Infographics: Life and Times During the Great Depression

The Visual Capitalist on the life had been during the Great Depression. 

Note: The Great Depression was preceded by an economic boom fueled by a credit bubble. The boom's epoch was popularly known as the "Roaring Twenties". Of course, generally, there won't be a bust (recession, depression or crisis) without an antecedent credit driven boom. 

The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.

The economy of the United States was destroyed almost overnight.

More than 5,000 banks collapsed, and there were 12 million people out of work in America as factories, banks, and other shops closed.

Many reasons have been supplied by the different economic camps for the cause of the Great Depression, which we reviewed in the first part of this series.

Regardless of the causes, the combination of deflationary pressures and a collapsing economy created one of the most desperate and miserable eras of American history. The resulting aftermath was so bad, that almost every future Central Bank policy would be designed primarily to combat such deflation.

The Deflationary Spiral

After the stock crash, money and consumer confidence was hard to find. Instead of spending money on new things, people hoarded their cash.

Fewer dollars spent meant more drops in demand and prices, which led to defaults, bankruptcies, and layoffs.

As a result of this spiral, the prices for many food items in the U.S. fell by nearly 50% from their pre-WW1 levels.

The price of butter went from pre-crisis levels of $0.21 to $0.13 per pound in 1932. Wool had a drop from $0.24 to $0.10 per pound, and most other goods followed the same price trajectory.

The Effects

Here’s how “real value” is affected in a deflationary environment:

Money

Real value increases: cash is king and gains in real value.

Assets (stocks, real estate)

Real value decreases as prices fall.

Debt

Debtors owe more in real terms

Interest Rates

Real interest rates (nominal rates minus inflation) can rise as inflation is negative, causing unwanted tightening.

From Bad to Worse

The Great Depression lasted from 1929 to 1939, which was unprecedented in length for modern history. To this day, economists disagree on why the Depression lasted so long. Here’s some of their explanations:

The New Deal was not enough

Looking back on The Great Depression, John Maynard Keynes believed that monetary policy could only go so far. The Central Bank could not ultimately push banks to lend, and therefore demand had to be created through fiscal policy. Keynes advocated massive deficit spending to offset markets’ failure to recover.

Keynesians such as Paul Krugman believe that Franklin D. Roosevelt’s economic policies through The New Deal were too cautious.

“You can’t push on a string.” – Keynes

The New Deal made things worse

Some economists believe the New Deal had a negative net effect on the recovery.

The National Recovery Administration (NRA) is a primary subject of this criticism. Established in 1933, the goal of the NRA was to lift wages. To do this, it got industry leaders to meet and establish minimum prices and wages for workers.

Cole and Ohanian claim that this essentially created cartels that destroyed economic competition. They calculate that this, along with the aftermath of these policies, accounted for 60% of the weak recovery.

Lastly, one other charge leveled at Roosevelt by his critics is that the sprawling policies from the New Deal ultimately created uncertainty for business leaders, leading to less investment. This lengthened the recovery.

“[The] abandonment of [Roosevelt’s] policies coincided with the strong economic recovery of the 1940s.” – Cole and Ohanian

The Federal Reserve didn’t do enough

Milton Friedman claimed that the Federal Reserve made the wrong policy decision, which extended the length of the Depression.

Between 1929 and 1933, the monetary supply dipped 27%, which decreased aggregate demand and then prices. The Fed’s failure was in not realizing what was happening and not taking corrective action.

“The contraction is…a tragic testimonial to the importance of monetary forces…[D]ifferent and feasible actions by the monetary authorities could have prevented the decline in the stock of money… [This] would have reduced the contraction’s severity and almost as certainly its duration.” – Milton Friedman (and co-author Anna Schwartz)

The Federal Reserve shouldn’t have done anything

Austrian economists believe that the Fed and government both made policy choices that slowed the recovery. For starters, most agree with Friedman that the Fed’s policy choices at the start of the Depression led to deflation.

They also point to the premature tightening that occurred in 1936 and 1937 as a policy failure. During those two years, the Fed not only hiked interest rates, but it also doubled bank-reserve requirements. These policies coincided with Roosevelt’s tax hikes, and a recession occurred within the Depression from 1937 to 1938.

