Category Archives: Global Economics

In Defense Of Playing Defense (Part 3)

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My Comments: On Wednesday I usually talk about Globla Economics. Today, however, I’m less concerned about emerging markets than I am the evolution of ideas that influence what is happening on Wall Street. Yes, it’s influenced by the hiccups we see in emerging markets globally but the political and economic forces at work in this country suggest the potential for something dramatic.

That’s a mouthful to absorb. What I hope you will get from these comments from Erik Conley is that being defensive right now with respect to your money is a good thing. I know I am with my money.

by Erik Conley, 9/18/2018

Summary
I lay out the case for playing smart defense in order to fill the hole that’s left open with the Buy & Hold approach.

When the stakes are high, it makes sense to have a contingency plan in place.

It is reasonable to expect that a solid Plan B could reduce the downside of these bear markets by at least 50%, which would have the effect of shortening the time it would take to reach one’s goals.

This idea was discussed in more depth with members of my private investing community, The ZenInvestor Top 7.

In part 1 of this series I posed the following question:
What would you do if you found out that your entire approach to investing was wrong? I said that this happens more often than you might think, and for a good reason. The investment advice industry, and the major financial media outlets, work hard to create the impression that the Buy & Hold method is far superior to any other approach that an investor can choose. But is this true?

In part 2 I closed with this thought:
The solution to managing risk with a B-H approach is to play smart defense. What’s that? My version is having a rules-based Plan B that is designed with one purpose in mind – shortening the amount of unproductive time that is wasted with a B-H approach.

Today in part 3, I will lay out the case for playing smart defense in order to fill the hole that’s left open with the B-H approach. Note that I’m not calling for anyone to abandon their B-H approach, especially if it’s been working well for them. What I’m proposing is adding a defensive piece to the B-H approach. Here’s how.

When the threat of a new recession, or a new bear market, is sufficiently high – turn to your Plan B.

Fans of the comedy show It’s Always Sunny in Philadelphia have come to know how the gang operates. After sitting around their (empty) bar and tossing around ideas about how to get people to come in and spend money, they finally agree on a Plan.

Each week the plan that the gang dreams up is more outrageous than the last one, and the plans never seem to work. What’s missing is that they never have a Plan B in case Plan A blows up, as it inevitably does. Maybe if they took the time and effort to make a backup plan, they could someday fill the bar with paying customers.

Here’s another couple of examples. Football coaches always have a Plan B ready to go if their original game plan isn’t working. Soldiers on the battlefield would never think about venturing beyond the compound without having a Plan B and a Plan C in place.

You get the idea. When the stakes are high, it makes sense to have a contingency plan in place. So what would a Plan B look like for a B-H investor?

Plan B. A rules-based, systematic procedure that is clear and concise – leaving nothing to chance.

Here are some of the steps that a B-H investor can take to manage downside risk.
• Sell your worst-performing holdings, and allow your best-performing ones to run. Review this monthly or quarterly.
• Set up news alerts on your main holdings. At the first sign of a regulatory body asking questions about accounting irregularities, misbehavior in the C-Suite, or a bad miss on an earnings report, sell first and ask questions later.
• If one of your companies announces a dividend cut, sell first and ask questions later.
• If you catch wind that the company may not be able to meet a loan recall, or roll over a line of credit, head for the door.
• If the company brings in a new CEO who has no experience in the business involved, leave quietly.
• If the CFO gives evasive or confusing answers to analyst questions on a conference call, sneak out the back door.

Macro signals
As I said earlier, recessions and bear markets are killers, especially when looked at from the perspective of time lost. The B-H promoters claim that there has never been a 20-year period in the market when investors lost money. This is true. But is it relevant? I think not, and here’s why.

We invest to grow our purchasing power. It’s that simple. But we don’t have an unlimited amount of time to accomplish this. There have been 4 really bad bear markets in the last century, and each one of them brought pain and suffering to investors. None of them suffered more than the true believers in B-H.

The investment business will tell you that bear markets are just part of the game, and if you are patient, you will recoup your losses in due time. This is another example of the mythology of B-H. It’s partly true, but it’s irrelevant. This approach requires you to sit back and watch as your life savings spend 10, 15, 20 years or more “under water.” When you finally get back to even, there is no getting around the fact that you have just wasted a significant amount of time getting to your ultimate goal, which is financial independence and security.

