It's Still The Economy, Stupid

2004-11-03T08:30:00.000-08:00

Green voting patterns

In Maryland, my current residence, David Cobb got just 3,229 votes out of two million plus. He was outpolled seven to one by Maria Allwine, the Green candidate for Senate (vs Barbara Mikulski). In six of the eight Maryland house races, there was a Green candidate, who all performed far better than Cobb; most performed better than Allwine. Theresa Dudley got 5% of the vote in Maryland's 4th District. Patsy Allen got 3% in Maryland's 3rd district. Keith Salkowski got 3% in Maryland's 2nd. Greg Hemmingway pulled 3% in Maryland's 7th.

In Oregon, my soon to be residence, Cobb got 4,524 of one and a half million votes. Teresa Keane, the effective Green Party candidate (it does not appear Oregon recognizes the Party on the general ballot), outpolled Cobb 9-1 and got 2% of the popular vote. Greens had a harder time in state legislature races, with all three candidates pulling 1% or less of the vote.

It appears that Greens had far more success in their traditional strongholds than in 2000 in local elections, though their support in the Presidential election completely evaporated. Nationwide, their best success was in Washington DC, not only a heavy Democratic stronghold but one where the wedge issue of statehood is embraced by Greens but much less so by Democrats. Greens won 6 of 12 Advisory Neighborhood Commission seats, pulled 7% in the House delegate race, and almost 10% in the City Council races.

Lesson #1: find good candidates and run them in as many races as possible. Greens had 432 candidates in 2004. They should set a goal of 1,000 for 2008. The ultimate goal should be every race in every election. From personal experience, it feels really good to have several "G" lines on the ballot.

Lesson #2: continue to grab issues neglected by both parties. These include pulling our troops out of Iraq immediately, a single-payer health care system, balanced budget, and local issues. This does not mean only grabbing issues important to the liberal side of the spectrum. Greens have an opportunity to run for such "non-partisan" seats as Secretary of State or Board of Elections where they can paint themselves as the referee between the two major parties.

Lesson #3: go full bore or not at all. Cobb ran an invisible campaign, first saying he was for a "safe states" strategy and then saying he was for campaigning hard in all states. I did not see a single Cobb poster, commercial in any media, or press release of an appearance in Maryland by him or Pat LaMarche. The next Green candidate for President should run like Nader in 2000 or not at all.

Lesson #4: act more like a political party than a tea party. Dissenters in the Democratic Party and the GOP are brought into the fold or removed. They are not allowed to act as a poison toward their party's electoral chances. That Kerry was partly a compromise candidate is probably the biggest reason for his failure to win. There were enough dissatisfied Democrats: the Deaniacs, anti-war Democrats largely with Kucinich, and Nader 2000 voters. They might have been voting for Kerry, but they were not the kind of enthusiastic supporters that drag their roommates to the polls to vote for Kerry. Kerry couldn't embrace the center, and he couldn't embrace the left. Similarly, Nader 2000 voters abandoned Cobb entirely.

Greens need a unified party as soon as possible, certainly before their primaries in 2008. If that means leaving people behind, so be it. In an election like 2004, and 2008 will be more so, your positions have to be clear and dissent is not allowed. Otherwise what is the point of voting for a compromise? They need to treat the party as a serious party, not one that allows a focus on candidates getting thrown in jail protesting voting machines or the war. They need to find their own Karl Rove or Terry McAuliffe and run all races behind this centralized leadership rather than a loose association of state parties. The local leadership can then concentrate on finding candidates and getting on ballots, rather than worrying about information control or running campaigns.

My next post will be on my Green Party blog, launch date TBA. Thanks all who have visited and made comments. Like Poland, you will not be forgotten.

2004-11-03T06:21:00.000-08:00

November 3, 2004

As you can see, a promise from me is about as good as a pledge from the Democrats to "fight for Ohio".

A few thoughts...

1) Bush won fair and square. He won despite an increase in turnout of 12 million voters. The Kerry campaign seems to think that provisional voters will break their way, but it certainly won't be enough in Ohio. They're more likely to pick up a state like New Mexico. There are provisional voters in almost every state. This may make the final vote total closer, but won't change the Electoral College in a meaningful way. Kerry could ask for a recount, but in the age of voting machines with no audit trail, he might as well ask for a highway to Mars.

2) Third-parties bit the big one. Nader got less than 1/2 of 1%. Cobb was outclassed by both Badnarik and Peroutka. In fact, Badnarik almost outpolled Nader, indicating that Democrats accomplished their task of returning nearly all third-party voters to the fold. And they still lost. Cobb ran a horrible campaign and fully deserves to be banished to the nether-regions of the Green Party organization. When you can't get one-third of registered Greens, you just suck. The big four third parties managed 900,000 votes in total, only about a third of what Nader got in 2000.

I still don't regret my decision to vote Green, and I still think third parties have a future. Their work begins today. There's probably only room for one third party to make an impact, and it will depend on establishing their own identity, getting candidates in on every ballot, and grabbing hold of simple issues to contrast themselves with both major parties, particularly the anti-war, anti-interventionist platform. Currently, sad to say, Nader and Badnarik represented this idea better than Cobb. If the Greens can heal the division within the party, get Peter Camejo back into the fold and get Nader's support (it's highly unlikely Ralph will be physically able to run in 2008), they have a chance to regain some relevance. Otherwise, there's very little hope for the Greens in 2008.

3) In this election, everything simply got overwhelmed by the "end times" rhetoric that both the GOP and Democrats used to good effect. Both sides were predicting the end of the world if the other candidate was elected. The reality is that doomsday prophets are never right (if they are, what would it matter). We will survive the next four years of Bush the same as we survived Pierce, Grant, Harding and all the other corrupt, incompetent Presidents we've had. With the focus on "the most important election of our lifetime", both party bases turned out, but third-party voters were even more likely not to want to show up (why, when Kerry and Bush get 12 million more votes?)

4) Maybe in their own mind they have a mandate, but despite picking up four House seats and two Senate seats, the GOP is handicapped from enacting the most radical facets of their plan. Iraq is a mess, and there is simply no way a Pyrrhic victory in Falluja or even capturing Bin Laden is going to provide any relief for the constraints of the budget, the constraint of our overstretched armed forces, the constraint of world opinion, and the constraint of the economy.

There is simply no way to go into Iran without a draft, and we'd pretty much need to have Israel take on Syria. Reducing our current forces in Iraq will allow the resistance to destabilize the situation further. North Korea has nuclear weapons, so we're reduced to negotiations whether we like it or not. Bush could try to pre-emptively take out Iran's nuclear facilities, and might even be able to get away with it. The reason is that both Iran and al-Sistani know the U.S. is overstretched and they are secure as long as they do not take an aggressive role that would invite a U.S. military response. Why provoke it, even if the U.S. cancels the January elections or invades Iranian airspace to conduct an armed attack. The current popular resistance is giving U.S. fits, and further aggression only intensifies it. Better to let the U.S. dig it's own hole, rather than to meet the fate of Al-Sadr's followers.

As far as the budget goes, appropriations for Iraq, Afghanistan and whatever else start from a position of -$500 billion. The U.S. is by far the world's greatest debtor and is currently existing on the kindness of foreign central banks, who maintain demand for U.S. debt and the dollar because the alternative is worse.

The economy is running on the fumes of the housing bubble and overconsumption. For the next four years, the threat to the dollar and interest rates will only grow. Trying to inflate only hastens the dollar's demise, as foreign central banks will offset the inflationary impact with a stronger currency. That's the EU's current policy. Japan is offsetting purchases of U.S. dollars with the retirement of bad debts in its banking system. China is offsetting their purchases by enticing inflows of foreign capital and purchasing companies that produce natural resources. All of these are stopgap solutions that do not correct the longstanding imbalances within and without the U.S. economy.

Bush is going into his second term with the economy threatening to unravel at any time, with the Fed raising interest rates, with huge trade and Federal deficits, and with 54 million Americans detesting him and all he stands for. If Democrats were to offer true resistance, the GOP will be doomed in 2008. What does that mean? This means picking a successor to Daschle in the Senate who will impede every single initiative by the GOP, and fight as dirty and effectively as possible for four years. It means forcing closet Republicans like Zell Miller out of the party.

More importantly, it means using economic muscle instead of political muscle. If 54 million Democrats were to cut their spending by $4000 per year, GDP would contract by 2% immediately. If 54 million Democrats were to double the gas mileage on their vehicles, it would reduce our oil consumption by 15 billion gallons a year. They could also participate by reinsulating their houses, putting in energy efficient windows, adding solar cells, reducing their air-conditioning and heating use. We won't need to fight for oil resources if we stop using them.

The only way for Democrats to have a voice the next four years is to use this power, because they failed at the voting booth. They will need to prove that it is still the economy, stupid. They need to put their money where their mouth is. Otherwise, they simply need to accept they are losers and their campaign for swing voters failed. The swing voters went to Bush. I truly believe that we can remake this country into one the world can be proud of, that we have the power right now to do it. The only question is whether "we" have the motivation.

Update: The General explains it well with fewer words.

2004-10-28T13:37:00.000-07:00

October Surprise

I've been looking for a good topic to go out on and this one finally inspired me. I'm moving back to the West Coast soon and this will be my last post here. I'll resurface on my own blog and won't be called Teddy Salad. I want to concentrate on Green politics and it doesn't really fit in here.

My wife surprised me today by telling me she will vote for George Bush next Tuesday. Since I don't plan on voting for Kerry, and that she's my wife, instead of shouting her down in outrage with a list of Bushie-boy's 101 greatest retard moves, I listened to her logic and it made sense. Not enough to get me to vote for Bush, but at least it made sense, unlike the screaming-banshee idiocy you might see, oh, here.

Her rationale was that as a future small business owner, voting for Bush is in her enlightened self-interest as he will lower (or not raise) her taxes and decrease (or not increase) the regulation of her business vis-a-vis Kerry. She mentioned that even though you can make a case that this is only a perception - a second term for Bush may actually be worse for the small business owner - it is still something Kerry has been unable to refute, so she throws her lot in with the GOP. Even though she's not yet a millionaire, she points out that generally everyone wants to be richer and more important, and though Bush's tax cuts overwhelmingly benefit the top 1%, she could be them someday. Bush wouldn't be an impediment to the process and would ultimately be her benefactor.

The metaphor she used was the first-class passenger on an airplane. When you start flying first class, you no longer identify with the passengers in coach. You feel you worked hard to make enough to enjoy the privileges of first class, and anyone showing sympathy with the coach class is perceived as a threat, because there are only so many first class seats. Whether these feelings are right or wrong is irrelevant. She simply noted that Bush is very effective at using this reaction by saying he will "protect us". What he is actually protecting us from, you can discuss among yourselves. I have my own ideas and, as I said, it does make sense. She noted that she's getting more conservative as she gets older, and I mentioned this was a pretty common phenomenon.

Her other observation was more trenchant. As a new citizen, she still has the perspective of someone outside the U.S. She prefers Bush because he embodies the "Ugly American": ignorant, selfish and mercenary. Kerry might put a more noble face in front of the U.S. but it would have little impact on policy. American foreign policy would still be ugly, interfering and arrogant. It would simply have a less repugnant commander-in-chief. She prefers the leader that would embody the ugly reality, rather than the lie.

Both of us hate lies, and this election has had nothing but lies. Both candidates are painting themselves as something they are not. Bush pretends he cares about us 'Merkans, and Kerry pretends he's not Bush. They lie to us and we lie to ourselves.

The "debate" has focused more on Vietnam than Iraq, and it's interesting that neither candidate can even come clean on the old lies, much less discuss the new ones. They discuss bad decisions already made and irreversible, rather that the real decisions that need to be made in January and beyond. The media pretends this all means something, and talks about momentum more than solutions. Americans, as Mencken observed, are getting what they deserve and getting it good and hard.

My reactions to all this is to vote for Cobb. I otherwise wouldn't vote, so short of a "none of the above" I'll stick with my registered party. If anyone reading this really wants to flame me with the standard "not voting for Kerry is a vote for Bush" crapola, my reply is that I could still vote for Bush, so don't piss me off because I can still change my mind.

None of this is to say I don't want Kerry to win. I think Kerry would be the better President for building the Green Party. He's put himself in an impossible situation and has a very small chance of either coming through on his mildest campaign promises or getting re-elected. He embodies the "no difference between the Republocrats and Dempublicans" idea of Nader perfectly, he comes on the heels of a disasterous Bush term and if he appoints a couple of pro-choice Supreme Court justices, the Democrats won't be able to use threats to Roe vs Wade as ammunition anymore.

Heck, Kerry's term would build all third-party candidates. If the economic situation gets dire enough, you might see an odd merger of Green-Libertarian-Constitution-Independent parties behind some opportunistic candidate promising a balanced budget, non-interventionist foreign policy, and reducing defense spending to pay for health care, welfare and retirement benefits. A lot can happen in four years and I'm no psychic. Even the Red Sox won. I didn't see that coming either.

If Bush does prevail, I still know the world isn't coming to an end. Somehow I survived the first term, and with enough psychedelic drugs and alcohol I'll be able to survive until 2008. Neither candidate will be able to do much with the economy, though Kerry might be able to postpone the economic collapse for a little longer. If I had to be honest, my personal economy has improved more in the last four years than ever before, though that has a lot more to do with getting married and buying a house as the bubble was inflating. My wife and I are looking forward to a new baby and a peaceful life away from DC politics. That's a heck of a lot more important in the grand scheme of things.

Anyway, thanks for putting up with me and my screeds. I wish you all the best. Keep working for a better world and keep smiling. Thanks to Mary Beth for hosting this site and giving me a chance to experience blogging. Peace. Teddy out.

2004-08-26T10:54:00.000-07:00

Income and Poverty Data

The Census Department reports the number of people in poverty increased 1.3 million to 35.9 million. In the same publication, Median Incomes declined 0.1% (the press release considers this "unchanged"). The number of uninsured rose 1.4 million to 44.961 million and the proportion of uninsured rose to 15.6% from 15.2%. Based on the anecdotal evidence and the continuing rise in inflation and health care costs, the same or greater increase should be expected when the 2004 data comes out next year.

Angry Bear has more in-depth analysis and the Carpetbagger muses about the new timing of the release.

2004-08-26T09:03:00.000-07:00

On Government Statistics

Here's a pretty good primer on government economic data and its potential bias. I'd particularly recommend the final paragraphs that deal in more detail with the unemployment and employment data published by the Bureau of Labor Statistics. I hope that further installments in this series come out soon.

A couple of additional notes:

Inflation statistics are the most prone to bias since their manipulation has the greatest effect on other key statistics as well as the greatest effect on government budgets. Both GDP and productivity statistics use inflation statistics as key building blocks for their own data, so downward bias in inflation statistics leads to upward bias in both GDP and productivity statistics.

Economists acquiesce to this bias by accepting that higher prices will lead to substitution from more expensive goods to cheaper alternatives, but not the reverse. They also assume that over time there are quality improvements in goods but not quality reductions.

Having bias does not mean that the statistics are not useful, as long as the bias is consistent. A consistent bias means that marginal changes in the data series are still meaningful. An increase in the over-the-year inflation rate from 1% to 4% still indicates rising inflation, even if the true numbers were 4% and 7% respectively. However, the longer the period of time between data points, the less likely the bias is consistent and the less comparable the data. For example, it's probably no longer useful to compare CPI inflation from the 1960s with the present rate.

Finally, the main reason the BLS establishment survey is "more accurate" than the household survey is due to its benchmark. Each year, the level of the employment series ard adjusted by the census of quarterly unemployment insurance records. The population estimates for the household survey are benchmarked to population control updates from the Census, but the estimates for employment, unemployment and labor force are never benchmarked. State and Local estimates from the household survey actually use establishment survey data and unemployment insurance data as part of the estimation process.

The benchmark revision is published twice a year for U.S. data and once a year for State and Metro Area data and is the indication of how truly accurate the estimates have been. The latest benchmark revision in February 2004 lowered total nonfarm employment by 122,000 or 0.1%.

2004-08-10T07:41:00.000-07:00

Not dead yet.

But swamped by work. Posting will be limited through next week.

2004-08-04T07:36:00.000-07:00

Better writers than I

Sean Corrigan is the best I've read involving Pure Austrian economics. His archives are over at lewrockwell.com.

Matt Taibbi continues to do amazing work over at the New York Press. This week's Press has both "The Liberal Case against John Kerry" as well as "The Conservative Case against George Bush".

2004-08-03T09:23:00.000-07:00

Comments on Kerry's economic plan

The full .pdf text can be found here, and the summary is over at Daily Kos.

Oy. The saddest part of this whole exercise was realizing that it still made sense by globally replacing Kerry/Edwards with Bush/Cheney in the document. Every proposal is essentially revising or reworking existing legislation, most of which was implemented by Bush (war on terror, No Child Left Behind, tax cuts, ad nauseum) . I guess the Democrats must not worry that much about Nader or the whole "no difference between the parties" meme because there is no significance between a Kerry/Edwards and a Bush/Cheney plan in this document.

And before Democrats start screeching about Roe vs. Wade, do a search for "abortion" (instances=0), Roe vs Wade (instances=2, one in passing and another listing the faults of the two Federal judges which Bush already appointed for life to U.S. Circuit Courts) or "right to choose" (instances=3, one is the "right to choose a doctor", the other two are non-specific, the first that the Republicans have eroded the right to choose without any mention of instances or even what we're choosing (our long-distance carrier, paper or plastic, what?!?) , the second that this right to choose, whatever it is, is never taken away).

The top priority is Iraq, and Kerry has no solutions except "building alliances". My experience in building alliances is limited to Civilization II, but even my rudimentary knowledge is enough to know that your ally needs to get something in exchange for cooperation. The three things I think our potential allies will need, we are either unable or unwilling to provide: improvement in the security situation, command over their own armed/peacekeeping forces, and economic stakes in the reconstruction. In lieu of foreign support, the only way to get the 40,000 soldiers Kerry wants is to keep all current military forces on "stop loss" forever, or bring back the draft. This would bring our total forces to 180,000 - less than half of the number Eric Shinseki estimated (and Democrats have used to point out Bush's ineffectiveness) we'd need to effectively police the country.

On economic activity, this plan is nothing but tax cuts, tax breaks, subsidies and investments. There's a bit in there about a balanced budget in four years which must be a typo. Not even Bush was crazy enough to try pull that one. All this stimulus works at cross-purposes with another Kerry priority, reducing our reliance on foreign oil (which of course is the influence on our current policy in the Middle East), because the kind of economic growth it generates, if any, will increase our energy needs to run new manufacturing plants and spend our higher incomes.

On health care, apart from paying through the nose to get more health insurance for kids and seniors, and prescription drug care, there is nothing to reform or change the system, except for tangential affairs such as reforming malpractice insurance - which as a big GOP talking point must be another typo. A lot of budget-busting corporate welfare there.

In short, I haven't heard so many empty promises since I told my wife I'd landscape the back yard. Let me make a few predictions about a Kerry Presidency.

1) We'll probably bring back the military draft. As we don't need that many people, it will probably get bundled into a public service commitment, like a 2-year mandatory term. It will take 6-12 months to train the new recruits and assimilate them into the armed forces. By that time, Iraq might be chaos to the point of being not salvageable, and plan B would be to hold hasty elections and fortify 100,000 soldiers in their bases before some type of Beirut-like retreat. I'd put the odds about 50-50.

2) Kerry will have a divided Congress and spend most of his time fighting over minor legislation. Republicans will take all of 15 seconds to remember they used to like balanced budgets, announce a budget crises and block every single non-pork spending bill. Budget fight will take so much time that there suddenly won't be any time or willingness to pass other legislation, such as undoing Bush damage to environmental laws.

3) The economy will fall into a recession and the bailouts will begin. A number of economists are already fearing a recession starting in early 2005. The Pension Guaranty Corporation is near bankruptcy. Unless the airlines can screw over their pensioners, they're going to dump their whole mess on that agency. The housing bubble will pop and we'll probably have to step in for Fannie and Freddie too, if they don't blow themselves up with derivatives first. Banks now have nearly a third of their funds in home mortgages. We now have a -$5 trillion net investment position with the rest of the world. There is simply no room for any kind of recession, and any resulting bailout would amount to a monetization of large amounts of debt, killing the dollar, raising interest rates and inflation and worsening the crisis.

4) The next president will be extremely unpopular. Bush and Greenspan have set all the dominoes to fall, but they haven't actually begun to collapse yet. The likelyhood of doing so before 2008 is extremely high. Unlike the bubble conditions, where lower interest rates stimulated economic growth, low CPI inflation and asset prices, the anti-bubble conditions will work in reverse. Kerry will have the additional handicap of total animosity from the GOP and its supporters (20% of Americans) at an order of magnitude above Democratic opposition to Bush. It's very difficult to see Kerry achieving any of these goals without alienating either Republicans or his own party or more likely both, and unlike Clinton or Reagan, he doesn't have the "party savior" mantle to help him. Like either Bush, he can only ride on his predecessor's coat-tails while facing restiveness on all sides. It's a recipe for total failure, which is too bad because change is badly needed. Unfortunately, there is no change written in Kerry's Plan for America.

2004-08-03T06:22:00.000-07:00

Summer Sucks
I've lived in the Washington DC area since 1996, and have yet to get used to the summers. Having grown up in San Diego probably spoils me from enjoying any other climate, but living in a former swamp is worse than most places.

This summer is worse than most because not only has it been hotter and more humid than most, but I just got back from a two-week vacation in Oregon where they have no idea what a "heat index" is. Portland had one of the hottest days on record while I was there (104 degrees), and I still found it preferable to a mild day in metro Washington, where you break into a sweat just thinking about walking somewhere.

Then there's the terror alert BS, where an alert means ID checks getting into every building even though this same security looks on passively as I nearly get run over by half a dozen cars crossing the pedestrian walkway on the way to work, after an hour on the Metro, which has no entry safeguards whatsoever, and sits like a duck at every Red Line stop packed with customers and with train doors wide open at every stop because they haven't been able to fix their defective switches for a week now.

I can't help but make a quick cost/benefit analysis and think the whole thing is stupid.

I really didn't want to come back from Oregon.

No, I wasn't energized by the Democratic convention.

I have a (possibly) interesting story about that, as I attended a Kerry meetup at Anzu in Adams Morgan about a week or two before the convention. My observation was that there was very little mixing going on. Even the people hawking books and other campaign material were just talking to each other rather than pushing their wares despite a capacity crowd inches away. Everyone there just seemed to show up, talk to the few people they knew, eat the hors d'oeuvres (which were wholly inadequate, though the calimari was very good) and leave. I think Bill Press was supposed to give a talk, but I left before anything happened. It was more an agglomerative experience than an interactive one, not much different than going out dancing in Adams Morgan on any other evening.

I suppose that's what happens when you're running Anyone But Bush. The only thing that matters is finding the right person and there's very little to talk about once you've decided except to hold pep rallies and raise money until the election. The conversations I overheard were almost entirely complaints about Bush policy rather than discussions about how Kerry's policy will improve matters.

There was no inspiration to break me out of my summer funk. In fact, it made things worse. In particular since it was drizzling when I stepped outside, the kind of summer rain here that actually make you feel scummier than before, because it isn't nearly enough to wash anything clean. It just lifts the dirt off the ground into dirty puddles and nothing dries out very fast afterward. Bleh.

Anyhoo, I suppose I've a few things to catch up with: growth is slower (not surprising), jobs report comes out Friday, budget deficit estimated at $478 billion for 2004, trade deficit will probably approach $550 billion, inflationary pressure continues to build, and stock market going nowhere. The outlook is as dreary as the weather. I'll try to pull myself together and get back to work.

2004-07-16T09:03:00.000-07:00

Retail Sales and Inflation

Retail sales declined 1.1% in June, reversing a revised (downward) 1.4% gain in May. The trend of retail sales growth is downward, which started well before any effect of the Fed's recent interest rate hike. The LA times attributed the decline to energy costs.

The current official savings rate is around 2%. Not counting "imputed rent", that figure is around -5%. The nonfinancial sector added $2.2 trillion in debt between the 1st quarter of 2003 and 2004, which means that around 20% of GDP is being generated by borrowing. Plugging in the numbers, mortgage debt of $7 trillion, an average interest rate of 6%, 2/3 of Americans owning their own homes, and wage income of $5.3 trillion implies that on average, 12% of wage income go to mortgage payments each month. Add in property taxes and principal, and that figure rises to about 20%. Factor out a large chunk of older Americans who own their homes free and clear and the number rises higher still. There is very little room in family budgets to absorb higher consumer prices. At this point, rising prices in one area immediately digs into retail sales elsewhere.

Consumer prices rose 0.3% in June. The bond market is rising solely because this number is less than the 0.6% rise in May, but the year-over-year rise in consumer prices increased to 3.3% in June from 3.0% in May, 2.3% in April, and 1.5% in March. That doesn't look like an inflation threat that is diminishing to me. I suspect the bond market reaction is more speculative in nature (lots of short covering, perhaps) than any fundamental reaction to inflation. (And you can take your "core index" cookie and stick it up your, hey! I don't fill up my gas tank with Pentium IVs)

In any case, the yield curve is flattening and this is not good in the short, medium or long term for those playing the curve. In any case, the dollar is down significantly today against most currencies, which doesn't indicate any foreign central bank buying. Gold, another inflationary barometer, is up $3.30 today. If we use the CPI to deflate retail sales, growth is shrinking even faster than the nominal figure.

2004-07-13T12:53:00.000-07:00

I'm sick of this and I'm sick of you.

Village Voice on the health-care crisis effects on young workers, who often either aren't offered coverage or can't afford care.

America's approach to paying for medical care stretches back to World War II, when regulations made accident and health insurance for employees tax-exempt. Meanwhile, a simultaneous wage freeze and worker shortage encouraged employers to offer insurance as a perk to attract labor, explained Ken McDonnell, a research analyst with the Employee Benefit Research Institute.

During the same period, England instituted universal coverage. The reasons we didn't are a complex knot of social and political influences now nearly impossible to untangle. "I think part of it is who's being served here. In more homogeneous societies, like in Scandinavian countries, [universal health care] came as a no-brainer," said David Jones, the president of the Community Services Society, a New York nonprofit. "But we're not homogeneous. There's a sense that 'We've got ours, I'm not sure I want to give it to those guys.' "

As employer-sponsored insurance took hold, the number of uninsured dropped steadily, reaching an all-time low of 23 million in 1976. But the very availability of good care quickly drove premiums up. In the 1980s, health care costs exploded, with annual increases peaking at 18 percent in 1989, before slowing briefly in the 1990s. Increases hit the double digits again in 2001, and reached 13.9 percent last year.

Perhaps not surprising, companies began to balk at providing benefits, leading individuals—the self-employed, the unemployed, the employed but not covered—to go it alone. Reforms designed to help the older and sicker buy private insurance served to further squeeze the able-bodied but vulnerable. Prices today are all over the map. A young, healthy adult in California can find basic catastrophic coverage for under $100 a month, but the same person would have to pay $280 for a similar plan in New York, largely due to differing state regulations.

I'm not sure what policy they refer to, but sign me up! My crappy basic coverage is $150 a month, but that's my 25% contribution. The total bill is $600 a month, and that's for a pretty big company which (I assume) has some leverage on price. Meanwhile...

For Lars Russell, in his early twenties, the cost of health insurance came as a shock. He graduated last year from the University of Michigan and moved to New York. "It's not really anything I can afford," he said in November. "I don't even have car insurance right now."

Russell would get little sympathy from McDonnell, the benefits research analyst. "That's life," he said, when asked about the huge number of uninsured young adults. "If you're young and healthy, you're going to take risks. It's life everywhere."

McDonnell cited an unwillingness to pay for insurance as a big reason young adults go without coverage.

It's a fine line, however, between being unwilling to pay even $100 a month and being unable to. And it's significant that when offered health insurance by an employer in exchange for a deduction from each paycheck, 74 percent of young adults take it, just a hair less than the 79 percent of older adults who do the same. "The argument is that if it's that important to you, then get a job that offers health insurance," said McDonnell, who, like so many experts on health care issues, is over 35 and has long had jobs with good benefits.

I've got a cuppa STFU ready for you, Ms. Russell. Who's gonna pay when Lars ends up in the emergency room for an appendectomy? Yep. It's coming out of your wallet. And the more people that bail out of the system because of cost raises the bill for you too. If, as the logic goes, healthy young people don't buy insurance, that means there's a much older and sicker risk pool that the industry still has to make a profit on. Does that make it clear why more people are uninsured and rates are going up 20% a year? Maybe if this principle is clear, you could explain it to those running the DC metro system.

There's a reason why single payer works in every developed nation but our own. No country pays more than 11% of their GDP on health care. We pay 15% of our GDP. There will always be complaints about their systems, but you won't be able to convince anyone in Canada, England, Germany, etc to dump their system for ours.