Critics of these policies say that this delayed the recovery by years.

“I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation. So, once again, a badly programmed monetary policy prolonged the depression.” – Friedrich Hayek

Personal Stories from The Great Depression

“One evening when we went down to check on the bank, there were hundreds of people out front yelling and crying and fighting and beating on the locked doors and windows. They had fires built in the street to keep warm and there were people milling around all over the downtown.” – Vane Scott, Ohio

“A friend I worked with said in the Depression he rode the rails and stopped to eat vegetables out of a garden. The owner said he would shoot him if he didn’t stop. My friend said ‘go ahead,’ as he was that hungry. ” – James Randolph, Ohio

“When neighbors couldn’t get a loan from the bank, they’d come to Dad. He sold farm machinery. He never put his money in a bank. He stored it in a strongbox in the fruit cellar, under the apples. He’d loan the neighbors what they needed and they paid him back when they could. If there was a month—especially the winter months—when they couldn’t pay, they’d slaughter a cow or a pig and give him a portion. In the summer it was vegetables: corn, peas, whatever they had growing.” – Gladys Hoffman, New York

“I thought the Depression was going to go on forever. For six or seven years, it didn’t look as though things were getting better. The people in Washington DC said they were, but ask the man on the road? He was hungry and his clothes were ragged and he didn’t have a job. He didn’t think things were picking up.” – Arvel “Sunshine” Pearson, Arkansas

Conclusion

After the 1937-38 Recession, the United States economy began to recover.

The focus of the American public would eventually shift away from the Great Depression, as events in Europe unfolded after Germany’s invasion of Poland in 1939.

For the Austrian account of the Great Depression read Murray N Rothbard's America's Great Depression

Courtesy of: The Money Project

What Happened to the ECB's Bazooka? Euro Surges as European Stocks Clobbered!

Last January I wrote: 

My point is that these central bank policies to subsidize the stock markets via monetary policies, as shown by the experiences of Japan, China and Germany, have conspicuously been increasingly afflicted by the laws of diminishing returns. 

The narrowing windows of gains only punctuate on the risk of severe or dramatic downside ‘flight’ actions overtime. Yet central banks refuse to heed reality. But they continue to focus instead on the short term. The result should be the worsening of the unintended consequences from present day ‘rescue’ actions.

Last night, ECB's Super Mario launched the much awaited stock market bailout via the "bazooka".

The result?

Just what happened to the honeymoon?  The honeymoon didn't even lasted a day as Europe's stocks got crushed!  

US stocks marginally declined, although they bounced back from intraday deep losses.

And the euro rallied hard!

Could the Super Mario's bazooka have been a buy the rumor sell the news? Or could this have been a lagging effect, where the rally may happen later?

If the bazooka failed to whip up on the risk ON appetite, what's to keep global stocks up? The FOMC meeting next week, where the doves are expected to prevail?

Truly interesting developments.

ECB Panics! Announces Deeper Negative Rates and Expands QE!

ECB's Super Mario lived up to the stock market's expectations. 

In the aftermath of the recent meltdown, Super Mario promised to bailout the stock markets with even more stimulus. Tonight Super Mario delivered

Here's the Bloomberg for the details:

Mario Draghi unleashed his most audacious stimulus package yet, unexpectedly testing the lower bounds of all the European Central Bank’s interest rates and expanding its monthly bond purchases by a third...

The 25-member Governing Council, meeting in Frankfurt on Thursday, cut the rate on cash parked overnight by banks by 10 basis points to minus 0.4 percent and lowered its benchmark rate to zero. Bond purchases were increased to 80 billion euros ($87 billion) a month from 60 billion euros, and corporate bonds will now be eligible. A new series of long-term loans to banks will begin in June.

The package exceeded market expectations for more stimulus and may signal increasing concern about persistent weakness in consumer prices and a Chinese slowdown. Draghi -- who will present new economic forecasts -- has repeatedly said policy makers are willing to do what’s necessary to revive inflation and underpin the region’s upturn.