“Time is the one resource that can never be renewed. Once it’s gone you can never get it back.”

Major bull & bear markets throughout history
The table below shows all of the major bull and bear markets since the Great Crash of 1929. It shows what was happening at the time to cause the bear markets, the losses suffered by investors, the loss of time, the macro environment that was present during each event, and the bull market recoveries that followed.

According to my analysis, a B-H investor would have earned an average annual return of about 9.7% throughout this entire period. That’s not bad at all. But it would have taken much longer to reach her investing goals if she simply rode out all of the ups and downs along the way.

It is reasonable to expect that a solid Plan B could reduce the downside of these bear markets by at least 50%, which would have the effect of shortening the time it would take to reach one’s goals.

For example, an investor who used a simple moving average crossover system as a way to reduce equity exposure would increase their returns from 9.7% to 11.6% per year, over the entire time frame.

An investor who systematically avoided the worst parts of economic recessions, and the bear markets that accompany them, would have achieved an annual return of 12.22%.
And an investor who used both the recession warning model and the bear market probability model would have achieved an annual return of 14.10%.

The reason for these better outcomes is based on the fact that markets go through long periods of over-valuation and under-valuation, and an astute investor will pay attention to which environment is in play at all times. Today the market is somewhat overvalued, so it makes sense to reduce exposure to the riskiest parts of the capital markets.

Likewise, in 2003 and 2009, the markets were very undervalued, and it made sense at that time to increase exposure to the risky end of the market. This is not rocket science. It’s just common sense.

Everybody is a Buy & Hold investor until their account value starts going down.

Where do we go from here?

In the next installment, I will present a few options for playing smart defense. Moving average crossovers are one. Mean Reversion is another. Sector rotation is a third. They are all defensive strategies that can be part of a solid Plan B.

See you next time.

Note from TK: Read Mr. Conley’s original article HERE.

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Check your math, central banker says: less immigration equals less growth

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My Comments: I have an interest in the immigration debate. I’m an immigrant, granted US citizenship on May 1, 1959. As I read horror stories about parents and others being deported, it has crossed my mind that I’m at risk. Probably not, but with ICE nosing about, who knows?

It’s not just the New York Times that’s publishing articles on immigration. This one comes from Reuters, the global news agency. (Disclosure: my great-great grandmother, Anna Mathilde Kraul married Peter William Reuter on August 10, 1857. Same family as the news agency.)

Anyway, if the administration continues to insist on restricted immigration, and Congress goes along with it, we can expect a slow but pervasive decline in our economy of the next few decades. Talk about ceding global economic supremacy to China, this is the way to make that happen.

Ann Saphir \ August 7, 2017

(Reuters) – Less than week after a U.S. President Donald Trump embraced legislation to reduce immigration, Minneapolis Federal Reserve Bank President Neel Kashkari urged residents of South Dakota to embrace newcomers instead.

“Just going to math, if a big source of economic growth is population growth, and your population growth slows, either because you restrict immigration or because you have fewer babies, your economic growth is going to slow,” Kashkari said at the Rotary Club of Downtown Sioux Falls, responding to a question about a Trump-backed bill to cut legal immigration by 50 percent over the next 10 years. “Do we want economic growth, or not? That’s what it comes down to.”

Kashkari not alone in seeing immigration as key to U.S. economic growth.

Dallas Fed President Robert Kaplan routinely points out that immigrants have historically boosted U.S. workforce growth, and therefore economic growth, and has warned that the crackdown on illegal immigration could hurt consumer spending. Fed Chair Janet Yellen told U.S. lawmakers earlier this year that slowing immigration could probably hurt growth.

Most economic research suggests that immigration has little effect on wages of U.S. workers, and one recent study of what happened after the U.S. ended a guest-worker program for Mexican farm workers in the 1960s showed that growers, instead of raising wages to attract more workers, simply automated more of their field work.

The U.S. economy has been stuck at about 2-percent growth in recent years, and appears unlikely to break to out of that pattern anytime soon, St. Louis Fed President Bullard said earlier Monday.

