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Financial Skeptic Bulletin, July 2008

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Situation continued to deteriorate from June.  Bonds dropped considerably, essentially in sync with stocks on inflation fears. 

For 401K investors one of the problems is extremely poor performance of some Vanguard funds during the downturn . Especially dismal performance of Windsor II probably can be explained by the fact that James P. Barrow has lost his touch.  In February, 2008  Vanguard dropped Grantham's Firm as Co-Manager of Funds ( which has a bear bias. If a value dropped more then S&P 500 during the downturn this is not a value fund. With Windsor II this happened probably due to overexposure to finance. Vanguard Windsor II holding in Bear Stears at end of 2007 was $694,324,525! The "golden days" of this fund are probably over due to the amount of assets under management.



Growth for growth’s sake is the ideology of the cancer cell.

Edward Abbey

"Any fool can buy a company. You should be congratulated when you sell."

Henry Kravis

“Financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design . . . The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version.”

John Kenneth Galbraith, A Short History of Financial Euphoria

[Jun 29, 2008] An anti-stagflation strategy: move back home by By Tim Harford

 June 27 2008 19:44 |

For us, the financial journalists, the credit squeeze is a lot of fun to write about. For you, the honest newspaper subscriber, it may not be so much fun to read about. This stagflation business – inflation and low growth all at once – is so depressing. You cannot look to the authorities for comfort. Your government blew all the cash in the good times, unless you happen to live in the Gulf or in China. Your central bank, desperately trying to sound both sympathetic and hawkish, is changing position more frequently than a presidential election candidate.

No, you cannot rely on others. If you are going to survive – perhaps even prosper – in a stagflationary world, you are going to have to be tough, resourceful and self-reliant. You will have to cope with a boss looking for people to fire, a tightwad bank manager and columnists who use words such as “stagflationary”. It is not going to be easy.

If you are a homeowner in the UK, for example, you probably have half a million pounds of mortgage debt, securely padlocking you to a house whose value is depreciating by £10,000 ($20,000, €13,000) a month. This is the financial equivalent of taking a swim while handcuffed to an anvil . What can be done? I suppose you could always hold your breath and hope the tide goes out fast.

On the other hand, you may have some savings. If so, it is vital to invest wisely. But where? Many pundits will have you believe that, in stagflationary times, “cash is king”. That all depends what they mean by “king”. After tax, a UK savings account will pay you less than the inflation rate, so the pundits are presumably thinking of the one-eyed-man-in-the-kingdom-of-the-blind sort of king.

It is true that cash has recently performed better than property and better than shares, with the FTSE 100 down about 15 per cent over the past year. Still, the savvy investor should be looking for inflation-beating returns. It is possible. According to the UK Office for National Statistics, the price of spirits is up nearly 10 per cent, milk, cheese and eggs are up more than 15 per cent, and the price of edible oils and fats is up more than 20 per cent. Here, surely, are the new investment classes. Had you sold shares last summer and stocked up on Nido and Mazola, you could have beaten the stock market by up to a third.

Past performance is no guarantee of future performance, of course, so it would be rash to jump headlong into a portfolio that is short on equities and long on powdered milk. Still, an investment strategy that would also see you through the collapse of western civilisation has something going for it.

Moving from investment tips to money-saving advice for consumers, there is good news and bad news. The bad news is that most things are getting expensive quickly. The good news is that the banks will not lend you the money to buy any of them, so the problem is largely academic.

You could refer to the lists of money-saving tips provided in certain newspapers, but I cannot personally recommend them. One “top 10” featured the following eye-catching tip: roll a lemon around on a flat surface before squeezing it, because this produces more juice. That is thought-provoking, but one thought it provoked was that the money-saving gurus have failed to reveal either for how long the lemon should be rolled, or how much extra juice would be harvested. I strongly suspect that calculated as drops of juice per minute, lemon-rolling does not pay the minimum wage. What is more, does anyone really look at a little dish of lemon juice and ruefully reflect that there is nothing for it but to squeeze another slice? As money-saving tips go, this is not much better than taking the batteries out of your doorbell and checking every minute to see if someone is on the doorstep.

Anyway, no amount of lemon juice is much help if you have been sacked by your investment bank and your monthly mortgage payment is due on Tuesday.

No, the really frustrating thing about stagflation is that, while there are people who are doing very nicely out of it all, emulating them is impossible. Take members of the Saudi royal family, for example. I will warrant that they are not rolling too many lemons at the moment, but the House of Saud is not the kind of organisation you can join by submitting a peppy application letter.

Shell tanker drivers are not in the oil billionaire league just yet, but should be pleased with a 14 per cent pay rise over the next two years. Economic commentators should also be hot property, but alas: no matter how great the supply of financial news, the supply of talking heads seems to keep pace.

Then there are the teenagers and young adults living at home. Despite being too young to know what stagflation is, they have perfectly positioned themselves to take advantage of it. The rising cost of fuel, food and services does not bother them: they do not pay for domestic heating or school fees, and they always borrow the car and leave the tank empty.

On the other hand, clothes, trainers, computer games, iPods, DVDs and even illegal drugs are all falling in price. Living at home is the perfect way to ensure a negative inflation rate, and by the time the little blighters leave, people will be giving houses away. It’s an ill wind, as they say.

The writer is an FT economics commentator

[Jun 07, 2008] 'They're Dead Wrong'

For months, economic Pollyannas have looked beyond the dismal headlines and promised a quick recovery in the second half. They're dead wrong.

...this downturn is likely to last longer than the eight-month-long recession of 2001. While the U.S. financial system processes popped stock bubbles quickly, it has always taken longer to hack through the overhang of bad debt. The head winds that drove the economy into this dead calm -- a housing and credit crisis, and rising energy and food prices -- have strengthened rather than let up in recent months. To aggravate matters, the twin crises that dominate the financial news -- a credit crunch and the global commodity boom -- are blunting the stimulus efforts. As a result, the consumer-driven economy may not bounce back as rapidly as it did in the fraught months after 9/11

...The upshot: the Fed's adrenaline isn't really circulating through the commercial bloodstream. According to mortgage-data firm HSH, rates on conforming 30-year mortgages (under $417,000) have only fallen marginally since the Fed began cutting rates, from 6.4 percent on Sept. 21 to 6.17 on May 30, while jumbo loan rates haven't budged at all.

...Economists say it generally takes nine to 12 months for Federal Reserve interest-rate cuts to work their way into the system. By contrast, sending checks to consumers tends to produce quick results. Some retailers have reported a surge of business spurred by the tax rebates. But consumers are shopping for necessities, not discretionary items. Sales at Wal-Mart and Costco were up in May, while sales at Kohl's and Nordstrom were down. David Rosenberg, chief economist at Merrill Lynch, argues that higher food and gas prices are eating the rebate. Follow the math. The rebate checks will total about $120 billion. Studies suggest that about 40 percent of that total, or about $48 billion, will be spent in short order; the rest will be saved or spent later. Rosenberg reckons that higher energy costs???crude-oil prices are up 40 percent so far in 2008???are draining about $30 billion out of household cash flow per quarter, and that food inflation, running at a 9 percent annualized rate, drains another $20 billion per quarter. "So instead of the stimulus being filtered into real economic activity, it's being diverted into the checkout counter at Albertson's and the gas station," he says.

[May 29, 2008] Pimco´s Bill Gross Must Read Piece On CPI

May 23, 2008 | immobilienblasen

The following post from Bill Gross is worth reading every single sentence. While i´m with Mish on what Inflation is ( see Inflation: What the heck is it? ) it is very telling how the US is able in depressing the symptoms of inflation. But as long as foreigners are willing to destroy money in buying US treasuries and agency paper one has to congratulate the US for their excellent PR ( no sarcasm! )...

I´m staying with gold......

[May 29, 2008] Asia Times Online Asian news and current affairs

This brings up a laughable "letter to the editor" of the Financial Times from David Nowakowski of Atlas Management, who wrote, "For 25 years, the Fed has kept inflation at an average of 3.2% a year - that should be applauded"! Hahaha! You will go a Long, Long Time (LLT) long time before you hear something so ridiculous! Hahahaha! Applauded! Hahahaha! <

But even 3.2% sounds good right now, as even food and energy, and everything else we have to buy, are increasing at rates of inflation that are multiples of the "official rate", which means that the horrifying 3.9% inflation is, unbelievably, the residual inflation after the government ignores the things that went up a lot in price, and then lies about the rest! Hahahaha! <

My laugh is nervous and dry, and for a little comic relief we go to this week's Barron's and look in their "Indexes' P/Es & Yields" table to see that the price-to-earnings ratio for the Dow Jones Industrial Average is now up to 87.07! This is, incredibly, up from last week's P/E ratio of 85.97! Hahahaha! <

And while that is funny enough, get a load of this; the dividends paid by the DJIA companies to their stockholders was $317.88, while earnings were only $149.16! Hahahaha! <

Naturally, my stupid kids come running into the room with that very fact in hand, and they want to know why it is that the 30 companies in the Dow Jones Industrial Average can pay out three times as much as they earn, and yet I can't let them have a tiny fraction of what I make with which to buy decent food, or shoes that are not held together with duct tape. My eyes narrowing, I pointedly ask them, "And who pays for the duct tape?" and they have to admit that I do. Naturally, I think this closes the whole point of discussion, and so I provide the denouement by saying, "So shut the hell up and go to hell!", but they, of course, don't. <

So I ignore them, and since I am already in the "Indexes' P/Es & Yields", I take a look at the S&P500, and see that the P/E ratio there is 22.89, which is up from last week's P/E of 20.89, even though earnings dropped to $62.28 from last week's $66.28, which are both down from last year's earnings of $83.39! Hahahaha!

[May 24, 2008] naked capitalism The Economist Has No Clothes

The strategy the [neo-classical] economists used was as simple as it was absurd—they substituted economic variables for physical ones.


Nadeau's article reminds me of the observation that the difference between physics and economics is that physics has 3 laws that explain 97% of everything while economics had 97 laws that explain 3% of everything.

[May 15, 2008]  Positive Thinking vs Skepticism in the Markets

The Big Picture

When financial companies feeling the need to dilute their shareholders just to make ends meet can link up with the trusting managers of other people's money, it's more than just the perfect match.  It's the perfect example of positive thinking at work in today's markets.

[May 14, 2005] Recessions Are in the Eye of the Beholder by Ben Stein

Remember the adage: "Be trustworthy to all and optimistic in all your dealings, excepting those of a financial nature." ;-)
May 8, 2008 | Yahoo

How many times have you been witness to an event and then read about it in the newspaper later? How many times would you say the newspaper reported the event as you witnessed it?

If you're like me, truthful, accurate reportage is a rarity in your experience when compared with, well, with your experience.

Reports of Recession Greatly Exaggerated

This is as true of giant national events as it is of neighborhood ones. I've been involved in many of these big events, from Watergate to the Drexel/Michael Milken junk bond scandal. The media simply never gets it right. They give an impression, highly colored by the inexperience, bias, and laziness of the reporter. Most of all, in national events, the reporting is based upon the reporter's urgent need to magnify his or her own importance. This is only human, but it's good to recognize it.

I've been thinking about this a lot because in the last few weeks, we've seen a barrage of data buried in the back pages of major newspapers telling us that the "recession" everyone said was a certainty, the "recession" that the reporters assured us would be about as bad as the Great Depression, is simply not happening.

The bond markets have rallied staggeringly. The stock markets had one of their best months ever in April. The rate of defaults on corporate bonds remains extremely low. And index securities that track mortgage defaults are saying that the fear of a colossal national mortgage default epidemic was ill-founded.

Ignoring the Data

Just as I am writing this, new employment data has come out showing only very small job losses in April -- 20,000 jobs out of a labor force of very roughly 160 million, meaning that 1 in 8,000 jobs has been lost. The actual rate of unemployment is falling to a very modest level -- 5 percent.

Yet the national media is still selling us fear of a recession. One of the major national newspapers has a reporter who's desperately trying to peddle a story of national economic collapse even as the economy stays afloat.

And the beautiful part is that it's now crystal clear that we're not in a recession (we could be later -- anything can happen). There was just a report that showed first-quarter 2008 GDP growth was positive, meaning that as a matter of arithmetic we can't be in a recession, any more than a man who's gained weight can also be losing weight.

The Economy's Still Afloat

No, that's not the beautiful part: The beautiful part is that because we're not meeting the definition of a recession -- two consecutive quarters of negative economic growth -- the pundits are trying to rewrite the definition, to make it just about anything they feel like making it. (Or, as I like to say, the new rules allow liberals to call a conservative administration's tenure a recession any time they have the urge.)

Ladies and gentlemen, the dogs may bark but the caravan moves on. Adroit moves by the Federal Reserve have saved the economy from a bad recession. The housing crisis was never anywhere near as bad as the media naysayers were trying to claim. The mortgage foreclosure problem was never the disaster hedge fund traders and their allies in the media were trying to say.

This big old leaky barge of an economy is still floating lazily down the river. It's not as strong as it was two years ago, but it's still above the water line. The big problem for most employers now (as they tell me) is getting decent labor. Any halfway skilled, halfway decent college grad can have her choice of jobs. Anyone with a real work ethic and an education can make a fine living.

Get Real Now

I've come to feel that you, my readers, are my family. So I hope you haven't been terrified by the media and didn't sell your stocks. I hope you've been buying while the market was down. It may have some further air pockets, but the direction sure looks like it'll be up for a while now. P/E's aren't at all high, and foreign stocks are amazingly cheap.

And I'll add another suggestion. My evidence is anecdotal at this point, but I'm hearing of an uptick in home sales in my beloved Southern California and my native Washington, D.C. I think the tide is hitting full ebb, and while it may ebb for a while, it'll turn before long.

The nation is still rich. Mortgage rates are low. Employment is high. Contrary to media reports, loans are easily available to qualified buyers. Houses are still tax-subsidized. Young families need homes. We old people need retirement homes. People are moving for many reasons, and they need homes, too. Clearly it's a good time to dip your toe in and see how you like the residential real estate water.

Bunk, More or Less

As for the financial journalists, take a cue from Henry Ford, who famously said, "History is more or less bunk."

I wouldn't say business journalism is all bunk. But I would say it's about glorifying the reporters and selling newspapers. And while fear sells papers, it doesn't make for good investors.

naked capitalism Milton Friedman's misfortune... Milton Friedman's misfortune...

Milton Friedman’s misfortune is that his economic policies
have been tried.” - John Kenneth Galbraith


Namazu said...
Milton Friedman famously recommended that the Federal Reserve be replaced with a computer to gradually increase the money supply. To paraphrase John McEnroe, you CANNOT be Mostly Serious!
Anonymous said...
'Is it possible that they have not been trying to save us, but are intentionally liquidating the country?'
David said...
I have to giggle and laugh everytime I hear "Milton Friedman's" name. For some odd luck my prospective in-laws (to be?) own and live in Rose and Milton's former summer (camp) in Orford, NH. It's not a palace by any means and when the Friedman's had it was barely a tumble down shack with a view of Mt. Cube. Supposedly my 'in-laws' lost one of Rose's paintings in a garage fire.

The irony is that I have long hated the legacy of the conservative Chicago school, the links with Pinochet of Chile, the downsizing of American industrial jobs, etc. the whole Right Wing tilt that came about with greater Class differences in wealth and more economic insecurity but I have to bend a little and think that there is some sort of humor that such a leftwinger as I (pretending to be perhaps?) might sleep in one of the Friedman's bedrooms when I visit there.

They were friendly people from all accounts while John Kenneth G. had a haughtiness greater in scale than even his tall stature (told to me by an associate while they were in India.) The Galbraith's hung out in summer nearby over in Vermont I am told.

However dense some of Galbraith's writing was, I think he had a much firmer understanding of real markets than the simplistic nostrums of Friedman. His "post-industrial market' ideas are especially understandable in light of the planning that successful corporations need to 'pre-market' for success. And govt and industrial planning are needed co-joined. The current meltdown of lack of planning (and regulation) is perhaps due to the Freidman doctrines. Also, I liked Galbraith's sweet, concise mini-biograph of Keynes he wrote somewhere, proving that he could also write for us more common folk.

[Jul 21, 2008] Econbrowser Why a lot of people think the CPI is not representative of their experience ... and are right. At least partly.

It looks like each class experience its own level of inflation. So there are different inflation levels for low income, middle-class and rich.  In no way this is one nation under God.

Government statistics, particularly the CPI, have been in the news (e.g., [0]). Following up on my previous posts [1], [2], I want to take a stab at the question posed in the title.

This post focuses on issue separate from the mathematics of the index forumulation, and has to do with what the typical weights at any given instant in time should pertain to. Should one use the expenditure weights that pertain to all the households aggregated in the economy? Or should one use the expenditure weights that pertain to the "typical" household? Kokoski (2003) summarizes the distinction thus:

In the democratic index, the expenditure pattern of each household counts in equal measure in determining the population index; in essence, it is a case of "one household--one vote". In the plutocratic case, the contribution of each household's expenditure pattern is positively related to the total expenditure of that household relative to other households--in essence, "one dollar, one vote".

Clearly, there's no "right" answer to this question. Just like when asking for the average household income, does one take the income earned in a year, and divide by all the households in the US? Or does one identify all the households in the US, rank them by income from top to bottom, and pick the one in the middle. The former yields the mean, the latter yields the median. Both are measures of central tendency.

Understanding that distinction can be helpful in understanding why any given observer does not feel the CPI represents his or her experiences. Literally, unless the income distribution is concentrated at one level, or all households have the same expenditure patterns regardless of income levels, then almost nobody will feel the CPI is representative of the changing prices facing them. The more unequally income is distributed, or the more expenditure shares vary by income level, the more strongly this perception will held.

The gap between the CPI weighted by expenditures (so that higher income households will naturally get a greater weight) and the CPI weighted by the average over households, irrespective of each household's total expenditures, is sometimes termed the "plutocratic gap". From Eduardo Ley in a 2005 Oxford Economic Papers article. From the abstract:

Prais (1958) showed that the standard CPI computed by most statistical agencies can be interpreted as a weighted average of household price indexes, where the weight of each household is determined by its total expenditures. In this paper, we decompose the CPI plutocratic gap -- i.e. the difference between the standard CPI and a democratically-weighted index, where each household has the same weight -- as the product of expenditure inequality and the sample covariance between the elementary individual price indexes and a term which is a function of the expenditure elasticity of each good. This decomposition allows us to interpret variations in the size and sign of the plutocratic gap, and to discuss issues pertaining to group indexes.

Note that despite the tendency to associate "democratic" with good, and "plutocratic" with bad (the terminology originates with Prais, I believe), economic theory does not provide a basis for strongly preferring the democratic over the plutocratic, in the absence of some strong conditions. And indeed, it's not clear that either index can be justified under general conditions.

Now, in the commentary on my two previous government statistics posts, a recurring theme is that the CPI is not representative of the particular writers' experiences. And it is true that if one's consumption bundle does not match that of the average consumption bundle, then one will either feel that the CPI understates or overstates the price level.

Another way of tackling this question is to ask what kind of household has a consumption pattern that matches the CPI? The answer is as follows:

It is natural to ask then what is the household better represented by the plutocratic CPI. Muellbauer (1974) searched for the household whose budget shares were closest to the ... aggregate weights in the UK CPI, and found it to be at the 71st percentile in the household expenditures distribution. For the US in 1990, Deaton (1998) estimates that this consumer occupies the 75th percentile. Thus, the 'representative' consumer embedded ... is inclined towards upper-expenditure households.

Ley cites a 1987 study by Kokoski that estimates the plutocratic gap at -0.1 to -0.3 percentage points per year over the 1972-80 period. In words, this means that CPI using democratic weights experienced between 0.1 to 0.3 percentage points greater inflation than the reported CPI inflation rate.

More recently, Kokoski (2003) has updated her analysis (a related version published in Monthly Labor Review in 2000, see here). She summarizes her paper thus:

This paper provides an empirical analysis of the differences between the plutocratic and democratic price indices, using data from the Consumer Expenditure Survey and the CPI for the periods 1987-1997, and for simulated price change scenarios. The results show that there is very little difference between the two types of index, and that one index need not always exceed the other. In the simulated scenarios, even the extreme cases where prices changed only for expenditure-inelastic goods and services, the difference between the democratic and plutocratic indices was only about one point for every ten percent increase in the relative prices of these goods.

Can we extend these results to the present time? It's not clear. There is the conjecture that, with lower income households having a basket skewed toward food and gasoline, the plutocratic gap would be wide, particularly over the last couple years. While that conjecture makes sense to me, I'd say that answer is actually not clear. The reason I say that is because of a recent paper by Broda and Romalis, who note that because of Chinese imports, lower income households have actually benefitted from globalization to a much greater degree than typically thought exactly because they have consumption patters skewed toward goods that have decreased in price over the past decade. From Broda and Romalis's paper:

… we find that inflation for households in the lowest tenth percentile of income has been 6 percentage points smaller than inflation for the upper tenth percentile over this period. The lower inflation at low income levels can be explained by three factors: 1) The poor consume a higher share of non-durable goods -- whose prices have fallen relative to services over this period; 2) the prices of the set of non-durable goods consumed by the poor has fallen relative to that of the rich; and 3) a higher proportion of the new goods are purchased by the poor. We examine the role played by Chinese exports in explaining the lower inflation of the poor. Since Chinese exports are concentrated in low-quality non-durable products that are heavily purchased by poorer Americans, we find that about one third of the relative price drops faced by the poor are associated with rising Chinese imports.

Still, the Broda-Romalis paper does not directly address what has happened in the very recent past (say the last two and half years), as prices of goods imported from China have started to rise, and oil and food prices have risen relative to other prices. Some ideas can be gleaned from the data provided in Kokoski (2003), who provides 1987 expenditure shares for the various income quintiles. I present for illustration the distributions for the bottom first and top fifth quintiles.

Figure 1: 1987 expenditure shares for bottom income quintile, according to Consumer Expenditure Survey. Source: Kokoski (2003), Table 5. pluto2.gif
Figure 2: 1987 expenditure shares for top income quintile, according to Consumer Expenditure Survey. Source: Kokoski (2003), Table 5.

With this information, one can make a back of the envelope calculation (and I stress this is only a back of the envelope calculation), based upon these shares and the indices reported for the components. This yields the following figure:

Figure 3: Year-on-year inflation calculated using annual CPI (not seasonally adjusted), (black), and guesstimated CPI for first quantile (blue) and fifth quantile (red). Inflation calculated as first log difference of annual CPI. Guesstimated CPIs calculated as geometric averages of component indices. Source: BLS, and author's calculations based on weights in Kokoski (2003), Table 5.

Here are several caveats. First, these are calculations that take into account differential expenditures at a very high level of aggregation, so they ignore differential shares at much finer levels of disaggregation. Second, relative prices may have moved even more dramatically in 2008, and the impact of that effect will be missed in this calculation. Third, these are a calculation based upon annual data; calculation of year to year changes will then allow for minimal influence of what has happened to food prices in the last half of 2007.

Those caveats in mind, these guesstimates imply that the differential between the actual CPI inflation and the inflation rate for the first quintile is only about 0.3 ppts in 2007.

A final caveat to keep in mind (from Kokoski (2003)):

...For most a priori definitions of demographic groups, there is generally more variation across households within each group than there is across groups. Since the statistical significance of any differences observed here between quintile indices is unknown, one should not draw quantitative conclusions from these results.

So one's experience should deviate from that represented by the CPI, even if one were at the 75 th quintile, exactly because of the highly individual nature of consumption bundles. But it is not clear that the income distributional aspects are driving people's differential experiences.

[Update, 2pm Tue 22 July]: Reader Andrew asks why I used geometric averages. Upon inspecting BLS documentation, I learn that I should aggregate the high level components (as opposed to the elementary prices) using the arithmetic average. I’ve recalculated the indices using the arithmetic averages, and present them in Figure 4. There is little visible difference in the pattern of results.

Figure 4: Year-on-year inflation calculated using annual CPI (not seasonally adjusted) , (black), and guesstimated CPI for first quintile (blue) and fifth quintile (red). Inflation calculated as first log difference of annual CPI. Guesstimated CPIs calculated as arithmetic averages of component indices. Source: BLS, and author’s calculations based on weights in Kokoski (2003), Table 5.

Posted by Menzie Chinn at July 21, 2008 08:15 AM

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Another great post!

It is important to note that the issues considered here are separate from the issues about substitution (Laspeyres vs. Paacshe indexes and so on) discussed in the last post. And they are also separate from the many other issues such as those in the Boskin report (such as quality changes, new goods, price variation among retailers, how to treat housing, etc.)

Before people jump to criticize the CPI, I hope they take time to understand these issues, and how inherently complicated calculating a useful price index can be. 

Posted by: ed at July 21, 2008 09:08 AM

Very nice post. Even though you show that everyone experiences inflation differently, it doesn't explain widespread beliefs that inflation is understated by 3 percentage points or more. I think the explanation for that perception is more psychological in that people experience inflation in their marginal spending. They really notice paying an extra $30 a week at the gas pump, but don't consider that amount in the context of their entire spending.

Posted by: Joseph at July 21, 2008 10:22 AM

As an interesting side note, what I found surprising from your figures 1 and 2 is that the affluent have so much more discretionary spending available beyond basic food, housing and utilities and they seem to squander it all on cars (private trans.) It seems to imply that in our society, when someone gets more money, the first thing they do is buy more expensive cars.

Posted by: Joseph at July 21, 2008 10:24 AM

As an upper middle class parent hoping to buy a home, to pay college tuition, and eventually to retire, the computed CPR is almost completely irrelevant. Housing purchase price (which isn't even in the CPR), tuition and medical costs together account for over 90% of my take-home income.

Once I have a house purchased and tuition paid for, it will again be irrelevant, but in some other direction.

Posted by: fg at July 21, 2008 10:57 AM

As mentioned by fg, above, ignoring the issue of the difference between Owner's Equivalent Rent, and actual housing prices, will mean that numbers for both your high and low quintiles don't really match actual experience.

If you instead took the "housing" component, and instead replaced it with rents for low income people (rents have increased by 10% per annum for the the last five years where I live), and housing prices (which have tripled in the last five years where I live), I suspect you'll see a rather different picture.

Garbage in, garbage out, and OER is garbage, in terms of computing real inflation.


Posted by: odograph at July 21, 2008 05:55 PM

I guess my take-away is that we should de-emphasize "the" CPI. As Menzie chronicles, there are many CPIs.

I don't see the word "core" in this page. There is one particularly poor CPI, beloved by glib politicians.

I think the (glib) claims that "inflation is low because the (glib) CPI is low" should be viewed with real suspicion.

As to what's better, we probably need to tailor it to our audience. A welfare recipient should have a CPI tailored to real rent. Perhaps retiree CPI should be rent-based as well.

Those of us concerned with retirements decades off might need another CPI to gauge our how well our savings are, or aren't, pacing buying power in geriatric drugs and fishing cabins.


Posted by: Andrew at July 21, 2008 07:29 PM

To people talking about owner's equivalent rent. If you want to track the prices that people experience you need to track the payments that people typically make. Housing is often paid for via a loan, so you need to use housing loan repayments as a major part of the housing cost rather than the raw cost of the house. The same for cars. This is how it is done in many places. So housing costs are made up of loan repayments, real actual rent, and a smaller portion for direct house prices since some housing is purchased that way.

In the US, tax laws treat a house that you live in as an investment rather than as a consumer item, so owner's equivalent rent is consistent with that treatment - you buy your house as an investment and rent it to yourself. In other places, your primary residence is treated for tax purposes as a consumer item (no tax deduction, but also no capital gains tax on it). It's a matter of classification. The house you live in is both an investment and a consumed item. You might try to work out what portion of it is investment and what portion consumed, and weight the loan repayments and owners equivalent rent by those weights.

Posted by: Andrew at July 21, 2008 07:49 PM

Anecdotal evidence suggests that people do not generally perceive the official CPI to be characteristic of their own inflation experience. Yale University professor Eduardo Engel reports that a popular newspaper in Chile ran a series of interviews with two dozen celebrities who were asked the same battery of questions, one of which was: "Do you trust the official CPI?" It was the only question to which all the respondents answered in agreement: "No." Government statistical agencies, therefore, have a difficult task: How best to summarize thousands of price movements in a single index.

(1) Why the CPI may be inappropriate: escalating transfer payments by the usual plutocratic CPI may result in over- or under-compensation relative to a democratic index during different times. Although these deviations may prove unimportant when averaged over time, there is an important perversity, however, that should be emphasized. The plutocratic gap in the CPI often accentuates the change in household welfare rather than smooth it. In effect, lower-income households suffer under-adjustments when inflation is more harmful to them (ie, when they can least afford it). During periods in which the plutocratic gap is negative, when prices behave in an anti-poor way, social programs, which primarily benefit the poor, are revised less than what would be the case with a democratic group index. Similarly, when price movements ar (ie, when the plutocratic gap is positive) indexed social transfers grow faster than proper cost-of-living adjustments would dictate. Thus, plutocratic-CPI adjustments display harmful procyclical features.

(2) On the other hand, plutocratic weights would arise if we were to draw prices at random in
such a way that each dollar of expenditure had an equal chance of being selected
(Theil, 1967; Economics and Information Theory p.136). So the standard CPI is quite useful as a macro indicator.

(3) Bottomline: different indexes could be easily computed for different purposes.

Posted by: Eduardo Ley at July 21, 2008 08:12 PM

Thank you very much for putting together such a picture of a discussion. There are a number of things that come to mind including why governments collect this data (cost of living indexed expenditures and stuff).

I wonder if something could be learned by not worrying too much about the whole, or the individual or the average. Instead, use the IRS data on household income by size and source (a series produced with a delay)to develop a distribution curve for household income by size, using a five-fold division, (too low, under, adequate, comfortable, more than enough)by comparing with the BLS household expenditure data by household income.

This approach would permit one to estimate the different effects of food, energy, transport and debt service on lower income households, the effects of health, energy, transport and education type expenditures on the better off.

It could provide a corrective to "core" CPI which probably eliminates the bottom half of households from the CPI estimates altogether while providing a basis for working towards a representative household defined in terms of the income which would support consumption expenditures which would be a norm to aim for rather than a description of what might appear to be.

The approach would also provide interesting critical insights into the three-key government data series, employment, income and consumption while offering the potential for an implied view of investment.

Safe Haven Of Misnomers, Fallacies, and Lies

July 31, 2008

Of Misnomers, Fallacies, and Lies
by Brady Willett

The Misnomer

The top misnomer being perpetuated by personalities like Jim Cramer and policy makers like Henry Paulson today is that financial problems are lingering because there is a 'crisis of confidence' in the marketplace. This misnomer continues that confidence can only be restored via radical bailout actions by policy makers. To note: we are not being told that Bear Stearns, the GSEs, and others necessarily deserve to exist, only that they must be bailed out because there existence is essential to the system (how confident are you in the 'system' after hearing this?)

To begin with, the contention that unprecedented bailout efforts are required to restore investor confidence is patently wrong. If a company is reliant upon the credit markets for its day-to-day survival and/or can not function if its reckless trading book no longer fetches top dollar, investors were wrong to have confidence in this enterprise in the first place. In this regard confidence restoration in the U.S. is akin to trying to bring back the grainy luster of a table made press board.