Remember, the ECB continues to throw 'everything but the kitchen sink'...yet the sustained failure to accomplish the desired goals.  And this is why the next phase of the bailout.

So central banks virtually does the same thing over and over again and yet expect different results. For some such acts are called insanity. But for policymakers it is called as standard.

Now the question is, how long will the honeymoon period last?

China's Shanghai Index Slumps 2%: Spot the Odd Man Out

Why has Chinese stocks been dumped 2% today?

The answer can be seen from spotting the odd man out below

The Shanghai composite as shown in the chart above from google. Intraday charts have been segregated by red horizontal line. Boxes provide likely views of state intervention.

In the past four sessions, particularly during the afternoons, the China's National Team have been actively providing support to local stocks--through panic buying.

The National Team tried again (during the early post lunch break session), but apparently sellers prevailed this time. Could it be that the National Team just run out of resources for the ritual afternoon push? Or has the selling pressure been so strong to have overwhelmed the National Team efforts? Or perhaps both?

Mainstream media noticed it too...

From the Bloomberg:

China’s stocks slumped, led by financial companies and energy producers, as traders weighed the level of government support for the world’s second-largest equity market.

The Shanghai Composite Index slid 2 percent at the close, adding to Wednesday’s 1.3 percent drop. The gauge extended losses in late trading, a reversal of the pattern seen this week, when suspected buying by state-backed funds lifted shares toward the end of the day. Industrial & Commercial Bank of China Ltd. and PetroChina Co., which led the daily rebounds, fell at least 1.4 percent. A measure of property developers tumbled the most in two weeks on concern the government will take steps to cool home price gains in top cities.

The suspected failure of state funds to prop up stocks on Thursday removes one of the key supports for the world’s worst-performing equity market this year amid deteriorating economic data and disappointment over stimulus measures announced during annual policy meetings this week. Data on Thursday showed February consumer prices rose the most since mid-2014. Shanghai authorities held a meeting on Tuesday to discuss measures to tame soaring property prices after recent frenzied residential homebuying, according to people familiar with the matter.

"Late-session rallies in the previous few days fueled speculation that the national team stepped in," said Daniel So, a strategist with CMB International Securities Ltd. "Investors feel disappointed today when the pattern failed to repeat. A lack of stimulus measures from the National People’s Congress meetings also let people down."

At least the Chinese government has the mettle to declare support to stock market as part of their policies (what I call the Xi Jinping Put). And by doing so, they provide basic examples of why such interventions has repeatedly failed to weave its magic on the marketplace over the long run.  And yet all those previous interventions has embedded costs....accrued costs of which has yet to be manifested on the markets.

Boomeranging BoJ’s NIRP: JGB Circuit Breaker, Corporate Bonds and Bank Lending Slows as Cash Hoarding Accelerates!

In this terse post, I’d like to only discuss two things: one, the immediate unintended side effects of the Bank of Japan's (BoJ) NIRP, and second, the growing political divide over the imposition of NIRP.

Yields of Japan’s Government Bonds (JGB) shockingly collapsed yesterday to have forced the government to implement a circuit breaker or the suspension of trading activities for JGBs.

From Bloomberg:

Trading of Japan’s government bond futures for delivery this month was halted for less than a minute after the price of the contracts dropped as much as 0.6 percent.

The so-called dynamic circuit breaker started at 12:32 p.m. in Tokyo and only applied to March contracts for about 30 seconds Wednesday, according to Masaki Takahashi, who works in the market management department at the Osaka Securities Exchange.

The underlying benchmark 10-year bond tumbled Wednesday, pushing yields up eight basis points to minus 0.015 percent as of 2:51 p.m., according to Japan Bond Trading Co., the nation’s largest inter-dealer debt broker. Yields rebounded after dropping more than five basis points to a record minus 0.1 percent Tuesday.

Wednesday’s slide was partly driven by the results of the Bank of Japan’s bond buying operation, according to Takenobu Nakashima, a quantitative strategist at Nomura Securities Co. in Tokyo. Its bid-to-cover ratio for debt with 10 to 20 years to maturity rose to 3.58 from 2.93 last week, indicating stronger investor demand to sell.

