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Incentives Matter…

Incentives Matter…

Via SchiffGold.com,

Economics 101 – incentives matter.

But politicians often seem to forget this. Or simply ignore…

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This article was originally published by Zero Hedge
Incentives Matter...

Via SchiffGold.com,

Economics 101 – incentives matter.

But politicians often seem to forget this. Or simply ignore it. “Generous” unemployment benefits provide the perfect example. With the US government handing out enhanced unemployment checks, we ended up in a bizarre situation with high unemployment even as job openings hit record levels.

Both President Joe Biden and Treasury Secretary Janet Yellen insisted that the enhanced government unemployment benefits weren’t incentivizing people not to work. In a podcast, Peter Schiff said this notion is absurd.

Only government economists could fail to understand this obvious relationship. There is a preference for leisure over work. People would prefer to have leisure than work. The only reason they give up their leisure to work is because they need the money. Because otherwise, they can’t pay their bills. They can’t pay the rent. They can’t put food on the table. So, even though they would prefer leisure, they have to work. Well, if the government says, ‘No, you don’t have to work. You can have the leisure that you prefer and we’ll replace your lost income. In fact, we will actually give you more money to take a vacation than what you would earn if you gave up that vacation and went back to work.’ How can anybody not realize that there is a link here between these lucrative payments not to work and so many people choosing not to work?”

[ZH: do not show Janet this chart from WolfStreet.com]

Politicians simply don’ have the power to overturn basic economics, no matter how hard they try. As economist Paul Prentice pointed out, you always get more of whatever you incentivize and less of what you disincentivize. “The supplemental unemployment payment does both—it incentivizes people not to work, and simultaneously disincentivizes them from working.”

Prentice lives in Colorado. He pointed out that as of mid-July, total employment in Colorado has yet to return to pre-lockdown levels. Personal income in Colorado has yet to return to pre-lockdown levels. Real GDP in Colorado has yet to return to pre-lockdown levels.

Furthermore, employment and income losses are concentrated among the poor and minorities. The last thing they need is an increased incentive not to work.”

GDP grew by 6.5% in the second quarter, but Peter Schiff called it “fake economic growth.”

We had no legitimate economic growth at all. All we had was people spending money. And one of the reasons that they spent more money.”

Prentice points out that real economic growth requires production. When you incentivize people not to work by giving them money to spend, it creates an illusion of prosperity that is actually undercutting the economy.

When fewer people work and fewer businesses operate at capacity, it is axiomatic that less income is produced. Government payments in lieu of earned income may help some individuals in the short run, but it harms the economy as a whole in the long run. One dollar of supplemental unemployment does not have the same economic impact as one dollar of production-based earned income.”

Unemployment benefits not only rot the foundation out of the economy, in the long run, they harm the very people they were meant to help, as Prentice points out.

Even for those who receive more in unemployment than by working, the short-term money cannot make up for the long-term loss of moving up the employment ladder, achieving seniority, and earning raises. At a sociological level, the loss of earned self-esteem that comes from gainful employment is incalculable. Generational damage will occur from children not observing the social benefits of employed parents.”

Unemployment benefits look good on the surface. That’s why politicians love them. But they come with all kinds of unseen consequences. Prentice sums up the damage done to Colorado’s economy by that state’s enhanced unemployment benefits.

The unintended economic consequences to Colorado of paying people not to work go far beyond the immediate impact of reduced employment. From where will the money come? Taxes on job creators? That harms all Coloradans as fewer jobs will be created. The government printing press? That harms all Coloradans through increased inflation. From Communist China buying more US Treasury debt? That harms all Coloradans by making us more beholden to a country that has shown itself to be a global enemy of freedom.”

You can ignore the laws of economics. But you can’t ignore the consequences of ignoring the laws of economics.

Tyler Durden Sun, 08/22/2021 - 12:10

Economics

Commodities and Cryptos: Oil slumps, Gold rebounds, Bitcoin plunges

Oil Crude prices are sharply lower after Evergrande debt default fears triggered a flight-to-safety that sent the dollar higher.  Evergrande’s woes…

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Oil

Crude prices are sharply lower after Evergrande debt default fears triggered a flight-to-safety that sent the dollar higher.  Evergrande’s woes are threatening the outlook for the world’s second largest economy and making some investors question China’s growth outlook and whether it is safe to invest there.  In addition to risk aversion flows pumping up the dollar, some investors are anticipating further hawkish signals that the Fed will set up a formal November taper announcement on Wednesday. 

Complicating the move in crude prices is the surge to record highs for UK gas futures.  Europe does not have enough gas and the energy problem could intensify if the early weeks of winter are cold. 

The US Gulf of Mexico production continues to recover from hurricane season, with now only 18.3% of offshore production being shut-in.  The oil market will still be heavily in deficit early in winter and if more demand comes that way, energy traders will buy any dip they get with crude prices. 

Gold

Gold’s rout is taking a break as investors run to safety over concerns Evergrande’s debt default concerns could spillover.  Gold got a boost as Treasury yields plunged, with the 10-year yield falling 5.4 basis points to 1.307%. 

Gold’s rally could have been much higher if not for the reports that Senator Manchin may be thinking of suggesting Congress take a “strategic pause” until 2022 before voting on the $3.5 trillion social-spending package.  Considering stocks are about to have their worst day since October, it is very disappointing that gold prices are only up around $10.  Gold may continue to stabilize leading up to the FOMC decision, with the next move likely being further downside.  Gold could struggle until the Fed finally starts tapering asset purchase.  It is then that it may start acting more like an inflation hedge.    

