Sunday, November 19, 2017

Small Business Failures Merit More Of Our Attention

Small Business Failures Merit Our Attention
It is very important that small business failures receive a lot more attention then they do, we will see a lot of these in the near future as people have started down this path when unable to find a job. Small business is hard, going into business is risky, and many people are not up to the task. As a property owner that leases space to many start-ups I have a keen interest and knowledge of the microeconomics that occur when a small business is formed. This includes its effect on the economy both long and short term. What many people fail to realize is that most business start-ups having a very short lifespan of just months or around a year, this means the economy experiences a short-term burst of spending that is quickly followed by a slew of long-term negatives.

While America claims to want new business formation as a society we are weak in creating policies that support them. We should not underestimate the role new government regulations or Amazon's exploitation of brick and mortar stores have played in undermining their success. In fact not only has government been complicit in allowing small businesses to be destroyed but in many ways they even subsidize Amazon. Today startups also face the harsh reality that many major retailers plan closing stores. While many people see this as creating new opportunities down the road, short term it is problematic. It is difficult enough for a new venture to turn the corner towards making a profit but semi loads of discounted merchandise flooding a market as a closing outlet liquidates its inventory only adds to the challenge. The pressure resulting from stores closing tends to trickle down affecting all sectors of an economy reducing overall demand for services and casting a wet blanket on demand at the same time pushing down prices.

The Ugly Reality Is Most Businesses Fail
Formation of new businesses is very important to America and the economy, but a dark side does exist. The study of the anatomy of a failed business can be very enlightening and can contain some rather mean unintended consequences. When a new business opens or is formed generally a fair amount of money is spent or invested. The source of this money is often the savings or loans from the owner, their family or close friends. This explosion of spending that accompanies opening a new business stimulates the general economy. Money spent on fixtures, signage, leasehold improvements, services, and inventory help create jobs, but as stated earlier a dark side exists to this entrepreneurial adventure and it is exposed if the business fails to achieve economic success. When a business fails people often get hurt.

I'm not talking about hurt feelings or simply feeling sad, the ramifications reach far deeper. I'm talking serious pain of a financial nature. Contracts go unfulfilled, bills are not paid. Suppliers must take write-offs, and landlords after only a few months rent and often several months that are never paid, usually get back buildings negatively altered by unsophisticated novices doing shoddy work. Utility bills go unpaid and must be written off, those who have sold services never collect monies promised, yet suffer the upfront cost and investment. The fixtures and inventory of these failed enterprises often sold at a discount or trashed become underutilized, or dampen a competitor's future sales.

And last but not least, let us return to the psychological damage that follows in the wake of a business failure. This often turns into shame as they dodge those they let down, and is often followed by bankruptcy, destruction of credit, broken families, divorce, loss of one's home. An entrepreneur who fails often sees years of hard work and all or most of their retirement savings vanishing into the land of broken dreams. In the end, the taxpayer and government may end up supporting those who fail during a business venture and have exhausted their savings and that is a cost and negative many forget. Whether they retire early without savings or need medical help society can be forced to step in. Long hours of hard work and sacrifice is only part of the demands and burdens asked of today's entrepreneurs, in fact just going down this path poses its own risk.

Wednesday, November 15, 2017

Tax Bill If Passed Will Fall Very Short On Promises

The Trumped Up Tax Plan Over Promises
The whole idea of Washington passing a tax bill that addresses and cleans up some of the gargantuan mess we call a tax code should be looked upon with skepticism. It is quite naive to think legislators polarized and unable to agree upon anything can tackle an issue as complex and divisive as tax reform. Even more outrageous is the idea they can do it quickly. A huge number of issues such as whether to exclude state and local taxes (SALT) remain explosive. As of Tuesday morning lawmakers had submitted some 355 amendments, so much for fast and simple. If anything does come out of all their promises we should have very low expectations as to the quality of reform and whether it will really benefit our country over time by stimulating economic growth.

