World Trade Rising

Each month the Bureau of Economic Policy Analysis, based in the Netherlands, releases a report on world trade.  The latest report for April, released June 24th, showed a month over month drop of 1.7% after a particularly strong increase of 4% in March.  The 3 month moving average is up about 5% with Japan, Asia and other emerging markets showing steady improvements in exports.


Previously I discussed the contradictions in conservative philosophy.  Today I’ll examine contradictions in modern liberalism, which has borrowed aims, ideas and sentiments from classical liberalism but has evolved from those roots.

Liberalism claims a fundamental belief in the inherent goodness of people, that there is an implied social contract between people to treat each other fairly.  It professes commendable goals of equality and individual freedom but is less concerned with the process of attaining those goals.  The underlying morality of the means toward an end often conflicts with the morality of the goal.  To say that liberalism believes that the ends justify the means is a false oversimplification of the philosophy because liberalism is concerned with process, but that concern is subservient to the goal.  Principles compromised in the path toward a worthy goal are an acceptable trade off.

John Locke, regarded as the founder of classical liberalism, conceived of equality as a natural state that human beings are born into.   Each person is not inherently subject to another and all people in a political society have a right to be treated equally under the law.  Modern liberalism broadens that concept of equality to mean that all people in a society should have equal opportunity to further their economic station; that each person in a society should have at least a minimum amount of goods to survive.

In Locke’s view, each person has a right to own property – property of any sort, not just land – and it is the government’s chief role to protect that property. No person may be forced to give up their property unless that person chooses to do so by some sort of implied or explicit contract.  As modern liberalism expanded the idea of equality, a contradiction in principles arose.  If a society was to ensure some level of survival to all people in that society, it would have to take property from those who had it in order to give it to those who didn’t.

Equal opportunity is a utopian ideal.  Few modern liberals would reasonably assert that such an ideal is attainable.  What is attainable is more equal opportunity.  In pursuit of that goal, public educational institutions were founded – funded not by taxes apportioned equally among the citizens but by monies – property – taken from those who had property.  No one can reasonably question the immense value that a schooled citizenry has to society.  Over the past 150 to 200 years, the outcome of such a policy has been a great boon to society.  If the means of getting there has meant some compromise of the principle of protection of private property, that is an acceptable trade off, modern liberals would argue. 

Equality, or fairness, under the law is a core concept of classical liberalism.  No reasonable person would argue that it is fair that someone starve to death on the street while those with full bellies walk by.  Although modern liberalism professes a belief in the inherent goodness of people, it does not trust in the goodness of people to freely choose to help those in need.  This contradiction is so profound that, for some, it undermines the moral basis of modern liberalism.  Modern liberals assume that there are not enough people who will freely choose to help those in need that people must be made to help those in need.  Rather than passing the hat, liberals pass a tax.

Inequality of circumstance, of station, of living standard – is unavoidable.  That is the natural state that human beings – in fact, all creatures – are born to.  To minimize that inequality in pursuit of a vision of justice and fairness may be a laudable goal but the mission is sullied by a less than principled process in pursuit of a worthy aspiration.  Some people will doubt such noble intentions, others will fight confiscatory laws or hide their property – making it all the more difficult for modern liberals to attain their ends.  Process matters.


Modern day conservatism and liberalism have several contradictions which make it difficult to forge pragmatic policy based logically on either theory.  Today I’ll look at the contradictions of the conservative philosophy.

Conservatism emphasizes individual freedom in a pro-forma manner but the philosophy particularly targets individual economic freedom.  Conservatism professes a support for moral freedom but herein lies one of many contradictions in the philosophy.  Advocating for tradition and the nuclear family, conservatives all too often prescribe moral values as part of their philosophy.  Politicians in the social conservative camp thus propose laws which aim to enforce certain moral choices – in effect, curtailing moral freedom.

