April 25, 2009
|Khan Academy||Economy Science/Technology|
Baseline Scenario links to a wonderful site, the Khan Academy, at which a young man named Salman Khan has posted more than 700 instructional YouTube videos on math and physics, as well as banking and money, the credit crisis, and finance. Everything I've watched so far has been quite good. And it's all free.
Khan has a Harvard MBA, a BS and MS in electrical engineering and computer science from MIT, and a BS in math from MIT. So he knows his stuff. But much more importantly, he's an excellent teacher, with a friendly, unintimidating manner. He keeps the videos short and simple. Many are aimed at children.
Great stuff. And did I mention that it's free? Internet generosity. I love it.
April 08, 2009
|Causes and Consequences of the Oil Shock of 2007-2008||Economy Energy Peak Oil|
On causes, he calculates that the runup in price was consistent with reasonable assumptions about oil demand and its elasticity. Elasticity is a measure of how strongly demand responds as price changes. For a product like oil, which has no short-term substitute and which is used in ways (like driving to work, heating a home, generating power) that people are highly reluctant to forgo, the elasticity is quite small. Which is to say, it takes one hell of a price increase to get people to consume less, especially in the short term. (In the long term, people may switch to smaller cars, and so on. Hamilton says that kind of long term adjustment may even help explain why prices have fallen as far as they have.) Worldwide GDP growth between 2003 and 2007 was such that at existing prices worldwide demand would have been greater than worldwide production, which had flatlined. Rising prices were the result. They kept rising until enough people were priced out of the market to equalize supply and demand. A speculative bubble in oil futures may have contributed to the price spike, but Hamilton's calculations show that it could have easily just been (mostly) your basic supply-and-demand story.
On consequences, he calculates that the impact of sky-high oil prices on the global economy may have been a significant factor in starting the recession that has now become such a vicious downturn. There was a debt bubble for sure, but it may have been the oil shock that pricked the bubble.
People tend to take cheap energy for granted, so we routinely underestimate the extent of its role in the economic fortunes of the modern world. Now that oil prices have fallen so drastically, exploration and new drilling have ground to a halt. Without new sources of supply, depletion will soon erase whatever supply cushion may exist at the moment. So the world is setting itself up for another big price shock when the economy eventually picks up and demand starts to recover. The world economy may get another big kick in the head just when it is trying to get back onto its feet.
April 07, 2009
|Adam Smith On Usury||Economy|
Conservatives love to invoke Adam Smith — most of them, I'm guessing, without ever having read him. They've heard the phrases "invisible hand" and "division of labor" and that's about it. They imagine an Adam Smith who would endorse their idea of unrestricted and unregulated capitalism. Not so.
Adam Smith, in The Wealth of Nations, advocated usury laws (limits on interest rates) because they would promote lending to prudent borrowers and productive projects, which was better for society as a whole:The legal rate...ought not be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent, the greater part of the money which was to be lent would be lent to prodigals and projectors [promoters of fraudulent schemes], who alone would be willing to give this high interest....A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.
When the legal rate of interest, on the contrary is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors. The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people than in those of the other. A great part of the capital of the country is thus thrown in the hands in which it is most likely to be employed with advantage.
Now before you say this approach discriminates against the poor, banks like ShoreBank of Chicago, and not for profit mortgage lenders extend credit to lower income individuals with loss rates in line with prime borrowers, It takes (gasp) borrower education and in person screening, something most banks eschew.
Mortgage lenders didn't pump out subprime mortgages out of the kindness of their hearts or because someone made them do it. They did it because that's where the high interest rates were. The same way that credit card companies handed out credit cards to anyone with a pulse. If you were someone who'd have a hard time paying off your balance, so much the better. That's where the high interest rates were.
And now the rest of us are left to pick up the pieces. Which is one reason why usury laws have existed for centuries — until very recently — and why we need them again.
But before we leave Adam Smith, here are some comments Noam Chomsky made in an interview:
[Adam Smith is] pre-capitalist, a figure of the Enlightenment. What we would call capitalism he despised. People read snippets of Adam Smith, the few phrases they teach in school. Everybody reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division of labor is. But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be. And therefore in any civilized society the government is going to have to take some measures to prevent division of labor from proceeding to its limits.
He did give an argument for markets, but the argument was that under conditions of perfect liberty, markets will lead to perfect equality. That’s the argument for them, because he thought that equality of condition (not just opportunity) is what you should be aiming at. It goes on and on. He gave a devastating critique of what we would call North-South policies. He was talking about England and India. He bitterly condemned the British experiments they were carrying out which were devastating India.
He also made remarks which ought to be truisms about the way states work. He pointed out that its totally senseless to talk about a nation and what we would nowadays call “national interests.” He simply observed in passing, because it’s so obvious, that in England, which is what he’s discussing — and it was the most democratic society of the day — the principal architects of policy are the “merchants and manufacturers,” and they make certain that their own interests are, in his words, “most peculiarly attended to,” no matter what the effect on others, including the people of England who, he argued, suffered from their policies. He didn’t have the data to prove it at the time, but he was probably right.
This truism was, a century later, called class analysis, but you don’t have to go to Marx to find it. It’s very explicit in Adam Smith. It’s so obvious that any ten-year-old can see it. So he didn’t make a big point of it. He just mentioned it. But that’s correct. If you read through his work, he’s intelligent. He’s a person who was from the Enlightenment. His driving motives were the assumption that people were guided by sympathy and feelings of solidarity and the need for control of their own work, much like other Enlightenment and early Romantic thinkers. He’s part of that period, the Scottish Enlightenment.
The version of him that’s given today is just ridiculous.
Lies my teacher told me.
April 02, 2009
If all you had to go on was the coverage in the media, you could be forgiven for thinking that the economic crisis is all about the financial sector. That it's all about banks and their problems. Banks, and maybe hedge funds.
But it goes much, much deeper, down to the fundamental conundrum of capitalism: workers are also customers. They must be paid so they can buy. Any given capitalist would like to maximize profits by paying workers as little as possible. But when all workers are underpaid, they don't have enough income, in the aggregate, to buy what's been produced. There is insufficient aggregate demand, as they say.
Since the early 1970s, inflation-adjusted US wages have stagnated, even while productivity has roughly doubled. Yes, household incomes have gone up some, but that's because more people in each household are working, and working more hours. Even with all that additional work, Americans haven't been making ends meet. So they started to borrow. Credit cards, then home equity loans. The missing aggregate demand was made up in the form of debt, debt, and more debt, until finally the system maxed out.
Capitalists got greedy, and sawed off the limb they were sitting on.
Or that's been my general analysis, anyway. But Chicago labor lawyer Thomas Geoghegan, writing in Harper's, has a deeper analysis, one that I think really gets into the specifics of how this happened — and with the appropriate degree of outrage. It's a brilliant, stunning piece, the best I've seen on this whole mess. It's long, but well worth reading in full. But since you may not have access to it, let me excerpt it at length, below the fold. Highly recommended.
Some people still think our financial collapse was the result of a technical glitch — a failure, say, to regulate derivatives or hedge funds. All we need is a better chairman of the SEC, like brass-knuckled Joe Kennedy, FDR’s first pick. It’s personnel — it’s Senator Gramm’s fault. Or it’s Robert Rubin’s fault.
In fact, no amount of New Deal regulation or SEC-watching could have stopped what happened. Hedge funds in themselves did not cause Wall Street to collapse. Some New Deal–type regulation was actually introduced in recent years, but it failed to do much: think of the Sarbanes–Oxley Act of 2002, which made CEOs swear an oath that their financial statements were not fraudulent. No, the deregulation that led to our Time of Troubles was of a deeper, darker kind. The problem was not that we “deregulated the New Deal” but that we deregulated a much older, even ancient, set of laws.