Bitcoin

A retest of the September low came far too easily for Bitcoin.  The fallout from the Evergrande is putting a tremendous dent in risk appetite that is sending everything lower. Cryptocurrencies, despite all the volatility, have been the best performing asset of the year, so it should not surprise Wall Street they are the first asset sold in the beginning of China-driven market selloff.    

Retail traders remain bullish, albeit many have capitulated in locking in some profit.  Some traders are anticipating a short pullback, while some lunatics are readying to buy more after tomorrow’s full moon.    

In El Salvador, President Bukele tweeted “We just bought the dip. 150 new coins!”  El Salvador’s total is now 700 coins and that enthusiasm has yet to be matched by other countries.   

If Bitcoin breaks below the $40,000 level, it could see momentum selling have it eventually return to the $30,000 to $40,000 range that it was in earlier this summer.  

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Economics

Asia’s Largest Insurer Hammered As Investors Sell First, Don’t Bother To Ask Questions

Asia’s Largest Insurer Hammered As Investors Sell First, Don’t Bother To Ask Questions

Few were surprised to see that the crash in Evergrande…

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Asia's Largest Insurer Hammered As Investors Sell First, Don't Bother To Ask Questions

Few were surprised to see that the crash in Evergrande dragged down property names (one among then, Sinic Holdings, crashed 87% in minutes and was halted), banks exposed to the property developer (according to report there are over 120), with the contagion spreading to commodities directly linked to China's property sector (such as Iron Ore which plunged 10%), as well as FX of commodity-heavy countries, one ominous decline was that of Asia Pacific's largest insurer, Ping An (whose name literally and unironically means "safe and well"), which dropped 3%, following a 5% drop on Friday, and hitting a four year low on concerns about its property exposure.

The selling took place even though the company issued a statement Friday saying that its insurance funds have “zero exposure” to Evergrande and other real estate companies “that the market has been paying attention to.” Real estate accounts for about 4.9% of Ping An Insurance’s investments, versus an average 3.2% for peers, according to Bloomberg Intelligence.

“For real estate enterprises that the market has been paying attention to, PA insurance funds have zero exposure, neither equity or debt, including China Evergrande,” Ping An said in a statement as it rushed to reassure investors.

While it may have no exposure, Ping An does have RMB63.1bn or $9.8bn in exposure to Chinese real estate stocks across its RMB3.8TN ($590BN) of insurance funds, and took a $3.2BN hit in the first half of the year after the default of another developer, China Fortune Land Development. The insurer is also head of the creditor committee for China Fortune Land, which specialises in industrial parks in Hebei province and suffered from delayed local government payments. One of its restructuring advisers, Admiralty Harbour Capital, was hired by Evergrande this week.

At a time when any Evergrande counterparties or even rumored counterparties are immediately deemed radioactive, Ping An's plight demonstrates how acute and widespread the selloff could become in China if Beijing fails to intervene.

“I expect a lot of financial institutions could be hit by the worries” about Evergrande, said Zhou Chuanyi, a Singapore-based analyst at Lucror Analytics. "As long as a financial institution has exposure to developers, Evergrande should take quite a significant share of that."

Yet as the market waits for some response official response, hopeful that Beijing will step in, we discussed earlier that China's policymakers have instead sought to crack down on excessive leverage across its vast real estate sector over the past years, which makes up more than a quarter of the economy, imposing a firm threshold known as the "3 Red lines" which developers must adhere to, and which has meant most developers are limit to % or 5% debt growth at best. 

For now it remains unclear how far the contagion will spread, although if Beijing stubbornly refuses to intervene, expect much more pain as capital markets seek to force Beijing's hand by make it unpalatable for the CCP to suffer even more selling which could spark social unrest.

“The price action across several asset classes in Asia today is horrendous due to rising fears over Evergrande and a few other issues, but it could be an overreaction due to all of the market closures,” said Brian Quartarolo, portfolio manager at Pilgrim Partners Asia.

As discussed earlier, Xi faces a tricky balancing act as he tries to reduce property-sector leverage and make housing more affordable without doing too much short-term damage to the financial system and economy. Mounting concerns that he’ll miscalculate are spreading ever-further beyond China-focused property developers and their suppliers.

“It’s what the Chinese would describe as trying to get off a tiger,” said United First Partners research Justin Tang, best summarizing Beijing's lose-lose dilemma.

Tyler Durden Mon, 09/20/2021 - 15:28
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Economics

Summarizing China’s Short Term Economic Outlook

Wells Fargo Economics analyses the extent of the current slowdown, and contemplates the impact on regional economies. Here’s the heat map: Source: McKenna/Guo,…

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Wells Fargo Economics analyses the extent of the current slowdown, and contemplates the impact on regional economies. Here’s the heat map:

Source: McKenna/Guo, “China Economic Gauge and Sensitivity”, Wells Fargo Economics, 20 Sep 2021, Figure 1.

From the report:

Our dashboard (Figure 1) suggests the short-term outlook for China’s economy is indeed deteriorating, consistent with the multiple downward revisions we have made to our GDP forecast over the past few months. Given the signals our gauge is showing, we believe easier monetary policy could be the next major policy move from the PBoC, and another RRR reduction could be imminent as authorities look to offset some of the deceleration.

This report is in line with the Goldman Sachs report (discussed here).

Wells Fargo highlights Singapore, South Korea and Chile as most sensitive to growth developments in China (on the basis of exports). Looking more broadly at “beta’s” of equity returns and currency values as well as export dependence, the list of at risk countries expands to include South Africa, Brazil and Russia as well.

 

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