2004-07-08T07:29:00.000-07:00

Put on the cuffs, you're going for a ride

Some inspired verse from Roger Ailes (the good one).

The Fed raised the target Fed Funds rate 1/4 point to 1.25% last week. This was the least unexpected move in history, so unexpected that 10-year Treasury yields fell by nearly a quarter point to 4.5% after the announcement.

There are two self-equilibrating forces at work in this economy. The first is in mortgage finance. On one side you have the homeowner. They might pay 6% on a 30-year fixed mortgage, but after the tax-deduction the effective rate is more like 4-5%. Most consider it an expense like rent, so the perceived rate is probably much lower than that. As long as prices appreciate faster than whatever that rate is, buying a house is a very profitable investment. In fact, with 0% down, the rate of return on equity is infinite. Not too much gonna beat that.

On the other side is mortgage and structured finance. They make money by playing the yield curve. At the low end you have money market and Fed Funds around 0-1.25%, and at the other end are mortgage loans earning 5-6%. The steeper the yield curve, the more money the industry can make. Not surprising then that the big players had their best years ever in 2003. Citibank alone made a cool $10 billion, Freddie Mac made $5 billion, Fannie made about $8 billion...and so on.

And the more you leverage, the more profit you make. Let's say you're a hedge fund. You borrow $100 million in capital (at 6%) and use it to short $1 billion of 10-year treasuries yielding 4.5% and buy $1 billion of mortgage-backed securities yielding 5.5%. The spread on this trade is 1%, and your interest costs on capital is effectively 0.6% (1/10th of 6%). The profit is $.004 on every dollar invested, so if you've got $1 billion hedged that's $4 million. There's nothing stopping you of course, from doubling that to $2 billion, or $4 billion, except the nerves of the people financing you (which in the case of JP Morgan or Citibank might just be a call down to Fred and Ginger in finance, or your golfing buddy Desiree over at Salomon Brothers).

You can cut your borrowing costs and increase profits by shortening the term on your loans. Maybe keep rolling over 90-day notes at 1.5%, which increases profitability to 0.85% (1%-0.15%).

The best part is that the whole system is self-equilibrating. The economy tanks, people flee stocks into Treasuries and rates go down and a new flood of homeowners rush to refinance, and everything gets restructured (you take profits on the mortgage-backs your long, too). The economy improves, and you know the Fed has pegged the low end of the yield curve, which gets steeper and more money for everyone!

The second system is between the U.S. importer and its foreign creditors (mostly East Asia). Low interest rates and rising asset prices mean we don't have to save, so the Japanese provide all the lending we need and we buy their products. If the dollar is in danger, the central bank prints Yen and buys all the dollars necessary to fix the exchange rate, as well as purchase all the debt we can issue. The central bank has infinitely deep pockets and can keep the process going, regardless of how "doomed" the U.S. currency appears. Of course, the numbers may get pretty big and start to alarm people after awhile, but if the U.S. economy improves, so does the dollar and the pressure is off East Asian central banks to protect the dollar. Contrary investor has a pretty good rundown in their July MO.

From the article, it's pretty easy to see the consequences of the Fed hike will not be decreased physical investment. Not a lot of that is going on. The effect will be on the yield spread, which is going to cut the amount of money available to the financial sector. This is why the Fed has to move deliberately and telegraph their moves well in advance. They cannot raise interest rates 1/2 point when the previous move was to announce inflationary bias, because that would cause volatility in the various spreads and crush some poor souls working with 20-1 leverage and 0.4% margins. It has to be one step at a time. With the latest employment report and another one due before the August Fed meeting, Alan and Co. will make the next decision just as painfully obvious as the last one.

Instead the worry is that someone will have to stop the credit creation machine. Maybe inflation impinges on consumers so much they can't afford to push up housing prices enough to make it profitable. Maybe enough people start moving money out of the low end of the yield curve that creditors can't leverage as much. As interest rates rise and the yield curve flattens, money is draining out of a system that was swollen with leverage by this most recent panic stimulus. The only question is who will starve for income and begin de-leveraging, and when. The Fed is acutely aware of this, so any excuse to not raise another 1/4 point in August will be seized upon.

The latest tightening may already be too much. There is simply no room left for error, because the behavior of players in this game has not been to correct errors, but take any advantage the Fed makes available. Rather than de-leverage, the financial system reacted by expanding at an exponential rate. Prices rose exponentially, lending, and so on. Every marginal move, therefore, is toward contraction and agents will react at the margin. We're at the peak of the roller coaster. Commence holding breath now.

2004-07-07T08:52:00.000-07:00

My favorite economic event, next to "Hearing Test Thursday"

The BLS Employment Situation, that is, showing June employment growth of 112,000, far fewer than anticipated.

Pretty much down the line this report is a retracement of previous strength in employment growth. Manufacturing had reversed a five year trend years of job losses (3.25 million since early 1998) in 2004, but June showed the first decline (-11,000) of the year. All gains came from service industries as construction and mining employment was flat in June.

Job gains were in (surprise, surprise), temporary help services (+12,100), health care and social assistance (+29,500), accommodations and food services (+13,300), membership associations (+11,400, probably gearing up for the elections), and transportation and warehousing (+19,200, of which 5600 was "couriers and messengers"). Outside of McJobs, there wasn't a whole lot of job growth in June.

In fact, I'm really surprised at how few industries in the entire economy outside of health care show any sustained growth. Very few industries had any significant change in either direction. That temp services has popped back up to the top gainers list indicates that despite recent profit growth, nobody is really all that keen to begin hiring in earnest.

Billions in tax cuts and no follow through in employment. And real hourly earnings have fallen over the past 12 months, the first time this has happened since 1995. If housing ever started to look anything but stellar, people might start to worry about how they were going to make the payments.

2004-07-02T06:20:00.000-07:00

Not Quite Dead Yet

But am on jury duty, the next worse thing, until next week. Plenty to talk about: Fed rate hike, employment report, and so on, but will have to wait until after the 5th.

2004-06-24T11:45:00.000-07:00

The Bill (so far)

Daily Kos reviews the cost/benefit analysis re: Iraq.

2004-06-24T07:50:00.000-07:00

What *can* one do?

This just makes me shudder...repetitively..

"Ten years ago, if I offered to buy your house with a 100 percent loan, you would have called it 'creative financing' and thought I was crooked. Today, everybody wants a 100 percent loan."

"Underwriting standards have loosened to almost historic levels," said Bill Dallas, a pioneer in no-money-down loans and a board member of the California Mortgage Bankers Association. "Nobody is heeding the yield signs."

"If there is a fissure in the economic system, it's in housing," Mr. Zandi said. "This is a big, rapidly growing market that has not been tested by higher interest rates. Many people got into their houses by the skin of their teeth."

They took out two mortgages this month, one for $280,000 at 6 percent and the second mortgage for $80,000 at 10.25 percent. Both are adjustable after two years, and the payments are virtually certain to rise, meaning that their budget will be further pinched unless their income rises, too.

"Thanks to God for finding me a mortgage program that let me buy my own house," Mr. Daneshi said.

[California] House prices have climbed so rapidly in the last few months that banks are refusing to appraise some properties as high as their selling prices.

Jennifer Tracy, a graphic designer, recently agreed to buy a condominium in Los Angeles for $235,000. But the same property had exchanged hands less than a year before for $114,000, and no appraiser would value it at more than $195,000. Ms. Tracy bought the condo anyway, but only after coming up with the extra cash to bridge the gap.

"What can I do?" asked Mr. Jackson, the manager of Bristol Home Loan, the subprime loan specialist. "My job is to help people realize the American dream."

2004-06-24T07:04:00.000-07:00

The Daily Dose
Maybe bad economics news invigorates me. I hope not. It's more like I've been holding my breath during a horror movie waiting for the killer to pop out of nowhere, and (s)he does, and my scream is a sense of release.

Durable goods orders fell 1.6% in May. This is on top of a 2.6% decrease in April. In March, durable goods orders had almost recovered to their previous peak of $220 billion set in June 2000. The current level of $187 billion was first reached in July of 1999. This does not bode well for manufacturing indices or employment, though this is a very volatile indicator and there have been several consecutive month declines both in the downturn and the recovery.

Weekly unemployment claims rose 13,000 to 349,000. Claims have stubbornly remained in the 325,000-350,000 range since late January. This pattern is similar to the one after the 1990-91 recession, when claims peaked at 509,000 in March 1991 and stayed above 300,000 well into the recovery. Weekly claims didn't drop below 300,000 for any extended period until 1999.

Continuing claims for unemployment are a better indicator of the pace of the recovery. These rose 75,000 to 2.967 million in the latest week. In the previous recovery, continuing claims peaked at 3.524 million in May 1991 and broke below 3 million for the first time in November 1992.

Unemployment claims seem to point to an extremely weak and fragile recovery for labor. These two news releases are related. In the state comments, states with the largest increases in unemployment claims pointed to increasing layoffs in manufacturing, construction, automobile, transportation and trade industries, the same ones seeing a decrease in new orders.

Conspiracy theory of the day: Who controls account 990N?

2004-06-23T12:07:00.000-07:00

Stuff I missed

Suburban Guerrilla points me to this June 7th post from Steven Roach, noting a few niggling details of "Our So-Called Recovery".

Over the first 29 months of the current economic recovery, real private wage and salary disbursements have increased a little less than 3% from levels prevailing at the trough of the last recession in November 2001. By contrast, over the same 29-month interval of the previous six economic upturns, the gain in this series averaged about 9%. The difference between these two trajectories — the anemic real wage income growth in the current cycle and the vigorous gains of the typical cycle — works out to a shortfall of $280 billion of inflation-adjusted income. Job growth is widely presumed to be the silver bullet that will close this gap. But it just hasn't worked out that way and American consumers remain as income-deficient as ever.

All that only serves to underscore one of the biggest pitfalls of all on the road to rebalancing — a persistent lack of internally generated labor income. In the absence of such fuel, the long awaited baton pass simply cannot occur. And, as a result, American consumers would have no choice other than to continue drawing support from the far more "toxic" sources of growth such as tax cuts, a further depletion of saving, increased indebtedness, and additional extraction of purchasing power from asset holdings such as property. The problem, of course, with this recipe is that the options are narrowing on most of these counts as well. Massive budget deficits limit the likelihood of further tax cuts. Personal saving rates of around 2% are near the lower bound of feasibility. Debt ratios are at all-time highs and debt service burdens are at the upper end of historical experience. And, as interest rates rise, the mortgage refi cycle stops, limiting the scope for further equity extraction from homes.

In the end, that's the problem with unbalanced growth paradigms — they're simply not sustainable. We debate endlessly the concept of the "breaking point" — when imbalances finally create enough stress in macro systems to force major corrections in financial markets and/or their real economic underpinnings. In fact, however, macro's strength is not in identifying these thresholds with any precision. Instead, it works best in providing a framework that depicts tensions in economic and market systems that must be resolved. To the extent that the US economy's income-generating capacity remains impaired and that the authorities, after allowing for a meaningful pick-up in the CPI so far in 2004, are running out of ammunition in providing alternative sources of growth, it seems reasonable to presume that the breaking point could be sooner rather than later.

The baton pass is the escape valve in all this — the means by which organic growth can alleviate imbalances. As I see it, two impediments are likely to keep blocking this transition — a return to subpar hiring and a persistence of muted wage increases. I concede that I will be wrong on my reservations over the baton pass if recent hiring vigor is sustained for another 6-9 months and/or real wage inflation suddenly accelerates. Yet I continue to believe that there is a compelling case against such a possibility.
...
The sharp recent upswing in hiring certainly draws this hypothesis into question. But three months does not render a decisive verdict, in my view, especially when it was preceded by 27 months of the so-called jobless recovery. Nor is there any reason to believe in the possibility of spontaneous leverage on the wage side of the equation; private industry wages and salaries are up only 0.9% in real terms in the 12 months ending March 2004 (a 2.6% nominal increase as measured by the Employment Cost Index less a 1.7% increase in headline CPI inflation over the same period). It is important, in this context, to make the distinction between cyclical and secular trends. I wouldn't at all be surprised to see another few months of rapid hiring as cyclical forces temporarily maintain the upper hand. But the secular overlay of limited pricing leverage, unrelenting cost cutting, and the new options of an IT-enabled global labor arbitrage all leave me convinced that as these cyclical forces subside, the US is likely to return to an underlying trend of subpar employment and limited wage income generation.

2004-06-22T06:08:00.000-07:00

The Fed's Dilemma

Financial Markets Center has a thorough retrospective on historical Fed policy and "the Great Easing" of 2001-2003. Paul Kasriel writes about the Fed "deep in the hole", raising interest rates from the lowest real interest rates ever.

Will rising interest rates sink American consumers? The Globe and Mail reports consumer debt is not solely a U.S. phenomenon. And the inflation rate is picking up but neither Alan Greenspan nor markets are concerned?

2004-06-21T08:41:00.000-07:00

Fighting the Summertime Blues

It continues to be difficult for me to post regularly here. The general direction of the economy hasn't changed and I generally find it boring to post on every number when the ones I feel are important are monthly or quarterly.

I've also had my time limited by a number of home improvement projects. As I'd assume is the case with most houses in the U.S., mine is over thirty years old with much of the original equipment. The previous owners have either owned it short-term for appreciation or hadn't been willing or able to shell out the money to properly maintain the place.

For starters, I nearly have a coronary every February and August opening the power bills. The windows on the house are original and horribly inefficient. The caulk is degraded and has gaps letting in air and insects (particularly ants). As ultimately we're paying the cost in Iraq to secure the energy for my horribly energy inefficient home, new windows were a priority. They aren't cheap, but I have found as with most things the best way to save money on everything is to call three or four companies and get quotes: they'll knock down the price quite a bit competing for the business.

After the windows, the air conditioning system will need to be replaced. After a second summer of replacing nearly all the refrigerant (and paying through the nose as the machine spun all day to cool nothing), it is time to jettison the 1988 Carrier for something better. I had a quote from Sears, which allowed me to get my usual HVAC company to throw in a new set of exhaust pipes and a year of maintenance along with the unit. The engineer who inspected our system was particularly entertained by the 3" exhaust pipe that was connected to a 4 1/2" inch one by what looked like chewing gum.

After we seal up the windows and put a more efficient cooling system in, the whole place needs to be topped off with insulation and the holes patched. My neighbor knocked out several of the walls of their similarly built residence and found that not only were the walls quite thin, but all the insulation had sunk to the bottom 1/3. The previous owner's satellite sytem means there are holes in all the bedroom closet ceilings for television wires (some of which are still in place). I'm not brave enough to go into the attic - I can hear something moving up there on occasion, meaning a possible call to pest control if whatever it is has made it inside the roof and is not just walking on it, but I can tell from the temperature differential of the closet under the entrance that there is nothing but air in its vicinity up there.

Anyway, the repairs will go into the five figures and the benefits will not return to me while I own the house. I could just as easily not do them and sell the house for slightly less and let the next owner take care of the problems. I could have just as easily not stopped contributing to my retirement plan and whittling down my savings to save up the money to do them. Why bother?

Well, this is an investment, meaning that the economic benefits will ultimately flow back to me, even if it is just a 0.0000001 cent reduction in energy prices because the improved house uses 50% less of it. I do place emotional value not cringing at opening my power bill each month. I feel less embarrassed when guests come over during the winter and there isn't cold air coming in through the windows and all the holes in the walls. If it means we're imperceptively less likely to spend trillions in the Middle East to secure dwindling energy resources, because those resources have become cheaper, it's a worthwhile investment. I value what is in my self-interest as well as the general interest. I will at least find good use for the $80 a month I won't be giving to PEPCO or Washington Gas.

The $87 billion of the Bush Administration's first funding request for Iraq and Afghanistan could have purchased four million hybrid cars or installed free solar systems on 3-4 million homes. In a broader scope, if we reduced our defense spending by half, we could easily use the $2 trillion over the next decade to provide a free electric car and solar power to every American home, and still have enough left over for medical care and education (particulary if we can cut health care expenses by 33% with a single-payer system).

I suppose you can make the argument, "Hey, what about Osama bin Laden?" I guess I could answer that if your willing to choose spending $2 trillion to hunt down one guy (or even 1,000 such guys) over a free car, home energy system, college tuition for your kids, and free health care, you should read this paragraph again. I know this sounds stupid spelling this out. It should. It really should.

It should sound stupid to spend trillions to blow stuff up, rather than to invest in things that can produce more things later. It should sound stupid to invest in an ICBM rather than a child that could develop a cure for cancer in five years rather than twenty.

But it's also naive we can change the system that does value these things overnight. The changes start with people doing a little bit every day. Our values will get put into the system and it will change. I mean value in the personal, economic and societal sense. Productive investment has a way of doing that. It returns itself over time, while non-productive investment does not.

There's a common argument that if we consume less energy, that will just drive the price down, which in turn will increase energy consumption. This kind of Malthusian thinking has never been correct. In fact, the opposite is true. We don't have more children when our standard of living rises - the birth rate of a country falls as per capita GDP increases. The reason is the value of children rises (not just the price of raising them).

Most people enjoy spending less time in rush hour traffic, having more money left over after filling the tank or paying the electric bill, not having children die in useless wars, not spending trillions on a useless military-industrial complex. Sure, things will happen faster and not be so costly if we devote resources to it or the price of oil goes up to $200 a barrel, but that doesn't mean it isn't happening now or individuals can't help the process along a little bit. Even if we can't or don't put a price on the costs, they still have a value, and I've often noticed there is an economic karma that comes around in unexpectedly beneficial ways.

Nothing depresses me more than when economists refer to our trade as "the dismal science". There is nothing dismal about it. Economics is how we value things and if our economy is screwed up it is because our values are screwed up and not the other way around. In addition, even though one individual can't change the system immediately, history is full of economists that laughed through disaster all the way to the bank. Richard Cantillon made a fortune during the Mississippi Bubble. Keynes managed to earn double-digit returns on stocks through the Great Depression. Just don't ask me what the market will do next Tuesday.

In closing, I'll be posting more when I'm not writing so many checks and having so many people tramp through my house. Hope this has been a fraction as good reading this as it has been to write it.

2004-06-14T07:00:00.000-07:00

The imminent return of global uncertainty

Retail Sales were up 1.2% in May. The year-over-year increase in retail sales is 8.9%. Mind you these numbers are not inflation adjusted. Gasoline sales were up 4% for the month and 22.5% for the year and building materials store sales were up 16.6% over the year - if that helps put this in perspective at all.

Because the U.S. doesn't save and stimulates the economy through borrowing, it's not surprising that the April trade deficit surged to a record $48.3 billion.

Your daily history lesson. The last Fed tightening cycle occurred from August 24, 1999 to May 19, 2000. The target Fed Funds rate went from 4.5% to 6% with four increases of 1/4 point and a final increase of 1/2 point. The stock market peaked in March 2000 before the tightening cycle was completed. Employment growth also peaked in March 2000 at an annual rate of 2.6%. The 1980s tightening cycle began in September 1987 with the discount rate (the Fed's benchmark at the time) at 5.5% and ended February 24, 1989 with a 1/2 point increase to 7%. Employment growth peaked around January 1989 at a 3.3% annual rate. As the economy has become more sensitive to interest rates, it appears the lag between higher interest rates and slower growth has shortened significantly.

The Fed is widely believed to once again begin tightening monetary policy with their next press release on June 30th. The futures market indicates the odds of a 1/4 point increase after the meeting is 100% and the odds of another 1/4 point increase after the August 10th FOMC meeting is 100%.

Doug Noland relates a couple of interesting factoids from the latest Flow of Funds report. First, annualized Foreign Direct Investment in the U.S. the past quarter was $2.1 billion (0.02% of GDP!), while credit market instrument holdings increased an annualized $1.16 trillion. Second, the net investment position of the United States (assets minus liabilities) has increased from -$2.1 trillion in 1998 to the current -$5.2 trillion. Our net indebtedness is now 45% of GDP.

The Fed is all set to tighten monetary policy in an economy extraordinarily dependent on speculative capital inflows, extraordinarily dependent on mortgage borrowing to finance consumption, and with an extraordinarily bloated, extraordinarily interest-rate dependent financial sector driving the economy. (Over 40% of S&P 500 earnings came from financial companies in the third quarter 2003).

I'm amazed how long these economic distortions have lasted, but in retrospect I should have known the powers that be have a survival instinct, and will work ceaselessly to perpetuate imbalances when the alternative is unthinkable. So now I wait for the next economic slowdown, which could come much quicker than we expect as the Fed begins to raise interest rates, when all the credit issues that have been papered over come back with fresh fury.

The weakest link over the coming months is the dollar, which has put in only a mild correction despite better fundamental news (higher GDP growth and higher interest rates offsetting higher inflation and larger trade deficit). It took a tremendous effort by East Asian central banks to stabilize their currencies against the dollar last year, and in a global inflationary environment these are resources badly needed elsewhere.

Protecting the currency means the Fed might have to tighten quicker and faster than they wish, and with an election and the return of "global uncertainties" this means more volatility in markets than speculators would wish. The rest of 2004 will be very interesting.

2004-05-27T12:43:00.000-07:00

How would you prefer to be impoverished? - May 27, 2004

To illustrate why relative prices matter, my favorite boring story asks which regime was preferable: Weimar Germany or Great Depression America? In the former, the price of money plummeted and Germans had to carry out their life savings in a wheelbarrow to buy a loaf of bread. In the latter, it was the price of goods plummeted and people cashed out their life savings of newly worthless stock certificates to buy the loaf of bread. The economic indicators evolved differently, but what you ended up eating was the same.

I'm reminded of this every time a Federal Reserve Board member makes a speech (as a side note, these speeches appear to be much more frequent these days, a solid indicator the value of a word from Alan and company is worth less than it used to be) reminding us that deflation will never, ever, ever, ever happen again as long as they've got working helicopters and a printing press.

I take them at their word, considering they've created an inflationary spiral that threatens to spiral out of control globally. U.S. consumer prices inflation is now running at a 4.4% annual rate. Chinese inflation is heading north of 5%. Even Japan is beginning to experience inflation, which most economists had nearly given up on after 15 years of trying.

Yet inflation has its own unintended consequences. The strength, or should I say lack of weakness, of the dollar has been almost entirely supported by foreign central bank purchases, and those purchases have almost entirely been from East Asian countries with the means to do so. Inflation in East Asia means that these countries will have to devote more resources to buying the goods and infrastructure necessary to keep their export-led economies functioning, and that regrettably means less money to purchase dollar-denominated U.S. debt securities.

It also means that countries don't profit as much from pegging their currency to dollars, so this type of analysis becomes more attractive.

While recent strength in the dollar has been encouraging, it is likely simply a speculative short squeeze. Now the squeezing has been done and hedge funds have liquidated their portfolios, we can get back to the longer term trend: higher interest rates and a weaker dollar for the United States. Higher inflation is going to be a big negative.

The impoverishment of Americans can just as easily be accomplished in an inflationary environment as in a deflationary one. Deflationary environments tend to be more exciting, with the stock market crashes and mass bankruptcy. However, senior citizens and college students have found out recently that inflation can impoverish you quite as efficiently when your income doesn't increase as fast as your expenses, you have to borrow more to finance your lifestyle and paying interest rates is always done in nominal terms.

Stockholders are also relearning the lesson of the stagflationary 1960s and 1970s: that the stock market doesn't have to go down to lose you money. Even at recent low official inflation rates and with a Dow Jones Industrial Average hovering around the same 10,000 level, stockholders have lost nearly 20% of their purchasing power since 1998. Compared to nothing, even those 1% money market rates are starting to look good.

And the American consumer has to be wondering why it's so difficult these days to make a living despite such rapid GDP growth. Jobs are harder to come by and raises are imperceptible. Homeowners are committing 40% or more of their income to house payments for the next thirty-odd years, savings is zero, and now the price of the remaining 60% of their expenses is getting higher.

Alan Greenspan praises his efforts as "wealth creation", but Kurt Richebacher notes:

"The striking key feature of so-called wealth creation through asset bubbles in favor of the consumer is, first of all, the associated record production of debt, set against the total absence of income creation. To maintain demand creation through this kind of wealth creation, ever more debt creation is needed - first, to keep the asset prices inflating; and second, to fund the spending on consumption.

Thinking it over, one realizes that "wealth creation" is really a grotesque misnomer for asset prices that are rising out of proportion to current income. The economic reality is not wealth creation, but impoverishment. We repeatedly hear from Americans that they are living in houses or apartments they cannot afford to buy with their present incomes. But many years ago, with incomes and prices as they were at the time, they could afford the houses. That says it all."

So don't you feel richer now?

The insidious development of the so-called recovery has been the complete lack of improvement in consumer finances. In fact, many consumers seem to be going out of their way to accumulate both debt and interest rate risk. Inflation doesn't help us here, either. With no savings there is only one way to keep consuming: borrow even more.

Consumers may be under the impression that a central bank committed to achieving inflation is one committed to achieving a reduction in the real value of their debts. This only works in the short run if your expenses are growing slower than your income, and only in the long run if your income is growing faster than your total debt. Debt service is a near record 18% of income and consumer debt is well above 100% of annual disposable income. Both are worse than in 2000 and near all-time records. Neither is indicative of a consumer that can adapt to inflation very well.

And I don't like the way some things are developing at all. Here's a story related from Thursday's Daily Reckoning.

"Interest-Rate Fears Spur Home Sales," declared a front- page headline in the "Personal Journal" section of yesterday's Wall Street Journal. A few pages away, a headline emblazoned across the top of the Journal's "Heard on the Street" column read: "Buying into Housing Stocks: Value Investors See Bargains Among Rate-Battered Shares; Betting Things Will Be Different."

The former story explains that folks like Danene and Greg Hanemann are accelerating their home-buying plans because they've "grown nervous that rising interest rates would make monthly payments unaffordable." But the latter Journal story asserts that housing stocks are cheap...as long as nothing bad happens to the housing market.

We agree...as long as nothing bad happens to the housing market.

We do not know if home prices will rise or fall, nor do we know if home-building stocks will rise or fall. But we do know that a few bad things are happening in the housing market. Thirty-year mortgage rates have jumped one full point, from 5% to 6%, in two months. A thirty-year mortgage at 6% is not a catastrophe, but the trend is troubling and it is beginning to affect the behavior of buyers and sellers.

The Hanemanns, who had been planning to begin shopping for a home in October, instead plunked down a deposit for a new home last March. "We weren't going to dicker with the house," says the Missus, "if our payments went up by even $100, we would have had to seriously think about backing away from buying a home."

We wonder how many more "Hanemanns" are accelerating their purchase plans - snapping up a home now while they can still barely afford it. How many more "last chance" homebuyers are boosting demand - temporarily - because they fear rising rates will force them to abandon or downsize their home-buying dreams? And what does this "front- loading" of demand portend for homebuilders? Are today's sales stealing from tomorrow's sales?

Furthermore, what if Danene and Greg are correct, and rates continue rising?

Doesn't this reasoning seem awfully familiar?

Automakers and SUV buyers have already discovered the inflationist paradox. Zero-percent financing was originally intended as a short-term program to boost auto sales during the recession. Now the program is well into its fourth year, though accelerating rebates are often used to get consumers to pay interest on their purchases. Every time automakers try to reduce the incentives, sales drop more dramatically.

Now sales are dropping without any reduction in incentives, thanks to rising gas prices. Everyone involved in supply and demand is beginning to have problems. Auto finance companies need to borrow more and at higher rates to finance these incentives. Their customers see the rising price of gas reducing the enjoyment of their SUVs. Selling the behemoths is usually right out - most consumers are already under water from 6+ year loans and collapsing used car prices. The companies shift income abroad rather than pay higher wages and benefits to auto workers. The system is becoming rapidly unaffordable by anyone, but the alternative is increasingly unthinkable.

It's the same way for the Fed. Do they really have any power with an economy they cannot afford to slow down, with interest rates they have almost no room to move lower? Should they be celebrating their "triumph" over deflation when they feel compelled remind us we're not going to have it? He can keep up appearances in public, but in private Alan Greenspan must be cursing his luck. Another four years of dodging bullets for Sir Printsalot.

2004-05-13T13:10:00.006-07:00

Stirling Newberry writes for BopNews and is an advisor to the Jim Newberry campaign. The opinions expressed here are his own.

When Wall Street looks back at the past, look out. Going around are comparisons to 1994 and to 1974.

The first is the last time the US looked for a "soft landing" in a recovery, the Fed raised interest rates rapidly, and choked off growing commodity inflation. But the Fed knows that it doesn't have the flexibility to do that, as Bush has borrowed every available dime for tax breaks.

In reality it is much better to look at the present factors than to wonder whether we are reliving the past, we never will, because as soon as people think we are, the past will be discounted in, and we are on a different path. The markets - equity and security - are still digesting a basic question: how much of recent improvments in jobs, profits and outlook is just inflation? If a great deal, then the Fed, the Bank of England, the ECB, the BoJ and others will have to tighten dramatically to ease inflation.