Next, if 'confidence' in the marketplace can only be generated by making the populace share the financial burden of bad financial choices it would be socialism, not capitalism, which engenders the greatest confidence in financial markets. How many bailout efforts does it take before the supposed confidence generating payoff from socialistic activities no longer outweighs the growing burden on the U.S. government and its citizens? Current trends suggest that we will eventually find out.

In short, the real story is not of investors being more or less 'confident', but of investors no longer behaving stupidly.

The Fallacy

The top fallacy making the rounds today is that inflation is the serious threat. What few seem willing to acknowledge is that the rising inflationary trend in 2008 has not been hurting the U.S. on a relative basis. Rather, and after ending a multiyear stretch of sever underperformance in 2007 (compared to other world markets), U.S. markets are holding up exceptionally well in 2008. Moreover, spiking inflation rates have helped take the once ominous threat of emerging market dominance off the radar.

Another positive (?) inflation story is seen in the debasing of the U.S. dollar (or the primary cause of today's 'inflation'). With trillions in U.S. assets being destroyed, bank stocks crashing, and policy makers reacting frantically to this deflation, dollar debasement is not only generating inflation but also helping smooth an otherwise rocky path for the financial markets. Given that this statement may seem controversial, consider the following: take away the debasing of the dollar and the bailouts still to come do not get enacted, future stimulus checks do not get printed, and wars do not get funded. In other words, it is a massive contradiction to extol the benefits of a strong dollar to combat inflation in one breath while calling for more unprecedented bailout efforts with the next.

To make a potentially long story short, a weakening dollar has and can be in the best interests of America if this weakness does not spark a 'crisis of confidence' in the dollar, or (remembering the above misnomer) so long as investors continue to behave stupidly.

The Lie

The biggest lie is that the Fed can always save the day. The reality is that post-Volcker the Fed has done everything possible to avert periods of creative destruction in the marketplace while at the same time doing little to promote the longer-term health of the U.S. financial markets through regulatory prudence. At the risk of sounding like a broken record, this deadly dynamic is largely the result of Alan Greenspan, a man who eulogized the supposed benefits of self-regulation at every opportunity. Today's crisis is suggesting that the self-regulated beast requires larger and larger bailouts in order to survive and a super-regulator to tame it - thanks for nothing Sir Alan!

As the Fed slashes interest rates, accepts junk for treasuries, and applies for the job of regulatory ringmaster, the recurring gravity of the situation should be obvious: the Fed can only save the day by postponing necessary periods of adjustment (i.e. today's 'deleveraging' is moving at a snails pace largely because of Fed meddling!) It goes without saying that when the adjustment obstacles become too large for even the Fed to handle the U.S. dollar and financial system crumbles. Perhaps only then will the 'lie' in question be fully exposed.

MF&Ls Unite!

If the deflationary monsters can remain veiled behind advantageous amounts of inflation, perhaps the U.S. bailouts can be effective over the short-term. Perhaps also if the world feels that it has no choice but to continue along the USD-hegemony-trail a little while longer, the system can avoid Armageddon. Nevertheless, few trends tell us that longer-term a crisis of confidence in the U.S. dollar can be avoided, and this suggests that one of the few safe options for the investor remains gold.

But before arguing that gold is about to return to its safe haven throne, remember that global policy makers, regulators, and money managers desperately want to avoid this outcome. As for the average investor, so long as he or she remains hooked on the misnomers, fallacies, and lies, they will continue running down a paper dream while walking right by gold. To wit, amidst today's financial blow-ups, foreclosures, and bank runs how many investors have been hoarding gold because they fear holding fiat money? Not many.

In short, while gold is the answer if the explosion occurs, there is reason to be optimistic that the paper chase can continue. Confidence in paper money may indeed be shrinking as the inflation rate increases and the Fed tries to throw its soothing cocoon over the financial world, but this confidence - unlike the trillions in OTC derivatives and off-balance sheet schemes - is nonetheless still observable.

[Jul 29, 2008] SP 500 Corporate Profits Leave Little Recession Doubt by Paul Kasriel

Safe Haven

Are we in a recession or are we not? The debate goes on. Take a look at the year-over-year change in operating profits of the S&P 500 corporations (see Chart 1). Profits have declined for three consecutive quarters through the first quarter of this year. Given reports of second-quarter profits to date and estimates of those corporate profits to be reported, it is a good bet that year-over-year profits will be down for four consecutive quarters.

... the current behavior of corporate profits is signaling a recession.

... ... ...

Now, the nice thing about corporate profit data is that they do not get revised as do a lot of other data that go into the recession decision. (I suppose that there might be an exception to this when it comes to the profit data associated with Fannie and Freddie!) With the S&P 500 profits data there is no debate as to whether the Commerce Department is using a correct measure of prices to deflate nominal data.

If Ben Stein wants to continue arguing that the U.S. economy has not yet slipped into a recession, as he did in Sunday's New York Times, so be it. In the meantime, those who are paying attention to the behavior of corporate profits continue to win Ben Stein's money.

The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, July 8th, 2008.

As discussed in previous commentary, despite the dire realities affecting the global economy, it appears investors are not heeding the warnings. Sure, some people are paralyzed like a deer in the headlights, where you can't blame them if they are just waking up to the reality of what lies before us. However, these still appear to be the few, with most still in denial concerning future prospects for the economy and markets. This is evidenced in gold and silver's sluggish performance of late. It should be doing far better as an alternative, but again, the public does not see the need to buy it yet. Can you blame them however, with the incessant cheerleading and gaming that the media (CNBC in particular) pawns off as analysis? Exposed long enough to this kind of thing it's bound to have an effect - that's just common sense.

What effect is this having on investors? The effect this is having is to make the greater investing population, who get most of their analysis from television believe it or not, complacent, where the conditioned response 'everything is just fine' is predicated on the belief that as with all the other times it appeared the sky was falling - it didn't. What's more, if you don't capitalize on other people's weakness and buy every dip in the stock market, bubble-vision commentators endeavor to make it appear you are an idiot, and will be left behind in the dust. Combine this with the belief the bureaucracy would never let anything happen to the economy / markets in an election year, and you have a recipe for disaster in terms of sentiment, which is the primary reason(s) stocks are falling - and could fall a great deal more.

Why would stocks fall a great deal more? On the surface, which is where most minds operate on a perceptual basis, if the stock market were to 'crash', it would be attributed to a disintegrating economy, which as you know from our last meeting is the case with respect to corporate earnings. The economy is falling off the preverbal cliff hypothecated by so many for years now (which again, is why the public thinks it doesn't matter), and the quality minds in the bureaucracy appear powerless to stop it this time because they can't keep the stock market from falling. Of course the reason they can't keep stocks from falling is not because of pessimism, but again, complacency. Market participants are not buying enough puts to keep the perpetual short squeeze alive - so the stock market naturally falls.

Of course the real bad news is the stock market is an important source of asset-derived income for many (the most important next to the housing market), as was the case with home equity withdrawals. So, if this source of income is lost, an unstoppable negative spiral could ensue, possibly ushering in the unthinkable - a Depression.

The bureaucracy knows this of course, which is where the inflation thingy comes into the picture. Here, as the economy gets progressively worse, central monetary authorities find the justification to print ever-increasing quantities of fiat currency to combat the slowdown, with the end result being rising prices as this inflation works its way through the (global) system to the consumer.

With all this said, it's not difficult to understand why stagflation appears to be the word right now then, because macro-conditions are undoubtedly gripped in a period of rising prices that appears to be having a visible impact on the economy. Unlike the last time we had a prolonged stagflation episode back in the 70's however, with high consumer debt rates set against low savings rates, the ultimate outcome will likely be quite different this time around. This time, with the US tapped on both a domestic and international basis, along with demographic considerations, regenerating the credit cycle will not be quite so easy, if not impossible. This is of course what is not being talked about in the mainstream media; the dire prospects that lay ahead for the larger economy.

This is because that's what it's all about you know, keeping the credit cycle growing. And this is how all economies mature through time. In the case of the US, being the centerpiece of the current global boom, the bureaucracy decided to export it's manufacturing sector(s) in favor of ever-increasing deficits and debts to extend the credit cycle, where since Nixon closed the gold window in 1971, the party has been nonstop basically. Here, manufactured imports could be had on an increasing basis in exchange for fiat currency so long as this inflation was not felt on a wholesale basis by exporting nations. As with all things however, the global nexus is maturing too now, where process has led to increasing input costs / commodity prices as an enriched labor pool in these exporting nations adds to demand.

So, let's take stock here. We have stagflation in Western (mature) economies, who in turn export their inflation to a developing world that needs to print money at break-neck speeds in order to cope with demand in their now booming economies courtesy of globalization. What's more, these countries, with the most notable example being China of course, are running huge foreign currency reserves as a result off all this, meaning too much money is chasing too few goods, which is why commodities are going through the roof. More recently however, wage gains in these economies that are necessary to keep the global credit cycle expanding have caused prices to rise too quickly - to the extent bureaucracies are having to attempt walking the fine line of slowing their own booming economies while not tipping mature economies into irreversible credit contractions. One could hypothesize we have already arrived at the station in this regard, which could permanently disrupt the entire global boom.

Politics of Foreign Debt - Part I Why the government had to bail out the GSEs - Forums

Most Americans do not question the existence of giant government sponsored corporations that subsidize the real estate industry with discounted loans. When I was interviewed by German Public Radio (See Recorded at Wall Street) my interviewer, besides expressing surprise at absurdly low prices in New York City where the interview took place, wondered why Americans tolerated US government subsidies of the US real estate industry via institutions and tax policies that the German constitution, as most European constitutions including the French, forbid. Good question. In August 2007, French President Nicolas Sarkozy proposed the mortgage interest deduction, a cornerstone of US FIRE Economy policy passed as part of the 1986 Tax Relief Act. The Constitutional Council, the highest court in France, struck it down as unconstitutionally creating a tax advantage for property owners. The development of a system of rent extraction by one class of society over another worried the framers of the US constitution, but in the end loopholes remained that left us open to the crisis of systemic corruption that we face today.


In August 2007, French President Nicolas Sarkozy proposed the mortgage interest deduction, a cornerstone of US FIRE Economy policy passed as part of the 1986 Tax Relief Act. The Constitutional Council, the highest court in France, struck it down as unconstitutionally creating a tax advantage for property owners.  The development of a system of rent extraction by one class of society over another worried the framers of the US constitution, but in the end loopholes remained that left us open to the crisis of systemic corruption that we face today.

Home mortgage interest deduction - Wikipedia, the free encyclopedia

Tax Break - Who Needs the Mortgage-Interest Deduction -

President Reagan was not. Addressing the National Association of Realtors in 1984, he said, "I want you to know that we will preserve the part of the American dream which the home-mortgage-interest deduction symbolizes." He didn't mention that it also symbolized the American love affair with debt; after all, it encourages people to pay for their homes with a mortgage instead of with equity. Two years later, in the tax-reform act of 1986, Congress ended the deductibility of interest on credit-card and other consumer loans; it left the mortgage deduction in place.

But Congress did set a cap. Today, a taxpayer can deduct the interest on mortgages worth up to a total of $1 million on his or her first or second homes. Also, you can deduct up to $100,000 on a home-equity loan. (And what prevents you from using a home-equity line to buy a flat-screen TV and then deducting the interest? Absolutely nothing; go for it.)

At the beginning of 2005, flush from his election victory, President Bush envisioned another major tax reform, somewhat similar to that of 1986. Simplifying the tax code was a major goal, as was winnowing out the tax breaks that were again eating a hole through the Treasury. Bush appointed a nine-member, bipartisan panel to drum up a proposal. The president ordered the panel to "recognize the importance of homeownership." People figured the interest deduction was off limits.

But the panel, with former Senator Connie Mack III as chairman, asked the taboo question of whether homeownership and the interest deduction were related. It decided that they weren't.

The Liberty Papers »Blog Archive » Eliminate The Home Mortgage Interest Deduction

  1. The ironic part is that despite its “sacred cow” status, few taxpayers actually benefit from it, since most filers take the standard deduction anyway, and some of those subject to AMT also do not fully benefit from it.

    But I concur that there is a certain “detrimental reliance” argument against summarily revoking it (i.e., “I was counting on it when I bought my home in the first place…”).

I agree that the mortgage interest rate deduction should be eliminated. What folks don’t understand is that it benefits banks. To avoid taxes people are willing to pay a bank $1000 to save $700. How whacked it that?

Politics of Foreign Debt - Part I Why the government had to bail out the GSEs - Forums

Banking expert Martin Mayer, author of The Bankers: The Next Generation The New Worlds Money Credit Banking Electronic Age and a dozen other books on banking and frequent writer for Barron’s Magazine, Institutional Investor, and others explains:

Exporters to America who keep the dollars and use them for American purchases and investments create what economists call an autonomous flow of funds back to the United States, financing the American trade deficit with an American investment surplus.

This produces the argument most closely associated with the new Federal Reserve chairman, Ben Bernanke (though Alan Greenspan believed it, too), that our trade deficit is caused by a surplus of savings that can't be profitably invested in the home countries of our trading partners. Financing for our trade deficit comes before — and actually causes — the deficit itself.

If instead of investing their dollars in the United States, foreign exporters want to take the proceeds of their sales in their own currency, their central banks will in effect sell them that currency for their dollars. Back in the late 1960's, when Great Society deficits and the Vietnam War prompted the first serious sell-off of dollars (and forced the United States to abandon the gold standard because too many holders of dollars, led by President Charles de Gaulle of France, wanted gold), those central banks lent those dollars into the new Eurodollar market, where they traded somewhat separately from domestic dollars.

This created a nightmarish prospect of the United States losing control of its own currency, and in 1971 the Fed chairman, Arthur Burns, negotiated a deal with the European and Japanese central banks. The deal was that they would return to America the dollars they acquired in their own economies, and the Fed would invest the money on their behalf, in absolutely safe government securities, without charge and at the best rates.

Today, the Fed continues as custodian of the "foreign official holdings" of such government obligations. During the Clinton administration, the Fed agreed to invest in federally guaranteed housing securities for those foreign central banks that wanted a better yield on their dollar reserves than they would get from government bonds, and now half a trillion dollars* of the total official holdings are invested in agency paper.

Foreign official holdings of government paper is a miner's canary number. It tells you if there is big trouble ahead. The most common worry is that the number will shrink suddenly, with foreign governments dumping their dollar holdings, driving down the dollar's value and driving up American interest rates, but that's not a real danger. If the price of our government securities dived, the foreign central banks would have to bear the loss. This would be a budget item for their governments, whose leaders would not like it at all.

- Federal Reserve System: The Mark of the Bust, Martin Mayer, June 14, 2006

* Half a trillion two years ago, almost a trillion today.

... ... ...

This marked the beginning of a period of political versus economic investment by foreign governments in the US. One government does not support another without purpose; compensation is expected in return, which compensation may not accord with US domestic interests. The bailout of Fannie and Freddie is the first example of a domestic economic policy decision made to satisfy short term foreign and US interests to the detriment of long term US interests. As we circle the whirlpool created by foreign debt and the folly of the FIRE Economy that the debt has enabled, you can be certain it will not be the last. To make matters worse, the maintenance of the FIRE Economy depends on foreign lending from non-market oriented, unelected often repressive governments. More on that and the implications later.

Jeremy Grantham Reverses Call, Says Emerging Markets Have Gotten Too Risky By Lynn Thomasson

"In the U.S., the Standard & Poor's 500 Index will tumble another 10 percent to 15 percent by 2010 as global growth slows and inflation accelerates, he said. Until then, the outlook for commodities and equities in developed and emerging markets looks poor, he said."

July 31 (Bloomberg)

Jeremy Grantham, chairman of Grantham, Mayo, Van Otterloo & Co., told investors to cut holdings of emerging-market stocks, reversing his recommendation earlier this year.

``Our advice until now was very simple: take as little risk as possible except for emerging markets,'' Grantham, 69, whose Boston-based firm oversees $126 billion, wrote in his quarterly letter to investors. ``Now it is even simpler: take as little risk as possible.''

Grantham said he favors holding cash instead of owning stocks because ``there are likely to be much better investment opportunities in a year or two (or three) than we have seen for 20 years.'' Dubbed a ``perma-bear'' for his dour view on U.S. stocks for more than a decade, Grantham correctly predicted a crash in technology shares two months before the bubble burst in March 2000.

The money manager cut his weighting on emerging-market stocks to ``neutral or just below.'' In the U.S., the Standard & Poor's 500 Index will tumble another 10 percent to 15 percent by 2010 as global growth slows and inflation accelerates, he said. Until then, the outlook for commodities and equities in developed and emerging markets looks poor, he said.

``I underestimated in almost every way how badly economic and financial fundamentals would turn out,'' Grantham wrote in the letter. ``Events must now be disturbing to everyone, and I for one am officially scared!''

Roubini- Global Recession Watch

Professor Roubini notes, there are a number of key countries now either in, or flirting with, recession. If the global economy slows enough - causing U.S. exports to decline - we might start to see significant job losses in manufacturing, and then the current recession could be more severe than I currently expect.


As I noted in a prior thread - Japan mfg output is down 2% in the last Q. Most found the speed/abrupt adjustment surprising.

Time to look at trasports and shipping. I suspect a huge adjustment in this area. CA truck transport (commercial miles driven w/ paid loads) down 18% for June, on a y/o/y basis. JIT deliveries means JIT adjustments.

Bob Dobbs writes:

"I take Roubini with a huge grain of salt. He's been crying recession since late 2006.

I think he has overestimated the time span over which the events of late will play out."

I suspect that Roubini, and those like him, underestimated the degree to which the economy could could be hotwired to produce good numbers, long after the fundamentals themselves went south.
Bob Dobbs | Homepage | 07.30.08 - 7:11 pm | #

rich writes:

He was a little early on his call, I agree. He underestimated stupidity. That was just about the only thing he's got wrong.

He underestimated panicky short-sighted fixes that ramped up the federal deficit, devalued the dollar, and fueled commodities inflation.

Tell the truckers, airline employees, hotel owners, car dealers, resort workers, etc. that Roubini was wrong. They're all in a deep recession right now...and for years to come.

aleister perdurabo writes:

Michael Hudson:

MH: I assume that by doom you mean that the dollar will continue to sink against foreign currencies, while price inflation eats away at what wages will buy. The idea that a worse economy will be self-curing is IMF anti-labor ideology and Chicago School propaganda. This is indeed what Nobel Economic Prizes are given for, I grant you. But it’s Junk Economics. A falling dollar threatens to become self-reinforcing. For starters, dollar-denominated stocks, bonds and real estate are worth less and less in terms of euros, sterling or other harder and foreign currencies. This doesn’t provide much incentive for foreigners to invest here. And if we go into a recession (not to speak of depression), there will be even fewer profitable opportunities to invest.

Meanwhile, U.S. import dependency will continue to rise as the economy de-industrializes ­ that is, as it is further financialized. U.S. overseas military spending will throw yet more dollars onto the world’s foreign exchange markets. So a weak economy here does NOT mean that the dollar will strengthen; it means we have a bad investment climate! Austerity will make us more dependent on foreign countries. For a foretaste, just look at what has happened when the IMF has imposed austerity plans on Third World debtors. And remember, last time when Robert Rubin was given a free hand, in reforming Russia under Clinton, the result was industrial collapse and bankruptcy.
aleister perdurabo | 07.30.08 - 7:19 pm | #

OPEC 2.0, by Tim Wu, Commentary, NY Times

Americans today spend almost as much on bandwidth — the capacity to move information — as we do on energy. A family of four likely spends several hundred dollars a month on cellphones, cable television and Internet connections, which is about what we spend on gas and heating oil.

Just as the industrial revolution depended on oil and other energy sources, the information revolution is fueled by bandwidth. If we aren’t careful, we’re going to repeat the history of the oil industry by creating a bandwidth cartel.

[Jul 30, 2008] Centex- Losses Increase, CEO Sees No Improvement this Year

From the Centex Investor Materials (from 8-K filed with SEC):
  • Market conditions worsened in the quarter
  • Foreclosures are rising
  • Employment is weakening
  • Consumer confidence is waning
  • Mortgage qualification standards are tightening
  • Traffic and sales have diminished
  • [Jul 30, 2008] The Shopping Center Economic Model Is History.

    Expect to see more stories like Macon Mall Faces Foreclosure.

    [Jul 30, 2008] Bennigan's Files Bankruptcy

    Restaurants chains start feeling pain. "More empty space available. More bad debt. More consumer ripples." Will Applebee's or TGI Friday's be next?
    From the WSJ: Bennigan's, Steak &Ale Close Doors, File for Bankruptcy Protection (hat tip Michael)
    Long-time, national restaurant chains Bennigan's and Steak & Ale have closed their doors and filed for Chapter 7 bankruptcy protection, shuttering more than 300 sites and letting go of thousand of employees.

    It is one of the country's largest restaurant bankruptcies ... The chains will liquidate and are not likely to re-open.
    More empty space available. More bad debt. More consumer ripples.

    [Jul 29, 2008] Mish's Global Economic Trend Analysis

    Era of ‘buy now and pay later, and later’ is over

    New York is the second state in five days to declare a fiscal emergency. See Schwarzenegger Announced Intention To Slash State Workers' Pay Till Budget Passes for more on the crisis in California.

    The most stunning thing about Paterson's announcement is how rational it is. He is not begging Washington for handouts, asking for higher taxes, or praying for miracles.

    This is pretty stunning too: In June 2007, the 16 banks that pay the most on their business profits remitted $173 million to the state treasury. “This June, just a month ago, they sent us $5 million — a 97 percent decrease.”

    Unlike Schwarzenegger who has for years resorted to floating bond or proposing various lottery schemes to "fix" the budget, Paterson has the correct solution.

    [Jul 29, 2008] Nov 2006 Peter Schiff Mortgage Bankers Speech Part 1 of 8

    Simply brilliant. See also February 2006 Peter Schiff U.S. Bubble Economy Part 1 of 5; and more recent  YouTube - Ron Paul advisor Peter Schiff's economic forecast (libertarian overtones should be ignored)


    Peter Schiff is not only brilliant, but brave and has the courage of his convictions. I admire him.


    Not only is Assmuss a patronizing fart... he was and IS an ASS! Peter's been right for so long that in certain circles he is now hated. As Peter told us, the bail out of Freddie and Fanny, Bear Sterns (via Fed/J.P. Morgan scam), and the collapse of big banks and investment brokers will eventually send inflation sky-high and our GREAT grandchildren will be left to pay for it all. The USA was once loved. We are now HATED by many around the world for our GREED and Military stance (for oil).


    I would like to see that pompous ignorant asshole with the Ph.D Mr. Asmus, speak at another one of these with Schiff. Shows you the true value of a Ph.D, or being a part of a conservative think tank - reminds me of jumbo shrimp, an oxymoron.


    Survival is a matter of teamwork. If people start to learn lessons from these financial mistakes...if we use our brains... we can overcome a disaster. Survival is your preparation NOW. But don't store food as if it is the end of the world. As a good christian you KNOW that the LORD GOD will "bail you out" ;) I enjoyed this Las Vegas conference on YouTube and I posted it on my personal website, which will have a lot of "airplay" in the village that I leave, because I will write a goodbye letter.

    [Jul 29, 2008] When Dr. Doom speaks, we should listen

    When CNBC or Fox needs a guest who can be counted on to deliver a thoroughly gloomy outlook for the U.S. economy, they call on "Dr. Doom."

    To say Peter Schiff is bearish is like saying Tiger Woods is an okay golfer, or China has a small problem with air quality. The president of Connecticut-based Euro Pacific Capital Inc. is so pessimistic about the U.S. economy that he lives in a rented house and keeps the vast majority of his and his clients' money outside the country, a healthy chunk of it in gold and energy stocks.

    "America is finished. We are going to destroy this country. Our economy is just going to unravel," he told me yesterday. "The question is how much money is the world going to lose before it writes us off?"

    Apocalyptic forecasts are a dime a dozen these days, so why should anyone pay attention to Mr. Schiff? Because his past predictions have proved uncannily accurate.

    When dot-com stocks with no earnings were shooting skyward in the late nineties, he was advising clients to stay away and instead putting money into the unloved energy sector, just in time for the great oil bull market.

    A few years later, when the housing bubble was inflating, he was warning about the dangers of reckless mortgage lending and the precarious state of Fannie Mae and Freddie Mac. "If it looks like a bubble, walks like a bubble and quacks like a bubble, it's a bubble," he wrote. That was in 2004, when speculators were still lining up to buy investment properties in Las Vegas.

    Ever the contrarian, Mr. Schiff made a bundle shorting the subprime mortgage sector.

    So, one year into the credit crunch and with more than $400-billion (U.S.) of mortgage losses piling up on company books, where does Dr. Doom see the U.S. economy heading now?

    Unfortunately, into an even deeper hole, one from which it could take years to emerge.

    Far from rescuing the economy from the housing debacle, the government's efforts to prop up Fannie and Freddie - which own or guarantee nearly half of the $12-trillion in outstanding U.S. mortgage debt - will only compound the problem by delaying the inevitable day of reckoning. The same goes for plans to help hundreds of thousands of homeowners refinance into more affordable mortgages.

    Apart from encouraging the very moral hazard that got the U.S. into this mess in the first place, the government bailout will come with an enormous price tag in the form of soaring inflation, Mr. Schiff argues. He believes government figures vastly understate the true rate of inflation, which he estimates is now running at 10 to 12 per cent. Before long, it could be north of 20 per cent.

    "The government doesn't have the balls to raise taxes. It's going to print the money. It's going to destroy the currency," he says.

    During the Depression of the 1930s, at least people who held cash made out okay. Because prices were falling, their money actually bought more. But if Mr. Schiff is right and the U.S. is heading into a period of hyperinflation, then even the most prudent savers will see their wealth eviscerated.

    With the walls closing in on the U.S. economy, where is an investor to turn? Apart from gold and energy producers, which benefit from a plunging U.S. dollar, Mr. Schiff likes conservative, dividend-paying stocks such as pipelines and utilities. He's especially fond of Europe, Asia, Australia and Canada, where his holdings include Barrick Gold Corp., Goldcorp Inc., Crescent Point Energy Trust, Baytex Energy Trust and Pembina Pipeline Income Fund.

    He has two words for Canadian investors thinking now is a good time to shop for bargain-priced U.S. stocks: "Stay away."

    [Jul 29, 2008] Staglflation Sightings Multiply

    Wednesday, July 9, 2008

    We have long warned that stagflation, or economic contraction accompanied by inflation, would become so evident that even the most optimistic observers could not deny its virulence.

    Last week, Warren Buffet was the latest to describe his encounter with the beast. The world’s most famous investor pronounced that the current economy is in the middle stages of a stagflation episode. Although Mr. Buffet is not typically associated with either bullish or bearish sentiment, he asserted that both the “stag’” and “flation” aspects of the condition would intensify before they relent. So if we can all recognize the wolf at the door, can we agree on the best course of action?

    Unfortunately for policy makers, different weaponry is called for to vanquish the two heads of the stagflation dragon. Recession can be held at bay by lowering interest rates, while inflation is usually tamed by raising interest rates. Given the impossibility pursuing both courses of action simultaneously, priorities come into play. Historically, inflation has been considered the greater long term economic menace, and has therefore been dealt with first.

    This was the plan of attack successfully mapped out by President Reagan and Fed Chairman Paul Volcker in the 1980s. With the President’s political backing, Volcker was able to kill stagflation with a short but heavy dose of double-digit interest rates. With the stable currency and low inflation that resulted, the stage was then set for a sustained and robust economic expansion.

    [Jul 29, 2008] - Capital markets - View of the day Bond yields to fall

    By Daniel Pfaendler

    Published: July 29 2008 15:06 | Last updated: July 29 2008 15:06

    Developed market bond yields should move markedly higher through the rest of this summer, but then fall sharply going into 2009, says Daniel Pfaendler, head of G10 economics & strategy at Dresdner Kleinwort.

    He believes the oil price shock and the unwinding of asset bubbles, over-leverage and economic imbalances in general should keep growth significantly below trend and real yields depressed for a protracted period of time.

     [Jul 29, 2008] Quote of the Day: Michael Belkin Permalink

    Posted by Barry Ritholtz on Tuesday, | 01:15 PM

    in Markets | Technical Analysis | Trading

    “Most global stock indexes have decisively broken below their 200 week moving averages, which is a major trend reversal. The intermediate term (3 month) and long term (12 month) model forecasts point down. We recommend taking advantage of every minor rally to close long positions, go short and shift out of tech and cyclicals into defensive groups. Stock indexes haven’t yet had the big surge in volatility (5% daily NASDAQ moves down and up amidst a declining market). That is probably approaching. Bear market trading is typically more productive selling into those big percentage bounces, rather than selling into big declines and then watching the market bounce back in your face.

    Potential downside targets after a 200 week average breakdown are 1) the 200 month average and 2) The previous 2002-2003 lows. Those levels are 25%-47% below current levels for most stock indexes. U.S. financial indexes are already there (BKX, XLF). So don’t think it can’t happen for the broader market and other currently elevated indexes, stocks and groups.”

    Michael Belkin
    The Belkin Report
    July 6, 2008

    [Jul 29, 2007] What happens when a bank fails

    You can check your bank using -- Safe & Sound (tm) Bankrate's free rating system for banks, thrifts, credit unions

    To say it's disconcerting to find that your bank has been shut down by authorities is probably an understatement. We asked David Barr, spokesman for the Federal Deposit Insurance Corp., or FDIC, about the procedure. The FDIC is an independent agency of the federal government. It is charged with insuring deposits in banks and thrift institutions up to $100,000 per depositor in individual accounts and $250,000 in retirement accounts. Deposits held in different categories of ownership may be insured separately.

    [Jul 29, 2007] Wall Street Breakfast Must-Know News - Seeking Alpha

    [Jul 29, 2007] Money Market Spreads Signal Continued Stress

    Even though the Fannie and Freddie near crisis, which produced a few days of panic in the credit markets, now seems to have abated, money market investors are still on edge. The Financial Times warns that various risk measures remain at elevated levels:

    Libor, the measure of inter-bank interest rates that is a key barometer of the health of the credit markets, continues to signal problems a year into the credit crunch and raises doubts about whether the financials’ share prices are close to a bottom....

    There is a growing realisation that the all-clear signal for the banking sector will not sound until the difference between Libor and the overnight rates set by central banks narrows from its current elevated levels.

    [Jul 28, 2007] Banks Cutting Back on Business Lending

    There have been quite a few anecdotes about a new tough-mindedness among banks, and it is finally showing up in the data. From the New York Times:
    Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term “commercial paper” not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001....

    “The second half of the year is shot,” said Michael T. Darda, chief economist at the trading firm MKM Partners in Greenwich, Conn., who was until recently optimistic that the economy would continue expanding. “Access to capital and credit is essential to growth. If that access is restrained or blocked, the economic system takes a hit.”...

    ... ... ...