“You can either accept slower growth; you can spend a lot of money to subsidize fertility – child care etc, very expensive – or you can embrace immigration. That’s math,” Kashkari told the audience in Sioux Falls, where the foreign-born population grew by more than a third from 2010 to 2014, figures from the U.S. census show.

“You guys have done a pretty good job of embracing immigration and that is a source of economic growth vibrancy.”

Why the American Middle Class Is Disappearing (and What It Will Mean for the Economy)

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My Comments: Today is Wednesday and my topic is, as usual, ‘global economics’.

The decline of the middle class has not happened overnight. It brings to mind the phrase ‘watching grass grow’ or ‘watching a car turn to rust’. You know it happens, but from day to day, you never notice any change.

And what’s confounding to me is that the people most impacted by this decline are the very same people who send Republicans to Congress and the White House. Years ago, Republicans were very aware that their future was dependent on an emerging middle class. Today they are beholden to those at the very top and are blind to the potential consequences.

States around the world that have the most dramatic economic discrepancy among their populace are not democracies, but autocracies where the ruling class is wealthy and everyone else is poor.

As a child I lived in India. At that time abject poverty was the norm where the streets at night were filled with people sleeping on the sidewalk. Children overwhelmed you whenever you left the hotel or apartment begging for food or currency with which to buy food. It began to change after the British left and people like Nehru became leaders. Today it’s a thriving democracy with a growing middle class.

Apart from the political ramifications of a disappearing middle class in the United States, there is a significant economic outcome on the horizon. Corporate America needs a middle class with the capacity to consume goods and services in order for there to be an incentive to manufacture goods and services and thereby earn a profit. If we allow the middle class to disappear, who is going to buy new homes and cars and all the goodies that advertising encourages us to purchase?

by Chris Hughes, Co-Founder of Facebook, Co-Chair at Economic Security Project, author of Fair Shot: Rethinking Inequality and How We Earn, on Quora:

Democracies do not last long without strong middle classes. I believe unless we make significant changes today, the income inequality in our country will continue to grow and call into question the very nature of our social contract. It is such a fundamental idea behind America that if you work hard, you can get ahead — and you certainly don’t live in poverty. But that is increasingly less true today. Many scholars smarter than me have looked at how democracies slide into authoritarian rule, and growing class resentment and the emergence of nativist or populist leaders is a recurring theme. (This is the concern that I share with many about Donald Trump’s dangerous lack of respect for the rule of law.)

Economically speaking, the biggest driver of growth in our economy is consumer spending. If we want to grow our economy, we have to put more money in the hands of working people. If you put a $100 in the pockets of the poor or middle class, they’ll naturally spend the vast majority of it on products and services they need, spurring economic growth. That same $100 put in the hands of the wealthy will mostly go into the bank for savings. The Roosevelt Institute has looked at the effects of this practically speaking: a guaranteed income of $500 a month to all Americans could add as much as 7 points to GDP growth over the next eight years.

History has proven that the “trickle-down” economic worldview may be good for America’s corporations, but it is not good for Americans. Just because economists tell us the economy is healthy again does not mean the American dream is strong.

I spend a lot of time discussing this exact topic in my book, particularly in the last couple chapters.

Source article: https://www.inc.com/quora/why-american-middle-class-is-disappearing-and-what-it-will-mean-for-economy.html

Is Capitalism Killing America?

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My Comments: In the minds of many, capitalism is the antithesis of communism. And they are essentially right. In the minds of many, communism and socialism and fascism are one and the same. And they are essentially wrong.

Communism is an economic model where the state owns everything involved in providing goods and services to the members of society. All members of that society are bound by a framework that starts at the state and ends at the state. History has shown this is a fatally flawed model.

At the other end of the economic model continuum is capitalism, where the state has no say in the production of goods and services to benefit the members of society. Everything is determined by the individual first and then slowly upstream as determined by the collective will of many individuals. Rules and regulations are anathema and are to be opposed and vilified at every opportunity.

Into this mix appears religion and other social pressures that have evolved over the millennia to create a mechanism which allows us to survive and thrive. I argue that capitalism in it’s unfettered state is an equally flawed economic model.