People often forget that nothing influences and shapes the economy as much as how we are taxed. Tax laws and legislation are one of the strongest forms of social engineering and have massive ramifications that shape how people handle their financial affairs. Sadly tax incentives and the fuzzy math that surrounds them often allow our gutless lawmakers and politicians to take us down the wrong path. It should be pointed out that a consumption tax based solely on "goods" purchased would free many small businesses and labor markets from the distortion our current system causes and at the same time encourage savings. America’s lack of savings is repeatedly pointed to as a problem, yet we tax small savings accounts making them a non-starter.

The Gargantuan Mess We Call Our Tax Code
Like many people, I find it difficult to believe much of the news that flows out of Washington or the words of our politicians. A bit of research shows the Committee for a Responsible Federal Budget a nonpartisan, non-profit organization committed to educating the public on issues with significant fiscal policy impact points out that even a $1.5 trillion increase to over what the debt was projected to increase over the next ten years amounts to almost $12,000 per household and that this is a steep price that we will be passing on to our children. It should be noted that as the national debt doubled and soared by almost ten trillion dollars during the eight years Obama was in office. This means currently the national debt is far higher than anyone projected just decades ago.

What happened to the more reasonable approach where tax reform and a tax cut were two separate items? It is far more intelligent to look at tax reform as a revenue-neutral way to simplify our massively complex tax code. Corporate and individual rates are two separate animals but how they flow and intersect ties them together. Everyone agrees dropping many of the tax breaks built the code over the years would make it fairer and allow overall corporate rates to fall. It is difficult to understand how many large companies doing business in America pay no taxes or why they can save huge amounts of taxes by offshoring their main corporate office and where they claim to be located.

The Chained CPI Understates Inflation
The worst part of the new tax bill according to former congressman Ron Paul is that it adopts the chained consumer price index. The chained CPI is a way of measuring CPI that understates inflation’s effects on our standard of living. Chained CPI increases the inflation tax which may be the worst of all taxes because it is hidden and regressive. The inflation tax is not even a tax on real wages but rather a tax on the illusionary gains in income caused by inflation. The use of chained CPI to adjust tax brackets is designed to push individuals into higher tax brackets over time. So much for the promise of a middle-class tax cut. When looking past the illusion conjured up to garner public support, we get nothing except more debt.

The ugly fact is that tax reform or no tax reform, America is on course to rapidly expand its national debt in coming years. Starting in 2017 entitlements were, and are slated to expand to a point where they blow a massive hole through our budget. Deficit spending which has become a way of life has grown regardless of which political party is in power. In the race to bury our heads in the sand, Washington has lead the way and anyone who thinks after the failed promises to deliver quality healthcare at a reasonable price they are going to be able to churn out a fair tax reform package most likely also believes in unicorns.

Two last things to ponder, first, with tax reform in the news I came across an interesting comment which caused me to think about the psychology of taxation. The comment read; Removing more income earners from the tax rolls only reinforces the 'let the rich pay' perversion.  In the end, this takes us further from individual responsibility and of course the intent of the Constitution. I interpret this to mean that if fewer people actually have skin in the game it could result in far less concern going forward for keeping spending in check. In some ways, the writer may have a point and this could unleash more spending and take the social friction of inequality to new levels. The second problem I see with quickly passing a bill that leaves computing the taxes we owe a complex drag on so many Americans is that it will put true reform on the back burner for many years.

Monday, November 13, 2017

E-Waste Disposal A Major Failure Of And By Government

For both political and economic reasons, poor recycling practices continue to haunt America and most of the world.  The message or call that we should conserve our natural resources is vastly understated. It seems many environmentalists are asleep at the wheel and busy nibbling around the edges of problems while massive abuses go unaddressed. While worrying about recycling things such as paper and plastic water-bottles they miss more important areas. When we look at the amount of trash and rubbish created by developed nations an area where our failures are particularly glaring is in the recycling efforts, or better said, the lack of recycling efforts in the area of what is known as e-waste.  Both an increase in population, as well as the growth of electronic devices per-capita, has created a disposal issue that the world has yet to address.

