How do we come out of this alive?

The wages shortfall has been replaced by benefits and then some. Picture: Supplied.

Taken from JobSeeker, JobKeeper ending will reveal massive recession crisis.

The core concept of Jobkeeper was all right, to make sure no one was deprived of the ability to buy because they had lost their income. The data in the graph are however insane. Does no one any longer have a sense of proportion, and can no one any longer look forward for more than a day at a time? And it comes with this, also at the link:

How much the recession will cost you

It comes from the Commonwealth Bank of Australia and it shows how much more money Australians are making than the year before. It’s a lot. We’re flying.

The black line is now at 16 per cent, which means we’re making 16 per cent more money in 2020 than last year.

Think about it like this: Australians who were banking $1000 per week last year are banking on average $1160 now. That’s a lot of extra money each week.

Where is the cash is coming from? Up until the start of the pandemic, the black line was being held up by the blue bars: earnings from work, i.e. salary and wages. We were 4 or 5 per cent richer than the year before, because more wages were being paid.

Then the COVID-19 pandemic starts. The blue bars turn slightly negative – wages and salaries went down (they would have gone down even more if not for JobKeeper!). But the red bars shoot up. That’s Treasurer Josh Frydenberg turning on the money taps.

JobSeeker is the big one, and the two $750 payments that went to pensioners.

We’re paying out 16% more in incomes while productive output must have fallen along with business profitability by some massive percent! If these numbers are anywhere correct we are heading for the rocks.

I will add that if the government, any government, still believes that the level of demand is what keeps the economy moving ahead or adds to job numbers, they are about to find out once again just how wrong that is. Not that they will learn, because they are too stupid, but they will find out all the same.

Belt up, Dan, and hit the road, you communist fool

Every so often you come across something so revealing that there is little more to add once you have seen it. In yesterday’s Herald-Sun there was an article titled, “China Backs Dan deal”. Of course it does, but this is how the story opens:

Daniel Andrews has questioned Scott Morrison’s priorities and demanded the Prime Minister come up with new trade markets for Victoria if his Belt and Road deal with China is cancelled.

Let me say that so far the Prime Minister has performed miles beyond my hopes with every instinct, especially on foreign policy, near perfect. Belt and Road must go. But that wasn’t what caught my eye. This was such pure economic ignorance – that he had demanded the Prime Minister come up with new trade markets for Victoria – yet I imagine it is a view largely supported by his equally ignorant supporters.

It is how these socialist think, that it is up to governments to find overseas markets. Of course Andrews has no idea how a market economy works. Obviously this is the way he thinks, that it is up to the government to sell our produce to foreigners and to create jobs for workers. A complete klunk, but the kind of ignorance that leads to economic collapse of the kind found in Venezuela right now.

Was it worth it? How many lives did we save?

Letters from friends.

Of the first one, I can see how that might be true if things are looked at from within the United States. Looking at things from within Victoria, it doesn’t stand up, mostly because I think Daniel Andrews is too stupid to get to that conclusion. And I mean really dumb, not just that he is a fool. There are plenty of fools everywhere. The universities are filled with people who are high-IQ morons. They can reason and read. They can research and write. They can do a crossword and a sudoku. That is the kind of conclusion one of them might reach. But not DA. He is a union thug who just likes to push people around. He never discusses. He never debates. He never explains. And I think it’s because he works on some low-grade principle of capitalists-bad, workers-good. Lockdowns simply reflect his nature and intellect. Force is something he understands.

I will, however, say now that he has postponed the results of his Inquiry to November 6, I am beginning to see some reason to believe what you see below may be true, since the results of the Inquiry will be released following the end of the election in the United States. After that, according to this note, what happens to the Corona Virus will no longer matter. Almost certainly just a coincidence.

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Speaking for myself, from very early on I have entirely thought of the Covid-19 “pandemic” as a hoax that has been seized upon by the left in the United States as a means to engineer the Democrats to a win in the election in November. The origins were in China and occurred either by chance or design, but once it had occurred, the dangers were seized on and amplified by the left to create the panic we now see. Everything else the left has tried had come up a bust, the American economy has performed better than possibly at any time in anyone’s memory, the Deep State and its media cohort have been exposed, and at long last there has been some kind of border protection put in place. Trump was in an unloseable position whereas now it is no better than 50-50.