Conservatism champions free market capitalism as the economic structure which will give the most individual economic freedom.  The haphazard to and fro of the marketplace does not promote social equality or deliver restorative justice and conservatives contend that government has no business intruding on an individual’s economic freedom in order to accomplish either of these goals.  Thus conservatism maintains that all government income redistribution schemes are baseless.  Here conservatism reveals its utopian roots.  While liberal philosophy has utopian aims, conservatism has utopian means.  In principle, free market capitalism is a sum of individual choices.  In practice, the participants in a free market try to gain an economic advantage through legal or political access, thus compromising the freedom of other individuals to make choices in their own self interest.  This inevitable contamination of the pure utopian model of capitalism transforms it to some degree into an income redistribution scheme.

Conservatives argue for limited government at the federal level but steadfastly propose a strong national defense, which requires more spending, more taxes and an increased intrusion by the federal government on both individuals and the separate states.  Despite their professed support for individual freedom, many conservatives have supported a military draft during the past century.  In addition to government’s role to protect its citizens from external threats, conservatism advocates a strong role for government to maintain an internal order.  Thus, conservatives support a strong police presence, a well funded judicial administration and penal system to dissuade and punish those who make moral choices which threaten the moral and social order.  Conservatives deny that any social benefits programs help maintain an internal civil order and so argue that the federal government should have no role in social welfare programs. 

Who shall determine the proper moral and social order?  Conservatism’s answer is majority rule but there lies another contradiction – a support for a populism which is antithetical to the founding principles of this country.  Conservatives hold a well deserved regard for the original text of the Constitution as they interpret it.  Yet the politicians who wrote the Constitution of this country were afraid of majority rule, regarding it as mob rule, and one of the most dangerous threats to a free people.  Accordingly, they enacted political institutions and processes designed to mitigate the danger of majority rule, creating a republican form of democracy. 

As an economic and political philosophy, conservatism is pro-forma anti-statist.  However, the practice of conservatism requires an intrusive statist framework to enforce traditional values.  In the U.S., these traditional values are based on Christian moral values as set forth in the Bible.  Since the Bible contains a set of rich, all-encompassing and deeply contradictory values subject to centuries of competing interpretations, it is not surprising that any politico-economic philosophy that embraces the Bible should embody contradictory aims.

These contradictions ensure disagreement not only between conservatives and liberals but also within the ranks of conservatives.

Banking Reform

Stayed up way too late watching the Senate banking committee debate resolutions to correlate the language of the House and Senate banking bills.  Finally went to bed at 1:30 AM MDT, and they were still going at it in Washington, where it was 3:30 AM.  Although pundits like to describe political conflict as a disagreement along party lines, there are other subtler alliances that cross party lines.  Democratic members of the 12 person Senate conference who were on the Banking Committee would align with banking members of the Republican Party on an amendment vote, while Democratic members on the Agricultural (Ag) Committee would align with a ranking member of the Ag who was a Republican, thus creating a difference in approach between Banking members and Ag members, regardless of party.

CNN money has a good summary of the reform bill that will probably go before the full House and Senate before July 4th.   Although proprietary derivatives trading restrictions on Wall Street firms was included in the bill, a 3% provision was included in the language, allowing these firms to trade derivatives as long as it does not exceed 3% of their capital, which most firms except for Goldman Sachs will not exceed.

What surprised me is the lucidity of members of the Senate at that time in the early morning, having spent 18 hours debating various language and amendments.  To pull an “all-nighter” at 20 years old is one thing – many of these Senators are in their fifties, sixties and seventies.  Very impressive.  What befuddles an ordinary person like myself is why, after 18 months of wrangling over the development of the bills’ language, does it have to come down to an endurance test?  The lawmaking process in a democratic republic is messy, almost as ugly as open abdominal surgery – and many of these lawmakers probably felt like MASH surgeons this morning as the sun came up.

Federal Reserve for Kids

Eight times a year, the Federal Reserve Bank publishes its Beige Book, a summary of economic conditions around the country. The Federal Reserve branch at St. Louis publishes a lot of current and historical information on the economy for adults but they also provide some educational tools for grade schoolers.