Bring all this into the 21stt Century and you have arguments pro and con. How does society find that spot along the continuum between the two models to best meet the needs of ALL OF US? It matters not that it doesn’t have a convenient name. What matters is that we focus our time and energy on the creation of a balance between the rights of individuals and the rights of society. The goal is to preserve society such that both individuals and society can survive and thrive.

We are in the midst of such a discussion today. The emergence of Trump and the push back from the non-Trumps will structure the framework that our children and grandchildren will experience as they travel through life. Without an economically viable middle class, we are doomed to failure. Your voice needs to be heard.

September 18, 2017 by Theodore Kinni

On August 2, 2017, the Dow Jones Industrial Average hit a record-breaking 22,000—its fourth 1,000-point advance in less than a year. That same day, I read the first sentence in Peter Georgescu’s new book, Capitalists Arise! End Economic Inequality, Grow the Middle Class, Heal the Nation: “For the past four decades, capitalism has been slowly committing suicide.”

How does Georgescu, the chairman emeritus of Young & Rubicam (Y&R) and a 1963 graduate of Stanford Graduate School of Business, reconcile the Dow’s ascent with his gloomy assertion?

“The stock market has nothing to do with the economy per se,” he says. “It has everything to do with only one thing: how much profit companies can squeeze out of the current crop of flowers in the garden. Pardon the metaphor. But that’s what corporations do—they squeeze out profits.”

In the latter half of the 1990s, Georgescu shepherded Y&R through a global expansion and an IPO. He has served on the boards of eight public companies, including Levi Strauss, Toys “R” Us, and International Flavors & Fragrances. He also is the author of two previous books, The Constant Choice: An Everyday Journey from Evil Toward Good and The Source of Success. An Advertising Hall of Fame inductee, the 78-year-old adman is still pitching corporate leaders. Now, however, he is trying to convince them to fundamentally rethink how—and for whom—they run their companies.

The fault lines in capitalism

Capitalism is an endangered economic system, Georgescu says. He sees a dearth of demand across the global economy, even as American corporations record their highest profits ever. “How does this magic happen?” he asks rhetorically. “You engineer it. You buy back your stock at 4% and change. Your earnings per share go up and the market says, ‘We like that.’”

What does he mean? He cites the seminal research by economist William Lazonick, who studied S&P 500 companies from 2003 to 2012 and discovered that they routinely spend 54% of their earnings buying back their own stock (reducing the number of outstanding shares and driving up share prices) and 37% of their earnings on dividends—both of which benefit shareholders. That leaves just 9% of earnings for investment in their business and their people.

This financial legerdemain obscures two fundamental fault lines in capitalism, and particularly in the US economy, according to Georgescu. The first is a lack of investment by companies in their own futures. “Our companies are not competitive because they don’t invest in themselves,” he says. “Total R&D investment is down. Total basic research, which is the precursor of innovation, is down dramatically. Investment in infrastructure has fallen to critical levels.”

The second fault line is the lack of investment by companies in their employees. “Innovation is the only real driver of success in the 21st century, and who does the innovation? Our employees. How are we motivating them? We treat them like dirt. If I need you, I need you. If I don’t, you’re out of here. And I keep your wages flat for 40 years,” says Georgescu, who points out that growth in real wages has been stagnant since the mid-1970s.

The engines of capitalism are sputtering

The lack of investment by US corporations in their businesses and people is not only causing the engine that powers innovation gain to sputter, but also slowing the engine of demand that produces topline growth. Why? Median household income in the U.S. is less than 1% higher today than in 1989, according to the Census Bureau. “There’s no middle class, and the upper middle class has very little money left to spend, so they can’t drive the economy. The only people driving the GDP are the top 20% of us,” Georgescu says.

In Capitalists Arise!, Georgescu shows how these issues are impacting the American public. Nearly 60% of American households are technically insolvent and adding to their debt loads each year. In addition, income inequality in the U.S. is reaching new peaks: The top layer of earners now claim a larger portion of the nation’s income than ever before — more even than the peak in 1927, just two years before the onset of the Great Depression.

Georgescu lays the blame for all of these conditions on the ascendency of the doctrine of shareholder primacy. “Today’s mantra is ‘maximize short-term shareholder value.’ Period,” he says. “The rules of the game have become cancerous. They’re killing us. They’re killing the corporation. They’re helping to kill the country.”