    Some suggest that the banks, spooked by enormous losses, have replaced a disastrously indiscriminate willingness to hand out money with an equally arbitrary aversion to lend — even on industries that continue to grow.

    [Jul 27, 2007]  Stigmatizing the poor

    Stumbling and Mumbling

    But there’s a nastier possibility. As Justin says, this is about stigmatizing the unemployed, by lumping them in with criminals doing community service. 

    In this respect, for all the New Labour drivel about “modernization” what’s going on here is something centuries old - treating poverty as moral failure. Here’s C.B.Macpherson describing 17th century attitudes to poverty relief:

    The Puritan doctrine of the poor, treating poverty as a mark of moral shortcoming, added moral obloquy to the political disregard in which the poor had always been held. The poor might deserve to be helped, but it must be done from a superior moral footing. Objects of solicitude or pity or scorn, and sometimes of fear, the poor were not full members of a moral community. (The political theory of possessive individualism, p226-7)

    Nothing much has changed in the last 350 years.

    [Jul 27, 2007] Speculation and Commodity Prices

    Low transaction costs are definitely fueling speculation. As Alex Tolley stated incomments: "The idea that that there is "good" and "bad" speculation depending on how prices move is silly and, I suspect, unfounded."

    Economist's View

    Ah, good - I've been meaning to do something like this myself, but never got around to it. Jeff Frankel sorts speculation into three types and notes that only one of the three types, "bandwagon behavior," is worrisome. However, there's little evidence that this type of speculation is present in commodities markets:

    Commodity Prices, Again: Are Speculators to Blame, by Jeff Frankel: ...Many currently are trying to blame speculators for the high prices of oil and other mineral and agricultural products. Is it their fault?

    Sure, speculators are important in the commodities markets, more so than they used to be. The spot prices of oil and other mineral and agricultural products — especially on a day-to-day basis — are determined in markets where participants typically base their supply and demand in part on their expectations of future increases or decreases in the price. That is speculation. But it need not imply bubbles or destabilizing behavior.

    The evidence does not support the claim that speculation has been the source of, or has exacerbated, the price increases. Indeed, expectations of future prices on the part of typical speculators, if anything, lagged behind contemporaneous spot prices in this episode. Speculators have often been “net short” (sellers) on commodities rather than “long” (buyers). In other words they may have delayed or moderated the price increases, rather than initiating or adding to them. One revealing piece of evidence is that commodities that feature no futures markets have experienced as much volatility as those that have them. Clearly speculators are the conspicuous scapegoat every time commodity prices go high. But, historically, efforts to ban speculative futures markets have failed to reduce volatility.

    One can distinguish three kinds of speculation in the face of rising prices. First, there is the “bearer of bad tidings”... The news that, in the future, increased demand will drive prices up is delivered by the speculator. Not only would it be a miscarriage of justice to shoot the messenger, but the speculator is actually performing a social service, by delivering the right price signal that is needed to get real resources better in line with the future balance between supply and demand. Without him, the subsequent price rise would be even greater, because supply would be less. But it does not appear that speculators played this role in the commodity boom that started earlier this decade: as already mentioned they, if anything, lagged behind the spot price.

    Second, when the price is topping out, stabilizing speculators can sell short in anticipation of a future decline to a lower equilibrium price. This type of speculator again adds to the efficiency of the market, and dampens natural volatility, rather than adding to it.

    Third, in some case, when an upward trend has been going on for a few years, speculators sometimes jump on the bandwagon. Market participants begin simply to extrapolate past trends and self-confirming expectations create a speculative bubble, which carries the price well above its equilibrium. Examples of previous bubble peaks include the dollar in 1985, the Japanese stock and real estate markets in 1990, the yen in 1995, the NASDAQ in 2000, and the housing market in 2005.

    It is the third kind of speculation, the destabilizing kind (also called bandwagon behavior or speculative bubbles) about which politicians, pundits, and the public tends to worry. There is little evidence that this has played a role in the run-up of commodity prices. So far, that is. Just because the boom originated in fundamentals does not rule out that we could still go into a speculative bubble phase. The aforementioned bubbles each followed on trends that had originated in fundamentals (respectively: rising US real interest rates, 1980-84; easy money and rapid growth in Japan, 1987-89; US recession, 1990-91, and Japanese trade surpluses; the ICT boom in the late 1990s; and easy US monetary policy after 2001). It could happen yet in commodity markets.


    Alex Tolley says...

    "Speculators have often been “net short” (sellers) on commodities rather than “long” (buyers). In other words they may have delayed or moderated the price increases, rather than initiating or adding to them. "

    No chance this is the physical owners hedging then?

    The idea that that there is "good" and "bad" speculation depending on how prices move is silly and, I suspect, unfounded. Far better to recognize that speculative instruments like futures can represent volume many times the underlying physical or money instrument and thus can take on a life of its own, un-anchored. Currency markets have been chronically like this for over 30 years at least, creating wild gyrations in forex rates. Low transaction costs lubricate these markets.

    I don't know if one can mitigate this trading without either incurring regulations that limit the # of transactions or increasing transaction costs. Alternatively we could go back to the bad old days of fixing prices by fiat. None of these choices seem desirable to me.

    Posted by: Alex Tolley | Link to comment | July 25, 2008 at 12:11 PM

    [Jul 27, 2008] Roger Ehrenberg And Readers Steve, BondInvestor, on Banking Industry Woes

    Bridgewater Associates estimates in a recent report that marked to market, US banking industry losses would constitute over $560 billion versus the $116 billion they have raised today. I guarantee that if banks were to mark their books in accordance with the levels indicated by Bridgewater, investors would collectively have a heart attack, liquidity would evaporate, credit spreads of all kinds would widen massively and the stock market would head south, pronto.

    While a "good bank/bad bank" structure may be part of the eventual resolution of this mess, pray tell how does a non-failed bank go about creating this sort of vehicle? A restructuring of this sort would presumably require shareholder approval, and an admission that a bank was in bad enough share to go this route would not merely tank the stock price, but almost certainly make any kind of debt funding, including routine money market operations, difficult to impossible. An effort to implement this sort of program would likely lead to a bank failure (if I were a depositor in excess of FDIC limits, I'd head for the hills). Thus in the absence of a Federal program, I am at a loss to see how this could work (even if the bank had a "pre-pack" negotiated with private equity investors, you'd still need shareholder approval, and you'd be subject to adverse reactions from funding sources).

    Reader Steve e-mailed some observations about recent FDIC actions that bear on this discussion. One of his lines of thought is how analogies to the S&L crisis (which was considerably smaller than our current mess) can be misleading. I've highlighted some key points:
    Simple comparisons--the number of bank failures, or the total assets of failed institutions--can be misleading. A more important measure is the percentage of assets that remain under FDIC control vs. the percentage sold either at the time of failure or immediately after. For example, in the FNB/Nevada and First Heritage transactions, FDIC is keeping 94% of the assets. FDIC has so far been unable to sell Indymac's servicing arm, and hasn't announced any portfolio sales. FDIC holds 100% of the assets of the second largest bank failure in US history. Fewer banks are failing (so far), but the number of healthy institutions able to absorb their performing assets has shrunk as well.

    There is also a significant difference in type of troubled assets between the 80's and today. Construction and development financing caused the majority of failures twenty years ago. Losses on household mortgages were not a big factor, because underwriting standards were higher. Today the problem assets are C&D, CRE and huge numbers of first and second home mortgages.

    The law governing FDIC has changed since the last crisis. The FDICIA of 1991 makes it impossible for FDIC to create bridge banks at will. Twenty years ago, Indymac would have been bridged, meaning that uninsured deposits would have been covered. Today, the `too big to fail' test for creating a bridge bank is codified, and very few institutions qualify.

    The huge losses embedded in household mortgage portfolios make the current banking crisis different, and the regulatory response is different as well. The reason for the concern over foreclosures has more to do with bank accounting than with bleeding heart concerns for mortgagors. When a property is foreclosed, a bank must write off the difference between the loan balance and the appraised value of the property (with a further downward adjustment for disposition costs). A write-off is a reduction in capital, so the bank's capital primary capital ratio is affected. Banks are prohibited from writing owned real estate back up. On the other hand, if the bank only recognizes an impairment on the loan, there is a reserve against capital but no write-off. So the loss can be strung out over time, and regulators can allow banks a fair amount of leeway in forming `opinions' about loss severities. In other words, an insolvent bank can appear to be adequately or even well capitalized. I believe an argument could be made that many institutions would be stone insolvent if foreclosures and write-offs were being done in accordance with traditional banking and regulatory practices. In particular, I suspect that the vast majority of foreclosed mortgages are investor owned rather than bank owned, and that regulators have adopted `go-slow' oversight in anticipation of legislative action on foreclosures.

    I agree 100% with Steve's assessment. A lot of banks are no doubt insolvent now. Critics can argue that Bridgewater's mark-to-market calculation doesn't necessarily reflect true economics, since some markets are arguably short of buyers, and hence the low prices reflect illiquidity as well as impairment of the assets. But the flip side is that we are at best only halfway through the housing price decline. Case Shiller has the housing market currently at a 19% decline from peak. A number of metrics (mean reversion, traditional relationship of housing prices to income and rentals, plus the likelihood of overshoot on the downside) suggest the bottom will be at least 35% below peak, and 40% or even lower is not out of the question. Bridgewater's $560ish billion measure against roughly $1.3 trillion in banking system equity (if memory serves me right) and the $116 billion in new equity raised so far. Even if you use the current Bridgewater figures as a proxy for ultimate losses (and that is likely to be light), there is a very big hole in the balance sheet of the banking system. And the reason for trying to fudge things is to prevent panic.

    [Jul 27, 2008] naked capitalism Alan Blinder Cash for Clunkers

    It's clear the Bush II 2008 tax stimulus was poorly though over. It would be much better move to stimulate switch to more energy efficient cars in some way or form -- it would help auto-industry and environment.
    Alan Blinder in today's New York Times, argues for an ostensible stimulus package (hey, since more stimulus packages are probably in the offing, better register your preferences early) that will help the environment. But what I like about it is that it would cost so little that it barely rates in the "let's goose the economy" category.

    The idea is that the government buys old cars of types that are just about certain to be heavy polluters. This is the dirty secret of auto emissions: the vast majority of the damage is done by a comparatively small percentage of cars. The program is means tested, so only those of middle and lower incomes can participate.

    Although this initiative would do nothing to remedy America's dependence on the internal combustion, it's an interim measure that yields tangible benefits at a comparatively low price.

    From the New York Times:
    Cash for Clunkers is a generic name for a variety of programs under which the government buys up some of the oldest, most polluting vehicles and scraps them. If done successfully, it holds the promise of performing a remarkable public policy trifecta — stimulating the economy, improving the environment and reducing income inequality all at the same time. Here’s how.

    A CLEANER ENVIRONMENT The oldest cars, especially those in poor condition, pollute far more per mile driven than newer cars with better emission controls. A California study estimated that cars 13 years old and older accounted for 25 percent of the miles driven but 75 percent of all pollution from cars....

    MORE EQUAL INCOME DISTRIBUTION It won’t surprise you to learn that the well-to-do own relatively few clunkers...

    AN EFFECTIVE ECONOMIC STIMULUS With almost all the income tax rebates paid out, and the economy weakening, Cash for Clunkers would be a timely stimulus in 2009...

    Here’s an example of how a Cash for Clunkers program might work. The government would post buying prices, perhaps set at a 20 percent premium over something like Kelley Blue Book prices, for cars and trucks above a certain age (say, 15 years) and below a certain maximum value (perhaps $5,000). A special premium might even be offered for the worst gas guzzlers and the worst polluters. An income ceiling for sellers might also be imposed...


    Anonymous said...

    The US had much higher growth rates when taxes were more progressive

    2. The "rebates" were rebates in name only. The idea of an economic stimulus is to increase spending. The rebate proposal was widely derided as providing something like 70% of the proceeds to middle income consumers who do not have as high a propensity to spend as lower income people. Economists argued that the best bang for the buck, stimulus wise, would be to increase food stamps and extend unemployment coverage.

    3. The rich have a hugely favorable tax regime thanks to low capital gains taxes and no taxes on corporate dividends. And since stock issuance is a trivial source of funding for businesses (less than 2%; retained earnings and debt are the big sources) the idea that the stock market is vital to the funding of American businesses is way overplayed. Big companies, the kind that fund in the stock market, have if anything been saving (which means getting smaller) as opposed to growing, in balance sheet terms, thanks to outsourcing and cost cutting.

    Anonymous said...
    Let's see. I drive a 21 year old mini pick up truck, that gets 21 miles per gallon, that still passes California emission standards. And I should turn in my little truck which doesn't chew up federal highways because a Hummer or Esplanade is better for the environment.
    Here's a better idea: how about first eliminating the tax incentive for humongous trucks for men with masculinity issues and work towards getting people into smaller cars with significantly higher mileage. Because I would gladly purchase a new mini pick up that got 50 mpg if such a thing actually were available in this country.
    Independent Accountant said...
    I agree with you. This is the first installment in the "GM-Ford" bailout. We don't need more "stimulus". Where does Blinder think the money will come from? My answer: Helicopter Ben's printing press. I love Blinder; there's never been an excuse to print money he didn't like. As for reducing pollution, we don't need that either. California tests all cars two or more years old, for emissions annually. If they fail, they must be repaired. The cars in question average 13 years old. That means they will come to the end of their life sooner or later. What is their current "life expectancy"? Two or three years? How much will the federal agency cost to run which will administer this program? When will the program end? Will it be as temporary as New York City's rent control? I say as Nancy Reagan did in another context: "Just say no".
    Audrey said...
    Tom Lindmark said...

    "Explain to me why the "richest" who pay the lions share of taxes deserve nothing when it's time to rebate some of those taxes."

    Because the rich have already gotten theirs. As the incomes for middle and lower class have stagnated and fallen, incomes and net worth for you rich people has gone up to historically unprecedented levels. (If I could put tags in I'd link to any number of hundreds of data sources showing the outrageous wealth gap trends)

    So shut the f*&k up. And do something to help your country for once you selfish, rich pigs.

    [Jul 27, 2008] PIMCO - Global Central Bank Focus - July 2008 "The Paradox of Deleveraging"

    This is the key idea behind Keynesianism. (see also Keynesian Economics, by Alan S. Blinder).. Government should play an active role. Keynesians believe the short run lasts long enough to matter. They often quote Keynes's famous statement "In the long run, we are all dead" to make the point.

    [M]acroeconomics is not just the summation of microeconomic outcomes, but rather the interaction of microeconomic outcomes. For me, a simple concept brought this realization: the paradox of thrift... if we all individually cut our spending in an attempt to increase individual savings, then our collective savings will paradoxically fall because one person’s spending is another’s income... what holds for the individual doesn’t necessarily hold for the community of individuals. Understanding this paradox is absolutely vital to understanding macroeconomics and even more so to understanding what is presently unfolding in global financial markets.   Once the double bubbles in housing valuation and housing debt burst a little over a year ago, everybody, and in particular, every levered financial institution – banks and shadow banks alike – decided individually that it was time to delever their balance sheets. At the individual level, that made perfect sense. At the collective level... when we all try to do it at the same time, we actually do less of it, because we collectively create deflation in the assets from which leverage is being removed....

    [M]onetary easing is of limited value in breaking the paradox of deleveraging if levered lenders are collectively destroying their collective net worth. What is needed instead is for somebody to lever up and take on the assets being shed by those deleveraging. It really is that simple.... [T]hat somebody is the same somebody that needs to step up spending to break the paradox of thrift: the federal government...

    By definition, levering Uncle Sam’s balance sheet to buy or guarantee assets to temper asset deflation will put the taxpayer at risk – but will do so for their own collective good! This was de facto what the Federal Reserve did when it put up $29 billion on nonrecourse terms to buy assets so as to facilitate the merger of Bear Stearns into JPMorgan... this was a fiscal policy operation.... At the end of the day, there are $29 billion more Treasuries on the open market than otherwise would be the case, and the Treasury is, one small step removed, on the hook for any losses the Fed experiences on the $29 billion of non-Treasury assets it now de facto owns....

    Which brings us to Mr. Paulson’s request to Congress to give him – and his successor – the power to spend unlimited amounts of taxpayers’ funds to buy the debt or equity of Fannie Mae and Freddie Mac. I confidently predict that he’s not going to get unlimited authority; it will most likely be checked by counting any such deficit-financed injections into Fannie and Freddie against the Treasury’s statutory borrowing limit, which can be lifted only by Congress. But Mr. Paulson is going to get most of what he wants, if only because legislators are too fearful of the consequences if they stiff arm him.... This is the way it should be: bailouts and backstops with taxpayer funds should be legislated by Congress and placed on the Treasury’s, not the Fed’s, balance sheet....

    Conventional wisdom holds that when an economy faces a paradox of private thrift, it is appropriate for the sovereign to go the other way, borrowing money to spend directly or to cut taxes, taking up the aggregate demand slack.... [C]onventional wisdom is struggling mightily with the notion that when the financial system is suffering from a paradox of deleveraging, the sovereign should lever up to buy or backstop deflating assets. But analytically, there is no difference: both the paradox of thrift and the paradox of deleveraging can be broken only by the sovereign going the other way.   Fortunately, Congress is finally grappling with this reality, as it moves towards passage of Mr. Paulson’s plan for backstopping Fannie and Freddie with taxpayer funds. It’s not a fun thing to do, particularly following the use of $29 billion of taxpayer funds to facilitate the merger of Bear Stearns into JPMorgan. But it is the right thing to do. And it is further the right thing that Congress is doing it, not the Fed under Section 13(3), except as a possible bridge to Treasury authority.

    Comments from Brad Delong Blog

    Maynard Handley | July 26, 2008 at 08:33 PM
    "At the individual level, that made perfect sense. At the collective level... "

    Or to put it more simply, the whole Invisible Hand concept is a crock. Or, more specifically, it is a crock to claim that at all times, in all places, it will solve all problems.

    Why is it that even your smarter libertarians like Richard Epstein, the ones who will admit that there might, in theory, be such a thing as externalities, even though they'll never actually admit to one in practice, can't seem to get this?

    And why is it that econ 101, at the same time that it is going on about the wonders of free trade, and the importance of not setting the minimum wage too high, is not flogging this type of example with the same enthusiasm? The primary reason that the country is populated by a large number of gullible fools who believe everything the GOP feeds them about the importance of removing regulation is because of what is taught in AP Economics and Econ 101. This sort of pattern is enough to make one a Chomskyan.

    Now, with respect to the details of this plan. Once again we have a situation where, sure it's for the taxpayers' benefit, but, once again, it turns out that it will be the super-rich who benefit most. Once again, I have to ask: if it's so essential that this sort of bill get passed, why not pass it in tandem with legislation that lays the bill where it is due; for example a surtax on incomes above a certain level, or on financial industries, or a very small financial transactions tax (like the stamp tax of many countries) that won't dissuade transactions of genuine financial merit but will dissuade vast amounts of the meaningless sloshing of money back and forth that we see these days?

    MattY | July 26, 2008 at 11:31 PM
    By the way, the author makes the common economic mistake. The backstopping done by the legislature only occurs when it is too late. Like the New Deal, the legislature only hires labor when labor has already gotten very cheap.

    In this case, the legislature is investing in mortgages because they are very cheap right now.

    PIMCO basically is going to want this government backstop so it can re-enter the business. PIMCO had been very careful about not getting caught, now, like wealthy do, this company wants the federal backstop, then PIMCO can be the second investor and do well.

    I would not be surprised if much of the gains possible in this backstop will end up, not in taxpayer hands, but in PIMCO hands and their followers.

    The real test here is to raise progressive taxes by a few points, then see how the legislature handles this. I think PIMCO would change their tune once they find their investors will have to pay for the bulk of their government guaranteed winnings some two years down the line.


    [Jul 26, 2008] IMF Paper US Housing Overvalued by 14%, Likely to Overshoot on Downside

    Publication of such papers suggests that situation is closer to "light at the end of tunnel" then one might think...  Passing of Foreclosure Prevention Act of 2008 points to the same direction.

    naked capitalism

    Research by an IMF economist concludes that US residential real estate was overvalued by 14% as of the first quarter of 2008. The paper seeks to define an equilibrium price and also anticipates that the housing market will fall markedly below that level.


    Rick said...
    Is there a link to the actual article?

    The generic "X% drop in US home prices" is fairly meaningless, except in continuing to inflame anxieties and additional generic statements. The average home price may be meaningful, but so might the median home price. So might the ratio of houses under contract to listings, and days to sale, etc etc. Maybe the article does discuss all of this...

    Since all real estate is about location (location location), to either a homeowner or a mortgage creditor (other than the US govt) the relevant data is that which is local and specific.

    For example, in "Silicon Valley" (nee Santa Clara County) in California, there are dozens of of defined (by the local realtor ass'ns) "Areas". Some, such as the Los Gatos/Saratoga Area have seen next to no decline in prices, and have seen something of pick-up since May of this year in houses under contract. Other "Areas" of the county (Alum Rock, South Almaden, Morgan Hill?) have seen prices plummet >30-40%, and the "average" house price decline for the Silicon Valley is of no help (nor interest). And all this variance is within one county of one state.

    In any case, just by discounting with updated (and potentially upcoming) increased interest rates - without any change in supply/demand factors - "drops" the value in "national" home prices, so I would submit that the stated overvaluation measure is neither particularly accurate (probably far too conservative), nor particularly meaningful - except of course to the extent the US taxpayer is picking up the tab for FNM and FRE's (necessary) recapitalization.

    (However, isn't there a conundrum within the valuation problem once "risk free" (US Treasury) capital is being used to underwrite the assets? Should the value of the REO owned by the US govt be calculated using a discount equal to the risk-free rate, or at the rate corresponding to the originator who has offloaded the asset, or at a rate corresponding to the potential buyer? (But if the Buyer uses a GSE sponsored/gtee'd loan, what discount rate applies?)

    (NB the quotes around "risk free"... NAB has already weighed in with its assessment, and the continuing decline in the value of the dollar supports a modification to that longstanding assumption...)

    R in NY

    [Jul 26, 2008] Institutional Economics ‘Light Reading It’s Not’ - Forbes

    Milton Freedman was really disingenuous promoter of 'free markets" (IMHO "Capitalism and Freedom" was written really of CNBC level ;-). But people do a lot of stupid things for good money and professors, especially former "undernourished" professors, are no exception...

    Chicago School Unwelcome at Chicago

    University of Chicago academics oppose naming a new research centre after Milton Friedman:

    In a letter to U. of C. President Robert Zimmer, 101 professors—about 8 percent of the university’s full-time faculty—said they feared that having a center named after the conservative, free-market economist could “reinforce among the public a perception that the university’s faculty lacks intellectual and ideological diversity.”

    “It is a right-wing think tank being put in place,” said Bruce Lincoln, a professor of the history of religions and one of the faculty members who met with the administration Tuesday. “The long-term consequences will be very severe. This will be a flagship entity and it will attract a lot of money and a lot of attention, and I think work at the university and the university’s reputation will take a serious rightward turn to the detriment of all.”

    ...faculty critics are concerned that it will be one-sided, attracting scholars and donors who share a point of view.

    The opposition probably tells us more about the lack of diversity and the ideological biases at the rest of the university than at the new research centre.

    [Jul 25, 2008] Econbrowser Negative Net Income The 2006 Balance of Payments

    Most commentary on the 2006q4 current account balance release focused on the improvement in the overall balance. Little noted is the fact that 2006 is the first year in which the net income category has registered negative. From Haver:

    ... The 2006Q4 current account deficit shrank sharply to $195.8bln from $229.4bln in Q3. It also shrank compared to its $223.1bln level in 2005-Q4. And a shrinkage in the deficit over four quarters ago is unusual.

    Such improvement generally was induced by recession (1990, 2001, 1981,198) but also can be occasioned by significant slowdowns (1995) and the sharp dollar depreciation from its pre-Plaza Accord peak was behind the persisting improvement in the late 1980s ahead of the onset of recession. The current account is simple to understand because it is the just the difference between the value of the goods services we sell Vs the ones we buy plus a few transfer items. The US has a small positive and essentially stable balance on its services account. The trade account is the problem. Its deficit is large and persistently growing larger.

    The recession-trade balance link I've discussed here. Reuters notes:

    "We believe the current account has peaked" and will decline to $809 billion in 2007, said Nigel Gault, U.S. economist for Global Insight. "The trends are becoming more favorable. Robust export growth, and some cooling in import growth, should keep the deficit down this year."

    Little remarked is that in calender year 2006, net income was -$7.6 billion, despite the surge in net income from -$5.5 billion in 2006q3 to +$3.0 billion in 2006q4 [late addition 12noon: and as Brad Setser notes, this q4 figure is likely to be revised downward]. Figure 1 portrays the trend in the net income category.

    ph 2007. Four quarter moving average (red) and 2006 average net income (green). Source: BEA, International Transactions release of 14 March, and author's calculations.

    Obviously, in a $13 trillion economy, this is not an enormous number; it's essentially zero. But the trend is interesting. I'm always wary of making predictions, but I'm willing to venture that from here on out, positive entries in this category will increasingly depend upon more dollar depreciation against the euro and other major currencies (a regression of net income on the 4 quarter change in the log Fed narrow dollar index over the last 17 years yields a statistically significant coefficient).

    So as Roubini and Setser pointed two years ago, even as the trade portion of the current account balance improves, the deterioration in the net income component will make overall current account deficit reduction harder over time -- unless we have a persistently depreciating dollar.

    The income and valuation effects (as well as expenditure switching effects) arising from dollar depreciation may seem like an unalloyed good; but it's important to realize that calculation of net assets and total returns in dollar terms obscures the fact that dollar decline reduces the purchasing power of the dollar against other currencies (i.e., as Ted Truman pointed out, there's a "terms of trade" effect from dollar depreciation [1]).

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    [Jul 25, 2008] What Explains the US Net Income Balance  by Alexandra Heath Reserve Bank of Australia - Economic Research, January 2007 BIS Working Paper No. 223

    Despite a significant deterioration in the US net foreign asset position, there has not been a corresponding deterioration in the net income balance. In fact, there has generally been a net income surplus. Two factors have been particularly important for the positive net income balance over the past 15 years or so. The first is that the United States has a positive net external equity balance and a negative net external debt balance. This contributes to a net income surplus because the income yield on equity has been higher than the income yield on debt.

    The second factor is that the United States earns a persistently higher income yield on its foreign direct investment (FDI) assets than foreigners earn on their direct investments in the United States. This paper summarises the evidence from firm-level studies and time-series data for the United States, as well as cross-country comparisons, to weigh up alternative explanations for this outcome. The evidence presented suggests that differences in income yields on FDI are not explained by the presence of large stocks of unmeasured assets. Moreover, they do not appear to be related to different characteristics of the investment such as industry composition or riskiness. There is some evidence that differences in the average maturity of investment have had some effect on yield differentials, especially in the 1980s. There are also incentives to minimise taxes that are consistent with the relatively low income yields earned on FDI in the United States, but no firm evidence that this is an important explanation.

    Keywords: net income balance, dark matter, income yields, foreign direct investment

    [Jul 25, 2008] The Case for a Newer Deal  by ALAN S. BLINDER

    May 4, 2008 | NYT

    PART of the New Deal was a new financial deal. The shameful shenanigans leading up to the 1929 stock market crash and the frightening wave of bank failures during the Depression led directly to the creation of the Securities and Exchange Commission and the Federal Deposit Insurance Corporation.

    As we emerge from this, the worst financial crisis since the 1930s, a New Financial Deal may follow. If so, what should some of the reforms be?

    A warning to laissez-faire-minded readers: The following is mostly about the dreaded “R” word — regulation. But I’m afraid that we need more of that, starting in the mortgage market.

    An inordinate share of the dodgiest mortgages granted in recent years originated outside the banking system. They were marketed aggressively, sometimes unscrupulously, by mortgage brokers who were effectively unregulated; we have now lived to regret that arrangement. The need for a federal mortgage regulator — including a suitability standard for mortgage brokers — is painfully obvious.

    Next, we should resist calls to scrap the “originate to distribute” model, wherein banks originate mortgages, which are then packaged into mortgage pools and turned into mortgage-backed securities that are sold to investors around the world. This seemingly convoluted model has given the United States the world’s broadest, deepest, most liquid mortgage markets. And that, in turn, has meant lower mortgage interest rates and more homeownership. These are gains worth preserving.

    But the model needs some nips and tucks. A far less radical, though still regulatory, approach would require both originating banks and securitizers to retain some fractional ownership of each mortgage pool. Keeping some “skin in the game” should accomplish two things: make the banks and securitizers more attentive to the creditworthiness of the underlying mortgages, and reduce the tendency to play “hot potato” with mortgage-backed securities.

    And while we’re on the subject of M.B.S., we must end the regulatory fiction that off-balance-sheet entities like conduits and S.I.V.’s are unrelated to their parent banks. (S.I.V. stands for structured investment vehicle, if you must know, but please don’t ask me the difference between it and a conduit.) Since last summer, we have seen one financial giant after another brought to its knees by losses that originated off balance sheet.

    What’s the solution? Take Shakespeare’s advice and kill all the S.I.V.’s? Probably not, though many will die of natural causes. These financial oddities were invented to exploit the regulatory fiction just mentioned. If you buy the premise that assets held off balance sheet pose no risks to their parent companies, then banks should not be forced to hold capital against them. But if you buy that, you may also be interested in a famous bridge connecting Brooklyn to Manhattan. The remedy here is simple: Apply appropriate capital charges to off-balance-sheet assets.

    That brings us to leverage. After all, high leverage means owning a lot of assets with only a little capital. This is where something fundamental changed on March 16. Before that day, only banks had access to the Fed’s discount window; broker-dealers took large risks without a safety net. But everything changed when the Federal Reserve became the lender of last resort to selected securities dealers. Because securities firms are now under the Fed’s protective umbrella, they must start operating as safely and soundly as banks. That means both closer supervision and less leverage.

    How much less? You may recall that Bear Stearns ended its life with leverage of around 33 to 1, meaning that just 3 cents of capital stood behind each dollar of assets. That won’t do any longer. Leverage of 10 or 12 to 1 is more typical for a bank. We should all take a deep breath here, because sharply reducing the leverage of securities firms, to bring it close to that of banks, will be a major change in the financial landscape. It will, for example, substantially reduce the profitability of investment houses and, therefore, reduce their scale. But that’s the price you pay for access to a publicly financed safety net.

    Next come ratings agencies, whose recent performance has drawn criticism. The good news is that they are making good-faith efforts at change. They are improving their analytics, and guarding against conflicts of interest by hiring ombudsmen and submitting to independent third-party reviews. We should applaud and encourage all that. The bad news is that they face an acute incentive problem when they get paid by the issuers of the very securities they rate.

    What to do? The third-party reviews should help. My Princeton colleague Dilip Abreu suggests paying ratings agencies with some of the securities they rate, which they would then have to hold for a while. Robert Pozen, head of MFS Investment Management, wants independent investors in the conduits to hire the agencies instead. Another idea would have a public body, like the S.E.C., hire the agencies, paying the bills with fees levied on issuers. If you have a better idea, write your legislators.