As for conspiracy theories, that is all there are in politics. Every political strategy requires all kinds of people to do their part with no scripting or instructions required. Every so often there are lone players, such as Lee Harvey Oswald. The rest of the time, however, there is a general theme that is played out where everyone on both sides understand the agenda, with those promoting the agenda all making up their own means of contributing towards its fulfilment, and those on the other side doing what they can to push back. So the theme on the left was – We must do everything we can to limit the spread of death and destruction from this deadly virus. For Trump, there was no serious choice but to take this hysteria seriously, and whatever he may have personally believed, to do all he could to limit the spread of the virus. So he stopped the borders, supported lockdowns and put Dr Fauci out in front to call the shots. The rest of the world, either because they too had no choice but to play along, which in all cases required them to do something, or because they were on the left and understood the game in play, amplified the horrors by working out their own response to highlight how bad things were and how Donald Trump had screwed up the response. Meanwhile in Democrat states, everything was done to make the pandemic appear as dangerous as possible. The actions taken in New York by Andrew Cuomo were not errors of judgement but undertaken to raise as much concern as possible.

In Australia, for whatever reason, nothing happened. No major pandemic, no deaths beyond the normal seasonal total for the flu, and no real contribution to add to the hysteria other than to suggest there was no need for it.

Which brings me to Daniel Andrews who has not for nothing been called the Andrew Cuomo of Australia. It’s not as if he blundered. Everything he has done has been deliberately aimed at creating as much media-driven alarm as possible in the midst of absolutely nothing statistically of significance. But the media are also playing along to the fullest extent they can as one would expect so you would think we were back to the Spanish flu once again.

I cannot therefore promise you that you will survive the Covid panic without some kind of damage to yourselves or families, but that is far far more likely than that you or anyone you know should come to any serious harm. The harm you should worry about, and this is much more serious than anything else that might happen, is that Joe Biden should become President. That you have had the possibility you might die within the next twelve months raised by 0.005% is hardly worthy of a moment’s thought.

And this is the second letter. This is about the cost and benefits of the efforts made to contain the CV-19. Was it worth it? he asks. How will we even be able to tell and by what date can we know? Lives interrupted everywhere.

Most of the decline in output from COVID is from shutting down the economy, not from the disease itself. What would have been the economic impact of C0VID if governments had not shut down our economies? Well, we have to make some simplifying assumptions – lets try …

  • With no government shutdowns, half the population gets covid over a period of about a year, half of those are asymptomatic. I’ve seen the asymptomatic ratio ranging from 40% to 80%.
  • Of the symptomatic quarter of the population, assume mortality is 5% (Worldometer.info estimates New York State mortality rate from verified and estimated infection is only about 1.4%. It was higher in Europe).
  • Of those deaths, most occur in the elderly cohorts. So labour force mortality (18-65 years) is less, lets say 2.5% (18-65 years). (New York State estimate would make labour force mortality under 2%). Impact on labour input is 50% infection rate x 2.5%mortality = 1.3%.
  • The symptomatic but recovered portion of the labour force, is off work for a month on average, worth 1/12 x 50% infection rate x 50% symptomatic ratio = 2.1%  of labour input.
  • So total reduction in labour input is only about 2.1 +1.3 = 3.4% for a year (assuming full employment).
  • There would be some substitution of capital for labour – about 0.5 elasticity in the long run (Knoblach et al, Oxford 2019) and less but still positive in the short run. Also some overtime and informal work accommodation.
  • On a micro/sectorial level, high mortality among the elderly would generate actuarial gains for defined benefit pension funds and actuarial losses for life insurance companies. For health plans there would be short-term losses and long term gains. Hard to say what the overall impact would be. There would be stress (even higher output) on health systems.
  • Another imponderable would be the impact on risk premia and liquidity in financial markets if there was a pandemic panic.