America's Sad Solution To E-Waste Disposal Falls Short
While issues like global warming make headlines the quantity of e-waste being generated has been on the rise, the total amount of e-waste produced is expected to reach 50 million tons in 2018, nearly 50 percent more than in 2010. The discarded products collectively known as e-waste include cell phones, TVs, air conditioners, appliances, computers, and solar panels. The sad truth is most are not recycled. There are two interconnected aspects to this global problem: a lack of awareness among the general public for the need to recycle e-waste, and a scarcity of sustainable options to actually do so.

To highlight just how pathetic society's efforts have been to address this problem and what a low priority this is I point to a recent announcement by the U.S. Environmental Protection Agency which recently announced it had awarded $100,000 to New York-based firm Advanced Recovery and Recycling, LLC. This money is to be used by the firm to continue its development of an efficient technology that recycles circuit board components. The firm’s innovation automatically and rapidly removes electronic parts from printed circuit boards, which are found in virtually all electronics. “This is accomplished without burning, smelting, or using chemicals, which reduces air pollution and electronic waste in landfills and incinerators,” the EPA stated. If the technology becomes commercially viable, the firm will be able to apply for a second federal grant of up to $300,000 to bring it to market.
It is apparent America's EPA cares little about stopping the source of future pollution yet is willing to spend billions on the back end trying to clean it up after it occurs. E-waste products contain heavy metals and when improperly disposed of they can leak toxins into the environment and water supply or into the air, in the case of incineration. Ironically, it is often the laws that exist in countries like America that are designed to protect the environment that make it very difficult to legally breakdown and recycle e-waste items. In fact, government rules as to how e-waste is handled, disposed of, and recycled add to and greatly limit the amount that is recycled.

The bottom-line is nobody wants to get involved with recycling the hard to deal with items because the government has made it so difficult to legally recycle these products within its so-called "safe" parameters. This means that business steers clear of this market because of the massive liabilities. Because precise figures do not currently exist, we have no clear picture exactly where all these discarded items come to rest. Shipping records indicate West Africa is one of the regions harmed most by e-waste, shipping records indicate large quantities of e-waste from around the world are dumped there, often illegally. Shortsighted manufacturers, governments, and consumers have created and greatly added to the problem of properly dealing with e-waste. It is obvious much of this could be addressed by the EPA stepping in and passing a law protecting and directing recycling firms on how best to process obsolete units rather than insisting this problem be swept under a rug. Recycling these items in a good way, if it cannot be done in a perfect way, is far better than our current solution.

The most encouraging news for e-waste recycling is that it can be done profitably.  The potential of this so-called “urban mining” is enormous—the U.N. report estimated that the intrinsic material value of global e-waste was $54.5 billion in 2014, principally from gold, copper, and plastics. And as far as mining prospects go, e-waste is one of the better ones, especially when there are smartphones in the mix. According to 911 Metallurgist, a ton of recycled iPhones yield about 324 times more gold than a ton of ore from Peru’s Yanacocha gold mine, and 13 times more copper than a ton of ore from Chile’s Escondida copper mine. Another valuable component in smartphones is rare earth elements, these could also be pulled out and reused. Currently, less than 1% of REEs are recycled, so reusing them would not only save money but lessen global dependence on China the vast producer of a majority of the world’s REEs.

Some Recycling Methods Better Than Others
Granted, there are also toxic materials including lead and mercury in e-waste, that much processing and refining are necessary to extract the useful elements. But in aggregate and individually, the prize is very appealing. The report states that the gold content from e-waste in 2014 is roughly 300 tons, which represents 11% of the global gold production from mines in 2013. Still, the fact remains that many people simply don't care how they dispose of their e-waste so they slip it into the trash sending it to a landfill even though it is illegal in many states. This means it might be wise to increase efforts to collect e-waste and form massive holding areas where it can be stored until better recycling technology becomes available.