    LAST, but certainly not least, is something that the United States cannot do on its own. Everyone knows we live in a world of giant multinational financial institutions, huge cross-border flows of capital and increasingly globalized markets. Such an environment demands ever closer international cooperation and coordination among the world’s major financial regulators. But today’s level of international cooperation is wholly inadequate to the need. Perhaps the current worldwide financial crisis will finally persuade the world’s financial regulators that lip service is not enough. At least we can hope.

    Finally, let’s be clear about the purposes of all these New Financial Deal reforms. They would not banish speculative bubbles from the planet. After all, there have been bubbles for as long as there have been speculative markets. But with each bursting bubble, new flaws in the system are exposed. Like a good roofer after a soaking rainstorm, we should patch the leaks we see now, knowing full well that more leaks will spring up in the future.

    Alan S. Blinder is a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve. He has advised many Democratic politicians.

    [July 25, 2008] Durable Goods, Beige Book

    Posted by Barry Ritholtz on Friday, July 25, 2008 | 09:15 AM

    in Data Analysis | Economy

    The Big Picture[Durable Goods] ... rose 0.8% headline and 2% ex transports versus consensus estimates of a decline of 0.3% and 0.2% ex transports. Leading the gains was an increase in orders for electrical equipment, machinery, vehicles and parts, primary and fabricated metals.

    Miller Tabak's Peter Boockvar notes that "the Govt stimulus package has a depreciation tax credit that expires by year end -- so companies have to now use it or lose it. That could have had an impact on order rates but we need more than one month's data to see by how much."

    Regardless, as we have said many times, watch the overall trend, not a single report.


    Charts by Jake

    Let's see what sectors are expanding and contracting, via the Federal Reserve Beige Book:

    Contracting sectors
    Residential real estate
    Department Stores 
    Home Improvement 
    Office/Shopping Mall Real Estate 
    Wood Products
    Construction Equipment
    Trucking Transports 
    SUV's/Light Trucks
    Job Placement Agencies 
    Environmental Services
    Chemical manufacturing 

    Neutral sectors 
    Discount Stores
    Tourism (local>far-away destination)  
    Rail Transports 
    Fuel Efficient Cars/Hybrids 
    Electronics (boost from tax rebates)  
    Food Retailing
    Steel Producers

    Expanding sectors 
    Tech services 
    Health Care/Pharma
    Oil/Natural Gas Drilling 
    Wind Turbine Parts 
    Food Manufacturing 
    Specialty Aircraft Parts 

    Sources: Federal Reserve, Merrill Lynch, Miller Tabak

    [Jul 25, 2008] Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders  June 2008

    Manufacturing and Construction Division, Commerce Department, JULY 25, 2008,

    [Jul 25, 2008] Bear Market Phases

    Mish's Global Economic Trend Analysis

    Ten Bear Market Phases

    1. A huge buy the dip mentality sets in during the initial decline. Most party goes cannot fathom that party has ended.
    2. Moderate concern sets in when buy the dip stops working.
    3. Initial panic.
    4. Numerous bottom calls are made, all wrong.
    5. Search for the guilty.
    6. Punishment of the innocent.
    7. More panic.
    8. Lawsuits fly.
    9. Regulatory power is given to those most responsible for spiking the punch bowl.
    10. Congress gets in the act and makes things worse

    Steps 4-10 are repetitive, may overlap, and may occur in any order during repetition. Certainly there have been numerous bottom calls for months now, but each rally has failed.

    [Jul 25, 2008] US faces global funding crisis, warns Merrill Lynch


    Merrill Lynch has warned that the United States could face a foreign "financing crisis" within months as the full consequences of the Fannie Mae and Freddie Mac mortgage debacle spread through the world.

    ... ... ...

    Fannie and Freddie - the world's two biggest financial institutions - make up almost half the $12 trillion US mortgage industry. But that understates their vital importance at this juncture. They are now serving as lender of last resort to the housing market, providing 80pc of all new home loans.

    Roughly $1.5 trillion of Fannie and Freddie AAA-rated debt - as well as other US "government-sponsored enterprises" - is now in foreign hands. The great unknown is whether foreign patience will snap as losses mount and the dollar slides.

    Hiroshi Watanabe, Japan's chief regulator, rattled the markets yesterday when he urged Japanese banks and life insurance companies to treat US agency debt with caution. The two sets of institutions hold an estimated $56bn of these bonds. Mitsubishi UFJ holds $3bn. Nippon Life has $2.5bn.


    [Jul 25, 2008] ""We interrupt regular programming to announce that the United States of America has defaulted …" Part 2"

    We've cribbed the title of a provocative post by Satyajit Das at Eurointelligence. He argues that the US's days of continuing to borrow abroad with little worry as to the consequences may be nearing an end.

    Here is the beginning of the Das post, which I recommend reading in its entirety:

    ... ... ...

    In recent years, the United States has absorbed around 85% of total global capital flows (about US$500 billion each year) from Asia, Europe, Russia and the Middle East. Risk adverse foreign investors preferred high quality debt – US Treasury and AAA rated bonds (including asset-backed securities ("ABS"), including mortgage-backed securities ("MBS")). A significant portion of the money flowing into the US was used to finance government spending and (sometimes speculative) property rather than more productive investments.

    ... ... ...

    Foreign investors may not continue to finance the US. At a minimum, the US will at some stage have to pay higher rates to finance its borrowing requirements. Ultimately, the US may be forced to finance itself in foreign currency. This would expose the US to currency risk but most importantly it would not be able to service its debt by printing money. The US, like all borrowers, would become subject to the discipline of creditors.

    For the moment, the US$ is hanging on – just.


    ... ... ...

    Here is the money paragraph to me from elsewhere in Das' piece:

    "Sovereign debt crisis, especially in emerging markets, are characterised by high levels of debt, especially foreign borrowings, poor fiscal policies, persistent trade deficits, a fragile financial system, over-investment in unproductive assets and a sclerotic political system.

    Arturo Porzecanski (in Sovereign Debt at the Crossroads (2006)) noted that:

     "Governments tend to default specifically when they must increase spending quickly (for instance, to prosecute a war), experience a sudden shortfall in revenues (because of a severe economic contraction), or face an abrupt curtailment of access to bond and loan financing (e.g. because of political instability). He further observed that: "governments with large exposures to currency mismatches and interest rate or maturity risks are, of course, particularly vulnerable."

    _That_ picture by and summary well describes the US of A as of 2008. Other comparable contexts ended in major social and political whackage. Well, my fellow citizens, if the ass fits, wear it.

    It is not 'different this time' even if the same good times are what those in the midst of them mostly, selectively see. The best inference is that for the US and it's currency, it is exactly the same this time as for others other times, only moreso. Das makes another very relevant point also elsewhere in his article, that debt service may be managed initially, but eventually reaches a level where it is politically unsustainable even before it becomes economically unsustainable. This is perhaps the most likely scenario for the US, we spin the hampster wheels of debt service on our $10T, $12T, $15T owed, while foreign currency holding shares for the $ drop to 50% and then below . . . and then we skip on a bond, and the world is made new and strange. This all may change not with a bang but a simper. What'll we do when our creditors fail to applaud?

    [Jul 23, 2008] FT Alphaville » Blog Archive » Default watch

    Corporate default rates set to soar in 2008. High yield bonds probably will continue to fall.  May be another 10-15%. A short version of the S&P report is at (It may have been updated since to include the Martinsa Fedesa bankruptcy.) The full report is on S&P’s RatingsDirect website (subscription only). It’ll be interesting in 12 months to look at what proportion of defaults come from companies subjected to a private equity-backed LBO in recent years.
    2008 is set to be the year of the corporate default. And it has been a while coming.

    The first seven months of 2008 - up to have seen 43 corporate defaults around the world. Of those, 41 have been in the US, one in Canada and of course, days ago, Martinsa Fadesa in Spain.

    Compare that to the 22 recorded through the whole of 2007 and 30 in 2006, and it’s clear that there’s a significant change in trend afoot.

    The annual corporate default rate, according to S&P, was around 0.97% at the end of 2007. A 25 year low.
    In a report today, the rating agency said that on top of the 43 so far in 2008, a further 145 corporates are “close to the default threshold”. And 118 of those are in the US.

    The fact is though, this uptick has been a while coming.

    Analysts have been predicting a rise in default rates for nigh on eighteen months. At the end of 2006, S&P and Moody’s were similarly both predicting a rise in default rates to around the 4-5 per cent level. There’s a growing sense - even from the rating agencies themselves - that the default rate will likely easily exceed the base-case scenario projection.

    [Jul 23, 2008] Underperformer...or Visionary?

    Senator Bruning is also the author of the famous quote "Fed is a systemic risk".
    July 23, 2008 | Financial Armageddon

    Time once described Jim Bunning, the Hall-of-Fame pitcher and 76-year old Republican junior senator from Kentucky, as "The Underperformer" because of his lackluster record on Capital Hill.

    But consider the following (thanks to Wikipedia):

    Bunning was also the only member of the United States Senate Committee on Banking, Housing and Urban Affairs to have opposed Ben Bernanke for Chief of the Federal Reserve. He said it was because he had doubts that he would be any different from Alan Greenspan....

    On December 6, 2006, Bunning was one of only two vote against the confirmation of Robert Gates as Secretary of Defense claiming that 'Mr. Gates has repeatedly criticized our efforts in Iraq and Afghanistan without providing any viable solutions to the problems our troops currently face. We need a secretary of defense to think forward with solutions and not backward on history we cannot change.'

    Along with the comments he made today, as reported by Bloomberg in "Fannie, Freddie Rescue Plan May Cost $1 Trillion, Bunning Says," it might also be said that Bunning will eventually be seen as some sort of visionary.

    A government rescue of Fannie Mae and Freddie Mac would require taxpayers to pay "way" more than the $25 billion estimated by the Congressional Budget Office, potentially as much as $1 trillion, Senator Jim Bunning said.

    Treasury Secretary Henry Paulson "hasn't told us the truth about this bill," Bunning, a Republican from Kentucky, said in an interview with Bloomberg Television today. "Why would you put in a backstop of unlimited amounts of money if you weren't going to need it."

    Paulson on July 13 asked Congress for authority to increase credit lines to Washington-based Fannie Mae and McLean, Virginia- based Freddie Mac, buy shares in the firms and give the Federal Reserve a "consultative role" in overseeing their capital requirements. The proposals are meant to restore confidence in the government-sponsored enterprises, which own or guarantee almost half of the $12 trillion of U.S. home loans outstanding.

    The House of Representatives is set to vote today on the rescue plan for Fannie Mae and Freddie Mac as part of broader legislation aimed at alleviating the worst housing slump since the Great Depression. Bunning called the plan "horrendous."

    "What is good about this bill is the fact that maybe it shores up Fannie and Freddie for a temporary basis," Bunning said. "What it does not do is change the model of Fannie and Freddie. It does not give the regulators the power to make the changes needed in Freddie and Fannie to make them viable entities for the future. That is why I object."

    [Jul 23, 2008] Mike Morgan Behind Enemy Lines

    Armageddon - I believe it is all but written into the screenplay at this point. The recent rally of 50-100% in banks and builders is indicative of the nonsensical days leading up to October 1929. What I am seeing in the field, is a crumbling of the builders and the banks, followed by retailers.

    But on Wall Street, Paulson is passing out the Kool-Aid and telling us we need protection from the short sellers. Let’s face it, if the short sellers push the envelope too far, buyers have the right to step in and take advantage of the bargains. But when the Federal Government, or should I say Goldman Sachs (Paulson), take it upon themselves to change the rules, that’s when you can bet Armageddon is in the cards. Over the next few weeks, we will all see just how much more pain there is, and the bag of garbage we just threw up in the air, will come back down harder and stinkier.

    Crisis Investing - Please. If you are not considering it, you need to start thinking about it. If you want to buy into the rally and continue to sip the Kool-Aid, you will be devastated.

    [Jul 23, 2008] DeLong Smackdown Watch: Tim Duy Edition by Brad DeLong

    Delong evaluation of Greenspan's monetary policy reminds me Wash Post. The essence of Greenspanism was blatant distortion of economic statistics to produce "feel good" results (that's why he peddled core inflation). A honest assessment of Greenspan monetary policy presuppose an objective evaluation of the level of distortion of  economic statistics during this period. And if the statistics was significantly distorted, the monetary policy based on this statistics was as close to the theater of absurd as we can get without referring to Soviet Politburo practices. If Delong looks outside his hermetic campus office  both real inflation and, especially, unemployment are close or over 10%. 
    Tim Duy writes:

    Economist's View: Tim Duy: Not So Bad?: Brad DeLong is puzzled. Earlier this week, defending Greenspan-era monetary policy,

    Now we are not yet out of the woods. If the tide of financial distress sweeps the Fed and the Treasury away--if we find ourselves in a financial-meltdown world where unemployment or inflation kisses 10%--then I will unhappily concede, and say that Greenspanism was a mistake. But so far the real economy in which people make stuff and other people buy it has been remarkably well insulated from panic at 57th and Park and on Canary Wharf.

    Today Delong adds:

    I still do not understand why the real side of the economy is doing so well in relative terms. The worst financial distress since the Great Depression ought to trigger the worst downturn in demand, production, and employment since the Great Depression. It hasn't--at least not so far.

    Good questions; I think economic activity has surpassed most peoples’ expectations. My answer to DeLong’s question comes in three parts:

    (1) The nature of the expansion defines the nature of the following contraction. The post-tech bubble expansion was anemic by most measures.... The tepid upside suggests a tepid downside....

    (2) The impact of the consumer slowdown is partially offshored, a point which I think deserves greater attention. This shifts job destruction to an overseas producer.... Note too that exports are not falling as they were in the 2001 recession as the global economy has held up better than expected.

    (3) Perhaps most importantly, however, is the massive liquidity injections from the rest of the world, or what Brad Setser calls “the quiet bailout.” In the first half of this, global central banks accumulated $283.5 billion of Treasuries and Agencies, something around $1,000 per capita. This is real money.... Foreign CBs are happily financing the first US stimulus package; will they be happy to finance a second? Do they have a choice? Their accumulation of Agency debt is also keeping the US mortgage market afloat. Do not underestimate the impact of these foreign capital inflows.

    If the rest of the world treated the US like we treated emerging Asia in 1997-1998, the US economy would experience a slowdown commensurate with the magnitude of the financial market crisis.... In short: External dynamics play a significant role in explaining the relatively mild US downturn. As long as foreign CBs are willing to accumulate US debt, the US government is willing to issue debt, the Federal Reserve is willing to accommodate the debt with low interest rates, we will avoid the most dire deflationary predictions.

    ***** [Jul 23, 2008] "Cherished myths fall victim to economic reality"

    naked capitalism

    This comment by Paul De Grauwe in the Financial Times, deserves more discussion that I can provide at this juncture (I am about to do a face plant), but I trust readers will find it a worthy offering.

    De Grauwe focuses on sacred cows that have been gored in the credit crunch. He has written before, in more technical terms, on central bank reliance on models that deviate in key ways from observable reality. Nevertheless, despite his view that these constructs are taking a mortal blow, he also acknowledges that they still play a central role due to lack of obvious replacements.

    From the Financial Times:

    The financial crisis continues to create victims. Not only people but also some of our most cherished ideas risk falling by the wayside. Take the hugely influential idea that financial markets are efficient. Its proponents told us that when financial markets were left free, they would work miracles. Savings would be channelled to the most promising investment projects, thereby boosting economic growth and welfare. In addition, these financial markets would spread risk around over a large number of participants, thereby lowering the risk of doing business, again boosting growth and welfare. In order to achieve these wonders, financial markets had to be freed from the shackles of government control.

    The country that embodied these principles most was the US. Helped by the missionary zeal of successive American administrations and pushed by international financial institutions, country after country freed their financial markets from pernicious government controls, hoping to share in these economic wonders.

    The credit crisis has destroyed the idea that unregulated financial markets always efficiently channel savings to the most promising investment projects. Millions of US citizens took on unsustainable debts, pushed around by bankers and other “debt merchants” who made a quick buck by disregarding risks. While this happened, the US monetary authorities marvelled at the creativity of financial capitalism. When the bust came, a large number of Americans who had been promised a new life in their beautiful homes were told to move out. This boom and bust cycle cannot have been an example of efficient channelling of savings into the most promising investment projects.

    The fact that unregulated financial markets fail to deliver the wonders of efficiency does not mean that governments should take over. That would be worse. What it does mean is that a new equilibrium must be found in which tighter regulation is reintroduced, aimed at reducing the propensities of too many in the markets to take on excessive risks. The need to re-regulate financial markets is enhanced by the fact that central banks, backed by governments, provide an insurance against liquidity risks. Such insurance inevitably leads to moral hazard and excessive risk-taking. The insurer cannot avoid monitoring and regulating the be haviour of those who obtain this insurance.

    There is a second idea that is likely to become the victim of the financial crisis. This is the idea found in macro economic models, that individuals are supremely well-informed creatures. In these models that are now being used in central banks and universities, individuals understand the most complex intricacies of the world in which they live and they have no disagreement about this. All these individuals understand the same “truth”.

    If we have learnt one thing from the credit crisis it is that individuals did not understand the “truth” and, it must be admitted, neither did economists. Individuals who sold the new financial instruments did not understand the risk embedded in these instruments, nor did the buyers. When the bubble started many interpreted the happy turn of affairs as permanent and took on massive levels of debt that turned out to be unsustainable. When the bubble burst, they did not understand what had happened and nor did most experts. Our world is one of a fundamental lack of understanding of the “truth”.

    But that is not the world of the macro economic models that are now in use in central banks. The world of these models is one of supernatural and God-like creatures for which the world has few secrets. These creatures can perfectly compute the risks they take and estimate with great precision how an oil price shock will affect their present and future production and consumption plans. They may not be able to predict each shock, but they know the probability distribution of these shocks. Thus the risk involved in financial instruments is correctly evaluated by individuals populating these models.

    These superbly informed individuals want the central bank to keep prices stable so that as consumers they can optimally set their consumption plans with minimal uncertainty, and as producers they can set prices equal to marginal costs (plus a mark-up). If the central banks keep prices stable, these individuals, helped by well-functioning markets, will take care of all the rest and ensure that the outcome is the best possible one. This is a world in which free and unfettered markets are always efficient.

    This is also a world where individual agents cannot make systematic mistakes. Their consumption and production plans are optimal. They will never build up unsustainable debts. In the world of these macroeconomic models financial crises should not occur. And if they do, it cannot be because of malfunctioning markets. Governments that impose silly constraints on rational individuals are messing things up, and central banks that do not keep their promises to maintain price stability are the source of macroeconomic instability.

    This intellectual framework helps to explain the single-minded focus of many central bankers on inflation. Clearly, inflation is important and maintaining price stability is an important task of the central bank. It is not the only task, though. Financial stability is equally important. But this dimension is completely absent from the macroeconomic models now in use. In addition, since financial stability these days also depends on avoiding deep recessions, stabilising the business cycle should also be of the concern of the central bank.

    Inflation in the euro area stood at 4 per cent in June. That is a problem. But is it an acute problem, compared with the disequilibria in the financial markets and the banking sector? When the European Central Bank raised the interest rate two weeks ago it took the view that inflation is the most important problem we face. No wonder the intellectual frame imposed on one’s mind by current macroeconomic models said that inflation is the number one enemy.

    There is a danger that the macro economic models now in use in central banks operate like a Maginot line. They have been constructed in the past as part of the war against inflation. The central banks are prepared to fight the last war. But are they prepared to fight the new one against financial upheavals and recession? The macroeconomic models they have today certainly do not provide them with the right tools to be successful.

    They will have to use other intellectual constructs to succeed.


    Richard Kline said...
    *sigh* Look markets simply ARE NOT efficient, and this has nothing _whatsoever_ to do with clumsy, inefficient government intervention. There are ample historical instances of market behaviors with no government restrictions which were manifestly irrational and inefficient. The historical data is the norm; modern economic theory said We Can Do It Better. So far, they haven't, this is just their claim, efficiency. Nineteenth century positivism gauded out in new duds. Piffle. That's without even raising, again, issues of systemicity which strongly lead inferences _away_ from the efficient market hypothesis.

    As someone who spends no little time studying and modeling historical trajectories, I can say for a fact that individuals and societies ALMOST NEVER grasp 'the truth' about their current social context, even assuming that one can, post facto, identify central truths. This is not simply a perspectivistic error, nor one of cognitive incapacity. Rather, we focus on current spin and do not operate from sufficient temporal parallax: we see one surface of the moment, not the movement of the webbed interaction over time. Fools buying market top prices demonstrate this time and again, just as in so doing they time and again _disconfirm_ the efficient market hypothesis.

    Furthermore, I am anything but sanguine regarding attempts 'to mitigate the business cycle.' Much of our current problem, in the US and in the 'developed global economy' derives from negative real rates, excessive stimulative interventions, and pro-cyclical biases. Sure, no one _wants_ a recession. But macroeconomic approaches to stimulating economies AS A WHOLE and by rates alone are damaging in their own way. It is one thing to develop government managed interventionary processes to mitigate losses to individuals, such as unemployment compensation and employment retraining programs. Those are good social investments which require government support to be genuinely effective and fair. But consider: why is it that we do not target our macroeconomic interventions? Small businesses disproportionately create new jobs---so why not grant THEM better interest rates and access to credit in downturns while letting the Big Boys fend for themselves? Why not subsidize retraining and education grants generally more in downturns? And so on, and so on: our tools are too few, too general, and too much designed to push up profits for the big players not for the economy as a whole. Don't stand in the way of downturns, ameliorate them at the individual level. That changes the context without simply pouring out pubic largess upon plutocrats at the top of the financial chain who are anyway best positioned to take care of themselves. . . . Oh, but that's (sorta) socialism. Sign me up.

    [Jul 22, 2008] Waiting out the bear? Safety first By Jim Jubak

    Jul 8, 2008 | MSN Money

    You have another chance to devastate your beleaguered portfolio -- by getting back into stocks too soon. The market and the economy are likely to keep grinding lower for a while.

    Bear markets in stocks give investors two chances to lose their shirts. Get ready for your second shot at big losses.

    ... ... ...

    Safer on the sidelines

    So, no, I don't think the drop that, as of Monday, had taken the S&P 500 to a loss of 20.6% from the Oct. 9 closing high -- a 20% decline that marks the official definition of a bear market -- is a bottom. I don't think it was a signal to buy -- unless you're a very nimble trader. And I'm still looking for the kind of washout that sends an "all clear" signal after a market like this.

    I wish I could give you a date for that all clear. I'm sitting on a 33% cash position in Jubak's Picks (as of July 1), and frankly, I'd rather have the money at work making money than sitting on the sidelines. But at the moment I think the important rule is still "safety first."

    [Jul 21, 2008] The huge threat to the US economy By Jim Jubak

    The U.S. Treasury and the Federal Reserve recognize that taxpayers will have to pay whatever it takes to keep these two players in the mortgage game. With $5 trillion in financial paper in the markets tied to these two companies, a failure at one or the other would panic the U.S. and every other financial market in the world.

    We wouldn't have to wonder about whether the U.S. economy would slip into a recession because we'd be in one -- and looking a depression straight in the eye.

    Fannie Mae and Freddie Mac are also just plain too big. It's incredible that two companies could be so large that their troubles could threaten the U.S. and global economies.

    Creditworthiness of the country at stake

    It's their very size that has turned the current financial crisis into something affecting much more than the mortgage market or even the U.S. banking sector. What's at stake now is the credit of the United States itself.

    Because of Fannie Mae and Freddie Mac, the overseas investors who hold $9 trillion in U.S. government debt and trillions more in U.S. dollars are weeks away from losing faith in the government's creditworthiness.

    In the days since the crisis at Fannie and Freddie turned red-hot, the council that advises Saudi Arabia's king has recommended revaluing the Saudi currency, the riyal, which is pegged to the U.S. dollar, by up to 30%. That could be a first step toward switching the riyal from a price pegged to the dollar to one pegged to a basket of world currencies.

    A similar advisory body in Abu Dhabi has suggested abandoning that country's dollar peg for its currency. A third oil-rich Middle Eastern country, Kuwait, ended its currency link to the dollar last year.

    More ominously, because the threat is more immediate, some of the world's largest sovereign wealth funds, including that of China, are edging away from the U.S. dollar at an increasing speed. China's State Administration of Foreign Exchange, which holds the majority of China's $1.6 trillion in foreign currency reserves (mostly in dollars), has been holding talks with European private-equity companies about investing in their latest round of funds. That would shift dollars into euros.

    You'd be absolutely right on the facts. And dead wrong in practice. You see, when you're a debtor, it's what your creditors believe, not any fact, that is important. If your creditor believes you might not be able to pay, it's that belief that counts, no matter the facts, when the creditor cuts off your credit. What a creditor believes is especially important when a debtor needs that creditor to keep extending credit in the future to finance new bills. That's, of course, exactly where the U.S. finds itself now.

    What the US must do

    What happens over the next few weeks or months is critical. If the U.S. government comes up with a credible plan to recapitalize Fannie Mae and Freddie Mac using government and private money -- even if the private money is mostly window dressing -- then overseas investors will be reassured that the U.S. isn't simply going to walk away from its financial obligations.

    If that plan includes tougher regulations and stricter limits on leverage, and especially if it replaces current management at the companies, overseas investors will gain confidence. If the plan includes an equity element, so the U.S. government (and taxpayers) have a chance to profit from a recovery at these two companies, overseas investors will start to believe the U.S. has faith in its own future. And if the plan includes a timetable for reducing the size of or, better yet, eliminating Fannie Mae and Freddie Mac, overseas investors might actually start to believe the U.S. government is in control of its own future.

    Certainly, it makes no sense from any perspective to let two private but publicly traded companies have as much power over the U.S. financial markets and the credit rating of the U.S. government as Fannie Mae and Freddie Mac do. Especially since the financial markets are so much deeper now than they were in 1938. The big banks and other investors are perfectly able to provide the liquidity that Fannie Mae was designed to provide in 1938.


    Possible consequences

    And if the U.S. doesn't come up with a credible plan? To protect their own interests, overseas investors will increase the rate at which they're moving away from the U.S. dollar.

    In the short run, that means a cheaper dollar -- good for U.S. exports but bad for U.S. consumers who will have to pay more dollars for everything this country imports, including oil. In the longer run it means underperformance by U.S. stocks and bonds because overseas investors will want to h rates and an increased cost of capital to U.S. companies that want to expand their businesses.

    What's happening at Fannie Mae and Freddie Mac wouldn't matter so much, of course, if the U.S. didn't owe so much to the rest of the world. But it does. The sooner we realize that the two most important jobs a debtor has are successfully managing creditors and getting out of debt, the better off the U.S. will be.

    Why Fannie and Freddie matter overseas

    So why is the crisis at Fannie Mae and Freddie Mac so important to overseas investors? Three reasons: The crisis at Fannie Mae and Freddie Mac wouldn't be so threatening to US financial credibility if these mortgage giants hadn't fudged the truth to sell their bonds, Jim Jubak says.

    Now, you may object that overseas investors are simply wrong in their beliefs. That Fannie and Freddie never had any government guarantee, explicit or implicit. That no bailout would turn that $5 trillion in owned or guaranteed mortgages at Fannie and Freddie into U.S. government debt.

    You'd be absolutely right on the facts. And dead wrong in practice. You see, when you're a debtor, it's what your creditors believe, not any fact, that is important. If your creditor believes you might not be able to pay, it's that belief that counts, no matter the facts, when the creditor cuts off your credit. What a creditor believes is especially important when a debtor needs that creditor to keep extending credit in the future to finance new bills. That's, of course, exactly where the U.S. finds itself now.

    What the US must do

    What happens over the next few weeks or months is critical. If the U.S. government comes up with a credible plan to recapitalize Fannie Mae and Freddie Mac using government and private money -- even if the private money is mostly window dressing -- then overseas investors will be reassured that the U.S. isn't simply going to walk away from its financial obligations.

    If that plan includes tougher regulations and stricter limits on leverage, and especially if it replaces current management at the companies, overseas investors will gain confidence. If the plan includes an equity element, so the U.S. government (and taxpayers) have a chance to profit from a recovery at these two companies, overseas investors will start to believe the U.S. has faith in its own future. And if the plan includes a timetable for reducing the size of or, better yet, eliminating Fannie Mae and Freddie Mac, overseas investors might actually start to believe the U.S. government is in control of its own future.

    Certainly, it makes no sense from any perspective to let two private but publicly traded companies have as much power over the U.S. financial markets and the credit rating of the U.S. government as Fannie Mae and Freddie Mac do. Especially since the financial markets are so much deeper now than they were in 1938. The big banks and other investors are perfectly able to provide the liquidity that Fannie Mae was designed to provide in 1938.

    Possible consequences

    And if the U.S. doesn't come up with a credible plan? To protect their own interests, overseas investors will increase the rate at which they're moving away from the U.S. dollar.

    In the short run, that means a cheaper dollar -- good for U.S. exports but bad for U.S. consumers who will have to pay more dollars for everything this country imports, including oil. In the longer run it means underperformance by U.S. stocks and bonds because overseas investors will want to hold fewer of them. It means higher interest rates because the U.S. government will have to pay more to get overseas investors to overcome their reluctance and buy our debt. And it means slower economic growth from higher interest rates and an increased cost of capital to U.S. companies that want to expand their businesses.

    What's happening at Fannie Mae and Freddie Mac wouldn't matter so much, of course, if the U.S. didn't owe so much to the rest of the world. But it does. The sooner we realize that the two most important jobs a debtor has are successfully managing creditors and getting out of debt, the better off the U.S. will be.

    [Jul 20, 2008] Taxpayers Can Bear No More

    This story is from the UK but the same situation applies here: Taxpayers can bear no more, admits Alistair Darling.

    Taxpayers are at the limit of what they are willing to pay to fund public services, the Chancellor has said in an interview with The Times. In his gloomiest assessment yet of the state of the British economy, Alistair Darling gave warning that the downturn was far more profound than he had thought and could last for years rather than months.

    He revealed that he told Cabinet ministers this week that there would be no more money for schools, hospitals, defence, transport or policing.

    He confirmed that the Treasury was considering revising its fiscal rules to allow more borrowing to deal with the economic problems. He said that he did not believe that voters, already struggling with higher food and fuel bills, would be willing to pay more tax. “People will pay their fair share but you can’t push that,” he said.

    Mr Darling said of this week’s Cabinet meeting: “I’ve been very clear with my colleagues that there is no point them writing in saying, ‘Can we have some more money?’ because the reply is already on its way and it’s a very short reply. I told them at the last meeting of Cabinet they’ve got to manage within the money they’ve got.”

    The Chancellor played down that the Government is reviewing the fiscal rules, which say that borrowing must not go beyond 40 per cent of gross domestic product. “This routine work has been going at the Treasury for several months,” he said.

    He made clear that he thought that the only politically viable option was to increase borrowing, rather than to raise taxation.