Back to responsible capitalism

Georgescu is convinced he knows how to beat this cancer, and he’s pitching it to corporate leaders across the country. “The cure can be found in the post–World War II economic expansion. From 1945 until the 1970s, the US economy was booming and America’s middle class was the largest market in the world,” he says.

“In those days, American capitalism said, ‘We’ll take care of five stakeholders,’” he continues. “Then and now, the most important stakeholder is the customer. The second most important is the employee. If you don’t have happy employees, you’re not going to have happy customers. The third critical stakeholder is the company itself — it needs to be fed. Fourth come the communities in which you do business. Corporations were envisioned as good citizens—that’s why they got an enormous number of legal protections and tax breaks in the first place.”

In Georgescu’s schema, shareholders are the last of the five stakeholders, not the first. “If you serve all the other stakeholders well, the shareholders do fine,” he says. “If you take good care of your customers, pay your people well, invest in your own business, and you’re a good citizen, the shareholder does better. We need to get back to that today. Every company has got to do that.”
We welcome your comments at ideas@qz.com. This post originally appeared on Insights, by Stanford Business.

Source URL: https://www.gsb.stanford.edu/insights/capitalism-killing-america

The end really is near: a play-by-play of the coming economic collapse

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My Comments: The headline says ‘really near’ but what does that mean?

In my past I worked with a currency trader whose idea of a long term hold of a position he’d bought was 3 days. His idea of ‘really near’ was about 30 minutes.

If you are now in your 30’s or 40’s, your definition of a long term hold on investments you own should be on the order of 10 years or more. For someone like me whose age suggests I may not be alive 10 years from now, a long term hold might be six months to a year.

What will happen in the foreseeable future is there will be an economic collapse, the markets will tank, and people will be jumping off buildings. These five economist share their ideas about how this will come about.

Max Cea  |  August 12, 2018

Since June, 2009, the pit of one of the biggest recessions in American history, the U.S. economy has been growing, slowly but steadily. That’s just over nine years of uninterrupted growth.

If the good times roll for another year — and most economists expect they will — this expansionary period will go down as the longest ever in American history, surpassing the 120-month-long period during the ‘90s tech boom.

But don’t be so quick to pop bubbly and send the confetti raining down. There’s precedence for unprecedented growth: It always ends. The economy, of course, moves in cycles.

And no matter how you slice it, it would seem there’s only so much more climbing before a fall. But what will set off a downturn? How bad will it be? And when will it actually happen? To answer these questions and more, Salon consulted with five economists, three of whom (Peter Schiff, Steve Keen and Dean Baker) predicted the 2008 financial crisis before it hit.

Dean Baker is a Senior Economist with expertise in housing and consumer prices

What Will Happen: A recession caused by the Fed over-reacting to a temporary uptick in the inflation rate.

How this will transpire: There are two ways we get recessions. The first and more common is that the Fed raises interest rates too much (ostensibly because of concerns about inflation) and throws the economy into recession. The other is a bubble burst. The latter happened in 2001 with the stock bubble bursting and the 2008-09 recession with the housing bubble.

I don’t see a bubble bursting recession on the horizon because I don’t see any bubbles large enough to sink the economy when they burst. (We have bubbles, like Bitcoin and Tesla stock, but nothing terrible will happen to the economy when they burst.).

This leaves the Fed. I think [Chairman of the Federal Reserve Jerome] Powell has been cautious with his rate hikes and will likely continue to be. Nonetheless, inflation data is erratic and it is virtually inevitable that we will see some periods of higher inflation in the not too distant future. This should in principle not be too severe.

When: Let me cast a vote for 2020.

What government should do: The best way to deal with a downturn is to have good automatic stabilizers in place. These are items like unemployment insurance and other transfer programs that automatically increase when we go into a recession and people lose their jobs.

Unfortunately, we have been going the other way, with many states cutting back unemployment insurance and other benefits.