But now we get to the prisoners dilemma: no one wants to tighten first, since that will push their currency up, and their economy down. Others would love to have cheaper inputs at the cost of the central bank that tightens. But, on the other hand, the nation that does tighten has a stronger currency, and can then bid up the prices of commodities, sparking inflation, and then leading to another round of "who tightens first?" This is why such moments almost always require an agreement for coordinated action among the major industrialized nations.

2004-05-13T13:10:00.005-07:00

2004-05-13T13:10:00.004-07:00

2004-05-13T13:10:00.002-07:00

2004-05-13T13:10:00.001-07:00

2004-05-13T13:10:00.000-07:00

2004-05-10T07:08:00.000-07:00

Broad sell off on interest rate fears.

Markets reacted negatively to a jobs report which indicates that because the US economy may be overheating, interest rates will rise. Europe off an averate of 1.5%, and the US opens lower. This nexus - between rising inflation and a recovery which is just barely starting - is going to drive the question of risk over the next few months into the summer. If inflation has reignited, and hiring is being driven by inflationary expectations, as it seems is possible - then interest rates will rise sooner, rather than later. This is not good for a heavily leveraged equities market.

Roach has been calling for higher interest rates for sometime, for pushing the Fed Funds rate to 3%. While he is on the inflation hawk side of the spectrum, the general estimates of what a neutral Fed Funds Rate would be range around 2.5% to 3.25%. If inflation reignites early, which the combination of no Fed action and job creation in low productivity sectors would indicate - then that number could easily be 4% by Fall, or 300 basis points.

While the Saudis are calling for higher production, there is little incentive for other OPEC producers to follow the Saudi lead on this, in that demand - lead by China and the US - seems relatively inflexible for the time being. This means that it will be difficult for Bandar to argue for increased production until such time as there is an expectation of price erosion.

Stirling Newberry is an advisor to the Jim Newberry campaign.

2004-05-03T14:18:00.000-07:00

Oil at 13 year high.

2004-05-02T14:36:00.000-07:00

The Return of the 70's

Stirling Newberry writes for BopNews and is an advisor to the Jim Newberry campaign. The opinions expressed here are his own.

Shoppers deserting supermarkets and going to discounters.

This is the 1970's political pattern - consumers pressure for lower gas prices, and then use "shopping around" to keep other prices low, since it is less political cost to keep one commodity - gasoline - down. This sign, that inflationary expectations have now been built into the economy, means that we are in the last phases of this recovery. At this point the fed will have to tighten to reach a "soft landing" or reignite full blown inflation. This is because energy inflation is the source of general consumer inflation.

What this means is that the very thing that consumers are doing to deal with inflation - overconsuming gasoline - is going to drive more inflation in the long term.

2004-04-29T08:15:00.000-07:00

Even with a billion dollars a day of stimulus: GDP Grows only 4.2% Which would be good numbers if we had seen this in 2002. Now, it says that even with the Fedal to the floor and borrow and squander running so fast that inflation is about to come back, the economy can manage "OK" growth.

Which means that if we move interest rates back to neutral, and move the deficit to a sustainable rate, GDP growth would be at 1.2%. Not encouraging, particularly with current producitivity growth. It means that the economy is boiling away about 1.8% of its growth potential to... something. The answer seems to be corporate profits.

What's worse is that the growth was entirely "bad GDP": lowered imports from devaluation, more government spending, and leveraged consumer spending.

Stirling Newberry writes for BopNews and is an advisor to the Jim Newberry campaign. The opinions expressed here are his own.

2004-04-28T13:55:00.000-07:00

The recent market volatility, and the spike in oil futures point to an expectation by Wall Street investors that this recovery has reached the point of needing to be reigned in. The questions being asked are "where is monetary neutral?", since current policy is for easing, and "will inflation be sparked off by the long low interest rates?"

The theory that guides monetarism is that monetary policy, rather than fiscal policy is most effective in aiding the economy. However the recent experience is that this is not the case, three years of pedal to the floor monetary policy did nothing to counter-act a long wallowing jobs drought. While matters might have been worse with tighter policy, clearly it was not monetary policy which sparked a sudden spike in hiring and growth last fall. Looking at employment statistics from regions around the country, one can see the instant spike which is the sign of fiscal policy easing.

Hence, practically, fiscal, and not monetary, policy worked in this case. Which means the long fight over monetary versus fiscal policy, with its Republican Versus Democrat overtones, is settled as a matter of fact: monetary policy was able to manage general pressures, but below the threshold of linkage of money supply growth and inflation, it is fiscal policy that creates jobs.

Stirling Newberry writes for Bopnews and is an advisor to the Jim Newberry campaign. The opinions expressed here are his own.

2004-04-28T11:54:00.000-07:00

Offshoring proves you still get what you pay for. Or, at least, you don't get what you don't pay for.

2004-04-28T06:26:00.000-07:00

Fed Warns of Dramatic Rise in Oil Futures.

As blogged last fall, the danger that Bush faced was that he had no levers on the economy, he could push jobs up and ignite energy inflation, or he could tighten, and send the economy into a spiral, or he could create low wage jobs and crunch the housing market. He chose to create jobs. With the violence in Iraq, and the rise of China and India as energy importers, we are soon going to be facing the results of that decision.

Stirling Newberry is an advisor to Jim Newberry's Congressional campaign. The opinions expressed here are his own.

2004-02-26T06:49:00.000-08:00

Happy Trails

It's been fun, but I no longer have the time to blog anymore. Work is a higher priority, and a project through March just became a project through who-knows-when. I've been struggling just to post as much as I have the past few months, and haven't been entirely satisfied with the quality or the quantity of posts, nor the amount of time (none) I've been able to browse comments.

I'd like to thank Mary Beth for allowing me to speak my piece here. She's running for the Maine lege, so if you want to contribute, there's a link on her site to donate.

I'd like to thank all the readers here whether you posted comments or not. I'm always lurking around other blogs, so you may see me in the comments when I get riled up. MaxSpeak, Nathan Newman, Brad DeLong, Angry Bear and KOS are the most likely places to find me.

Blogging is tremendously addictive, so I'll probably return to it someday. For now, I'll just return to the background, lurking.
Best wishes to you all and may the stars shine upon the end of your road.

2004-02-25T14:01:00.000-08:00

The Dilemma

Let's go back to early 2003. Sensible anti-war advocates are saying in so many words, "Yes, Hussein is a bad guy, but if you remove him, there's nothing to hold the country together. WMDs are a red herring. Whether he has them or not, not even Kuwait views Iraq as a threat. Iraqis will view any attempt at intervention, particularly a unilateral, aggressive one as an occupation and fight it accordingly. The rest of the world's terrorists would jump at the chance to go to a chaotic Iraq and take potshots at the U.S. We can't manage a transition. It will turn into a complete clusterfuck regardless of our motives, intentions or methods."

Flash forward to today. Iraq is a complete clusterfuck. Tens of thousands of Iraqis killed. Over 500 of our troops killed and counting, another few thousand injured and counting (but who's counting?). Shi'ite cooperation hinges on two "good cop" / "bad cop"clerics who are demanding elections now - "don't make me break my fatwa off in your ass!" The U.S. is pretty much going to ignore them at their peril. Bob Dreyfuss has the skinny on the "shia fellas":

Time for a reality check. The Shia fellas are not our friends. Before, during and after the Saddam years, Iraq's organized Shiite movements have been backward-looking, reactionary, terrorist-supporting religious fanatics. They've managed to combine their medieval outlook on religion with a slippery ability to make deals with occupying and colonial powers, from the Ottomans to the British to, now, the United States. Their insistence on forcing Iraqis to abide by Islamic law scares many civilized and educated Iraqi Shiites. In fact, Iraq has for many decades tried to develop a secular society, but efforts in that direction have been impeded by fanatics like Sistani and his ilk. The ability of the clergy to mobilize the rabble against progress has been an enormous problem for Iraq since the 1920s. If that's democracy, I don't want any of it.

But now that we're waist deep in the big muddy, we're left with two bad options. The first is that Bush and Co. can try to push toward his puppet election, knowing that Sistani can issue a fatwa urging resistance at any time after June 30 and all hell will break loose. If I were Sistani, maximum impact would be right around early September, because nothing would mess with Bush re-election chances more than the GOP Convention sharing the headlines with chaos and American soldiers dying. Even if the Shi'ites don't run out of patience by then, they can always launch their own October surprise even a week before the election. Bush has no cards here. Bush either starts the process towards a general election immediately or Sistani can start the resistance at a time and place of his choosing. Iraq trumps Bin Laden, because Bin Laden hasn't had the free time to kill any Americans recently.

The other alternative is to cut and run. This is unpalatable for Bush because he's already getting flak from his own party on deficit spending, his Air National Guard duty, and gay marriage. It's no sin to backtrack on promises or waffle on issues, but underlying everything is commitment to leadership through a set of underlying priorities. When a leader starts abandoning clear priorities for trivium, then the F-word starts being uttered. When it starts being uttered by normally loyal supporters, you're in deep doo-doo.

So what to choose? It's a no brainer. Get the U.N. to police Iraq and enforce a timetable for elections. Bring the troops home now. Even conservative priorities should include getting spending under control which, yes, includes the Pentagon, and rolling back at least the dividend and estate portions of the tax cuts. Continuing the occupation of Iraq is unwinnable, and can do nothing but hurt Bush. A Democratic administration will find this out too, so they might as well campaign for withdrawal and turning things over to the UN - with the rebuttal that we have to have priorities. We know what the chief priority is - it's the title of this blog. With the alternatives in Iraq being equally dire, we should choose the least bad and get back to the basics.

2004-02-25T12:10:00.000-08:00

Kerry on and on and on

While I'm glad some of the Blogosphere Elite have come over to the Edwards camp, it looks like he's only going to be a distant second by the convention, barring some sort of March 2 miracle. Still, he's on the short list for Veep candidates and provides a good electoral counterbalance to Kerry. His political rise has been even more meteoric than Clinton's (who had one term as AG and two terms as Arkansas Governor before running for the highest office). Edwards has had one term in the Senate. At the least, he's the frontrunner for 2008 or 2012 - unlike Clark, Dean and the others, he didn't shoot himself in the foot, and he wasn't an also-ran.

I'm also glad Nader is in the race for the same reason as Cockburn and St. Clair.

Listening to Democrats screaming about Ralph Nader's entry into the presidential race we finally understand the mindset of those Communist dictatorships that used to take such trouble to ensure that the final count showed a 99 percent Yes vote for the CP candidate. It's a totalitarian logic. "Anybody But Bush" chorus the Democrats. But they don't mean that. They mean, "Nobody But Kerry". And if John Edwards wins big in the primaries next week, they'll start shouting "Nobody But Edwards".
...
What has Nader done since 2000, asked [Robert] Scheer scornfully, albeit stupidly. As Jim Ridgeway points out in the Village Voice, It's been Nader and his groups, not the Democrats, who've spearheaded universal health care ever since Hillary Clinton botched the chance for health reform in the early 90s. It's been Nader and his troops who've kept the searchlight on corporate crime, who raised the hue and cry on Enron, when Democrats were smoothing the counterpane for Lay in the Lincoln Bedroom.

People continue to chide Nader for a "vanity campaign", but without his 2000 contribution, there would be no Dennis Kucinich and maybe not even John Edwards. And I love the way Nader pisses off Democrats. They need to be pissed. So pissed that they won't dare allow the GOP to steal the election. They need to be complaining about Diebold before they mysteriously deliver Ohio to the GOP. If Bush is re-elected, they need to start impeachment hearings for sending the U.S. to war on false pretenses.

And no, I won't be voting for Nader. Personally, I don't think he'll even get 1% of the vote this year, regardless of his polling numbers. Regardless of his principles, which are dead on correct, he simply doesn't have the personality to be President. It's been pretty well established that a number of individuals who worked pretty hard for the man have had major conflicts and fallings out with Nader the individual. There's far too many incidents to ignore, he's just not a fun guy to work with. But that doesn't mean his message should be ignored, particularly now. As he says in his own words:

I think the mistake the Democrats are making when they use the mantra 'anybody but Bush' is, first of all, it closes their mind to any alternative strategies or any creative thinking, which is not good for a political party. And second, it gives their ultimate nominee no mandate, no constituency, no policies, if the ultimate nominee goes into the White House.

And then they'll be back to us. I guarantee you the Democrats, the liberal groups, the liberal intelligentsia, the civic groups that are now whining and complaining, even though they know they're being shut out increasingly, year after year, from trying to improve their country when they go to work every day. And they'll be saying, 'Oh, you can't believe -- we were betrayed. The Democrats are succumbing to the corporate interests in the environment, consumer protection.'

How many cycles do we have to go through here? How long is the learning curve before we recognize that political parties are the problem? They're the problem! They're the ones who have turned our government over to the corporations, so they can say no to universal health insurance and no to a living wage and no to environmental sanity and no to renewable energy and no to a whole range of issues that corporations were never allowed to say no to
30, 40, 50 years ago. Things really have changed.

It would have been unthinkable just a couple decades ago to try and hack away at Social Security, Welfare, Medicare, health care as an entitlement, union rights, environmental protection, civil liberties, and so on, but these things were well underway before Dubya got into the Oval Office. It's been amazing how easy it has been for CEO's to break their promises to workers on health care and pensions. I have only heard one Dem candidate really say things implying corporations owe their workers and customers more than they do the shareholders. There's another that rails against "corporate subsidies and corporate greed", but few that are seriously proposing restoring the rights and responsibilities that we've discarded or lost.

The next President is going to have to do a whole lot more than just stop the bleeding. They're going to have to stand up for these things and fix these problems, all the while fighting a $500 billion budget gap and a GOP lobbing little green slander grenades at them. I can't see Nader being anything but progress toward restoring this nation's purpose, even though he has no chance of winning.

2004-02-25T08:52:00.000-08:00

It's a little too late to start acting responsible, Alan

Peter Eavis at theStreet gives us another free article analyzing statements by Alan Greenspan that called for regulation of the lending practice of the three government sponsored mortgage finance companies - Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

Imagine a country where the most powerful bank regulator in the land repeatedly voices deep concerns about two of the country's largest financial institutions -- but is powerless to rein them in.

That could never happen in America, right? Wrong. Take a look at Federal Reserve Chairman Alan Greenspan's testimony Tuesday before the Senate Banking Committee on government-sponsored mortgage giants, Fannie Mae and Freddie Mac.

The combined lending of these three institutions has increased to around $4 trillion. The amount of derivatives they are party to is unknown. A couple of decades ago, they represented less than 20% of the market for mortgage finance. Currently they now represent over 60%.

They also carry very little in equity to cover losses. Fannie Mae has about $20 billion to cover $2.2 trillion in debt. How fast that can disappear if rates move unexpectedly was demonstrated last year.

In the second half of 2002, Fannie suffered massive losses on closed-out derivatives that arose due to its devil-may-care attitude toward prepayment risk. The company refuses to disclose the size of these losses, but some financial sleuthing indicates that they are huge. Before its accounting scandal, Freddie openly reported closed-out derivative losses. If Freddie can post these losses, Fannie is also able to, but refuses, almost certainly to protect the position of Fannie CEO, Franklin Raines.

The Fannie losses are key to understanding Greenspan's testimony. If interest rates had dropped just a little bit further than they did in 2002, Fannie's equity would've been wiped out.

Think Detox is exaggerating?

Well, as rates fell, Fannie's equity plunged by $10 billion, or 50%, to $11 billion (excluding a gain from a change in accounting) in just two quarters in 2002. Recent numbers indicate that the company is still taking huge bets on rates that could blow up in its face. But the nation's premier bank regulator can do nothing. Except complain, which he did very eloquently Tuesday.

Did I mention that the foreign sector owns about 15% of all GSE debt?

Alan, it's too late to start trying to reign in the GSEs. They grew out of your control years ago. About all you can do now is keep interest rates from rising so the GSEs don't get killed. You can talk about instituting debt ceilings, but there's no way you want to slow down mortgage credit growth (incidentally, the Congressional bill set to regulate the GSE has no such ceiling), because it's the only thing keeping the economy afloat. The only way consumers can keep spending is to refinance their house and pay off their credit cards. This means treasury bonds have to stay below 5%. If they ever threaten to get there, you have to step out and say interest rates are going to stay low forever, so maybe bond traders will relax and bring down rates again.

Everyone knows you're full of BS when you mention the GSEs aren't "government guaranteed". Well, maybe not by the government, but they sure are guaranteed by the Fed. The fact that people aren't in full panic right now means they've seen your wink and nod.

Even the talk of regulation is a joke: the Bush nominee for Director of OFHEO was the freaking head of derivative trading at JP Morgan "the derivative king". When Freddie Mac got busted for misreporting the value of their derivatives, his nomination got dropped like a Brick-ell. But this only means that OFHEO gets placed in regulative limbo. Congress wants a new agency with "more teeth", but they're certainly taking their sweet time setting it up when time is pressing. The reality is OFHEO had plenty of teeth - certain people just didn't like what they had to say.

Nobody wants to stick their neck out and challenge the GSE's, not even you Alan, so I suspect this is just a big serving of CYA. If a GSE were to implode and take the economy with it, you could at least say you warned us, even though you didn't do a thing to stop it. Your responsibility is to make boring speeches and keep interest rates low forever. Get back to work.

2004-02-23T11:14:00.000-08:00

Easy Money Madness

Daily Reckoning columnist The Mogambu Guru, who can even make my ranting sound coherent, opines:

Anyway, suppose you, as a successful capitalist swine, hire a hundred guys to make a hundred widgets, and sell the widgets for a dollar apiece, and thus GDP is $100. So far, so good. Then a few days pass, and we wake up with a blinding headache in a strange, seedy little hotel on the outskirts of town with a one-eyed woman who says her name is Darla, and when we frantically call in to the office, we find that you raised the price to two dollars, and you also figured out a way to make widgets with only fifty employees! The hike in price, unfortunately, reduces widget sales by 25%. But GDP jumps to $150! And because you fired half the employees, labor costs plummeted, and the next thing you know Alan Greenspan jumps on an airplane and flies down to visit your factory and give you an award as Proud Poobah of Productivity, which you deserve because productivity has soared. In the old days, it took a hundred guys to make a hundred widgets. Now it takes only fifty guys to make seventy-five widgets, and you doubled the price to more than make up for it. You're a genius!

But unemployment is up by 50%, total sales volume is down, and inflation has soared to 100%. Only a Fed chairman as clueless as Alan Greenspan could possibly only see the upside in this.

...or George Bush.

Peter Eavis has another take on Alan's bout with Credit Inflammatory Disease.

You realize what the head of the nation's monetary system and the most powerful actor in the global economy is doing here? After five years of volatile stock markets, he's asking us to rely on equity prices. As for house prices, they could fall steeply as the credit binge slows down. In fact, Greenspan concedes that the buoyant housing market and boom in mortgage refinancing "are not expected to continue at their recent pace." But, of course, the central banker does not predict what will happen to house prices when that pace slows right down.

Meanwhile, Dan Denning sees something very New Economy in the Japan-China-U.S. financial relationship.

One way to describe the willingness of Asian countries to buy U.S. bonds and keep their currencies weak is to call it what it is: vendor financing. Loaning money to your customers so they can afford to buy your products is a risky proposition, however. So is keeping your currency cheap in order to make your exports competitive, so Americans can buy them on debt. Sooner or later, you either lend more money to your cash-strapped customer, or he stops buying because he doesn't have the resources himself. As a vendor, the sooner you realize this, the sooner you'll stop lending. It looks like the Japanese are beginning to realize that selling to Americans on credit has its own kind of economic blowback. Bankruptcy for the customer, non-performing loans for the vendor. Wasted capital for everyone.

Vendor financing might look toxic and unsustainable, but it can survive surprisingly long when you can just print money to cover any shortfall in cash flow or increase production (which also happens to be your capital for lending). Lucent and its customers thought they had this capacity when the stock market boom made printing money as easy as issuing another 100,000 shares. Unfortunatly, when this was no longer possible, vendor financing crashed and burned. Lucent went from a company with a net worth in the tens of billions, to one that now has a negative book value. Many of their dot.com customers haven't been so "lucky". When the vendor runs into financial problems, the borrowers get creamed.

Incidentally, remember when Greenspan was raising interest rates to generate that "soft landing"? Well, the Chinese are may raise interest rates for the first time in a decade. Iceberg ahead?

2004-02-23T10:23:00.000-08:00

Greenspan presses my buttons yet again

Mr. Magoo sez consumers are managing debt well.

Oy.

Here's a basic rule for analyzing economic data: if what you're looking at is a ratio, look at the development and the prospects for the things that contribute to that ratio. Not doing so is stupid. It's poor analysis. The ratio tells you nothing without the components - it's like looking at prices without analyzing supply and demand. Unfortunately, it's commonplace in the media today, and the disease seems to have spread to the brain of our Inflationist in Chief.

Greenspan feels consumers are managing debt because their ratio of monthly debt service to income has been stable over the past two years. Yes, the debt portion (the numerator) is now growing at double-digit rates, but that's okay because interest rates have fallen (and just who did that, Alan?) and payments remain constant.

Now, do we really believe that interest rates are going to come down another 5.5%, as Alan cut them the past two years? If so, start borrowing money, because in a couple year's they'll be paying you to do it.

So if a similar drop in interest rates is not feasible, then what happens to the debt-service ratio in the near future? Well, without making any predictions, if debt continues to increase at double-digit rates, I'd say consumers are going to start managing debt a lot less well. If not, they're going to have to borrow a whole lot less money to keep debt service ratios constant. Either is not conducive to our long-term economic health. The economy either gets more fragile and more vulnerable to higher interest rates, or we head toward recession.

And yes, Magoo, we've noticed that debt ratios have risen since the 1940s. There were a couple things called the Great Depression and World War II. Maybe you've heard of them? If I got sick and fell under 100 lbs last year, and then got better and went back to my usual 175 lbs, I wouldn't worry about dieting. But you could say the same thing about me if I ballooned over 300 - he's gained weight constantly since last year. What weight is good and what is too much? Greenspan's "analysis" tells you nothing.

If I wasn't already aggravated by Greenspan, John Snow spoke at the same meeting. Fortunately, his speech was so incoherent I couldn't get mad at it...something about floating down the Ohio river through a field of gardenia bushes.

2004-02-16T07:08:00.000-08:00

Protectionism by any other name

Bush Chairman of Economic Advisors Greg Mankiw gets a defense this weekend from both Jagdish Baghwati and Brad DeLong.

This type of argument is where everybody begins to look silly. It's true that very few economists will favor protectionism, and for the record, I agree with Mankiw in principle. More important issues abound, however.

First, it was a tremendously impolitic thing to say, for two reasons. First, you don't want to remind Americans, who are down 2.4 million net jobs, that natural economic forces will send jobs overseas. Second, it focuses light on the Bush Administration's total incompetence and incoherence with regard to the jobs issue. More than three years after employment peaked, Bush is just now making noises about job retraining (nothing in the 2005 budget, but he's in favor of it, reportedly) and continues to espouse that tax cuts are creating employment (which they aren't). There's also the issue that he's previously supported steel tariffs, and continued to push for a NAFTA for the Americas, which is less about free trade than intellectual property rights, patents, which are protectionist whatever you call them. Add to that the Department of Labor advising employers on how not to pay overtime, passing bills eliminating overtime for millions of Americans, interfering on the side of management during the ILWU/PMA conflict (and still losing). This is an Administration that is anti-labor to the core and anti-free trade whenever it runs against their constituency.

Secondly, it highlights the flaws in the assumptions made by economists on trade. We assume free movement of labor and capital, which clearly does not exist for labor. As a result, capital becomes more mobile and factories move overseas. We assume there are no economies of scale, and yet midwestern wheat farmers on hundreds of acres are much more productive than Central and South American land tenants forced to till their small plots. When the consumers that benefit from lower prices are all in the U.S., and the producers that lose are all in developing nations, don't think people haven't noticed the reality for the last fifty years.

There was a push during NAFTA for international labor standards (union protection, minimum wages, etc) that would have only allowed countries to join free trade areas had they met these minimum requirements. This would have been a much better setup than the nothing that was actually in the agreement. When factor prices head to equilibrium, it's much better for labor to see foreign wages increase than domestic wages fall. But this type of forward thinking has sadly been lacking from trade agreements, including the ones under Clinton, Bush the former, and Reagan. They have instead been focused on keeping cheap goods coming in for American consumers, to the detriment of the developing world in the short-run, and to our own detriment over time.

Now is certainly not the time to usher in another round of protectionism, which occurs in many forms, as Ron Paul indicates in his questions for Alan Greenspan.

"...But you mentioned the condition of protectionism. You worry about protectionism, which I think is characteristic of all societies that destroy their currencies, and especially when you have fluctuating fiat currencies. People yield to the temptations of protectionism. But once again, there are different ways of bringing about protectionism. There are tariffs, but there is also the competitive devaluations and the exchange rate of the dollar, which is a reflection of monetary policy."

Not surprisingly, the Bush administration recently jettisoned support for their "strong dollar policy", something that was really not under their control, but as speculators had decided that the economy could not function well with the dollar at previous levels, the administration must have just decided to accept reality and project the image that they were in favor (and thus somehow in control) of the policy all along.

As Mr. Paul illustrated above, this is not a free trade policy. The people it directly benefits are U.S. capitalists who have overseas operations (their sales and profits denominated in foreign currencies are worth more). It benefits foreign capitalists who want to buy U.S. assets (now much cheaper in their currencies). It forces our largest creditors in East Asia
to devalue their currencies by buying our debt (or suffer the consequences). It's not helping our workers, who now consume more expensive foreign products while losing jobs, pensions and income, in the least.

An administration trying to restore credibility with average Americans would be better served not to openly snub them with an election coming up. Economists trying to restore credibility as a discipline would be well served to temper their textbook theory with a smattering of reality. Furthermore, it's time to actually do something, paying something more than lip service to the challenge of creating employment in the current economy.

2004-02-11T11:37:00.000-08:00

Greenspan and Responsible Monetary Policy

Greenspan was blathering on to Congress today. Needless to say, I've vented a lot of against the Mr. Magoo of monetary policy, but the one consistent beef is, much like our President, the constant willingness to bend statistics to his narrow view of policy.

Case in point is his reiteration that the Fed "beat" inflation during the Reagan Administration. While inflation declined during the 1980s, there is no evidence that this was coincident with Federal Reserve policy.

The Fed had to start to lower interest rates in late-1981, as the world economy becan to collapse under Chairman Volcker. The collapse was engineered by a combination of extremely high interest rates in the developed world (up to 20% in the U.S.) with a bursting bubble in lending to developing nations. The latter had borrowed heavily during the 1970s to finance development. They were still heavily reliant on commodity exports to generate income to pay those debts. In 1982, when world commodity prices began to collapse, Mexico and several other countries nearly defaulted on its obligations.

Meanwhile inflation was still running at nearly double-digit levels. As mentioned before, the Fed had started to reduce rates, which are supposed to increase inflation, far in advance of any appreciable "price stability". This does not prove in any way the fed "licked" inflation. In fact it shows the Fed was licked before inflation was even at reasonable levels, and forced to expand monetary policy regardless of the consequences. That inflation continued to decline during the 1980s was more due to the policies developing nations had to adopt to receive favorable terms on renegotiating their debts, a consequence of Volcker bursting their bubble rather than later Fed policy.

In fact, the goal of "price stability" is not really an achievable or desirable goal of monetary policy. First, price stability is in the eyes of the beholder. If the CPI or the PCE deflator in GDP figures (the Fed's definition), are low and stable, other prices (like houses, natural gas, health care, pharmaceuticals) could be wildly inflating or unstable and this would still meet the narrow definition the Fed has set for itself. Similarly, the Bush administration defines Afghanistan as "stable", based on its definition of Afghanistan as the Kabul city limits. While this kind of delusion helps sell talking points, it has no effect on the efficacy of policy.

Genuine targets for monetary policy should have two dimensions: depth and breadth. Depth meaning the statistic actually measures what it is supposed to measure, and that there are reasonably direct and provable effects that manipulating factor A will affect the statistic B. Breadth means that there are actually a group of related statistics, such that if factor A does not affect B (with some good excuse), it will affect C, D, E, et cetera so that the predicted policy effect can be proven. If price stability were honestly desired as a goal, we'd have lots of bundles of "prices" (not just CPI), and if certain prices (houses, medical care, etc) were inflating due to monetary policy, we could find reasons why CPI was not, and it would keep our basic economic relationship, that expansionary policy leads to inflation, valid. Many people believe that CPI is deliberately understating inflation, so if the Fed is using CPI to determine "price stability" without any breadth, they will come to incorrect conclusions about how effective their policy is.