First, we removed the possibility of creating real, binding contracts by allowing employers to bust the unions that had been entering into these agreements for millions of people. Second, we allowed those same employers to cancel existing contracts, virtually at will, by transferring liability from one corporate shell to another, or letting a subsidiary go into Chapter 11 and then moving to “cancel” the contract rights, including lifetime health benefits and pensions. As one company after another “reorganized” in Chapter 11 to shed contract rights, working people learned that it was not rational to count on those rights and guarantees, or even to think in these future-oriented ways. No wonder people in our country began to live for the moment and take out loans and start running up debts. And then we dismantled the most ancient of human laws, the law against usury, which had existed in some form in every civilization from the time of the Babylonian Empire to the end of Jimmy Carter’s term, and which had been so taken for granted that no one ever even mentioned it to us in law school. That’s when we found out what happens when an advanced industrial economy tries to function with no cap at all on interest rates.
Here’s what happens: the financial sector bloats up. With no law capping interest, the evil is not only that banks prey on the poor (they have always done so) but that capital gushes out of manufacturing and into banking. When banks get 25 percent to 30 percent on credit cards, and 500 or more percent on payday loans, capital flees from honest pursuits, like auto manufacturing. Sure, GM is awful. Sure, it doesn’t innovate. But the people who could have saved GM and Ford went off to work at AIG, or Merrill Lynch, or even Goldman Sachs. All of this used to be so obvious as not to merit comment. What is history, really, but a turf war between manufacturing, labor, and the banks? In the United States, we shrank manufacturing. We got rid of labor. Now it’s just the banks.
...GM...really makes its money by running a bank on the side. “After a while,” said a friend from Detroit, “the only reason they were making cars was so they could make loans.”
Everything followed from this. The bloating of the financial sector helped create the growing U.S. trade deficits, which brought in a flood of cheap money for borrowing — which helped further bloat the financial sector. Look at the timing. The big trade deficits came at about the time the caps on interest rates came off, in the late 1970s. Capital flowed out of manufacturing, with its “low” profits, and into the financial sector, where profits were much higher. We became less competitive in manufacturing because we could not accept the lower rate of profit—not vis-à-vis our competitors in Mexico, but vis-à-vis our competitors in New York City. [...]
[T]he financial sector would not have been able to crowd out manufacturing without three major changes in the law.
First, and worst of all (as I always have to say, being a labor lawyer), we lost the right to organize. That’s a long story, but over the years employers found out they could just ignore the Wagner Act and fire pro-union workers right before so-called secret-ballot elections: they found out there was no real limit on what they could use as threat. And the result is that people in this country can’t get a wage increase. They can’t get a wage increase despite all our gains in productivity. That’s not supposed to happen. But that’s what did happen. The Economic Policy Institute reports that, since 1972, the median hourly wage for men has remained basically flat, and has actually declined for the bottom fifth of workers. (Women saw more of an improvement, but that’s only because women were grossly underpaid in 1972.) What is more astonishing is that in this very same period, when workers were losing financial ground, their productivity — their output per hour — nearly doubled. They were doing twice as much work for the same wage or less. [...]
At any rate, the wage stagnation that resulted from the inability to organize goes a long way toward explaining the current situation. People took their “cut” of productivity by going into debt. You may object: “Why did people have to go into debt? After all, family income went up.” That’s true, but only because more family members were working — and working longer hours. The income “gain” was illusory. The more hours people worked, the more they had to pay out in day care, in transportation, in eating at fast-food restaurants; that is, in outsourcing their private lives to vendors. I could go on about this: how we need more cars to get more family members to work, and so on. Let’s just say that the longer we’re away from home, the less we really take home at the end of the day.
This growing gap between how much we produced and how much we earned led to a bizarre paradox: as the economy grew, individual people were actually becoming worse off. Even people who were making more money were living in a way that put them deeper in debt. I think many of these people, strung out, began making wild consumer purchases as objective correlatives for the fact that they had no time to consume. It seems that the less time there is to consume, the more consumers spend.
I have briefly mentioned the second big legal change: over the past forty years, employers have found ways to cancel any earned right, of any kind, at any time. I’d say that with a competent lawyer any employer can cancel any promise to any worker. As a result, people learned it was not rational to save. In particular, right around the time Reagan took office, companies began to figure out that they could go in and out of Chapter 11 in order to dump their obligations not just to workers but also to retirees. As a labor lawyer, I saw firsthand in bankruptcy court the shocking way in which companies could cancel retirees’ health, severance, and pension rights, though some were federally insured. Although we now think of the middle class as a debtor class, people came into these Chapter 11 cases not as debtors but as creditors — yes, creditors, because big wealthy companies owed them pensions. By the time the “reorganizations” were over, the creditors had managed to hang on to five cents on the dollar, maybe ten. Often the companies weren’t “bankrupt.” The parent firm was simply shutting down the subsidiary and taking all the loot. [...]
[T]he third big change, which came along with the other two: the legalization of usury....[I]t became the law of the land: the old, state-mandated top rates of 9 percent or so were gone; now...there were no effective caps on what the big national banks could charge credit-card holders. Now we’re all shoveling billions into the banks, and there’s no way working people who can’t get a raise will ever climb out of debt. [...]
Because interest rates were so high, the banks no longer wanted borrowers with good moral character. Look at the way lending has changed just since the time I was in law school in the early 1970s. Even then, the mantra of my teachers in contracts and commercial paper was: “The loan must be repaid!” I have a friend, a professor, who still quotes that refrain. But it’s out of date. At interest rates of 25 percent, or 50 percent, or 500 percent, lenders don’t really want the loan to be repaid — they want us to be irresponsible, or at least to have a certain amount of bad character.
If he could charge 35 percent, [a banker] might not necessarily think, “The loan must be repaid” — at least not right away. And if he can charge 200 percent, he actually may not want the loan ever to be repaid. I had a retired schoolteacher in my office the other day whose husband is deep into Alzheimer’s. The two had taken a loan for $1,700, somehow managed to pay back $3,000, and still they had not even begun to pay off the principal. That’s not uncommon... [...]
It may be hard to grasp how the dismantling of usury laws might lead to the loss of our industrial base. But it’s true: it led to the loss of our best middle-class jobs. Here’s a little primer on how it happened.
First, thanks to the uncapping of interest rates, we shifted capital into the financial sector, with its relatively high returns. Second, as we shifted capital out of globally competitive manufacturing, we ran bigger trade deficits. Third, as we ran bigger trade deficits, we required bigger inflows of foreign capital. We had “cheap money” flooding in from China, Saudi Arabia, and even the Fourth World. May God forgive us — we even had capital coming in from Honduras. Fourth, the banks got even more money, and they didn’t even consider putting it back into manufacturing. They stuffed it into derivatives and other forms of gambling, because that’s the kind of thing that got the “normal” big return; i.e., not 5 percent but 35 percent or even more.
Go back to the top and repeat the sequence. It was what scientists call an autocatalytic reaction. It just kept going. All of that cheap money would have been a good thing if it had gone into manufacturing. But it didn’t. The capital inflows from the big trade deficits couldn’t go into manufacturing because the returns in banking were just too high. And because this autocatalytic reaction kept going — as long as there was the imbalance between finance and industry — the system could not readjust or stabilize. The bigger the deficit, the bigger the capital inflow; and the bigger the capital inflow, the bigger the financial sector became; and the bigger the financial sector became (relative to manufacturing), the bigger the trade deficit became.