    Jack Burton:

    Good report Mish, I follow the economic events in the UK very closely as I am a frequent visitor there. You are quite right about the UK government now following the USA playbook. For some reason, the UK has been on a decade long USA style binge of borrow and spend, now this has spread to the public sector. With predictable results I might add.
    I first noticed the Bubble Economy in the UK back in the late 90s, by 2006 it was a white hot big bang of a bubble, a whole new universe, something I had never seen in the UK before. Knowing that UK industry was hollowed out years earlier, I questioned how this new found wealth could be. The City Of London was the answer. Financial services and it's bastard child "Housing Bubble" were the answers. Now it has burst. So many deep in debt UK households are in for a back to the 50s look at cold dark houses and small paychecks for long hours. Where are the jobs in the UK? Take away financial services, housing bubble and public employment, and there isn't any. All other jobs are just service jobs to the Big Three that are going down.
    Good article Mish, every post of yours is looked forward to by me and those I tell about your blog.

    Teddy Saturday, July 19, 2008 4:28:52 PM

    Supply side economics or spending without taxation is what got us in this mess with the biggest excesses being the Iraq war and war on terrorism. When you decide to go to war, you're suppose to raise taxes to pay for it, not cut taxes and then spend a trillion there so far with the rest of the world picking up the tab. This country has suffered unconscionable losses in manufacturing jobs, especially to China and India, as a consequence of refusing to pay as you go, resulting in our outrageous trade deficits. This war, and not social security which runs a surplus, is bankrupting this country. We have copied Magaret Thatcher's England into bankruptcy.

    We now have almost no middle class since we have minimal manufacturing and with the inflation of the last four years, the salaries for most people in this country along with their debt levels provide nothing more than a sustenance existance. And with foreigners buying up what is left of the equity in our companies, we resemble Argentina more and more each day. If you rely on the kindness of strangers, you become a "nation of sharecroppers". The elite foxes are still in the hen house, but how much is there left to steal?

    [Jul 19, 2008] “No Atheists in Foxholes.” — No Libertarians in Financial Crises. 

    Jul 17th, 2008 by jfrankel |

    Someone this week asked me what I thought of policy-makers who ex ante profess a free-market ideology and acute sensitivity to the dangers of moral hazard from financial bailouts, but who toss that ideology overboard when faced with a financial crisis.  The reference was to Treasury Secretary Henry Paulson’s lobbying this week in support of a rescue for Fannie Mae and Freddie Mac, the two big home mortgage agencies, following on the rescue of Bear Stearns in March.   My reply was:  “They say there are no atheists in foxholes.   Perhaps, then, there are also no libertarians in financial crises.”

    There are more egregious cases than Hank Paulson of inconsistencies between ex ante promises by policy-makers not to bail out and ex post bailouts when disaster strikes.    (Indeed, some amount of change in position may even be rational for an office-holder, though I would draw the line at false stateme="MsoNormal" style="MARGIN: 0in 0in 0pt">

    An example I have in mind concerns the members of the starting team in the Bush Administration who had lectured the Clinton Administration on the evils of its allegedly excessive bailouts of emerging markets in the 1990s, only to engage in worse when they themselves were faced with the Argentine crisis that began in 2001.  There was no particular reason to rescue the Kirchner government.   Argentina in 2003 would have been the perfect place to refrain from rolling over an IMF program, thereby putting a limit on the moral hazard problem.   The Clinton Treasury had done this with Russia in August 1998 despite high costs in terms of systemic contagion.   Yet the Bush White House continued to push the IMF to bail out Argentina.  Apparently the failing lay in simple inexperience and lack of awareness that any such choices are always difficult.   (See pages 9-11 of my article on Managing Financial Crises, in the Cato Journal, Summer 2007.)    The Administration was very much following in the footsteps of the Reagan Administration, which talked tough at first when the international debt crisis hit in 1982 but which then participated in comprehensive IMF-led bailouts of Latin American debtors who had been pursuing far worse macroeconomic policies than the emerging market governments of the 1990s crises. 

    Incidentally, before writing this blog post, I checked into the World War II origins of the sentence “There are no atheists in foxholes.”     I discovered to my surprise that this expression was intended, and is still considered, as a put-down of atheists, and that their lobby protests its use. 

    Of course the proposition is not literally true; indeed some soldiers lose their pre-existing belief in God when confronted with the horror of war.   But let us stipulate that those who suddenly face death more often find religion than lose it.  What strikes me as odd is that the expression is apparently normally interpreted as meaning that people who profess atheism don’t really mean it, and that their true colors come out under pressure. I had, apparently erroneously, thought rather the reverse.(Indeed, Richard Dawkins argues that vast numbers of people who would no more bet on the existence of God than on the existence of the Easter Bunny, nonetheless call themselves “agnostics” rather than atheists, to avoid rocking the boat.) I had always taken the expression to mean that mankind’s hunger for religious beliefs comes from a desperate desire for divine intervention – or, failing that, comfort – when confronting death.  Something more along the lines “There are no unsoiled underpants in foxholes.”     I am in sympathy with the character in a novel who said “That maxim, ‘There are no atheists in foxholes,’ it’s not an argument against atheism — it’s an argument against foxholes.” 

    So what’s my point?    Not to argue that governments should intervene always  (nor that they should intervene never).  The lesson for government officials is that wherever they choose to draw the bailout line – one hopes the line strikes an intelligent balance between the short-run advantages of ameliorating a serious financial crisis and the longer-run disadvantages of moral hazard — they should think through the system ahead of time.  They should take the appropriate regulatory precautions during the boom times, which correspond to the bailouts that will inevitably come during the busts.  

    Long ago, the United States worked out the approximate right answer for banks:  there will always be rescue of small depositors ex post when banks run into serious trouble, and so under our system, (i) deposit insurance provides formal guarantees ex ante and (ii) banks must pay the price ex ante through reserve requirements, capital requirements, and active regulatory oversight.  What we now need to do is design the analogous sort of system for non-banks.

    It should not come as a surprise to high officials that there are such things as financial crises anymore than it should come as a surprise to soldiers that there are such things as bombs.   Human nature must be accepted for what it is.   But in the case of  high officials, it shouldn’t be necessary for them to alter their fundamental beliefs when crisis strikes, in the absence of truly unforeseeable developments.

    [Jul 19, 2008] Grasping Reality with Both Hands The Semi-Daily Journal Economist Brad DeLong

    American economic engine needs tuning and attempt to convert it into financial speculation Mecca failed. " "We can't make any headway in my opinion, if we don't understand what went wrong.
    A more measured approach might be to acknowledge the errors and work to convince the political class to move toward regulating and dealing with our situation based on the understanding of what we have recently done so wrong."


    Brad is not worried. Nouriel Roubini is:

    In a series of recent writings on the RGE Monitor Nouriel Roubini – Chairman of RGE Monitor and Professor of Economics at the NYU Stern School of Business - has argued that the U.S. is experiencing its worst financial crisis since the Great Depression and will undergo its worst recession in the last few decades. His analysis leads to the following conclusions:

    This is by far the worst financial crisis since the Great Depression. Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust

    Dozens of large regional/national banks (a’ la IndyMac) are also bankrupt given their extreme exposure to real estate and will also go bust.

    Some major money center banks are also semi-insolvent and while they are deemed too big to fail their rescue with FDIC money will be extremely costly.

    In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure (i.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks). Firms that borrow liquid and short, highly leverage themselves and lend in longer term and illiquid ways (i.e. most of the shadow banking system) cannot survive without formal deposit insurance and formal permanent lender of last resort support from the central bank.

    The FDIC that has already depleted 10% of its funds in the rescue of IndyMac alone will run out of funds and will have to be recapitalized by Congress as its insurance premia were woefully insufficient to cover the hole from the biggest banking crisis since the Great Depression

    Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.

    This financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion.

    This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk – and the collapse of many counterparties – will lead to a systemic collapse of this market.

    This will be the most severe U.S. recession in decades with the U.S. consumer being on the ropes and faltering big time as soon as the temporary effect of the tax rebates will fade out by mid-summer (July).

    This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices. This will be a long, ugly and nasty U-shaped recession lasting 12 to 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects.

    Equity prices in the US and abroad will go much deeper in bear territory. In a typical US recession equity prices fall by an average of 28% relative to the peak. But this is not a typical US recession; it is rather a severe one associated with a severe financial crisis. Thus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of stock markets.

    The rest of the world will not decouple from the US recession and from the US financial meltdown; it will re-couple big time. Already 12 major economies are on the way to a recessionary hard landing; while the rest of the world will experience a severe growth slowdown only one step removed from a global recession. Given this sharp global economic slowdown oil, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.

    The current U.S recession and sharp global economic slowdown is combining the worst of the oil shocks of the 1970s with the worst of the asset/credit bust shocks (and ensuing credit crunch and investment busts) of 1990-91 and 2001: like in 1973 and 1979 we are facing a stagflationary shock to oil, energy and other commodity prices that by itself may tip many oil importing countries into a sharp slowdown or an outright recession. Also, like 1990-91 and 2001 we are now facing another asset bubble and credit bubble gone bust big time: the housing and overall household credit boom of the last seven years has now gone bust in the same way as the 1980s housing bubble and 1990s tech bubble went bust in 1990 and in 2000 triggering recessions. And a similar housing/asset/credit bubble is going bust in other countries – U.K., Spain, Ireland, Italy, Portugal, etc. – leading to a risk of a hard landing in these economies.
    But over time inflation will be the last problem that the Fed will have to face as a severe US recession and global slowdown will lead to a sharp reduction in inflationary pressures in the U.S.: slack in goods markets with demand falling below supply will reduce pricing power of firms; slack in labor markets with unemployment rising will reduce wage pressures and labor costs pressures; a fall in commodity prices of the order of 20-30% will further reduce inflationary pressure. The Fed will have to cut the Fed Funds rate much more – as severe downside risks to growth and to financial stability will dominate any short-term upward inflationary pressures. Leaving aside the risk of a collapse of the US dollar given this easier monetary policy the Fed Funds rate may end up being closer to 0% than 1% by the end of this financial disaster and severe recession cycle.

    The Bretton Woods 2 regime of fixed exchange rates to the US dollar and/or heavily managed exchange will unravel – as the first Bretton Woods regimes did in the early 1970s – as US twin deficits, recession, financial crisis and rising commodity and goods inflation in emerging market economies will destroy the basis for it existence.

    Thus, the scenario of 12 steps to a financial disaster that I outlined in my February 2008 paper is unfolding as predicted. If anything financial conditions are now much worse than they were at the previous peak of this financial crisis, i.e. in mid-march of 2008.


    I half agree with Brad's post, while the other half is made seriously ill. The part I agree with is that monetary policy is not the tool for dealing with asset bubbles, so Greenspan's policies were probably basically right. What makes me ill is the attitude of smug complacency towards asset bubbles, and the interests of the middle-class savings and investing class. "...the people doing the buying and investing were relatively well-off, and were grownups..." Brad's mental map of the economy seems to belong to a Depression-era world made up of a minority of plutocrats and a mass of impoverished factory workers, where unemployment is the only problem. Does he not know how many people own stocks these days and are hurt by the volatility of the financial markets? As for the "grownups" part, I know from personal acquaintance how many intelligent and well-educated people are frightfully naive about investing, and these are people who do most of what little savings we as a nation do.

    "...investors are supposed to take care of themselves." Tell that to the employees of Enron, or for that matter, the employees of sound companies who nevertheless saw their 401Ks melt away, and then maybe lost their jobs on top of that. I'd better stop there, before I fall into what Phil Gramm would call "whining". I just want to make the point that smugness and complacency is not necessarily a monopoly of the right.

    Posted by: Phil P | July 17, 2008 at 06:40 AM

    My view is that it is not given that the extra real estate built is a definite plus.

    One problem that I see is energy efficiency, and we invested a lot in exurban homes and large cars. Now we have hard time decreasing the demand for fuel to maintain the stuff. A temporary excess of fiber was not a constant drain on resources, and in time, one could find uses for it. A pool of monster houses or houses in monster locations, and monster vehicles is not as benign.

    The other annoying thing is that it is OK for the invisible hand of the market to misallocate a trillion, but politically impossible to spend a trillion is a genuinely useful fashion, like more rational health care or energy production.

    [Jul 19, 2008] Rethinking retirement

    A survey of nearly 4,000 Americans across four generations found that most adults believe responsibility for a secure financial future is rapidly shifting to them.

    People can typically borrow $50,000 or half the vested balance of their 401(k) accounts with extremely favorable interest rates. Failing to repay loans on time typically incurs a 10% excise tax and borrowers must also pay income tax.


    Dipping into retirement money wouldn't be a problem if other sources of retirement income -- such as Social Security and pensions -- weren't drying up, Weller said. More people today are counting on 401(k) accounts to be their primary income source in retirement.

    Yet a study by Hewitt Associates this month found four out five workers aren't socking away enough money into their 401(k) accounts to keep up their standard of living after retirement.

    On average, employees are projected to replace just 85% of their income in retirement, compared with the 126% they would need when factoring in inflation, longer life spans and medical costs, the study by Hewitt found.

    Struggling Americans raiding 401(k)s - MSN Money By The Associated Press

    The study found workers in 2004 had $31 billion in outstanding 401(k) loans, a fivefold increase from $6 billion in 1989. Between 1998 and 2004, an average of 12% of families with 401(k) plans borrowed from them.

    "They don't necessarily pay penalties. But the penalty is that they have fewer retirement savings," said Christian Weller, an author of the study.

    As economic conditions grow bleaker, the number of people dipping into retirement money will only rise, he added.

    A $5,000 loan, for example, could cut retirement savings by 22% even if the loan is repaid without penalty, according to the study. That's assuming the person has a $40,000 salary and is five years into a 35-year career.

    Jim Bunning's Capitalism Pitch Is in Strike Zone by Caroline Baum

    Inconsistency in regulation and popularity of "free market" fundamentalism prepared the current trap.

    July 18  | Bloomberg

    ``It turns out socialism is alive and well in America,'' Bunning said in his opening statement at a July 15 Senate Banking Committee hearing.

    ... ... ... 

    The securities industry regulator introduced new requirements for anyone looking to sell short the stock of 19 financial companies. The new measures will expire in 30 days if not extended. (Everyone who thinks they won't be extended, raise your hand. Good. We can move on.)

    ... ... ...

    Case-by-Case Capitalism

    ``We want free-market mechanisms as long as everything is doing fine,'' says Jim Glassman, senior U.S. economist at JPMorgan Chase & Co. ``In times of crisis, we want to keep market mechanisms in check. If shorting a company is a bad idea, reality will prove it wrong.''

    More Regulation

    How do we know the market failed if we don't allow it to work? Capitalism without failure is like religion without sin.

    The U.S. has spent the last 30 years dismantling some of the onerous regulations enacted during the Great Depression. Entire industries have been deregulated. The Glass-Steagall Act separating commercial and investment banking was repealed. Where rules still existed, financial innovation -- the Eurodollar and Eurobond markets -- found a way around them.

    It's a foregone conclusion that the country is headed back in the other direction. The only question is how far. The Nasdaq bubble gave us Sarbanes-Oxley. Now that the housing collapse has devastated construction and finance industries, government can take up some of the slack. (Who better to staff new regulatory agencies than out-of-work Wall Street types, who know the ins and outs of the rules?)

    The Foreclosure Prevention Act of 2008, which is now in a House-Senate conference committee, establishes ``a new independent regulator'' for the GSEs that would set capital standards and beef up risk management.

    Conflict of Interest

    What if said regulator finds the GSEs inadequately capitalized? One alternative would be to shrink their huge balance sheets.

    But wait! Congress needs Fannie and Freddie to gobble up all the mortgages banks are willing to make to prevent a complete implosion in the housing market. (That new regulator is being unnecessarily tough on poor Fan and Fred.)

    Maybe Treasury should start a taxpayer-funded sovereign wealth fund and buy all the bad loans -- even foreclosed homes -- no one wants. In retrospect, the Resolution Trust Corp., created in 1989 to dispose of savings and loans' bad assets, looks like a model of efficiency compared with some of the proposals being bandied about today.

    And no, none of them are solutions for a market failure. You can't whine about the death of capitalism when government is putting a gun to its head.

    (Caroline Baum, author of ``Just What I Said,'' is a Bloomberg News columnist. The opinions expressed are her own.)

    Social Safety Nets, Inflation Fighting, and Market Discipline

    Here is another important consideration for future Fed policy...
    I've had some differences with Barney Frank in the past over Fed policy, but here he makes an interesting point. Why do European central banks respond more aggressively to inflation than the US central bank? Could it be the difference in social safety nets?:

    Frank Says Stronger Social Safety Net Would Free Fed, by  –Michael S. Derby, Real Time Economics: There are many reasons why the Federal Reserve is boxed in on monetary policy, but Rep. Barney Frank Wednesday found a new dimension to the central bank’s dilemma. ...

    Ben Bernanke and his fellow policy makers are facing a worrisome mix of tepid growth, troubled financial conditions and rising price pressures... The weak economy and market tumult call for rate cuts. But the energy-driven price gains and deteriorating expectations for future prices call for rate increases.

    That’s left the Fed stuck at its current rate of 2%, very likely for an extended period. But according to Frank, if the U.S. social safety net weren’t so miserly, the Fed might actually have more room to take on inflation. ... “The relative insufficiency of our social safety net vis-a-vis what you have in Western Europe constrains monetary policy,” Frank said.

    If the U.S. offered more support for the unemployed and displaced, “the Federal Reserve would then be freer…to slow down the economy in the knowledge this would not have a disproportionately negative effect” on the working population. That part of the population is already losing notable ground in economic terms, he said. ...

    And, contrary to what you might hear - sometimes based upon the argument that we are not in a technical recession - "families are facing hardship":

    Bernanke: Recession or Not, Families Are Hurting, by Sudeep Reddy: ...At a House hearing, Mr. Bernanke — responding to a lawmaker’s question about Americans’ economic pain ...[and] whether a recession is underway. ...

    “Whether it’s a technical recession or not is not all that relevant,” Mr. Bernanke said. “It’s clearly the case that for a variety of reasons families are facing hardship.” ...Mr. Bernanke recounted the “numerous difficulties” facing the economy: “ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and some other commodities.” ...

    As to whether this is a technical recession, “I don’t see why that makes a great deal of difference,” Mr. Bernanke said, adding that the terminology doesn’t play into the Fed’s policy decisions.

    In other what are you whining about news, prices are up, and the ability of workers to buy goods and services is down:

    U.S. consumer prices soared at their fastest annual pace in nearly two decades last month... Even more worrisome for policymakers than the headline inflation jump may be signs that food and energy prices are starting to filter through the broader economy, as evidenced by sharp price gains last month in housing, transportation and services. ...

    The consumer price index jumped 1.1% in June..., the second-highest increase since 1982 and the highest since 2005. Excluding food and energy, it advanced 0.3%. ...

    Consumer prices swelled 5% on a year-over-year basis, the highest rate since May 1991. The core CPI grew a more modest 2.4% compared to June 2007, though that's still well above the Fed's long-term goal of 1.5% to 2%. Over the past three months, core inflation rose at a 2.5% annual rate. ...

    In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, fell 0.9% in June, suggesting incomes aren't keeping pace with prices...

    [Jul 17, 2008] JP Morgan’s Dimon Prime Mortgages Look “Terrible” Housing Wire

    JP Morgan’s no-nonsense CEO Jamie Dimon was clearly trying to temper investors’ newfound enthusiasm with a dose of market reality.

    “Our expectation is for the economic environment to continue to be weak – and to likely get weaker – and for the capital markets to remain under stress,” he said in a press statement. “We remain conscious that since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer.”

    [Jul 17, 2008] Dani Rodrik: "Death of globalisation consensus"

    Even though Greg Mankiw claims in the New York Times today that " Economists are nearly unanimous in their support of an unfettered system of world trade," another Harvard economics professor begs to differ.

    Dani Rodrik, writing for Project Syndicate, finds that some prominent former staunch advocates of liberalized trade regimes are having serious doubts to the point that they are actually airing them in public. The big issue appears to be – surprise – that trade is not delivering the benefits in practice that it is alleged to produce in theory.

    And worse, as Rodrik has noted at his blog, the benefits in theory are often exaggerated. We wrote about one such discussion:

    The debate among Serious Economists about the benefits of free trade continues, and Dani Rodrik continues to take a dispassionate look at the data and the models.

    This post, although a bit geeky, is intriguing because Rodrik dissects an analysis cited by Bernanke in a recent speech, which found that the benefits of free trade per US household since World War II are roughly $10,000, and full liberalization would generate another $4,000 to $12,000 per HH. Rodrik finds those numbers to be "grossly inflated" and explains why in "The Globalization Numbers Game."

    At the end of the post, Rodrik chides his peers for goosing numbers to make their case:
    What puzzles me is not that papers of this kind exist, but that there are so many professional economists who are willing to buy into them without the critical scrutiny we readily deploy when we confront globalization's critics. It should have taken Ben Bernanke no longer than a few minutes to see through Bradford et al. and to understand that it is a crude piece of advocacy rather than serious analysis. I bet he would not have assigned it to his students at Princeton. Why are we so ready to lower our standards when we think it is in the service of a good cause?
    There is a simple answer: because with honest numbers, the case may not be compelling. These models (as I understand them, which admittedly may not be perfectly) rest on certain assumptions, many of which do not operate in practice. Thus, there is the real possibility that adjusting any model's results to more closely approximate real world conditions may reduce (or improve) the theoretical benefits to open trade. Give that many observers believe that America's free trade deals tend to favor its corporations rather than the population as a whole, it seems more likely than not that any rectification of theory to reality would lower the level of benefits.
    There may be another cause for pause as far as unqualified support for more open trade is concerned. Research into financial crises by Kenneth Rogoff and Carmen Reinhart has found that:
    Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically.
    High levels of international trade is a necessary, although perhaps not a sufficient condition for high international capital mobility (reader views on this point in particular would be of interest).

    Now, from Rodrik's article at Project Syndicate:
    The world economy has seen globalisation collapse once already. The gold standard era – with its free capital mobility and open trade – came to an abrupt end in 1914 and could not be resuscitated after the First World War. Are we about to witness a similar global economic breakdown?

    The question is not fanciful. Although economic globalisation has enabled unprecedented levels of prosperity in advanced countries and has been a boon to hundreds of millions of poor workers in China and elsewhere in Asia, it rests on shaky pillars.

    Unlike national markets, which tend to be supported by domestic regulatory and political institutions, global markets are only "weakly embedded".

    There is no global anti-trust authority, no global lender of last resort, no global regulator, no global safety nets, and, of course, no global democracy. In other words, global markets suffer from weak governance, and therefore from weak popular legitimacy.

    Recent events have heightened the urgency with which these issues are discussed. The presidential electoral campaign in the United States has highlighted the frailty of the support for open trade in the world's most powerful nation. The sub-prime mortgage crisis has shown how lack of international coordination and regulation can exacerbate the inherent fragility of financial markets. The rise in food prices has exposed the downside of economic interdependence without global transfer and compensation schemes.

    Meanwhile, rising oil prices have increased transport costs, leading analysts to wonder whether the outsourcing era is coming to an end. And there is always the looming disaster of climate change, which may well be the most serious threat the world has ever faced.

    So if globalisation is in danger, who are its real enemies? There was a time when global elites could comfort themselves with the thought that opposition to the world trading regime consisted of violent anarchists, self-serving protectionists, trade unionists, and ignorant, if idealistic youth. Meanwhile, they regarded themselves as the true progressives, because they understood that safeguarding and advancing globalization was the best remedy against poverty and insecurity.

    But that self-assured attitude has all but disappeared, replaced by doubts, questions, and scepticism. Gone also are the violent street protests and mass movements against globalisation. What makes news nowadays is the growing list of mainstream economists who are questioning globalisation's supposedly unmitigated virtues.

    So we have Paul Samuelson, the author of the post-war era's landmark economics textbook, reminding his fellow economists that China's gains in globalisation may well come at the expense of the US; Paul Krugman, today's foremost international trade theorist, arguing that trade with low-income countries is no longer too small to have an effect on inequality; Alan Blinder, a former US Federal Reserve vice-chairman, worrying that international outsourcing will cause unprecedented dislocations for the US labour force; Martin Wolf, the Financial Times columnist and one of the most articulate advocates of globalisation, writing of his disappointment with how financial globalisation has turned out; and Larry Summers, the US Treasury chief and the Clinton administration's "Mr Globalisation", musing about the dangers of a race to the bottom in national regulations and the need for international labour standards.

    While these worries hardly amount to the full frontal attack mounted by the likes of Joseph Stiglitz, the Nobel-prize winning economist, they still constitute a remarkable turnaround in the intellectual climate. Moreover, even those who have not lost heart often disagree vehemently about the direction in which they would like to see globalisation go.

    For example, Jagdish Bhagwati, the distinguished free trader, and Fred Bergsten, the director of the pro-globalisation Peterson Institute for International Economics, have both been on the frontlines arguing that critics vastly exaggerate globalisation's ills and under-appreciate its benefits. But their debates on the merits of regional trade agreements – Bergsten for, Bhagwati against – are as heated as each one's disagreements with the authors mentioned above.

    None of these intellectuals is against globalisation, of course. What they want is not to turn back globalisation, but to create new institutions and compensation mechanisms – at home or internationally – that will render globalisation more effective, fairer, and more sustainable.

    Their policy proposals are often vague (when specified at all), and command little consensus. But confrontation over globalisation has clearly moved well beyond the streets to the columns of the financial press and the rostrums of mainstream think tanks.

    That is an important point for globalisation's cheerleaders to understand, as they often behave as if the "other side" still consists of protectionists and anarchists.

    Today, the question is no longer: "Are you for or against globalisation?" The question is: "What should the rules of globalisation be?" The cheerleaders' true sparring partners today are not rock-throwing youths but their fellow intellectuals.

    The first three decades after 1945 were governed by the Bretton Woods consensus – a shallow multi-lateralism that permitted policy-makers to focus on domestic social and employment needs, while enabling global trade to recover and flourish. This regime was superseded in the 1980's and 1990's by an agenda of deeper liberalisation and economic integration. That model, we have learned, is unsustainable. If globalisation is to survive, it will need a new intellectual consensus to underpin it. The world economy desperately awaits its new Keynes.

    [Jul 17, 2008] Traders Forecast Banking Stress to Last To End of 2010

    401K investors will be royally fleeced again. And in compasion with this period 2001-2003 recession will look like a walk in the park.  Stock promotion jerks like Ben Stein  or Cramer did a good job in this area :-(.

    From the Financial Times:

    Traders are betting that the credit crunch will still be hurting banks at the end of 2010 with financial institutions expected to be scrambling for cash to shore up their end-of-year balance sheets.

    A popular so-called butterfly trade in the money markets is showing expectations of three to four times the stress at the end of 2010 as before the credit crisis started to bite last summer, although it implies the situation will have improved sharply compared with today.

    ... ... ...

    Laurence Mutkin, head of European rates strategy at Morgan Stanley, said money markets were pointing to long-running financial strains. “The market expects that these stresses will persist,” he said. “It is saying the system survives but individual institutions will have to fight hard to be among the survivors.”....

    [Jul 13, 2008] - Columnists - Tony Jackson - Judging by the US, the worst may be yet to come

    Judging by the events of last week, equity markets are entering a full-blown valuation crisis. Strategists have warned that earnings forecasts for individual companies are much too high proved to be right.

    By Tony Jackson

    Published: July 13 2008 17:12 | Last updated: July 13 2008 17:12

    You can always count on America to give the world a lead. Just as it kicked off the credit crisis, so it stays at the cutting edge as the crisis unfolds. So much the worse for the rest of us.

    Phase I – the writedown of dodgy securities – is by no means over, but is no longer the big story. Phase II – the travails of ordinary commercial banks – is now well under way. And this, of course, is the mechanism whereby the credit crunch transmits itself to the real economy.

    In the UK we may feel we know about this stuff already. After all, shares in the mortgage lender Bradford & Bingley are down some 90 per cent on a year ago.

    But shares in IndyMac Bancorp, a lender of comparable ranking in the US, were down 99 per cent before the bank finally went under last Friday. As for the drama of Fannie Mae and Freddie Mac, that is in part a US speciality. But it also illustrates a wider issue.

    To do their job of propping up the US mortgage market, the two agencies must borrow heavily from the capital markets. If – as looks to be the case – those markets become shut to them, they must instead sell assets, such as mortgage-backed securities.

    In today’s markets, that would mean a fire sale. Other banks would then be obliged to mark to market and take further writedowns. And so the spiral winds on.

    More generally, Lombard Street Research reports that total US bank credit in the 13 weeks to mid-June fell by an annualised 9 per cent. That is the worst since records began in 1973 – or, in effect, since the Great Depression – and compares with a 15 per cent rise as recently as March. So much for the Bear Stearns bail-out.

    The pressure is therefore on the banks to recapitalise further. But providers of capital seem to be getting scarcer.

    Part of the problem lies with US rules, whereby if you hold over 9.9 per cent of a bank you risk having to top up its capital should it fall below a given level.

    The rules also hamper you from appointing directors – not an appealing prospect for an activist investor or private equity house. Hence recent moves to relax those rules – but how soon?

    Similarly, the US Treasury is urging commercial banks to issue covered bonds, like their European counterparts. But there are snags. In the UK, for instance, analysts have argued that Bradford & Bingley will have difficulty maintaining its lending because of the extra capital needed to guarantee its covered bonds.

    Despite all the alarm bells, though, the effects on the real economy are only just starting to show, even in the US. According to Morgan Stanley, US issuance of home equity loans actually accelerated in the 13 weeks to June 4. That, combined with the tax rebates to US households, presumably accounts for US consumer spending holding up so far.

    But the latter factor is of course a one-off. And with consumer confidence at a 28-year low, the real downturn surely cannot be long postponed. After all, for lending to be sustained it is not enough for banks to advance the money. Ultimately, borrowers need to be confident in their ability to repay.

    Granted, Morgan Stanley also estimates that real capital spending by US corporations rose by 5.7 per cent in the second quarter versus only 0.1 per cent in the first. That is frankly puzzling, and gives comfort to those hardy souls who argue the US downturn is the product of fevered Wall Street imaginations.

    But corporate cash flows are under pressure, bonds markets are unaccommodating and bank lending is down. So how is this spending to be financed henceforth?

    In the UK, the same sense of trouble postponed is if anything stronger. According to Leigh Goodwin of Fox-Pitt Kelton, UK defaults on both mortgages and commercial loans are still at the bottom of the cycle.

    In mortgages, for instance, the default figure in this year’s first half was a negligible 1-2 basis points of book value. He expects this to rise to around 50bp – which, in the context of margins of 70-80bp, would wipe out most of the banks’ profit on mortgage business.

    On the narrow question of bank valuations, one could argue all this is mainly in the price. Up to a point, no doubt.

    But according to Absolute Strategy Research, the analysts’ consensus forecast is for a 10 per cent fall in European bank earnings next year, but a 23 per cent bounce the year after. For Europe, excluding the UK, the latter figure is 33 per cent.

