EU Intransigence in Brexit Negotiation Echoes Trump: Putting EU First

In today’s US print edition of the Financial Times there was a Comment piece by Jean-Claude Piris, former director-general of the council of the European Union’s Legal Service. It is titled, The Myth and Delusion over Single Market Access. In the piece he argues that Britain does not understand what access to the “free market” means. As Britain seeks a unique relationship, he claims that Britain is ignoring facts and should drop such ideas and focus on what the EU offers. This Comment is political posturing and not in fact true.

His key point is this: “…[T]he single market is based on the free movement of goods, services, capital and people, and choosing among these freedoms is not permitted.” This maybe a rule enshrined in EU law but it is just that. Many other enshrined EU laws, created for its benefit, have been negotiated way – such as France and Germany both violating the budget deficits.

The free market can be whatever it needs to be. It can exist between the free movement of goods and services, and capital. It does not require the free movement of people. That adds a social-cost and social-layer of bureaucracy that is the main reason why Britain left in the first place. It is this argument, that the EU cannot separate the components of this “law”, that will undermine the Brexit negotiations and sits at the heart of the success of the EU.

Before the forerunner of the EU was founded, the EEC, Britain was closely involved in the original concept of the “United States of Europe”. While Churchill may have implied both an economic and political model, he did not imply political union – even though this had been offered in a desperate moment some years before in 1940 to France at the point of collapse under the weight of the German Army.

But just as the original ideas for a barrier-less trade framework was being explored, Britain exited the dialog and so the French and the Germans continued the work. It was still mostly an economic model – but Britain’s withdrawal from those early stages were fatal. The EEC formed up and without Britain to act as a counter weight, France and Germany – for different reasons – pushed forward with ever greater economic and creeping-political alignment.

So it’s disingenuous for EU leaders and others to say what the free market is and is not. All is possible. It is purely a negotiating ploy to try to trump an argument. It is no different than saying, “Put EU First” just as Trump says, “Put America First”. No different.


Democrats Desire for Regulation Increases Inequality

Yes, you read the title of this blog correctly but you wont accept the point. It so happens that one small data point represents a major contributing factor to inequality. Since WWII the availability of affordable housing has declined. First both left and right drove increase affordable housing. It was good for the wider population as it led to a wider base on which the American Dream was driven. However, the plan backfired.

Over time more and more lower income families took up the opportunity and more and more subsidies were driven into the market. This even led to aspects of the financial crisis that sits at the root of our current economic malaise. But the key is that an effective level of affordable housing around the US supports the need of workers to move to where there was work. This is one of the factors that drove growth and even productivity. That is, until the late 1980s. Since then productivity has been slowing, and it turns out, the stock of affordable housing. At the same time, Americans move less, and the baby boomers have started to retire.

But the odd part is not that left and right supported the goal, it is the left that have fought against themselves. In the US print edition of the WSJ on Sept 30-Oct 1, there is an Opinion piece title, “Why Housing is Unaffordable in California“. This article nicely captures the facts that democrats, in control of Californian legislature, have passed land regulation that limits how land can be used. This has contributed to continuing and driving land prices up and at the same time pricing lower paid workers out of the region. Yet at the same time the state legislature encourages its population to bass bonds to fund new affordable housing plans. It is thus fighting against itself. The rich are getting richer and the poorer are unable to get a hold on the work that would help them close the inequality gap.

Why don’t our politicians stop being politicians and get out of the way of real decision makers that work together and in the same direction?

Warning Noted Re Germany’s Recent Election

William Gibson of the WSJ wrote on Sept 26th in the  WSJ (see The Populist Wave Reaches Germany) an Opinion piece that neatly calls out the major issues now liberated in the recent general election that apparently awarded Chancellor Angela Merkel another four years in office. Mr. Gibson goes beneath the headlines to highlight what are actually disturbing issues.

The news that masks the issues suggest that the share of the popular vote won by the ruling coalition dropped from two thirds in 2013 to just over half. So far, ok. But as a result of declining popularity of the classic parties, the center-left Social Democrats have announced they will not participate in the next government. This is where issues emerge.

To creat a coalition this means Angela Markel has to work with either the Greens and the Free Democrats, or she and her party lead a minority government that limps along one parliamentary vote at a time, aligning with any party that works with her decision at the time. The bad news is the Greens are demanding the phase out of the internal combustion engine; the Free Democrats are skeptical of an ‘ever deeper’ EU. Their leader wants to phase out the European Stability Mechanism. All told its a deal with the devil or devils.