And meanwhile, we lost more and more skill-based jobs. Oh, we had jobs, and even jobs that required college and postgraduate educations. But we stopped being skill-based workers. We became “knowledge workers,” dependent on the financial sector. And knowledge workers, unlike skill-based workers, don’t have the bargaining power to get higher wages out of rising productivity. What can they withhold? They can’t withhold knowledge. And since they have nothing to withhold, it’s much trickier for knowledge-based workers to get a higher wage. And if there are fewer skill-based workers, it becomes harder to raise wages in general. And if it’s harder to raise wages, then more of us go into debt. [...]
[W]ith no cap, with no limit on the bloat, the financial sector faces the same problem as manufacturing — especially now that it has managed to extract all of the value from manufacturing. That is, the financial sector constantly needs new “products.” So we came up with more derivatives. We had always had futures, but now we had futures about futures. We have long had futures on the weather; for example, there is a weather index. But now we have futures on the weather futures. These are the “products,” not widgets, etc., that our form of financial capitalism makes. This is what our country makes now: new products on which to place our bets. After the dot-com bust, we lost even our taste for investing in high tech. But we missed those dot-com profits, and so we turned our powers of invention to the bubbles themselves. We invented bigger and better pumps, in the form of new financial products. [...]
Paradox: “You say interest rates were too high, but in fact, the Fed rate, which sets most other interest rates, has rarely been lower than it was over the course of the past decade.” I admit it’s paradoxical. But as we now know, with low-interest mortgages — even the subprimes — the interest rates really were high, because they were variable....And even if those rates did not rise “variably,” a mortgage with very little down is a guarantee that the new “owner” is so house poor that he or she will need other kinds of debt to get by — credit-card debt at 35 percent. [...]
The money we bet in Chicago is the money we should have been investing in Detroit. And I know they’re lunkheads in Detroit, but the lunkheads ended up running the auto industry because the smart people, the Harvard dropouts and the autodidacts from Texas Tech, decided that the real money wasn’t in starting software companies or running telcos but in derivatives.
We set up the incentives to keep our best and brightest out of Detroit. In June 2008, even in a bad year for Wall Street, 39 percent of the Harvard graduating class went directly into consulting or the financial sector, and many others will go a few years later, after graduate school. [...]
It’s obligatory in an article like this for the writer to present a Plan. [...]
First, we have to pass a new type of law against usury that accepts the world in which we all live now. The saintly Illinois Senator Dick Durbin has proposed an amendment to the National Banking Act, to put a cap on interest at 35 percent. But that would let too many banks go on as before. Here’s an alternative: let’s cap interest at 9 percent, then let a federal agency give exemptions to applicants — banks — that want to raise rates up to Durbin’s limit (I would stop at 20 percent).
To get the right to this higher rate of 20 percent, however, the bank would have to demonstrate each year, to a federal agency, that it has a reputation for honesty and fairness and that it had not been found guilty of any fraudulent or bad-faith practices, such as the use of hidden fees or charges, or the unfair garnishment of someone’s pension. I’m aware that this standard is vague. I suppose few licenses would be denied. But the very existence of this procedure — and the right of you and me to email our gripes to a federal agency with the power to exert extreme pressure — would have a chilling effect on banks and keep them from getting too near unconscionable conduct or charging the highest possible rates.
Second, we should have state-owned banks like the German banks known as the Sparkasse. Maybe each of the fifty states could charter its own bank. Each would issue credit cards at a rate much lower than what the private banks charge. Also: no fees at cash machines, no oppressive collection cases, no gratuitous destruction of people’s credit ratings. The catch is that, as in Germany, the U.S. Sparkasse would lend only to the most creditworthy people. That is, the state banks would set benchmarks not only for how the private banks should behave but how the people should behave as well.
Third, we should have at least one or two “public guardians” as directors at the banks and other financial firms we have bailed out with $700 billion in taxes and all the money the Fed has printed. Every financial company into which we have “injected equity” should be required to have government-appointed directors, up to a third of the board. We can use these directors to nudge (if not dictate) what the banks and firms should do. For example, the directors should work to bring down credit-card rates. Through guardians, we can lower rates, bank by bank, by moral suasion and a certain built-in pressure rather than by external decree. The guardians should also demand of us good character if they bring down the rates. “Our directors” should help push capital into manufacturing. Of course, there has to be a reasonable profit, but sometimes a reasonable profit can be 3 percent instead of 30 percent.
Fourth, we should require the banks we bail out to cancel an appropriate amount of consumer debt — especially in instances where people would have paid back the principal by now had the interest rate been more reasonable. My retired schoolteacher, the one with the husband who is deep into Alzheimer’s and who has already paid $3,000 on a $1,700 loan, should be let off the hook. The banks we have bailed out should follow the Golden Rule: just as their own debts have been written down or paid off, so they in turn should do unto others.
Finally, we should think about ways to “inject equity” directly into the accounts of working people rather than into banks. The best way to do this is to announce a plan to raise the gross replacement rate of Social Security from 44 percent to something closer to 65 percent, which is still short of the rate in many European social democracies. We can afford this as much as or more than they can.
We could aim to reach that goal gradually, over the next twenty years, but even announcing the goal encourages future-oriented thinking. It would encourage people to believe that they could invest in real things again, instead of pinning their hopes on the false and predatory promise of a big, Vegasstyle payout. The promise of a real public pension that people can live on would lead fewer of us to chase bubbles in good times, even as it gave all of us the confidence to keep spending when times were bad. [...]
What’s immoral is to pump up demand, as we have, by handing out easy money at high interest and driving people into debt. Even in Babylon they spared people that kind of captivity. We now have to ensure our own country does the same.
It's stunning, isn't it, how nobody talks this way anymore. Not on the teevee anyhow. Not in America.
March 24, 2009
|We Been Tranched||Economy|
Collateralized mortgage obligations (CMOs) work something like this. A large number of mortgages are put into a trust, and the mortgages are then sliced into horizontal layers, or tranches. In a very simple example there might be three tranches. The top tranche might contain 70% of the mortgages by dollar amount, the middle tranche 20%, the bottom tranche 10%. The trick is that as payments come in on the mortgages, the top tranche gets first claim on all the incoming cash flow. People figured there was no way 30% of the mortgages would default so the top tier was definitely going to get paid, and so it got a triple-A rating, basically as good as money. The middle tranche got first dibs on the remaining cash flow, so it was golden, too, unless more than 10% of the mortgages defaulted. That made it more risky than the top, so it paid a higher rate of return, but it still seemed pretty solid. The bottom tranche was the last to get paid, so it was the riskiest, one of those toxic assets we hear so much about.
So I watch what's happening with the "bailout" plans, and it strikes me that it's tranches all over again. The top tranche consists of the likes of AIG, Citigroup, Bank of America, and JP Morgan Chase. They get paid first. If there's money left over, the middle tranche gets paid. That's GM and Chrysler and a bunch of smaller banks. The bottom tranche? That's us.
Actually, it's worse than that. Not only do we in the bottom tranche get paid last, we're the ones, collectively, who are doing the paying. The top tranche, meanwhile, consists of the firms most responsible for the mess we're in. They made the biggest, riskiest bets and raked in the largest returns until the bubble popped, and now they're first in line for payouts from us taxpayers. They, and their problems, are all we ever hear about.
What a hustle.
March 17, 2009
|That "Surprisingly Strong Housing Report"||Economy|
CNN says a "surprisingly strong housing report" was one factor causing stocks to go up again today.
This graph puts the housing report in perspective. It's that tiny little uptick at the end.
[Via John Robb]
March 13, 2009
|Jon Stewart Plays Hardball||Economy Media|
You've probably seen this wonderful, wonderful bit from The Daily Show a little over a week ago:
CNBC's Jim Cramer took exception, and last night Stewart had him on the show. Stewart starts out funny, but then he plays some real hardball, in parts 2 and 3 especially. Unedited, uncensored version. Watch:
Why does it take a fake news show to ask real questions? (He asked rhetorically...)