My preferred monetary target is to keep consumption growth stable. Both tools of Fed policy, money growth and interest rates, have a more direct effect on consumption demand than on prices. A Fed policy that increased demand could still result in lower prices, if supply increased more than the policy increased demand. Obviously, there are other things besides Fed policy that affect demand, but the point is that analyzing a more direct relationship reduces the time lag of policy, as well as the number of things that can offset the policy.

If the Fed lowers interest rates, they change the relative price of consumption versus savings. Future consumption is worth less because of the lower interest rate, so consumers spend now rather than save. That our national savings rate has come down steeply since interest rates began to decline in 1982 is an established fact, and though there are plenty of other variables that affect savings and consumption, interest rate policy will affect consumption more quickly and more directly than it will affect prices. Likewise, expanding the money supply and lending gives consumers more credit and increases the amount they are able to spend. Once again, consumption is affected before, more directly, and more consistently by monetary policy than the price level.

While consumption is easy to measure by counting up receipts, we have to estimate prices by measuring both the quantity and quality of goods consumed. Measures of consumption are much more accurate than measures of prices because there are fewer intermediary variables to account for.

Finally, using consumption instead of prices will accommodate the overriding goal of policy: to moderate the business cycle. There have been periods of high growth with low inflation and periods of low growth with high inflation. If we are using inflation to gauge whether the economy is "overheating", we're more likely to make errors in applying policy fighting inflation rather than overconsumption. Using consumption rates, we can moderate a variable that is directly linked to output, rather than a variable that is indirectly linked.

We can measure a virtual boatload of alternate and related economic variables to give us a breadth of analysis on consumption. Saving reacts inversely with consumption, because in economic accounts all income is either consumed or saved. Credit growth is also related to consumption, as it is the purchasing power available to consume goods at any price. We can also look at our trade balance to see how much we're consuming vis-a-vis other countries to determine whether policy is too tight or too lax. Consumption growth and all the related indicators would overwhelmingly show Fed policy has been the most lenient for the longest period in history, and though nominally GDP continues to grow, it is a very unhealthy type of growth, dependent solely on the ability to overborrow and overconsume that the policy fosters.

It's pretty clear that if the Fed regulated consumption, they'd have done a lot more during the 1990s to prevent the economic bubble that popped with the stock market in 2000. They would also have left enough policy ammunition to allow what Steve Roach calls "reloading the cannon". Should the economy start to struggle, the Fed only has 1% of interest rates to cut, and very little pent-up demand to extract.

Likewise, the Federal Government cannot initiate their own stimulus while running a $500 billion deficit. At least nowhere near what they could have done by maintaining a surplus. The Bush policy has been the equivalent of a deer hunter who, not seeing any deer to shoot, starts unloading against birds, squirrels, trees, and so on. Should an incipient recession require a pickup in spending, there is very little money left to draw from.

There may not have been an asset bubble to pop if Greenspan had been serious with his "irrational exuberance" speech of 1996. If Greenspan is to be judged sheerly on the number of crash/bubble dynamics of the global economy during his reign, he's the worst central banker ever. He has presided over the largest number of crises ever seen by a central banker. Moreover, he continues to be dishonest with his assessment that we are experiencing a standard and strong recovery which has been anything but, nor honest with his blanket assessment that the Fed is powerless to diagnose bubbles before they pop when the lack of foresight has been due rather to the blinders he keeps on to avoid examining alternative measures of demand and prices.

A responsible monetary policy would have rates about where they were in 1996 - 4.5% percent higher than the current rate. In addition, Greenspan and the Fed would have acted to restrict credit growth, particularly by working with regulators like OFHEO to regulate lending outside the banking system. It goes without saying that rates should have increased far earlier than they did during the 1990s. But such is Greenspan's "asymmetric" policy, which only fights busts and does nothing to hinder the booms that precede them. It's a recipe for disaster.

2004-02-11T06:43:00.000-08:00

Hey Reggie! Is that rhinocerous around?

Risk is slowly coming back into financial markets as the U.S. economy slows. Argentina's MerVal fell nearly 8% on rumors the country will not make a payment to the IMF in March. Brazil had a similar rumble in their financial markets a couple weeks back involving payments on their enormous debt, and Thailand (the origin of the 1997 East Asian crisis)markets fell in response to the initial reports of the avian flu.

I think my fellow bloggers have thoroughly deconstructed both the joke that is the 2005 Bush budget as well as the ERP's silly employment predictions. I'll take a pass.

I never got a chance to look at fourth quarter 2003 GDP numbers, so I'll run through them. These were the major contributors to the 1% increase that converts to a 4% annual rate of growth. Personal consumption expenditures (1.84%), which were mostly nondurable goods (0.89%) and services (0.87%). The large decline in the contribution of consumption to GDP growth (-3.05% from third to fourth quarter), indicates the tax cut stimulus is done, and consumers must go back to meager wage increases and borrowing to fund consumption. Not surprisingly, the biggest individual contributor to consumption growth was medical care (0.53%), followed by furniture and household equipment (0.34%) and food (0.31%). There was also an "other" nondurable goods category that contributed 0.35%. That these categories are ones where inflation is a bit higher than the CPI average indicates this consumption is less than voluntary.

Gross private domestic investment also contributed 1.84% to GDP growth. Residential investment (go housing bubble go) contributed 0.54% to the gain in investment. Equipment and software contributed 0.76%, so here we go again measuring how much of this was actual dollar spending and how much was imputed. In current dollars, spending on information processing equipment and software increased by $11.9 billion (0.1% of GDP). Converted to "real", or constant dollars, the increase becomes $19.4 billion. Outside of information processing and residential investment, industrial equipment investment fell $2.3 billion, transportation equipment investment rose $1.9 billion, and "other" investment rose $4 billion. I would hardly call this a resurgence of investment spending. It looks just like last quarter, where the majority of "investment" was housing or imputed tech spending.

Government consumption expenditures contributed just 0.16% to GDP growth, as most Homeland Security, Iraq and Afghanistan spending was thrown into the second quarter of 2003. Net exports contributed 0.19% to GDP growth. This seems to be a function of the weak dollar, as both imports and exports increased, but exports added 1.69% to growth and imports subtracted 1.5%.

Going forward, consumption growth is being impinged by stagnant employment and wages. Consumers can always borrow, and have done so, but given private savings rates that are already negative there is little room for an increase in borrowing that would positively impact GDP. While residential and computer equipment investment seem to have endured through the first quarter, the economy reminds me of a car out of gas coasting downhill. As long as what brung us isn't impeded, the U.S. economy can continue to grow in the 2-4% range through at least the second quarter of 2004. But there are very few avenues to increase consumer spending unless we see a significant pickup in hiring. We won't see a significant pickup in hiring without a significant pickup in spending. Corporate and household borrowing rates remain low in the meantime, allowing cost reductions via refinancing, but that doesn't improve the outlook going forward. Predictions I'm seeing for 4-5% growth in the first quarter seem really high.

2004-02-06T08:08:00.000-08:00

Job Growth is not Strong

What Atrios said, and then some.

January is typically the weakest month for job growth, as the temporary workers hired for the Christmas season are no longer employed. Not seasonally adjusted, nonfarm payrolls fell by 2.6 million in January. Typically, there is a symmetry beween the hiring during the Christmas season and the layoffs in January. As the Christmas hiring season was quite lame (743,000 hired between September and December, compare this to 2.2 million in 1998 and 2.4 million in 1999), the layoff season is less than usual as well. Add to this the move by BLS to concurrent seasonal adjustment (readjusting the data each month), which weights the most recent trends (poor employment growth) heaviest, and the "usual" amount of layoffs may not be usual at all. The usual amount of job losses between December and January was 2.7 million from 1994-1999 and were often closer to 3 million.

So people should be very careful of interpreting a 115,000 seasonally adjusted increase as "significant". I would not consider it significantly different from zero. Note also that last January had a similar increase of 104,000 seasonally adjusted. February 2003 had job losses of 159,000 and March 2003 had job losses of 110,000. This means nothing. The job market is still very weak, and it correlates with the Challenger report as well as yesterday's jump in weekly unemployment claims.

What Bush should be doing is putting effort into getting the GOP Congress to reauthorize the extension in unemployment benefits, putting money behind job re-training and Community Colleges, refunding the SBA, and providing alternatives for the people out of work. He is not, and that is yet another sign of total lack of compassion for the unemployed and underemployed, and yet another reason why his poll number suck so bad. The measley amount of money these efforts would require ($10-$20 billion) adds exponentially to the reality that this Administration has its priorities completely out of whack.

And the Chicago Trib has an article on the rise in self employment which always accompanies a downturn in payroll employment. The self-employed are not on payrolls (that is, if they are the only employee), and certainly these stories (all two of them) are well-educated employees with significant contacts in their old businesses who became consultants.

The majority of job losses since the employment peak of January 2001 have been throughout manufacturing (-2.77 million). These are industries like textiles and apparel (-289,500), computer and electronic products (-540,600), machinery (-314,400), and fabricated metal products (-280,000). The usual educational background of workers in these industries is high school education and they do not become "consultants" at their old firms. These jobs have been outsourced to China, India, etc. The average age of these workers is older, and they are having greater difficulty finding work. It doesn't help that older workers pay much more for health benefits (no longer paid by their employer) and are more frequently having their benefits cut off by their employer (who always say they can't afford it).

The mean duration of unemployment is currently 19.8 weeks, while the median is 10.7 weeks. Both statistics are typical for an economy coming out of a very deep recession. Figures for last January were 17.8 weeks and 9.3 weeks, respectively. For the 1982 recession, the peaks were 21.2 and 12.3 weeks, respectively. For the 1991 recession, the peaks were 19.0 weeks and 10.0 weeks, respectively.

To repeat, this is the weakest job market since the 1982 recession, and some measures are starting to equal numbers set back in 1982-83, when the unemployment rate hit 10.8%. While the nominal unemployment rate is 5.6%, that is the only statistic that is positive. When you add in the marginally employed, unemployment is 9.9%. And all the unemployment numbers are based on an extremely low rate of growth of the labor force. While the labor force was growing around 2+ million a year between 1992-2000, it has been growing at 1 million a year since 2001. If the labor force grew at a constant rate, we'd have 3 million more unemployed and an official unemployment rate around 8%.

2004-02-03T19:21:00.000-08:00

I'm Super, thanks for asking, Tuesday update

Looks like Kerry remains the frontrunner, winning Delaware, Missouri and North Dakota, finishing a strong second in South Carolina, a strong third in Oklahoma. Edwards wins South Carolina and is neck and neck with Clark in Oklahoma, second in Missouri, tied for second with Lieberman in Delaware. Clark has taken a 760 vote lead in Oklahoma and finished a distant fourth in Missouri, South Carolina, and tied for fourth in Delaware. Dean has finished third or worse in every state and looks almost done. Lieberman dropped out. Sharpton pulled 10% in South Carolina and low single digits elsewhere. Kucinich has 6% in New Mexico (1% reporting) but is 1% everywhere else.

My guess is that Lieberman's support will mostly go to Kerry and about a fourth to Edwards. Sharpton will stick around until the majority of the South votes and then he'll probably award his support to Edwards or Kucinich unless he has enough delegates to warrant heading to the convention. Dean will need to win one of the larger states coming up like Michigan or he's through before the end of March.

At this point it looks like Kerry, Edwards and Clark. Sharpton and Kucinich will not be a factor except which camp they tell their supporters to and Dean looks on his way out. Clark also looks shaky, and will need to get some momentum soon or he may follow quickly after Dean. Kerry is the frontrunner, but as Edwards seems to pick up a good chunk of support the day before every single primary, you can't count him out as Kerry has only taken 50% or more in two states. My money is still on Edwards, as he's getting plenty of momentum and exposure (should his voice hold up), and his message is a bit easier to define (what there is of it). His focus on the economy(!) and jobs should definitely play well in MI, OH, IL, IN and PA, where Kerry would seem to have the natural advantage. But it's till very interesting with several months to go.

It will also be interesting to see if the ricin attack gives Bush much of a bounce in opinion polls. One out yesterday had Kerry beating Bush 53 to 46, and the President's approval ratings are back to the all time lows between 45-50%. The budget mess isn't helping, either.

2004-02-03T14:11:00.000-08:00

Cuttin and Pastin

Marshall Auerback hits multiple nails on the head regarding last week's change in Fed wording.

We still maintain that in the absence of a complete meltdown in the capital markets, the Federal Reserve is probably not keen to see a big appreciation of the dollar. On the contrary, it is happy to perpetuate the gentle declining trend. Of course, the danger of any trend, once it becomes firmly established, is to intensify, accelerate, overshoot, and ultimately spin out of control. It is the gentleness of the dollar decline that has accomplished at least 2 things: (1) It has kept the bid in the US debt market, which in turn has suppressed the mortgage interest rate and helped to absorb excess capacity, (2) kept the industrialists quiet about the effects of globalization/free trade, thereby reducing the dangers of a turn toward US protectionism which would be disastrous for all.

The change in language of the Fed should be understood in this context: it at least creates some doubt in the minds of speculators that the dollar is a one way bet, thereby helping to avert a dollar collapse. This also provides some support to beleaguered Asian central bankers apparently fighting a losing battle against accelerating dollar weakness, notably the Bank of Japan. Perhaps one should see Japan’s Minister of Finance Sadakazu Tanigaki’s comments, “Japan needs to carefully consider diversifying its official reserves to include more holdings of gold”, as a veiled hint that its seemingly endless support of the dollar will not go on forever. The Bank of Japan announced last week that it spent 7.2 trillion yen in the month of January, at the behest of the Ministry of Finance, to forestall further appreciation pressures on the yen.

That the Bank of Japan has intervened on such a scale suggests that the dollar’s fundamental weakness is far greater than has been hitherto implied by the relatively gentle decline in the dollar index. But for the BOJ’s unprecedented support, and (equally important) the renminbi peg (whose absence might also create a freefall in the dollar), the greenback might have already taken on status comparable to the Argentinean peso. Putting the odd bit of grit on the icy slope of dollar devaluation serves to prevent this fiasco from occurring, but it does not fundamentally change the underlying picture.

From a tactical standpoint, the Fed’s timing was impeccable: bond yields were near their 5 month lows, stock indexes were near 31 month highs, and so they felt they had some room to remove a clause they felt was doing more harm than good in terms of cultivating a policy of benign neglect in the external value of the dollar. It can be taken as a verbal tightening, but it is highly unlikely that the Fed has any real interest in changing the fed funds rate anytime soon.

From a relative perspective, keeping the Yen/renminbi appreciating less than the Euro helps Japanese and Chinese exports make inroads in Europe. For the mercantilist, export-driven growth economies of East Asia, accumulating $1,000 billions of ultimately worthless U.S. debts is a willing sacrifice - the yin to the U.S. yang.

Auerback then sets in for the kill.

The dirty little secret about the American economy today (that no central banker dare acknowledge publicly) is that there is no anti-inflation constituency left within the United States. There cannot be, given the preposterously high levels of debt, which makes the only socially acceptable policy response at this stage a deliberate policy of debt confiscating inflation. The ongoing weakness of the dollar over the past 2 years stems from the growing realisation that the United States cannot continue to be the source of global demand indefinitely, so long as its economic imbalances—from budget and trade deficits to record levels of private debt—remain firmly entrenched. Given the comparatively poor America social welfare safety net (in contrast to its Euroland counterparts), and its continued high levels of immigration, the political economy imperatives of the United States invariably push monetary and financial officials in the direction of growth, employment and higher inflation. There is no savings constituency to speak of any longer which might oppose this policy (at least in an electoral sense).
...
in a fiat currency system, any such constraint [to purchasing dollars] faced by a central bank is ultimately illusory. The BoJ is the monopoly supplier of yen. As long as private agents are willing to accept yen credits to their bank accounts, there is little besides pure accounting formalities between MoF and the BoJ that prevents the BoJ from creating and selling all the yen it desires in foreign exchange markets. There is simply no limit to the BoJ's ability to create its own fiat currency and sell it. Therefore, to state BoJ sales of yen are "extremely large" and "unsustainable" is to ignore the very nature of virtually unlimited money creation available not only to the BoJ, but to any central bank running a fiat currency.

In contrast to private sector agents, who do not have the endless capacity to create money out of thin air, central banks have an unlimited war chest with which to play this game. Eventually, these private sector agents will either have committed all their investable liquid funds to shorting the dollar against the yen, or their risk managers will swoop down and demand no further dollar short/yen long positions be put on given the existing extreme VAR's. Long before the BoJ runs out of yen to sell - which it can't, because it has the power to credit accounts with yen balances at will – private sector financial participants will find themselves tapped out of dollars to spend, or risk budget to spend, on this trade.

The unsustainability, in other words, rests entirely with the yen buying power of private currency speculators, not with the yen selling power of the BoJ. This asymmetry remains largely unrecognized because it is rare that a central bank is actively engaging in so massive an effort to depreciate its own currency. But because the BOJ has evinced its clear willingness to use the powers of the electronic printing press (at least whilst the dollar is trending around 105 to the yen) it is hard not to believe that it too has begun, albeit tentatively, to embrace a policy of competitive currency devaluation (although in the case of Japan, the political imperatives in relation to Washington and Beijing also militate against a substantially weaker yen above 120, particularly in a US Presidential election year, because of the protectionist pressures and competitive currency devaluation threats that such yen weakness would launch; so there are political limits today to yen weakness...

Although Auerback seems to think that it gives the U.S. an advantage (If every other country rushes to devaluate versus the dollar, woo-hoo! Cheaper goods for us!), this is not necessarily so.

The reason is that all this JCB money just sits there, doing nothing. The Yen reserves could be lent out to finance productive activity, but that is not the case. What productive activity do we need? The volume of complaints of China driving out jobs all over the world seem to rise by the day, as well as the complementary assertion that all this production is a bubble of its own - successful as long as it employs enough Chinese to keep a restive populace satisfied, and to keep vendor financing its very lucrative American customer.

Instead, the money simply rests in nonproductive activity, such as assets. While Japanese monetary base has jumped by 70% since the end of 2000, and foreign exchange reserves have nearly doubled since that time (coincidentally about the same amount, $400 billion), the result has been laughably little inflation or production within Japan itself. Milton Friedman must be rolling over in his grave (Oh, yeah. He's not quite dead yet - maybe Keynes is, though.)

And since this increases the ratio of unproductive assets (and liabilities!) to productive assets, it means the race to the bottom is really a race to zero returns.

Meanwhile, the other ratio rising is of speculative trading to actual trading. The problem with speculators is there's really no reliable way to know what they're thinking. A purely speculative economy is a zero-sum game that rests on the greater fool theory. Fortunately, there's no greater fool than the central banker, who will continue to lend at 1% while most borrowing rates are much higher. However, the more importance and money we devote to the speculator, the more unpredictable the markets, and those two little words excised meet quicker and more violent reactions when 1000 traders are slugging it out instead of 10, particularly when you've been cultivating an environment where "everybody knows" something. To find out you're wrong is a shocking experience, for everyone, to say the least.

More volatility in financial markets? Count on it. Opportunity for a major financial accident? Rising by the day. Ability of the Fed and central banks to control the monster they've created? Like an Indy 500 driver chugging beers in the cockpit. They may not realize it until the blowout occurs, but their ability to deal with financial problems has been seriously compromised. More to the point, there is an increasing number of things they cannot do. We cannot have deflation, yet we cannot raise interest rates (which would seem to be the case if we get inflation). We cannot let the dollar depreciate too much. We cannot let the U.S. economy slow down (bad economic news sends dollar buyers fleeing). We cannot have foreigners stop buying U.S. debt, and we cannot slow down our borrowing. As soon as those "invulnerable" institutions, these unshakable truths, have been tested and shaken beyond their means, things will certainly get interesting very quickly. We may find there are other things we cannot do.

2004-02-03T10:34:00.000-08:00

More Budget Unseriousness

George Bush's 2005 budget was released, and next to works by Austin, Twain, and Hawthorne, may go down as one of the greatest works of American fiction of all time.

Krugman really lays into him right away.

Well, whaddya know. Even as the Republican leadership strong-armed the Medicare drug bill through Congress, the administration was sitting on estimates showing that the plan would cost at least $134 billion more than it let on. But let's not make too much of the incident. After all, it's not as if our leaders make a habit of faking their budget projections. Oh, wait.

The budget released yesterday, which projects a $521 billion deficit for fiscal 2004, is no more credible than its predecessors. When the administration promises much lower deficits in future years, remember this: two years ago it projected a fiscal 2004 deficit of only $14 billion. What's new this time is that the administration has decided to pay lip service to conservative complaints about runaway spending.

While Krugman just hacks apart the 2005 budget, Calpundit notes that the Bush Administration has NEVER BEEN CLOSE with either revenue or spending projections in ANY of their budgets from 2001-4, and some of the assumptions in the 2005 budget are doozies. Referencing Daniel Gross over at Slate:

Not very confidence inspiring, is it? And as Gross points out, $2.04 trillion [in revenue] would be a 13% increase over 2004, a year-to-year increase bigger than any we've seen for the past 20 years.

Even the Washington Times notes that Bush has never issued a veto and, this being an election year, has no credibility to do so even by his own party. Hence the 2004 budget, long delayed, was passed with little fanfare and signed privately by Bush, who apart from riders on overtime rules had no significant spending issues addressed.

Despite economic growth, federal revenues are not growing. This is deeply troubling because it seems to be not growing even without the effect of the administrations penchant for giving much of it away via tax cuts and deductions. Let's face it, marginal spending is voluntary but marginal income is not. Even if the Bush Administration could possibly hold the line on spending, which it has never done, it would still be running $300-$400 billion budget deficits because the government seems to be stuck under $2 trillion in revenues.

To balance the budget, Bush (or his successor), will need to cut $400 billion from a $2.4 trillion budget where nearly two-thirds of spending is not discretionary. Right now the deficit is running at half of the $700-900 billion in discretionary spending. Fifty percent cuts in agency programs are simply not possible, so fantasy seems to be the order of the day. In short, the election year budget is a farce and should not be taken seriously.

Oh, and did I mention the budget doesn't include any money for Iraq or Afghanistan? Somebody must think we'll really be 100% out of both countries. It's a shame we can't keep those puppets in line.

2004-01-29T09:26:00.000-08:00

Tax Revenues and the Housing Bubble

MaxSpeak has a pretty good post analyzing the origin of our budget deficit. Most telling is the graph of revenues versus outlays, as a percentage of GDP. Please remember that the 2004 outlays (which appear flat vis-a-vis 2003) are due to a) the rapid growth of GDP in the next 12 months, likely IMO to be overstated b) expected outlays based on the current Bush budget, which if the past is any indication, will be wildly understated.

While Max makes a macro analysis, I'd like to take a micro look using a hypothetical taxpayer and working upward.

Tax revenue peaked in 2000, coincidentally with the stock market bubble, which immediately causes many economists to assume "capital gains taxes", or the other coincident event: Bush tax cuts. Just from looking at the graph, the total rise in revenue from 1992-2000 was around 3% of GDP, revenue jumped from 17.5% of output in 1992 to 20.5% of output in 2000. If all that was capital gains related, it wouldn't nearly cover the 4.5% drop from 2000-present. The same is true of Bush's tax cuts. The deficit increased from a $150 billion surplus in 2000 to a $350 billion deficit in 2003, and the deficit is expected to be around $450 billion in 2004. The difference is around $600 billion or about 5.5% of GDP. Since the deficit is computed from both spending and revenue, that 5.5% change needs to explain both the 4.5% drop in revenue and the 2% rise in spending. While the tax cut/spending theory gets us closer to that 6.5% combined difference, it doesn't cover it in entirety (all number expressed as % of GDP).

While I feel both of these played a role in the current budget problems, another major influence is certainly the housing bubble. As housing values rose 50% from 1998-2003 (according to the Federal Reserve's Z-1 tables), mortgage debt was up more than 70%. Mortgage interest on that debt is deductable when you itemize your taxes, and (as I've found out to my delight), the yearly interest on a mortgage on even a median priced house in many metropolitan areas easily tops the standard deduction, even the modified standard deduction under the Bush tax cut (to "eliminate the marriage penalty", the deduction for a married couple was raised to double the single level).

For fun, you can play with the IRS withholding calculator to see how $1000 in extra mortgage interest works in your favor. The itemized deduction is a constant rate (your tax rate) on the dollar against withheld taxes. So, for a married couple making $125,000 a year, the 25% tax rate would mean $250 less revenue for Uncle Sam for every $1000 in mortgage interest deducted. A single person making $50K a year is in the 15% tax bracket and another $1000 in mortgage interest means $150 less for the gummint.

Let's make a very rough and conservative estimate of how much money this could be costing the government. We'll guess home ownership to 40 million U.S. households. Let's take a median mortgage of $140,000 in 1998 and 70% higher in 2003 ($238,000). Multiply 40 million versus $238,000 to check: $9.5 trillion. That's pretty close to the $9.2 trillion in mortgage debt in the third quarter, plus a bit for the gain in the fourth quarter and any mortgage debt that is not included in this line item but in some sort of "other" category.

To be extremely charitable, we'll assume an average 15% tax rate. Historically, there was a roughly 8% mortgage rate in 1998 and 6% rate in 2003 for the average household. This works out to $11,200 interest paid in 1998 (.08 x $140,000) and $14,280 per household in 2003 (.06 x $238,000). It would follow that at a 15% tax rate the average household pays $600 less in taxes due to higher interest payments and 40 million households means a total of $18 billion less revenue for the government. Since this is certainly a conservative estimate, we'll double it to put in a range $18-36 billion per year in reduced revenue due to higher mortgage interest deductions.

This estimate pales in comparison to both Bush tax cuts, which are estimated to have reduced tax revenue by $150-200 billion, the higher unemployment rate (probably adding $100 billion more in lost revenue) and spending increases ($150 billion). The insidious part of the mortgage income tax reduction, though, is that it works only after the standard deduction has been eclipsed, and once it is worthwhile to itemize, it caps income tax withholding in future years. So if someone were to project revenue for future years based on a recovering economy, the income tax projections would be underprojected by $18-36 billion plus the additional mortgage interest that would incur from a larger mortgage debt base.

To expand this analysis, note all the factors involved in calculating the impact of the estimate. If interest rates were to rise, all other things equal, a 1% increase in mortgage interest rates costs the Federal Government about $400 per household (.01 x $238,000 x .15). A 10% increase in mortgage debt costs the government about $350 per household. Lower interest rates have actually saved the government quite a bit of money the past three years by reducing the amount of mortgage interest being deducted. With mortgage interest rates at forty year lows, however, I doubt we'll see much improvement in the future.

Referring back to MaxSpeak, the projection through 2014 is for government revenue to climb back to 20% of GDP in ten years. This projection assumes quite robust economic growth rates that would surely mean higher interest rates and higher home prices than the current situation.

Based on an extremely conservative estimate of current mortgage debt growth rates (around 5% per year versus the actual 10% growth per year), a return to the 30-year average of mortgage rates (+.2% per year to 8.2% in 2014), homeownership increasing 2% per annum, the effective tax rate rising by 0.5% per year (to 20.5% in 2014, along with revenue) and our lower bound current estimate ($18 billion), the cost of higher mortgage interest deductions will be (thank you Excel) $30 billion in 2004, $44.5 billion in 2005, and finally $273 billion a year in 2014.

As if we didn't need this in addition to the recession-free assumptions of 4.5% nominal GDP growth for the next decade, an unemployment rate of 5.2% in 2014, inflation averaging 1.9% average for the next decade, etc., etc that the CBO uses in estimating tax revenue.

I hope you can deduce from all this that the assumption for federal revenue growth is hopelessly unrealistic, even under "conservative" CBO assumptions. The continuation of the housing bubble only changes the qualifier from "hopelessly" to "laughably".

But as with most of the Bush Administration policies, particularly regarding Iraq and the economy, "laughably unrealistic assumptions" are par for the course. This administration is the most fiscally irresponsible this country has ever had (and probably ever will), and with several bubbles in the balance and $33 trillion in total debt, this is certainly not the time to be unrealistic with so much at stake. The flat truth is that Bush and the GOP have crippled the federal budget for DECADES in just three years. Add to this that the crippling private pension funds, federal pension protection, state unemployment insurance funds, social security, medicare, health insurance in general, the entire social safety net is in tatters, facing enormous future obligations that have no hope of being funded under realistic projections. At this point, replacing this administration is only going to be a first step in fixing a legacy of economic troubles.

2004-01-28T14:42:00.000-08:00

Dow Drops 142 points on Fed statement

Just when I stop paying attention blogging and stock prices, the market pulls a fast one. The FOMC changed its statement slightly, removing the part where it stated the Fed would keep interest rates low "for a considerable period". At the time the statement was issued, the Dow was up around 20 points, so I think we have some causality there, as from that point forward it was straight down and the Dow finished off 141.55 or 1.33%. The S&P 500 was down 1.36% and the Nasdaq fell 1.83%.

