by as there was no single source, that I could find. I pulled this data together from various sources so please understand that the finding are not 100% fact.  As far as the data involved, I believe it to be 95% accurate.  

It appears that there is a strong correlation between banking regulation and a decrease in the volume and frequency of bank failures.  The one unmeasured variable here that would/could significantly alter the judgement this chart provides is the total number of banks. I did built a secondary chart, however I was unable to find reliable data from 1890 through 1920, so the value of the second chart is limited.  

While I would not have expected this outcome I have to admit that my opinion of the value of a regulated banking industry has changed.  Now from a political and economic philosophy I am in favor of regulation as it does seem to work. That said I would prefer that regulation did not confer responsibility for failed banks.  If a bank fails it is my opinion that it should be be liquidated with shareholders wiped out.  Depositors should be made whole according to FDIC guidelines.  I firmly believe that another bank will either spring up to meet the now unmet need or an existing bank will jump into fill the void.  I am firmly in favor of not allowing banks to get so large that they represent a significant threat to the U.S. and global economy.   Interesting findings non-the-less and my mind has been changed with regard to the value of banking regulation. 


U.S. Department of the Treasury. Annual Report of the Comptroller of the Currency (1931), pp. 6, 8
Currency – Friedman and Schwartz  1963          
Board of Governors (1937)

'Defend the Humanities'--A Dishonest Slogan

A great critique that is almost never made by a university professor especially in the hyper PC UC System in California The article is best summed up by this quote " There was a time when "save the humanities" would have been an appropriate cry, but that was years ago, when they were being dismantled in one department after another and replaced with the intellectual triviality and sheer boredom of endlessly repetitive Marxist identity politics, as cowardly administrators looked on and did nothing. The poverty of intellectual content was masked by an elaborate jargon, but that only made things worse: the remade programs became the laughing stock of their campuses. But now the day of reckoning has arrived Enrollments have collapsed, to the point where the smaller departments face extinction. Those enrollments are sinking not because students don't value the humanities, but because they do". Since the intellectual foundation of capitalism have been banished from the humanities departments is it any surprise that they have failed to see the coming approach in the invisible hand of Adam Smith's teachings. The time has come for universities to shed the useless and damaging gender, ethnic and humanities departments which not only ill prepare students for productive life in American society but create a generation with a dangerously skewed world view. The article below is a good read.

'Defend the Humanities'--A Dishonest Slogan

Thursday, November 18, 2010

Blog » The Billion Prices Project @ MIT

MIT team develops real-time inflation statistics globally utilizing a massive 5,000,000 pricing database which pulls pricing data from online sources in real-time.  I am really surprised no one thought of this before. Certainly a very good idea and great work from the MIT team. I am curious as to how accurate this will ultimately turn out to be given the wide variances in online pricing. Worth a read and a place where I will certainly be turning to for inflation validation in the future. I will also be keeping an eye on how closely these daily statistics mirror quarterly statistics produced by the CPI here in the US.

Blog » The Billion Prices Project @ MIT

Friday, November 12, 2010

Inflation Protection, Oil?

Could oil be the best play for providing inflation protection?  Oil as we all know is priced globally in dollars however it is a liquid, global market making it in my opinion an excellent inflation hedging vehicle.  If we look at the recent run up in oil while taking a look at the historical inventory, consumption and pricing data we see that we are near historically high supply with slightly reduced global demand. Inventories look strong and the rate of inventory draw down looks very, very low.  This begs the question why the steady price increase?  I believe that oil's recent strength can be attributed to the vast increase in M1 (Money Supply) created through the various, Federal Reserve lead, quantitative easing rounds.   I have provided a variety of charts to help you visualize my argument.

Oil's Recent Pricing:  The price has been moving steadily upward.

Global Crude Supply:  Global Supply has been steady and is expected to increase.

Global Crude Consumption:  Consumption has been steady however there has been a 2%+ decline in global demand in 2009. In fact, the decline sank global demand below the pre-bubble year of 2005 by .20%.

Source: US DOE

Global Crude Inventories: Were slightly down in 2009 but are forecast to increase in 2010 before heading lower again in 2011.

Global Crude Inventory Withdrawals:  Withdrawals declined steeply and are forecast to remain flat.  So basically less demand.

M1 Money Stock:  So if supply is steady and demand is down even slightly with no major increases in demand forecast why the price rise?  Take a look at the graph below.  The graph showcases increases in the M1 Money Stock, you can see that in 2009/2010 there has been a dramatic increase in dollars globally. In 2009/2010 there was an increase of roughly $400 billion or roughly 28%.  Now remember oil is a globally traded commodity priced in dollars.  As the value of the dollar declines the price of oil must rise globally.  This is why I believe oil is an excellent hedge against future inflation.  Now what stock represents the best vehicle this is your decision.

Bi-partisan Fiscal Commission - Not deep enough

The bi-partisan fiscal commission's proposal seems a very sensible. My only complaint is that it does not cut enough. I worry that $200 billion a year in savings, while a good start, is not enough to make a dramatic debt course correction. I would also have liked to have seen more of a focus on wage/benefit cuts to Federal employees.  Below is a graph highlighting the explosion of Federal compensation.  The growth in compensation has been dramatic and unnecessary. The wage differential between public and private sector employees is unfair, unwarranted and unsustainable.

The proposal is a good start but more needs to be done.  Links for more info below.

Yes, We Can! (Avoid Greece's Fate) - Barron's

Bi-partisan Fiscal Commission
Chart thanks to: Carpe Diem Blog