November 28, 2008
This is horrible, on so many levels. NY Daily News:
A Wal-Mart worker died after being trampled when hundreds of shoppers smashed through the doors of a Long Island store Friday morning, police and witnesses said.
The 34-year-old worker, employed as an overnight stock clerk, tried to hold back the unruly crowds just after the Valley Stream store opened at 5 a.m.
Witnesses said the surging throngs of shoppers knocked the man down. He fell and was stepped on. As he gasped for air, shoppers ran over and around him.
"He was bum-rushed by 200 people," said Jimmy Overby, 43, a co-worker. "They took the doors off the hinges. He was trampled and killed in front of me. They took me down too...I literally had to fight people off my back."
The unidentified victim was rushed to an area hospital, where he was pronounced dead at 6:03 a.m., police said.
The cause of death was pending.
A 28-year-old pregnant woman was knocked to the floor during the mad rush. She was hospitalized for observation, police said.
Three other shoppers suffered minor injuries, cops said.
Before police shut down the store, eager shoppers streamed past emergency crews as they worked furiously to save the store clerk's life.
"They were working on him, but you could see he was dead, said Halcyon Alexander, 29. "People were still coming through."
Only a few stopped.
"They're savages," said shopper Kimberly Cribbs, 27. "It's sad. It's terrible."
Other reports indicate the pregnant woman miscarried. Shoppers ignored Wal-Mart employees' requests that they leave the store.
It's not like people were fighting to get air or water. They were fighting to be first in line to get some crappy stuff for Christmas. But they've been programmed to the point where I guess that seems like air or water.
November 15, 2008
One of the surest ways to go wrong in predicting the future of the stock market or the economy is to go with conventional wisdom. People are most bullish at the top of the market and most bearish at the bottom. That's just a fact. People are practically hard-wired to expect that current trends, whatever they may be, will continue.
With that in mind, watch this video (via John Robb). In it, Peter Schiff — one guy who saw the economic meltdown coming — tries to argue with a succession of well known idiots back in 2006 and 2007. They literally laugh in his face. But he who laughs last...
Even Schiff gets some things wrong: he predicts inflation and a surge in the price of gold. When credit bubbles burst, the result is not inflation but deflation, and that is what we're seeing now. As Robert Prechter, the heavyweight champ when it comes to predicting the present crisis years in advance, wrote recently:
Cash now buys 1.7 times as much stock and real estate, twice as much silver, and 2.5 times as much oil as it did a short time ago. And if you are incautious enough to want high-yield bonds or asset-backed (in)securities, you can get a wheelbarrow more of them for your dollar as well....This trend is far from over. The longer you hold onto your money, the more it will be worth, until the deflation ends.
Fans of gold think gold soars when the economy is in crisis, but historically that's just not true. As Prechter has shown, gold does better during economic expansions than during recessions. And over the last six months, gold has fallen just like every other commodity.
I took my retirement money entirely out of the stock market more than a year ago. It was obvious to me that all the big trends were unsustainable. I don't mention this to say I'm smarter than other people. What I am, I think, is more skeptical. My bias is to expect the conventional wisdom to be wrong on most things. It's especially wrong on the markets.
There are going to be rallies, but I think the bottom is a long way off. I do expect that we'll get a fairly good bounce soon. It's likely to be impressive. If so, you might want to take it as an opportunity to get your money out. But the conventional wisdom will tell you otherwise. People will see the market rise and they'll say the bear market's over. They'll sing "Happy Days Are Here Again," just like they did in 1930. When that sentiment reaches a crescendo, that will be the time to get out — assuming you're still in. That's how I see it, anyway.
When will it be time to get back into stocks for the long haul? When almost everybody says there's no hope.
There's a lesson here about conventional wisdom generally. Just because everybody says something, that doesn't make it so.
Disclaimer: This is not a recommendation to buy, sell, or hold any financial instrument.
November 13, 2008
|"A Very Frightening Economy"||Economy|
I have the feeling people just aren't getting how screwed we really are. The US economy has been running on debt. Lending has ground to a halt. Do the math.
Here's a small glimpse of what's coming (from CBS2, Chicago):
The warning is out – [Chicago] Mayor Richard M. Daley says a parade of corporate chief executives have told him huge layoffs are planned around the city and will carry into next year. [...]
Mayor Daley says corporate leaders told him huge layoffs will impact the city this month and next, and into the new year. He also says city, county and state governments should be prepared for their revenue to fall dramatically because of the souring economy.
"This is going to be all year, so it's going to be a very frightening economy," Mayor Daley said. "Each one tells me what they're laying off, and they're going to double that next year. We're talking huge numbers of permanent layoffs for people in the economy. It's going to have a huge effect on all businesses."
The mayor said the gravity of the situation cannot be underestimated.
"We never experienced anything like this except people who came from the Depression," Mayor Daley said. "When you have that many layoffs early – and they're telling me this is only the beginning of their layoffs – that is very frightening."
Mayor Daley also warned that local governments will be in jeopardy and may not have enough money to meet payroll, although he is not worried about paying City of Chicago employees.
In addition, the federal bailout plan is changing, and the big three automakers are all warning they could go bankrupt, and lawmakers say if the auto industry goes down, the huge number of jobs lost would cause more house foreclosures.
November 12, 2008
|Income Inequality And The Economic Crisis||Economy Musings|
There's an important lesson in the current economic crisis that hardly anyone's talking about: income inequality as a cause.
There have been two periods of extreme income inequality in the US: 1) just before the Great Depression, and 2) right now. People acknowledge that, but almost nobody draws the obvious conclusion.
How would extreme income inequality have fed the current crisis and soon-to-be depression?
Most Americans have seen their inflation-adjusted incomes stagnate or fall over the last couple of decades. What has been the result? Consumption by average Americans is the engine that drives the American — and much of the world — economy. It accounts for 70% of US GDP. Falling income ordinarily means falling consumption, which means a slowing economy. To forestall that outcome, Americans were deluged with easy credit. They made up for the shrinkage in their incomes by borrowing, largely in the form of home equity loans and credit card debt. But now that's over. Falling home prices have taken home equity loans off the table. And I don't know about you, but I used to get a pre-approved credit card offer in the mail just about every day. No more. Easy credit is gone, so now the economy's being hit all at once, rather than gradually, with the consequences of the reduction in the average person's income. Nobody's shopping. The result will be a self-reinforcing spiral that's really only just getting underway. Less consumption will lead to layoffs, bankruptcies, etc., which will lead to even less consumption, and so on.
Meanwhile, incomes soared for the people at the top. Since there's a limit to how much stuff people can buy, all that concentrated wealth went looking for places to invest. Interest rates were low (feeding the rest of us with easy credit) so it didn't pay to stick one's money in things like Treasury bills. And with their incomes growing at a giddy pace, people at the top felt impervious to risk. Enter the mortgage-backed securities, CDOs, CDSs, etc., etc.
In a more equitable society, the average person's income would have been growing all along and there wouldn't be such a giant pool of money at the top. Average people wouldn't have needed to take on enormous amounts of debt to see an improvement in their standard of living. The well-to-do wouldn't be drowning in cash and feeling like risk couldn't touch them. No bubble, no bubble bursting.
The irony is that American capitalism has cut its own throat. By hogging the spoils, the rich created a situation where the very system that supports them is in jeopardy. A more equitable society is a more sustainable society.
Small wonder that we're not hearing much about that.
November 10, 2008
|The Thing About GDP||Economy|
The thing to keep in mind whenever somebody talks about GDP (via AngryBear):
Unfortunately GDP figures are generally used without the caveat that they represent an income that cannot be sustained. Current calculations ignore the degradation of the natural resource base and view the sale of non-renewable resources entirely as income. A better way must be found to measure the prosperity and progress of mankind.