The only worry for this economy is higher interest rates, particularly mortgage rates. When the Fed raised rates in 1989 and 1990, instead of the "soft landing" they got a recession and an S&L crisis. When rates were raised again in 1995, we had a near recession. When rates were raised a third time in 2000, we had another recession en lieu of a "soft landing". Thus ended the Fed's attempts to raise interest rates even a little (the 2000 hikes were milder in absolute terms than either earlier period).

An economy that runs on debt and credit creation simply cannot tolerate significantly higher interest rates. While rates are falling, an economy saves less and less and consumes more and more, holding less cash relative to outstanding debt levels. But if interest rates are falling, debtors reduce their interest payments, which compensates for lower cash generation, and everything seems hunky dory. But when rates go up again, it is difficult to meet payments with the gradually restricted cash flow.

Also as a consequence, large lenders have a very simple equation determining profits: interest earned minus interest paid plus capital gain minus default. As rates are falling, capital gains are boosted, particularly if the entity owns bonds as lending reserves. It boosts the difference between interest earned and paid if the entity can refinance faster than their customers. It also reduces the default ratios as lower rates allow more credit to be accessed by customers, so assets grow faster than losses, even if losses are growing at double-digit rates.

When the 10-year treasury-bond rate jumped by 150 basis points in a month during the summer of 2003, it nearly gave debt markets a heart attack. Fortunately, either the selling subsided or a large buyer, (such as the Japanese Central Bank or the Fed itself), stepped in to buy Treasuries and the yield on the bonds topped out around 4.6%. Thirty-year mortgage rates headed up to 6.3%, but once again fell with Treasury yields. But since the jump in rates was not enough to make refinancing completely useless, homeowners simply switched to adjustable-rate mortgages and continued to access the equity built up over reent years. This would not be the case had the 10-year Treasury jumped another percentage point or two, or especially if the yield curve were to flatten slightly, which would drive up ARM rates relative to fixed-rates.

The Fed's change in wording sent shudders through debt markets today. Ten-year treasury rates jumped 11 basis points to 4.2%, up from a bottom of 3.97% set just two weeks ago. There is the smell of another blowout in swaps ahead, as bond traders usually go home earlier than stock traders do and really won't react until tomorrow morning. It will be interesting to see what happens to bond rates now that Alan and Co., ever slightly, have removed the "forever" from their "rates will stay low forever" FOMC statement. I'm sure traders had thought the statement was permanent as long as the economy wasn't generating hundreds of thousands of jobs. This has to be a shock.

Eventually there has to be a threshold where interest rates are so high that refinancing is out of the question, and the desire to buy a second, third or fourth house is no longer profitable. Now is not that time. Homeowners have such a huge return, thanks to capital gains, tax credits and low interest rates, that the only thing restricting mortgage credit and homebuying is the lenders themselves. The question is, what would drive mortgage interest rates up to that level, say 7 or 8%, and what are the risks?

In one scenario, the decline in the dollar could finally give us some CPI inflation (say 5-6% a year). Interest rates would then rise to give lenders a positive real return. I don't think this is the most likely scenario. First, the CPI is horribly biased against inflation. Second, as has been discussed earlier by Kash at Angry Bear, the U.S. is partially shielded from a weaker dollar by foreign exporters willingness to reduce profits to keep dollar prices steady. Thirdly, higher inflation would mean that fixed-rate mortgage payments would deflate (hopefully) relative to income. U.S. capital prices would also deflate, and any producer with extra money could snap up U.S. capital and avoid the increasing price of foreign-produced exports (similar to the Japanese reaction to the big decline in the dollar in 1985-87).

In the second scenario, China (or some other country), allows their currency to revalue and no longer needs to buy dollars to prevent the revaluation. This would cause treasury bond rates to rise and other rates would move in sympathy. This scenario is more likely than the first and could take place very gradually, depending on how many billions in bond purchases are cancelled. I can't really envision any country shocking the market, as this would cripple economically the chief importer of their products (as well as call attention to themselves for U.S. reprisals). Such a policy could also be cancelled or reversed fairly quickly.

In the third, and most likely scenario, the swaps market blows out like it did last summer, repeatedly, and rates keep ratcheting upward to higher levels. This seems to be the environment the Fed is fostering. I think expectations now are that sometime, the Fed will raise rates again, and every speculator in Treasuries feels they will get out before everyone else. They also rely on the Fed to telegraph their intentions, and make moves in miniscule amounts. Yet today's action shows that any movement whatsoever, even in language, is enough to precipitate a stampede out of long-dated Treasuries.

We'll see just how big the stampede is in the next couple days, but that it was precipitated by such a minor change in wording has to worry the Fed. They really don't have much room to raise rates, period Once they do, expectations will surely be for more than just one hike, and all the central banks in the world won't be able to stop the speculative deluge. While the JCB has billions, my last check of open-interest on treasury bond futures was around $1 trillion. God knows how much of the $170 trillion of derivatives function by treasury bond holdings. If mortgage rates were go get back to 7-8%, it's hard to conceive how housing demand could maintain current levels, or that mortgage lenders wouldn't start hemorrhaging money since most of their customers have locked in between 5-6%.

2004-01-21T12:04:00.000-08:00

Japan loses $73 billion attempting to strengthen dollar

As this is the business times, the loss is measured in pounds.

However, in trading in Tokyo yesterday it was clear that Japanese exporters were also preventing the massive currency intervention programme from succeeding. As the yen fell to Y107.50, a number of carmakers were understood to be dumping large amounts of their foreign-earned dollars on the market.

Please note that if U.S. interest rates were to suddenly shoot up to 8% and speculators started dumping treasuries and agencies on the market, the Fed would be reduced to doing the same thing, which would only embolden the speculators, knowing that the Fed is buying to protect bond prices. The problem (aka moral hazard) with totally transparent policies to deis that people come to expect you to hold your side of the bargain. In this case, the JCB is trying to protect private sector sales and profits, which fall as the Yen got stronger versus the dollar, as well as protecting the asset prices of any existing dollar denominated instruments owned by Japanese.

The question is how much willingness does the JCB have to protect the dollar? We know they'll probably try until the last Japanese private investor has cashed out their dollars. After that, they are the sole institution that can simply print money to make up what they lose on dollars. If they choose to exchange the new Yen for Euros instead of dollars, watch out. The current environment seems to be that the JCB will buy everything.

The JCB also unexpectedly eased monetary policy today by increasing the maximum amount of reserves they can hold as dollars by a little less than 10%. The initial reaction was a strengthening of the yen to 106.5 to the dollar, but by the end of the day the dollar strengthened to 106.94, virtually unchanged.

I wonder how much money is made each day by speculators leveraging each one of these moves? If you know the JCB is going to intervene, you pile on to any significant strengthening of the Yen to amplify it, then try to sell your Yen before all the other speculators do. I can't imagine how much speculation the JCB is fostering right now, but to be able to los $73 billion in a year, it's easily in the $trillions.

Until the U.S. stops running a trade deficit, raises interest rates, or sees corporate earnings rise to levels where a stock market rally will be justified, the dollar is a one way bet - down. The only way to prevent this is to intervene and the JCB has showed all its cards.

The U.S. stock market is a hostage. Rather than hold U.S. bonds, a Japanese national could buy U.S. stocks or junk bonds and done okay last year. A 20% capital gain would offset the 10% depreciation of the Yen/dollar exchange rate. However, it means that speculators must remained convinced that corporate earnings will improve or the stock market will continue to be heavily inflated against earnings (the current S&P 50 price to earnings ratio is around 28). If there were signs that the economy were to start sliding back towards low or negative growth rates, the market could head south very quickly.

The speculators are now in charge. There's no way to know when the stock and junk bond rally will end, or if it will, but there will be plenty of volatility as all that money slugs it out. The risk is definitely rising exponentially relative to the reward at this point. This kind of environment, speculation, overconfidence and leverage, is fertile ground for financial accidents.

2004-01-21T08:54:00.000-08:00

Prediction: Edwards will win the Democratic nomination

Putting A and B together to form C.

From Buzzflash's interview with linguist George Lakoff:

Q: You're critical of the Democratic Party, saying they don't have a clue about framing, haven't laid the groundwork, don't understand it even now. And you say right now the Democratic Party is into marketing. They pick a number of issues, like prescription drugs and Social Security, and ask which ones sell best across the spectrum, and they run on those issues. What do you mean by that? Isn't the Republican Party into marketing? They're into brand identity, selling Bush as a brand. They use all sorts of marketing tools in addition to framing. So what's wrong with the Democrats being into marketing?

A: They don't use it right. They don't have a central vision. The Republicans do. The Republicans understand what they're about, and everything they do evokes what they're about. So they know how to talk and think as conservatives. They know how to build a conservative brand. The Democrats don't have a brand. They don't have a vision that they can articulate clearly and say what that vision is. What they have is a long list of programs. You say: Okay, what is your vision? And they'll give you 50 programs. That's not a vision, because the programs change from year to year. They are always going to be adjusted and fixed, and compromised, and so on.

What you want to know is what progressives are about morally – what they stand for. That's the crucial thing. Then you can go to particular Congressional districts and see if there are issues where taking a stand on one of these issues will evoke that vision. But you have to have that progressive vision in the first place. They have a conservative vision, and it's very clear what that is. Their language evokes a conservative vision, and they can talk about that vision. They can talk about the kind of country they want and so on. It's very important that the Democrats learn to talk about the kind of country they want in general, what their moral vision is and how it differs from the conservative moral vision, why they think the conservatives have betrayed American values. Then you can do your marketing on top of that. But you don't just do marketing.
...
The issues are not the ideas. Democrats and liberals in general don't support their intellectuals, for example. They assume that the issues are about self-interest, and that there can be group self-interest. There are interest groups – ethnic groups and so on. But that's not how people vote. People vote on their morality and their identity. Occasionally they vote on their self-interest when it's important, but mostly they vote for what they believe in and who they are.

From Editor and Publisher, we learn Edwards did just this in Iowa - riding an endorsement by the Des Moines Register.

Richard Doak, the Register's editorial page editor and one of seven editorial board members, agreed that most newspaper endorsements do not have the impact that Edwards got from this one. "I think this endorsement made a lot of Democrats take a second look and they liked what they saw," Doak said.

Edwards benefited from receiving the endorsement at a time when many voters remained undecided and the field of candidates was larger than usual. Those factors forced voters to give the endorsement more attention, especially when it involved a surprise candidate like Edwards, who was not a local product, not a front-runner, and was a newcomer.

"I think the biggest help was letting people look at him in a different way," said Paul Anger, Register Editor. "He grew on us."

"It was a surprise that we picked an underdog -- most would have expected us to pick Dean or another frontrunner," Doak explained, saying the choice was unanimous among the board and included little discussion. "We had written him off as not experienced, but over time, watching him comport himself, we changed our minds."

Doak said Edwards did well in the last debate and ran positive, thoughtful ads. "He seemed to articulate the fundamental Democratic argument best," Doak said. "The need to redirect the resources of government into the service of working Americans."

So based on Lakoff's framing model and Edwards' vision, he should win the nomination. It doesn't hurt that he has a Bill Clinton-esque atmosphere (both are lawyers, Southern, and relatively young). He might not do well in New Hampshire, but all the Super Tuesday states are from his neck of the woods.

2004-01-20T10:30:00.000-08:00

Martin Luther King

Some inspirational words:

Strangely enough, I would turn to the Almighty, and say, "If you allow me to live just a few years in the second half of the twentieth century, I will be happy." Now that's a strange statement to make, because the world is all messed up. The nation is sick. Trouble is in the land. Confusion all around. That's a strange statement. But I know, somehow, that only when it is dark enough, can you see the stars. And I see God working in this period of the twentieth century in a away that men, in some strange way, are responding — something is happening in our world. The masses of people are rising up. And wherever they are assembled today, whether they are in Johannesburg, South Africa; Nairobi, Kenya; Accra, Ghana; New York City; Atlanta, Georgia; Jackson, Mississippi; or Memphis, Tennessee — the cry is always the same — "We want to be free."

And another reason that I'm happy to live in this period is that we have been forced to a point where we're going to have to grapple with the problems that men have been trying to grapple with through history, but the demand didn't force them to do it. Survival demands that we grapple with them. Men, for years now, have been talking about war and peace. But now, no longer can they just talk about it. It is no longer a choice between violence and nonviolence in this world; it's nonviolence or nonexistence.

On justice and perserverance:

The issue is injustice. The issue is the refusal of Memphis to be fair and honest in its dealings with its public servants, who happen to be sanitation workers. Now, we've got to keep attention on that. That's always the problem with a little violence. You know what happened the other day, and the press dealt only with the window-breaking. I read the articles. They very seldom got around to mentioning the fact that one thousand, three hundred sanitation workers were on strike, and that Memphis is not being fair to them, and that Mayor Loeb is in dire need of a doctor. They didn't get around to that.

Now we're going to march again, and we've got to march again, in order to put the issue where it is supposed to be. And force everybody to see that there are thirteen hundred of God's children here suffering, sometimes going hungry, going through dark and dreary nights wondering how this thing is going to come out. That's the issue. And we've got to say to the nation: we know it's coming out. For when people get caught up with that which is right and they are willing to sacrifice for it, there is no stopping point short of victory.

We aren't going to let any mace stop us. We are masters in our nonviolent movement in disarming police forces; they don't know what to do, I've seen them so often. I remember in Birmingham, Alabama, when we were in that majestic struggle there we would move out of the 16th Street Baptist Church day after day; by the hundreds we would move out. And Bull Connor would tell them to send the dogs forth and they did come; but we just went before the dogs singing, "Ain't gonna let nobody turn me round." Bull Connor next would say, "Turn the fire hoses on." And as I said to you the other night, Bull Connor didn't know history. He knew a kind of physics that somehow didn't relate to the transphysics that we knew about. And that was the fact that there was a certain kind of fire that no water could put out. And we went before the fire hoses; we had known water. If we were Baptist or some other denomination, we had been immersed. If we were Methodist, and some others, we had been sprinkled, but we knew water.

That couldn't stop us. And we just went on before the dogs and we would look at them; and we'd go on before the water hoses and we would look at it, and we'd just go on singing "Over my head I see freedom in the air." And then we would be thrown in the paddy wagons, and sometimes we were stacked in there like sardines in a can. And they would throw us in, and old Bull would say, "Take them off," and they did; and we would just go in the paddy wagon singing, "We Shall Overcome." And every now and then we'd get in the jail, and we'd see the jailers looking through the windows being moved by our prayers, and being moved by our words and our songs. And there was a power there which Bull Connor couldn't adjust to; and so we ended up transforming Bull into a steer, and we won our struggle in Birmingham.

Something close to my own heart:

Now the other thing we'll have to do is this: Always anchor our external direct action with the power of economic withdrawal. Now, we are poor people, individually, we are poor when you compare us with white society in America. We are poor. Never stop and forget that collectively, that means all of us together, collectively we are richer than all the nations in the world, with the exception of nine. Did you ever think about that? After you leave the United States, Soviet Russia, Great Britain, West Germany, France, and I could name the others, the Negro collectively is richer than most nations of the world. We have an annual income of more than thirty billion dollars a year, which is more than all of the exports of the United States, and more than the national budget of Canada. Did you know that? That's power right there, if we know how to pool it.

We don't have to argue with anybody. We don't have to curse and go around acting bad with our words. We don't need any bricks and bottles, we don't need any Molotov cocktails, we just need to go around to these stores, and to these massive industries in our country, and say, "God sent us by here, to say to you that you're not treating his children right. And we've come by here to ask you to make the first item on your agenda fair treatment, where God's children are concerned. Now, if you are not prepared to do that, we do have an agenda that we must follow. And our agenda calls for withdrawing economic support from you."

And so, as a result of this, we are asking you tonight, to go out and tell your neighbors not to buy Coca-Cola in Memphis. Go by and tell them not to buy Sealtest milk. Tell them not to buy—what is the other bread?—Wonder Bread. And what is the other bread company, Jesse? Tell them not to buy Hart's bread. As Jesse Jackson has said, up to now, only the garbage men have been feeling pain; now we must kind of redistribute the pain. We are choosing these companies because they haven't been fair in their hiring policies; and we are choosing them because they can begin the process of saying, they are going to support the needs and the rights of these men who are on strike. And then they can move on downtown and tell Mayor Loeb to do what is right.

But not only that, we've got to strengthen black institutions. I call upon you to take your money out of the banks downtown and deposit your money in Tri-State Bank—we want a "bank-in" movement in Memphis. So go by the savings and loan association. I'm not asking you something we don't do ourselves at SCLC. Judge Hooks and others will tell you that we have an account here in the savings and loan association from the Southern Christian Leadership Conference. We're just telling you to follow what we're doing. Put your money there. You have six or seven black insurance companies in Memphis. Take out your insurance there. We want to have an "insurance-in."

Now these are some practical things we can do. We begin the process of building a greater economic base. And at the same time, we are putting pressure where it really hurts. I ask you to follow through here

Stirring words, though most people only remember this speech for the last bit.

Well, I don't know what will happen now. We've got some difficult days ahead. But it doesn't matter with me now. Because I've been to the mountaintop. And I don't mind. Like anybody, I would like to live a long life. Longevity has its place. But I'm not concerned about that now. I just want to do God's will. And He's allowed me to go up to the mountain. And I've looked over. And I've seen the promised land. I may not get there with you. But I want you to know tonight, that we, as a people, will get to the promised land. And I'm happy, tonight. I'm not worried about anything. I'm not fearing any man. Mine eyes have seen the glory of the coming of the Lord.

2004-01-15T07:29:00.000-08:00

Taibbi on Democratic weakness

Another soon-to-be classic over at the NY press. Matt excerpts a NY Times piece by James Traub on Howard Dean.

Traub: A few weeks ago, I asked Howard Dean how, given his vehement opposition to the war in Iraq, if he felt he could overcome the Democrats’ reputation as the antiwar party. "I think you’re still in the old paradigm, which says that they’re the party of strength and we’re the party of weakness," Dean admonished me as I sat across from him on his campaign plane. The chaos in Iraq, he said, had upended the old stereotypes. In John F. Kennedy’s day, Dean pointed out, the Democrats enjoyed the reputation as the party of resolution. "I think this may be the year to regain it, oddly enough," Dean said.

Taibbi: I laughed out loud after reading this paragraph. The humor here was in imagining the reaction of Noam Chomsky to the article’s very premise. Here was the New York Times, vilified by the right as the great Trojan Horse of leftist propaganda, writing an iconic piece whose premise held that the Democratic Party–the Democratic Party!–needed to overcome its anti-war reputation. And there was Howard Dean, almost universally described in the media as the next incarnation of Leon Trotsky, agreeing with this premise.

Traub concludes his article: Strong and wrong beats weak and right–that’s the bugbear the Democrats have to contend with. George McGovern may have had it right in 1972, but he won Massachusetts, and Richard Nixon won the other 49 states. McGovern recently said that he is a big fan of Howard Dean, whose campaign reminds him very much of his own. Dean may want to ask him to hold off on the endorsement.

My laugh out loud moment was here:

As for kicking ass, forget about it. Any party that has to roll up its shirtsleeves and pleadingly show off its biceps to James Traub is doomed from the start. The way to show voters that you are strong is to walk into the room with James Traub and punch him in the face. Then, as he crawls around on the floor picking his teeth out of the carpet, you ask him: "What was your question again?"

Such a display would doubtless trigger all kinds of press reaction. But there certainly wouldn’t be any more 7500-word treatises on your "toughness" problem.

The rest was a tongue-in-cheek exploration of how the Democrats could use fascism, but if you don't take it literally it is easier to enjoy.

2004-01-15T06:50:00.000-08:00

Light blogging til March

Busy season has come and that will restrict the amount of blogging I can do. Meanwhile, here's an interesting article that pretty much explains why I never watch any pundits or television in general: they don't really inform us but rather are selling something.

2004-01-13T11:56:00.000-08:00

More labor law violations at Wal-Mart

Sigh, What else is new?. Apparently not a lot of Wal-mart workers eat food, and therefore don't need lunch breaks. And somewhere inside the Wal-mart is an actual functioning high school that teaches those child workers during school hours. Is this what we will tolerate for a $4.50 spatula?

2004-01-13T11:25:00.000-08:00

Ten Rules of Investing in the New New Era

Back on March 23, 2000, Bill Fleckenstein published a piece at Silicon Investor titled "13 rules of investing in the 'New Era'". While the article is prominently posted on the wall of my office, the link seems to have expired long ago over at SI, so I'll have to dictate the gist of it.

The rules were for the stock market and the rules were: 1) Invest exclusively in equities, 2) Don't diversify, 3) Go for growth, 4) Forget about dividends, 5) Ignore valuations, 6) Buy stocks of companies with little or no earnings, 7) Buy on margin, 8) Buy first, research later, 9) Buy on the dip, 10) Be a momentum investor, 11) Be greedy, 12) Buy and hold forever, 13) Ignore history, listen to propaganda.

While the titles don't do service to the description of each rule, the article really captured the mentality of investing at the peak of the bubble. That the article was published literally a week before everything came unraveled multiplies it's importance. In the interest of the public good, I'd like to update and condense these rules for 2004.

1) Invest exclusively in housing
Savings doesn't yield anything. God knows who's ripping off your mutual fund. The stock market goes down, too. We know that now. But housing has gone up every year for the past century and will continue to do so. Keep a small amount in a checking account for current expenses and throw everything into your house. Did you see the "future millionaires" series on CNN.com? Every single one had 80% or more of their net worth in their house. You'd be a fool to put your money anywhere else.

2) Buy as much house as possible
You're an unmarried couple with no kids? So what?!? Buy that 5000 square foot home with the pool and four car garage! You can't make any money on a three-bedroom two-bath with a one car garage and everyone knows it! Townhouses and condos? Neighbors on the other side of a wall mean no appreciation. Take 60% of your income and calculate what house you can afford with that monthly payment. Then add $50,000 for the bidding war that will ensue when you play with the big boys and girls. Even if you have no money for a down payment, you can easily find a lender willing to let you put nothing down and there are construction companies that actually pay you to put a down payment on one of their houses. What could be better than that? Think of the tax deduction! You could have the income of a Rockefeller but still be in the 10% tax bracket. Boo-yeah.

3) Releverage annually
After several years, your house may have appreciated so much that you have TMES or "too much equity syndrome". You really only need 20% in equity to escape PMI, so now's the time to buy what you've always wanted. That four-car garage can fit at least two Hummers, and if your neighbors complain just run em over. Freakin tofu-eating hippies.

4) Forget fixed rates
Thirty-year fixed rate mortgages are for losers who lived during the Depression, and we know that will never happen again because of Alan Greenspan. Think of how much more house you can get with a 3.5% 1-year ARM rather than a stodgy old 30-year fixed rate mortgage at 6%. Who lives in a house thirty years anyway? You'll always have to be able to cut and run in an instant for a more expensive mansion, so keep those terms short, stupid!

5) The house is the new bank account
If you're ever running low on cash, just call up your friendly mortgage broker. He/she will easily be able to get you into a lower rate mortgage and you can take out as much equity as you like. Out of equity? How about a nice 125% home equity loan from your local credit union at 3%? Still can't get equity? How about asking your broker to get another appraiser. I'm sure the last one was just drunk or something, and a sober one would see the house is worth at least $10,000 more.

6) Improve, improve, improve
There are very few investments better than the $20,000 kitchen with Corian countertops and oak cabinets. Not only does it make the house look nice, but it raises the value by twice that. Rip out the carpet and add wood floors. Finish that basement. Two-year old appliances are energy burning fossils that don't look nice. Two words: crown moldings. And is there any unimproved space on your lot? Knock out that wall for another room or if you can, add a whole new floor. A five bedroom always sells for more than a four bedroom and you can never have enough bathrooms. Don't worry about improving the house too much, because all your neighbors are too and you'll never price the house out of the market that way. Home Depot and Lowes have plenty of financing available, and the way they're building stores one is sure to be within several yards of your home. Reserve your parking spot in the first row now.

7) Find neighbors as greedy as yourself
The key to finding a good neighborhood is neighbors as greedy as yourself. Drive down the street and count the Hummers, Mercedes', BMWs, Lexus', and other luxury cars. Count the pools and check out the landscaping. If you find an area that looks just marvelous, yet prices are still affordable, you're in profit heaven, baby. If you can't find the place, search for the most run down 2 bedroom in a rich area and raze that baby. There should be plenty of space for your new mansion and you won't have to worry about getting your 750sl keyed.

8) Ignore doomsayers
How many years are those idiots going to predict a bubble when we all know prices don't go down (in good areas) and even then, housing markets are local. I could care less if NOrthern California has problems, anyway, because all my neighbors have Mercedes and the school district is fantastic.

9) Get your real estate/mortgage broker/banking license
Did you know real estate agents get 3% of every house they sell? At today's prices? If you're tired of your loser job, what better way to make a mint than to sit in beautiful open houses handing out jars of apple butter with your picture on it? Just a couple of sales a year can pay the rent and there are millions to go around. If you don't like sales or are better with numbers, go to work for a mortgage lender and they'll come to you. New financial products and services come along every day, so there's always a demand for new employees to sell them.

10) If your equity runs high, buy another house!
TMES is a major problem with home prices rising 10% a year forever. If your equity gets too high no matter what you try to do to reduce it, buy another home! Get a second mortgage, rent it to cover the payments and double your money as the price goes up.

2004-01-13T10:01:00.000-08:00

Borrowing ourselves rich

Marshall Auerbeck has a good commentary today on Alan Greenspan's early January speech at the American Economic Association.

Before Alan Greenspan breaks his arm giving himself too many congratulatory pats on the back, he ought to consider the foregoing quotes, especially his own. The Fed Chairman has certainly been in a festive frame of mind as we have come into 2004. In a speech made on January 3rd, Greenspan confidently asserted that there was at least tentative evidence to suggest that "our strategy of addressing the bubble's consequences rather than the bubble itself" had been successful.
...
There are signs that the rest of the world is unprepared to join in the ovation which Greenspan clearly thinks is justified under the current circumstances. In spite of the best efforts of Asia's central bankers, it is highly telling that the dollar has continued to sell off and gold continues to rise. More significantly, is that such dollar depreciation, although accompanied by some hand-wringing amongst French and German industrialists (who perceive their export markets under collective threat as a consequence of the euro's record-breaking strength against the greenback), is not engendering any significant reaction from Euroland's monetary authorities. They appeared prepare to let the dollar's freefall continue indefinitely. If anything, recent comments by European Central Bank President Jean-Claude Trichet, who said the euro's 22 per cent gain in the past year would not prevent the region's exports from increasing, appear a rebuttal to Mr Greenspan, especially as such remarks came on the heels of the Greenspan and Bernanke speeches. In effect, Trichet appears to be telling American policy makers, "You're on your own."

...it concludes

In contrast to Mr Greenspan's musings, a more accurate characterisation of current reality is that an unsustainable boom in consumer spending fuelled by credit has simply replaced the unsustainable bubble in corporate expenditure of the late 1990s that was driven by corporate debt. In view of these continued imbalances, we view the bear market as merely interrupted, rather than eradicated; at some point in the near future it will return. But when this latest bubble pops appears to us to be very much a case of Asian central bank discretion, rather than "brilliantly conducted" Fed policy.

Echoing this analysis is Bill Gross' commentary in today's WaPo.

The United States is overextended, not just militarily but economically. We are trying to do too much, borrow too much, spend too much, and sooner or later we will have to suffer the consequences. We are a country in the beginning stages of what can best be described as hegemonic decay. Empires take decades if not centuries to wither, a process more clearly viewed through a rearview mirror; Edward Gibbon's masterful account of the decline and fall of the Roman Empire is perhaps the greatest example of this truth. But here and now, we're much less inclined to Gibbon's viewpoint than we are to Alfred E. Newman's. "What, we worry?" is pretty much the national motto when it comes to our finance-based economy and its future prospects.

Gross paints a pretty accurate picture of the popping of a credit bubble instead of the frantic reflation of one.

Pretend that you're a head or co-head of a household. You earn a good salary, but it never seems to be enough. There are bills to pay, the Joneses to keep up with, and you've had your eye on that goofy Hummer for at least a few months now. You'd like to save money, but you can't or you won't, so you don't. As a matter of fact, each year for the past decade or so you've had to borrow 4, 5, 6 percent of your annual income to pay for what you want. You're running a personal deficit. But that's still okay, you figure. You're strong, vibrant, prospects are good, and there's no way you shouldn't be able to handle it. You can grow your way out of current liabilities and have more than enough to pay for future obligations such as college for the kids, that faraway retirement for you and your spouse, and health care, if that should ever come up. And your creditors undoubtedly will see it the same way. They know a good risk when they see one.