David Blanchflower is a Dartmouth Labor Economist with an expertise in wages and unemployment

What will happen: [Predicting a future recession] is pretty darn hard to work out. It depends on what the signals are, and it depends what people do. In a way, the financial market shock that was coming [in 2008] shouldn’t have been a surprise. We saw it in 1929. Keynes warned about the long, dragging conditions of semi-slump. And we’ve seen the slow recovery driven by the fiscal authorities go into austerity, keeping fiscal policy too tight.

The worry might well be that this is a shallow turn, but if the policymakers fight like ferrets in a sack, that might make things worse. Bernanke was asked [with regards to the 2008 recession], “What would unemployment have been if the US hadn’t acted?” It went to 10 percent, and he said it would’ve been 25 percent if the Fed hadn’t acted. So the issue is not so much what do I think it’ll look like. It’s, what’s the response of the policymakers to the downturn? Do they make it work? Do they dampen it? Do they see it before it’s coming? My suspicion is it’s probably going to be a relatively shallow [dip], but it’s probably going to be made worse by the fact that the policymakers will look like blinded lunatics.

Why: I think the arguments you have to make are that this is now the second longest recovery ever. I think by next spring it will be the longest ever. Recoveries generally don’t die of old age. They die because of misplaced actions by the Fed and rising oil prices. Obviously, the stimulus that was put in place in the U.S. at the late stage of a recovery has given a boost.

And then the Fed are cranking it back. The other thing is that there’s a lot of evidence that the U.K. and Europe and elsewhere — that these economies are slowing.

How this will transpire: My work suggests, in a series of recent papers and various contributions that I’ve made, that particularly Western economies are a very long way from full employment. And the number is likely in the mid-twos, not in the mid-fours. So the actions by the Central Bank, in the U.S. especially, but also this week in the U.K., to raise rates are mistakes.

There is no wage pressure, there is no inflation, there’s no basis in the data to do that. And that’s what generates recessions.

How Well is American Capitalism Working?

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Tony’s Comments: I’m becoming a Social Capitalist in my old age. On the one hand I embrace capitalism as the most viable economic model for us to follow while on the other hand know that in it’s purest form, it can be as evil and unworkable as communism at the other end of the spectrum.

Given the current polarization of civil discourse, and the fundamental lack of understanding by most people about economics, it’s a given that many people feel threatened and become responsive to politicians whose goal is to incite fear as a motivator.

Somewhere between the extremes of pure capitalism and pure communism is a workable solution that supports the strengths and advantages of capitalism and the concurrent need for society to overcome it’s failings. The solution for all of us is acknowledge that society has an obligation to itself that cannot be realized with pure capitalism.

People who have a knee jerk reaction to the word ‘socialism’ need to be educated. This article by Philip Kotler is a good start.

Philip Kotler | 10/27/2017

The answer to the question depends on who you ask.

If you ask America’s corporate executives, their answer is that American Capitalism is working well and would even work better if there were fewer government regulations and if taxes were lowered.

If you ask America’s middle class, their answer is that American Capitalism worked better in the past but now it is harder to finance a middle class life style given the high costs of sending students to college and taking care of their parents who failed to save enough money for their retirement.

If you ask working-class Americans, their answer is that they haven’t improved their earnings since the 1980s but their expenses have risen dramatically and they can only survive with a credit card and rising indebtedness.

If you ask the 15% of our population living in poverty, their answer is that they can’t find a decent job and they survive on food stamps, food kitchens, clothing handouts, and cheap housing or even homelessness.

Markets, left to themselves, do not always lead to efficient or equitable outcomes. Free-market capitalism can lead to monopolistic or oligopolistic industry domination–witness Google, Facebook, Amazon, and Apple. It leads to a growing concentration of income and wealth. The average income for the top 0.01 percent of households grew 322 percent, to $6.7 million, between 1980 and 2015. As of 2015, the data shows that half of all US income went straight into the pockets of the top 10 percent of earners. Thomas Piketty, the economist, predicts that eventually 60 percent of income will go to the top 10 percent of earners.

American Capitalism is largely Free-Market Capitalism where businesses are in private hands and companies are relatively free to make decisions on what to produce, where to produce, what to pay employees, where to sell, and what intermediaries to use in distributing their products and services. Businesses are subject to some regulations to ensure product quality and safety and no harm to the environment.