Many people might be surprised to find it is the Chinese government and local NGOs have been taking the challenge of e-waste most seriously. In 2013 China reported that it had recycled 28% of its e-waste in state-of-the-art facilities, a higher share than in the U.S. and Canada (12%) and Australia (1%). Since it began in 2012, a “Green IT Classrooms” program by Chinese NGO Netspring claims to have enabled the recycling of more than 20 tons of e-waste while providing IT education to more than 20,000 underprivileged kids. Likewise, India is trying to rein in and recycle its e-waste before things get out of hand. By 2020 the country predicts that it could recover some $4 billion from recycling its e-waste.

The Swedish firm Ericsson has proven gathering e-waste for recycling need not be difficult. For example, they recently launched the campaign to drive the awareness and collection of e-waste in an African country. An e-waste collection station opened to the public at Sorbonne Plateau in the capital Abidjan for a period of four months with a 20-foot container serving as the collection depot. Citizens were encouraged to bring in old phones, computers and other electronic equipment to be disposed of in a safe and responsible manner. The container in effect acted as an education and awareness center manned by volunteers. At the close of the campaign, collected e-waste will be transported to an Ericsson-approved recycling partner in Durban, South Africa. Ericsson has made taking back and recycling its obsolete products a key part of its business– it provides free product retrieval and safe disposal services to all customers globally. The firm claims that when it takes back its products, over 98% of the materials are recycled. Ericsson’s “ecology management program” continues to expand its reach since it started in 2005 the program has taken back e-waste from more than 107 countries.

Most E-waste Is Dumped Or Buried And Not Recycled
Fortunately for concerned consumers, there are more and more opportunities to properly dispose of e-waste, much of which will be recycled. In the U.S. events put on by municipalities, businesses, and non-profits like the Boy Scouts, which typically accept e-waste free of charge. Presently, not all of these collection drives are free, have quantity limits, and some don’t accept all kinds of e-waste. It has become increasingly clear that many consumers are not willing to pay to dispose of e-waste junk, so the trend is for e-waste collection to be free and all-inclusive. And particularly as e-waste catches on as a source material for extracting valuable materials, firms will be eager to offer to recycle for free, since they will ultimately be earning money. Combined with reducing landfill intakes and environmental pollution, this is a growth industry that’s win-win for everyone.

A co-author of a recent study on Europe’s e-waste recycling potential thinks that recycled e-waste could eventually replace much of the virgin material currently coming from mines. This would require more top-down policy, meaning governments should collectively initiate a global directive to drive such an agenda. If life on this planet is to be sustainable resource efficiency and recovery should be embedded into every business and supply chain. As demand for recycled materials increases, and as more countries start to make manufacturers responsible for dealing with e-waste at the end of a products life, more designers would also start to change designs with recycling in mind. When products are designed so that they can be easily dismantled and disassembled for recycling it streamlines the path to sustainability reducing the need for energy in recycling downstream. While the way we are currently handling e-waste may fall short of being considered a "sin" it is indeed a slap in the face of mother nature.

Footnote; Interestingly the link for more information on the company the EPA gave a grant to has recently turned into a dead end. I have over time written several articles on the subject of the environment and sustainability below is the link to one of the most popular. As usual, your comments are welcome and encouraged.

Sunday, November 12, 2017

NAFTA, Let US Favor "Regional Trade" Over Global Trade

A strong strategic dimension exists for NAFTA
While NAFTA is often decried as a reason many manufacturing jobs have fled America other reasons add to their flight and many of those are self-inflicted by our government. A very strong strategic dimension exists for NAFTA and when President Reagan fathered and endorsed the concept decades ago he recognized the need to create a powerful regional trade bloc to compete in a changing global economy. Reagan envisioned this would be vital as Europe and East Asia created their own regional economically self-sufficient trade arrangements and zones. Issues such as over-regulation, our inability to control healthcare cost, a complicated tax system all add to the flight of jobs to foreign lands. It is important not to blame NAFTA for more than its share of our problems and understand it can also be used as a tool not only to improve the "neighborhood" but at the same time insulate America from many of the abuses that come from China when it subsidizes industries to increase their market share.

