TrivCap Economy Almanac

Greek Crisis Monitor

2012-05-27T15:00:08Z

Interesting charts regarding the European situation from Bloomberg BRIEF:

Click to enlarge:

˜˜˜

Source:
Bloomberg BRIEF
by Niraj Shah, Bloomberg Economist
May 24, 2012

April New Home Sales: The Hype vs. The Reality

2012-05-27T14:51:00Z

Check out some of the headlines a few day ago following new home sales reports.

Detroit Free Press: April new-home sales increase 3.3%, pointing to recovery

"Americans bought more new homes last month, the latest evidence that the U.S. housing market could be starting to recover."

Fox Business News: US New-Home Sales Up 3.3% In April; Prices Rise In March

"Sales of newly built homes in the U.S. grew faster than expected in April and home prices posted a solid gain the prior month, adding to the increasing momentum for the long-struggling sector."

New York Times: New-Home Sales Climbed in April, Building Optimism

"The spring home-selling season got off to a strong start in April, the Commerce Department said Wednesday, with rising sales and prices providing evidence that a housing market recovery was gaining some traction."

San Francisco Chronicle: New-home sales rise in April

"Americans bought more new homes last month, the latest evidence that the U.S. housing market could be starting to recover."

The Hype vs. The Reality

After all that hype, let's take a look at the reality. To eliminate seasonal fluctuations, the best comparison is the current month vs. the same month in previous years.

Here is a chart from reader Tim Wallace that shows what I mean.

click on chart for sharper image

Being the ever-optimist, I happen to believe that home sales are in a bottoming process. However, a bottoming process and a "recovery" are not the same thing. A claim that a recovery is underway needs to be backed up with facts, not hype.

There is little evidence of a recovery.

We have heard similar recovery stories (all false), dozens if not hundreds of times. All were based on wishful thinking, gimmicks, temporary fluctuations, and shoddy reporting similar to what you see above.

Supposedly the "recovery gains traction". Pray tell what "recovery" is that?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

What will happen to Greece?

2012-05-27T14:32:47Z

Nouriel Roubini : The risk is that you'll have Greece...

[[ This is a content summary only. Visit my website : www.nourielroubini.blogspot.com for full story! ]]

Roubini : The austerity fatigue is spreading to France and the Netherlands

2012-05-27T14:19:41Z

Nouriel Roubini : You have on one side austerity fatigue,...

[[ This is a content summary only. Visit my website : www.nourielroubini.blogspot.com for full story! ]]

Roubini Economic Outlook for Europe

2012-05-27T14:10:26Z

Nouriel Roubini : The European recession is getting worse....

[[ This is a content summary only. Visit my website : www.nourielroubini.blogspot.com for full story! ]]

Guest Post: Facebook SOBS Or… “Don’t Cry for Me Avaritia”

2012-05-27T14:04:28Z

Submitted by Ben Tanosborn

Facebook SOBS or… “Don’t Cry for Me Avaritia”

The sobs we have in mind are neither short, audible gasps of breath of those who are invested in Facebook stock, nor are they intended as a bastardly reference of those who, inside and/or outside of the Company, put together and took to fruition this much-awaited I.P.O. (Initial Public Offering). These mnemonic sobs we have in mind represent simply Shares-Of-Bubbly-Stock. For that’s what those 421.2 million shares of Facebook were: Overpriced, bubbly stock.

In Christian ethics – although not in exclusivity – there are a number of vices, most often referred to as the seven deadly or capital sins, which depict the antithetical side of virtue. Of the seven, avarice or greed (Avaritia in Latin) comes at the head of the list for me since its practice affects the wellbeing of others, and not just those who profess it.

And it was this lady, Avaritia, who walked the Red Carpet a week ago, Friday, May 18, in a glittering dress that reminded us of what rapacious capitalism is all about, as shares of Facebook started trading past their scheduled time in the NASDAQ. A very surprising opening with a larger (25 percent) number of shares issued for trade, at a much higher (52 percent) price… or a “more aggressive” price in Wall Street IPO parlance.

On the 32nd anniversary of Mount Saint Helen’s eruption, some people expected a price eruption during the stock’s first day of trading, given past behavior with other IPO’s and Facebook’s pre-eminence in the circle of social media networks. From a 10 to a 30 percent jump in value in its inaugural trading day was not atypical talk. But the shares offered at $38 fizzled, inching just one percent at the close… and offering bad vibes for the trading days ahead, which immediately brought in Avaritia’s favorite board game for these occasions: the blame game.

This game is already in play in Wall Street and beyond, and promises to be one of long and costly duration with a worthy cast of characters, all one-percenters. Roll the dice and point the finger: Was it the NASDAQ’s fault? Or was it Mark Zuckerberg and his top management who dropped the ball? [What the heck is that young multi-billionaire hiding under that hoodie, some are asking… contempt for the dumb middle class?!] What about Morgan Stanley, the lead banker on the IPO? And why exclude the two other giants, JP Morgan and Goldman Sachs? And to be fair we must not forget the analysts, and those who claim selective dissemination of material information critical to the evaluation of risk-taking in the purchase of Facebook stock. To make it even more interesting, here we are five days into the game and attorneys have decided to join in with class action litigation which could bring the stakes well into the 10-figure category. Mount Saint Helen’s 1980-eruption brought damage of $2.75 billion in today’s dollars… could Facebook’s fiasco bring financial damages of similar magnitude? This blame board game could certainly become another classic like that game most of us grew up with: monopoly.

There are those who contend that at $38 per share Facebook is a bargain, and that a market capitalization of $100 billion will soon multiply by 2, 3, 4… or more. After all, that very selective group of 3,500 nerds-par-excellence who run the show from Silicon Valley have it all; and that includes the key to super-monetize 900 million users, perhaps a few hundred million more, to the tune of $5, $10 maybe $20 per user… bringing revenues, and after-tax profit, to levels that even Steve Jobs would not have had in his wildest, most creative dreams.

But, of course, there are those realists – count me among them – who think that the world we live in poses a number of constraints on emotional, unrestrained optimism. Time is immutable, and our days still contain 24 hours. In a slow-growing world economy with limited resources, the advertising dollar might shift but not grow much. Yet, innovation will remain rampant, competition constantly knocking at the door. And we mustn’t dismiss disloyalty as a human trait, even among that elite group of 3,500 who could be tempted by that gal who cohabits with Predatory Capitalism, Avaritia.

Bottom line to this Facebook fiasco is clear and simple: Wall Street, once again, treated shares of stock as Casino-land chips with values way outside of the fundamentals’ realm and the likes of companies such as Google. What should have been an offering price in the $10 to $12 range was absurdly made public at $38 per share.
“Don’t cry for me Avaritia… The truth is I never left you.”