Capitalism takes on different forms in different countries. Consider two other forms of Capitalism – State Capitalism and Social Capitalism. Ask: what would work better for the majority of Americans?

State Capitalism

Two examples of state capitalism are Russia and China. Both are capitalist systems without democracy led by autocratic rulers. We’ll focus on Russia here.

Since the Russian Revolution in 1917, the Russian economy operated as a complete Communist economy until recently. The State owned all the land and businesses, decided on the industries to build and operate, and managed the macroeconomic instruments of taxes, credit and the money supply. The State produced most of the jobs, determined the pay, and set quotas for the annual outputs in most product areas. The Communist economy, instead of producing growing income for the proletariat, ended up producing a wider sharing of misery.

The Cold War ended in 1985 when Mikhail Gorbachev assumed the reins of power in the Soviet Union. Gorbachev introduced the policies of glasnost and perestroika to the USSR. GLASNOST, or openness, meant a greater willingness on the part of Soviet officials to allow Western ideas and goods into the USSR. PERESTROIKA was an initiative that allowed limited market incentives to Soviet citizens.

This started a period of Russian Capitalism culminating today in Putin’s Russia. The Russian government controls about 65% of the Russian economy through state-owned enterprises and state owned banks. The Russian government’s role in other industries vary from 50% in oil production, 27% in electronic hardware, 15% in telecommunications, down to 0% in steel production. Putin has promised to reduce the government’s role in the economy by privatizing state-owned enterprises. But paradoxically, Russia is currently consolidating other industries and buying back some privatized companies.

Private business companies in Russia are monitored by numerous federal, regional and local bodies for tax-collecting and law enforcement. Bribery is extensive. There is very low business confidence, especially among small entrepreneurs. Russia now has 96 billionaires. Russian businessmen keep their money abroad even as Russia desperately needs private investment for upgrading industries and infrastructure. The owners of Russian oligopolies keep top state officials on their payroll or make them confidential beneficiaries of their businesses.

This system has not led to producing better lives for most Russians. A few gained extreme riches and the many live with low pay and great uncertainty.

Social Capitalism

The Nordic community – Sweden, Norway, Denmark and Finland – practice a form of capitalism known as Social Capitalism. This includes a combination of free market capitalism with a comprehensive welfare state and collective bargaining at the national level. The four characteristics of Nordic Capitalism are:
· A commitment to widespread private ownership, free markets and free trade. Most of the production and distribution system is in private hands.
· The government supports individual autonomy and social mobility. It support its citizens in developing a healthy lifestyle free of hard drugs and alcohol and positive on exercise and nutritious eating. The government greatly supports preserving the environment and clean air and water.
· The Nordic model involves a tripartite arrangement where representatives of labor and employers negotiate wages and labor market policy mediated by the government.

This type of Capitalism leads to a more educated and satisfied citizens but it comes at the price of higher taxes, especially for the middle class and rich. A common misconception is that the rate of economic growth in the Nordic economies may be lower than it would be with American-styled Capitalism. The irony is that Sweden was just ranked #1 as the best country for business.

What Model of Capitalism Will We Choose?

Robert Reich reminds us that “we can make the economy work for us, rather than for only a few at the top.” Unfortunately, the American economy is rigged “by those with the power and resources to buy the politicians, regulatory heads, and even the courts.”

Obviously, most Americans would not want American Capitalism to drift into the State Capitalism model in Russia or China. It would lead to a great reduction of freedom and worsen the economic life of most Americans.

Should the American economy move closer to the Nordic model of Social Capitalism? Opinions would vary greatly among American groups. The wealthy class would curse this development, especially because it would involve significantly higher taxes and require paying higher wages to American workers.

The middle class might be divided. Their taxes would be higher but their benefits would also be higher. Those who aim to start businesses or achieve high management positions might be happier leaving things the way they are. The American Dream is to acquire wealth. Those middle-class Americans who would prefer a better health care system, a better educational system, free college education and cleaner air and water would lean toward Social Capitalism.

The working class would largely favor Social Capitalism where the government will strive to provide enough jobs for everyone and a living wage. The poor would favor Social Capitalism because the objective is to eliminate the condition of living in poverty.

Bernie Sanders recently posited that higher taxes would lead to lower health costs, higher education and a better environment.