    Given the experience of past downturns, that is frankly unrealistic. We are in this for the long haul, and the US is showing the way.

    [Jul 17, 2008] Facing the Hard Truths about Energy - A Report by the National Petroleum Council

    [Jul 16, 2008] Falling Oil Prices and CPI


    As I noted yesterday, the difference between a moderate and severe recession might be what happens with oil prices:

    One of the keys to the base case is that oil prices decline in the 2nd half of 2008 (something I've been predicting for some time). This prediction is based on demand destruction, lower subsidies in certain Asian countries, weaker demand growth in China, and a few other reasons. The fundamentals of supply and demand for oil suggests a small decrease in demand could led to a fairly large decrease in price. If this happens, then that will hopefully lead to Kasriel's "sharp deceleration in inflation".

    [Jul 16, 2008] Fed Funds Probabilities - No rate change through September

    A rate cut is now more likely (in their view) than a rate hike by the September meeting.

    [Jul 15, 2008] Kasriel- Base Case vs. Checkmate

    "The base case includes a sharp deceleration in inflation in the not-too-distant future as energy prices stabilize and then retreat due to a slowdown in the growth of global demand for energy. The Federal Reserve will maintain the federal funds rate at 2% through the first half of 2009. In the second half of 2009, when economic growth picks up enough to stop the upward trend in the unemployment rate, the Fed will start raising the funds rate."

    Note: the Northern Trust link doesn't seem to work. Here is the Kasriel July Outlook.

    Northern Trust chief economist Paul Kasriel writes for July: Base Case vs. Checkmate

    Our base case economic scenario is that the U.S. economy entered a recession in early 2008, will remain in a mild recession throughout 2008 and will begin to experience an anemic recovery in the first half of 2009. The base case includes a sharp deceleration in inflation in the not-too-distant future as energy prices stabilize and then retreat due to a slowdown in the growth of global demand for energy. The Federal Reserve will maintain the federal funds rate at 2% through the first half of 2009. In the second half of 2009, when economic growth picks up enough to stop the upward trend in the unemployment rate, the Fed will start raising the funds rate.

    Our risk case scenario is that the U.S. dollar begins to fall precipitously coinciding with a rise in Treasury bond yields. U.S. inflation does not moderate because of the depreciation in the dollar. As a result, the Federal Reserve is forced to raise the funds rate even in the face of a rising U.S. unemployment rate. This would be “checkmate” for the U.S. economy, turning a relatively mild recession into a severe one.
    Kasriel's "base case" is very close to my view; a mild to moderate recession that lingers for some time with a prolonged period of elevated unemployment. However I don't expect unemployment to reach 8%.

    One of the keys to the base case is that oil prices decline in the 2nd half of 2008 (something I've been predicting for some time). This prediction is based on demand destruction, lower subsidies in certain Asian countries, weaker demand growth in China, and a few other reasons. The fundamentals of supply and demand for oil suggests a small decrease in demand could led to a fairly large decrease in price. If this happens, then that will hopefully lead to Kasriel's "sharp deceleration in inflation".

    However, if oil prices increase or stay elevated, then the Checkmate case becomes somewhat more likely (although I still think it is highly unlikely). See Kasriel's piece for much more.


    Datahead writes:
    It's hard to believe that oil will continue at these elevated prices with all of the demand destruction occurring right now. So I concur with both you and Kasriel.

    I believe that oil prices may retreat more quickly than many expect and begin to better reflect the demand/supply situation rather than serve as a dollar/inflation hedge with significant speculation. If the oil hedgers/speculators begin to unwind their positions, it could fall pretty quickly. It's perhaps the only good economic news in the near-term horizon.

    Scott writes:
    So, the folks over at iTulip swear the oil price increase is mostly (80%) due to dollar depreciation, rather than increased demand. That suggests to me that demand destruction won't do the trick. If this is the case, it seems that the only way to tame oil prices is to bolster the dollar by raising rates - significantly.

    Which puts us right back into the checkmate scenario.

    I gather that CR and iTulip disagree on the fundamental reason for very high oil prices? The very high oil prices are creeping into everything - that has to be what's driving that insane jump in the CPI.

    Calculated Risk writes:
    wally, oil might not be the only path to Kasriel's "Checkmate", but I think it's the most likely. If you read his piece (the link wasn't working the last time I tried), Kasriel suggests a huge bailout of the GSEs could be another trigger:

    "Why might the dollar dive? Because the U.S. Treasury is forced to issue more debt in order to recapitalize either Fannie/Freddie/ the Federal Home Loan Bank System/FDIC, and the rest of the world balks at being the buyer of last resort for U.S. government debt. As this is being written on Friday, July 11, a hint of this is happening. Rumors are swirling that the U.S. Treasury will have to recapitalize Fannie Mae and Freddie Mac. Rather than resulting in the usual flight-to-quality bid for U.S. Treasury securities, yields on Treasury coupon securities are rising and the dollar is falling. Another factor that could precipitate a further sharp decline in the dollar might be the severing of the pegs that foreign monetary authorities have maintained between their currencies and the U.S. dollar. The byproduct of these pegs has been upward pressure on the inflation rates in these foreign economies. If these monetary authorities can no longer tolerate this imported inflation and sever their currency pegs to the dollar, the dollar would likely go into a tailspin."

    Best to all.

    It seems like a strong dollar with massive asset deflation is the only way out

    ac writes:

    Kasriel's "base case" is very close to my view; a mild to moderate recession that lingers for some time with a prolonged period of elevated unemployment. However I don't expect unemployment to reach 8%.

    FWIW Gary Shilling recently predicted unemployment topping out at 7.2% in a "major recession" lasting until Q2 2009.

    He says something to the effect that he's not going to predict the coming depression, and otherwise alludes to the possibility that his forecast may be overly optimistic.

    dblwyo writes:
    CR - it may amuse you to know that your outlook and Kasriel's base case are nearly identical to the Fed's outlook as well...thru '10. In fact they even bumped up the "central tendency" for growth a tad this year because of the slowmotion of the slowdown. And FWIW my own assessment and analysis agrees.
    Three other obs:
    1) we've not really seen a "severe" recession since circa 1980 and even that hardly qualifies since YoY real GDP growth was -2%. Severe would be more like -4%+.
    2) Downturns in GDP are always coincidently accompanied by almost equal downturns in Employment - so not only is the definition a downturn in both it reflects the underlying realities.
    3) We're on such a tight S/D marginal balance with supply constrained by two decades of rational under-investment the demand destruction for oil WILL see serious prices drops. Particularly when you consider the feedback loop from being on the margin to rational speculation. To which one ought to add Prof. Hamilton's excellent work on the oil reserve exhaustion premium you pointed to. That too has a feedback link. The $20-30/barrel impact of these factors could see us back in the $90-110 range toward the end of the year, barring geo-political problems IMHO.

    son-of-curtis writes:
    For a analysis of a mild verse severe recession we must first look at the argument that the expansion of credit is what kept the economy going.. we garnered real products and sent paper promises... to the tune of 9 trillion dollars... to the extent that the destruction of the credit making ability of banks is impaired is the severity of the recession/depression..

    How likely is it that CDO,MBS, and other securitization of loans will come back? If so who would be the buyers?

    The capital destruction going on as we speak is going to cause a long and severe depression not to even go into the social aspects of it..

    My grandpa lived through the worst of the depression and one thing he told me was that he never stole one thing in his life but if he was facing the depression again he would turn into a thief.

    No one who travels outside this country can help but notice the difference in 20 years of how the ROW feels about us. Will they lend their hard earned money to us based on faith based currency. Not... if that were only true.. no the genie is out of the bottle and no three wishes for us...

    Elvis writes:
    I think many consumer are so stradled with debt, they are easily tipped into BK if they lose their job, HELOCs, or have health issues. As employment increases and/or remains for these people and inflation beats them senseless, the reprecussions will cause a severe dislocation in the economy, prompting a severe recession. You can only pull a rubber band so far until it snaps. I think that rubber band will snap relatively soon.

    Aleister Perdurabo writes:
    The price of coal has gone up from around $30 per short ton in 2000 to around $123.50 per short ton as of June 25th, 2008. This would seem to parallel the rise in oil. All energy is getting expensive. I don't see oil coming down any time soon.

    Anonymous writes:
    CR My Friend,

    Re: "sharp deceleration in inflation"

    How (old boy) can you have a sharp decrease as a future factor, when the sharp increase that has been parabolic, continues to be factored out of things like CPI or inflation metrics? The powers that be who exclude energy, food and housing remain in denial, so what will they do in the second leg of the year, supercharge that bias by lowering interest rates and then flood the economy with a tsunami of easy liquidity...... it worked about six years ago and maybe a lot of the retarded people out there that just burned up that easy cash, will be ready for more, and then buy into the next instant bubble?

    number2son writes:
    Talking about the VIX on haloscan breeds the same behavior that got us into this mess in the first place.

    I'm inclined to agree. And this really is just a rephrasing of the 1929 saw about shoe-shine boys talking about stocks.

    But this is not a phenomenon unique to the U.S. It's global.

    Barley writes:
    ipodius - nice take.

    Here is mine (by year end):
    1. Inflation to 4.5%
    2. Unemployment (national) to 6.7%
    3. Oil moving to sub $125
    4. Continued house price declines - maybe another 10 - 12%
    5. Large price declines in CR (next wave of liquidation) maybe 30%
    6. Foreign ownership rules for banks changed
    7. Business capacity contraction and asset destruction
    8. GDP finishes off the year at .1%
    9. A Democratic Whitehouse
    Barley | 07.15.08 - 3:35 pm | #

    tj & the bear writes:
    C'mon... I have yet to see anyone (including CR) state where the new jobs and/or new spending is going to originate. These things just don't happen -- there has to be a driver.

    There are NO FUNDAMENTALS to support job growth, period, end of story. Even the so-called return of manufacturing can't stem the losses in that sector.

    There are also NO FUNDAMENTALS to support spending growth, period, end of story. Consumers are tapped, businesses are strapped, and don't even talk about the government.

    tj & the bear writes:
    The whole "oil" argument is a catch-22, too.

    The only way you'll have true demand destruction is through a wrecked economy. Furthermore (as Darth Toll often points out) all those oil dollars are being recycled into the U.S., so if oil declines precipitously so does support for Treasuries & Agencies.

    Circumstances are much too complicated and nuanced for such simplistic "answers".
    tj & the bear | 07.15.08 - 3:54 pm |

    Brian J. writes:
    The problem with the oil arguments is that American demand isn't the only, or even the primary, driver in global demand. There's China, with its economy still growing at 9-10% a year. India is growing nearly as fast. And many of the oil producing state themselves, from Russia to Brazil to Saudi Arabia, are increasing their consumption, leaving less for export.

    So even tremendous American demand destruction will barely dent global oil demand- and hence won't do much to oil prices.
    Brian J. | 07.15.08 - 3:57 pm |

    3rdbillygoat writes:
    Time will tell on the prediction, but FWIW:

    1. Demand Destruction - perhaps an argument that suffers too much from a US-centric view. China is #2 global oil consumer after US, yet per capita they consume approx 1/15 of US oil consumption. So just a small per capita bump could propel consumption significantly. And of course there are all the other countries to consider. US is not the only game in town but it seems too many theories revolve around US being the center of the universe. There's plenty of other demand out there that will likely continue to grow; regardless of subsidies being reduced or removed.

    2. I don't see how these events are going to play out "business as usual", little dip and then everything's fine - the evidence is substantial that America is BROKE. Too many for too long buying too much shit they don't need with $$ they don't have. The bill has come due and... we can't pay.

    3. So many of these economists/analysts/pundits are wrong over and over and over again, yet still proclaim from the media pulpit - why are we even still paying attention to most of 'em?

    Time will tell, but seems tough(er) times for some time are likely just ahead.
    3rdbillygoat | 07.15.08 - 3:58 pm

    jkiss writes:
    Oil has been firm to higher because exports from the oil exporters is down 2.2%, or nearly 1Mb/d, from 36Mb/d to 35Mb/d. The US, goaded by high price, is using less, maybe as much as 4% less gasoline and jet fuel probably down 10% pretty soon. In sum, US use might go down 1Mb/d, pretty much compensating for exporters decline... for 2008. More reductions likely next year, and really significant availability of oil after 2010. Note that in every recession in the past century, including the thirties, we had cheap energy to help pull us out. This time we will have continuous shortages.

    Yes, subsidies in Chindia are ending, but this will not necessarily cut usage... China suppliers have been supplying the local market at a loss, so have been limiting sales causing long lines. With subsidies ending buyers can get all they really want, albeit at a higher price. Accordingly, consumption may go higher... of course, this can only happen in command economies.

    BTW, the same thing happened in russia following their blowup, price, availability and consumption of many things all rising in tandem.
    jkiss | 07.15.08 - 3:59 pm

    joe shmoe writes:
    hmmm, what's the relation between deflation and recession?

    Post-boom Japan had big deflation, but not a huge recession. right? Slow but postive growth over the 1990s.

    The Great Depression had deflation and big-time recession.

    If we go Japan's way, then CR's forecast could be close to right.

    Whether CR is right or wrong (we will find out) we shouldn't mock his proposal if we disagree. A joke is one thing, mocking is another. Plus "LOL" and "You've got to be kidding" are only persuasive arguments among people like those who call their chief strategist "turd blossom."

    We can do better than that.
    joe shmoe | 07.15.08 - 4:05 pm

    badger boy writes:

    If you are from Washington d.c. I agree completely. If you are a software engineer with a top secret clearance, it is still "Name your salary" in DC.

    For the rest of those who are not among the blessed few, please name these mythical comanies which are hiring.

    I suspect ipodius bases his economic analysis on the now hiring signs in the window of his local mcdonalds
    badger boy | 07.15.08 - 4:09 pm

    [Jul 11, 2008] Will Japan's Lost Decade Become the Norm ?

    This is a very informative post with excellent, insightful comments...

    ... what if the resolution of the credit crisis and global imbalances isn't a nasty recession or punishing inflation but Japan-like protracted low growth, with stagnant to deteriorating living standards?

    This idea may not be as much of a stretch as it sounds. Policy makers, in trying to avoid the depression/entrenched inflation extremes, may steer themselves into the Japan solution.

    In the US, despite the brave talk of free markets, we have been socializing losses right and left and trying to shore up plummeting asset values. Although inflation is running at high rates in many countries, it is the product mainly of commodities price increases due to developing economy demand. If the banking system in the US, UK and Europe are in as bad shape as I think they are, demand for imports will slacken further, which will reduce growth, and in some cases, reduce consumption. Reader DownSouth reminded us that from 1979 to 1983, oil consumption fell from 67 million barrels per day to 58 million bpd. And high fuel price act as a tariff, again hurting exporters. We have already discussed that factories near Hong Kong are being shuttered at a rapid pace, and this is before the expected post-Olympics slowdown.

    Similarly, the strain on food prices is due to biofuels, increased consumption of meat in third world, and poor harvests in Australia, have put pressure on foodstuffs. Biofuels subsidies may get undone (one can only hope) and similarly, higher food costs will have us all, not just people in developing countries, being more sparing of our meat consumption. A near-global slowdown will intensify that trend.

    And there is the bigger question of whether we really have reached a crisis of capitalism, whether a system whose raison d'etre is growth and increasing standards, can adapt to a world of resource constraints. The optimists at the Milken Institute Global Conference felt that technology would provide and answer. But new technologies take time to be developed and implemented, particularly on a broad scale, while the needs appear urgent.

    From Bloomberg:

    Count Hong Kong real-estate mogul Ronnie Chan firmly among those who think Japan's 1990s experience is highly instructive. The reason: Lost decades may become the rule, not the exception.

    ``What if the lost decade in Japan becomes the global norm?'' Chan, chairman of Hang Lung Properties Ltd., said at the Asia Innovation Initiative conference in Fukuoka, Japan, on July 8. ``Can you imagine that? Perhaps we should. Perhaps people should get used to slower growth, or no growth.''

    It's not that Chan, who runs Hong Kong's fourth-largest real-estate development company by market value, is a pessimist. Property developers don't often relish 10 years of lost growth here and 10 years of declining asset values there. Chan sees a rare confluence of economic and demographic trends that bode poorly for a global rebound.

    No one should be surprised by the rapid pace of economic expansion after World War II.... It began from a low base, following the devastation of economies in Europe and parts of Asia. Next came rapid population growth and a boom in innovation. Then there were new social and institutional paradigms as democracy spread and organizations such as the United Nations and the World Bank offered support.

    Today, the picture looks vastly different. As everyone tries to stabilize growth, things are hardly at a low base. Population growth is fueling demand for commodities, driving up inflation and increasing poverty rates. Innovation may slow as investment dries up. And institutions such as the International Monetary Fund hardly seem up to today's challenges.

    Oddly, one of Asia's potential failures is democracy, Chan says. It simply isn't proving to be the panacea that leaders in the U.S. and Europe promised. Poverty rates remain stubbornly high in many Asian democracies, and so does corruption. The former is often a result of the latter.

    It's certainly not that democracy is bad. Yet there's something to be said about what Chan calls ``premature democratization'' in Asia.

    Elections matter only when nations build strong institutions such as independent courts, ministries, a free press, credible central banks and ample systems of checks and balances. Their absence means many governments don't operate as transparently or successfully as expected.
    Yves here. That is not a trivial point. My Communist college roommates would remind me that Russia and China were the only economies to industrialize in the 20th century (for the record, I was apolitical then and previously had a someone who appeared in the Ivy League Playboy issue and later a brilliant but highly wound poet as roommies).

    Similarly, Japan with its one party system is not exactly a Western-style democracy. Singapore, an island with just about nothing going for it, and some serious disadvantages at the time of its independence, prospered under a far sighted nation-builder who bordered on being a benevolent dictator, Lee Kwan Yew. Yew in particular was concerned about corruption, and early on created tough watchdog agencies and implemented the policy that top bureaucrats would earn the same level of pay as top private sector professionals, both to make sure the government would attract good people and reduce the incentives to cheat.

    Back to Pesek:
    All this may be a problem for the region as it tries to avoid the worst of the credit-market crisis. Chan wonders if the type of prosperity during the decade before the 1997 Asian crisis will be more unusual in the future.

    ``Those 10 golden years of rapid growth and high returns may well have been an aberration,'' Chan says.

    The combination of surging energy and food prices will challenge economies with political rifts, such as Thailand and Malaysia. Nor does it bode well for high-poverty ones such as Indonesia and the Philippines, or those trying to compete amid China's boom -- South Korea, Singapore and Taiwan, for example.

    Slower growth is absolutely necessary, of course. Economists, including Kenneth Rogoff of Harvard University, argue that accelerating inflation is a clear sign the global economy needs to cool to let commodity supplies and fuel alternatives catch up. Yet a sharp slowdown in Asia may be devastating.

    Take China, which needs to expand about 10 percent annually to raise the living standards of 1.3 billion people. Slowing growth will place dangerous pressure on Asia's second-biggest economy. For a nation at China's level of development, 5 percent growth is essentially a recession...

    Policy makers are merely putting off the inevitable and treating the symptoms of what ails the global economy. If they aren't careful, Japan's experience during the 1990s will become a familiar one.

    ``It's not a scenario many expect for the West or for Asia,'' Chan says. ``But I'm not sure it can be ruled out.''
    Anonymous said...
    I think people confuse Capitalism and Democracy....they are supposed to be two very different things. In America, we have seen democracy effectively vanish. We now operate mostly as capitalists in both economics and politics, and thus have the monied special interests at the top functioning like benevolent dictator without enough benevolence. Ultimately, though, capitalists are nationless (they economic nations unto themselves) and reduce countries to demographic zones.

    July 11, 2008 7:18 AM

     Richard Kline said...
    With regard to the US, I don't think the original question is an either-or. From my perspective of considering long-trend historical analysis, I think it's highly likely that the US will have a 'lost decade' of stagnation and minimal growth that feels more like a decline. Through a generation, we have put off multiple, crucial macro-economic initiatives; now, we will have to implement and pay for them all at once. A real health care system, and it's funding. Affordable higher education that hasn't been for ten years. A complete reconfiguation of public mortgage subsidies. A tax system which supports public expenditure even at the current rates. A prodigiously expensive, unproductive, and unsuccessful military establishment experiencing continuous mission creep at the behest of peabrain politicos of all flavors. A great deal of infrastructure work which has been shriked by deadbeat governments, local and federal. Urban sprawl which will be tremendously costly to either sustain or abandon with permanently doubled or trebled oil prices from the time of their masterplan approval. Failure to meet any of these initiatives only precipitates more stagnation; successfully meeting them requires long-term revenue commitments for which we have neither consensus nor planning. The dollar is not going to recover to its former levels, so our long term costs for imports finished and raw will take a bigger chunk of our discretionary income than we have been accustomed to hitherto. Oh, and we have a colossal amount of existing public debt to fund if not retire. Inflation takes everyone of these problems, inverts it, and makes the ass-end balloon (not pretty). Yadda, yadda, yadda, but look, these things take time to work through, and most of them simply can't be put off another ten years like they have been for thirty.

    The question is whether ten years of stagnation begins with three-five really bad years of implosion. If the powers that be do _really rapid triage_ cutting out the infected capital in the financial system but keeping the banking system as a whole solvent, we may get only three-five crummy years and long and featureless financial plain. If those said powers throw huge public commitments at stupendous private paper losses, we'll blow our powder early and have nothing left to fund the necessary parts of the re-build. Or if the authorities kill our currency, there will be Hell to pay, but the Devil will have to get in line behind all our senior creditors overseas. To this point, it's a near run thing as the public authorities seem so mesmerized on the need to coax bankrupt speculators back in from their window ledges with great wads of public cash that they are leaning toward blowing this thing, badly (when they should slam down and bolt the frickin' window instead and pray for a high wind). Nor can they conceivably save individual mortgage holders from asset price declines; faith based economics just won't serve: those losses are in the pipeline and inevitable, so effort would be better spent on political mitigation. Our present 'leadership' is 1930 level, sold to the system and paralyzed in the headlights, so I think implosion is the more likely experience, if not the certain one.

    However, as the US goes so _does not go_ the rest of the world. I'm going to steer clear of the EU in this monologue. That said, what typically produces growth is demand, and there is tremendous demand starting from a very low base in many, indeed most, 'emerging economies.' Domestic demand in India, China, Vietnam for a few will produce growth if the public authorities there choose to use that ratchet. Whether that growth is 'emergent high' or 'emergent low' it is likely to be positive and substantial because the bar is set lower in these realms. In this respect, the article prompting Yves' post here seems to me off base, and their musings regarding the 'inefficacy of democracy' not at all cogent to the issue of growth (despite what neo-liberals would have us think, but remember Think for Yourself). Taiwan and HK may not see the kind of growth they have through the last twenty years, but China will continue to grow barring massive macrofinancial mismanagement, which doesn't seem in the cards.

    I will add here that in my view _no one_ does genuinely good economic forecasting even five years out, including myself; good in the sense of both substantively accurate, comparable in scale to outcome, and following from anticipated causes. Even though in a rather complex way I have tools for this that others don't which make appropriate historical comparisons possible, I still don't see prediction as readily achievable: too much changes, and too much expected not to change proves ephemeral. Even which is which are very hard to discern from their midst, so hard that efforts to do so are more dependent on luck then perspicacity for their accuracy. So too, then, with this 'ten flat years' suggestion: we do not see the technological innovation, political dislocation, or military provocation which banks a moving trend into a deflection point only potential rather than probable at this instant of observation.

     . . We'll get ten flat years unless we blow a hole in them or build an autogyro for and ascension by another azimuth. Sez I.

    July 11, 2008 7:41 AM

     Richard Kline said...
    A Polish commentator quoted in the media (who and where I cannot recall) several years after 89: "What we wanted was democracy. What we got was capitalism." So as well could seven generations in Western Europe and the United States declaim. I'd have warned the Poles and their neighbors, but I didn't have a soapbox, and they wouldn't have listened anyway . . . .

    July 11, 2008 7:45 AM

    Danny said...
    Sometimes I wonder how we got where we are now, and then I read comments like the first two, and, to some extent, Richard's, and it all makes sense. Who ever thought democracy would be a good idea?

    "Slower growth (i.e. less environmental degradation) and lower living standards in the developed world are to be welcomed but will inevitably hamper our ability to make the transition to a low-carbon economy."

    So, you would rather have humans living in lesser conditions so that the Earth is cleaner? Last time I checked, when civilizations advance, they become wealthy enough to care about the environment, and the cost/benefit analysis of accumulating more wealth versus living in a clean place becomes weighted more and more in favor of clean than in wealth. Green buildings cost more to build, so it takes more wealth to buy or rent a 'green' unit than it does so random rat hole with lead in the paint that is less energy efficient. You should be cheering increasing wealth, especially in places like China, as they are beginning to actually care about the crappy air, because as they become wealthier, they can care about the environment, because putting food on the table isn't the primary issue.

    Back to the whole issue of democracy. We act like democracy wasn't tried before modern times. That it has been the reason why we are all prosperous. That is utter and total nonsense. Anyone who has really gotten into political philosophy knows that the Greeks realized how unstable democracy was, and that it would always lead to its own collapse. Our founding fathers knew this, John Adams even said, "Democracy never lasts long. It soon wastes, exhausts and murders itself. There was never a democracy that did not commit suicide." There are many great books on this subject, but Hoppe has one in particular, 'Democracy: The God that Failed'.

    Those of us who understand political philosophy are watching with amusement as democracy murders itself. The crazy democratic 'solutions' that are going to be proposed and put into place will hasten the self mutilation. At the same time, it is disheartening knowing what the end result will be, lots of pain for the masses, who don't really know any better.

    July 11, 2008 8:22 AM

    b said...
    It's always seemed to me that one obvious factor in Japan's predicament is demographics. Their population is falling, ipso facto demand for housing and many other assets will also fall. This is already occurring in Europe, and even China's population will peak in the next 50 years. Sometime this century, world population will begin declining.

    If population falls 1%, and real growth is flat, people are 1% richer on average. How is that worse than population growth of 1% and real growth of 2% like we have averaged in the US?

    All the navel convoluted analysis about political systems seems fairly silly.

    The big problem I foresee is that our whole economic system can't deal with positive deflation. That's where the Fed made it's mistake in the early 2000s. That deflation was good. If they had raised rates, house prices would have flattened and cars and TVs would have cost less.

    July 11, 2008 9:00 AM

    [Jul 10, 2008] Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs crash

    The housing market has fallen hard but it's not time to buy, no matter what you hear. Depending on where you live it's either time to decide if you can afford not to sell before prices go lower, or grin and bear it as prices fall farther. The choice depends on your likely future employment prospects and where you live.

    ... ... ...

    Professional traders use the term "catch a falling knife" to refer to the misguided over-eager trader who jumps into a crashing market to buy what he or she believes are distressed assets only to find that the descent was only starting. Just like the tech stock trader who bought stocks in December 2000 after the NASDAQ plunged nearly 50% from its apex, but before the market collapsed the rest of the way down to 1172 in 2002, if you buy a home today you can expect significant additional price declines. But you would not know it by reading Ben Stein.

    [Jul 10, 2008] 10-Year Treasuries Little Changed After Lower TIPS Sale Demand By Sandra Hernandez and Cordell Eddings

    The 10-year note yielded 3.81 percent at 4:25 p.m. in New York, according to BGCantor Market Data. It touched 3.78 percent, the lowest since May 21. The price of the 3.875 percent security due in May 2018 was little changed at 100 17/32. The two-year note's yield increased 3 basis points to 2.42 percent.

    The Treasury Department's quarterly sale of 10-year TIPS drew a yield of 1.485 percent, above the average forecast of 1.4498 percent of nine bond-trading firms in a Bloomberg News survey. Ten-year TIPS yielded 2.47 percentage points less than regular Treasuries, the narrowest gap in almost three weeks. The gap, known as the breakeven rate, indicates the inflation rate traders expect over the life of the securities.

    [Jul 08, 2008] Oil price shock means China is at risk of blowing up By Ambrose Evans-Pritchard

    Peak Oil is real, and it isn't going away.  Already trans-ocean transportation costs became prohibitive and in many cases they reversed or close to reserved the benefits of outsourcing. Rise in oil prices has gutted the profitability of the Asian trade model for everything but high-value goods (solar panels, semiconductors, etc.)  But the transformation of world economy to "post peak oil" situation justp with growing demand and long term price will probably increase from current level.  In any case there is no viable substitute for oil... Solar energy is too tiny and biofuels are both tiny and affect fool production (with possible exception of Brazil ethanol).

    The great oil shock of 2008 is bad enough for us. It poses a mortal threat to the whole economic strategy of emerging Asia.

    The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. At a stroke, the trade model looks obsolete.

    No surprise that Shanghai's bourse is down 56pc since October, one of the world's most spectacular bear markets in half a century.

    Asia's intra-trade model is a Ricardian network where goods are shipped in a criss-cross pattern to exploit comparative advantage. Profit margins are wafer-thin.

    Products are sent to China for final assembly, then shipped again to Western markets. The snag is obvious. The cost of a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded.

    "The monumental energy price increases will be a 'game-changer' for Asia," said Stephen Jen, currency chief at Morgan Stanley. The region's trade model is about to be "stress-tested".

    Energy subsidies have disguised the damage. China has held down electricity prices, though global coal costs have tripled since early 2007. Loss-making industries are being propped up. This merely delays trouble.

    "The true impact of the shock will only be revealed over time, as subsidies are gradually rolled back," he said. Last week, China raised internal rail freight rates by 17pc.

    BP 's Statistical Review says China's use of energy per unit of gross domestic product is three times that of the US, five times Japan's, and eight times Britain's.

    China's factories "were not built with current energy levels in mind", said Mr Jen. The outcome will be "non-linear". My translation: China is at risk of blowing up.

    Any low-tech product shipped in bulk - furniture, say, or shoes - is facing the ever-rising tariff of high freight costs. The Asian outsourcing game is over, says CIBC World Markets. "It's not just about labour costs any more: distance costs money," says chief economist Jeff Rubin.

    [Jul 9, 2008] 'Inflationistas' Coming Around

    Financial Armageddon

    Based on the following post, "Confessions of a Former Inflationist," by Global Economic Trend Analysis publisher Mike "Mish" Shedlock (who is also in the deflationist camp), it looks like at least a few of the "inflationistas" are starting to come around.

    I recently received an Email from "RS", a long time member of the hyperinflation is coming crowd now but now sees things in a different light. Let's tune in and see what "RS" has to say.

    Mish, I was a true believer in the "hyperinflation is coming" theory for quite some time. However, I have since changed my mind. Here’s why: I own a computer business and I used to pay techs $15-20/hr. I now have people willing to work for $8-$10/hr. While the nice guy inside is saying “pay people well” the businessman is saying “market conditions demand paying people what the market will support.”

    Recently I have had to offer price discounts to obtain new business. Some contracts I picked up were for around 1/3 of my standard fees. I have cut costs to the point where they can be cut no further if I am to maintain my debt obligations. I am now at the point where my options are to work more hours for less money or “exploit” the labor market. Considering that I am already working 80-90 hour, there was no choice.