A Power Vacuum is Killing the Eurozone

2012-05-27T12:06:33Z

That is the title of my latest column, here is one excerpt:

We thus face the danger that the euro, the world’s No. 2 reserve currency, could implode. Such an event wouldn’t be just another depreciation or collapse of a currency peg; instead, it would mean that one of the world’s major economic units doesn’t work as currently constituted.

We are realizing just how much international economic order depends on the role of a dominant country — sometimes known as a hegemon — that sets clear rules and accepts some responsibility for the consequences. For historical reasons, Germany isn’t up to playing the role formerly held by Britain and, to some extent, still held today by the United States. (But when it comes to the euro zone, the United States is on the sidelines.)

THERE appears to be a power vacuum, and the implications are alarming. We may be entering a new world where international cooperative arrangements, in environmental areas as well as finance, are commonly recognized as impossible. If the core European nations cannot coordinate effectively, what can we expect in dealings with China, Russia and other countries that have less of a common background and understanding?

I consider this a big deal, even beyond its immediate macroeconomic ramifications, which of course are a big deal too.

There is a second, more technical point too:

…some of the banking systems in the periphery nations may be too broken for monetary policy to take hold. Imagine the European Central Bank trying to infuse new money and credit into Spain, while bank deposits move quickly to Germany, Switzerland and other safer places. Again, why would anyone want to keep money in the bank of a fiscally troubled nation? That loss of confidence will not be easily repaired.

At this point, probably euro-wide deposit insurance is needed before monetary policy can help in Greece or Spain (that wasn’t true two years ago). Yet creating a eurozone-guaranteed safe asset in those economies ultimately boils down to the eurobond idea, which of course the Germans are reluctant to do.

Here is a related Op-Ed from Mark Mazower, focusing on the theme of a collapse of European and international cooperation. Here is a good article on why plans for tighter political union in Europe will not easily work. There is talk the UK will cut off migrants if the euro collapses. Switzerland may introduce capital controls. What else? I do not see this turning out well.

The Leprechaun Factor

2012-05-27T13:58:23Z

Irish myths and UK policy.

Celebrity Illusion

2012-05-27T13:00:03Z

Shocking illusion – Pretty celebrities turn ugly!

Prepare to be freaked out, again. You’ve seen “Pretty girls turn ugly” now try the celebrity version!

It won second place in the Best Illusion of the Year Contest, 2012!

It’s a new scientific finding called the “Flashed Face Distortion Effect”. You can read more about it here

http://mbthompson.com/research

and here

http://www.perceptionweb.com/abstract.cgi?id=p6968

Tangen, J. M., Murphy, S. C., & Thompson, M. B. (2011). Flashed face distortion effect: Grotesque faces from relative spaces. Perception, 40, 628-630 doi:10.1068/p6968

Hat tip http://boingboing.net/2012/05/22/weird-illusion-causes-faces-to.html

The ‘war on coal’ is a myth

2012-05-27T12:38:40Z

Photo by Nick Humphries.

A version of this post originally appeared on Climate Progress.

Big polluters and their congressional allies have created a new straw man to knock down with the invention of the so-called “war on coal.” It is a multimillion-dollar disinformation campaign funded by Big Coal polluters to protect their profits and distract Americans from the deadly effects of air pollution on public health.

However, with the number of coal jobs in key coal states actually on the rise since 2009, it’s more like peacetime prosperity than war in coal country. The War on Coal is nothing more than a new shiny object, designed by big polluters to distract Americans from the real war — the polluters’ attacks on their health — and the truth.

Coal companies and dirty utilities claim that long-overdue requirements to reduce mercury, arsenic, smog, acid rain, and carbon pollution from power plants will kill jobs. In West Virginia, however, coal mining employment was higher in 2011 than at any time over the last 17 years. Federal jobs statistics also show modest coal mining job growth in coal states like Virginia and Pennsylvania.

In West Virginia, a recent report from the nonpartisan West Virginia Center for Budget and Policy showed coal mining jobs are actually rising, with 1,500 new coal jobs added since 2009. In Pennsylvania, Energy Information Administration (EIA) data shows a 2.3 percent increase in coal-related jobs. And in Virginia, EIA data shows a 6.7 percent increase in coal mining employment from 2009 to 2010.

The Environmental Protection Agency (EPA) has promulgated or proposed new clean air standards for smog, acid rain, mercury, air toxics, and carbon pollution that will save lives, create jobs, and protect public health. For example, the Mercury and Air Toxics Standard [PDF] alone could prevent up to 11,000 premature deaths, 130,000 asthma incidents, and 540,000 lost work days every year. This would provide at least $59 billion in economic benefits.

The Economic Policy Institute (EPI) projects that the mercury standard will actually have a “positive net impact on overall employment — likely leading to the net creation of 84,500 jobs between now and 2015.” The jobs created by the standard, however, would not just be limited to certain industrial sectors. EPI’s study projects that “8,000 jobs would be gained in the utility industry itself,” along with the over 80,500 jobs that would be created to build pollution control equipment. While dirty coal companies claim that the mercury standard will cause massive unemployment, EPI notes that “only 10,600 jobs would be displaced due to higher energy costs.” Richard Morgenstern, a former Reagan and Clinton EPA official, predicts that the new standard will have “no net impact” on employment.

EPA predicts that its proposed carbon pollution standard [PDF] for new power plants will have no impact on employment or existing coal plants. In fact, the standard simply complements existing market factors, as the EPA points out:

Because this standard is in line with current industry investment patterns, this proposed standard is not expected to have notable costs and is not projected to impact electricity prices or reliability.

So what is happening to King Coal? The real culprit is the low price for natural gas. A February 2012 analysis of coal plant retirements by the Analysis Group [PDF] found that coal plant declines resulted from basic changes in market forces:

The sharp decline in natural gas prices, the rising cost of coal, and reduced demand for electricity are all contributing factors in the decisions to retire some … coal-fired generating units. These trends started well before EPA issued its new air pollution standards.

Coal industry executives themselves say that low natural gas prices, a warm winter, and a sluggish economy are the primary reasons for coal mining worker layoffs. The Bipartisan Policy Center (BPC) noted [PDF] that industry-commissioned doomsday projections of economic losses from EPA standards are vastly exaggerated by including unrelated regulations and worst-case scenarios. BPC found that “several investment analysts were conducted prior to EPA’s [rule] proposal and made worst case estimates about what EPA was likely to require.”