Bottom line: its hard to see an impact on global GDP of more than about -3% from the disease itself (-3.4% labour input with some capital and technology offsets). The forecast decline in world GDP of –5.2% this year (World Bank) means a total gap of about 8.5% (+3.3% potential growth less WB’s –5.2% forecast 2020). The global GDP decline is mostly the result of shutting down much of the global economy. Was it worth it? How many lives did we save?

The political consequences of CV-1984

From These Two Charts Should Land Dr. Fauci in Prison. And if that doesn’t, this definitely should if it’s even remotely true: In New Interview Bobby Kennedy Jr. Claims Dr. Fauci will Make Millions on Coronavirus Vaccine and Owns Half the Patent. Not to mention this as well: CDC director acknowledges hospitals have a monetary incentive to overcount coronavirus deaths.

But it is this bit of common sense that really does get to me: from Rush Limbaugh.

I’ll tell you there’s something else. There is something else about this, folks. The people who are telling you what you have to do to shut down your business, to not send your kid back to school, to not go back to work, these are people that have not lost a paycheck during this crisis. Have you noticed? There’s not a single [Victorian] worker that’s been fired. Not a single one. This is crucially important. The people that have not lost a paycheck are the ones telling you that you need to give up your livelihood, shut down your business, don’t go back to your job.

This used to be an issue when this began, but has for some reason gone away. This is the socialist ideal; income security exists only in the public sector. But after a while, and it does take a while, the money you get will buy you only a fraction of what it used to buy as the economy caves inwards. And at the same time your personal freedom and independence disappears in ways you never dreamed might happen. This is from The Wall Street Journal which is as mainstream as it is possible to be: The Pandemic Is a Dress Rehearsal. This is what you can see before the story cuts out:

Eight months after the novel coronavirus burst out of Wuhan, China, it has created unprecedented economic and social disruption, with economies cratering across the globe and more destruction to come. Tens of millions have lost their jobs, and millions more have seen their life savings disappear as governments forced restaurants, bars and other small businesses to shut their doors.

Wealthy societies are able, for now, to print and pump money in hope of limiting the social and economic damage, but such measures cannot be extended…

And then, eventually, what happens after that?

Why did Marx single out Mill for criticism but never answer him?

A Question asked on Marx and Mill.

What were the theoretical issues when Marx and Marxian economists criticized John Stuart Mill as vulgarizer of classical system?

What is the real content of vulgarization, when they claim that J.S. Mill vulgarized Ricardo’s teachings? In what sense is he blamed to have opened the way to neoclassical economics?
Béla Balassa once wrote in his paper “Karl Marx and John Stuart Mill” (Weltwirtschaftliches Archiv, Bd. 83, (1959), pp. 147-165):
  •  Marx’s treatment of John Stuart Mill is one of the great puzzles of history of economic thought. Reading Marx (and his followers) one gets the impression that Mill was an insignificant figure whose writings exemplify the “decline” of Ricardian economics. Whenever Marx mentions Mill’s name (which does not happen very frequently) he v\never forgets to add some derogatory comment. (p.147)
In another paper (John Stuart Mill and the Law of Markets, The Quarterly Journal of Economics Vol. 73, No. 2 (May, 1959), pp. 263-274) he wrote:
  • For present-day economists [Mill] represents a “half-way house” between Ricardo and Marshall; for Marxists he is the apologist personified, sharing the responsibility with many others for the “decline” of Ricardian economics.(p.263)
I wonder why John Stuart Mill was so unduly ill-treated by Marx and Marxian economists.

Then answer is, of course, that Marx had no answers to what Mill wrote, neither economically nor ethically. But is Marx’s animosity to Mill the reason virtually no economist will read Mill today?

Explaining what is wrong with Magic Money Theory [MMT]

This was from Beachcomber in the comments:

Hi Steve, I just read a fascinating essay by Peter Smith at Quadrant: Money printing in the age of Covid

In the essay it states:

In the age of COVID-19, bonds sold to finance deficit spending are being largely or wholly bought up by respective central banks. This is manifest in banks’ holdings of deposits with their central bank and of treasury notes or bills.

