Monday, May 10, 2010

Housing, Wages, Illusions.

When I first started to unlearn the Keyensian nonsense I learned in the economics classes I took in University, I found the concept of malinvestment strange. For example, Austrians warn that when interest rates are too low, money flows to malinvestments. I thought this didn't mater in the larger sense because the money "flowed and multiplied through the economy" regardless. After a few simple thought experiments from good authors such as Henry Hazlitt, I now understand the implications.
To see recent malinvestment on a grand scale one only needs to look at the US housing market. Low interest rates for a decade caused a speculative housing boom. Currently there are 20 million empty units in the US! Thats enough vacancy to house Canada! That is the face of malinvestment! It's true that people produced those houses and got paid for their work but now, that capital is just locked up, unavailable and useless. It should be obvious that with that kind of surplus, housing prices must go down. Unfortunately, the government is trying to not let this happen by giving huge tax incentives and reduced interest rates to buy houses. This keeps prices artificially high. It's like a boat filling with water and the government is paying people to get more water in the boat! Given that the vacancy rate is still increasing, that several million houses will be foreclosed on this year, and Fannie will be closing the trough of free money, house prices can be assured to plummet. Anyone who used to build houses will have to find employment doing something else.

The jobs picture in the US is quite funny also. It was reported that some 200,000 jobs were recently created but unemployment rose to 9.9 percent from 9.7 percent. This number bears so little resemblance to actual unemployment it's hard to fathom why it is ever mentioned at all. It's as though temperatures were reported always half their true value! The real number is closer to 22 percent if you bother to include people who don't have a job. For economic stats without the statist political spin see shadowstats. It was started by a finance guy who needed real data for pricing models he built for corporations.

It's ironic that during the recession, minimum wage has risen nearly 40% over the last 3 years. So at a time when wage adjustment is absolutely necessary for economic recovery, the lowest wages are being artificially pushed in the opposite direction. It's difficult to find ways for Main Street to lower prices when wages are rising! Most people who work minimum wage are the young, usually in their first job. It should not surprise anyone then that this is the group with the highest unemployment currently. Disincentives to introductory-type jobs would seem under the circumstances to be exactly the opposite of what is needed.

Government mandates low interest rates and fuels bubbles and then place every obstacle to possible recovery in the way of the economic engine. Then it tries to convince people they are fixing the economy. Terrible.

It occurred to me this week how gullible most stock traders seem to be these days. Today it was announced that the Eurozone had put together nearly a trillion dollars to stabilize the Euro. Of this, 570 billion "comes from" the member nations, 75 billion from the European Central Bank and 300 billion from the IMF. Translation: a trillion dollars got made up.
This is a Ponzi scheme in it's simplest form. Borrowed money must come from savings which are derived from production. Without this saved production, one is forced to print more money if one wishes to spend it. Thats exactly where this money comes from. One fiat currency bails out another. Eventually the music stops and everyone scrambles for a chair. If I were American, I would be in disbelief that my own country, which is totally insolvent, is in any position to prop up a currency with no value. And yet, this news was enough to rally markets? I'm not sure how much of Canadian tax money ended up in this package, but if it's anything, it's too much.

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