We Have Lost Jobs To Mexico But More To China
Let's call a spade a spade. When we voice problems over trade issues when it comes to NAFTA  we are always talking about Mexico, however, a far greater problem stems from unfair trade from overseas. In its own self-interest America should return to the goal of a North America-wide economic revival, and when necessary, and if possible, even extend the efforts into South America. The main draw for outsourcing jobs and sending them overseas has always centered around two issues, low-cost labor and opening new markets for American companies to sell into, or what we often refer to as expanding new markets. Many companies have viewed the billion plus people of China as their future but in all honesty, this is an illusion because its leaders will never really open its borders to outside companies.

It is strongly ingrained in the DNA of China and its political system that they exploit outsiders by copying their products then competing against them at every turn. People often forget that China is an American made product and that their economic prosperity flows from the fact that decades ago America started down the perilous path to building China into a world power to counterbalance Russia and the Kremlin. Central to the American effort was offering the prospect of economic incentives to China, we combined this with a hard-line military response to communist aggression. As wealth flowed into China and it gained strength they made a point of playing us for fools and pilfered our technology while becoming more belligerent by the day. Why we should want to send our jobs and wealth across the oceans to countries that wish to rival us or do us harm makes little sense from a strategic point of view.

North American Supercorridor Concept
The fact that China has not been fair in trading with America is a major reason to strengthen ties with those closer to home. Not only would such a deal drastically expand their markets it would also dent the theft of intellectual property which is a massive problem when it comes to China. In 2016 the trade deficit with China was a whopping 319.5 billion dollars. We should remember that America is blessed with neighbors to both the north and south of us that pose no military threat and we should make the best of this situation. Originally NAFTA was sold to the American people under the idea it would strengthen our economy and security. Viewing this reality let us not forget the fact the area south of our border is full of people willing to work for low wages. So why ship goods across vast oceans when you can put them on a train that has access to all of the United States.

Trump Has Pledged To Renegotiate NAFTA
As the incomes of those to our south increase, they will consume more American made goods. The benefit of transferring jobs just across the border at least results in less need for a border wall, in fact as things improve in Mexico many immigrants here illegally will most likely return home on their own. To be perfectly clear, we should not confuse the concept of fair trade with free trade. Multinational companies and their powerful lobbyist have long fought for the freedom to build products anywhere in the world then sell them here in order to secure the lowest possible production costs and highest profits. Over the years the greedy companies who have benefited from sending our jobs overseas have spun a tale of how lower prices and jobs from things like shipping have more than offset the negatives from such policies but it is not true. Whether they have lied or been simply misinformed does not matter as much as the massive trade deficit which sucks wealth out of our country.

For decades we have carried countries such as China, Japan, and South Korea on our backs and allowed them to carry huge trade surpluses at our expense. Looking forward a strong case can be made that if  countries outside the region complain that tariffs we place on their goods or levy upon them violate World Trade Organization rules and vow retaliation, little question exist that the continent of North America is large and diverse enough to be self-sufficient, this means we should work closely with those living nearby to improve the neighborhood. With nearly 90% of the continent’s economic output, and buying power little question exist to the fact the United States can more or less write the rules. Make no mistake this is about jobs and tariffs. By requiring all goods sold in North America to be manufactured mainly in North America in order to avoid tariffs both Canada and Mexico would be big beneficiaries.

Footnote; This is being written while Trump is off on his tour of Asia, where he has exhibited several faces concerning trade. How tough he is about bringing jobs home or whether he will flip-flop on the issue is still up in the air.

Monday, November 6, 2017

Bitcoin, Cyptocurrencies, And What Are ICOs?

Recently I came across the term ICO for the first time and quickly found it stood for initial coin offering. These are on the rise because of the success of Bitcoin and its soaring value. Bitcoin is a cryptocurrency (or crypto currency) which is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency. To those of us in many areas of the world simply toiling along and concerned about getting through the day these currencies seem a bit abstract.