My guess is that over time our free-market ideology will morph into the Nordic model of Social Capitalism. It’s time now to start fixing our Capitalism.

Source article: https://www.huffingtonpost.com/entry/how-well-is-american-capitalism-working_us_59f2c98ce4b06ae9067ab7bc

Trade Wars: Stop Hyperventilating, It’s All About the Dollar

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My Comments: Since this article first appeared several months ago, the current administration has doubled down on the idea of import tariffs. For some reason, it thinks that trade wars are what is needed to ‘Make America Great Again’.

A reverse analogy that comes to mind are the gas price conflicts that used to appear in town when some gas station owner decided to lower the price by a few cents, only to have the station across the street do the same thing. Before long, gas was being sold below cost.

As consumers we got to enjoy a price break, but the gas station owners got to lose a lot of money until someone said ‘enough’ and it was over. Tariffs wars between nations simply raises the price on what we buy and we as consumers ultimately lose. At what point do we declare ‘we’ve won’ and life goes back to normal?

By Krishna Memani | March 07, 2018

So, I’ve been reading a lot of articles, such as the one by Noah Smith on Bloomberg titled: “What Trump’s Trade Guru Doesn’t Get About Economics.”

In this article, Smith, a really good blogger who tends to boil things down to simple stuff, goes on to explain to us in detail why trade wars are bad economics.

Of course, I fully agree with him on this. As someone who grew up in the 1970s and 80s—especially in an industrially insular India—I experienced firsthand the bad economic policy of protectionism.
I know, I know. Tariffs won’t meaningfully reduce the trade deficit. For that matter, I also know that, for a country with a low savings rate, eliminating or reducing the trade deficit may not be the best thing for near-term growth. Furthermore, one would have to sleep through an “econ 101” class to not see how tariffs could reduce productivity growth and act as an indirect tax. Also, it is quite obvious that other countries are likely to respond to Trump’s trade provocation, a scenario that of course will cause the steps laid out in this paragraph to happen all over again.

While I don’t know this for sure, I am quite certain that Peter Navarro, the loudest proponent of this protectionist policy, who I believe happens to be an economist by training, gets all of this, too. The point I’m trying to make is that this policy, in my view, has nothing to do with economics. Instead, it’s all about politics, which, as we all ought to know very well, happens to be messy.

Arguing on the economics of this topic as a market participant is a useless exercise because it does not bring us to any conclusion. Trump got elected on a protectionist agenda—and to placate his base he is moving forward on that agenda. And no amount of pleas by the commentariat on the economic principles is likely to help.

So, I have accepted the fact that while it may be bad economic policy, some form of tariffs on some imported goods are likely to be passed. But it’s not the end of the world or a risk to the outlook for the financial markets from my perspective.

To carry forward the political argument a bit, I believe it is also true that if the Trump Administration further intensifies the trade conflict, the real damage to the economy will be quite substantial. The same base that is cheering him on right now may not be so enthusiastic later—and no one understands that more than Trump, in my judgment.

Further, while limited tariff policies make us uncomfortable and create all sorts of bad outcomes and dislocations (remember the “voluntary” auto restraint agreement of 1981 and numerous other such initiatives?), the impact on the longer-term growth potential of the economy would be modest at best. Further, protectionist policies prove themselves over time to be bad and eventually get unwound. I suspect they will be no different this time.

They will certainly create near-term issues with the markets. However, given the momentum in the global economy and the deficit-financed “oomph” to the U.S. economy, my expectation would be that markets will stabilize and move forward after a short hiatus, at worst.

With that being said, the risks to the market cycle and the markets have increased. And that increase has nothing to do with the tariffs themselves. Instead, these increased risks are coming from the almost certain prospect of a weakening dollar. It is this potential weakening of the U.S. currency that has the potential to change things dramatically. If the dollar weakens a lot, thereby indicating that financing flows to the United States are slowing, inflationary pressures will rise and bring the current market cycle closer to an end. I hope somebody emphasizes that consequence to Trump rather than talking to him about the benefits of trade.

So, let us all stop talking about the economic logic of trade because it has no bearing on the debate. Instead, we can focus on the politics and hope that the dollar doesn’t weaken too much while we are waiting for this to pass.