But then something happens. Your company's prospects sour, your pay raises virtually vanish, your health deteriorates, your family life sours -- who knows? With no savings and a boatload of debt, the wheels all go into reverse. Creditors are not so friendly. Not only will they not lend you that 6 percent of your salary every year but they want a higher interest rate on what you've already borrowed.

The United States is strikingly similar to the Alfred E. Newmans just described. It's strong and vibrant, with a future seemingly as bright as that of any country on the planet. Productivity is soaring, markets are recovering, its salary (or gross domestic product) shows decent increases almost every year. It goes wherever it wants to go, its Humvees symbolic of global military domination. Where's the decay in this hegemony?

I'll interject here that the housing bubble has been very, very good to me. Eleven months after buying my first home, its appreciation allowed me to refinance away my entire second mortgage, and that at a lower rate than my original first. I felt like Yakov Smirnov "What a country!".

But I avoided taking out the 5/1 ARM that all the kool kids were taking. I don't want to even risk a nightmare if interest rates were to rise to, say, 8% at any time during the mortgage. It would not only mean a much higher monthly payment later, but would mean that many fewer people could afford my house. Thinking in reverse, to get a $2000 monthly payment on a 30-year mortgage at 5.5% means buying a $352,250 house. At 8%, the same payment would only buy a $272,565 house. Lower-interest rates have gone hand in hand with the housing bubble. If rates were to rise (more significantly than the 1% they jumped in 2003), it would likely spell disaster for home prices.

A couple friends said, "Oh, but you could refinance again before the fixed-rate term was over". If housing prices were to decline even a little, that would not be an option. The median price of a house in San Diego is now over $600,000. Just 5% of that amount is $30,000. For many buyers, that would be their ENTIRE equity stake in the house. Refinancing on a house with negative equity?Sorry, I'm not gonna go out like that.

Bill Gross's nightmare scenario is that East Asian countries would pull the plug on U.S. borrowing.

Because China's monthly trade surplus of $10 billion-plus with the United States implies a $120 billion annual addition to its dollar reserves, there will come a time when its hundreds of billions in holdings of U.S. notes and bonds look a tad too risky. In turn, the hundreds of billions that Japan and other Asian countries have been buying to keep their currencies competitive with the Chinese yuan and the U.S. dollar will be subject to a sanity check as well. At some point our Asian creditors will wake up and smell the coffee. Perhaps there will be dollar or Treasury note sell-offs or a revaluation of the yuan and then the yen. In any event, we pay the price: higher import costs, a cutback in spending on cheap foreign goods, rising inflation, perhaps chaotic financial markets, a lower standard of living.

China's willingness to buy our bonds, and its philosophy of fixing its currency to the U.S. dollar, will one day be tested. And should it lose patience, all its neighboring Asian states will move in near unison. U.S. interest rates will rise, our goods in the malls and the showrooms will be less affordable, and the process of national belt tightening and increased savings will have begun.

This jump in rates could happen extremely quickly, because speculators on interest rates have been banking on the Federal Reserve to keep interest rates low indefinitely. The Federal Reserve, however, only controls the Fed Funds rate, not the 30-year mortgage or the 10-year Treasury bond rate that parallels the 30-year mortgage rate. Ten-year treasury yields rose over 1% in under two weeks back in July 2003, and nearly unhinged the interest rate derivatives market. When speculators, which should include a lot of households with very high LTV mortgages as well as shiny new ARMs, run into trouble, the tendency is for everyone to rush out the door as soon as possible. The amount of money invoved has become staggeringly huge. The value of household real estate in the U.S. as of June was a cool $14 trillion (probably closer to $15 trillion today). Interest rate derivatives run in the tens (and possibly hundreds) of trillions$ in notational value. The GSE's (Fannie/Freddie/FSLB) issued $1 trillion of debt in 2003 alone. A major dislocation could leave most people financially crippled for years in a matter of weeks.

Meanwhile, a very low Fed Funds rate means low CD, savings, interest checking and money market rates, and very little reason for Americans to save money. The longer we keep rates low, the longer we remain exclusively reliant on the kindness of strangers to fund any borrowing. If the Fed keeps rates low as all other rates rise, this only enhances the dependency. Again, while things haven't fallen apart, the numbers involved have become mind-bogglingly huge. Japan bought nearly $30 billion of U.S. treasuries in two days and the Yen still fell. The Federal Reserve, incidentally, has around $20 billion in foreign reserves TOTAL.

The recent economic strength hasn't been comforting to me at all. In fact, every once in awhile I have to choke back vomiting in terror. It's run against every economic truism of the 20th century and that certainly isn't right. Ed McCarthy puts it best: you can't borrow yourself rich! Moreover, the conventional wisdom is starting to turn, much like it did against the stock market in late 1999. Rather than forecast the recovery indefinitely, like investment spending and the stock market rally was back then, the opinion has turned to "It can't last, but I don't want to predict when it will end". I can assure you that it won't be pleasant to be exposed to risk when it does.

2004-01-13T08:20:00.000-08:00

The trade deficit and the dollar

Kash over at Angry Bear raises an important point about the trade deficit.

...the US dollar has lost around 15-20% of its value against its trading partners, which means that imports should have cost the US 15-20% more over the year. The fact that they only cost about 2% more tells us one thing: importers and/or foreign firms who sell in the US have substantially cut the price that they're willing to accept, presumably in order to keep market share in the US.

Economists call this phenomenon "exchange rate pass-through", and it is crucial to understanding if the weaker US dollar will help the US trade deficit. If firms selling imports in the US are accepting lower prices in order to maintain their market shares, as this report seems to suggest, then the weaker dollar will not reduce imports at all. That's why the decline in the dollar may have less of an impact on the US's trade balance than many think.

I'd add a couple of things to this analysis. The price of our imports and exports have the same hedonic deflator as with consumer and producer prices. Computers and other electronic goods are particularly affected by hedonic adjustment, because the price is adjusted by "quality" improvements such as processor speed or chip capacity. This distorts the amount of "exchange rate pass through" by understating the rate of inflation across the board.

Our increasing dollar volume of imports would seem to indicate that in nominal dollars, we are indeed paying more for imports regardless of what the price indices say. In nominal dollars, imports rose $77.7 billion in the past year while in constant (deflated) dollars imports rose just $39.7 billion. The deflators reduced the increase in imports by nearly 50%! While our economic growth could also increase our imports, I note that in the third quarter imports rose by $13.3 billion compared to $17.2 billion in the second quarter, when GDP growth was just 3.1%.

The second issue is that there is a substitution effect on our imports similar to any set of goods. As China and Japan have protected their currencies more than Euro-based nations, their imports become cheaper and importers buy more from those countries. This underweights those countries in a trade-weighted index. This effect is undoubtedly small, though.

The third issue is the large weight of oil prices in the import index. Most oil exporting countries keep their currencies relatively fixed to the U.S. exchange rate because their transactions are valued in dollars. Here are the performances of currencies from major oil exporting countries over the past year: Russia +10%, Kuwait +2%, Saudi Arabia 0%, Mexico -3%, and Venezuela -6% - not quite as strong as the +22% appreciation of the Euro.

All these phenomena, along with exchange rate pass through, help to shield the U.S. from the effects of a declining dollar. When the dollar began a major decline in 1986-87, import prices in 1986 actually fell year-over-year. Only in 1987 did import prices rise, and this was only by 10%, compared to a 50% decline of the dollar versus the Swiss Franc and Japanese Yen, a 45% decline versus the German Mark, a 35% decline versus the French Franc and a 30% decline versus the British Pound.

2004-01-12T09:49:00.000-08:00

The recovery mirage

Steve Roach no like.

Contrary to popular spin, the US labor market is not on the mend. In the final five months of 2003, a total of only 278,000 new jobs were added by nonfarm businesses — a gain that is easily matched in a single month of a typical hiring-led recovery. Moreover, literally all of the job growth that has occurred over this period has been concentrated in three industry segments — temporary staffing, education, and healthcare — which collectively added 286,000 positions in the final five months of last year. The “animal spirits” of a broad-based hiring-led revival by US businesses are all but absent. Jobs may be rising in America’s low-cost contingent workforce (temps) and in high-cost-areas that are shielded from international competition (health and education), but positions continue to be eliminated in manufacturing, retail trade, and financial and information services.

The modern-day US economy has never been through anything like this. Fully 25 months into this so-called economic recovery, private-sector jobs are still about 1% below levels prevailing at the official trough of the last recession in November 2001; at this juncture in the typical recovery, jobs are normally up about 6%. Had Corporate America held to the hiring trajectory of the typical cycle, fully 7.7 million more American workers would be employed today. Moreover, the current hiring shortfall far outstrips that which was evident in America’s only other jobless recovery — the upturn following the recession of 1990–91. In that instance, it took about 12 months for the job machine to kick back into gear. By our calculations, the current job profile in the private economy is now 2.4 million workers below the trajectory of the jobless recovery a decade ago.

Corporations have cut costs and restored profits during the recovery - so much so that their profits as a percentage of National Income are at boom-time highs. Corporate profits were 11.5% of National Income in the third quarter of 2003, up from 8% at the bottom of the recession (3rd quarter 2001). Corporate profits were just 9.6% of National Income at the peak of GDP (1st quarter 2000), they were 12.1% of income at their peak during the last boom (3rd quarter 1997) and they were just 9.8% of income at the peak of the Reagan/Bush boom (4th quarter 1988).

One really has to go back to the 1950s to see corporations taking such a large share of the income pie, or wage income taking such a small share. The ratio of employee compensation to corporate profits was below 5-1 for most of the 1950s. In the first quarter 2000 this ratio was 6.8-1. In the latest quarter the ratio is 5.5-1.

Given this, we can almost say that the recovery has largely run its course in terms of corporate profits, especially since we're seeing a good measure of public revulsion toward corporate greed that always accompanies this type of economic development. That leaves two modes of adjustment: either wages need to significantly increase, which would seem to require an uptick in employment not currently forecast, or consumers are going to run out of credit cards to max. Another alternative would be that the Bush Administration would refocus its budget priorities to support the welfare of those such as the uninsured and the unemployed, but that prospect is so laughable that I can barely believe I bothered to write it down.

2004-01-09T07:43:00.000-08:00

Employment Situation for December

Employment skyrocketed by 1,000 in December. Bush is another 343,000 behind his tax cut pledge.

Despite positive data for manufacturing output, manufacturing employment was down 26,000 in December. Hours per week in manufacturing fell 0.1 hour. If there is any pickup in demand for manufacturing, it is not being reflected in either hiring or extra hours.

Unemployment fell to 5.7%. The recent decline has been entirely due to a lack of growth in the labor force. In June, when unemployment peaked at 6.3%, the labor force was 146.917 million. Last month the labor force was estimated at 146.878 million. A constant labor force participation rate would have meant unemployment at 6.2%. The unemployment rate assuming a constant labor force participation rate is somewhere between 7-7.5%. About 1.6 million more people have been classified as "not in the labor force" in the past six months.

It seems to me that the NAIRU (non-accelerating inflation rate of unemployment) has returned to the 6% level that prevailed for much of the 1980s and 1990s. The lower rate from the end of the 1990s appears to be due solely to the economic bubble. Unfortunately, this means that 2% of the labor force now unemployed has little chance to be rehired, short of another bubble.

Despite record economic growth, businesses are not hiring. Capacity levels are still below what normally accompanies hiring in manufacturing. Going forward, there appears to be little to suggest that the caution employers are now showing has any reason to lift. While the economy may add jobs over the next several months, I do not see the possibility of hiring in numbers corresponding to the strength of the recovery, nor in numbers able to make up the deficit in hiring. Bush will almost certainly go into the election as the first president since Herbert Hoover to have negative employment growth during his term.

2004-01-08T06:31:00.000-08:00

And I thought the GOP only screwed workers

Congress has "forgotten" to fund the Small Business Administration, which cannot meet demand for loans and has shut down.

The U.S. Small Business Administration has temporarily shuttered its most popular loan guarantee program because it cannot meet an unexpected surge in demand.

The closing of the 7(a) loan program pinches a key source of financing for many of the USA's 5.6 million small companies just as the economy is recovering, small-business advocates warned Wednesday.

The agency blamed Congress' failure to approve its fiscal 2004 budget, which began Oct. 1. That budget called for $9.4 billion for the loan program.

But small-business advocates and bankers said the agency underestimated demand.

"As the economy struggles to create jobs, now is not the time to cut off small businesses from access to capital," said Rep. Nydia Velázquez of New York, the ranking Democrat on the House Small Business Committee.

The Labor Department has recently been trumpeting their household survey, which assumes around 500,000 have left the workforce to start their own businesses in the past year (as opposed to the establishment survey, which is down around 2.6 million since Bush took office). With unemployment rates staying at high levels, is it really wise to cut all available options for most Americans to earn money? We can't all work at Wal-mart, nor would we want to.

2004-01-07T12:00:00.000-08:00

Your daily dose of bad news/Whither China?

Despite the rising stock market, one-third of U.S. corporations with a pension plan are planning to freeze benefits if they are not given relief. After a short respite, credit card delinquency reaches a record high. Japan has spent $28 billion to strengthen the dollar in just two days. China will use $45 billion in reserves to recapitalize several struggling banks. How does your debt compare?. Which reminds me of an old joke: Which Japanese (or Chinese) owns your house?.

The article on the way China is recapitalizing was the most interesting. In order to recapitalize the banking system, normally the Chinese central bank would have to sell dollars (the majority of reserves are in dollars) and buy Yuan, but the article states that the banks are required to keep these reserves in dollars, so in other words this is simply a transfer of assets from one balance sheet to the other. In addition, the funds are being transferred largely to facilitate the global stock offering for banks: China Construction and Bank of China. While Chinese IPO's have lately been oversubscribed up 700-1 a Beijing analyst asks the pertinent question, "Why would anyone think these banks," which have bad loans anywhere from 20-50% of total assets, "have changed their behavior?"

The stock offering would increase the reluctance of Chinese to revalue the Yuan anytime soon, as any appreciation of the currency would devalue the banks' dollar assets. At the same time, if the banks do have significant problem loans, they may still need to liquidate these assets to provide working capital, and this probability increases with the proportion of assets that are recapitalization funds. This is a catch-22 for China similar to the one that is also enveloping the Japanese economy. A proper recapitalization of the banking system would mean dumping a significant number of dollar assets on the market and incurring a considerable loss on the remaining dollar reserves (in order to give the banks Yuan for working capital and to make new loans). At the same time, this would mean an erosion of the advantageous terms of trade with the U.S. and Europe. But protecting the exchange rate with the dollar is becoming exponentially more expensive by the day. Neither Japan nor China can commit any funds to developments like improving the power distribution system, when they instead commit the money to buying U.S. treasury, agency and corporate debt.

At the same time, Chinese real estate is looking more and more bubble-icious. As the Chinese know very well that the real estate bubble in Japan is the origin of Japanese banking problems, they are surely reluctant to do anything to pop this bubble, which would only compound the bad loan problems in their banking system.

As a result, I think the global reflationary effort will hinge on what China does. China, just as much as the U.S., needs to generate significant domestic inflation at some point to reduce their burden of bad debts. But how to accomplish this when growth is already straining the infrastructure within and worsening global overcapacity without? No wonder China is still go any which way on the Yuan: revaluation, devaluation, or a multicurrency peg and are still "studying" the issues. Ultimately, all these roads lead to the liquidation of dollar assets, and with trade relations with the U.S., North Korea and Taiwan ongoing, it's difficult to entertain policy going against U.S. interests. Yet the decision will have to be made. The question is will it be made in 2004. Could the ultimate "October surprise" come not out of "Bush's Brain" but somewhere else?

2004-01-06T08:45:00.000-08:00

Thinking about the next slowdown

There I go again, thinking ahead.

We survived 2003 thanks to the continuation and expansion of the greatest credit bubble in history. By the end of 2003, the ratio of debt to GDP should be 3.1 to 1. In 1982, it was 1.7 to 1. In 1990, it was 2.3 to 1. In the last four quarters, we've added $5 of debt for every $1 of GDP. The new Z-1 tables will be out on January 8th, and I don't anticipate they will be good news.

Japan, China and the rest of East Asia are lending us about $1 trillion a year just to keep our currency from depreciating too quickly. Private investors bailed out last year, so the central banks had to step in. It hasn't helped much. The Euro is up to a record high of $1.27 today. The Yen is up to 106 to the dollar. If China were to revalue the Yuan, we would see a very quick uptick in inflation. We're already seeing a jump in raw materials prices because the Chinese are starting to buy them instead of our debt securities. Either we get inflation, companies sacrifice profits, or we borrow even more, inflating our debt instead of our CPI.

And at some point, there will be limits to how much we can borrow. The ratio of debt to income will eventually backtrack to more sustainable levels, someday. Foreign central banks are clearly nervous, and there are scattered voices among economic commentators that maybe, this time, the dollar reserve monetary system may be ending once and for all. China is considering repegging the Yuan to a basket of currencies, for one.

If there is such an adjustment, there are two ways that debt to income levels can return to normal. The first is a debt-deflation that reduces debt levels through default. This will also crush asset prices. We should hope we don't go that way. A more likely candidate is a resurgence of inflation, which boosts nominal GDP relative to debt levels. The Federal Reserve is certainly hoping for the latter outcome. The only difficulty is that if official inflation picks up, then there will be upward pressure on interest rates as well. In an economy living and dying by monthly payments and refinancing, and growing numbers of people converting to adjustable-rate mortgages, a rising interest rate environment contains its own corrective mechanism. If we can no longer reduce monthly payments (or if they increase), we can no longer spend and the economy slows down again.

And we used a big chunk of the leeway we had just to get through the year. Thanks to the tax cut, the federal budget deficit is expected to be around $500 billion or almost 5% of GDP. The Federal Funds rate remains at a 50-year low at 1%. Thanks to the largesse of our foreign creditors and money market funds yielding nothing, we were able to fund any bond issue that dollar borrowers needed to float, particularly if it was corporate and high yielding, and yield spreads fell to levels not seen since the bubble years. Everything went right, and there is little room for improvement. If the economy were to slow down, there simply aren't a lot of resources left.

During periods of economic growth, we should see a gradual reduction in borrowing, particularly by the government. We should see a resurgence of employment - 300,000 jobs a month, not 100,000. We should see the Fed boosting interest rates, not keeping them at obnoxiously low levels. That we are not seeing this taking place belies the daily blathering of a strong, recovering economy. Things are not right at all. Current policy is contradicting decades of economic thinking. NAIRU and Taylor's rule are out the window. Doesn't that seem odd?

So what happens as the economy gradually slows down? Economists certainly don't believe we can keep 8% up forever. Paul Kasriel is predicting a 3.7% growth rate for the fourth quarter. After that, what if we don't get 4% GDP growth as far as the eye can see? Will employers want to hire? Will the government be able to engineer another tax cut? Will the Fed lower interest rates, and will anyone care? Will states be able to stay solvent? Will housing prices go up another 10%? Will the falling dollar finally increase CPI inflation, or will we just be able to inflate our asset prices and debt levels for another year?

Things certainly look shaky at present. We've been seeing one good piece of economic news followed by one bad piece. Again, not the stuff that sustainable recoveries are made of. I think the most likely scenario is that a slowdown in the U.S. will impact other nations first. South Korea has a significant consumer credit bubble. Mexico would be immediately impacted by a decline in U.S. imports. Japan and Europe are already tottering on the edge of recession. At that point, they will have to decide whether to keep financing our borrowing binge or start redlining us. The next six months are going to be key to whether Bush gets re-elected. If things start to slow down abruptly, he is going to be toast.

2004-01-06T06:50:00.000-08:00

This is just shameful

Sweet Jeebus. The Department of Labor advising businesses on how to not pay workers overtime.

WASHINGTON -- The 1.3 million low-wage workers the Labor Department says will be guaranteed overtime pay as part of new rule changes may not necessarily see any extra cash.

While touting the $895 million in increased wages it says those workers would be guaranteed from the changes, the Labor Department is suggesting ways employers can keep their labor costs from going up.

Among the options: cut workers' hourly wages and add the overtime to equal the original salary, or raise salaries to the new $22,100 annual threshold, making them ineligible.

The department says it is merely listing well-known choices available to employers, even under current law.

Bullshit. The object of the Department of Labor is to protect workers: their wages, their benefits, and their rights. This is the opposite. It undercuts anything the Department can say about protecting workers. At this point, they might as well rename it the Department of Profit Protection and get it over with.

Here is the Department of Labor's mission statement.

The Department of Labor fosters and promotes the welfare of the job seekers, wage earners, and retirees of the United States by improving their working conditions, advancing their opportunities for profitable employment, protecting their retirement and health care benefits, helping employers find workers, strengthening free collective bargaining, and tracking changes in employment, prices, and other national economic measurements. In carrying out this mission, the Department administers a variety of Federal labor laws including those that guarantee workers’ rights to safe and healthful working conditions; a minimum hourly wage and overtime pay; freedom from employment discrimination; unemployment insurance; and other income support.

Funny, I don't see anything in there about cutting overtime benefits for 8 million workers and advising businesses how to not pay overtime for 1.3 million more. Labor Secretary Elaine Chao should resign. She is a disgrace to her office.

2004-01-03T09:53:00.000-08:00

Happy Blog Year

Something funny was going on with Blogger's ISP and I wasn't able to access/post from work over the past week. I have wanted to link to Michelle Singletary for awhile, because of her no nonsense approach to financial planning. She has two good articles to start of the year here and here that are must reads. Most people that visit here (I hope) are already following this advice, but it's always nice at the beginning of the year to revisit one's priorities. I'll have something more substantial soon.

2003-12-30T10:02:00.000-08:00

I am curious, gugle

Just wanted to see if Congress was still letting the legislation extending unemployment benefits expire. Answer: Yep. If the Senate takes Hillary and Gordon seriously and immediately reauthorizes the bill the day Congress reconvenes, it will still mean up to 360,000 Americans losing unemployment benefits. My guess is it will be a bit longer than immediately.

Going with out your usual income really sucks, especially since 25% of Americans only have one month's expenses in cash, and less than 50% have three months expenses or more. You don't need to tell the folks in the Reserves, who signed up for a weekend a month and get a year; a year with military pay versus their civilian pay and their families having to make do. But, at least when their term is up they can leave. Uh, oh.

2003-12-30T09:29:00.000-08:00

Bubble Mathematics

Susan Tompor has a two-part series underway exploring consumers and their credit, making plenty of references to Warren and Tyagi's The Two-Income Trap. The Houston Chronicle also does some mathematical gymnastics with various relative prices of investments. Just be sure to always question the assumptions. There's two in every sentence, the inflation rate and the rate of return.

In currency markets, the Euro is hitting record highs while
the Yen fights the program. Kos wonders if its a bad thing. In the tradition of two-handed economists, it is and it isn't. A couple interesting factoids are that first, the Dow Jones Industrial Average is up 25% in dollar terms but just 4% in Euros. Second, the 140,000 billion Yen that the Japanese Ministry of Finance is authorized to borrow in order to buy dollars and sell yen on the open market is almost 30% of Japanese GDP. And whatever happened to the "barbarous relic"?

While it would be hard to beat last quarter's 8.2% annualized GDP figure (only 2% growth for the quarter and slightly under 4% over the year), things are definitely starting to slow down. How much they slow down will be revealed on January 30th. Paul Krugman wonders today if we enjoyed it while it lasted. Credit markets sure did.

2003-12-30T08:57:00.000-08:00

Resolutions

1. Only discuss relative prices: In economics, absolute prices don't matter, so don't get sucked into a "inflation or deflation?" debate. Keep thinking in terms of income versus expenses and assets versus liabilities and income statements versus balance sheets. Also try not to aggregate any analysis too broadly. There will be winners in any economic environment as well as losers, whether the economy booms or busts.

2. Don't make predictions: Too many economists try to be fortune tellers. If I'm forced to make a prediction, at least offer one scenario on how I can be wrong. Keep Bill Bonner's mantra in mind: this is what ought to happen, not what will happen. Sure, the dollar looks to be toast in 2004, but speculators dictate the market, not the fundamentals. The NASDAQ was supposed to be toast in 2003. It's up almost 70% from its lows.

3. Don't mention detractors: Don't waste blog space linking or mentioning idiots who have no clue. I sometimes wonder why anyone attends Presidential Press Briefings, especially when the White House itself now refers to them as "gaggles" (definition: a herd of cackling geese). You KNOW what Scott McClellan is going to say. If nobody attends, how can they spin? You KNOW Bill O'Reilly is all about the ratings. If you don't watch him (it's a beautiful day outside today) then he becomes powerless.

4. More links to good articles, less commentary on them: this is a pet peeve that I'm often guilty of - readers can figure things out for themselves. My favorite posts in retrospect are those where I can cram 25 related links in a single paragraph with no commentary.

5. Don't stray from the central theme: It's still the economy. While much of politics is an interesting sideshow, people's livelihoods depend on the performance of our economy. It's not my job to be pessimistic or optimistic, to bash Bush or praise him, but to try to interpret the signs on how the economy is evolving. The central idea behind Carville's slogan was that politicians should care about ordinary Americans, and to show they care by trying to make the economy work for them. At the same time, governments should work on policies that accomplish this task most efficiently; supporting a private sector environment that cooperates with workers and is not in competition with them.

Happy New Year to you all!

2003-12-17T13:17:00.000-08:00

Money just ain't what it used to be

I've noted the conspicuous drop in money supply in several earlier posts. As of last week, M2 money supply (seasonally adjusted) was down $40 billion (about 0.6%) since July 7th. M3 money supply is down $72 billion (about 0.8%) over the same period. MZM is down $87 billion (about 1.3%) over the same period. This is compared to 2003 before July 7th, where M2 rose $297 billion, M3 rose $383 billion, and MZM rose $311 billion over the six month period. Much of the growth was between April and June, when these money stocks were growing at annual rates in the high teens.

In theory, a drop in money supply should influence lending activity and thus economic activity. This is why money supply growth is often viewed as a leading indicator. But it is dangerous to draw hypotheses from data. Commercial and industrial loans from banks reporting weekly data fell $25 billion from 12/25/02 to 7/2/03 and $27 billion from 7/2 to 12/3. In a similar vein, real estate loans at commercial banks rose $139 billion for the first six months of 2003, and $69 billion over the next five months. The economy grew 2.1% in the third quarter. Consumer credit grew $47 billion from December 2003 to June 2004, and $36 billion from June to the present. It does not look like the drop in money growth has had any significant effect on growth or lending activity, except perhaps modestly on real estate lending.

What seems to have happened is that the amount of money going into M2 and M3 has slowed relative to the money coming out. Think of what happens when people purchase, refinance, or extract an equity loan from their home. The money will probably end up in a short term money account like a money market fund at a commercial bank. As the homeowner figures out what to do with those funds, it may end up as an automobile, in a mutual fund, as a down payment on an investment property, a luxury cruise, home improvements or whatnot, and it is no longer counted in M2. So while refinancing is increasing, the growth rate of money going in is faster than money coming out, when the refinancing boom slows down, the process reverses itself. Institutional money funds, also big parts of M2 and M3, are used as collateral for loans, so while huge amounts of real estate lending is going on, those firms will hold larger amounds of IMFs, and when lending slows, they will require smaller amounts. Seeming to back this up is data on total time deposits at all depository institutions, which grew $402 billion, or more than 10%, from December to June, and have been flat (up $35 billion) since.

So the screeching halt of money supply growth has not caused a screeching halt in lending activity. That's good in that sense. But the lending data and the current level of interest rates don't suggest any pickup in lending either, especially consumer and industrial lending, which we would expect to sustain investment spending and economic growth over the long term.

Where it has benefited companies is in lending spreads. With less funds required to sustain real estate lending, there is more capital left to be allocated to junk and higher yielding bonds. With CD rates at multi-decade lows, the demand for higher-yielding assets has also increased. In return, as demand has lowered higher-yielding borrowing rates, it has led to a flurry of corporate refinancing at lower borrowing costs, with lower interest payments reducing the need for cost cutting and job cuts to increase profits.

Is this process sustainable? Probably not. Junk bonds and stocks are priced for a continually improving economy. If we're lucky, we'll get half the growth of the third quarter, and half again of that in the first quarter of 2004. Christmas sales have not been encouraging, state and local finances are still strained, and employment gains have been meager. There have been glimmers of hope, such as the latest industrial production data, but these improvements in the monthly data have yet to show any staying power and are far from levels where they would lead to more hiring. Overall, expectations are very high relative to what I think this economy is going to provide.

The key imbalance developing is between business profits, which have improved tremendously, and consumer saving, which has deteriorated badly. This is the part of money supply that is most worrying. While savings in the GDP definition has increased, thanks to the tax cut, demand deposits at commercial banks have dropped $16 billion, or about 5%, while consumer credit has increased $36 billion. True savings should equal the net inflow into net worth. Even if we have more of our income left after expenses, if we draw down our checking accounts and run up our credit card bills, we can hardly call that savings. The tax cut has masked a crunch on consumer finances, caused by cuts in state and local government spending, job losses, increases in insurance and energy costs, and above all the reduction in the amount of home equity we can extract to maintain spending above what our incomes can provide.