— Barber Conable, former President of the World Bank, 1989
Economists treat that as a minor quibble, but nothing could be more fundamental.
People look at those graphs of rising GDP and naturally assume good things are happening. But there's more to it. As I wrote a while back:
Just came across a great phrase from Al Gore: we're "operating the planet like a business in liquidation". Liquidating everything, using it up as fast as we can, last one out lock the door. Except there is no "out".
The bottom line on sustainability: unsustainable = stupid. Fatally stupid. Suicidally stupid. Pretty much by definition, when you stop and think about it. Sustainability is the fundamental requirement for long-term survival. Anything else is sawing off the limb we're sitting on — and there ain't no net.
GDP, like a lot economic abstractions, blinds us to reality. But of course we want to be blinded — otherwise it wouldn't be so easy.
Time to see clearly.
November 05, 2008
|Robert Shiller On The Economy||Economy|
Yale economist Robert Shiller, one of the few prominent economists who predicted the current crisis, on where we are and where we're headed:
The worst is ahead of us.
October 28, 2008
|Maker Of Toy Cars Worth More Than General Motors||Economy|
In the fad-driven fantasyland of toys, Hot Wheels has had an incredible ride. Those pocket rockets have been racing down their familiar orange tracks for four decades now and, unlike the real car market, show no signs of slowing down. Last year Hot Wheels set a record, as sales surged by 16 percent, and they continue to accelerate in 2008 even as the economy tanks. In fact, as Motown melts down, Hot Wheels is heating up. The tiny toy cars’ parent company, Mattel, now has a market capitalization that surpasses General Motors. That’s right—Wall Street thinks the maker of toy cars is worth more than the largest real carmaker in America.
October 24, 2008
|Bad Night For Stocks||Economy|
Stock markets around the world are crashing overnight.
In Asia, Tokyo's Nikkei index lost 9.60% and Hong Kong's Hang Seng lost 8.30%.
In Europe, as I write this, London's FTSE index is down 7.01% and Paris' CAC is down 7.30%.
Update (4:50 AM) - FTSE down 8.70%, CAC down 9.80%.
October 20, 2008
|Krugman On The Real Plumbers Of Ohio||Economy Politics|
Paul Krugman looks past Joe the Plumber to ask how the real plumbers of Ohio are making out. NYT:
[W]hat's really happening to the plumbers of Ohio, and to working Americans in general?
First of all, they aren't making a lot of money....[A]ccording to the May 2007 occupational earnings report from the Bureau of Labor Statistics, the average annual income of "plumbers, pipefitters and steamfitters" in Ohio was $47,930.
Second, their real incomes have stagnated or fallen, even in supposedly good years. The Bush administration assured us that the economy was booming in 2007 — but the average Ohio plumber's income in that 2007 report was only 15.5 percent higher than in the 2000 report, not enough to keep up with the 17.7 percent rise in consumer prices in the Midwest. As Ohio plumbers went, so went the nation: median household income, adjusted for inflation, was lower in 2007 than it had been in 2000.
Third, Ohio plumbers have been having growing trouble getting health insurance, especially if, like many craftsmen, they work for small firms. According to the Kaiser Family Foundation, in 2007 only 45 percent of companies with fewer than 10 employees offered health benefits, down from 57 percent in 2000.
And bear in mind that all these data pertain to 2007 — which was as good as it got in recent years. Now that the "Bush boom," such as it was, is over, we can see that it achieved a dismal distinction: for the first time on record, an economic expansion failed to raise most Americans' incomes above their previous peak.
Since then, of course, things have gone rapidly downhill, as millions of working Americans have lost their jobs and their homes. And all indicators suggest that things will get much worse in the months and years ahead.
So what does all this say about the candidates? Who's really standing up for Ohio’s plumbers?
Mr. McCain claims that Mr. Obama's policies would lead to economic disaster. But President Bush's policies have already led to disaster — and whatever he may say, Mr. McCain proposes continuing Mr. Bush's policies in all essential respects, and he shares Mr. Bush's anti-government, anti-regulation philosophy.
What about the claim, based on Joe the Plumber’s complaint, that ordinary working Americans would face higher taxes under Mr. Obama?...[T]he typical plumber would pay lower, not higher, taxes under an Obama administration, and would have a much better chance of getting health insurance.
I don't want to suggest that everyone would be better off under the Obama tax plan. Joe the plumber would almost certainly be better off, but Richie the hedge fund manager would take a serious hit.
But that's the point. Whatever today's G.O.P. is, it isn't the party of working Americans.
The people who show up at McCain/Palin rallies are mostly the very people who would do better under Obama. But when McCain sneers that Obama "believes in redistributing wealth," the crowds erupt with outraged boos. Maybe they should stop for once and think.
McCain, too, believes in redistributing wealth. He just believes in redistributing it in the other direction, away from the people at his campain stops and toward the already wealthy — away from Joe the plumber and toward Richie the hedge fund manager.
And they boo Obama?
October 16, 2008
|Unintended Consequence: Mortgage Rates Spike||Economy|
US mortgage rates have soared this week in an unexpected reaction to the latest Treasury financial rescue plan, which has prompted investors to buy bank debt and sell bonds backed by home loans.
Interest rates on 30-year fixed-rate mortgages...rose to 6.38 per cent on Thursday from 5.87 per cent last week - before the Treasury said on Tuesday that it would take equity stakes in banks and guarantee new bank debt.
Investors responded to the new guarantee by buying existing bank debt, reckoning it could be refinanced with the new government-supported bonds. As they did so, they sold lower-yielding paper issued by Fannie Mae and Freddie Mac, the mortgage companies put into government conservatorship last month.
The sales of Fannie and Freddie paper pushed up yields on their debt, which is backed by mortgages. This, in turn, pushed mortgage rates to levels not seen since the government took over Fannie and Freddie on September 7.
Fannie and Freddie had been taken into conservatorship by their regulator to help keep mortgage rates low and – it was hoped – revive the housing market.
However, the opposite is now happening, making it more difficult for struggling homeowners to refinance their mortgages and for prospective homebuyers to get financing. As a result, house prices may fall further before they find a bottom.
Still no free lunch.
October 15, 2008
|Rout In Asia||Economy|
Asian markets are crashing overnight. As I write this, Japan's Nikkei 225 Index is down 9.55% and China's Hang Seng Index is down 7.46%.
It just keeps coming.
That's the other thing about bear market rallies. They don't last long. Today: Dow down 7.9%, S&P down 9%, Nasdaq down 8.5%. More than 97% of the volume on the NYSE was in stocks that declined in price.
The frozen credit markets don't appear to be improving and may even be getting worse. But it's not just the financial crisis that's hammering the market. The real economy is tanking, too. Real retail sales in September (figures released today) are down 4.3% from a year ago. Consumer spending is something like 70% of GDP, so falling consumer spending confirms what we already know: we're in a recession. People have stopped taking out home equity loans, so they have less money to spend. And people are increasingly pessimistic about the economic future, so they're hanging on to what money they do have.
Except for the occasional short-covering rally, it's hard to see how stock prices don't continue to fall from here. Who's going to buy? And there are still lots of potential sellers. Most people have been hanging on to their stocks, hoping for a rebound. At some point, they'll start selling in earnest. Then look out.
October 14, 2008
|Bear Market Rallies||Economy|
Yesterday's stock market rally was impressive. The Dow rose almost a thousand points. That took it to levels it hadn't seen since, since — well, since Wednesday. Market breadth was impressive, too, with almost 20 stocks going up for every stock that went down.