It is important to highlight that with the BOJ holding 34% of the JGB market as of January 2016, shrinking market liquidity PLUS NIRP has been contributing to the current increase in JGB market volatility

Yields of Japan's 30 year bonds also crashed

Of course, the aim of the BoJ's previous Zero Interest Rate Policy (ZIRP) has been to bolster credit growth.

For the private sector this hasn’t been happening. To the contrary, credit growth has been materially slowing, notes the Japan Macro Advisors: (bold added)

In February 2016, the growth in the total bank lending in Japan slowed slightly to 2.2% year on year, down from 2.4% in January. The bank lending growth seemed to be on a deceleration path, having peaked in August 2015 at 2.7%.  

The sign of a slowdown is even sharper in bank deposits. It has decelerated from the peak of 4.6% in May 2015 to 3.1% in February 2016. The slowdown in deposits growth could be a reflection of a slowdown in the economy. In the quarterly published statistics, we see that the housing loan lending has been slowing since last summer. In the October-December quarter, new housing loans has grown negatively by -6.4% year on year.

With ZIRP being unable to fulfill what it had been designed for, the BoJ has doubled down to merge ZIRP with NIRP.

Unfortunately, stagnation in bank credit growth seems to be the initial outcome, since the NIRP took effect on mid February.

The corporate sector seem to be reluctant to issue bonds. Worst, credit risk has been rising on corporate bonds.

From Nikkei Asia (bold mine)

The Bank of Japan's negative rate policy is beginning to distort the way corporate bond rates are set.

Default risk premiums are rising even though the creditworthiness of issuing companies remain unchanged. This is because many companies prioritize keeping interest rates positive to rope in buyers.

With some companies becoming less willing to issue bonds, some market insiders are wondering if the corporate bond market will shrink…

However, the BOJ's negative rate policy has caused JGB yields to significantly decline, affecting corporate bond rates, too. In some cases, total interest rates are negative even if default risk premiums are added, making it difficult to attract buyers.

And more signs of distortions on Japan’s corporate bond market.

Interest rates on logistics company Nippon Express's five-year bonds and on seasoning maker Ajinomoto's seven-year bonds were decided based on an absolute level of interest rates. This method has become the norm when issuing bonds with maturities of less than 10 years now that yields on 10-year JGBs are negative.

That said, there is a problem in adopting an absolute level of interest rates. The corporate bond market's system of assessing a company's creditworthiness based on risk premiums could become dysfunctional…

In the secondary market, a strange phenomenon is taking place: The risk premium tends to be larger for corporate bonds with higher creditworthiness. That's because, with JGB yields tumbling, creditworthy companies are forced to set much higher premiums to keep their already-low bond rates positive.

As a result, the spread between premiums on higher-rated issues and lower-rated issues has narrowed, causing "creditworthiness-based yardsticks" to collapse and making it difficult for some investors to manage their portfolios.

More signs of NIRP backfire…credit growth diminishing not only in Japan but also in Europe:

Rising default risk premiums are making some companies less willing to issue bonds. One financial officer of a company listed on the first section of the Tokyo Stock Exchange is worried that an increase in premiums could deteriorate his company's loan terms. Default risk premiums on corporate bonds are an important factor when coming up with borrowing rates. Therefore, higher risk premiums could work to the disadvantage of companies when taking out loans in the future.

Bond issuances are on the decline in Europe, which adopted a negative rate policy ahead of Japan. The amount of corporate bonds issued in 2015 tumbled 20% from 2013, before the negative rate policy was adopted, according to U.S. market research company Dealogic.

With NIRP providing less income for financial services firms, as well as, security for depositors, the initial ramification has been for the both parties to withdraw from the system.

Money market funds, mutual funds and insurance pullback from providing services to consumers.

First money market funds, from another Nikkei Asia report: (bold added)

With negative interest rates making stable returns impossible to achieve, all 11 Japanese asset managers running money market funds plan to close them and return assets to investors, effectively ending a once-flourishing market.