Are Bitcoin And Cyptocurrencies Our Future?
Simply out of curiosity I asked a commodity broker several weeks ago as to whether he had heard of any of his clients jumping into bitcoins and he said no or not to any great degree. It is important to remember that commodity trading falls into one of the more the high risk endeavors that most prudent investors avoid this in some ways makes it ripe for those wanting to place a bet on a cryptocurrency. His response causes me to question just how widespread the mania over these alternatives to state-issued fiat currencies really is.

Regardless of what is happening in America's heartland, it seems interest in this asset class is surging and this is apparent in the mania over initial coin offerings. For years as more and more people have become uncomfortable with holding their wealth in fiat currencies they have bought gold as a safe haven. Cryptocurrencies are seen as an alternative to such things as gold bars and silver coins because of their advantage of being easier to buy and sell. Because of bitcoins surging value interest in cryptocurrencies is growing and some investors are being drawn into this new and risky "asset class" without doing due diligence. This has caused me to wonder how much of this is driven by the fear of being left out of the move rather than faith in these new places to put our wealth.

Bitcoin Is Trading Around $7,500 As This Is Written
As we hear that even the CME plans to introduce a futures market in such investments, Bloomberg reports that U.S. regulators are growing concerned that mom-and-pop investors are unwisely jumping into some of these new cryptocurrencies based on celebrity endorsements. This means some speculators may be leaping into cryptocurrencies, sometimes without fully considering the risk. The U.S. Securities and Exchange Commission has even issued a surprising warning, advising that stars often lack sufficient expertise to ensure investments are appropriate. Even worse, pitches could be unlawful if famous backers’ compensation isn’t disclosed, the agency said. “Celebrities who endorse an investment often do not have sufficient expertise to ensure that the investment is appropriate and in compliance with federal securities laws,” the SEC said in its statement.

The SEC statement went on to say “If you are relying on a particular endorsement or recommendation, learn more regarding the relationship between the promoter and the company and consider whether the recommendation is truly independent or a paid promotion.” This represents the agency’s latest effort to sound alarms about the white-hot ICO market. In recent months, SEC Chairman Jay Clayton has repeatedly cautioned this space is probably full of fraud. While the SEC didn’t name any specific celebrities, some of the stars who have pushed ICOs include Paris Hilton, Floyd Mayweather, and DJ Khaled.

Returning to the subject of ICOs, it looks like a new era is coming for ICOs, also known as token sales. China’s central bank has announced a ban on ICO funding and an ICO freeze in China because it has “seriously disrupted the economic and financial order.” This has caused much speculation over whether, and how much, financial regulators will look to regulate the space. The Chinese committee voiced concern that some ICOs are financial scams and pyramid schemes which echoes a recent warning from Singapore’s MAS or central bank. Brick and mortar financial institutions also claim to be concerned that “ICOs are vulnerable to money laundering and terrorist financing risks due to the anonymous nature of the transactions, and the ease with which large sums of monies may be raised in a short period of time.

This turns our attention towards the platforms which help connect companies selling tokens or cryptocurrencies with buyers, this is where Blockchain comes in. Blockchain is a secure transaction ledger database where applications like Bitcoin run. It is shared by all parties participating in an established, distributed network of computers and records and stores every transaction that occurs in the network. It essentially eliminates the need for “trusted” third parties such as payment processors. Blockchain proponents often describe the innovation as a “transfer of trust in a trustless world,” referring to the fact that the entities participating in a transaction may not even know each other yet they exchange value with surety and no third-party validation. This has made Blockchain a game changer. Someday when we look back on this will we be able to see just how big a deal all this really is.

Saturday, November 4, 2017

Euro-zone Problems - Italy - Spain - And bad Debt Galore

While we have heard a great deal about how the EU wants to hit the UK with a steep bill for leaving, Britain is adamant it won’t pay. The Reste à Liquider is a fancy moniker for the EU's unfunded future liabilities or the amount yet to be settled, remains an issue of great debate. The forecast of
A Slew Of Problems Continue to Haunt The Euro-zone
perhaps €60 billion seems to be the area where they are going, however, even if Britain would be insane enough to agree, the Euro-zone's problems are far from resolved. The area faces a slew of problems but in my eyes, two of the most pressing are that Italy is insolvent and Spain is coming apart with Catalan separatists defying Spanish Prime Minister Mariano Rajoy