But that's the thing about bear market rallies. They're explosive. Partly because so many people are desperate to recoup some of their losses, and partly because so many people have sold short. Short sellers need to buy stock to close their positions. When the market starts to rally and the short sellers start scrambling to get out, they add significantly to the frenzy of buying. Market breadth (advancers leading decliners) is typical, too, of bear market rallies. Some of the rallies with the greatest breadth in history occurred during the period from 1929 to 1932 when the Dow lost fully 89% of its value.
And what about today? If all you read were the closing averages, it seemed like a pretty tame day. Dow down 76 points. No biggee. But it was actually pretty wild. The Dow shot up 400 points at the open, extending yesterday's rally, and then proceeded to drop 700 points. In the final hour, it managed to regain about 225 points; hence, the tame number at the close. But if you weren't paying attention, you missed the 700 point drop. During normal times, a 700 point drop would be big news. Now it's just another day.
But even that doesn't tell the whole story. The Dow and S&P declines were pretty slight, but the Nasdaq declined more than 3.5%. The difference was that the Dow and S&P include a lot of banks and other financial stocks, which rallied huge after Paulson announced plans to "inject" them with $250 billion in capital. The rally in financials masked the weakness elsewhere. The Nasdaq is light on financials, so it gives a truer picture of what's going on. The financial house may be slowly getting in order, but the real economy is tanking. Recession is here and it's getting worse.
If I owned stocks — which I don't, not since about a year ago — I think I might have taken yesterday's rally and the surge at this morning's open as an opportunity to get out. But that's easy to say from the sidelines. I do think there's not going to be much upside to staying in, and there's potentially a whole lot of downside to not getting out. But that's just my opinion. I'm not giving investment advice. I'm not qualified. I'm just trying to put yesterday's rally and the rallies to come in some perspective. People see a rally and they get their hopes up. But every bear market has rallies.
October 10, 2008
Well that was interesting.
The Dow had a nice short-covering rally, climbing 900 points from the low.
And then proceeded to fall 500 points in about 6 minutes.
October 09, 2008
|Stocks Crash In Asia||Economy|
Tomorrow could be ugly. Bloomberg:
Asian stocks tumbled, driving Japan's Nikkei 225 Stock Average down as much 11 percent, and U.S. futures fell on concern the deepening credit crisis will push the global economy into recession. [...]
"It's a financial panic," said Choi Min Jai, who oversees the equivalent of $2.1 billion at KTB Asset Management Co. in Seoul. "The recession can only get worse. You can't find the link that will break the vicious cycle."
The MSCI Asia Pacific Index lost 4.9 percent to 87.86 as of 10:33 a.m. in Tokyo. The measure is poised to drop 16 percent this week, the biggest slump since the index was created on Dec. 31, 1987. Only four stocks gained in the 990 member gauge. [...]
All Asian benchmark indexes dropped. Japan's Nikkei plunged 9.8 percent to 8,264.65. Australia's S&P/ASX 200 Index tumbled 5.7 percent. Today's slump left the Nikkei valued at 9.9 times earnings and the S&P/ASX 200 at 11 times profit, the lowest for both indexes since at least April 2000, when Bloomberg started keeping track of the data. [...]
MSCI's Asian index is down 42 percent this year as mounting mortgage-related losses at financial firms caused credit to dry up, toppling banks including Lehman Brothers Holdings Inc. and slowing global demand for Asia's exports.
U.S. stocks tumbled yesterday, wiping out almost $900 billion in market value, with the Dow Jones Industrial Average closing below 9,000 for the first time since 2003. The Standard & Poor's 500 Index slid 7.6 percent to 909.92, capping a seven-day decline, the longest losing streak since 1996.
The article refers to today as yesterday, because in Asia it's tomorrow. If you see what I mean.
Today the US stock market wiped out $900 billion. In one day. In just the US. Gives you some perspective on the size of the forces at work. Paulson and his $700 billion fund really don't stand much of a chance.
If this keeps up, one day very soon we may see a day like October 19, 1987. There don't seem to be any buyers left.
|"An Unfolding Debacle"||Economy|
I've just started following John Jansen's blog Across the Curve. He traded bonds for 30 years and seems to know his stuff. Most of it's way over my head, but even I can understand this, written after the market's close today:
I have said this before and risk redundancy but more and more it seems likely that the resolution of this crisis will be an historic financial calamity. Each and every step which central banks and regulators have taken to resolve the crisis has been met with failure. In the beginning, the steps would produce some brief stability. In the last several days, the US Congress (belatedly) passed a bailout bill, the Federal Reserve has guaranteed commercial paper and in unprecedented coordination central banks around the globe slash base lending rates. Listen to the markets respond.
The market scoffs as Libor rises, stocks plummet and IBM is forced to pay usurious rates to borrow. There is no stability and no hiatus from the pain. It continues unabated in spite of the best efforts of dedicated people to solve it.
We are in the midst of an unfolding debacle. It is happening about us. I am not sure how or when it ends, but the end, when it arrives, will radically alter the way we live for a long time.
Whoever wins the US election and takes office in January will need prayers and divine intervention.
And I thought I was bearish.
|Bush To "Assure" The Country||Economy Politics|
This should knock another thousand off the Dow (Bloomberg):
President George W. Bush will address the nation tomorrow to tell Americans they should remain "confident" amid falling stock markets and a worldwide credit crisis, administration spokeswoman Dana Perino said.
The president wants to "assure" the country that Treasury Secretary Henry Paulson and other administration officials are taking "every effort to stabilize our financial system," Perino said.
"Economic officials are aggressively taking every action," she said. "The Treasury is moving quickly to use new tools to improve liquidity, which is the root cause of this problem."
The timing of the statement, spurred by "volatility" in the U.S. markets today, hasn't been set, Perino said, adding that it likely will take place about 10 a.m.
Pretty hilarious, actually, in the bitterest kind of way. Nothing says "assure" to the country like seeing Dubya on the teevee.
But maybe it's not such a good idea to keep reminding people of all the stunningly drastic steps government is taking. Not when people can see none of it's working. If this stuff isn't even making a dent, could be we're really up shit's creek.
Let's give Krugman the last word:
And by the way: liquidity is not the root cause of this problem. It's terrifying that the Bush administration still thinks it is.
|Fear And The Stock Market||Economy|
This thing is far from over. There will be rallies — who knows, maybe even tomorrow — and some of them will be quite explosive because of short-sellers scrambling to cover their positions, but from today's action it looks like real fear has set in. We may have reached the recognition point, where people have realized they're up on a high wire without a net.
Warren Buffett once pointed out that the markets during a panic are like a crowded theatre during a fire — but with one crucial difference. In the stock market, you can't leave your seat to run for the exit until you find some other guy who's willing to buy it from you. When the theatre's filling up with smoke that's not easy, not without practically giving it away.
Like the old Wall Street adage says, bear markets move a lot faster than bull markets because panic is a lot stronger emotion than hope.
All of this is just my opinion. Please don't take it as investment advice.
Today looked to be an up day in the market after rallies in Asia and Europe, and the Dow was up almost 200 points early. It has since fallen
almost 500 points more than 600 700 800 850 points from the high.
9000 8900 8800 8700 8600 now. Ouch.
|Credit Markets Remain Frozen||Economy|
With all of the extraordinary steps that have been taken, you might expect the credit market would be easing. But you'd be wrong. It's getting worse. Bloomberg:
The cost of borrowing in dollars for three months in London soared to the highest level this year as coordinated interest-rate reductions worldwide failed to revive lending among banks for any longer than a day.
Attempts by policy makers to restore confidence to money markets are being stymied by almost daily crises among financial institutions. Iceland's government took over the nation's biggest lender today to keep the country's banking system working. American International Group Inc., the insurer taken over by the U.S. government, may need $37.8 billion of extra funds, the Federal Reserve Bank of New York said yesterday.