If that was not enough, there was a 7.9-point gain by the Alternative for Germany, or AfD, a far-right populist party. The AfD is incredibly the third largest party in Germany, and second largest in the old East Germany. This is more than incredible; this is significant and could be a sign of great and growing dissatisfaction. We all need to keep on guard. This situation can easily and quickly, and quietly, shift further.

Is Warren Buffett Really That Bad?

I read with interest the Economics piece on Wednesday this week by the FT’s Robin Hardin titled, “How Buffett broke American capitalism“.  It was wrong on so many levels and I figured was a slam on one who many hold up as a scion of industry.

First Mr. Hardin praises Mr. Buffett and reminds us of his business acumen- creating wealth out of situations where it does not appear to exist. But then he suggests that Mr. Buffett has a dark side: Buffett seeks to “avoid competition and minimize capital investment in the real economy”. This is a description of darkness, it seems. What does it mean?

The author refers to the growing set of work that suggests out US economy is operating with diminished competition. At the same time corporate profits are running at near all-time highs and capital investment is running at historically low levels. These are all reasonable well known ‘facts’ but are they connected to what Buffett is doing, or is what Buffett doing causing any of these? Does Buffettism have a dark side?

Apparently price mark-ups are increasing over the years and as such contributes to growing margins and so profits. During the recent period capital investment is down- if you have read my blogs regarding the abysmal performance of US productivity (even IT-based productivity) you would know this. Mr. Hardin says hear conditions are central to the success of Mr. Buffett.

Apparently folksy Buffett seeks to ‘widen the moat’ which is code for looking for businesses that have little competition or driving business to do things to distance themselves from their competition. This is not darkness; it is sensible. What the article author is conflating is what is happening in the industry. Mr. Buffett has about the same number of large competitors. What our economy lacks significantly is the turn over in smaller and midsize firms they drive creative destruction and reallocate assets to efficient uses. Yes, there is a lack of completion and innovation from small start-ups. Than Uncle Sam and the federal government and excess regulation and ineffective tax systems for that. Buffett is not dark- left and right leaning politicians are the issue here.

The the article takes another turn. Apparently Mr. Buffett tends to take out all the cash of his acquisitions and jack up the prices. This leads to increased profits and lower capital investment. Go ask any CIO or CFO or treasurer about why firms spend money on capital investment. This is not about economics, it is about financial management. Money seeks money. More money seeks higher returns. If you have not noticed two factors are at play here:

  • Near zero interest rates, even negative interest rates
  • Massive quantities easing whereby trillions of dollars (and Euros) are seeking yield in low-yield market

So CFOs and CEOs have gorged themselves in cheap debt to help increase stock buy-backs to drive EPS (to meet bonus targets) which is quite rational if ‘dark’. The choice was an unproven or unaccountable risk in a long term capital project. Why invest in a 5-year risky investment in plant and machinery and R&D if you can instead just acquire the competitor? That is rational, not dark. And the hand that makes this mess possible is not invisible- it is Uncle Sam again.

Mr. Hardin simply suggests that Buffett buys his way into monopolistic firms and profits. Mr. Buffett is not dark. He is simply playing the cards our dark politicians are playing. They know least about how the world works; they know most about how to retire millionaires with free health insurance for life. What’s wrong with this picture?

Three for Three: Lies of Communism and Capitalism

There were three articles in the August 14th US print editions of the Wall Street Journal and Financial Times. One highlighted what the mainstream media does not want to admit about Trump; one looked at the so called lies at the heart of capitalism and communism, and the last looked at Brexit and Germany’s view of its neighbor. This blog looks at the third hot topic of the lies of capitalism and communism.  

In “From Lenin to Lehman – the big lies“, Martin Sandbu of the FT would have you believe that communism and capitalism have failed and thus we ought to seek some compromise, some hybrid model.  This is bunk and ends up being journalistic diatribe.  The author has some bone to promote and the space offered by his newspaper editor allowed him to confuse us all.  But its not all bad news.  Let’s look at his lies at the center of communism.

