You are browsing the archive for 2013 May 03.

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Is the Fed Getting Too Much Credit for This Rally?

May 3, 2013 in Economics

By Alan Reynolds

Alan Reynolds

If the U.S. economy is so bad, why has the stock market been so good? A commonplace answer is that the Fed pushed stocks too high by pushing bond yields too low. In fact, that is why many worry that …

There are only two ways the Fed’s bond-buying spree could have pushed stock prices up, and neither is consistent with reality. One way the Fed might have raised stocks would be through improving fundamentals — namely, earnings. Unsurprisingly, stocks hit a new high after earnings hit a new high. Earnings per share for the S&P 500 last peaked near $22 in mid-2007, and then fell below zero at the end of 2008 before rebounding to about $25 by the end of March. But it would be problematic to give the Fed much credit for the cyclical rebound in earnings, considering the weakness of the recovery.

Earnings per share can rise because of stock buybacks or cost-cutting, after all, which have nothing to do with monetary or fiscal “stimulus.” Cheap credit encourages cost-cutting by investing in labor-saving machinery, but that aggravates unemployment. Lower interest rates surely boosted profits of leveraged corporations. But the flatter yield curve (e.g., “operation twist”) squeezed bank margins, while near-zero returns reduced the interest income of cash-rich tech firms. Lower interest rates likewise helped indebted consumers, but had the opposite effect on the incomes of seniors and other prudent savers.

There are only two ways the Fed’s bond-buying spree could have pushed stock prices up, and neither is consistent with reality.”

In short, the net effects of quantitative easing on corporate earnings appear ambiguous at best. Yet the only other way Fed policies could have lifted stock prices would be by raising the ratio of stock prices to earnings — the price-earnings multiple. Before 2009, it would have been perfectly reasonable to expect any Fed-induced drop in bond yields to be reflected in a higher p-e multiple. Stock prices mirror the discounted present value of future earnings, which usually leads investors to bid up stock prices whenever longer-term interest rates fall. This is why it makes no sense to worry that the recent p-e ratio of about 18 on the S&P 500 is slightly higher than the long-term average of 15 without taking into account that yields of 1.8% on 10-year Treasury bonds are immensely lower than the average of 5.5%.

Let’s consider how …read more

Source: OP-EDS

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PAUL: Stemming the flow of wasted foreign aid

May 3, 2013 in Politics & Elections

There are many examples of waste, theft and misuse of our military aid to countries such as Egypt and Pakistan. Much of this misuse has been recorded by the State Department. We have laws as part of the Arms Export Control Act that require President Obama to report to Congress violations by foreign countries of the conditions of their aid. Theft of funds or equipment, or the misuse of defense articles, would qualify in this regard.
If a substantial violation is discovered, that country can be deemed ineligible for further U.S. military aid. To my knowledge, this has never actually occurred. Still, the abuse and misuse continues, as does American taxpayer dollars flowing to countries that behave in this fashion.
Foreign aid continues even when substantial violations by various countries are regularly uncovered. During Secretary of State John F. Kerry’s testimony before the Senate Foreign Relations Committee recently, he pledged to investigate any instances of waste and even theft of foreign aid. I was glad to hear this.
There’s a problem, however. The details of these violations remain classified. We know these violations are occurring; we just aren’t allowed to know by whom, in what country and the nature of the violations.
How are we supposed to investigate misuse of foreign aid when we aren’t allowed to know what violations have occurred? How can we examine millions – or billions – of dollars wasted, when that waste is kept secret? How can we decide if foreign governments are up to no good with our tax dollars when our own government regularly ignores or covers up any wrongdoing?
The administration once promised transparency, but nations such as Egypt and Pakistan now regularly receive billions of our dollars with no reasonable amount of oversight or enforceable conditions. At a time when Americans are watching debt pile up back home at astronomical levels, Washington continues to send money to countries that don’t seem to respect us, much less appreciate our generous financial gestures.
Part of the problem is that the State Department has not had an inspector general in more than five years. This position is specifically designed to ferret out wasteful programs and instances of misused or stolen program funds. The House Committee on Foreign Affairs sent Mr. Kerry a letter in February asking that the secretary appoint someone …read more

Source: RAND PAUL

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Great interview of David Stockman

May 3, 2013 in Economics

By Mark Thornton

David Stockman is interviewed here on the Austro-friendly Power Trading Radio by John O’Donnell.

Reservations are required for the David Stockman book signing event in New York on May 21st.

…read more

Source: MISES INSTITUTE

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EPA Trying to Confuse Public on Impact of Keystone Pipeline

May 3, 2013 in Economics

By Paul C. "Chip" Knappenberger

Paul C. “Chip” Knappenberger

The U.S. Environmental Protection Agency recently got in a rather public spat with the U.S. Department of State over the proposed Keystone XL pipeline project. Apart from the irregularity of one Cabinet agency attacking another, the episode was a boondoggle for the EPA, which came out looking both petty and unscientific.

In a letter to the State Department, the EPA contends that the State Department (which has the ultimate say in the whether or not the pipeline gets the green light) did not accurately assess the magnitude of the carbon dioxide emissions that would result from the burning of the 830,000 barrels of oil the pipeline would transport each day.