In comments the question is asked as to from where the “central bank” garners the money to buy the bonds.

To which Peter Smith answers:

It creates it out of thin air cos it can.

The central bank simply issues a cheque or like instrument, drawn on the central bank, which allows the holder of the bond (assume it is a non-bank – the process is short-circuited if the holder is a bank) to lodge the cheque in its bank account. The bank correspondingly lodges the cheque with the central bank and sees its deposts with the central bank increase accordingly. The central bank now has an asset – the bond – and a corresponding liability – the bank’s deposit. It can go on doing this till the cows come home. Or, practically speaking, until inflation rears its ugly head.

Is this true? Can this continue forever? With shrinking incomes and the associated shortage of money supply, inflation seems unlikely. Peter Smith makes a distinction from Modern Monetary Theory without explaining how it is different. Can the creation of money from nothing by the Government continue forever? If so, then Andrews can reign forever!

First, if there is an authority on the banking system in Australia outside and beyond the reach of government, it is Peter Smith. He was, when I first met him, the economist for the Australian Bankers’ Association, then became the Chief Economist for the State Bank of Victoria and finally was the first Chief Executive for the Australian Payments Clearance Association. No one gets this stuff better than he does.

But let me buy into this because this is part of my expertise as well. And to follow this with any understanding you have to divide the economy into two halves. On one side is production, the actual goods and services produced, which also includes the production of inputs into the production process, such as iron ore and natural gas.

And on the other side there is the monetary side of the economy which is completely distinct. This comprises:

  • money as a medium of exchange, say a $100 note, but represents the value of goods and services so that we can sell what we produce to buy what others produce
  • money which we set aside as a store of value, such as bank accounts or superannuation savings, and
  • money which we use as a unit of account so that businesses can calculate how much things cost to produce so that they can determine what to charge so that they can calculate whether they are making a profit.

And it should be emphasised that only profit-making businesses create more value than they use up in production. Loss-making enterprises – which include virtually every activity run by governments – slow the economy, using up more value than they create. Loss-making enterprises cause the economy to contract. Only if there are other enterprises making profits – almost always private sector enterprises – can the economy expand. Without understanding that, you cannot understand the first thing about how an economy works.

Creating more money does NOT create productive resources. Giving more money to governments, or allowing them to print more money out of thin air, lets governments spend on non-productive activities which they inevitably do. Spending more on non-productive activities means less is spent on productive activities.

And adding to the problems, when the government expands the volume of money by just printing the stuff up, they undermine each of the uses money has: as a medium of exchange, as a store of value and as a unit of account. The economy can no longer be run as productively as it might have been and often even leads to a fall in real income across the entire community.

Virtually no politician I have ever met has understood this. Virtually no political leader I see in the news today understands this. All of the others are Keynesians now, who believe the mere spending of money creates jobs, growth and higher real earnings. On this they could not be more wrong.

We will be paying for this ignorance for a very long time to come.

Mostly empty (MMT)

There are a lot of cranks in economics, and it only gets worse all the time. I have been sent a copy of this editorial in The Oz yesterday which is a reminder of just how off the rails economists are: The promise and pitfalls of Modern Monetary Theory. The final para:

MMT certainly has theoretical appeal, even for rational, hard-nosed economists. It’s axiomatic there is no budget constraint in such a model. But we live in a complex, even messy world. Imagine telling a populist National, a clueless Green or a Labor class warrior there is no spending limit. How can you hope to manage the economy? … As an analytical tool the theory has merit. But with printing money in the real world, there is a day of reckoning or just a long stagnation. Our income can never be guaranteed, so we need to earn and pay our way.

They seem to come down against it, but only just, and hardly in a way that might alert you that any genuine application of MMT will wipe out cash-denominated savings, along with driving our economy into a wasteland of unproductive outlays. Living standards would be guaranteed to crash. Yet with government debt that way it is everywhere, why not just print the stuff up. No political leader lasts for ever. Leave things to the next lot to fix.

