A bailout has the opposite effect!

Bailouts disintegrate the economy. Companies took on too much debt and did not perform good enough to be profitable. A company would not perform because of an outdated business model, inferior products, bad cost control, etc. In any case they are doing something wrong which makes it uninteresting to let them continue operations. Instead, other companies are performing better, making those companies the ones that attract talent and investments. This is a logical economic process like in nature: “survival of the fittest”. With bankruptcies you would rid yourself of the bad performing companies, which would benefit the economy in the long run. Specializations in which other companies operate are more profitable so there is a shift in activities benefiting the economy. Giving companies bailout money would mean giving them money for being an inferior organization that is not suited for the current economy. Giving a company more money does not mean the company will suddenly be fit for the economic environment. It is nothing but a short-term fix, without addressing underlying problems.

A government is meant to govern a country, and not meant to play for an investor that will see negative returns. Any logical investor would refuse the idea to invest in a company that is about to go bankrupt. Besides, it is your taxes they invest with. I could simply refer to the failed Chrysler bail out in the 80s. No bailout can benefit the economy over the long-run. Unfortunately, politicians still don’t get that.

Economic freedom: working where you please

Recently news is reporting on the refusal of the United States government to give work visas to foreigners. I believe people should get more freedom on where they would like to work. This is because of shortages in human resources in many countries and to promote economic efficiency.

In the United States only, there are more than 3 million job vacancies that are unlikely to be filled in anytime soon. Other countries are facing the same problem, a problem that could be overcome by bringing in foreign talent. If there are job vacancies that can’t be filled, economic growth will have a limitation.

Some jobs could better be filled by foreigners. For example in The Netherlands, who would like to do cleaning work nowadays? Or paint your house? And if there are people that do it, they charge way too much for it. This forces people to “do-it-themselves” and being limited in the time they spent on other things (including work). Bring in a foreigner and he or she will do a good job for a decent price, saving the locals money and/or time. The foreigner that did the work would also be better off then when doing the same work in his or her home country. The economy will benefit because the local people will have more time for highly-skilled work and the foreigner is contributing by being part of the work force and spending part or all his money in The Netherlands.

Now it won’t be a good idea to be giving work visas to everyone that enters a country. But step by step a country could let more people in to fill vacancies, which will lead to an overall higher level of economic prosperity.

Pig Flu in China

Just for the record: the pig flu has already been in Mainland China for a while. Doctors and hospitals here know about it, but it is still kept secret by the authorities.

How the Central Bank can fight a recession

In this post I would like to show you how a countries’ Central Bank can fight a recession.

Many believe a fiscal stimulus would be the thing to go for, but as I have shown in my first article about the US stimulus this has proven not to be the right answer to a recession. It was the Chicago School of Business economist Milton Friedman that proved the Central Bank is the one and only mechanism to fight a recession. Even though he won the Nobel Prize in the 1960s, governments tend to neglect his findings.

The Central Bank could use the following tools to get an economy back on its feet:

• Lower interest rates
• Decrease in banks’ reserve ratio
• Increase money supply

Lower interest rates

The economy can benefit from an increase in peoples’ consumption. Lower interest rates will both discourage saving and encourage borrowing. It would discourage saving because the returns on those savings would be very low, and it would encourage borrowing because the interest rate on borrowing is very low. Both would in their turn trigger spending.

Interest rates should not be below zero. This is because such a rate would make money worth more when someone is not saving it, effectively making spending a stupidity.

Decrease in banks’ reserve ratio

The Central Bank could decrease the banks’ reserve ratio regulation. When banks can keep lower reserves, they have more money available to lend. Companies in their turn would have more chance of landing the loans needed for their development.

Too low reserve ratios would be risky though, since they would not protect the bank from market fluctuations. When there is a “run” on the bank or many people take out their deposits the bank would not have enough liquidity to give back its deposits. Banks would then go bust, calling Lehman Brothers as an example.

In China banks have the benefit of having a shitload in deposits. Even though many loans are non-performing, there are enough deposits to cover them. Still, instead of their American counterparts these banks see their problems shifted towards the future.

Increase of money supply

When increasing the supply of money the Central Bank simply “creates” (supplies) more money that is brought into the market in the form of cheap loans to financial institutions.

A Central Bank should not “create” (supply) too much more money. When too much money gets into the market serious inflation could dispose of the money’s value. Decreasing the real value of money would then be the opposite of the effect that the Central Bank is aiming for.

Conclusion

I hope you now get an idea on how a government can best fight a recession. Hence, no taxpayers’ money would be spent to build sandcastles. ;-)