Coal-generated electricity is relatively inexpensive because the public pays for the external costs from burning coal. These expensive harms include premature deaths, asthma attacks, respiratory ailments, lost productivity, and the impacts of climate change. The National Academy of Sciences estimates that burning coal costs $62 billion annually due to premature deaths, more respiratory ailments, and lost work days.

The American Coalition for Clean Coal Electricity — a front group for coal companies and dirty utilities — plans to spend at least $40 million in ads and lobbying to convince Congress to block these vital public health standards. Fortunately, voters won’t be fooled by this attempt to distract them from the real public health impacts of dangerous air pollution. We understand that this isn’t a war on coal. It’s a war on us.

Filed under: Article, Coal

A Closer Look at Chinese Purchases of US Treasuries

2012-05-27T12:30:04Z

Reuters – U.S. lets China bypass Wall Street for Treasury orders
China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury’s first-ever direct relationship with a foreign government, according to documents viewed by Reuters. The relationship means the People’s Bank of China buys U.S. debt using a different method than any other central bank in the world. The other central banks, including the Bank of Japan, which has a large appetite for Treasuries, place orders for U.S. debt with major Wall Street banks designated by the government as primary dealers. Those dealers then bid on their behalf at Treasury auctions. China, which holds $1.17 trillion in U.S. Treasuries, still buys some Treasuries through primary dealers, but since June 2011, that route hasn’t been necessary. The documents viewed by Reuters show the U.S. Treasury Department has given the People’s Bank of China a direct computer link to its auction system, which the Chinese first used to buy two-year notes in late June 2011. China can now participate in auctions without placing bids through primary dealers. If it wants to sell, however, it still has to go through the market.

Comment

This story helps explain a lot in regards to some of the official outflows shown seen in the chart below since 2011. If Chinese officials are able to completely bypass the primary dealers when purchasing Treasuries, then a large chunk of these transactions will never be recorded in the TIC data.
While it is impossible to say how large an effect this rule change has had on the official purchases shown below, it is probably no coincidence that the two largest monthly outflows ever came within a month or two of the June 2011 change. As the story states, while China can bypass the dealers for purchases, it must still sell through them. This could put a downward bias on the way in which the Treasury reports these purchases going forward.

Click to enlarge:

Source:
Bianco Research
Charts Of The Week
May 23, 2012

Spending Big at the Ag Department

2012-05-27T12:17:19Z

Last weekend I wrote about legislation sponsored by House Republican “Buck” McKeon (R.Ca) who is the head of the powerful Armed Services Committee. Buck had proposed a spending plan for the military that maintains spending on guns and ammo at the highest level in the nation's history. The proposal's spending levels are above those set by congress in last year’s Budget Control Act. I gave the Republicans gas for coming up with such a ludicrous plan. Many readers read concluded that I was just shilling for the Democrats. In an effort at that “fair and balanced” thing, l will hack up a Democratic proposal on spending this weekend.

Senate Democrat, Debbie Stabenow (MI), head of the powerful Agricultural Committee, has come forward with her plan for spending by the US Agricultural Department (USDA). The legislation (S.3240) would put spending by the good old USAD at $969 billion over the next nine years.

A budget hasn't been approved in 1,100 days, so it’s difficult to compare the proposed spending with what has happened the past few years at the USDA. The last time a budget was seriously considered, the 2013-22 spending was $997b. So it looks like cuts of $23b have been proposed this time around. But that is just for show. The bill has supplementary provisions for “credit assistance,” “education,” and “trade promotion”. The add ons come to an extra $28B over the next decade, so what has been offered up by Senator Stabenow has no cuts at all.

It’s not that I want to cut the USDA budget to the bone. After all, they are doing such a good job of protecting the country’s food supply, right? Well, actually, they aren’t doing so well at that. The CDC spells it out:

48 million folks got sick from what they ate last year, 128k ended up in the hospital, 3,000 ended up in the morgue. This holiday weekend some 400k folks will be up puking their guts out, 3,000 will end up in a hospital, and 25 folks won’t make it till Tuesday. So if you’re planning a BBQ to celebrate Memorial Day, watch out for the rancid lamb, the salmonella salad, and the Norovirus burgers.

The real job at the USDA is protecting the farmers. You would think that the unending recession would put those hard working folks in the fields in distress. Actually that is not the case. Farmers have been doing better than the bankers the past four years. Total revenues are up 15%%, net income has risen by 8% ($92b). (link)

The real estate crisis has crushed many Americans, but not the farmers. Arable land is at the highest value in history. Prices were up 20% in both 2010 and 2012. In the past ten-years, farm land values have more than doubled:

Senator Stabenow is probably doing what she’s supposed to be doing. As the head of the Senate’s Ag Committee she’s supposed to be sucking up taxpayer money and seeing that it’s spent on the farmers she’s supposed to represent. Her home state, Michigan, is a modest player in agriculture. It’s ranked 22th, but farming is still a success story in the “Mitten.”

In Michigan, 41% of all farmers are getting checks from the USDA. Of those farmers on the dole, the top 10% are getting 71% of the handouts. (Link) No doubt this has helped the good Senator’s fund raising efforts; she’s been around for twelve years.

It being an election year, we will have more than the usual amount of political speeches this Memorial Day. Republicans and Democrats will be out there pushing the “debt/deficit” hot buttons. They will be selling a message of austerity and a return to some level of sanity with deficits. But when you look at what the Reds and Blues actually do when they are back in D.C. drafting legislation, you'll see that that both sides of the aisle are proposing spending on their pet projects. Neither side has any interest in cutting spending. What they will be saying on the stump this weekend will sound nice, but actually they are all lying.

Note:

Don’t get too riled up about the spending bills from Buck or Diane. There is not a chance in hell that any of this will pass. We will go another 400 days without a budget. Someday we will pay a price for this.

Sunday Morning Reads

2012-05-27T11:43:10Z

A few longer reads for a cloudy NY Sunday morning:

• IPO stands for ‘it’s probably overpriced’ (Marketwatch)
• The Hunch, the Pounce and the Kill (NYT)
• Buying a Piece of America: Why Chinese Shoppers Love U.S. Brands (The Atlantic) see also The Year That Changed Retailing Forever (Bloomberg)
• An Alternative to Hedge-Fund Alternatives (Barron’s)
• Health Bargain Hunters Use Websites to Cut Doctor Bills (Bloomberg)
• Martin Wolf: Lunch with the FT: Paul Krugman (FT.com)
• Playboy goes West (Prospect Mag)
• How Banks Bought the Tea Party: Cash Transforms Populist Insurgents To Reliable Vote For Financial Industry (Think Progress)
• The myth of English as a global language (Times Literary Supplement)
• The wrong Carlos: how Texas sent an innocent man to his death (The Guardian)

What are you reading over brunch?