Our grandchildren will look back on these years as the “old days” and this past decade has had some memorable events – an election decided by the Supreme Court, 9/11, two wars, Katrina, the banking meltdown, the oil spill.  The St. Louis Fed features a timeline of banking, credit and policy events for the past three years.  You can also download a PDF of the timeline so that, 10 years from now, you’ll have notes when you tell your stories.  The grandkids will think you know everything.

Small Cap Breakout

From a March 6, 2010 WSJ article: “Finance professors Eugene Fama and Kenneth French have found that one in eight small growth stocks typically becomes large each year—and that these small stocks on the cusp of becoming big generate giant annual returns of as much as 62% on average.”

What’s a small cap stock?  Investopedia gives these approximations:
Mega Cap – Market cap of $200 billion and greater
Big Cap – $10 billion and greater
Mid Cap – $2 billion to $10 billion
Small Cap – $300 million to $2 billion
Micro Cap – $50 million to $300 million
Nano Cap – Under $50 million

The Russell 2000 index of small cap stocks uses the same range, $300M to $2B.  However, AOL’s stock screener classifies small cap as $250M to $1B.  Market Watch’s screener is one of the few that allows a precise range of values, rather than selecting from a list of values, but does not have as much screening criteria as some sites.  The screening tool at Yahoo Finance lists values for market cap  which apparently follow AOL’s criteria for small screen stocks, with market cap gradations at $500M,$1B, then jumping to $10B.

At Yahoo, I ran a screen for stocks with a market cap between $500M and $1B, sales greater than $500M, a P/E ratio of 10 to 20 and a 5 year estimated EPS growth rate greater than 50%, or 10% a year.  That criteria produced some companies just under $1B market cap that I wish I had invested in several months ago.  While small cap stocks have risen a few percent this year, some of these stocks have risen 20 to 50%.   Small cap stocks usually lead the way out of a recession and even though they have had a good run the past twelve months, there is probably more to come.

There seems to be an eternal debate and much research into this question: do growth funds and ETFs produce better returns than value funds and ETFs?  It depends on the time period that one looks at.  Here is a short 2007 article on the small cap value vs. growth.  

Non-Manufacturing Index

Each month, the Institute for Supply Management (ISM) surveys purchasing managers around the country about changes in inventories, orders, sales and employment.  If there is no change from the previous month, the index reads 50.  Anything greater than 50 is a positive.  ISM publishes two composite indexes each month, one for manufacturing (PMI) and one for non-manufacturing (NMI), which represents more than 80% of the economy.

In January of this year, the non-manufacturing index squeaked into the positive zone with a 50.5 reading, followed by a 53 reading in February. In May, the NMI rose to 55.4, and a key component of that composite, the Business Activity Index, rose to 61, a level not seen since 2006.  The indexes are calculated in such a way that they reflect the dispersal of either positive or negative activity throughout the economy, so a reading of 61 indicates that improvement is spreading ever wider through a variety of companies.

Employment is usually the last horse out of the gate when coming out of a recession and this time is no different.  However, for the first time in 28 months, the Employment Index portion of the composite index broke into positive territory at 50.4.

This recession has a greater gravitational pull than the more recent ones at the beginning of this decade and the early nineties.  Pulling against this recovery are home foreclosures, commercial real estate debt coming due, European sovereign debt problems, China’s monetary support of its own exports and a lack of lending to small businesses.  But the rockets are firing.   

Constitutional Authority

At first glance, right wing Minnesota congresswoman MIchele Bachmann and the editors of the British publication Financial Times seem to have little in common.  Ms. Bachmann is noted for her strident and combative opinions which she shares often with the viewers of right wing talk TV. She befriends only those facts which she judges won’t bite her.