Money market funds invest mainly in short-term instruments such as commercial paper and government debt carrying maturities of less than a year. Though principal is not guaranteed, these investment trusts have been considered safe. Japanese money market funds held 1.37 trillion yen ($12 billion) in assets Friday…

Money market funds were introduced in Japan in May 1992. Retail investors were drawn to their safety and higher returns compared with bank deposits. Total assets in money market funds peaked at 21 trillion yen in May 2000. But their popularity waned after the 2001 collapse of U.S. energy company Enron, which caused the money market funds holding its debt to drop below par value.

Next, mutual funds and insurance.

The impact of negative interest rates is spreading to other financial products. Returns have sunk below 0.02% for money reserve funds, mutual funds similar to money market funds with assets totaling more than 10 trillion yen. Because these funds serve as settlement accounts used in stock and mutual fund trading, returning customers' assets is difficult. Asset management companies can cover losses to keep their value above par but bear the cost of doing so.

Some life insurers are halting sales of products aimed at savers. T&D Financial Life Insurance will suspend sales of some single-premium whole-life policies March 16.

NIRP appears to be on path to destroy Japan’s financial system. 

Instead of ‘financial inclusion’, Japan financial system could be headed for atavism where unbanked people will swell. And by widening the chasm between savings and investments, the retrogression in Japan’s banking and capital markets will lead to lower standards of living which will likely be highlighted by a massive crisis (which will likely spread elsewhere)

And as the BoJ increases their share of JGBs, it means lesser private sector participation on the JGB market. 

From another Nikkei Asia article:

Because Japanese interest rates keep falling amid the BOJ's incremental monetary easing, foreign pension funds, as well as Japanese banks and pension funds, have been reducing their JGB holdings. This has increased the relative proportion of speculators in the market, making bond yields more susceptible to volatility.

This only means that the price function of JGBs has been rendered materially broken, thus the enhanced volatility. Yet the BoJ hopes to ingest a larger segment JGBs in order inflate away such unsustainable debt levels via the NIRP.

And as noted above, depositors have been withdrawing from the system

From another Nikkei Asia article

Japan's cash in circulation is growing at the fastest rate in 13 years as ripples from the Bank of Japan's negative interest rates push consumers' money out of savings accounts and into safes and other at-home repositories.

Japan had 6.7% more currency in circulation in February than a year earlier, the BOJ reported. That increase is the largest since February 2003, when consumers withdrew cash following changes to Japan's deposit insurance system. Particularly popular now are 10,000-yen ($88.25) bills, with circulating stock surging nearly 7%, the central bank said. The 5,000-yen and 1,000-yen bills have seen upticks of less than 2%.

The consumer shift from banks to home safes

Consumers increasingly find that keeping money in the bank is simply not worth the trouble. Large banks are paying a mere 0.001% interest on deposits -- 10 yen per year for an account holding 1 million yen. ATM fees and other charges would put many savers at a loss.

Instead, many are looking to safes to protect their money at home.

"Safes have really taken off since the negative-rate policy was announced," a worker at a major Tokyo home electronics retailer said. Fireproof models selling for around 50,000 yen are especially popular. Shimachu, a home goods chain based in Saitama Prefecture, reported twice as many safe sales now as a year ago. Commercial security provider Kumahira noted growing interest in safes from businesses as well.

Keeping cash in the home entails a higher risk of burglary. Sohgo Security Services said that requests for information on home security systems have risen 10-20% since the BOJ's negative interest rates took effect in mid-February, though the company admitted the cause of the increase is unclear.

The articles conclusion:

The central bank's negative rates are intended to push funds into consumption and investment -- not safes and mattresses, where they do nothing to stimulate the economy. Switzerland, a pioneer of negative-rate policy, apparently experienced similar unintended consequences: printing of 1,000-franc ($1,003) bills, the largest available, surged when rates dipped below zero.

Notice that much of the adverse reports came from Nikkei Asia, a mainstream media outfit that used to be the administration’s megaphone? Now the same firm appears to be pushing back hard on the BOJ’s NIRP as I have earlier noted here.