JPM Morgan’s Risk Strategy

Links, 5/27/12

2012-05-27T10:55:51Z

Stray dog completes 1700km China race BBC

Let’s Talk Turkey About Greece Ian Welsh. Could Russia use a warm water port? Da?

A Very-Useful Chart To Prepare You For The Next Greece Election Chart from Credit Suisse Business Insider

Harsh Language from Lagarde: “IMF Has No Intention of Softening Terms”; From Head of Deutsche Bank: “Greece is a Failed Corrupt State”; Purposely Inflammatory Statements to Force Greece Exit Mish

Germany Walks Away From Greece Testosterone Pit. Reading the Lagarde tea leaves.

Beware hidden costs as banks eye ‘Grexit’ Gillian Tett. Party like it’s 2007…

Europe’s biggest fear: A run they cannot stop Schumpeter, Economist (RS)

Hard cash for tough times FT

Drug money saved banks in global crisis, claims UN advisor Guardian. Oldie but goodie!

Gentlemen prefer bonds

COSCO Seeks Gov’t Funds after Huge Losses, Sources Say Caixin. China’s biggest state-owned shipping firm.

J.P. Morgan replaces prime brokerage chief: report Reuters

Bank Regulators Under Scrutiny in JPMorgan Loss Times

JPMorgan: Jamie Dimon and the horse he fell off Jack and Suzy Welch. Yeah, but what about the horse he rode in on?

Former Lloyds head of fraud and security Jessica Harper charged over £2.5m fraud Telegraph (RS)

Lunch with the FT: Paul Krugman. Give the Booker Prize to the Maastricht Treaty!

Reddit’s Alexis Ohanian And Activists Aim To Build A “Bat-Signal For The Internet” Forbes

Economics Is Not Math The Institute for New Economic Thinking

Humbler horizons Free exchange, Economist. The new normal…

PG&E Violated Pipeline Safety Rules, Investigators Say WSJ

Killings, cancer, corruption and Azerbaijan: Eurovision in the Islamic Republic of BP Greg Palast

From Baku, With Love (And Intolerance) Slate

You can identify poor neighborhoods from space Grist

Next to U.S. firing range in Afghanistan, a village of victims WaPo

Cable theft delays Proastiakos [commuter rail] services Ekathimerini

Vatican in chaos after pope’s butler arrested for leaks, bank president ousted for negligence WaPo

The Imperial Mind Glenn Greenwald. Fake vaccines for Pakistani childen [all so Obama can whack OBL in an election year --lambert]

Egyptians ask why a Mubarak holdover like Shafik did so well McClatchy

Protest in the streets despite downpour and tornado warning, 1 arrest Montreal OpenFile

What are Lawn Removal Parties?

Night Thoughts in Hagsgate Archdruid Report

Antidote du jour (hat tip reader Lidia):

More Notes on the Division of Labour (Part Two)

2012-05-27T10:02:00Z

Smith’s example was not unique, nor was he the first to identify pin making. He asserts at the start of the paragraph “from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker”.

The paragraph in Wealth Of Nations also follows part of what is written in his manuscript known as the “Early Draft”, which is among some of Smith’s manuscripts that were written 12 years before WN (1776) and is cited in his “Lectures On Jurisprudence” (1762-3) 1983, Oxford University Press. The manuscripts were found in Glasgow University archives by W. R. Scott, author of Adam Smith as Student and Professor, Glasgow. Peaucelle shows that the manuscript details the ‘eighteen operations’ are in identical arithmetic to the productivity improvements that are found in the multi-volume, Encylopedie, Paris (1755) by Diderot and D’Alembert’s, and similarly in Chambers Cyclopedia (4th edition, 1741). What Smith reported arithmetically relies on these 18th-century sources.

Smith’s Early Draft is interesting because it shows the arithmetic of a similar example and clarifies the divisions of the work among the operators:

“The division of labour, by which each individual confines himself to a particular branch of business, can alone account for that superior opulence which takes place in civilized societies, and which, notwithstanding the inequality of property, extends itself to the lowest member of the community. Let us consider the effects of this division of labour as it takes place in some particular manufactures, and we shall from thence more easily be enabled to explain in what manner it operates in the general business of society. Thus, to give a very frivolous instance, if all the parts of a pin were to be made by one man, if the same person was to dig the mettal out of the mine, seperate it from the ore, forge it, split it into small rods, then spin these rods into wire, and last of all make that wire into pins, a man perhaps could with his utmost industry scarce make a pin in a year. The price of a pin, therefore, must in this case at least have been equal to the maintenance of a man for a year. Let this be supposed equal to six pounds sterling, a miserable allowance for a person of so much ingenuity, the price of a single pin must have been six pounds sterling. Supposing that the wire was furnished to him ready made, as at present, even in this case, I imagine, one man could with his utmost dilligence scarce make twenty pins in a day, which, allowing three hundred working days in the year, will amount to six thousand pins in the year; an immense increase! His maintainance for a day therefore must be charged upon those twenty pins. Let us suppose this maintainance equal to ten pence, a most liberal allowance compared with the foregoing, there must be a half penny of this charged upon each pin over and above the price of the wire and the profite of the merchant, which would make the price of a pin about a penny: a price which appears as nothing compared with the foregoing, but which is still extravagant compared with that which actually takes place. For the pin–maker, in preparing this small superfluity, very properly takes care to divide the labour among a great number of persons. One man straightens the wire, another cuts it, a third points it, a fourth grinds it at the top for receiving the head, three or four people are employed about making the head, to put it on is the business of a particular person, to guild the pins is the occupation of another, it is even a trade by itself to put them in the paper. When this small operation is in this manner divided among about eighteen persons, these eighteen will perhaps among them make upwards of thirty six thousand pins in a day. Each person, therefore, making an eighteenth part of thirty six thousand pins, may be considered as making two thousand pins a day, and supposing three hundred working days in the year, each person may be considered as making six hundred thousand pins in the year, that is, each person produces six hundred thousand times the quantity of work which he was capable of producing when he had the whole machinery and materials to provide for himself, as upon the first supposition; and one hundred times the quantity of work which he was capable of producing when the wire was afforded him ready made, as upon the second. The yearly maintainance, therefore, of each person is to be charged not upon one pin as by the first supposition, nor upon six thousand as by the second, but upon six hundred thousand pins. The master of the work, therefore, can both afford to increase the wages of the labourer, and yet sell the commodity at a vastly lower rate than before: and pins instead of being sold at six pounds a piece as upon the first supposition, or at twelve pence a dozen as upon the second, are commonly sold at several dozens for a half penny.”