Financially Italy is the Euro-zone's Achilles heel, not only is Italy insolvent (it’s not alone in that), but there’s a gigantic effort to hide the depth of its problems. According to the IMF, Italy’s non-performing loans levels were €356 billion at the end of June 2016 and only growing worse. This figure represents 18% of total loans for Italian banks, 20% of Italy’s GDP and one-third of total Eurozone NPLs. Intesa Sanpaolo an Italian banking group holds a nice chunk of that. The ugly reality is that Brussels and Frankfurt are being called to pump large amounts of money into Italy. In the end Draghi's pledge to do ‘Whatever it takes’ may become a very heavy burden for both Juncker and Merkel.

Italy the third largest economy of the Euro-zone after Germany and France, holds the largest public debt totaling over 2.3 trillion euros. It might be fair to say Italy is a debt bomb waiting to explode and the country is being held together only because of the direct intervention of the ECB which made over 102 billion euros of Italian bond purchases in 2011-2012 alone. This has continued since then and the sum has gotten much larger. Only through the LTRO have the finances of the Italian state been kept afloat. Almost everyone agrees that Italy’s public debt is unsustainable and needs an orderly restructuring to avert a default, but as usual in the Euro-zone no action is happening. In many ways for Euro-skeptics Italy remains the Achilles heel of Europe, these skeptics are quick to point out that, once foreign investors withdraw, Italy will crumble under the weight of its debt.

The Prospect Of Italy Outgrowing Its Problems Are Slim
The problem of regions voting for independence pale next to the crushing debt several countries in the zone face, however, it should be pointed out that while most eyes are on Spain when it comes to political discontent it is also growing in other areas. The leaders of Italy's two wealthiest northern regions recently claimed victory in non-binding referendums, seeking greater autonomy from the central government in Rome. Voters in both the Lombardy region which includes the city of Milan and in Veneto overwhelmingly backed more regional control over tax revenues, immigration and education systems recently. More than 95 percent voted "yes" in both regions, according to the projections. This is not a small event in that Lombardy and Veneto accounts for 30 percent of Italy's GDP and around a quarter of Italy's population.

Many of these taxpayers in the north have come to resent subsiding the relatively poor southern regions of Italy. Veneto's capital is Venice, said there it is thought the result will give a popular mandate and empower the far-right party Northern League in advance of elections next year. This group argues that taxes the north sends to Rome are wasted by inefficient national bureaucracy. Even though secessionist sentiment in the two wealthy regions is restricted to what has been dubbed "fringe groups" with little following, the vote in favor of greater autonomy reflects pressures similar to those that resulted in Scotland's narrowly-defeated independence vote, Britain's decision to leave the EU and the current Catalan crisis. This opens Pandora's box and paves the way for even more areas to ponder if they should go off on their own.

Wednesday, November 1, 2017

Austerity Should Be Renamed Sustainable Spending

We would be far better off if the term austerity was replaced or renamed sustainable spending. An article that was published several months ago on Project Syndicate by James McCormack titled, "The Quiet Demise of Austerity" states the merits of austerity seem to have been forgotten just when it is needed again. In the article, he points out that debates about the potential advantages of using stimulus to boost short-term economic growth, or about the threat of government debt reaching such a level as to inhibit medium-term growth, have gone silent. It is possible that the problem with the general concept of austerity lies in the moniker we have chosen to use to describe it, we might have been better off calling it sustainable spending.

Austerity Is Often Seen As Heaping Misery On The Poor
Thr reason for this article is that Washington is currently putting together a tax bill promising both reform and tax cuts which means our deficit spending is again being ignored. It is as if the whole world has capitulated to the idea that we can spend our way out of the debt. In the article I sighted McCormack wrote; Objections to austerity were understandable after the 2008 financial crisis when growth was languishing below 2% and sizeable negative output gaps suggested that overall employment would be slow to recover. But now the merits of austerity seem to have been forgotten just when it is needed once again.