It’s a sign of a growing divide on NIRP by Japan’s establishment. It won’t be long where the BOJ may not just be kiboshed by the marketplace but by politicians as well. Such are growing signs of inherent barriers to the BoJ’s rampant inflationism. 

 

So far Japan’s stocks have partly recovered since the BoJ’s NIRP’s announcement.

The Nikkei was up 1.26% today, as part of the ongoing counter trend (bear market) rally.

The Nikkei has, so far, been short of reaching January highs when NIRP was announced. But volatility should be expected given the severe real world dislocations brought about by NIRP.

Nevertheless, people pulling their money out of the financial system will serve as a nasty headwind for Japan’s assets. That’s unless the average citizens will see stocks as a refuge. But if they do so, then NIRP will just blow another huge bubble from which will eventually implode and send even more people to scamper outside the financial system.

Yet the BoJ has positioned itself where there seems NO way out.

It’s sad to see how desperate central bank policies will lead to MORE societal hardships.

Infographics: 5 Differences Between a Good Analyst and a Great Analyst

Submitted by Quandl's Raquel Sapnu [see Quandl's futures link here]

Let me transcribe what is written above:

1) A good analyst looks for answers, a great analyst reveals the truth

A great analyst goes beyond developing reports. She digs deeper—she doesn’t just find out what the number is, she figures out why it is that way. She ask the bigger questions that lead to actionable insights and drive strategy

2) A good analyst is detailed-oriented, a great analyst is a master of nuance

Good analysts can spot minute details and subtle patterns, but first rate analysts can also place those nuances within the bigger picture. They immerse themselves in the data, but they don’t get lost in it. Because they’re plugged into the wider strategy, they’re better knowing at what to focus on and what to set aside

3) A good analyst is analytical, a great analyst is also synthetical

If analysis is reverse engineering, synthesis is engineering. It’s the ability to build things, to combine data points, patterns, and themes into a coherent story. Good analyst can take a number and deconstruct it into its most minute components. A synthesizer can create a unifying pattern for those data points and patterns

4) A good analyst is dubious, a great analyst is an outright skeptic 

While a decent analyst guards against their own biases, a great analyst enjoys questioning their conclusions. They will seek out devil’s advocates, inviting colleagues to scrutinize any beliefs. Because no process is perfect, they don’t try to hide the flaws in their approach. Instead they try to expose them.

5) A good analyst presents insights, a great analyst tells stories

Great analysts know how to make their findings digestible to a wide variety of audiences. They can help any part of the organization understand why the data is meaningful. They’re not just number crunchers, they have the ability to make people believe in the results. Insights are only meaningful if they inspire action. Ultimately, great analysts drive strategy

Phisix 6,900: 100% of Today’s Gains Courtesy of Team Viagra!

Some entities must be so so so very desperate to see the PSEi back to 7,000 soon. 

Why? Perhaps because they know that current levels are unsustainable. So they likely need fire up the public's imagination to draw in more greater fools, not only to project G-R-O-W-T-H (especially with elections a few months away), but likewise to be able to unload on their high priced inventories.

While the entire session has almost been down, Team Viagra had to ensure that today’s must close on the green. So Team Viagra engineered a concerted pump on a few heavyweights for this happen. 

The PSEi was down during pre-market interventions period by about 33.66 points .48%. Then the Viagra magic. Via marking the close, the index ended suddenly up by 22.82 (.33%) on a low volume day! 

So not only did Team Viagra’s coordinated pump buoyed the index by an astounding .82%, ONE HUNDRED PERCENT of today’s gains came from manipulations!!!

The biggest last minute pump came from the holding sector which soared by 1.4%. The holding sector was today's biggest gainer outside the mines.

Three issues were the subject of the concentration of the pumping activities. In particular, SM investments, the largest listed company that posted ZERO growth in 2015 led the marking the close pump by an astounding 3.87%! 

SM was followed by JGS 1.4% and property firm ALI .9%. Although the latter closed down by 1.46% for the day

This certainly has not been about the PSEi’s latest trading platform: Nasdaq’s X-stream.