I have long argued that Smith’s ‘pin factory’ example in chapter 1 of Wealth Of Nations, which while interesting, is by no means the last word on the importance of the division of labour to commercial societies. I suggest that the implications of Smith’s further example, a few pages on, of the production of the common labourer’s woolen coat is extremely, if not more, important for our understanding of how market societies raise productivity, improve existing products, creates new products (Schumpeter’s ‘perennial gale of creative destruction’), and lower unit prices and raise real wages, which in turn improve living standards. We know this happened in Europe and North America, and is happening now in China, India, and Brazil.

Smith shows in his woolen coat example, the long supply chains of productive labourers involved in producing such a simple basic product. I recommend that you read it, not just as an illustration of the national and international division of labour, but also the inter-sectoral division of labour (to use a modern designation) across all the sub-operations in the products produced elsewhere by distant, unconnected masters and operators, who probably do not know of those who might eventually use what they produce to produce other products, beyond the knowledge of earlier and later inter-mediate links in long production chains.

In my “Adam Smith: a moral philosopher and his political economy”, 2010, 2nd edition, Palgrave Macmillan, ‘Great Thinkers in Economics’ series, I present Table, 6.1, ‘Manufacture of a Common Labourer’s Coat’ page 58, which shows 17 direct trades who manufacture the coats, 4 indirect trades in the carrier business, 5 trade supplying tools, 19 indirect trades supplying the skills used in manufactures related to the coat output, also mentioned by Smith in his woolen coat example. I also recommend consulting A. Young’s 1928 paper published in The Economic Journal, where he brings Smith’s example up-to-date and shows its implications of increasing, NOT decreasing, returns that dominated marginal analysis in the 19th and 20th centuries, and is still taught in Economics 101 today.

Smith’s example of a simple, basic product represents the remarkable division of labour needed to produce a simple coat in the 18th century, the implications of which are not drawn out in the ‘pins’ example, but which is about as far as most students, and their tutors, go through Wealth Of Nations on this critically important subject.

Brad Delong, however, as I regularly mention, gives to his students details of the income gap of Yanomamo, stone-age, hunter-gatherers along the Orinoco River in South America compared with modern New Yorkers along the Hudson River. That gap was $90 for the Yanomamo to $36,000 for the New Yorkers. The difference in product availability (using notional Stock Keeping Units), the gap is highlighted by several hundred products for the Yanomamo, compared to ‘tens of billions’ for New Yorkers. This significant difference indicates that while the Yanomamo hunter-gatherer economy provides what is available solely from within the tribal territory, the New York tribe depends on the availability of billions of products in long, complex, and inter-dependent product and service chains, where participants do not know nor need to know those involved more than a link or two along the supply chains.

Understanding how product and service chains function, both autonomously and under state regulations, is a focus of modern political economy, for which Smith’s insights are of lasting value.

One insight is that separate productivity and product changes all along the linked, but disparate, supply chains alters costs and product availabilities for all those businesses involved, who know, and do not need to know, the input and output businesses only a few links away, and this is accomplished without any overall supervisory management control. This is the real power of markets in raising living standards for millions of consumers.

The difference between Adam Smith and Karl Marx boils down to fact that Smith understood the power of freer markets to manage the apparent anarchy of complex, linked supply chains better than any known alternatives of the Sovereign and his ministers (or today, Commissars and bureaucrats) making billions of decisions a day (clearly beyond them), while Marx believed that state officials could manage complex, linked supply chains better than freer markets. The Soviet experiment showed they couldn’t.

Hence, Smith’s philosophy can be summed for a modern complex economy as “markets wherever possible, state intervention where necessary”.

More Notes on the Division Of Labour (Part One)

2012-05-27T09:55:00Z

A correspondent questions Adam Smith’s arithmetic in his well-known example of the ‘pin factory’, in particular about the “astonishing” production feat of conducting thousands of operations needed to produce “12 pounds of pins a day” (Wealth Of Nations).

Smith’s life-long habit of visiting places of manufacturing and commerce are attested to by Ian Ross, in his definitive biography, The Life of Adam Smith, 2nd edition, 2011, Oxford University Press (and mentioned by his first biographer, Dugald Stewart, 1793). There were several nail factories or nail producing parts of general workshops in the Kirkcaldy area, where Smith grew up before he went to Glasgow University in 1737. His mother’s family was well connected in the town and in their farms nearby, and in Kirkcaldy’s busy little estuary fishing port, where his father had been the Customs Officer. He said he visited a small nail factory that employed 10 men, but does not say where. He certainly visited other places of work, including a tanning factory in Glasgow and the Carron Iron Works, near Falkirk, that made ordnance for the navy, run by his friend Dr John Roebuck. Smith took Edmund Burke to see it.

Heavy machinery was water driven. Several large machines used in pin making are illustrated in the French Encylopedie, a uniquely interesting source of information about early 18-century pin-manufacture, and many other forms of manufacture.

Crude 18th-century Pins were inches long to suit everyday clothes, not as per modern tiny pins. They were cut from brass wire. The men did not do the 18 operations; they did one operation, and some did more than one related operation. Output per hour was different in some of the operations (cutting the brass wire, or example, compared to preparing the heads) and time was therefore available to move between other tasks and share in other operations too.

The arithmetic shares are proportioned not by what each man did to complete a single set of pins, but by the notional per capita share of the total number measured by the weight of a given output (credible comment has been offered questioning Smith’s ‘strange’ use of measuring output by weight).

One man spent 12 hours, six days a week, cutting the thin wires, presumably using a guillotine. Could he cut the wire into 4,000 pin-sized pieces per hour? Possibly yes, if he operated a treadle machine (like on old manual sewing machines) with a metal jig to cut lengths of wire from a large spool of wire, and a bucket to catch them. “When they exerted themselves” (no Health and Safety regulations, no Employment Protection laws), higher output was possible. Having worked in factories as a youngster (during my long eight ’gap’ years), I remain amazed at the manual dexterity demonstrated by experienced male and female employees doing repetitive work. Boring work, yes, but it paid well, in relative terms.

Until recently, from a reader’s correspondence, I have not seen any scepticism about the figures given by Adam Smith which he quoted, apparently, from the French Encyclopédie, ou dictionnaire raisonné des sciences, des arts et des métiers, edited by Denis Diderot (1713-84) and Jean le Rond d'Alembert (1717 – 29) 1783, which was perhaps inspired by the earlier English Cyclopedia (1725) and the political situation in France. A young French economist, whom I have met, J. L. L. Peaucelle, assessed the ‘pin factory’ example, in a credible forensic account of Smith’s French sources for the numerical data: ‘Adam Smith’s use of multiple references for his pin making examples’, European Journal of The History of Economic Thought, vol. 13, no. 4, pp 480-512. Peaucelle has identified Smith’s (unacknowledged) sources for the pin-factory data.