Economists once understood what the problem with such an approach actually is, as discussed in my Classical Economic Theory and the Modern Economy. As discussed at length within the book, until 1936 economists always first thought about the real economy and then, but only then, brought in money at the end. Here is the turning point in economic theory. From The General Theory itself where the approach taken by Mill is to examine the issues in relation to commodities and not money.

In J. S. Mill’s Principles of Political Economy the doctrine is expressly set forth:

What constitutes the means of payment for commodities is simply commodities. [That’s Say’s Law, by the way.] Each person’s means of paying for the productions of other people consist of those which he himself possesses. All sellers are inevitably, and by the meaning of the word, buyers. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. Everybody would bring a double demand as well as supply; everybody would be able to buy twice as much, because every one would have twice as much to offer in exchange. [Principles of Political Economy, Book III, Chap. xiv. § 2.]

Contemporary economists, who might hesitate to agree with Mill, do not hesitate to accept conclusions which require Mill’s doctrine as their premise. The conviction, which runs, for example, through almost all Professor Pigou’s work, that money makes no real difference except frictionally and that the theory of production and employment can be worked out (like Mill’s) as being based on ‘real’ exchanges with money introduced perfunctorily in a later chapter, is the modern version of the classical tradition.

I might add that money was hardly introduced “perfunctorily”. Mill even explicitly states the quantity theory of money. Virtually no one today any longer thinks in real terms. In fact, virtually no one, especially economists, even know how to think in real terms – they think they do but they don’t. It’s why they are incapable of understanding even the basics that were once universally taught and understood. That is why our economies are heading straight for the rocks.

You do know that an increase in the GST from 10% to 12.5% would mean a 25% increase in tax revenue

At the moment the GST is 10%. On $1000 there is therefore a tax of $100. If the tax is raised to 12.5%, on $1000 the tax would be $125. $125 is 25% higher than $100. The increase is not 2.5%. It is 25%. We would be mad to allow this to happen. Which brings me to this in today’s paper: Lifting GST rate is critical for meaningful tax reform, economists say.

Reforming the GST, including lifting the rate to 12.5 per cent, is critical to boosting economic and productivity growth and could raise between $14bn and $40bn a year, consulting firm PwC says.

This is the same kind of expertise that forecast thousands of deaths from the coronavirus. Do not go anywhere near allowing anyone, State or Federal, to raise our taxes. Let me quote Judy Sloan, also in The Oz today: Don’t waste time on tax: It’s spending that matters. Here Judy is referring to the advice from “former department head Jane Halton”:

Unless the GST or other taxes are increased [Ms Halton says] we won’t be able to afford the public services we apparently all desire. We are approaching a cliff, according to her, and unless something is done, devastation awaits. This is a common refrain from the Canberra bubble.

Judy concludes:

The real pity is that there haven’t been many (any?) reports about expenditure reform. The billions of dollars of government spending that are just wasted and the broader failure to achieve the stated objectives of programs — now those are issues worth considering.

Do not let anyone raise our taxes. We would be mad to let them do anything that allows governments to waste even more money than they already do.

It’s either a wage-based economy or slavery

It must be one or the other. There is no third way.

There are only two ways you can get other people to work for you.

You either hire people and pay them a wage.

Or someone owns their labour and commands them to do what they do.

The first form is called the market system. The second is referred to as slavery although in the modern world there are various forms of disguise. But if things need to be donem you must have one or the other.

It is only where we have a market economy that freedom is even possible. The loons of the left wish to replace the market economy with socialism, which for all practical purposes means a return to a slave-based economy.

Every socialist economy must ultimately resort to some form of forced labour with fake versions of market economy. Socialist economies are those in which workers are allocated to the jobs they do in a society with a virtual absence of personal freedom. There are also no private employers so that everyone works for the government. And since there is no private enterprise, all production is decided by the government. And since there is no market economy for the purchase and sale of anything, all production decisions are made by central planners. And since there is no price system, no one can work out which is the least wasteful form of production.

So not only does socialism mean a return to poverty at levels not seen for hundreds of years, it also means all forms of work are forms of slave labour.

It is inevitable and cannot be avoided.