Those who oppose austerity often cling to the idea that a major reduction in government spending can change future expectations about taxes and future government spending that encourage private consumption and propel forward overall economic expansion. They further argue that, in periods of recession and high unemployment, austerity policies are counter-productive, because reduced government spending can increase unemployment, reduced government spending reduces GDP, which means the debt to GDP ratio examined by creditors and rating agencies does not improve. In truth, short-term government spending financed by deficits does support economic growth when consumers and businesses are unable to do so.

Years ago I wrote a piece about how Austerity has been given a bum rap and how blaming it for the problems we faced was often akin to blaming the medicine taken after someone becomes sick for the illness, this does not make sense. This is especially true when austerity is introduced as a way to bring unsustainable out of control government spending back in check. Austerity is a term that recently has been given all kinds of negative connotations because it is often painful. The recent trend has been to blame austerity for the pain it causes, however, again I reiterate, it doesn't make sense to blame the medicine taken after someone gets sick for the discomfort the illness has caused.

Federal Government Expenditures Have Exploded
Economic growth tends to mask a multitude of problems, in economics austerity refers to cutting spending often by lowering and reducing the number of benefits and public services.  Austerity policies are often used by governments to try to reduce their deficit spending. Spending cutbacks are sometimes coupled with increases in taxes in an effort to demonstrate long-term fiscal solvency to creditors.  It is easy to point your finger at measures taken to reduce runaway or wasted spending and blame them for creating a reduced spending spiral but that is unfair. Please note that while it is important to control rising budgets and how much is spent, where it is spent is just as important.

Supporters of austerity predict that a major reduction in government spending can change future expectations about taxes and government spending, encouraging private consumption and resulting in overall economic expansion. Critics argue that, in periods of recession and high unemployment, austerity policies are counter-productive, because, reduced government spending can increase unemployment, reduced government spending reduces GDP, which means the debt to GDP ratio examined by creditors and rating agencies does not improve and short-term government spending financed by deficits supports economic growth when consumers and businesses are unable to do so.

Austerity measures are typically taken if there is a threat that a government cannot honor its debt liabilities.  Such a situation may arise if a government has borrowed in foreign currencies that they have no right to issue or if they have been legally forbidden from issuing their own currency. In such a situation, banks and investors may lose trust in a government's ability and/or willingness to pay its obligations and either refuse to roll over existing debts or demand extremely high-interest rates.  One reason austerity is unpopular is that it is often painful to the people and the voters.  Social spending programs are often targeted for cuts.  Taxes are raised, port and airport fees, train and bus fares are common sources of increased user fees.  Retirement ages may be raised and government pensions reduced.

In many cases, austerity measures have been associated with public protest and claims of a significant decline in the standard of living. The argument by contemporary Keynesian economists that budget deficits are appropriate when an economy is in recession bolster this movement. They claim it reduces unemployment and helps spur GDP growth, and that in an economy one person's spending is another person's income. If everyone is trying to reduce their spending, the economy can be trapped in what economists call the paradox of thrift, worsening the recession as GDP falls. If the private sector is unable or unwilling to consume at a level that increases GDP and employment sufficiently, thus the argument often heard that the government should spend more, and not less.

In fact, many economists argue that austerity measures do not necessarily increase or decrease economic growth.  All attempts by central governments to prop up asset prices, bail out insolvent banks, or "stimulate" the economy and deficit spending make stable growth less likely.  Often the typical goal of austerity is to reduce the annual budget deficit without sacrificing growth.  Over time, this should reduce the overall debt burden, as the economy grows.  Blaming austerity for the blow-back from governments living beyond its means is more than unfair, we should at all times conduct business and run our government with responsible reigns on spending. If a government spends and runs its business in an austere way the issue of when to start cutting or tightening should never surface.

Footnote; At some point, the present and the future intersect, it is not just about the deficits of today but the promises you make coming due. These promises and how they affect the financial landscape must be factored in. The bill for overspending does eventually come back to haunt you. A look at the ugly math of today is a real eye opener.