I reproduce the relevant passage from Wealth Of Nations, Book 1, chapter 1, with relevant emphasis in bold:

‘To take an example, therefore, from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations.”

Satyajit Das: The Great Pretender – India’s Economic Past & Future, Part 1: “India Shining”

2012-05-27T08:00:45Z

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk (2011). Jointly posted with Roubini Global Economics

In the aftermath of the global financial crisis, optimists hoped that the BRIC (Brazil Russia India China) would drive the global economic engine. But China’s economic growth has slowed to its lowest rate in three years. Brazil’s economic growth has fallen from around 7.5% to under 3%. Russia’s economy is heavily dependent on oil and energy prices. India also has stalled. This 3-part paper looks at the development and future trajectory of the “I” in the “BRIC”. The first part looks at the background to India’s recent rise.

Despite the world and its citizens earnest desires, India seems destined to never fulfil its economic potential.

Hindu Growth…

In the 30 years following independence, India achieved a modest rate of economic growth of 3-4% per annum and incomes improved by 1-2% each year. This was the “Hindu rate of growth”; a derogatory term coined by economist Raj Krishna to draw attention to India’s poor performance compared to other Asian economies.

India’s poor economic performance was not driven by religious factors but the half-baked socialist policies of its leaders. India’s first Prime Minister Jawaharlal Nehru admired the Soviet Union, becoming one of the few followers of its ultimately unsuccessful economic policies.

The economy was administered by a central Planning Commission, through a series of 5 year plans, modelled on a similar process used in the Soviet system. Major businesses were State owned and operated. Private firms required official licenses, their operations being strictly controlled by the regulatory regime, rather than free-market demand.

The Indian economy was closed to the world. The principal policy was import substitution and a reliance on internal markets for development. India’s currency, the rupee, was inconvertible. A system of high tariffs and import licensing restricted foreign imports.

This was the era of the “License Raj”, a reference to the elaborate licenses, regulations and stultifying red tape required to operate businesses in India. Consents from up to 80 government agencies were required before private companies could produce goods and services. Under the terms of a license, the government regulated all aspects of operations, including production levels, prices, investment policy and financing. The government restricted businesses from laying off workers or closing factories.

At the time of its independence, India was a stable relatively open economy with high rates of economic growth and significant international trade and investment. By the 1980s, three decades of poor economic management meant India had low growth rates, was closed to trade and investment and prone to instability.

Desperate Revolution…

In the 1980s, India made tepid efforts at reform. By the early 1990s, the country was in dire straits. A combination of international factors (high oil prices) and domestic failures (public finance problems and political turmoil) left the nation effectively bankrupt. Remaining foreign exchange reserves were only sufficient to cover payments for less than 2 weeks. The Reserve Bank of India (“RBI”), the country’s central bank, was forced to airlift 47 tonnes of gold to the Bank of England as humiliating collateral for a loan, while it waited for assistance from the International Monetary Fund.

On 24 July 1991, Manmohan Singh, the current Prime Minister and then Minister of Finance, told the Indian parliament that “the room for manoeuvre, to live on borrowed money or time, does not exist any more. ” Mr. Singh succeeded in passing a reformist budget, devalued the rupee and opened the door to foreign investment in certain industries. He also reduced the tariffs and eased the system of licenses.

Mr. Singh ended his speech to parliament quoting French author Victor Hugo: “No power on earth can stop an idea whose time has come.” Within the next decade, the idea of India as a “major economic power in the world” seemed within reach.

Innians’ Success…

The actions of 1991 paved the way for a period of expansion and relative prosperity for India. Over the last two decades, India’s economy has almost quadrupled in size, growing at an average rate of about 7% per annum and over 9% from 2005 to 2007 – Chinese rates of growth.

The key drivers of growth included a large population which created a substantial domestic market, high savings rates which financed investment and an educated, English speaking workforce which was under employed. De-regulation allowed a latent commercialism, suppressed during the license raj days, to prosper.

While the reforms of 1991 and the nation’s natural resources were crucial, India was lucky. The opening up of India coincided with the rise of business process outsourcing (“BPO”). Developed nations commenced outsourcing basic support services and information technology (“IT”) to cheaper foreign providers. The need to re-code computer software to avoid the Y2K or Millennium Bug and support the Internet boom provided a significant boost to the India IT industry.

The external environment was favourable, characterised by strong global growth underpinned by the “peace dividend” from the end of the Cold War. The rise of emerging markets, especially the BRIC (Brazil, Russia, India, and China) nations, helped sustain a flow of investment into India. A weak Indian Rupee assisted growth, allowing Indian exporters to compete and encouraged foreign capital.

India also avoided the worst of the 1997/ 1998 Asian monetary crisis and the 2007/ 2008 global financial crisis. The high level of regulation of the financial system, including extensive capital controls, and domestic focus of the banking system protected the Indian economy.

The last factor which assisted growth was the large Indian Diaspora. The lost decades had resulted in a flight of human capital to developed economies. Beginning in the 1990s, there was a steady flow back of these skills, augmented by overseas education and experience, into the Indian economy.

Non-resident Indians (“NRIs”) were important in supplying capital. Indians working overseas, both in technical or more modest positions especially in the Middle East remitted more than $20 billion a year to India, the most of any country in the world. Successful expatriate Indian businessmen and professionals provided business connections which helped Indian business.

India and Indian had arrived on the global economic stage. Activist Arundhuti Roy satirised President George Bush’s favourable view of “Innians”: “…I like rish Innians…they are obedient and brainy…they provide additional brainpower to help solve problems… Innia is important as a market for US products…one billion people to exploit…” Domestic Innians now shared the success of their immigrant countrymen.

India Shining…

India’s GDP rose by 43% between 2007 and 2012, slightly less that China which increased by 56% but much fast than developed economies which grew only 2%.

Economists rushed to out do each other in spruiking the India story. Forecasts of growth rates of 8.5% per annum or even higher became commonplace. Morgan Stanley, the US investment bank, predicted that India’s growth would reach 9-10%, outpacing China’s pedestrian 8% within three to five years. In a report titled India: Better Off Than Most Others, Macquarie Capital, argued that India’s traditional weaknesses -low exports, a predominantly state-owned financial system lightly integrated to foreign markets, sluggish export growth because of bureaucracy and the large domestic agricultural sector producing only for domestic consumption- were now strengths underpinning growth.