"To see little or no reaction in the fixings is very disappointing and reinforces the fact that Libor is broken and the transmission mechanism from central banks isn't working," said Barry Moran, a currency trader in Dublin at Bank of Ireland, the country's second-biggest bank. "Things are still very stressed and we don't know what's going to fix it."
The London interbank offered rate, or Libor, for three-month loans rose to 4.75 percent today, the highest level since Dec. 28. The Libor-OIS spread, a measure of cash scarcity, widened to a record. The overnight rate fell to 5.09 percent, still 359 basis points more than the Fed's 1.5 percent target rate. [...]
"I don't see a wave of liquidity coming into the market," said Alessandro Tentori, an interest-rate strategist in London at BNP Paribas SA. "People are still holding on to their cash because there's still a great deal of uncertainty out there." [...]
The Libor-OIS spread, the difference between the three-month dollar Libor and the overnight indexed swap rate, climbed 23 basis points to an all-time high of 348 basis points. The average was 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened 5 basis points to 410 basis points, the most since Bloomberg records began.
"Libor spreads are still wide, which suggest offshore banks are not willing to take more risks lending to other banks," said Cezar Bayonito, a liquidity trader at Allied Banking Corp. in the Philippines. "Interest-rate cuts will be of little help in the near term because the issue is trust, not rates."
It certainly seems that the problem in the credit markets is just what Nouriel Roubini has been saying all along: nobody knows which apples are the good apples and which are the bad apples. That is, nobody knows which banks or companies are next to fail. So nobody wants to lend to anybody. The underlying problem is a lack of transparency. That, and the fact that it's impossible to give meaningful valuations to many of the trillions of dollars in derivatives that are out there (since there's no market where they're traded) so it's impossible to separate fact from fiction on many companies' balance sheets. The bottom line: nobody knows who to trust. As Roubini has been saying, there needs to be a program of triage, where the good apples are saved and the bad apples are shut down. Only then will people begin to trust counterparties enough to loan them money. My guess is that the crisis will have to get worse, though, before governments have the nerve to undertake something so radical.
October 08, 2008
|Despite Rate Cuts, Credit Markets Remain Frozen||Economy|
Central banks around the world cut interest rates overnight. Has it helped? Not yet. Bloomberg:
Overnight corporate borrowing costs jumped, default risk increased and the bond market remained all but closed after central banks worldwide cut interest rates, showing unprecedented government intervention was failing to aid companies struggling to finance themselves.
Overnight rates on dealer-placed commercial paper rose 56 basis points to 3.5 percent, while the cost of protecting corporate bonds from default rose. Two issuers sold $750 million of U.S. company bonds this week, compared with the weekly average this year of $16.8 billion.
The coordinated rate cuts come as companies struggle to fund daily operations and economists say the world is already mired in a recession. The Federal Reserve joined the European Central Bank and four others today in lowering interest rates by as much as half a percentage point in a coordinated effort to unlock short-term credit markets frozen since Lehman Brothers Holdings Inc. filed for the biggest bankruptcy in history on Sept. 15.
"We've reached the point where so many of these government plans have fizzled that the reaction is reserved until we actually see the impact," said Christopher Low, chief economist at FTN Financial in New York. "They can't stop a recession. What they can do hopefully is prevent a really nasty recession." [...]
"The reality is there's no private sector balance sheet willing to step in so the Fed and the Treasury are becoming the only balance sheet," said Mark Kiesel, executive vice president at Pacific Investment Management Co., the manager of the world's biggest bond fund. "In a market that lacks trust and confidence the private sector is on the sidelines." [...]
Corporate borrowing options have dwindled as the investment-grade bond market remained all but closed for a fifth week. Companies from newspaper firm Gannett Co. to electricity producer Southern Co. have been forced to tap credit lines or forego raising debt because of the market's disruption. [...]
The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 3.87 percentage points, after widening to as much as 4.03, the most since Bloomberg began compiling the data in 1984.
"I do believe over time policy will work," said Kiesel, who oversees $180 billion of corporate bonds in Newport Beach, California. "The problem with all these measures is it operates with a lag and the deleveraging is real time. The deleveraging cycle is operating on a real time basis much faster than policy can overcome it."
The world economy has already fallen into its first recession since 2001, according to JPMorgan Chase & Co. economists Bruce Kasman and David Hensley. The U.S. is "definitely in a recession," Low said.
Money-market funds, the biggest buyers of commercial paper, began to flee the market three weeks ago, pushing yields to the highest since January and persuading the Fed yesterday to backstop the market.
Prime money-market funds have pulled $200.3 billion of assets from commercial paper since Sept. 16, the day after Lehman filed for the biggest bankruptcy ever, and built up their safer government debt holdings instead, according to IMoneyNet Inc., a research firm based in Westborough, Massachusetts, that tracks money funds.
Big companies derive cash flow from sales of "commercial paper" — short-term IOUs that pay interest. When the IOUs reach maturity, the companies "roll them over" by selling new ones. Before long, if credit markets don't thaw, we are going to see a lot of commercial paper reaching maturity, and companies will be unable to find private sector buyers to roll them over. The Fed will have to buy them — something which was never part of the Fed's mandate, until yesterday. Otherwise, we'd see a lot of big companies going into default.
October 07, 2008
Consumer spending is falling off a cliff. Here are some reasons why:
- Americans' retirement plans have lost nearly $2 trillion dollars (so far) in the past 15 months. (How big is a trillion?)
- Nearly 1 in 6 US homeowners has a mortgage that's now under water (i.e., the principal is more than the house is worth).
- Home equity loans have fallen almost to zero in the most recent quarter.
People feel poorer, and with good reason.
|The Party Of Economic Growth||Economy Politics|
I'm always interested in things that "everybody knows" that turn out to be flat wrong.
"Everybody knows" that the Republican Party is the party of economic growth, with Ronald Reagan as patron saint. But here are the last 13 presidents ranked by the rate of growth in per capita real GDP (via Angry Bear):
- Bush Sr.
FDR, bête noire of Republicans everywhere, tops the list and nobody else even comes close. From 1932 through 1944, real per capita GDP grew 8.05% per year. But maybe it was the war? From 1932 to 1940, the growth rate was 5.37% per year, more than twice Reagan's rate.
LBJ's rate was 3.98%, about 1.6 times Reagan's rate. JFK's rate was 2.65%, and so on.
FDR and LBJ, who increased the federal government's role in social programs more than any other presidents, by far, were the heavyweight champs of economic growth, by far.
But "everybody knows" social programs kill economic growth.
|Finance You Can Understand||Economy|
Today the news is all about "commercial paper." What's that about? And Credit Default Swaps (CDSs). They have something to do with this whole mess, right? But what are they? And what about the Paulson plan? Was there an alternative?
For an absolutely superb explanation, go listen to this audio at This American Life. Nothing out there matches it for vividness and clarity.
And for an equally clear and vivid discussion of the whole mortgage bubble and the Collateralized Debt Obligations (CDOs) that fueled it, go listen to their other audio from last May. Equally superb.
The team who put these shows together now have a daily podcast "Planet Money Podcast" that you can subscribe to for free at iTunes. (Update: They're also available at http://www.npr.org/blogs/money/)
I can't recommend them too highly. Listen and learn.
October 06, 2008
In Southern California, fully half of the houses being sold now are houses that were repossessed by the bank.
You can read a statistic like that, and it doesn't really hit home. But watch this video. Trust me. It's like nothing you've ever seen.
October 03, 2008
|Buy The Rumor, Sell The News||Economy|
The House passed the bailout bill, after which the Dow dropped almost 300 points in 20 minutes.
Update: The Dow finished the day down 157.47. That's a drop of 486 points from its peak shortly before the bill passed. A vote of no confidence from the market.