Mr. Sandbu claims that there are two lies.  The first suggests that communism undid itself since it brayed its own vision of a society of equals, solidarity and self realization through collective purpose.  I can see the old black and white videos now.  The reality was that a centrally planned economy led to an inner circle of leaders who were “more equal than others” and this spread into the very infrastructure built and supplied to govern the commune.  Reality was never like this ideal.  The second lie concerns the possibility of central planning.  Trying to understand how organizations work is complex; how economies work is harder still.  Nothing beyond the planning of a dinner table is possible, lets be honest.  But some folks tried.

From here the author decides to show how and where capitalism failed.  He argues correctly that the price mechanism is a superior tool to central planning by being able to convey demand and supply conditions.  However he suggests that the price system failed during the financial crisis since asset prices were bubbling and so we all fell for the froth and of course we all missed the risk embedded, hidden in the US mortgage system.  He argues that the wealth we all thought we had in the prices of housing assets was not real.  The value was a lie.  Clearly the author is using price incorrectly.

He then asserts that the crash we experienced has left the western countries now poorer than before the crisis and so bereft of any chance to live a life better than our parents.  It seems the American Dream is neutered if you swallow Mr Sandbu’s point of view.  I think this is all twaddle.

First price and value.  Those of us that are smart enough know the difference but is this at the heart of the first lie?  Did we all feel that as prices rose into bubble status the value of our assets increased?  Yes we did.  But the lie was not in the price per se but in the processes used to derive that price.  There were policies, promoted by democrat and republican, that encouraged the start of the bubble by enabling poor folks to take out loans they realy could not afford, as a means to promote house ownership (the America dream) to more of the population.  This was followed up by exotic financial tools that spread risk across many products.  This was then corrupted by villains that poorly rated risk and those loans taken out by poor people that had no income.  So all told it was a ponsi scheme promulgated by social engineers and politicians.  It was not a simple failure of price.

Yes, as a result our economies have taken a beating.  Worse, those same politicians have throttled our economies ability to drive growth:  affordable housing is depressed; new start-ups are regulated and taxed to record lows; innovation, R&D and education are under invested and regulated.  Overall yes the American dream is under attack.  But that is not a lie or a failure of price or capitalism. It is a failure of our socialist, centralized, big government model.  We live in a near-socialist system with more controls and more of the economy under government controls than ever before.

The lie is that our media won’t report how bad this situation is.  The article suggest some middle ground is needed.  We need more pure market-based freedom to allow the individual to grow, thrive, and live on the fruits of his labor.  We need free markets.  Such freedom will lead to +3% GDP growth and then enough surplus money will be generated to pay for welafare for those on hard times.

The Inconvenient Truth About Charlottesville 

The cout detat continues apace as the establishment, the democrats and an increasing number of republicans continue to resist Trump.  Charlottesville and its aftermath was just what the doctor ordered, in the eyes of the left.  Their arch-enemy was in trouble no matter which way he leaned.  But I have to tell you, after reading the Opinion piece by Holman W Jenkins Jr., in Saturday’s Wall Street Journal, the whole things stinks.  See The Extremist Show is Just Starting.  It seems that the Democrats control the city where the application for the Charlottville demonstration,  against the removal of a civil war statue, was made.  Why didn’t they turn it down?  Did they deliberately set the whole thing up?  

But reading on we find that the democratic city members who voted to remove the Robert E Lee status have all left office.  Two didn’t seek re-election; one did and lost; and one had to leave his teaching job under a cloud due to a “history of bigoted, anti white tweets”.  It seems, according to the article, that the removal of the statue was not a popular item.  It was only popular with a small number activists groups.  The author of the opinion piece lists some of these activist groups and their background is less than savory and full of trouble making social media or principles.  The whole event seems to be a prefect set up by a number of clever inviduals who might have staged the whole thing.  It’s just too prefect and unlikely to have happened without careful planning – on both sides.  And this is the point that the mass media don’t want to talk about.  It takes two to make a fight and both sides turned up looking for that fight.  Yes, Trump took the middle road as Obama did and as explained in “Trump follows Obama’s example of moral equivalence“.

So after reading this opinion piece was I left with sour taste.  It seems that the establishment is gearing up for hard work against President Trump.  Those on the extreme right need to watch their actions.  They may end up falling for the bait and thus damaging the very think they perceive helps their cause (even though Trump does not).  The coffee was strong but with such a sour taste I had no option but to go to the tread mill for an hour to get my frustration out.  

