Good union, bad union.

A lot of discussion has been centered around excessive union demands that end up bankrupting various governments. Some have even declared all unions as evil. I think there can be a line drawn; some unions can be a useful tool of social equilibrium, while others may have no economic or social justification at all. I think private unions can be necessary to ensure that the profits are more fairly shared between the owners and the labour, but for this system to work, some conditions have to be met. Below I list those conditions and show how they often do not apply to public unions.

• Contract negotiation must happen with the employer. This ensures that unions will not be able to extort more than their labour is worth. At some point true business owner would prefer shutting his business down as an alternative to operating at a loss. Public unions, however, negotiate their contracts with other public workers in the government, while the true "business" owner - the taxpayer - is left out of the picture. This often allows public unions to negotiate conditions that could never be sustained in a profitable business.
• Business interests must be somewhat aligned with labour interests. The alignment does not have to be absolute. But if small private business goes bankrupt, workers normally suffer too. For public unions this is generally not so - public money comes in no matter what.
• Business must not be a monopoly. This is self-explanatory, I hope. The unwelcome effects of monopolies are well known in the Economic science. Healthy dose of competition ensures that labour  stays aware of its true market price. Public unions are often operated within a monopoly service, such as school system, and the costs are frequently hidden from both the taxpayers and the users of these services. The results, again, are a distortion of the market and salaries that would never be obtained in a competitive business.

 These three points are my case against many public unions, but not necessarily against private ones.

Understanding the recent dollar strength.

As American economy is breaking down like a 1986 Oldsmobile, some people are wondering why the dollar has been strengthening so much, and whether it is just a weakness in Euro, Yen, etc, that we see.

My opinion - it's real dollar strength, not just euro weakness. But it is very temporary.
Let me explain.

In the last 2 decades, money has been flowing into BRIC, lots of dollars, that were converted to local currencies. In order to keep their currencies down, BRIC started to buy dollars at an ever accelerated rate, now approaching 90$ billion per month.

Now enter financial crisis. As investors realize that their BRIC companies are going to turn into smoking craters and the notoriously corrupt 3rd world government may just confiscate all their money, investors pull out of emerging world.

So what we have is that suddenly many private investors flock back to the political stability of the dollar. At the same time, BRIC continues to buy dollars due to the force of sheer inertia (and they still have trade surplus).

What's important to realize is this whole process is temporary. Private flight cannot continue for too long, and will stop in a few months. Also, Foreign Central Banks can only buy dollars with money made from selling stuff to us. As soon as real consumer depression hits in US, that money flow will wither out and die and central banks will have no choice but to withdraw their dollar.

Now combine this with ever more reckless fiscal policy of US government, and we are setting ourselves up for the dollar crash of epic proportions, some number of months ahead. And by epic I mean, 50% drop within a span of 1 month would not be unrealistic.

JPMorgan: systemic crisis is underway.

So, the zero hour is here. They finally come out and say it how it is, systemic crisis is underway:

A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages," according to the report co-authored by analyst Christopher Flanagan. "We would characterize this situation as a systemic margin call.

It is no longer some blogger or professor, but none other than official JPMorgan Chase report... TAF seems not to be working. Next milestone would be a major bank failure. Let's just hope we will not see any heart failures.