It’s important to point out that a barrel of oil extracted from Canada’s tar sands produces about 17 percent more carbon dioxide emissions than the average barrel of oil refined in the United States. However, that extra 17 percent does not come from the oil itself, but from the energy-intensive manner in which it is mined. This emissions premium will almost certainly shrink over time as new technologies are developed to more efficiently extract the oil.

The recent spat with the State Dept. was a boondoggle for the EPA, which came out looking both petty and unscientific.”

The concern is how much of this extra carbon dioxide will find its way into the atmosphere because of the pipeline. The State Department concludes that the tar sands oil will come to market whether or not Keystone XL is ever built, meaning the pipeline would result in a minimal production of carbon dioxide that otherwise would not have occurred.

The EPA, on the other hand, argues that absent the pipeline, the oil will largely remain in the ground. Therefore, building the pipeline will cause the extraction of oil, with the end result being the emission of an extra 18.7 million metric tons of carbon dioxide per year.

That sounds like a lot. But herein lies the EPA’s prevarication. Typically, when gauging “climate impacts,” as the EPA claims is its “focus” in the letter, emissions are put into a computer model to determine how they would actually impact the climate. Taking that extra step isn’t hard. The EPA didn’t do it. In fact, climate models are designed precisely to provide information about how emissions affect the climate, and are the primary source of projections of future global warming resulting from …read more

Source: OP-EDS

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Another Libertarian Case for An Appropriate Ethical Model for Business

May 3, 2013 in Economics

By John P. Cochran

Joseph Salerno’s recent post on The Libertarian Case for Corporate Social Responsibility reminded me of a similar argument about a free market based ethic for business by Richard W. Wilcke in the Independent Review (2004).

While I served as dean of business at Metro State, we invited Richard in for a presentation of his thoughts on an anti-crony capitalism/anti-mercantilism business ethic. The lecture was well attended and well received by students with lots of good questions. Not so much so by business faculty.

For those interested here is the abstract and a link.

The Abstract:

Economist Milton Friedman drew the wrath of anti-market business ethicists for his controversial 1970 essay “The Social Responsibility of Business Is to Increase Its Profits.” Business leaders seeking an ethical standard consistent with the free market should look elsewhere, however, because Friedman’s essay seems to exculpate a practice antithetical to the free market—corporate lobbying for special government favors.

“An Appropriate Ethical Model for Business and a Critique of Milton Friedman’s Thesis”

…read more

Source: MISES INSTITUTE

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Turning Again to Immigration Reform

May 3, 2013 in Economics

The Senate this coming week will begin amending the bipartisan “Gang of Eight” immigration reform bill. The cornerstones of the proposed legislation are increased border security and a path to legal residency for undocumented migrants, but Cato has long argued that a key component of politically feasible immigration reform has to be increased numbers of guest workers and legal immigrants. “Only a timely, cheap, and lawful way to enter and work in the United States will stanch unauthorized immigration and grow our economy,” argues Cato scholar Alex Nowrasteh.

…read more

Source: CATO HEADLINES

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Armed, Overbearing and Dangerous

May 3, 2013 in Economics

By Ted Galen Carpenter

Ted Galen Carpenter

US military spending is far too excessive for legitimate defense needs

Officials in both the Bush and Obama administrations have argued that China’s military budget is excessive for the country’s legitimate defense needs. But US military spending is vastly greater than that of China or any other country. Indeed, Washington’s military budget for this year, including funding for the war in Afghanistan, is about six times Beijing’s official defense budget. Given that China is located in a region with multiple security concerns while the US neighborhood is extremely stable and peaceful, it would seem that it is US military spending that is excessive for legitimate defense needs.

Such an overcommitment of resources to the military is unhealthy both for the US domestic economic health and for minimizing international conflicts. It places an undue burden on US taxpayers while making other countries uneasy and suspicious.

US military spending is far too excessive for legitimate defense needs.”

A new infographic from the Cato Institute shows just how wildly out of proportion Washington’s military spending is to that of other countries. Perhaps the most striking statistic is that the US now accounts for 44 percent of all global military spending. Put another way, the US spends nearly as much on the military as the rest of the world combined. The outsized nature of such outlays is evident in other ways. Twenty percent of the US federal budget is devoted to military spending, while the average for US’ NATO allies is a mere 3.6 percent. Five percent of US annual GDP is allocated to the military, but for the NATO countries, Japan and China, it is well below 2 percent.

Washington’s exorbitant spending encourages allied countries to free ride on US security exertions and keep their own defense budgets lower than they might be otherwise, thereby freeing up financial resources for domestic priorities. Such a de facto subsidy understandably appeals to both the political leaders and the populations of those allies. However, that subsidy also encourages allied countries, especially the members of the European Union, to neglect security problems in their own region, expecting Washington to take care of them instead. And for nations that have an ambivalent or complicated relationship with the US, the effect of its bloated military spending is even more negative.

Big countries such as China, Russia and India have reason to wonder why US leaders give such …read more

Source: OP-EDS