It was wonderful to watch the preceding Friday to listen to Scott McNealy talking sense on CNBC’s Squawk Box.  He took Andrew Ross Sorkin to town over the mass media mess.  He explained to Mr Sorkin that everyone in their right mind stands against Nazis and extremeists – Trump included – and to use the argument of the change in tone, or the sequence of speeches the president made, as an proof he was defending Nazis is stupid.  Mr Sorkin was taken aback and not able to get his point over since he was pushing the establishment’s arguments.  See the video here. Mr McNealy affirms that Trump did not say or imply that any Nazis or white supremacists are “fine people”.  Trump was referring to the likehoood that on both sides, there were some there who were going to protest peacefully and some others were going to peacefully protest the protesters.  But Trump’s words were construed since it played into the establishment’s plans.  The cout detat is gathering space.

My Second of Three: The Lies of Communism and Capitalsm

Three articles came across my desk yesterday – and I noted them with a blog on the first concerning Trump/Obama.  Today my “second of three” looks at a comment by Martin Sanbu of the Financial Times, titled “From Lenin to Lehman – the big lies“.  Let me restate the lies Mr. Sandbu explains.

Communism promoted two lies:

  1. A society organized by communism would lead to widespread equality trough collective purpose.
  2. Central planning would lead to a more efficient economic system

These two lies came crashing down as we all know.  We are all human, and despite our best efforts, when you put some of our number in charge of others, they tend to pay themselves for the pleasure.  Absolute power corrupts absolutely.  The second lie took a while longer to fail but some economists nailed it.  We are all enterprising and creative individuals that seek to improve – that is a natural tendency.  Communism flew in the face of this and ignored a basic human need.  It also created a massive information problem.  The economy is so big that no amount of method or information can be gathered and analyses centrally.  There are more efficient systems to help organize resource allocation.

So far, so good.  Now let’s look at the authors’ lies of capitalism.

  1. The market values of financial and other assets accurately reflect the economic value they represent
  2. The future will always offer more opportunities for a better life than the past

Mr Sandbu has tried to make an argument in order to write a column.  His arguments are manufactured and simple, probably because he assumes you would not understand the realty.  Let’s look at them.
The first lie is explained with the argument that prices measuring wealth that people thought they had did not in fact exist.  This a massive misunderstanding of the price mechanism and what happened in the financial crisis. First, weath is always and everywhere a relative measure.  As such we need something to compare one to another – price fits the bill nicely.  Howeve, justbecause  the price of assets go up does not mean you are more wealthy.  Yes, press articles told us that as house prices went up we could therefore monetize the increase in value.  But that extra cash is not wealth – since we incurred a debt (increase in debt).

The second problem is that prices were not set efficiently.  There were several failures in the system that meant risk was not correctly priced into the asset price.  This is not a failure of price per se.  It was in part a failure of living and cheating individuals (that didnt go to jail) and incompetence by others.   If we had more transparency (and accountability) in the pricing systems that worked together, more folks would have seen the risks sooner and the bubble might have been nipped in the bud.  

The second lie is totally made up.  The author argues that we are now poorer than we were before the crisis and that our future prospects are negative such that the young are now dissalusioned.  This is fallacy.  This is not a failure of capitalism.  We do not live in a free market.  We live in a massively over regulated and over taxed econonmy.  Never before has the US government taken so much tax and spent so much (e.g. Debt) on social transfers.  The number of rules we have to follow has never been higher.  The number of rule-making bodies writing those rules, and rule-making bodies managing the rule-making bodies, has never been higher.  Over 51% of Americans receive a social transfer of some kind from the governance (see A Nation of Takers).  

If the central bank had raised interest rates sooner private industry would have returned to normal investment practices.  If the central bank had collapsed its balance sheets sooner, private funds would not have been crowded out and instead redirected to stock buy-backs and uncompetitive M&A, which has now created yet another stock-market bubble.  We need a good dose of natural, healthy, honest hard work that is rewarded and encouraged. We need to stop talking about how we are all owed a debt by the government and they should give is all that we need.  We need to take responsibility for our own success.  

The author concludes that we now need a mix – of communism and capitalism to get out of the mess we are in.  He is mistaken.  We exist today in a mixed model.  Socialist has been creeping up on us for years – and this is the analogy to communism.  No, we are not let by Leninist’s or Trotskyist’s but we are led by socialist policies that align with the lies of communism above.  We need more honest work, and honest pay, in a freer economy.  We do need regulation – but we need less so we can see where the real wood for the trees lays.