If I am not mistaken, Malaysia and Saudi Arabia’s bourses run under the same Nasdaq XTS trading system. Unfortunately, there has been any single account of Viagra moves or activities. 

And even more, today's activities was a follow up from yesterday where Team Viagra managed to reduce to the session losses to a minimal. 

As you would notice, corrections have become a taboo. For the frantic Team Viagra, Philippine markets can only go up! 

Yet such signify as exactly one of the principal reasons why crashes occur. 

Yes the session end Viagra syndrome can be seen "ONLY in the Philippines"! And that's the secret to the Best Stock Exchange in ASEAN.

And this is why with Team Viagra, it's definitely more fun in the Philippines! 

Note: figures/images from colfinancial.com, Bloomberg, PSE and technistock.net. 

And as previously indicated: My purpose for such postings have been to document irregularities for posterity, which may serve as lesson to future generation practitioners: There is no such thing as a free lunch; perversion of the marketplace will have incite a blowback or will backfire.

Facebook Posts of the Day: Socialism Sounds Great in Speech Soundbites, US Populist Vote Against the Establishment

The first post on socialism comes from Russian Chess Grandmaster and former World Chess Champion Garry Kasparov (hat tip Cato's Dan Mitchell)

The next post comes from iconoclast author and risk analyst Nassim Taleb

By the way, due to time constraints I haven't opened my facebook account for a number of months now, but such has not been a hindrance from reading great posts like the above.

Quote of the Day: The Difference Between Minimum Wages and Free Markets on Unemployment

Professor Don Boudreaux at the Cafe Hayek provides an awesome explanation: (bold mine)

(1) The unemployment caused by a minimum wage is permanent, in the sense that even in theory it will always exist. Unlike the unemployment that arises when trade becomes freer, the unemployment that is caused by minimum-wage legislation is not the result of transaction costs and other frictions that prevent workers who lose their jobs from finding alternative employment immediately. Put differently, in principle if not in practice, no workers need be rendered even temporarily unemployed by freer trade. In contrast, the minimum wage necessarily (in the absence of genuine monopsony power) causes some workers to lose their jobs and causes these destroyed jobs to remain destroyed for as long as the minimum wage remains in place.

Put in yet another different way, unlike with free trade, the creation of unemployment is not a temporary or incidental consequence of minimum-wage legislation. Lasting job destruction is part of the essential logic of the minimum wage. While in principle, and over time also in practice, free trade does not lead to permanent job losses, job losses caused by the minimum wage, in addition to springing from the very logic of the minimum wage, are indeed permanent.

Second, unemployment caused by free trade is, in reality, simply a particular instance of unemployment caused by changes in the pattern of economic activities. In both principle and practice this unemployment differs not a whit from the unemployment caused by, say, consumers coming to prefer more chicken to beef, more outdoor recreation to indoor entertainment, more wine to whiskey, or living in Arizona to living in Michigan. That is, the unemployment caused by freer trade is inseparable from the very logic of a market economy driven by consumer sovereignty and competition. Far from free trade being an exception to the rules of a market economy, it is protectionism that is an exception. The minimum wage, in contrast to free trade, is emphatically not part of the logic of a market economy; like protectionism, the minimum wage is a suspension of, or an interference with, the logic and principles of a market economy and of consumer and worker freedom. If this fact means nothing else, it means that free trade (like any competition-driven change in the pattern of consumer spending) enjoys a presumption of legitimacy while the minimum wage, which is a restraint on the operation of the market and on voluntary contracting, operates under a presumption of illegitimacy.

Third, economic theory and empirical evidence strongly suggest that the ill consequences of the minimum wage are not randomly distributed. These ill consequences are suffered only by low-skilled workers and, even among low-skilled workers, disproportionately by those who are the least advantaged (for example, by inner-city blacks rather than by suburban whites). The downsides of free trade, in contrast – and in addition to being only temporary and part of the larger logic of the real-world market – are much more random. These ill consequences are not more likely to fall only on low-skilled workers, or on blacks rather than whites.