Indian leaders moved between international forums, basking in their new found status and power. Indian businessman made trophy purchases of business overseas, financed by debt. At the World Economic Forum at Davos, representatives of the Indian government and business announced that India could grow in its sleep.

India’s economic hubris was exemplified by a marketing slogan, first popularised by the then-ruling Bharatiya Janata Party (“BJP”) for the 2004 Indian general elections – “India Shining”.

While India’s economic progress was evident, the benefits were narrowly based. A large portion of the population continued to struggle with low living standards or poverty, lacking access to basic amenities such as sufficient nutrition, clean water, sanitation as well as basic education and health services. The basis of the growth was also not balanced.

After years without a good news story, the Indian media focused on the nation’s “greatnesses”, relying on extraneous facts. The fact that the market capitalization of State Bank of India surpassed that of Citigroup was cheered. The press celebrated the first Indian edition of Harper’s Bazaar, which featured a crystal-studded cover, the introduction by Rolls-Royce of its new Phantom Coupe in India and the opening of a new BMW showroom in Delhi.

Billionaires Shining…

India now had nearly 7% of the world’s 1,000 or so billionaires, despite its GDP being only 2% of world GDP. The total wealth of Indian billionaires is more than 20% of the nation’s GDP, about the same as Russia but higher than China where it was less than 3%.

Mukesh Ambani, head of Indian based petrochemical giant Reliance Industries, and the fifth richest man in the world with a net worth of around $50 billion, used his wealth to build Antilia, a $2 billion house within sight of some of Mumbai’s slums. The lavish property was dubbed India 21^st century Taj Mahal.

Controversial from the outset, Mukesh Ambani and his family reportedly have not moved into their new completed home, preferring to move between Antilia and their previous residence, Sea Wind. The press speculated that the building did not comply with principle of Vaastu, an Indian tradition similar to Feng Shui, the ancient Chinese system of aesthetics. Antilia’s shape was supposed to move energy beneficially through the building to improve the wealth and well being of residents. But it may violate of a key principle of Vastu. The building’s Eastern side does not receive ample morning light. It is more open to the West, which exposes it to negative energy.

Hindus believe that living in a building not built according to Vastu principles brings bad luck. In recent times, Mukesh Ambani’s empire has been adversely affected by a bitter fight with his brother Anil as well as legal and regulatory problems with some of his businesses.

Like Ambani, India’s bad luck may be just beginning, as growth slows rapidly and her problems mount.

Prime Minister Singh recently conceded that “it would be wrong to conclude that India is now unshakeably set on a process of rapid growth.” It was a contrast to Home Minister P. Chidambaram earlier optimism: “Thanks to our domestic consumption and demand, India and a handful of other countries, despite world gloom, are a shining example of a resilient economy”.

Links for 2012-05-27

2012-05-27T07:06:00Z

Gaffe? What Gaffe? Greek Polls? All Over the Place

2012-05-27T05:50:00Z

I am amused by the Financial Times headline Tsipras shrugs off gaffe about Hollande.

When Evangelos Venizelos, the Greek socialist leader, boarded a 7.30am flight to Paris on Tuesday, only his closest aides knew he was on the way to a hastily arranged meeting with the French president.

The last-minute invitation to meet François Hollande came after Alexis Tsipras, the leader of the radical left coalition Syriza and Greece’s new political star, caused a stir in Paris with a typically blunt put-down of the French leader.

Mr Tsipras, whose Syriza party surged to second place in Greece’s May 6 general election, advised that Mr Hollande stick to moderate policies, or risk being abandoned by voters as “Hollan-dreou”.

The reference to George Papandreou, the Greek socialist premier forced to resign after rowing back on pre-election promises and accepting the harsh bailout terms imposed by international creditors, was “very poorly timed”, said a Greek diplomat, noting that French parliamentary elections are due on June 10.

Syriza denied that the comments constituted a gaffe, and pointed out that members of the French far-left had used the “Hollan-dreou” phrase before Mr Tsipras.

However, the jokey comments at the expense of France’s socialist president may have also clouded the young Greek leader’s visit to Berlin, the next stage of his trip. There, the left-of-centre German politicians who met with Mr Tsipras insisted that Greece must implement reforms agreed under the bailout if it wanted to stay in the eurozone, refusing to countenance Syriza’s demand for a renegotiation of the deal.

Gaffe? What Gaffe?

For his statement to be a gaffe, Tsipras would have to care. Instead, he is laughing to the voting booth. Being snubbed by Merkel and and Hollande plays into his hands as I suggested earlier today.

Some recent polls have shown New Democracy back into the lead but the Financial Times continues with ...

Yet the firebrand leader’s travails abroad did not appear to have dented his popularity at home. While polls suggest that Mr Tsipras is viewed as the politician most responsible for blocking the formation last week of a coalition government – an outcome that more than 60 per cent of Greeks would have preferred to a fresh election – Syriza nevertheless increased its support by two points this week, to 30 per cent.

The Financial Times article is as of May 25, 2012 11:21 pm. So, if Tsipras made a gaffe, pray tell where is it?

Note the irony of Hollande refusing to meet with Tsipras, just as Merkel refused to meet with Hollande until Hollande defeated Sarkozy.

Greek Polls? All Over the Place

Bear in mind there are numerous conflicting polls. Reuters reports Greek pro-bailout conservatives regain lead.

Greece's conservatives have regained an opinion poll lead that would allow the formation of a pro-bailout government committed to keeping the country in the euro zone, a batch of new surveys showed on Saturday.

Greece was forced to call repeat elections for June 17 after a May 6 vote left parliament divided evenly between groups of parties that support and oppose the austerity conditions attached to a 130 billion euro bailout agreed with the European Union and International Monetary Fund in March.

Polls up to Saturday had showed pro- and anti-bailout parties running neck-and-neck ahead of the vote which could determine the country's future in the single currency.

Five polls published in the weekend press showed the conservative New Democracy party, which supports the bailout, with a lead of between 0.5 and 5.7 points over the anti-bailout leftist SYRIZA party - though analysts said the race was still too close to call.

I suspect but cannot prove the poll cited by the Financial Times is more accurate. Reuters continues ...

FRAGILE LEAD

Analysts said New Democracy's lead was precarious. "These polls show that people got scared from SYRIZA's lead in previous surveys," said political analyst John Loulis.

"This is still a very tight race. New Democracy has a small advantage but whoever called them favorites would be dead wrong," he added.