    I just interviewed a single man nearing retirement age with a young daughter a couple years older than mine. He is not only willing, but trying to hide the fact that he’s DESPERATE to work for $8-10/hr. I might be able to afford to pay him $12/hr today, but with what’s coming over the horizon, wisdom dictates paying him $8 and using the difference to lessen debt obligations as quickly as possible. That would lower my costs for when the available business gets even tighter, leaving me in a stronger position to bid and win, and helping make sure he’ll still have a job in 12+ months.

    As it seems to me, high debt load, plus rising product prices, plus deflation’s hit is painfully powerful. I’m confident from reading your articles that it’s only going to get worse.


    [Jul 9, 2008] Free Preview - WSJ.comCaught in Capitulation Catch-22 by David Gaffen

    There might be no such thing as 'capitulation'. It look like an artificial concept that is somewhat reflect change of psychology and investor sentiment that are visible only in retrospect. 
    The selloff that sent major indexes into bear-market territory has some investors awaiting the "capitulation" moment that signals it's time to dive back into stocks.

    It often seems like investors are looking for a road sign emblazoned "Capitulation: Three Miles." But capitulation is one of those market paradoxes -- it can't really be quantified until those most eagerly awaiting it are themselves frightened out of the market.

    "You have to picture someone on the deck of a battleship handing over a sword to an enemy, not this 'Hey, the market's a little tough, but I think we can get a trade on the long side' stuff," says Barry Ritholtz, director of equity research at Fusion IQ.

    Not all signs of this vaunted event are anecdotal or ephemeral. Analysts say there are a few hard numbers that would indicate a selloff has reached a crescendo."

    [Jul 9, 2008] Foreign Policy In Focus End of the Petroleum Age

    More and more, the evidence suggests that this is not just a temporary crisis. It is the beginning of the end of the Petroleum Age.

    How do we know that the Petroleum Age is drawing to a close? Two key indicators tell us that this is so. First, many of the giant fields that have satisfied our massive thirst over so many years are experiencing diminished output. Second, although the major oil producers are spending more money each year to discover new reserves, they are finding less and less oil. Either of these factors by itself is cause for significant worry; the combination is deadly. discoveries may add one or two million barrels of oil per day to existing output in 2015 and beyond, but by that point output from existing fields is likely to be considerably lower than it is today. Nobody can predict exactly where combined worldwide production will stand at that time. But more and more analysts are coming to the conclusion that the output of conventional (i.e., liquid) petroleum will peak at about 95 million barrels per day in the 2010-2012 time-frame and then begin an irreversible decline. The addition of a few million added barrels from Kashagan or Tupi will not alter this trend.

    ...none of this can stop the inevitable closing of the Petroleum Age.

    Some say that any palliative is worth the expense as we head toward certain disaster. But this is not a logical response. Knowing that the age of petroleum is drawing to a close, it is far better to devote our talents and investment dollars on hastening the arrival of its successor, rather than prolonging the agony of oil’s decline.

    At this point, we cannot be absolute certain of the dominant energy source of the post-petroleum era. Will it be the Solar Age or the Biofuels Age or the Hydrogen Age? But we do know that it will revolve around some constellation of renewable, climate-friendly, domestically-produced supplies. From now on, America’s top priority in the energy field must be to explore all potential components of this new energy future and move swiftly to develop those with the greatest promise.

    [Jul 9, 2008] Greed and dogma fertilize food crisis  By Sameer Dossani

    Jul 9, 2008 | (originally at Foreign Policy in Focus - A Think Tank Without Walls)

    Soaring food prices reflect the transformation of agriculture from a primarily local activity to a global business. When agricultural policy is made by international financial institutions with market fundamentalist policies and by big agribusiness whose primary concern is their own bottom line, it is a recipe for disaster

    ... ... ...

    ...As Chuck Prince, head of Citigroup at the time, famously stated, "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance."

    That's a deeply troubling attitude. The willingness of investors and companies to go along with speculative bubbles and the prevalence of a huge amount of speculative capital in the global economy generally may have grave implications. These conditions suggest that the bubbles may not be the disease in themselves, but the symptoms of something much deeper. The market may be so based on speculation, and speculative investors have such a tendency to herd together, that we are in a chronic bubble economy. The economic bubble of the day may change - "emerging markets" bonds one day, tech stocks the next, and home mortgages the day after that - but the presence of a bubble may be ubiquitous.

    Using this hypothesis, the food crisis becomes a little easier to understand. Commodities, including food, are seen as relatively safe investments. One can imagine situations where most of the world's population stop buying houses or computers, but it's hard to stop buying food. The World Bank and the International Monetary Fund (IMF) have pushed for the deregulation of trade in agriculture, and therefore it is much easier today for the private sector to invest in a global food market. Once big investors and analysts begin to act as though food commodities are a safe bet, the herd mentality kicks in, more and more investors join the fray and eventually you have an over-inflated food market in the same way as you had an over-inflated mortgage market.

    [Jul 9, 2008] Maybe China is a typical creditor after all by bsetser

     July 9th, 2008 | Brad Setser Follow the Money

    Creditors through the ages haven’t liked to take policy advice from debtors. They generally tend to think that borrowers should listen to the advice offered by those lending them money. And they often think debtors fail to pay sufficient attention to the concerns of their creditors when formulating economic policies.

    Sound familiar?

    China believes that the US hasn’t paid enough attention to the dollar’s value. That isn’t exactly news. Wen more or less said as much in November. Nor should any American be surprised that China no longer the US financial sector offers the best model for the future development of China’s own financial sector. Securitizing risky mortgages loans into complicated financial structures no longer looks like the highest stage of financial evolution.

    But I was still struck by Edward Wong’s front page New York Times article several weeks ago. It highlighted China’s new assertiveness — and China’s increased willingness to criticize US economic policies.

    Steven Weisman’s C section article that followed the completion of the Strategic Economic Dialogue wasn’t that different than Edward Wong’s big front page story. The governor of China’s central bank now argues that China needs to learn from the United States’ mistakes as well as its successes. Clever rhetoric. Those who think that the United States needs to learn from its own recent mistakes would have trouble disagreeing with Mr. Zhou.

    These articles raise some fundamental issues about how China’s economic and financial relationship with the US will evolve. Right now China has lent — according to the US data — about $1.1 trillion of its savings to the US. Realistically, it has lent a bit more — let’s say $1.3 trillion. The US data tends to undercount Chinese holdings of US assets.

    That is a large sum by any measure — it is roughly 10% of US GDP, and it is more like 30% of China’s GDP. given the extraordinary pace of growth in China’s foreign assets — and its large current account surplus — China’s financial exposure to the US is set to increase rapidly.

    Many — see Gideon Rachman as well as the FT’s Alphaville — have argued that the growth in financial interdependence between the US and China will reduce political tension between the two. China has a large and growing financial stake in the US economy; the US relies on Chinese financing. Their economic interests consequently largely converge.

    I was never fully convinced by this line of argument. The United States and Latin America were financially intertwined for much of the twentieth century. That didn’t mean that the US and Latin American countries always saw eye to eye. Latin debtors and their American creditors often had different interests. That created conflict, or at least tension, in the United States’ relationship with Latin America.

    This is true more generally: creditors and debtors often have conflicting interests.

    For example, China would like to see the US place more of a priority on maintaining the dollar’s external value — and thus the value of China’s large dollar holdings. That is code for higher US rates. Higher US rates would also make the PBoC’s life easier by reducing the incentive to sell dollars and buy RMB. Falling US rates have combined with the RMB’s appreciation against the dollar to pull huge sums of hot money into China.

    The US would prefer to direct US monetary policy at stabilizing the domestic US economy rather than stabilizing the dollar’s external value.

    Other areas of potential conflict also aren’t hard to see. The US may believe that China’s institutions for managing its governments external investments should converge with US norms for managing public money (think the norms governing state pension funds or Alaska’s permanent fund). China may prefer to develop its own institutions for managing its external investments — institutions that, for example, may be more inclined to support state firms as national champions than comparable pools of public money in the US.

    The US might change its domestic financial regulations in ways that reduce the value of Chinese investments in US financial institutions. Or it could refuse to bailout a bank or broker dealer that China has invested in. CITIC, remember, came close to buying a small stake in Bear Stearns.

    Or China may simply want to buy assets that the US doesn’t believe China’s government should own.

    China’s policy makers face a particularly difficult challenge. They have invested an enormous share of China’s savings in low-yielding, fairly long-term, dollar-denominated bonds. The value of those bonds — expressed in RMB — is likely to fall over time. Those losses are the cost of subsidizing China’s exports. They were baked in, so to speak, when China decided to hold its currency down and thus overpay for US financial assets.

    As Dean Baker noted a while back, Chinese policy makers knew full well that they were taking on the risk of huge (paper) losses when they bought so many dollars. They effectively choose to take large financial losses rather than allow the RMB to appreciate to its market value.

    But it isn’t at all clear that China’s public expects to get hit with the (deferred) bill for the last six years or so of export subsidies — and is willing to swallow the huge losses that will be revealed as China lets its currency appreciate relative to the dollar and euro. We can debate whether or not these losses are real or not some other time. Central banks can operate with negative capital, so China doesn’t need to issue bonds to recapitalize its central banks and “realize” the loss any time soon. But it seems clear — at least to me — that there is an opportunity cost associated with using the funds raised by issuing RMB bonds to buy depreciating dollars rather than make domestic investments. And for that matter an opportunity cost associated with holding large government deposits at the central bank (rather than spending those funds at home) to help sterilize rapid reserve growth.

    When those losses are realized, there will be a strong temptation for China’s policy makers to argue that the losses reflect bad US economic policy — not bad Chinese currency policy. That worries me.

    There are many ironies in the current situation.

    The US still acts more like a typical creditor than a typical debtor.* It believes other countries should adopt its economic model to succeed. But if China adopted the US practice of allowing its currency to float, the US might lose access to the financing that allows it to sustain large deficits at low cost. Even analysts — like me — who believe adjustment is essential don’t want it to happen over night.

    China increasingly argues that other countries should emulate its own economic policy mix. Yet it isn’t clear that it really wants the rest of the world to model all their policies on China’s own policies. If the US adopted China’s restrictive policies toward foreign portfolio investment or China’s policy of limiting foreign firms ability to take over existing Chinese firms (as opposed to making greenfield investments), China’s government would face serious limits on the kind of US assets it could buy …

    * In some ways, the US is a creditor. It has a large accumulated stock of foreign assets - and many Americans want the opportunity to trade some of their stock of existing US assets for assets abroad. In that way, it has much different interests than many other big debtors. But it unquestionably is a big global borrower too.

    [Jul 9, 2008] A Disgrace? by Dean Baker

    Jul 9, 2008 | Economist's View

    Dean Baker:

    For folks not familiar with Social Security, it is the country's biggest social program. It costs over $600 billion a year (20 percent of the federal budget) and has 50 million beneficiaries.

    At a forum on Monday, after wrongly claiming that Social Security won't be there when young workers retire, McCain went on to say:

    "Americans have got to understand that we are paying present-day retirees with the taxes paid by young workers in America today. And that's a disgrace. It's an absolute disgrace, and it's got to be fixed." [Transcript available from Congressional Quarterly]

    Of course present-day retirees have always been paid their benefits from the taxes paid by current workers. That has been true from Social Security's inception.

    Some folks might have thought Senator McCain's description of Social Security as a "disgrace" was worth a mention somewhere in the media, but the NYT, Washington Post, WSJ, and USA Today don't seem to have noticed. It's not like he said "bitter."


    I was watching CSPAN yesterday, while I was eating dinner, and who should I see but John McCain. And he said the most extraordinary thing. It's the second paragraph of the excerpt that follows; I've included the rest so that you can see that there was no context that made it seem more reasonable...

    Let me repeat the astonishing bit: "Americans have got to understand that we are paying present-day retirees with the taxes paid by young workers in America today. And that's a disgrace. It's an absolute disgrace, and it's got to be fixed."

    The fact that we are paying present-day retirees with the taxes paid by workers, young or otherwise, is not a disgrace, or a scandal, or a new development. Social Security has been funded this way since its inception.  ... This is not a disgrace; it's the way the system operates. And it's certainly not a sign that we've mortgaged our children's futures, or that something has to be fixed.

    One interpretation of this statement would be that McCain is being deceptive: trying to make a straightforward feature of Social Security seem like a scary new problem, in order to gin up support for his nonexistent plans to fix it. I tend to think that he just doesn't know how Social Security works. (This would explain why he doesn't see the problem with privatizing the system: the need to pay a generation's worth of transition costs.) However, it doesn't really matter which explanation is right: either one ought to be close to disqualifying. ...

    More hilzoy:

    Just one day after releasing an economic plan (pdf) that said that "John McCain supports supplementing the current Social Security system with personal accounts" (p. 5), McCain repeated his earlier claim that "I want young workers to be able to, if they choose, to take part of their own money, which is their taxes, and put it in an account which has their name on it."

    Supplementing Social Security with private accounts is one thing. Allowing workers to divert their FICA taxes into private accounts is another. The first just gives workers more options; the second guts Social Security's funding. These are very, very different proposals. Unfortunately, McCain doesn't seem to understand the difference, perhaps because he doesn't understand how Social Security works.

    And there's this:

    Now, before you think, "Wow, that must be a slip of the tongue, he can't possibly mean that," please note that McCain said essentially the same thing to John Roberts on CNN this morning. ...

    This is not the first time that McCain has hinted that he will follow in Bush's Social-Security-dismantling footsteps. In a Wall Street Journal interview published in March, he made his intentions explicit:

    "I'm totally in favor of personal savings accounts," [McCain] says. When reminded that his Web site says something different, he says he will change the Web site. (As of Sunday night, he hadn't.) "As part of Social Security reform, I believe that private savings accounts are a part of it—along the lines that President Bush proposed.

    (Months later, McCain still hasn't changed his website.)

    Does McCain really think he can get away with having two different Social Security plans? Well, as ThinkProgress has pointed out, McCain was denying his history of supporting private accounts just last month. It seems he just can't make up his mind. But perhaps having two different positions makes political sense—especially if one of them has already failed.

    It's becoming clear that McCain simply reads what's on the cards (and not very well), but he really doesn't get the finer details of policy and is thus susceptible to confusion, misdiagnosis, and to bad suggestions from those around him. Haven't we had enough of that over the last seven and a half years?

    [Jul 8, 2008] Robert Reich's Blog Why Most Who Lose Their Jobs Don't Get Unemployment Benefits by Robert Reich

    Meanwhile, full-time jobs are vanishing. More companies are contracting out their work. As a result, more people are doing several part-time jobs, or are self employed. They’re also more likely to be part of a couple whose family depends on two sets of paychecks.

    So when times get tough, as they are now -- and people lose a job after having it for only a few years or lose their part-time job or lose their client, or one member of a couple loses earnings -- a family can be in real trouble. And there are no unemployment benefits, not even partial benefits based on the proportional loss of income from a part-time job, to help them. Or to help counter-balance the economy as a whole.

    It’s a disgrace that most Americans who lose their jobs don’t qualify for unemployment insurance. It's also bad for the economy because unemployment insurance is less effective as a counter-cyclical device. Congress should expand coverage (condition federal UI funding of states) so a majority of American families have some security in these perilous times.


     Cameron Mulder said...
    This post has been removed by the author.
    1:55 PM  
     Cameron Mulder said...
    Is there any collected work on what government policy should be in a Post-industrial economy.

    Many of the issues we face today in regards to healthcare, unemployment, welfare, and even housing appear to have roots in how the economy worked in 1950 and various government incentives created to support that structure.

    Now that people change jobs and living location so much faster then before. What needs to change to not just support the new economic order, but also to deal with the issues of inequality and macroeconomic stability.
    1:56 PM  
    Anonymous said...
    Corporations should get tax breaks for creating jobs and tax increases for when reducing jobs.
    We are Americans before we are shareholders.
    We need to build a livable society that has some sense of fairness and is guided by morality.
    People want good jobs, they don't really want benefit programs. That is what's wrong with the republicans conservative mentality.

    [Jul 6, 2008] How The Bubble Bursts

    We’re seeing formerly powerful financial institutions destroyed by even these first stages of deflation. That’s because their only power came from franchise - from being able to take out high-risk spreads. So they actually had very little capital to support vast amounts of debt when things began to sour.

    High risk has been rewarded in the past by government (easy monetary policy), legislation (the repeal of Glass-Steagall, now clearly a mistake), and the markets (the Wall Street marketing machine). Those rewards fall away quickly when you see that you have built your house built on sand.

    For decades, but especially over the last seven years, central banks have “solved” any and all market dips, slowing economies, and financial problems by creating debt. If the stock market declines, just make it easy to borrow, so people can buy stocks. If the economy slows, just make it easy to borrow, so people can consume more. This methodology may work on occasion, but doing it systematically leads to crisis.

    Central banks can’t fix this problem: They can only create more banking debt or transfer its risks onto taxpayers via TAF auctions or nationalization - which will only stabilize the banking system long enough for banks to dilute themselves massively by suckering investors into buying stock. More debt isn’t the solution.

    So stay the course. Stay out of the way. Bottom feeders keep coming up empty. There will be rallies in stocks. Some will be quite vicious, but that doesn’t mean we’re in a bull market. The GDP’s going to go way down, but will eventually come back when debt is wiped out to a point where those with savings want to lend or invest again.

    We have a long way to go, though - and risk is high.


    Robert Dresser

    It is nice to know that there is at least one other person out there that recognizes how foolish policy makers were to repeal the Glass-Steagall Act. I noted how it was contributing to earlier scandals (e.g., Enron) in talks I gave at that time. I really didn't think anyone else would recognize the importance of keeping investment banking and commercial banking regulatorily separate. Oh, to have not had the "free market" fools run monetary and microeconomic policy these past twenty-five years!

    Richard Monihan

    Seems to me pessimism is high. This can feed on itself and create the situation by which deflation and long term suffering become widespread.

    This isn't to say optimism itself will save the day. However, while there is massive debt that needs to be washed out of the system, a great portion already has been washed out. Is there more to go?

    Of course. Debt is the engine that drives every economy...debt is what we borrow against the belief that this borrowing will yield a greater return in the long run.

    If that debt becomes too great, the yield won't materialize. That is the situation some of these individuals/firms led themselves to reach.
    But, at some point, that yield WILL materialize for many who have longer views and/or took out debt earlier (or have been good at paying it off). At that point, other distressed properties begin to look very, very good again.

    The Fed is not an evil conspirator in a game of beggaring the population. That is not its goal, whether you choose to believe it or not. It certainly does not have unlimited tools to prevent all manner of crises, either (neither does a gold-based currency, either, by the way).

    However, the REAL problem that leads to deflation is expectations. It is the guy next to you who sees the market decline 10% in a week and he feels that he has to get out before it goes further. If he's the only one who does so, then he more than likely will lose out on the rally that follows.
    If there are 20 of him, and they have alot invested, then they create further declines because their expectations fell.

    If, on the other hand, most of these investors choose to hold, or at least leave slowly in bits and pieces, then the declines will be less severe and eventually things will even out.

    Markets move on the back of many different bits of information and inputs. Lowering interest rates tends to drive up stock prices, but the opposited occurred in the 90's, when raising interest rates coincided with a rising sometimes other factors come into play.

    Right now, there are many factors in play. But the largest, and most distressing, is the doom and gloom factor of expectations.

    I have had conversations with many friends who are absolutely in fear of the "bad times ahead". I have pointed out to them that times are only bad if you choose to let them be, and are unprepared. Just saying they are going to be bad will make them bad, it doesn't prepare you.

    I, on the other hand, remain cautiously optimistic. I am not going to be investing, but I'm not selling either. I will take my lumps if a downturn arrives, because the upside that follows will be significant and wonderful, and I won't have to worry about timing it.

    I am prepared for bad times, but being prepared for them doesn't mean I have to expect them or even act like they will be bad.

    It's all about attitude. I've survived before, I'll do it again. Any of you who, like me, lived through the 70's know what I'm talking about. Will this be worse? I doubt it. Could be if the doom and gloomers take over, though.

    I choose not to let them. In the end, pessimists lose, pollyannas lose, but optimists win.

    [Jul 6, 2008] Trade Deficit Forecast to Have Widened (And Ruminations on a Possible Tipping Point)

    I may be wrong, but I think there is an increasing, inchoate sense that we are on the verge of a tipping point (I see (Duy's urgent need to post on vacation as an indicator). I probably can't speak for other gloomsters, but even though I have long thought It Would All End Badly, I still get a sinking feeling when I look over the cliff and see how far down down might be. While I see lots of reasons to expect terrible outcomes, part of me reminds myself that we have muddled through disasters somehow and typically managed to avoid the worst. But can we assume this time won't be different?

    And when we have triggers, like big declines in the stock market, that sense of peril is worse (and mind you, I am positioned to profit from that sort of day!). But as more people start to look over that cliff into the chasm that I have studied from time to time, I think more and more of the public at large is getting a sense of how far the fall might be. And most people are constitutional optimists, so that line of thinking is probably more upsetting to them than to folk like me.

    I may be placing too much faith in that collective barormeter of animal spirits, the stock market. Normally, after a month as bad as June, you'd expect some sort of reversion (indeed, Barry Ritholtz has called for one). And last week may have been distorted by the July 4 holiday. But looking at the trading in the US, several attempts to rally (admittedly some on dubious pretenses, but what's new about that?) petered out.

    I am wondering whether investors are too shell-shocked to get out at current levels and are looking for a rally either to sell into or to validate a decision to stand pat. If an upward move looked to have any sign of conviction, some would revert to form and start bottom fishing. But I wonder what happens if another bear market bounce is not forthcoming.


    Anonymous said...
    I realize that the price of oil has been increasing, but then, so has the price of wheat, soybeans, and corn, major American exports.

    While oil pricing plays a major role in American import deficits, the increase in exports due to rising grain prices is simply glossed over.

    The trade numbers are likely to be really, really bad - reflecting the reality of a transformation over a generation in which Americans have proudly turned themselves into a nation of consumers.
    Richard Kline said...
    I will be interested to see if US exports changed meaningful, particularly exports ex grains and distillates. The only reason for meager optimism in the last year has been the economic prop of increased exports; if that falters there's . . . nothing. Well, except _prayer_, but that's a given. : )

    I fully expect to see a DOW 7000 in the present cycle. More likely in 09, but I'm no expert caller or pretend to be. I've wondered whether we would have a crash scenario, but my sense looking at the declines over the last eight months or so is more that we will have a steady grind down to November, 100 points here, 250 there. Equity holders just don't _want_ to get out, they can't believe that the stock market wealth machine is running seriously in reverse, so there is no incentive for them to sell; instead they hold on to hope. That's the story of the last six months, and for reasons of my own I consider it yesterday's chart as of 1 July. There is nowhere to go but down, really.
    William W. Wexler said...
    It seems to me that there are many conflicting forces working against each other to create chaos and shear. These forces will release on the weakest part of the container, which is the bottom 80% of the population.

    I agree with the assertion that as energy costs increase, companies will cut back on jobs and equipment purchases. Pressure from low price imports on the one hand, increased manufacturing costs on the other... who gets the squeeze? Always the bottom, never the top.

    Vehicle fuel costs are so high now that consumers are having to choose what to let go of next. In far too many cases it's been solvency, as people leverage themselves into precarious debt loads with credit cards and second mortgages hoping and assuming that something's got to give. The standard of living down here in the streets is diving like a Kamikaze. Unemployed on COBRA are sitting on a ticking time bomb waiting for their health insurance to expire and their already absurd premiums to explode. The steady effort to cut away the social safety nets and bankruptcy protection since Reagan are about to become front page news.

    [Jul 5, 2008] American Energy Policy, Asleep at the Spigot
    Even as politicians heatedly debate opening new regions to drilling, corralling energy speculators, or starting an Apollo-like effort to find renewable energy supplies, analysts say the real source of the problem is closer to home. In fact, it’s parked in our driveways.

    Nearly 70 percent of the 21 million barrels of oil the United States consumes every day goes for transportation, with the bulk of that burned by individual drivers, according to the National Commission on Energy Policy, a bipartisan research group that advises Congress.

    SO despite the fierce debate over what’s behind the recent spike in prices, no one differs on what’s really responsible for all that underlying demand here for black gold: the automobile, fueled not only by gasoline but also by Americans’ famous propensity for voracious consumption.

    To be sure, the American appetite for crude oil is only one reason for the recent price surge. But the country’s dependence on imported oil has only kept growing in recent years, undermining the trade balance and putting an added strain on global supplies.

    Although the road to $4 gasoline and increased oil dependence has been paved in places like Detroit, Houston and Riyadh, it runs through Washington as well, where policy makers have let the problem make lengthy pit stops.

    “Much of what we’re seeing today could have been prevented or ameliorated had we chosen to act differently,” says Pete V. Domenici, the ranking Republican member of the Senate Energy and Natural Resources Committee and a 36-year veteran of the Senate. “It was a bipartisan failure to act.”

    Mike Jackson, the chief executive of AutoNation, the country’s biggest automobile retailer, is even more blunt. “It was totally preventable,” he says, anger creeping into his affable car-salesman’s pitch.

    The speed at which gas prices are climbing is forcing a seismic change in long-held American habits, from car-buying to commuting. Last week, Ford Motor reported that S.U.V. sales were down 55 percent from a year ago, while demand for its full-size F-series pickup, a gas guzzler that was the country’s best-selling vehicle for 26 consecutive years, is off 40 percent. The only Ford model to show a sales increase was the midsized Fusion. A Ford spokeswoman says the market shift is “totally unprecedented and faster than anything we’ve ever seen.”

    If the latest rise in oil prices isn’t just another spike — like those of the 1970s and 1980s — but is instead a fundamental repricing of the commodity responsible for much of modern American life, the impact of that change will affect everyone from home builders and homeowners in exurbs to corporate leaders, landlords and commuters in cities.

    ... ... ...

    A much more effective approach would be to simply raise taxes on gasoline, Mr. Dingell says, because higher prices are the easiest way to change buying habits. Some Europeans agree with this, noting that policy changes engineered through taxation can alter consumer choices without impeding economic growth.

    Consumers overseas might not like higher taxes on gasoline, but they’ve adapted, says Jeroen van der Veer, chief executive of Royal Dutch Shell, the European energy giant. “A society can work, can function and can grow even at higher fuel prices,” he says. “It’s a way of life — you get used to it.”

    [Jul 5, 2008] The Mortgage Lender Implode-O-Meter News Pick-ups Debate Over It's Hyperinflation (and US  Economic Collapse)

    Jun 30, 2008 |

    As far as I am concerned, the "inflation vs. deflation" debate is over: we are already at hyperinflation -- even though certain markets and measures of credit exhibit deflation. If you want to quibble about the definition (how "hyper" the inflation actually is), go somewhere else: my point is that we have embarked on the path from which there is likely to be no return, given the way the system works. And the real kicker is: in response to the crisis, the system hasn't changed.

    The big glaring data point backing this argument is oil prices. Oil prices in 2008 have shocked everyone, literally everyone, including me -- and that's saying a lot since I'm a "peak oiler," and already believed high and increasing rates of inflation were in the cards for purely monetary reasons.

    [Jun 5, 2008] William Poole - "The Fed Wants To Create Inflation"


    Isn´t is amazing that just a few days after leaving the Fed Bill Poole is speaking out what the real agenda of the Fed is...... The interview in the FAZ ( one of the most respected German newspapers ) covers lots of others topics like the $, China, commodities, real estate etc but the following quote stands out.

    "Historically inflation is one tool to take pressure away from borrowers. The Fed´s policy is to create inflation to relieve the stress. The Fed was and will be "easy" as long as the economic situation and the health of the financial institutions have stabilized/improved "

    "Easy as long...." LOL! They are trying always to be easy and keep the ponzi game going. I urge you to read How The Bubble Bursts from Mr. Practical via Minyanville for a nice summary how this will end and why Bernanke & Co will fail this time.

    On top of this i have found one of the better rants i´ve seen during the past quarter. This comes from Aaron Krowne and fits perfectly to the topic. Debate Over: It's Hyperinflation (and US Economic Collapse) .It´s also gives a different viewpoint on the inflation/deflation debate.

    [Jun 5, 2008] Strike! by Sam Jones

    "The shift from equity to bonds is continuing “unabated” notes Citi’s European equity strategy team "
    Jul 04 |

    Did you need any more evidence of a tough few months ahead for equities? How about these lines, from Citi:

    There’s a buyers strike on. The shift from equity to bonds is continuing “unabated” notes Citi’s European equity strategy team - with institutional and retail investors pulling out at an alarming rate. Take, for example, the sucking vacuum at the mutual funds left by fleeing consumers:

    Retail investors began selling down holdings of equities almost as soon as fears over sub-prime mortgages took hold in early 2007. They have been sellers of equities for 15 consecutive months.

    [Jun 5, 2008] naked capitalism Hoisted From Comments Has Neo-Liberalism Failed to Deliver the Goods

    From Juan, in response to a comment in italics by reader DownSouth:

    The one place I might disagree with you is to the question as to what high oil prices represent. Are they a further manifestation of market fundamentalism run amok? Or are they the antithesis of this, a refusal by non-OECD countries to participate in a market system that demands natural resources and agricultural products on the cheap?

    If price of oils was determined by cost of production/supply/demand rather than trade in financial instruments, I would place more weight on 'refusal to participate'. As it's developed since 1987, it strikes me that the producing nations and major integrated oilcos' abilities to move price has been substantially diminished.

    Neo-liberal market fundamentalisms include financial opening and deregulation which, in different forms, were applied on a world scale right along with the theft of public goods through privatizations, et cet -- a 'grand' global looting had been unleashed in a (partially directed) effort to overcome systemic crisis.

    Here let me repeat something which I wrote elsewhere three months ago:

    Between 1965 and 1973, the U.S. manufacturing sector's rate of profit fell by 40%, a decline that worsened with the 1974-5 recession, was hit again by the severe early 80's slump, began recovering in the 1990s but peaked in 1997, falling into 2003 since which there has been some rise but - in all cases over the last decades - never to pre-1965-73 levels.

    Andrew Glyn considered the world to have been "suddenly projected from boom to crisis” with the first phase of above.

    The failure of political Keynesianism, and then monetarist policies to ressurect rate of profit dovetailed with a 'we don't know what to do so lets try 19th c laissez-faire on a world scale' set of policies demanded by the U.S., given voice by Reagan and Thatcher in her famous statement: 'There Is No Alternative [to a worldwide free market]', or TINA.

    Borders to capital flow in all its manifestations had to be everywhere broken; state owned industries had to be privatized; poor fiscal management had to be tightened and almost everywhere on the backs of the working class and poor as needed social services were cut and cut again. Debt payments, no matter how great a percentage of export earnings, had to be made if a government were to expect future access to IMF and World Bank funds.

    Neoclassical economists and their theories provided ideological justification; a sort of 'we are all neoliberals now' attitude infected world leaders until, in 1989, John Williamson coined the term 'Washington Consensus', which was very much not the consensus of those most subject to the various 'shock therapies'.

    So, how did the world do under this set of misguided fundamentalisms?