Like most imbalances, the one between household savings and profits will rectify itself over time. Either savings will rise relative to profits (a big hiring spurt occurring without any increase in spending or profits), or profits will fall relative to savings. You can choose yourself which one you think is more likely. I've already done so. If the result of that adjustment means another increase in yield spreads, a number of riskier companies could quickly find themselves financial trouble, and the economy will quickly find itself in peril with little juice left in the policy gas tank. Extreme nervousness dead ahead.

2003-12-17T09:20:00.000-08:00

Math, Bad Writing and Economics

I picked up on this multi-blog discussion via Crooked Timber, which in turn references Brad Delong and Ophelia Benson.

I'm sure I'm as guilty as any economist/blogger in "administering corporal punishment to the deceased equine quadruped". While I developed a visceral hatred of math and arcane economic theory during a brief fling with an Economics PhD program, it's still very tempting to cover every assumption behind any economic conclusion just to "prove" I know what the hell I'm writing about. Economists in general are somewhat insecure because while the theory of economics has developed over the last 100 years, the actual economy is pretty much the same animal. Proving yourself to Brad DeLong requires a completely different style and organization than writing like Paul Krugman. The worst part comes when you disagree with Krugman yet need to write a coherent narrative. You can begin to attack his assumptions, start bringing in the economic jargon, and quickly become wholly unintelligible. Or you can keep it simple and morph into a 10-year old boy who can only say "Krugman sucks".

Which is why Brad DeLong laments that a two-hour lecture on the economic conclusions of a Ph.D-level paper quickly becomes a two-hour lecture on mathematics and modeling theory. He wants to explain the paper, but is worried that the students won't get it without explaining the math, so instead of losing two hours at the end answering background questions he blows it all at the beginning recapping theory. It's also why when Robert Kuttner criticizes Krugman on variety of issues he talks about where nothing can be done, it can quickly devolve into a discussion that means little to anyone. The discussion quickly devolves into long standing bitch sessions between differing schools of thought (e.g. Keynesians versus Austrians) and isn't about the economy anymore. Anyway, I'd thoroughly recommend crawling through a number of these links to see the various opinions on the subject. They're all quite good, except for him.

2003-12-17T07:27:00.000-08:00

Retailers not having a Merry Christmas season

In the Chicago region, they're discounting early. Wal-mart sees December sales at the low end of estimates. The weather certainly hasn't helped.

While some analysts are surprised by this, it was only a matter of time before consumers would run out of tax cut cash to spend. I think with third quarter GDP so fantastic, expectations were a little too high and mediocre growth looks much worse in comparison. From the reports I've seen, retail sales will still be up from last year, but 2-4% growth is not the blowout retailers were hoping for.

The Wal-mart article mentions that gift certificate sales are up significantly this year. I know from personal experience that we're once again going this route. Post 9/11, it's been far too much of a pain to lug presents cross-country to the family. While this would bode well for first quarter sales if it is a trend (retailers count certificates as sales when they're spent), if retailers have too much inventory then they will lose any profits discounting what they don't sell.

2003-12-17T07:13:00.000-08:00

Natural gas prices rising

Tell me something I don't know. My November gas bill was more than double the October bill. Natural gas is not terribly fungible because the infrastructure is not as extensive as with oil - pipelines are regional rather than national. It certainly does set up the same conditions for manipulation as existed in California. Fortunately industrial users are complaining, so Orrin Hatch is leading an investigation. You can bet your sweet bippy that if it was just consumers, we'd be SOL.

2003-12-15T09:14:00.000-08:00

Does Greenspan read the news, or does he get everything from his "advisors"?

Alan says that China is absolutely not costing the U.S. jobs.

Meanwhile, IBM announces they will move 4700 white-collar jobs to China and India.

2003-12-12T10:50:00.000-08:00

A good read

Black Commentator has two good articles this issue. One is on a 12/7 Dean speech on race and the Democratic Party, and the second by Paul Street on the disenfranchisement of Americans with felony convictions - both definitely worth a read. I probably won't vote for Dean, but if he keeps picking up endorsements and making these kind of speeches (he has some good speechwriters - read it to see how many Bush cliches are turned upon their heads), he won't need me.

Some relevant excerpts:

From Street: Manza and Uggen’s dark finding rests largely on the very disproportionately black composition of America’s official criminal class within and beyond Florida, a reflection of criminal justice disparities so great that an astonishing one in three black adult males in the United States carries a felony record. Manza and Uggen factor in and cross-match all the relevant social-science inputs on race, socioeconomic status, party identification, and voter turnout to show that felony disenfranchisement was a wining tool for the Republican Party, consistent with broader and related Republican efforts to minimize and dilute the heavily Democratic weight and significance of the black vote. Anyone concerned about the prospect of long-term Republican hegemony in the American Party system should support the movement to extend the ballot to ex-felons – a reform that is supported by 80 percent of Americans according to a recent poll.

From the Dean article:

The December 7 speech is a clear and definitive break from the lethal grip of the Democratic Leadership Council, the southern-born, corporate-mouthpiece faction of the party. The DLC’s favored presidential candidate is Senator Joe Lieberman, it’s most illustrious personality is Bill Clinton, and it’s most prestigious founding member is none other than – Al Gore.

Gore’s endorsement of Dean should be viewed as head-swiveling proof of the bankruptcy of the DLC’s white “swing voter” strategy. The DLC-Emeritus has effectively jumped ship.

[snip]

Where does this leave Al Sharpton and Dennis Kucinich? Exactly as they are, preaching the same social democratic, anti-racist, pro-peace message as before, for as long as their energies can sustain them. Dean’s political leap would not have been possible in the absence of Sharpton’s energetic Black candidacy and Kucinich’s principled, progressive white voice from the Left. At this historic juncture they dare not go anywhere. Dean has picked up the torch that Sharpton and Kucinich have been carrying and they must stay in the race to make sure he doesn’t set it down. By persevering in pressing the Left edges of the Democratic envelope, the “Two Civilized Men” created the political space for Dean to make his historic break. Although we cannot expect either candidate to rejoice in the frontrunner’s actions, Dean’s leftward march is also their victory over the DLC, and they must defend it – against Dean himself and his newfound allies, if need be.

[snip]

Indeed, Sharpton could have vetted Dean’s speech, which reads very much like the distilled product of A More Perfect Union, the book written by Rep. Jackson and Frank Watkins, Sharpton’s former campaign manager. The same river runs through it, the historical currents that also informed Rev. Jesse Jackson’s speech to South Carolina State University at Orangeburg, last week.

"The big fight in this state should be trade policy and the Wal-Martization of our economy," said Jackson, the local Times and Democrat reported. "The challenge is to get South Carolina to vote its economic hopes and not its racial fears." Most low-income Americans are white and "they work every day. They work at Wal-Mart without insurance. They work at fast-food places. They work at hospitals where no job is beneath them, where they don't have insurance, so they can't afford to lay in the beds they make…

"The challenge for South Carolina is to move from racial battleground to economic common ground to moral high ground."

The first few paragraphs of Dean's speech:

In 1968, Richard Nixon won the White House. He did it in a shameful way – by dividing Americans against one another, stirring up racial prejudices and bringing out the worst in people.

They called it the "Southern Strategy," and the Republicans have been using it ever since. Nixon pioneered it, and Ronald Reagan perfected it, using phrases like "racial quotas" and "welfare queens" to convince white Americans that minorities were to blame for all of America's problems.

The Republican Party would never win elections if they came out and said their core agenda was about selling America piece by piece to their campaign contributors and making sure that wealth and power is concentrated in the hands of a few.

To distract people from their real agenda, they run elections based on race, dividing us, instead of uniting us.

But these politics do worse than that – they fracture the very soul of who we are as a country.

It was a different Republican president, who 150 years ago warned, "A house divided cannot stand," and it is now a different Republican party that has won elections for the past 30 years by turning us into a divided nation.

In America, there is nothing black or white about having to live from one paycheck to the next.

Hunger does not care what color we are.

2003-12-12T08:33:00.000-08:00

Redux

Not related to anything economic, but I just watched "Apocalypse Now" for the ump-teenth time earlier this week, and then I see stuff like this, this and even crazy stuff like this. See what they were protecting man, a f*&*^%$ puppy!

Are any of the Sheen family of military age?

Baghdad...shit, I'm still only in Baghdad. Every time I think I'm gonna wake up back in the desert....

Time to drop that last tab of acid.

2003-12-12T08:08:00.000-08:00

Consumer confidence declines

This link is the generic Bloomberg variety, so it won't last long at that site. The University of Michigan survey index of consumer confidence fell from 93.7 to 89.6. While I care very little about consumer confidence indices right now, I will note that the index has been stable in the 80-100 range since November 2000. This would seem to indicate consumers have the attitude "growth is nice, but hey buddy, where's the jobs?" I doubt we will see any significant pickup in consumer confidence until we start getting 300,000 new jobs a month and a 5% unemployment rate. One month or one quarter of job growth isn't going to do it. Neither, apparently, is Dow 10,000 or 8.2% growth in quarterly GDP .

So it's a little more disturbing that these kind of things are quoted in other stories below consumer confidence:

The economy's strengthening in the last six months has yet to afford companies the ability to raise prices as they compete with imported goods and manufacturers face excess production capacity. Ford Motor Co. and General Motors Corp. are among businesses that have boosted discounts to lure buyers.

``We have no pricing power -- it's very hard to get a price increase to stick,'' said Joseph Erba Jr., chief executive officer of North Carolina-based Brayton International, in an interview. Brayton is a unit of Steelcase Inc., the largest maker of office furniture. ``A lot of our suppliers are coming to us asking us to take price increases and we've had to stave them off.''

...

Passenger car prices fell 0.8 percent last month, the biggest decline since April, after rising 1.6 percent in October. General Motors spent $4,406 per vehicle on incentives in November, up from $4,312 in October, according to CNW Marketing Research. Ford spent $4,396, up from $4,277. Chrysler's spending on incentives climbed to $4,351 from $4,235.

...

Members of the Federal Reserve's rate-setting Open Market Committee said signs of economic growth, while encouraging, still may not generate substantial numbers of new jobs until late 2005, minutes from their Oct. 28 meeting said.

``Members generally anticipated that an economic performance in line with their expectations would not entirely eliminate currently large margins of unemployed labor and other resources until perhaps the latter part of 2005 or even later,'' the minutes said.

2003-12-12T07:40:00.000-08:00

Dow 10,000

As fascinated as I am with meaningless numbers, I can't get too excited about yesterday's "event". What matters in investment is relative performance.

The S&P 500 first hit its current level in October 1998. The Dow first hit 10,000 in March 1999. The Nasdaq first hit its current level in July 1998. Depending on the mix of stocks in one's portfolio, the long-term investor hasn't made money in stocks in more than five years, plus or minus a few months.

On October 1, 1998 one could have bought a 10-year treasury bond yielding 6% and been up 27.7% in interest and 3.0% in price today. To catch up to a 10-year bond, the Dow would have to hit 13,700 by next year, 14,400 by December 2005 and 15,250 by December 2006. Want to be really depressed? Check out the performance of foreign short-term government bonds (TEMFX - 25%), gold (FGLDX - 43.5%), and natural resources (MDGRX - 90%) over the same period at Microsoft Investor.

Now, don't slug me for bringing this up. If you really need to slug someone (verbally or otherwise), it should be someone like him, her, him, and him for starters. I hope we all learned that stocks have risks and they don't always go up. But apparently there are a few cheerleaders left that think every little thing like Dow 10,000 solves all our problems, which it does not.

2003-12-11T14:58:00.000-08:00

I am the walrus waiter

I think Billmon reacts with the proper amount of sarcasm to media reports that the restaurant industry is hiring. I'd also like to add that restaurant workers who make tips are can be paid a fraction of the minimum wage.

Bill Gross offers investment tips to the Fed's reflationary efforts. I agree with his investment analysis, but not the part that the Fed can actually generate reflation. All they've managed to do so far is generate negative real interest rates, which are nominal rates less inflation. This lines up Bill Gross and his cohorts on one side of the boat against consumers and participating central banks. As more and more people try to exploit this situation, it drives the real interest rate even more negative, which may be inflationary. Problems will of course occur when the trend in the real interest rate reverses itself and they will certainly not be inflationary, nor good for Gross' investments. But I applaud those who try to make money while they can.

2003-12-11T08:38:00.000-08:00

Issues 2004, part 4

So what is to be done?

For the purposes of this exercise, I'm going to work under the premise that I'm utterly powerless to enforce policy. My vote in 2004 is just one of millions (and depending on the machinations of electronic voting may not even be correctly counted, if at all). I'm also utterly powerless to stop people from shopping at Wal-Mart, or to get people to not buy SUVs, stock in Amazon.com or any other nutty thing.

The other assumption that I'm going to work under is that I'm wrong about everything: the election, the draft, Iraq and the economy. I'll work under the principle that I'm as wrong as can be. Iraqi insurgents drop their weapons and hold free elections next spring. The economy continues to grow, adds 300,000 jobs a month and causes the unemployment rate to fall to 5%. Inflation remains tame and interest rates stay low. Both the budget deficit and the trade deficit fall, and state and local budgets improve greatly as revenue from income taxes expands markedly. Stock prices rally 15% to new highs and Bush is re-elected in a landslide.

Even in this case, I would still have a persuasive argument that the best course of action for Americans is to cut their spending relative to their incomes, and pay off their debts. Even if stocks increase 15%, after taxes that gain will only be 11.5%, and even with inflation under control, it will certainly be higher than the current 3% annual rate. A 4% inflation rate reduces the real, after-tax return on stocks to 7.5%. Meanwhile, it will increase the real after-tax return on debt reduction to 4% higher than the borrowing rate. Paying 9% credit-card returns 13%. Paying a 6% student loan returns 10%. Even paying a 5% mortgage returns only slightly less than 9%, because the debt is usually so large relative to the payments, that the interest expense one can deduct will be reduced very little.

In addition, this argument is even more persuasive because it removes the argument that cutting spending harms the economy. In a recession, it is easy to think: "If I stop spending, and my neighbor stops spending, and everyone stops spending, things will just get worse." By this logic, the best time to cut spending is when the economy is booming; to get one's financial house in order to keep spending during the next recession. The data back this up. Most Americans increase spending relative to income during an expansion - particularly at the beginning of an expansion. If I'm wrong, and prosperity is right around the corner, this is the best time to cut spending and improve your household financial picture.

I'm not recommending cutting spending for the hell of it, but from my personal experience, it has significantly increased my net worth AND it has made me a much more informed consumer and citizen. Asking questions such as: "Do I need this?", "Do I need this NOW?", "Can I get this cheaper?", and "Who makes this?" every time they open their wallet gives citizens a lot more power than just blindly reaching in and handing the money over. As a correlary to HL Mencken's observation that "people get the democracy they deserve" is that "people get the economy they deserve". The successful companies succeed because people buy their products. If we want responsible companies in the economy, we should research what they do and how they conduct business. If these companies are so profit-driven that they sacrifice the well being of their employees and customers, we should not buy their products, and instead buy products from responsible companies. If a company is not doing the right thing, putting profits before workers, or allowing bad things to happen, we need to stop buying their products or buy from their competitors. Some people might say that no company is pure, but regardless, we can always strive to buy from the most responsible ones, that's the way to effect the maximum change possible.

Furthermore, responsible spending is something that anyone can do, regardless of their income. For the libertarians out there, this allows free enterprise, but gives non-capitalists (most of us) a check on the balance of corporate power. And it is not to say that regulation or incentives can't be used where necessary, just that the foundation of responsibility in a capitalist system rests with the consumer. Corporations will always try to maximize profits. But the self-interest of the consumer is far more complex than just receiving the lowest price. In an age where many Americans feel they no longer have a voice in their own government, its nice to know there is not just one way to vote. Merry Christmas.

2003-12-11T08:03:00.000-08:00

Data review: Retail sales and unemployment claims up

Retail Sales were up 0.9% in November. Ex-autos they were up 0.4%. This comes on the heels of September sales down 0.3% and October sales flat, so consumer spending is hardly thriving. As long as auto companies offer zero-percent financing and $5000 in incentives per vehicle, they will move product and pad these numbers. The rub comes when the economy slackens, oil or insurance prices spike higher, or people have finished upgrading to the new SUVs. Christmas this year looks only average, and the good news has been concentrated on discount realtors. Consumers, already stretched to the limits, are being forced to switch to cheaper goods. As a side note, this is a tremendous bias in the CPI and other inflation indices, which assumes people will switch from steak to hamburger if the former gets too expensive, but that they will never switch back, leading CPI to understate actual inflation.

Unemployment claims spiked upward to 378,000 in the week ending December 6th. Last week's number was unchanged at 365,000. While things are not deteriorating rapidly, this is not a direction that signals any strength in hiring apart from seasonal jobs.

Other indicators released today were business inventories (up 0.4%) and import prices (up 0.4%, 0.3% ex-petroleum).

2003-12-05T09:23:00.000-08:00

Issues 2003, the election

With his popularity fading, George Bush has to promise the moon next year. There will be no spending cuts but possibly another tax cut, if the economy needs it and if the budget can handle it, but the economy would have to slow down considerably. Alan Greenspan isn't raising interest rates anytime soon, so he is on board. $300 million in the campaign fund? Check. Bush is assured to focus on his strengths and what he can control, which is anything but the economy. Economy-wise, we won't see much except a lot of PR from the Bush camp on any good number (and even if the numbers are bad, they'll still point out it could be worse).

The Democrats are really about four candidates: Dean has the money and the momentum, Clark has the DLC, Gephardt has Iowa and an apparently recently located attitude, and Lieberman has the legacy. Kucinich, Moseley-Braun, and Sharpton don't look to be anything more than marginal. Edwards and Kerry look totally lost. Graham is gone. My guess is it will come down to Dean and Clark. And don't worry about the Greens. While Nader may run, despite the screeching and howling of "Officious Liberal Democrats", he won't get more than 1%. The issue for Democrats is whether "Anyone but Bush" is enough of a recruiting tool or Republicans will steal another election. We know the Rs will try and the spectacle will be quite entertaining.

However the election turns out, there will be two issues for the President-elect to confront. First is the draft. It has been well established that we do not have enough troops in Iraq (Neocon delusions aside). We certainly do not have enough troops to invade Iran, North Korea or Syria (though Israel could help us with the latter). The statement by Bush is that they are "not considering" a draft now, but you'd be surprised how fast they'll consider it on the day after the election if they need it. Dean and Clark, who both have made statements that we are not doing enough to pacify and rebuild Iraq will certainly need more troops to do so. Justin Raimondo has a very good analysis of this dilemma today. Like me, he feels the draft is a done deal - the only remaining thing is the justification. I'd add that Bush can even reinstate the draft faster if the economy recovers. The negative PR from conscription will have something to balance it out.

This leads to the bigger issue, the resources we are devoting to "wars on terror"TM and rebuilding Iraq. While the monetary resources devoted to Iraq are quite small ($87 billion is only 0.4% of our $2 trillion federal budget), the "war on terror"TM is a much greater drain: $400 billion on defense plus $200 billion or so from related non-defense programs. Then there is the labor expenditure. Thousands of reservists away from their jobs on extended tours of duty. Labor diverted from productive pursuits to destructive ones. How can any level of social spending, particularly of the discretionary variety, survive?

A Bush re-election would lead to an immediate attack on these programs. He won't need to worry about re-election so we'll be told that these are the "tough choices" that have to be made. A Dean or Clark presidency would also require tough choices. Which of them would want to roll back the tax cuts, or cut the defense budget, or withdraw from Iraq in their first term? At best, we'd see a turnover of leadership to the United Nations in Iraq, but again that's only a minor part of the resources that have been allocated.

While Democrats can rightly assert that a Bush re-election would begin a full-frontal assault on government employees, Medicare, Social Security, and all social spending programs (i.e. more of the same, amped up a few more notches), the really need to stop deluding themselves that a Democratic President in 2004 will have many options at their disposal. Reversing the tax cut and spending programs will be contractionary, and if the economy continues to struggle, will be untenable. Commitments to Iraq, Afghanistan, "the war on terror"TM, and who knows what else by next November have already been made. The crisis in medical care will only get worse. While a huge stock market rally, a quick and thorough economic recovery, and maybe a major oil discovery or two would significantly lessen the pressure on their finances, Americans have to realize that from here on out, they're on their own.

There's very little out there to suggest that gains will eradicate the losses from the last three years anytime soon. We need 2000 Dow points just to get even with March 2000. Corporate earnings would have to rise another 40%. We need two and a half million jobs to get back to February 2001. Pension and state government "rainy day" reserves are exhausted. The same can go for the savings accounts of seniors and the underemployed. When we get back there, the optimists can check back in with me. Until then, rather than hope we need action.

Part Four - what is to be done - later

2003-12-05T07:49:00.000-08:00

Issues 2004, part 2

Concerns for 2004:

We're at the limit of fiscal and monetary stimulus.
The 2004 federal deficit is estimated to be between $500 billion and $550 billion. Most state governments are faced with revenue shortfalls which by law must be balanced with tax increases or cuts in spending. The Federal Funds rate is currently at a fifty year low of 1%. Speculators are lining up to bet against the dollar. There is very little room to stimulate the economy if things get worse. Relative to history, GDP growth can only get worse. Third quarter GDP was a multi-decade high and even the most optimistic economists aren't expecting anything close to that in the fourth quarter. Meanwhile, the economy only recently started generating a mediocre amount of employment. If 8.2% growth only generates 300,000 jobs, what happens when growth falls again? Are businesses willing to hire more employees if growth rates dip again, particularly when they have just about exhausted the profitability of cutting costs. Consumers have regained confidence somewhat, but that confidence is muted by the employment situation. Those that have desired to keep spending have had to borrow more and hope for employment later. The economy had better start generating jobs soon, because both business and consumer expectations demand nothing less, and there is very little left in the policy gas tank.

The dollar in the crosshairs.
Speculators, from George Soros to Warren Buffet, have become nearly unanimous in their opinion that the dollar will continue to fall. The textbook economics requirements have been in place for some time now: massive trade deficit, relatively low interest rates, and relatively high inflation rates. Now that the speculators are saying the dollar must fall, it's a slam dunk that the dollar is toast unless foreign central banks step in to prevent this. They can do this because if they lose money on their dollar assets through devaluation, then they print more domestic currency (and use it to buy more dollar assets). The effect on foreign money supply and inflation will depend how zealously the speculators will want to attack the currency the central bank is acquiring. Hence, as Japan was forced to spend record amounts to defend the Yen, deflation started to disappear, the Nikkei Dow jumped 25%, and Japanese bond rates jumped off the zero line. China too, is witnessing 20 percent plus money growth and the flipping of Shanghai apartments like so many pancakes. With so much smart money against the greenback, one would think that the world's reserve currency would be jettisoned as fast as Phil Donohue on MSNBC. When that happens, U.S. interest rates and inflation spike upward, and borrowers exposed to higher interest rates get wiped out.

But not so fast: central banks have really deep pockets. There's no limit to how far central banks will go to protect their country's trade position with the importer of last resort. It is far more likely that at best, the dollar will face an orderly decline, and may even rally against currencies (like the Euro), which have seen outsized gains. It's much more probable that all other countries will rush to devalue their currency just as fast as the greenback, particularly when they see the recent success of formerly sad-sack countries like Argentina and Japan. Instead, the threat once again comes from the United States itself. If U.S. growth slows down, then all countries will feel the pinch immediately. Rather than wean themselves off U.S. led growth, they've let themselves become even more dependent on it. And as they've done this, the recent burst of U.S. expansion is leading to significant inflation in all the raw materials non-post industrial countries need at the same time more and more of their capital has been diverted to owning rather precariously valued U.S. debt assets. A U.S. slowdown that quickly went overseas might blow up Brazil and South Korea, as well as debt spreads for all risky borrowers, such as GM and Ford. This also goes for risky consumer borrowers, who have done little over the past three years to climb of a similarly dangerous debt situation. It is one thing to have a "strong dollar" policy, but another that those dollars are actually doint something. As more dollars are going in central bank vaults, they might as well go under the mattress. Deflation is still lurking out there, but as usual it's only as the equal and opposite reaction to extreme inflationary stimulus across the globe. I'm less worried about the dollar than a global increase in risk premiums, particularly with all the new and refinanced debt sloshing around.

Whither Refinancing?

The homeowner today is only able to refinance by converting fixed rate mortgages into some sort of ARM. This puts them at risk to any future increase in rates. At 4%, a 1% increase in interest rates boosts a monthly mortgage payment by 12.5%. Another rate increase to 6% boosts the payment 13.2%. In our monthly payment society, this would cripple consumer spending for those who have already bought the maximum home they could afford. The refinancing bug has been endemic. Corporations will issue around $500 billion of debt this year. Most of that will be refinanced. But that debt is another person's asset. Senior citizens are already aware what happens to incomes when interest rates are pushed down to nearly nothing. Likewise, lenders are well aware the perils of lending long and borrowing short. Is there any wonder there are $100s of trillions in notational derivatives out there? The big question is has everyone refinanced and what happens when we can't reduce our payments any more. We already see the movement to 6-year auto loans, 40-year mortgages, instant home equity loans, reverse mortgages, ARMs and so forth in the consumer sector. Lenders absolutely do not want this bubble to end. They cannot afford it to. Delinquency and default levels continue to rise, and only generating more volume can keep the rates stable or declining. The big danger is a shock: either higher rates or a "double-dip" recession. While both seem slight today, the level of exposure throughout the economy is frightning.

What else is lurking out there?

Enron and WorldCom are ancient history. Fannie and Freddie have just about corrected all their accounting irregularities. The demise of National Century Financial crippled many hospitals, but the economy recovered in time to prevent the coup de grace. The problem is both volatility and the duration of the slowdown. The stock market has rallied, but is still well below the level of early 2000. Debt levels have continued to rise at an increasing rate. Interest rates don't seem to want to go lower. Gold prices are testing $400 an ounce, and there is still a whole lot of short-interest out there. Derivatives are a riddle wrapped in an enigma wrapped in a black hole. A fragile recovery like this is not going to be very responsive to disappointment, especially since we've already pretty much discounted it. Republicans were crowing about job gains the last two months, and this months report should lead to a few murmurs. The deficit cannot continue to grow exponentially, or can it? Uncertainty is starting to creep back in - it's not getting worse, but it's not getting better. How long can we wait? What happens if the recovery is out drinking with Godot?

Part 3 - on the election - will be posted shortly

2003-12-05T07:22:00.000-08:00

November Employment Situation

November employment was up 57,000 - worse than expected, but in line with weekly claims numbers which appear to have stabilized around 350,000. If claims can edge down to 300,000 a week, we should see employment growth move up to the 200,000 a month we desperately need right now. October employment was revised upward to +137,000 from +125,000. There's not really much that can isolate that outside of seasonal adjustment. Concurrent seasonal adjustment means that adjusted data will change a little every month. While manufacturing production indexes are showing gains, manufacturing employment fell 17,000 in November and is down 549,000 over the year. Manufacturers seem to be expanding hours rather than employment. Average weekly hours in manufacturing rose to 40.8 and overtime hours rose to 4.4 per week. In July those two indicators were 40.1 and 4.1, respectively. This has been consistent with employer surveys like Manpower, which have reported this behavior not just in manufacturing but across all private industry.

The unemployment rate fell to 5.9% while the number of unemployed declined slightly to 8.674 million from 8.779 million. The labor force increased 484,000, which is an indication that many of the people who have been leaving the labor force are coming back to try and find part-time work at Christmas. Normally, the labor force drops (not seasonally adjusted) by 300,000 in November. This year it increased by 200,000. The unemployed that are "re-entrants" to the labor force fell by 119,000 in November. That marginal workers are finding work is a good sign, but these are seasonal, temporary jobs.

This months data is discouraging. The large amount of growth we've seen the last three months has done little to revive employment. By this time in the "jobless" recovery of 1991-2, the economy had added over 1.4 million jobs, while the "job-loss recovery" of 2002-3 has lost over 700,000. Employers seem content to hold off hiring decisions despite rapid economic growth.

Most economists expect economic growth to be much less in the fourth quarter, though still relatively strong at around a 4% annual rate. Unfortunately, the tailwinds of the tax cut and early 2003 refinancing boom are fading rapidly. The only gain in "investment" we've seen is from the hedonic adjustment made to computer and technology spending and real estate investment. While retail spending is up at the cheaper end of the spectrum, it has come at the expense of the more expensive, retail end. Consumers don't have enough money to go to Neiman-Marcus, so instead they're buying their presents at Wal-Mart. Very little in this recovery looks sustainable on the surface.