SYRIZA, led by its charismatic 37-year old leader Alexis Tsipras, is doing particularly well among the young who are particularly hit by unemployment, pollster Pulse said.

New Democracy, by contrast, had a big lead among the over-60s, Pulse said.

In a bid to woo anti-bailout voters, conservative leader Samaras said on Saturday Greece should be given more time to comply with a bailout term to generate about 11.5 billion euros in savings over the next two years.

"All new spending cuts ... should take place over four years, not two," he was quoted as saying by Real News.

Greece's bailout deal allows for a possible relaxation of the country's bailout targets if its recession worsens.

Greece's new government will have to act fast. Without new bailout funds, Athens may run out of cash by end of June, newspaper To Vima reported, citing a memo compiled by former Prime Minister Lucas Papademos on May 11.

"From June 20, the government's available cash will cross negative territory to the tune of 1 billion euros," the document said, confirming earlier reports by finance ministry officials that Greece might run out cash by the end of June.

Given the highly inflammatory statements of Lagarde regarding no renegotiation of terms (please see Harsh Language from Lagarde: "IMF Has No Intention of Softening Terms"; From Head of Deutsche Bank: "Greece is a Failed Corrupt State"; Purposely Inflammatory Statements to Force Greece Exit), New Democracy leader Samaras is disingenuous at best in his call to renegotiate the terms of the bailout.

I believe Greek voters will see through Samaras' lies, preferring the "no bailout" message of Tsipras.

Regardless, intense fear-mongering by the New Democrats, Pasok, Merkel, and Hollande is likely. Some of that will be counterproductive.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

War document: General William Tecumseh Sherman to the Mayor and Councilmen of Atlanta

2012-05-27T04:55:17Z

By lambert strether

For Memorial Day Weekend, I thought I’d curate a few documents on war. Here’s the first:

HEADQUARTERS MILITARY DIVISION of the MISSISSIPPI in the FIELD
Atlanta, Georgia,

James M. Calhoun, Mayor,
E.E. Rawson and S.C. Wells, representing City Council of Atlanta.

Gentleman:

I have your letter of the 11th, in the nature of a petition to revoke my orders removing all the inhabitants from Atlanta. I have read it carefully, and give full credit to your statements of distress that will be occasioned, and yet shall not revoke my orders, because they were not designed to meet the humanities of the cause, but to prepare for the future struggles in which millions of good people outside of Atlanta have a deep interest. We must have peace, not only at Atlanta, but in all America. To secure this, we must stop the war that now desolates our once happy and favored country. To stop war, we must defeat the rebel armies which are arrayed against the laws and Constitution that all must respect and obey. To defeat those armies, we must prepare the way to reach them in their recesses, provided with the arms and instruments which enable us to accomplish our purpose. Now, I know the vindictive nature of our enemy, that we may have many years of military operations from this quarter; and, therefore, deem it wise and prudent to prepare in time. The use of Atlanta for warlike purposes in inconsistent with its character as a home for families. There will be no manufacturers, commerce, or agriculture here, for the maintenance of families, and sooner or later want will compel the inhabitants to go. Why not go now, when all the arrangements are completed for the transfer, instead of waiting till the plunging shot of contending armies will renew the scenes of the past month? Of course, I do not apprehend any such things at this moment, but you do not suppose this army will be here until the war is over. I cannot discuss this subject with you fairly, because I cannot impart to you what we propose to do, but I assert that our military plans make it necessary for the inhabitants to go away, and I can only renew my offer of services to make their exodus in any direction as easy and comfortable as possible.

You cannot qualify war in harsher terms than I will. War is cruelty, and you cannot refine it; and those who brought war into our country deserve all the curses and maledictions a people can pour out. I know I had no hand in making this war, and I know I will make more sacrifices to-day than any of you to secure peace. But you cannot have peace and a division of our country. If the United States submits to a division now, it will not stop, but will go on until we reap the fate of Mexico, which is eternal war. The United States does and must assert its authority, wherever it once had power; for, if it relaxes one bit to pressure, it is gone, and I believe that such is the national feeling. This feeling assumes various shapes, but always comes back to that of Union. Once admit the Union, once more acknowledge the authority of the national Government, and, instead of devoting your houses and streets and roads to the dread uses of war, I and this army become at once your protectors and supporters, shielding you from danger, let it come from what quarter it may. I know that a few individuals cannot resist a torrent of error and passion, such as swept the South into rebellion, but you can point out, so that we may know those who desire a government, and those who insist on war and its desolation.

You might as well appeal against the thunder-storm as against these terrible hardships of war. They are inevitable, and the only way the people of Atlanta can hope once more to live in peace and quiet at home, is to stop the war, which can only be done by admitting that it began in error and is perpetuated in pride.

We don’t want your Negroes, or your horses, or your lands, or any thing you have, but we do want and will have a just obedience to the laws of the United States. That we will have, and if it involved the destruction of your improvements, we cannot help it.

You have heretofore read public sentiment in your newspapers, that live by falsehood and excitement; and the quicker you seek for truth in other quarters, the better. I repeat then that, bu the original compact of government, the United States had certain rights in Georgia, which have never been relinquished and never will be; that the South began the war by seizing forts, arsenals, mints, custom-houses, etc., etc., long before Mr. Lincoln was installed, and before the South had one jot or title of provocation. I myself have seen in Missouri, Kentucky, Tennessee, and Mississippi, hundreds and thousands of women and children fleeing from your armies and desperadoes, hungry and with bleeding feet. In Memphis, Vicksburg, and Mississippi, we fed thousands and thousands of the families of rebel soldiers left on our hands, and whom we could not see starve. Now that war comes to you, you feel very different. You deprecate its horrors, but did not feel them when you sent car-loads of soldiers and ammunition, and moulded shells and shot, to carry war into Kentucky and Tennessee, to desolate the homes of hundreds and thousands of good people who only asked to live in peace at their old homes, and under the Government of their inheritance. But these comparisons are idle. I want peace, and believe it can only be reached through union and war, and I will ever conduct war with a view to perfect an early success.

But, my dear sirs, when peace does come, you may call on me for any thing. Then will I share with you the last cracker, and watch with you to shield your homes and families against danger from every quarter.

Now you must go, and take with you the old and feeble, feed and nurse them, and build for them, in more quiet places, proper habitations to shield them against the weather until the mad passions of men cool down, and allow the Union and peace once more to settle over your old homes in Atlanta. Yours in haste,

W.T. Sherman, Major-General commanding

Readers, thoughts?

NOTE I’m no Civil War scholar, and information on the web seems scanty and sometimes tendentious; but see here on the general destruction of Sherman’s march to the sea, and here for some background for the letter.