 The editors of the Financial Times are more measured and sedate in their tone, as befits a British financial newspaper.  They admit and weigh facts which might counter their editorial position.  Both have shown support for Joe Barton, a Texas congressman who apologized to the CEO of the British oil company BP for the “shakedown” he received from the Obama administration.  To the casual reader, this might seem like one more tiff in a political cock fight but the disagreement is a deeper one, a fundamental difference in opinion about the authority vested in the Executive branch by the Constitution.

To illustrate the “anti-shakedown” perspective, I’ll quote from the more lucid Financial Times (FT) editorial.  The FT writes “While the US has pulled back from some of its more populist rhetoric, the decision to extract $20bn from BP was unwise.  Congressman Joe Barton may have been lambasted for describing the deal as a “shakedown” but he was close to the mark.  Much as one may sympathise with the plight of gulf fisherman, and wish them to be recompensed swiftly, it was unnecessary to bully BP into coughing up without the protection of the normal judicial process.  This smacks of confiscation.  It will stoke up similar populist demands in future crises and it make it hard for the US – the biggest owner of foreign assets in the world – to resist other nations’ extrajudicial imposts.”

The police functions of the executive branch are well established in the Constitution of this country.  A corporation like BP is an agent of capital, a legal shell for the accumulation and deployment of capital, and it is well within the legal authority granted by the Constitution to the President to escrow or arrest for a limited time a portion of that capital which the corporation represents.  Although BP has publicly admitted responsibility for the damages, it demonstrated an obstructionist attitude when it initially refused to release video of the blow out so that an independent assessment of potential damage could be made.  BP has demonstrated a similar obstructionism in paying what appear to be legitimate claims.  BP’s capital will have its day in court.  The $20bn of BP’s capital has not been expropriated by the US but is in escrow, a financial safekeeping familiar to anyone who has closed on a house.

Social Security Returns

Here’s a toast to all the suckers out there, you and me.  Our government “borrows” the social security payments we make during a lifetime and promises to pay the money back with interest.  A thirty year old loans the government money for 30+ years at an average interest rate of 3%, at which time the government starts paying the money back in the form of monthly Social Security checks.

Here’s the sucker part.  The U.S. Treasury also sells 30 year bonds to banks, other governments and financial institutions.  The historical data for the 30 year bond shows that while interest rates are extremely low now, since 1977 the Treasury has paid an average of 7.54% to borrow money using these bonds.  For the slightly younger set, the average has been 5.93% since 1990. Social Security has become a way for our government to cheaply borrow money from us at interest rates far below market.

Advocates for the current system of Social Security cite the 2008 financial crisis and stock market drop as a rallying cry against any privatization of Social Security.  “Can you imagine what would have happened to our retirement funds if we had privatized Social Security?”, they ask.  For those nearing retirement, the 3% we have been earning on our Social Security taxes is 40% of what our government has paid out to banks and other governments to borrow money for this long a period.  As you can see, we have already taken a 60% hit to our retirement funds because it is built into the Social Security system.  If our government borrowed money from us at market rates, monthly social security checks would be more than double what they are now.  Hey sucker, this is why most high schools only offer a semester or two in economics.  Keep the suckers stupid. 

The Apologizer

In a Congressional hearing this week, Joe Barton, a Republican congressman from Texas, apologized to Tony Hayward, the CEO of BP, the company whose well continues to spew oil and gas into the Gulf of Mexico.  Joe felt that the Obama administration had been too hard on BP. 

Will Joe apologize to Jeffrey Skilling, the former CEO of Enron currently serving a 24 year sentence in a suburb of Denver?  Enron collapsed in 2001, wiping out billions of dollars in employee pensions as well as the company’s stock and bonds. Skilling insists he did nothing wrong and perhaps Barton feels that Skilling has received harsh treatment at the hands of government proscecutors.

After Skilling, Joe Barton may apologize to Bernie Madoff, serving a life sentence for bilking investors and charitable organizations out of billions.  Joe may feel that the government was too hard on this old man.

Joe may be previewing the Republican theme for the upcoming November elections:  “Vote Republican.  We kiss ass.”