After Christmas, consumers will tally up their credit card bills and also start estimating their tax bill for 2003. The size of refund checks is going to determine how much follow through we get in spending. From my experience, I saw the tax cut immediately in terms of a payroll tax cut, so that will not result in a bigger refund. State and local tax increases will also be in effect. It's already snowing out East. Republican leadership in Congress looks ready to let the let the funding for extended unemployment benefits expire. Christmas might be survivable, but the New Year is not going to be very happy unless employment gains quickly improve and last into 2004. There is little relief elsewhere.

2003-12-03T08:30:00.000-08:00

Still off-topic

Matt Taibbi continues to put out fantastic work. If there is one journalist that can wear Hunter Thompson's shoes (the not-yet-drugged-out Thompson, pre-Nixon ), this is the guy. He's getting a lot of buzz - this time in cursor, which links to his Cage Match column at the NY Press as well as his fantastic series on the Democratic candidates over at The Nation. Particularly good is his Dennis Kucinich column (full disclosure: I will vote for Kucinich if the Democratic Party nominates him. Which, of course, they will not.)

Welcome to the Dennis Kucinich paradox. The congressman is not serious precisely because he is serious. Because he wants his victory to mean something, he is said to not really want to win. Pundits and journalists talk a lot about Kucinich's height and his decidedly non-Hollywood looks as the main reasons he cannot be considered a contender, but on the campaign trail, it sure looks like Kucinich's chief "problem" is that when he talks, he means it.

It does not take much exposure to Dennis Kucinich to realize just how serious he really is. He says things that could never even occur to a phony. This was most forcefully demonstrated to me right at the start of an hourlong interview in a minivan on the road back to Bangor, Maine, after the candidate's appearance at an organic farmers' fair in rural Unity.

We had been talking about corporate crime, and at first Kucinich said some things that sounded very much like Howard Dean--that he was going to make prosecuting irresponsible CEOs more of a priority, etc. But then, as he sat there loudly munching Udon noodles (bought at the fair: Kucinich is a devout vegan), he suddenly stared off into the distance and added something else.

"I think rehabilitation should be part of it," he said. "We ought to rehabilitate the guy who steals his company's pension."

I looked up, surprised. "You mean like drug court?" I said. "Rehab programs after sentence? Re-education?"

He nodded. "Why not? You have to go to rehab for traffic court. Treatment for these people should be made available, if circumstances dictate that they need it." He smiled. "After, of course, an appropriate term of service to society."

I laughed. Well, that makes sense, I thought. Why does a serial speeder have to seek treatment, while the person who liquidates thousands of jobs and imperils whole economies does not? Why is a drug problem considered treatable, while a greed problem isn't? The question gets right to the heart of the fundamental prejudices of our society: You have a problem if you use drugs to dull your misery, but you don't have a problem if you're just trying to get rich by any means, legal or otherwise.

The politics of Dennis Kucinich are easy to see but hard to describe, which is why conventional journalism, comfortable only with crass idiocies, has settled on calling him a leftist and burying him in the thirteenth paragraph. But to me the best way to describe Kucinich is to say that he seems to be the only candidate who responds as an intellectually ambitious human being would to the problem of the presidency.

Someday I hope to write like that, but I'm not holding my breath. Until then, I highly recommend any work by Taibbi there is out there. You may not agree with it, but it's breathtakingly honest, which is a breath of fresh air in an atmosphere filled with fakery.

2003-12-01T14:04:00.000-08:00

Mixed reactions to consumer spending

Consumer spending is improving this holiday season. Or is it? The NY Times thinks 3-4% growth look "modest", while Visa thinks things are much better than that. The LA Times cites Wal-mart and Visa in their upbeat article, while the Dallas Morning news thinks the best is yet to come.

2003-12-01T13:48:00.000-08:00

Consumer frenzy

Another good commentary by Steve Perry in the Minneapolis City Pages. It's more depressing than anything I can think of right now.

As if Wal-mart isn't toxic enough to our society already, a woman nearly got trampled to death over $29 DVD. Strangely, this is in the Globe and Mail's "Science and Technology" section. I don't know what that is supposed to mean.

I'm not a terribly pessimistic person when it involves the microeconomy. Last time I checked, I had 100% control over where I spent my money. I do need food to survive, but I don't have to support supermarket chains that raise profits by exploiting their workers. By supporting businesses that value their customers and employees, we end up with a much friendlier form of capitalism.

It doesn't even have to cost more. I, for one, would gladly like to see a coffee shop that sells a latte for less than three bucks. I know how much those beans cost, and you can roast them in a $2 popcorn popper. We're an entrepreneurial society. If you can't join em, beat em.

But those $29 DVDs? Piece of crap. And I'm not talking about just the quality of the product.

2003-12-01T09:26:00.000-08:00

Still working on Part 2

Meanwhile, here's Nathan Newman with his inadvertant examination of GDP growth.

2003-11-29T06:10:00.000-08:00

Issues 2004, part 1

What went right in 2003:

The Bush Administration figured out how to implement a successful tax cut.
In 2001, they offered a "rebate" by giving $300 to every American and $600 to couples. This didn't work for two reasons. First, the money had already been collected, so it ended up as a transfer payment that offset in the GDP accounts. Second, when the rebate was credited to the 2001 tax returns, Americans found the tax cut was no more than an advance, and there was no follow through in spending.

In 2003, the Administration simply advanced payroll tax reductions that they'd passed in 2002. Miracle of miracles, GDP growth hit 8.2% in the third quarter. Since the tax cut was an immediate payroll tax reduction, it immediately ended up in personal income without being offset as a reduction in government spending. The deficit increased by $250 billion, but being met by borrowing instead of income flows meant that all the tax cut went right into the "flow variable" GDP accounts, while the revenue loss went right into the "stock variable" federal debt. The same would be true if we took out a home equity loan of $30,000 to finance a new Ford Expedition (we did that too in the third quarter).

Foreigners protected the dollar.
While the dollar weakened in 2003, it could have been much worse without the help of East Asian central banks. The greenback lost 20% versus the Canadian Dollar and the Euro, 15% versus the Swiss Franc, 12.5% versus the Japanese Yen and 10% versus the British Pound. However, the dollar lost 0% versus the Chinese Yuan, which is still fixed at 8.3 to the dollar. To keep their currencies from falling further, the Japanese Central Bank increased its holdings of foreign reserves from $450 billion to nearly $600 billion. China's foreign reserves rose from around $250 billion to $400 billion. Taiwan's foreign reserves rose from $160 billion to $200 billion. South Korea's foreign reserves rose from $115 billion to $145 billion. The inflow of capital in to dollar assets protected U.S. interest rates from rising, kept the dollar from falling further and offset our $500 billion annual trade deficit. It also exported a good deal of our reflationary efforts: industrial production in these countries is rising at double-digit annual rates, while U.S. industrial production remains flat over-the-year.

Consumers and businesses refinance.

Corporate debt issuance should hit a record $500 billion for all of 2003. As most of this is not to develop new domestic production (who needs it?), the bulk is being used to lower interest payments by retiring higher yielding securities. Ford is a case in point. Last year, the company was downgraded by the major bond ratings agencies and the difference between its borrowing rate and U.S. treasuries rose above 5%. This year saw the search for yield reach out to companies like Ford. Its bonds currently yield only 2.5% above equivalent treasury securities, so it has been a big issuer in corporate debt markets, both to retire 2002 bonds and to finance it's rebates, 6-year loans and seemingly endless zero-percent financing program. Consumers, too, used the lowest mortgage rates in forty years to refinance like gangbusters. The MBAA mortgage index hit an all time record of nearly 10,000 in June 2002. The result was that consumers could afford bigger houses, home prices rose in some areas by over 20% and home production, starts, and sales hit volume and growth records in 2003. Businesses could also increase profits without cutting employment and costs as much. Payroll employment has increased by nearly 300,000 in the past three months.

Fannie and Freddie buy out everybody.
From Doug Noland: Despite its interminable accounting woes, Freddie Mac posted strong growth during October. Freddie’s Book of Business jumped $38.0 billion for the month, a 33.8% annualized growth rate, to $1.387 Trillion. Over three months, the company’s Book of Business surged $96.0 billion, or 29.8% annualized. Freddie’s Retained Portfolio expanded at a 27% annualized rate during the month to $655.5 billion. Over the past three months, the company’s Retained Portfolio jumped $60.3 billion, or 40.5% annualized. Freddie and Fannie’s combined Retained Portfolios increased an unprecedented $169.3 billion over four months (the onset of near Credit market dislocation in July through October), or 36.3% annualized. It is not often in financial history that a $1.5 Trillion portfolio expands at such a pace. Over the past 12 months, Freddie and Fannie’s Retained Portfolios have increased $280 billion, or almost 22%. For comparison, total Federal Reserve Assets are up about $25 billion so far this year to $758 billion.

While money supply growth has fallen into negative territory, the credit bubble has run unabated. Higher mortgage interest rates have reduced mortgage refinancing to only a quarter of June levels, but Fannie and Freddie's largesse have kept credit available for mortgage lenders to keep making deals. Adjustable-rate loans have increased to over a quarter of all loan volume. Forty-year mortgages are now available to lower monthly payments. Seniors are being pressed to take out reverse mortgages to pad incomes being constricted by low CD, bond and savings rates. Down payment programs like Nehemiah continue to expand even though foreclosures on the loans they finance continue to increase. Minsky's "financial spandex" continues to adapt to conditions that would have popped the same credit bubble in 1929 and possibly even as recently as 1990.

Part 2 will be posted later

2003-11-24T09:28:00.000-08:00

Happy Thanksgiving

I wish peace and happiness to everyone out there. I'll be back next Monday.

2003-11-21T08:27:00.000-08:00

Just a coincidence, but we were going there tonight

Via Hesiod, we should all choose Costco over Walmart. I already knew that, but I didn't know this:

James D. Sinegal, the president and CEO of Costco, has no palace guard and no profile to speak of, particularly compared to a retail legend like Sam Walton. Yet he's the guy who in 20 years has taken Costco from a startup to the FORTUNE 50 using, as surely as Mr. Sam, highly distinctive practices. He caps Costco's markups at 14% (department store markups can reach 40%). He offers the best wages and benefits in retail (full-time hourly workers make $40,000 after four years). He gives customers blanket permission for returns: no receipts; no questions; no time limits, except for computers—and even then the grace period is six months.

But some of the practices that made Costco great have lately come under attack by Wall Street. The company's margins have been squeezed by rising labor costs and by Sam's latest run at its nemesis. Costco has twice reduced its earnings outlook this year; after the second warning, in August, its stock dropped 21%, to $29. For the fiscal year ended Aug. 31, Costco's earnings rose 3%, to $721 million, on a 10% rise in revenues. The stock has climbed into the mid-30s, though it's well below its all-time high of $58 in May 2000. Analysts have pounded on Sinegal to trim the company's generous health benefits and to otherwise reduce labor costs. But he's taken only limited steps in that direction, like modestly increasing employees' share of health-insurance premiums. That doesn't satisfy critics like Deutsche Bank analyst Bill Dreher, who recently wrote, "Costco continues to be a company that is better at serving the club member and employee than the shareholder."

Sinegal just shrugs. "You have to take the shit with the sugar, I guess. We think when you take care of your customer and your employees, your shareholders are going to be rewarded in the long run. And I'm one of them [the shareholders]; I care about the stock price. But we're not going to do something for the sake of one quarter that's going to destroy the fabric of our company and what we stand for."

Amen, brother.

2003-11-21T08:07:00.000-08:00

Last Day

Today is Ms. Salad's last day of work. While she's not leaving out of her own volition - an incident where her boss made racial comments about her made it impossible to keep working there - she won't be collecting unemployment (though we may just file a claim anyway just in case she qualifies). In any case, we'd planned on her leaving at the end of the year anyway so that we can have kids. Both of us are nearing 35 and my family is getting anxious.

Don't worry about me. My job is enough for us to get by and we've been planning for this for several months, but I was interested how our decision will impact the economy.

First, we'll be paying a lot less taxes, particularly since we bought a house early this year. I filled out an amended W-4 for my work and the worksheet recommended that I declare "married" and "six deductions". Not wanting to be greedy and not actually having a child yet, I declared four deductions. That alone reduced my withholding by 29%. I'd be interested to see how much the housing bubble has been guilty of reducing federal revenue. Even with the new tax law it is still better for us to itemize. Houses are so expensive that ten months of interest payments alone are more than the standard deduction, and that's for a median priced house here in DC. As so many people have bought expensive houses (or refinanced their way into them), I'm sure that has significantly reduced income taxes nationwide. In addition, we're on track for a very large refund this year, because as we moved into the new house we finally donated a lot of our redundant furniture, clothing, computers, and other crap to charity.

Second, it will mean a lot less spending. To live with one income we just can't bop down to Home Depot and buy $1000 worth of lumber to install a floor. We've set up a reserve fund for emergency expenses and as that exceeds our budgeted amount we can do extra stuff with it. But our spending on home improvements is going down, as well as for all other discretionary expenses.

Finally, it's going to mean a smaller contribution to our retirement plan. Both of us had been contributing 10% of our income to our 401k accounts. Her contributions will cease, and mine will have to be cut in order to increase my paycheck to what we have budgeted. That's less money for stock and bond funds to invest.

Even though the official unemployment rate is 6%, this has not tracked the number of people that have left the labor force in the last three years. If we used a constant labor force participation rate, the unemployment rate would be about 7.5%. All these people are contributing less taxes, less spending, many have to pay more for insurance, they've had to reduce their contributions to retirement plans or if they are less fortunate, dip into them or other assets to put food on the table.

Without a sustained increase in employment, these trends are going to continue. Government budgets are going to be strained. The projected federal deficit for 2004 is between $500-$550 billion. My home state's budget for 2004 has cuts for every single program except education and health care. Health insurance premiums are scheduled to go up 16% on average next year. God forbid if we have a cold winter. Heating oil prices are up around 20% from last November. Natural gas prices are up 10%. In short, it's going to take a lot more than 100,000 jobs to fix things for most Americans. We need 2.6 million just to get back to where we were three years ago, and about 3 million have entered the potential labor force since then. It's hard to see how more tax cuts are coming, with the budget problems we already have. If we were to see any kind of economic slowdown from here, I shudder to think what would happen.

But most depressing of all, is that our leaders are so freaking clueless. We need action on a medical care crisis, and we get a crap. We need to prioritize our federal spending, and we get crap. We certainly do not need this dishonest, wasteful crap. But why should I complain? I know my "President" isn't listening.

At the least, I feel better for not contributing so much to this debacle anymore. My wife is extremely happy she'll be able to do more in the garden and "detox" from her late job. I'll actually have more free time, since our schedule was affected by our joint commute. When we have kids we won't have to worry about arranging our work schedules for doctor's appointments, etc. I think after we get used to our less lucrative, yet less stressful life, it may be hard to go back. That should make the folks at Home Depot, and especially in the White House, worry a little.

2003-11-20T11:16:00.000-08:00

Has the consumer reached Judgement Day?

That's the surprising conclusion from a report by Dan Denning over at the Daily Reckoning

You walk through the automatic doors into a cavernous space, brightly lit.

An elderly woman greets you with a radiant smile and a charming "hello." You see two or three others, also dressed in blue, like the smiling woman. You then slowly wander through a space the size of two football fields, through stacks of merchandise 20 feet high.

Along the way you encounter stacks of cans and boxes, pillows and stereos, furniture and clothing everywhere; you are practically the only person in the store. It's quiet, except for the sounds of "The Girl from Ipanema," wafting down from somewhere above you.

No, this is not an all-night grocery store at 4 am Sunday morning.

This quiet, almost desolate, place is Wal-Mart on the 14th of the month. The throngs of greedy, sharp-elbowed bargain hunters are not there.

This isn't a scene from Wal-Mart's future, either. This is how it is right now, today. You see, Wal-Mart's foundation customer has finally gone bust.

That's not idle speculation. It's based on an ingenious method Wal-Mart has developed for judging the liquidity of its core customers. Wal-Mart knows the paycheck-to-paycheck consumer is its lifeblood. It also knows that most paychecks are issued on the 15th and the 30th of each month. Government-issued checks come out at the end of the month. If you want to know how the wage earners are doing, you have keep track of the middle of the month.

So each month, Wal-Mart adds up all the sales from all of its stores on the 14th of the month, when consumers are out of money. Then Wal-Mart subtracts that figure from all the sales from all of its stores on the 15th of the month, the day Joe and Mary Paycheck get paid. The resulting difference is perhaps the single best measure of the liquidity of Middle America.

"The consumer's liquidity crisis is the worst that Wal-Mart has seen and is the most pronounced in the last five to seven years," according to a recently issued Deutsche Bank report, quoted in Grant's Interest Rate Observer.

Lower interest rates have been great for homebuilders, mortgage lenders and car dealers. But Wal-Mart doesn't sell homes or cars. In fact, money once spent at Wal-Mart now goes into the new house and/or the new car. The company cites the rising cost of gasoline as a drag on earnings.

The trend of all relative prices in the economy over time is to regress to the mean. There are many reasons for this. The first is that consumers substitute cheaper items for more expensive items. But more powerful than this is the budget constraint - if something gets too expensive relative to your income, then you either sacrifice many other things to get it or borrow heavily. And even borrowing has a constraint - you can't borrow so much that lenders won't think you can pay it back.

The two most important relative prices in the economy are savings (income versus expenses, aka "profits" to businesses), and net worth (assets less liabilities, aka "stockholder equity" to corporations). Consumers are already aware of the pressure on savings: there aren't any, and while incomes stagnate from lack of jobs and smaller bonuses and raises, expenses are squeezing consumers no matter where you look.

But a more troubling concern is net worth. Total U.S. assets are around 4.5 times our GDP. In 1945 this ratio was about 2-1. Total liabilities are about 3 times GDP. As recently as the 1960s, the ratio was about 1.5-1. Ultimately, Boomers won't be able to eat their house or 401k after they retire. They will need to either sell their house or (failing that) take out something like a reverse mortgage to generate income. Either way, they will put downward pressure on housing prices by consuming the value of those assets, and the ratio of assets and debt to GDP will return to its historical mean. Sooner or later. And its much easier to regress to the mean through falling asset values than by increasing income, unless that increase is via large amounts of inflation. This is why Denning believes we have a "box seat to a historic event: the forced deleveraging of the American financial economy."

2003-11-19T06:39:00.000-08:00

Discussion thread
For civil debate: which Democratic candidate would be best for the economy and why?

2003-11-18T07:27:00.000-08:00

Sporadic blogging ahead

Lots of work to do before my family comes into town for Thanksgiving. Lots of cleaning and prep work to do at home as well. Mrs. Salad's last day on the job is Friday (she will be in the unemployment claims for the week ending 11/28). You can check out Angry Bear, MaxSpeaks or Wampum, who are still as busy as ever.

I have a backlog of longer topics, but very little time, so it may be just snippets and prowling the messages for the next few weeks. If anyone out there has anything to say, you can treat all the posts as open threads and I'll edit the post to highlight what everyone is talking about.

2003-11-14T11:19:00.000-08:00

News bites

Retail sales fell 0.3% in October. September sales were revised downward to -0.4%. Producer prices rose 0.8% in October, while PPI inflation over the year stayed at 3.4%. Industrial production growth slowed to 0.2% in October from 0.4% in September. The dollar suffered its worst week in six months versus the Euro, with the latter rising as high as $1.179 in today's trading. And the outlook for municipal bonds across the board next year is "grim".

All signs are pointing to slower growth in the fourth quarter, as well as a downward revision to third quarter GDP numbers. As the recent U.S. credit surge has boosted foreign economies. Australia and England have already raised interest rates. New Zealand is raising interest rates soon. Rising inflation, a falling dollar and rest-of-the-world boom sure makes some things look pretty interesting. Of course, the standard disclaimer applies - I don't want to get caught up in one of these things.

2003-11-13T10:12:00.000-08:00

Useful Advice

Bill Fleckenstein still writes a useful column (possibly the only one) over at MSN Money. His philosophy of investing is highly correlated with mine as an economist, and offers up many useful nuggets this go around.

In the investing business, it's very easy to misjudge things and then find yourself in a situation where something you expected to happen didn't happen or happened in a way different from what you expected. That is, you were wrong.

Being wrong in this business comes with the territory. The real trick in the investment business is making sure that your mistakes don't kill you.

So I'll be the first to admit that even with the strong monthly data coming out - I didn't see third quarter GDP or such strong job growth coming. However...

Readers of my daily Market Rap column know that I stand behind my motto: "Often wrong, never in doubt." I have a lot of conviction, but I make plenty of mistakes. So, when you factor what I think into what you think, you should factor in the possibility that I might be wrong, and then consider how you will deal with that.

What I'm not in doubt about is that the U.S. economy is in the final stages of a mammoth Credit Bubble that will result in a massive loss of wealth for many Americans. How the bubble will pop and when (if it hasn't already) is subject to debate. From my contrarian bent, the best investments for Americans over this period will be the worst ones the past decade: raw materials and other currencies, the worst will be the best ones now: U.S. stocks, long bonds and housing.

Investing is a complicated subject even when done right. None of us has all the answers, and we all make mistakes.

Despite my being constructive last spring, the present surge in the market has been bigger and better than I imagined. But I really couldnÂ’t care less that the market is going up and I didn't catch it. The risk/reward has been all wrong, in my opinion (even though it has worked).

It's as if you've been playing poker and continually drawn to an inside straight. Odds say you lose, but if you do it and win, you'll have made money even if the risk/reward was poor. And that's been the story with the stock market.

Just like you can make loads of money from a credit bubble. That's why they're so attractive! But like stocks the economy is cyclical. It doesn't go straight up or straight down. The most money can be made by buying low and selling high. But in any case the main thing is to make sure mistakes don't kill you.

In a booming economy, it's not wise to spend all your cash and rack up mountains of debt, because as soon as the worm turns you will be horribly exposed. It's also not wise to assume just because the indicators are better - things are all clear from here on out. Recessions correct imbalances (just as booms perpetuate them). If the main imbalances of the 1990s boom were too much capital investment, asset bubbles, massive trade deficits, overconsumption, then a successful recession would mean correction of these imbalances, not the opposite. That many of these imbalances actually are getting worse - well, I'm not the only one that is concerned.

That doesn't mean the market can't rally, though I'd remind people we're still about 25% below the levels of March 2000. It also doesn't mean the economy can't grow. It just means sustainable growth will be elusive from here on out. A lot of people were kicking themselves for not selling their stocks in 2000 when the writing was on the wall. They will be kicking themselves again for not selling when this rally ends too. They'll be kicking themselves for not refinancing when interest rates rise to 9% (odds of that happening in the next 30 years, all but certain). They'll be kicking themselves for not selling their house when prices top out someday. Those people will be wrong too, but a 50% drop in home prices means different things to those that own the house free and clear and those who just assumed 80-15-5 mortgages for 40 years. To the former it's a nuisance, to the latter it's crippling. Our problem is we have an entire generation of individuals who will be paying off their mortgages, cars, and credit cards well after retirement age. The assumption is the economy will recover and housing bubble won't burst and the Fed can fix everything. The reality is we'll see.

2003-11-13T08:29:00.000-08:00

The more things change...

The trade deficit widened to $41.3 billion in September. Wal-mart, where pretty much everything is made in China and they treat their workers accordingly, made $2.3 billion in just three months. Oh, but that was just not enough for some people.

In the land of billions of profits and $8 an hour wages, some people are understandably upset.

These three multi-billion dollar supermarket chains, who are currently crying poverty, earned over eight billion dollars in net profit in the last five years alone. That would have been impossible without the hundreds of thousands of workers who make their stores run.

The companies claim that since Wal-Mart is moving in to the supermarket business they have to cut their costs in order to compete. They are trying to divide the working class by claiming that the grocery workers are overpaid. If we are to believe the companies it seems every grocery worker is making about seventeen dollars an hour. But the vast majority of grocery workers are part-time, and the average worker is taking home about $1,300 a month. One of the main victories these workers have won over decades of struggle is a decent health care package.

The conventional wisdom is that since the economy is soft, labor should just shut up and be happy they have a job. However, the opposite is true. It is increasingly transparent that employers are using the economy as leverage to extract concessions. During the Great Depression, in fact, unions won their greatest increase in living standards - keeping wages constant while prices fell - which left a generation of economists wringing their hands about "sticky wages". Funny nobody every complains about "sticky profits".

There's one news network that says they are fair and balanced, but there are many definitions of fairness - it is one thing to be fair and present both sides of an issue. It is another thing to recognize the (un)fairness inherent in this:

There are those who say that in times of economic trouble everybody needs to give in a little. But in a country where the 400 richest individuals are worth $955 billion dollars I think what we need is a little bit more taking by those on the bottom.

Meanwhile, jobless claims rose to 366,000 last week. Last week's estimate was also revised up to 353,000.

At work, I'm currently filling out my health insurance election forms. I'm comparatively lucky that my employer pays a big chunk of the cost of health insurance. Still, the three plans I have to choose from will run me around $185 a month, up from the $150 that I'm paying now. That works out to $420 this year I'll have to devote to health insurance rather than other things this year. When my wife left her last job in 2000, we were on COBRA for a couple months and that ran me around $300 a month. Today, it would be around $500 a month. As it is, after the last experience my wife has moved to my insurance and we'll have no such break this time. This cannot be said about the 2.6 million others that have lost jobs in the past three years. It goes without saying that George W. Bush knows nothing about these types of things, and cares even less.

2003-11-08T08:55:00.000-08:00

Corporate balance sheets not improving

While many companies in the private sector have been able to boost profits by cutting costs, this isn't translating into the reduction of debt levels. And while debt spreads have narrowed thanks to profit improvement and a recovery in demand, this may be giving a misleading picture of corporate financial health.

...a number of banks are using the methodology to help determine whether they're earning enough on corporate credit, and using that to figure out how much more fee income they may need from providing other services to a company to make the relationship worthwhile. The methodology is also being used by an increasing number of institutional investors, he adds. Given that, MKMV's most recent findings suggest that the cost of capital supplied by banks and the public debt markets for many large issuers of debt may be higher than credit ratings alone may lead their finance executives to expect.

The study does confirm the impression that corporate credit quality is improving—though, again, the main reason is rising stock prices, not falling debt.

Earlier, CFO.com interviews Philip Arestis. Snippets:

"The [recent] economic downturn is not typical. It's not the kind of downturn we had in the '70s, for example. This is because of overinvestment in the late '90s, and that's very important. Most people would agree that there was New Economy thinking, in IT in particular, though we overinvested not just in telecommunications but in other areas as well."

"In terms of the personal and corporate sectors, we see these problems becoming reality, especially if unemployment increases further and disposable income goes down. In that case, the current huge increase in property prices becomes unsustainable. So we could very well have a property bubble as well. And if the corporate sector does not invest, its current imbalance of debt to income may very well continue."

"A much better way to conduct fiscal policy is to enable U.S. state governments to avoid tackling their deficits through expenditure cuts. State after state recently initiated cuts in expenditures to avoid deficits, which they have to do, of course. They just have to balance their books. If the federal government came forward and honored the shortfalls so that states wouldn't have to cut back on schools, infrastructure, et cetera, then we'd have the same deficit, but all these cutbacks would be avoided. This would produce an environment where the corporate sector revises expectations and would begin to be more optimistic about future levels and speed of economic activity."

Clearly, to the extent that the imbalances we have talked about disappear, or are mitigated significantly, this would give us great confidence that the recovery is sustainable. But two further indicators would also be very important. The first is substantial recovery in investment activity. But recovery in the rest of the world also, especially Europe, is paramount. Monetary and fiscal policies in the European Economic and Monetary Union can and should do a great deal more than they have been providing. Alongside these initiatives, a concerted action globally would be an excellent [step] forward, and a significant pointer in the [right] direction. In other words, international coordination of economic policies would produce a global climate of sustainable recovery. The U.S. economy would benefit a great deal from such coordination of policies.

2003-11-08T08:12:00.000-08:00

unbelievable

There is the kindness of strangers, and then there is this...

For now, it is worth noting that China's foreign-exchange reserves jumped $17.1 billion during October to $401 billion. Year-to-date, largely dollar reserve holdings have surged $114.6 billion, or an annualized 48%. Chinese reserves increased $74.2 billion during 2002. For further perspective, Chins's reserves expanded $5.0 billion during 1998, $9.7 billion during 1999, $10.9 billion during 2000, and $46.6 billion during 2001. Through September, Bank of Japan foreign-exchange reserves have surged $132.6 billion, or 39% annualized. Bank of Japan reserves increased $63.7 billion for all of 2002. Combined Chinese and Japanese foreign-exchange reserves are on pace to balloon $314 billion this year (43%), compared to last year’s $138 billion. Gone Parabolic.

Indeed.