    "Real global GDP growth averaged 4.9%a year in the Golden Age years from 1950 through 1973, but dropped to 3.4% annually in the unstable period between 1974 and1979. Dissatisfied with the instability, inflation, low profits and falling financial asset prices of the 1970s, advanced country elites pushed hard for a switch to a more business friendly political-economic system; global Neoliberalism was the result. World GDP growth averaged 3.3% a year in the early Neoliberal period of the 1980s, then slowed dramatically to 2.3% from 1990-99 as Neoliberalism strengthened, making the 1990s by far the slowest growth decade of the post war era." (James Crotty)

    As would be expected, the post-1973 annual growth rate of world real gross domestic investment fell substantially through 1996.

    With the exception of parts of Asia, economic development throughout the world failed to gain traction, chronic excess capacity on one hand and credit fueled financial exuberance on the other.

    Given the system's inability to create employment so rapidly as required, a glut of labor and an expanding informal sectors as well. All the 'better' to intensify the international (and domestic) competition among workers, drive and hold wages down so also make consumer credit increasingly important to retention of living standards, no matter that this has been only another transfer to loan capital.

    Average weekly earnings, constant 1982 dollars, for all private nonfarm workers in the U.S. peaked in 1972 at $331.59, falling to $257.95 in 1992 until 'recovering' to $277.57 in 2004 and likely having faltered again since then.

    It is at least interesting that conditions of surplus labor, lower wages, deficit funding, tech innovations, etc, have not been able to generate another long wave expansionary phase. One might even suspect that finance has been 'pumping' too much from the real and that 'long-felt unease' is related to this.'

    The primary contradictions which I've seen developing over the last number of decades have been:

    1. The ending of national economies v. what can only be national states, a contradiction between economic mode of organization and national states.

    2. Progressive expansion of fictitious capital v. the possibility of satisfying such claims, a 'satisfying' which depends upon a) global creation of surplus value and b) substitution of credit for a relative insufficiency of realized surplus value (profit). This has provided much of the 'advanced' world with what is no more than a superficial prosperity even as it has also helped undermined its real basis. The spectacle of finance hides too much.

    3. In combination, the above two have generated greater class, ethnic, international and subnational tensions. The social relations of the world capital system have become quite strained, which is not to say that capitalism is 'doomed' but that its present form has become increasingly untenable and a 'change in state' is almost certainly unavoidable, in fact seems to be underway.

    mat said...
    why must global GDP growth be maximized in order for a global order to be considered a success? in spite of some well known ongoing wars, global violence has decreased since the 50's while average life expectancy has gone up. if we measure economic orders strictly in economic terms then we miss the purpose of having an economic order in the first place. and isn't it possible that in the 60's average weekly earnings in the US reached unsustainable levels on a relative basis? if we're taking a global perspective of things, have the declines in the US been offset by gains elsewhere in the world, particularly in asia?

    [Jul 4, 2008] Unleash Fiscal Policy

    Clinton administration was part of the same economic trend as Bush II administration ...

    Meanwhile, the twin deficits continue to rise. Our last trade surplus was in 1975--mostly downhill from then. Strangely enough our account deficit has risen since then. Conclusion? We relied more and more on credit, both personal and governmental.

    Clintonites will argue, of course, that under their watch, there were account surpluses. I would point out, however, that the trade balance began to rise sharply in the Clinton watch, moving from -70 billion in 1993 to -378 billion in 2000.

    Clinton rode the wave....lucky. He happened to govern while the U.S. led the world in a marvelous IT revolution. While jobs increased and government coffers filled, the trade deficit increased sharply, over 500%. In short, the central issue of trade was muffled. Have you ever heard a Clintonite brag about trade surpluses?

    Since Clinton, of course, the trade deficit has doubled. The only bright spot in the trade deficit has been services, mostly financial. (Republicans like bankers. Unfortunately, financial services while a golden opportunity for a few, were not so good for the average American.) Various arguments have been used to soften this harsh reality; economists have gone to measure deficits in terms of percentage of GDP, hopefully to show us that it aint all that bad. Well, it is. Trade is important.

    Some economists argue that the falling dollar will make our goods cheaper on the world market, thus dramatically improving our trade balance. Hmmmm. Aren't happened yet. We keep shedding manufacturing jobs.

    To keep ahead of the downward curve, businesses outsource or overseas everything, from teeth to sneakers. Of course, the fallling dollar will encourage foreign tourists.... but now there is the problem of oil. On this last and most dramatic of our headaches, I would suggest that it may be the straw that breaks the camel's back or it may be ironically be our savior.

    How our savior? If the present spike in oil is not primarily speculation--and I suggest that we will know this by year's end-- and if exporting countries stop subsidizing the cost of oil--, then we may have to become more local. Transportation costs of goods will rise, from ships and planes to trucks. Rail will be less expensive. (Now there's an infrastructure worth talking about.)

    Additionally, we will have either to find alternatives to oil in the manufacturing of some goods (plastics, for example) or find suitable alternatives that do do require oil. We also need cars with much, much better mileage. In other words, inventiveness will again count. Shortcuts--cheap labor and environmental degradation--will be throttled.

    [Jul 4, 2008] Soc Sec XXIX- What does patriotism have to do with Social Security 'crisis'

    If you examine the economic and demographic assumptions that together generate the standard Intermediate Cost alternative of the Social Security Trustees you see a picture of a future America that is kind of bleak. I mean I lived through the period from 1968 to 1983 and economically it was not much fun. We had war and assasinations and oil crises and three recessions and a constitutional crisis over impeachment. It wasn't all doom and gloom, over that same rough time period the world transtioned from the baseline assumption that nuclear armeggedon was pretty much ultimately unavoidable to a place where that prospect seemed inconceivable. And as a kid who grew up with school "duck and cover" drills that was an unalloyed good, but still there was a widespread sense that in particular these kind of economic outcomes were outside the norm, that times had been better before and that times would be better again. In part this was just nostalgia for an America that for a lot of people really never was, after all 'Happy Days' and 'Back to the Future' were not exactly documentaries, but Reagan's 'Morning in America' had a real resonance to people, there was a real sense that the future could be better than the immediate past and even the imagined past of the fifties as seen through the lens of 'Father Knows Best'.

    But none of that optimism shows up in the Tables and Figures of the Social Security Reports. Instead they and commenters thereon insist that the future is simply going to mirror the outcomes of 1968-1983, indeed just the other day I had a commenter that insisted that Low Cost outcomes were impossible because they were inconsistent with the last forty years. Well that is what happens when you pick a starting point that manages to take in all of the worst post-war years and ignores everything that happened before. I will be unpacking some numbers below the fold but want to leave these doomsayers with a hopefully provocative question.

    Why the hell are you betting against America? While we maybe well and truly entering permanent Roubini-land why are you doubling down based on that?

    As I say it all starts with the numbers, and in particular the numbers as seen in Table V.B1: Principal Economic Assumptions, Table V.B2: Additional Economic Factors, and Table V.A1: Principal Demographic assumptions, all of which (and many more) to be found in 2008 Social Security Report: List of Tables. The Economic tables show outcomes in five year periods since 1960 and annually since 1997 and then turn around and project annual results for the following ten years and then for multi-year periods (V.B1) or intervals (V.B2) after that. The Demographic table reports both by interval back to 1940 and then annually from 1995. Going forward Table V.A1 projects results with 5 year intervals.

    Generally speaking the various models of the Trustees' Report assume that under all three alternatives (Low Cost, Intermediate Cost, and High Cost) results will settle out in the relatively short term at ultimate levels. Which is just another way of defining long term sustainability of the US economy under projections that are presumed to range from optimistic (Low Cost) to pessimistic (High Cost) with Intermediate serving as a median. So lets take a look at some of those numbers and contrast them with 2004, a year of good economic performance but not one that most people would remember as exceptional.

    Now I know some people will want to jump in and start the standard defense of 'Boomers!' and 'Covered worker ratio!!'. And yeah I get that but these ultimate numbers are all for period beyond 2050 when the impact of the Boomers on the economy should be pretty much a fading memory (we will be 86 to 104 in 2050). Why on earth should we assume that even optimistic numbers for the second half of the twenty-first century will trail the numbers of the second half of the twentieth century so badly? I understand that conditions approaching perma-recession could happen, I am the farthest thing from a global warming denier or from not recognizing the food/fuel crisis going forwards. On the other hand I am not just ready to simply write America's economic future off as a lost cause either.

    I am not happy with the status of America today. Which doesn't mean I have lost faith in its possibilities tomorrow. Which know it or not is exactly what embracers of Social Security 'crisis' have done. Dudes and dudettes what caused you to lose your faith here? Criminy its the Fourth of July.

    Read More on "Soc Sec XXIX: What does patriotism have to do with Social Security 'crisis'"

    [Jul 4, 2008] New York Times Death Spiral Watch (Energy/Speculation/Journalism/Internet Timothy Egan Edition)

    Exhibit A: New York Times reporter Timothy Egan in May 2001 on the California energy crisis:

    Timothy Egan, May 11: Many Utilities Call Conserving Good Business: Hundreds of miles to the south [of Seattle], the city-run utilities in Los Angeles and Sacramento, have generally managed to avoid the rolling blackouts of recent months by opting out of the state's deregulation experiment and promoting conservation with near-religious fervor.... When Vice President Dick Cheney said last week that conservation could not be a centerpiece of energy policy, he left some utilities -- those that have spent 20 years trying to prove just the opposite -- feeling as though their efforts had been undermined. In his speech, he said, "Conservation may be a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy."...

    These guys in the Bush administration are doing this manly stuff, putting their horns on to make it sound like conservation is for sissies," Mr. Royer said. "But we know from experience that conservation equals generation. They are the same." Other utilities, even some that embrace conservation, agree with the Bush administration that the nation cannot conserve its way to energy independence....

    S. David Freeman, the man named by Gov. Gray Davis to oversee the state's response to its power crisis, said that conservation remained a way not only to get through the difficult summer ahead but also to meet long-term energy needs.... Tom Eckman, the conservation manager of the Northwest Power Planning Council, which was created by Congress to guide major power decisions in this region. "It's common sense. If you can get something for 10 cents, why pay a dollar for it?"...

    Mr. Cheney said that the Bush administration would oppose any measure based on a premise that people should do more with less. His remark was echoed this week by Ari Fleischer, the White House spokesman. Asked on Monday if Mr. Bush believed that Americans should change their lifestyles in the face of a power crisis, Mr. Fleischer dismissed the idea of people using less energy as one solution. "That's a big no," said Mr. Fleischer. "The president believes that it's an American way of life, and it should [be] the goal of policy makers to protect the American way of life. The American way of life is a blessed one. And we have a bounty of resources in this country"...

    [Jul 4, 2008] High and Low Finance - Inexperience May Feed the Bubbles -

    The evident explanation for this, the professors conclude, is that “the trend-chasing behavior of young managers reflects their attempts to learn and extrapolate from the little data they have experienced in their careers.”

    To be sure, callow and inexperienced youths were far from the only ones who extrapolated from recent data to find theories of a new economy believable. Alan Greenspan was 74 and had been chairman of the Federal Reserve board for 12 years when, on April 5, 2000, he embraced the new economy and pointed to profit forecasts by Wall Street analysts as a reason to expect the tech boom to continue.

    Mr. Greenwood said he suspected that a lack of experience played a role in the housing bubble as well, although that is much more difficult to confirm with data. He said he and Mr. Nagel might look for evidence that younger people — many of whom would normally be renters — were more likely to buy homes in bubble markets after prices had soared.

    That thesis would gain support if it could be shown that fewer young people bought in those markets before prices soared, and that the expansion of home-buying by the young did not take place in markets where home prices never rose as they did in the most extreme markets, like the Silicon Valley and Boston, where the two professors live. (Mr. Nagel, who is 35, told me he has always been a renter. Mr. Greenwood, who is 31, said he had owned a home, but sold it a year or so before the peak when prices seemed unreasonably high to him.)

    The two professors say the experience thesis helps to explain why stock market bubbles are relatively uncommon. “Once investors have experienced a bubble and subsequent crash, they are less willing to participate the next time through,” they write. “The younger fund managers we study in this paper, and perhaps also the retail investors that allocated money to their funds, may have learned from their experiences during the technology bubble.”

    [Jul 4, 2008] World Bank- Biofuels Increased Food Prices 75%

    Natural resources constraints will now cause a significant slowdown in global growth.

    The Guardian has a leaked copy of a World Bank study that finds biofuels to be the biggest culprit in global food price increases. This finding will not only feed calls to scrap biofuels (save perhaps those derived from sugar) but may lead to a recognition that resource challenges cannot be pursued in isolation. In particular, food, water, and energy scarcity are interconnected problems and need to be addressed on an integrated basis. It also disputes the claim that increased consumption of meat in developing economies played a significant role in food price inflation.

    From the Guardian:
    Biofuels have forced global food prices up by 75% - far more than previously estimated - according to a confidential World Bank report obtained by the Guardian.

    The damning unpublished assessment is based on the most detailed analysis of the crisis so far, carried out by an internationally-respected economist at global financial body.

    The figure emphatically contradicts the US government's claims that plant-derived fuels contribute less than 3% to food-price rises. It will add to pressure on governments in Washington and across Europe, which have turned to plant-derived fuels to reduce emissions of greenhouse gases and reduce their dependence on imported oil....

    [Jul 4, 2008] Felix Salmon Says Bear Stearns--Except for Its CEO--Was Smarter than Lehman Brothers

    Brad DeLong's Semi-Daily Journal

    Lehman and the Failed Hedges: It looks as though Lehman Brothers is going to lose money in the second quarter... because the finance wizards at Lehman seem to be incapable of hedging their positions...

    ...We've seen this movie before, most memorably at Bear Stearns.

    ...Ironically, it was Bear Stearns who had at least some people, led by mortgage head Tom Marano, who understood this. They knew that the big risk to the firm was chaos in the financial markets, so they put on a "chaos trade" which would make lots of money in such an event, and very broadly hedge the risks the bank faced. But CEO Alan Schwartz, in a fateful decision, reversed that trade. As Kate Kelly reported,

    he wanted specific pessimistic plays that would offset specific optimistic bets, rather than the broader hedges Mr. Marano had employed.

    [Jul 3, 2008] High Gasoline Prices- Pete Davis v. Lawrence Kudlow

    Yes, gas prices should be kept high enough to create incentives to conserve, find alternatives, etc. If we work together now we'll leave a much stronger economy to our kids and grandkids. Is the problem our dependence on "foreign oil" or on "oil"?
    Angry Bear

    ...In a nutshell, that's why we're 58% dependent upon foreign oil. Every time we have an energy crisis, in 1973, 1979, 1990, and 2008, we rush short-term expedients and cosmetics into law without doing much to solve the long-term problem.

    If we were serious about the long-term problem we would never have allowed gas guzzling SUV's onto the road; we wouldn't have starved mass transportation; we would have developed much more renewable energy; we would have done a lot more conservation; and MOST OF ALL we wouldn't have allowed prices to decline after the crisis, killing energy saving investments and leading us right back to profligate energy consumption.

    Our energy policy is like our diets. We diet frequently, but we never stick to our diets long enough or change our lifestyles enough to lose weight. Then, when diabetes and heart disease sets in, we rush to our doctors for the miracle cure that isn't there ...

    Until we learn to live with somewhat higher energy prices, we'll continue to be at the mercy of OPEC and of periodic energy crises. As long as we demand quick fixes from our political leaders, that's all we will get -- quick fixes that don't work.

    [Jul 3, 2008] Fortis Made Cash Call in Face of Expected U.S. 'Meltdown' - Chairman,"

    Some recapitalization moves may have been motivated by other considerations.

    Expectations at Fortis that the U.S. markets are on the verge of "meltdown" were behind the Benelux bank's decision last week to launch a sweeping recapitalisation programme, said chairman Maurice Lippens.

    "We were saved at the last minute. Things in the U.S. are going far worse that people think," Lippens said in an interview with De Telegraaf.

    Forecasting bankrupties among U.S. banks amid declining credit cover, and also citing Citigroup and General Motors as blue chip companies impacted by the turmoil, he was quoted as saying: "The U.S. is heading for complete meltdown." Fortis last week surprised shareholders with recapitalisation measures worth a total of 8.3 billion euros, including a 1.5 billion euro capital hike.

    [Jul 3, 2008] Ruined by 401[k] Predators - Yahoo! News

    ...If the Me Generation isn't careful, it could become the Poor-Me Generation. Over the next 20 years, a record $17 trillion will move from pension funds and 401(k) accounts into the hands of freshly minted retirees, says trade group Investment Company Institute. Not surprisingly, that money pot -- and the fat asset management fees it will generate -- has financial-services firms salivating.

    The problem is that, like Morrill, many retirees and pre-retirees are woefully unprepared for the shift from "wealth accumulation," or saving and investing, to "wealth distribution," or drawing down those assets throughout their golden years. On June 24, MetLife (NYSE:MET - News) research arm Mature Market Institute released a study showing that 69% of pre-retirees overestimate the amount of money they can safely withdraw from their accounts each year during retirement -- many, dramatically so -- while 49% underestimate their expenses. Likewise, a May study by the research group National Institute on Retirement Security found that about one in three households approaching retirement is at risk of running out of money.

    Aggressive investment brokers are focusing on that yawning gap between perception and reality. Promising early retirement, fat investment returns, and big annual cash withdrawals, they're increasingly succeeding at seducing investors to turn over their retirement accounts -- and then putting them in high-fee and often inappropriate investments. "This is emerging as a big problem," says Mary L. Schapiro, CEO of the Financial Industry Regulatory Authority (FINRA), the securities industry's private oversight group, which recently launched a program to train corporate benefits managers to vet financial advisers who run in-house seminars. "The issue has intensified for the next generation of retirees -- the largest we've ever seen."

    [Jul 3, 2008] LBO Defaults May Rise as About $500 Billion Comes Due, BIS Says By Neil Unmack

    July 4 (Bloomberg) -- Leveraged-buyout loan defaults may be ``significantly higher'' than ratings companies' estimates as about $500 billion of debt used to fund the takeovers comes due, the Bank for International Settlements said.

    ... ... ...

    The default rate on high-yield notes worldwide rose to 2% in May, from 1.7% in April, and is likely to reach 6.3% by May 2009, according to Moody's Investors Service.

    Buyout firms typically borrow to finance about two-thirds of the cost of acquisitions. The debt they raise is rated below Baa3 by Moody's Investors Service and BBB- at Standard & Poor's.

    Investors are demanding more in interest relative to benchmark rates to buy high-yield debt. The average U.S. leveraged loan yielded 413.2 basis points more than the benchmark London interbank offered rate this year, compared with 270 basis points at the end of 2007, according to S&P.

    Sales of collateralized loan obligations, or CLOs, slowed to $30 billion in the first quarter, less than half the amount a year earlier, the BIS said, citing JPMorgan Chase & Co. data. The total of outstanding CLOs expanded to almost $250 billion in 2007, more than double the amount in 2004, according to the report, prepared by the bank's Committee on the Global Financial System.

    [Jul 3, 2008] Pervasive Pollyannas of Prosperity

    The Big Picture

    How absurd has the Panglossian cheerleading become? On my pal Larry Kudlow's show last night, several of Candide's descendants talked about how great stocks are if you hold them for 30 years. That's right, the holding period for equities according to this crowd is three decades. Of course, this means every pullback is a buying opportunity. Words such as these can only be spoken by someone who has never worked on a trading desk or managed assets professionally -- or if they did, they lost most of their clients' money.

    [Jul 3, 2008] Fed Watch Denying the Great Adjustment

    Economist's View

    This is not a surprise, as US policymakers are unwilling to accept what Yves Smith sees as the inevitable result of years of debt-supported consumption growth:

    Perhaps I am lacking in imagination, but I see lower living standards for Americans an unavoidable outcome. We're seeing it now, via rising food and energy costs with stagnant wages. If you were to describe what ails this economy in its most fundamental terms, we have gone on a borrowing binge to support an unsustainable level of consumption.

    Merely having consumption fall to a healthier level would precipitate a slowdown. And that's before we get to the problem of "and what do we do with the debt hangover?"

    ... ... ...

    I have long maintained that this adjustment should be characterized by weak consumption growth but better-than-expected business activity overall, particularly in export and import-competing industries. Effectively, the US is offshoring some of its weakness. The combination should be something that consumers clearly associate with recession, but with better than expected output, especially when policy stimulus is added to the mix. This is very much like the current environment, a recession that still lacks a single quarter of negative GDP growth. But the level of stimulus is starting to look excessive, and supporting a more inflationary environment than anticipated.

    How long can this process continue? As long as global policymakers are willing to support it. Indeed, it is almost of a game of chicken, with US and emerging market policy makers on a collision course, neither wanting to accept the adjustment, a greater reliance on internal balance, necessitated by excessive US consumption.

    The US is not likely to back down soon. We are seeing increasing calls for additional stimulus packages, and Brad DeLong is even suggesting the Democrats abandon any pretense of fiscal responsibility. The Federal Reserve is stuck, afraid to counter inflation via a rate hike themselves, instead exhorting foreign central banks – the very banks keeping the US afloat – to provide space for greater US growth at the expense of their own. In the meantime, the Dollar turns lower and oil sets a new record seemingly each month.

    Breakeven on the 10 year TIPS tested 260bp today, settling at 259. With US policy stuck in place, I suspect that emerging markets will take only baby steps toward changing the current dynamic. That leaves the ECB as the force most obviously leaning against the wind.

    Indeed, until inflation becomes sufficiently uncomfortable that a broader swath of nations finds meaningful policy tightening a necessity, I expect current financial trends to continue.


    Values Crisis, the Politics of Reality and why there’s Going to be a Common Sense Revolution in this Generation (continued 1 2 3 4 5 6 7 8)
    Patrick Reinsborough


    •Corporatization and increasingly centralized control.
    • Reliance on coercion (both physical and ideological) to maintain control
    • Drive to Commodify all aspects of life.
    • Community fragmentation/cultural decay (replacement of lived experience with representation— image based mass culture, television addiction, increasing alienation).
    • Elevation of consumerism to the center of public life (consumer monoculture).
    • Increased mechanization and blind faith in technology (trend towards cyborgianism).
    •Fetishization of speculative/financial wealth.
    • Accounting flaws that mask liquidation of ecological and social capital.
    • Pathological values/flawed assumptions.
    • Undermining of planetary life support systems

    [Jul 02, 2008] Ryding Sees `Most Serious' U.S. Inflation Risk Since 1960s

    Phillips curve does not make sense in this environment as unemployment and inflation are rising simultaneously. Weak dollar contributes to inflation. Gold and oil prices are payback for 1% and 2% rates. Exporting easy monetary policy led to "credit abundance".  High energy prices might be side effect of outsourcing production to China.  Right now the base investment policy to to move money to cash. See also Tom Keene On the Economy Show

    July 1 | Bloomberg

    John Ryding, chief economist at RDQ Economics and former top economist at Bear Stearns Cos., talks with Bloomberg's Tom Keene about U.S. inflation, the outlook for Federal Reserve monetary policy and the labor market.


    [Jul 02, 2008] Yergin Says Supply Concerns Driving Oil Prices Higher

    Pretty light-weight interview from the adept of free markets and unlimited growth...

    July 1 | Bloomberg

    Daniel Yergin, chairman of Cambridge Energy Research Associates, talks with Bloomberg's Tom Keene about his testimony before the Joint Economic Committee in Washington on global energy markets, factors driving crude oil prices, and the outlook for oil supply and demand.


    [Jul 02, 2008] 100 Percent Cash Is Todd Harrison Raving Mad or Just Foxy Tech Ticker, Yahoo! Finance by Todd Harrison, founder and CEO of

    May be not 100% but 80% but you better be safe then sorry. that is especially true for baby boomers. As Harrison remarked "People are still conditioned to chase reward". But in reality we entered entirely different phase of the long term market cycle and the slowdown can last five years. It can last considerably more then that. And market completely changed as globe is too small for so many people. Its like bacterial colony on dead squirrel story. but the colony can find another dead squirrel.  So growth of GDP is much less meaningful in this situation... 

    Todd Harrison, founder and CEO of, generated a firestorm last week when he declared his long-term cash account to be 100% in cash.

    This comment, from Yahoo! Finance user "odgoggmg," typified the response among the Tech Ticker community: "If you are EVER 100% cash, it's pretty much admitting that you don't know what's going on or how to profit from it. If you do fall into that scenario, the last thing you should be doing is giving advice." In the accompanying video, Harrison explains his rationale for being ultra-conservative in his long-term account (while still trading his short-term "bucket" from both the long and short side).

    In a nutshell, Harrison believes we are heading for a "prolonged period of socioeconomic malaise," and investors need to shift their focusing from "chasing performance" to capital preservation.

    [Jul 2, 2008] Small Banks' Reckoning Day Is Coming

    According to the Federal Deposit Insurance Corp., $45.4 billion of the $631.8 billion in construction loans outstanding at the end of the first quarter were delinquent. When banks announce second-quarter results in coming weeks, they are expected to report sharp increases in loans that builders can't repay.

    [Jul 2, 2008] Commodity Demand to Drop as Growth Slows, Faber Says (Update1)  by By Millie Munshi and Monica Bertran

    Demand for industrial commodities including oil will fall, pressuring prices, because the financial sector is in ``disarray'' and the U.S. economy will continue to slump, investor Marc Faber said.

    ``The industrial-commodity complex is vulnerable because demand will slow down,'' said Faber, publisher of investment newsletter the Gloom, Boom and Doom Report. ``The economy is weakening, corporate profits will disappoint, valuations are not particularly attractive, and the financial sector that serves to channel savings into investment is in disarray.''

    Demand for commodities will fall after raw materials including oil, corn, copper and gold touched record highs in the first half, Faber said in an interview on Bloomberg Television. The global economic slowdown will last a ``very long time,'' he said.

    ``The financial crisis has been the appetizer,'' Faber said, referring to the $400 billion in writedowns at the world's largest banks and securities firms in the past year. ``We still need the main dish.''...

    The U.S. economy went into recession last October and current statistics are hiding the ``severity'' of the recession, Faber said. Economists have also understated the rate of inflation as higher food and energy costs impact consumers, he said.

    Commodities will face a ``correction'' after a seven-year rally and prices will decline in the next six months to one year, Faber said on June 26. Faber told investors to abandon U.S. stocks a week before 1987's so-called Black Monday crash.

    [Jul 2, 2008] Past Due Home Equity Lines of Credit Increase Most Since 1987

    naked capitalism

    The rise in delinquent home-equity accounts was the biggest since the ABA began collecting data in 1987, Kaplan said. It was also the highest in 11 years. Delinquencies often don't peak until late in an economic slowdown.

    ABA chief economist James Chessen said in the statement that because of job losses, slow income growth and falling real estate and equity markets, there is ``little relief'' in the coming months.

    [Jul 2, 2008] Merrill says GM bankruptcy possible Financial News - Yahoo! Finance

    High yield bonds might tank...

    Credit option contracts on the Chicago Board Options Exchange that would pay out if GM or Ford default before September 2012 ticked higher. The contracts, which remain lightly traded, point to a roughly 73-percent default risk for GM and a 69-percent risk for Ford over that period.

    [Jul 1, 2008] That's gasoline in that hose, not water

    As seen in the Fed Funds vs. Crude Oil graphic above, clearly that hasn't been water coming out of Ben Bernanke's fireman's hose.
    The Mess That Greenspan Made

    This morning's Ahead of the Tape column($) in the Wall Street Journal trots out the same old tired axiom about recent Federal Reserve policy as it relates to financial instability and rising prices, particularly rising oil prices - the old "fireman" metaphor.<

    Like many others, the "fireman as arsonist" model always seemed to make more sense to me.

    Follow the logic, if you will...

    With the prospect of a world-wide meltdown in banking and credit during an era of rising prices that show up everywhere but in the government's inflation statistics, faced with the choice of saving the global financial system by creating even more money and credit OR reducing the amount of money and credit pumping through its veins in order to contain rising prices, the Bernanke Fed is said to have chosen the lesser of two evils by selecting the former.<

    In fact, since the credit crisis began almost one year ago, the idea of central banks "tolerating more inflation", erring on the side of more money and credit creation to ensure stability, has become almost conventional wisdom.

    And so it was again this morning:

    In a sense, the Fed's decisions of the past few months were easy ones. Inflation worries never went away, but when the house is on fire, nobody complains to the firemen about water damage.

    As seen in the Fed Funds vs. Crude Oil graphic above, clearly that hasn't been water coming out of Ben Bernanke's fireman's hose.


    Prev | Contents | Next



    Groupthink : Two Party System as Polyarchy : Corruption of Regulators : Bureaucracies : Understanding Micromanagers and Control Freaks : Toxic Managers :   Harvard Mafia : Diplomatic Communication : Surviving a Bad Performance Review : Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime : PseudoScience : Who Rules America : Neoliberalism  : The Iron Law of Oligarchy : Libertarian Philosophy


    War and Peace : Skeptical Finance : John Kenneth Galbraith :Talleyrand : Oscar Wilde : Otto Von Bismarck : Keynes : George Carlin : Skeptics : Propaganda  : SE quotes : Language Design and Programming Quotes : Random IT-related quotesSomerset Maugham : Marcus Aurelius : Kurt Vonnegut : Eric Hoffer : Winston Churchill : Napoleon Bonaparte : Ambrose BierceBernard Shaw : Mark Twain Quotes


    Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 :  Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method  : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law


    Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds  : Larry Wall  : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOSProgramming Languages History : PL/1 : Simula 67 : C : History of GCC developmentScripting Languages : Perl history   : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history

    Classic books:

    The Peter Principle : Parkinson Law : 1984 : The Mythical Man-MonthHow to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Hater’s Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite

    Most popular humor pages:

    Manifest of the Softpanorama IT Slacker Society : Ten Commandments of the IT Slackers Society : Computer Humor Collection : BSD Logo Story : The Cuckoo's Egg : IT Slang : C++ Humor : ARE YOU A BBS ADDICT? : The Perl Purity Test : Object oriented programmers of all nations : Financial Humor : Financial Humor Bulletin, 2008 : Financial Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related Humor : Programming Language Humor : Goldman Sachs related humor : Greenspan humor : C Humor : Scripting Humor : Real Programmers Humor : Web Humor : GPL-related Humor : OFM Humor : Politically Incorrect Humor : IDS Humor : "Linux Sucks" Humor : Russian Musical Humor : Best Russian Programmer Humor : Microsoft plans to buy Catholic Church : Richard Stallman Related Humor : Admin Humor : Perl-related Humor : Linus Torvalds Related humor : PseudoScience Related Humor : Networking Humor : Shell Humor : Financial Humor Bulletin, 2011 : Financial Humor Bulletin, 2012 : Financial Humor Bulletin, 2013 : Java Humor : Software Engineering Humor : Sun Solaris Related Humor : Education Humor : IBM Humor : Assembler-related Humor : VIM Humor : Computer Viruses Humor : Bright tomorrow is rescheduled to a day after tomorrow : Classic Computer Humor

    The Last but not Least Technology is dominated by two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt. Ph.D

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