It is now clear that the US financial system - and now even the system of financing of the corporate sector - is now in cardiac arrest and at a risk of a systemic financial meltdown. I don’t use these words lightly but at this point we have reached the final 12th step of my February paper on The Risk of a Systemic Financial Meltdown: 12 Steps to a Financial Disaster (Step 9 or the collapse of the major broker dealers has already widely occurred).
Yesterday Thursday a senior market practitioner in a major financial institution wrote to me the following:Situation Report: So far as I can tell by working the telephones this morning:
LIBOR bid only, no offer.
Commercial paper market shut down, little trading and no issuance.
Corporations have no access to long or short term credit markets -- hence they face massive rollover problems.
Brokers are increasingly not dealing with each other.
Even the inter-bank market is seizing up.
This cannot continue for more than a few days. This is the economic equivalent to cardiac arrest. Then we debated what is necessary to restart the system.
I believe that the government will do another Hail Mary pass, with massive guarantees to the short-term commercial credit system and wide open short-term lending by the Fed (2 or 3 times expansion of the Fed balance sheet). If done on a sufficient scale this action will probably work for a while. But none of these financial measures affects the accelerating recession -- which will in turn place more pressure on the financial sector.
Another senior professional in a major global financial institution wrote to me:Today, in our trading room, I could see the manifestations of a lending freeze, and the funding hiatus for banks and companies, with LIBOR bid only, the commercial paper market closed in effect, and a scramble for cash - really really scary.
Do you think this is treatable without a) a massive coordinated liquidity boost and easing of monetary policy and b) widespread nationalisation of some banks, gtess to others AND a good bank/bad bank policy where some get wiped along with their investors? The Treasury TARP plan is an irrelevance if we are at a major funding crisis.
And to confirm the near systemic collapse of the system of financing of both financial firms and corporate firms Warren Buffet declared yesterday, as reported by Bloomberg:the U.S. economy is "flat on the floor" after a cardiac arrest as companies struggle to secure funding and unemployment increases.
"In my adult lifetime I don't think I've ever seen people as fearful, economically, as they are now," Buffett said today in an interview with Charlie Rose to be broadcast tonight on PBS. "The economy is going to be getting worse for a while." ...The credit freeze is "sucking blood" from the U.S. economy, Buffett said.
We are indeed at the cardiac arrest stage and at risk of the mother of all bank and non-bank runs...
There's a lot more in his paper, including suggested actions. Read it.
The problem now is that nobody knows which banks, brokerage houses, hedge funds, etc., are insolvent because of toxic mortgage-related assets and which are not. (Non-bank entities — the so-called "shadow banking system" — are relatively unregulated, thanks to Republican policies, and so have minimal transparency, and many of the mortgage-related assets on their balance sheets are grossly overvalued. If they were marked down to their true market value, many more of these entities would be found to be insolvent. But because of the lack of transparency, nobody knows which ones are insolvent or which dominoes will knock down which other dominoes.) Roubini likens it to walking blind through a mine field. As a result, nobody wants to lend money to anyone else. The Fed and the Treasury can pump liquidity into the system, but it does no good because banks are hoarding whatever cash they can get their hands on. The American economy has been living on credit for some time. Now the credit window has slammed shut, so the economy is grinding to a halt. It's a self-reinforcing feedback loop, because the more things seize up the more scared people get, so the less willing they are to lend or invest, which makes things seize up even more.
Don't think the House/Senate plan will fix this. It won't.
September 30, 2008
|Roubini Conference Call||Economy|
NYU economist Nouriel Roubini has an excellent track record in predicting and analyzing economic crises (including the present one). His economic/financial analysis firm, RGE Monitor, is making its premium content available for free during this economic crisis, here. They just ask you to register.
There is a lot of great material there, but for an excellent overview of where we are, how we got here, and where we're going, you may want to listen to a recent conference call with Roubini here. He talks for almost 40 minutes and then there's Q&A. He talks fast and covers an awful lot of material, so if you're like me you may need to listen to it multiple times. But I think it's the best thing I've heard or read on what's really going on and will repay the effort to absorb it. Highly recommended. I'm putting it on my iPod.
He sees a "nasty" 18-month recession and severe financial crisis ahead. Not the Great Depression, but the worst recession and crisis since the Great Depression. He sees the Treasury rescue plan as "a disgrace and rip-off benefitting only shareholders and unsecured creditors of banks." He sees the demise of the shadow banking system. But that just scratches the surface of what he has to say. Put on your thinking cap and go listen.
September 29, 2008
|Our Shock Doctrine Moment||Activism Economy Politics|
The Right wants to use this economic crisis as a Shock Doctrine moment to take the country even farther to the right.
Digby asks the obvious question: why don't we turn it around and use it as a moment to move the country to the left? Republican policies have been so thoroughly discredited by the last eight years that if there were ever a time for advancing a Progressive agenda, this is it.
Go read it.
|"A Transfer Of Wealth...A Degree Of Stench...A Bit Of Manufacture"||Economy|
Watch this carefully. Excellent from start to finish.
Check this out:
We had a former head of the FDIC tell a group of congressmen yesterday that the Bush administration has been going around the last few weeks, actually, so tightening up on the practices of banks that they're forcing them to have bigger reserves, which in a way would, you know, kind of create — help to create the kind of tight money policies that we're saying we’re trying to alleviate with this bill. So, you know, there needs to be a deeper look at this. It seems to me there's a possibility that this crisis has a little bit of...uh...manufacture to it.
When thinking about the "bailout," notice who's shoving it down the Congress' throat: Wall Street and the Bush Administration. Does anybody really think they have our best interests at heart? Democrats need to wake the hell up.
September 26, 2008
|Fiscal Conservatives||Economy Politics|
|Jon Stewart's "Freedom Memory"||Economy Humor & Fun Politics|
Jon Stewart nails it, as usual:
Fool me once, shame on you. Fool me twice...
September 24, 2008
A lot of big numbers are getting tossed around these days. Numbers like trillion.
We can lose sight of how big a trillion really is. This helps:
1 million seconds = 11 days
1 billion seconds = 32 years
1 trillion seconds = 32 thousand years
Or to put it another way:
A million seconds ago was the week before last.
A billion seconds ago, I was in grad school.
A trillion seconds ago there were Neanderthals in Europe.
Trillion is a big number.
September 23, 2008
|Naomi Klein: It's The Shock Doctrine||Economy|
I wrote The Shock Doctrine in the hopes that it would make us all better prepared for the next big shock. Well, that shock has certainly arrived, along with gloves-off attempts to use it to push through radical pro-corporate policies (which of course will further enrich the very players who created the market crisis in the first place...).
The best summary of how the right plans to use the economic crisis to push through their policy wish list comes from Former Republican House Speaker Newt Gingrich. On Sunday, Gingrich laid out 18 policy prescriptions for Congress to take in order to "return to a Reagan-Thatcher policy of economic growth through fundamental reforms." In the midst of this economic crisis, he is actually demanding the repeal of the Sarbanes-Oxley Act, which would lead to further deregulation of the financial industry. Gingrich is also calling for reforming the education system to allow "competition" (a.k.a. vouchers), strengthening border enforcement, cutting corporate taxes and his signature move: allowing offshore drilling.
It would be a grave mistake to underestimate the right's ability to use this crisis -- created by deregulation and privatization -- to demand more of the same. Don't forget that Newt Gingrich's 527 organization, American Solutions for Winning the Future, is still riding the wave of success from its offshore drilling campaign, "Drill Here, Drill Now!" Just four months ago, offshore drilling was not even on the political radar and now the U.S. House of Representatives has passed supportive legislation. Gingrich is holding an event this Saturday, September 27 that will be broadcast on satellite television to shore up public support for these controversial policies.
What Gingrich's wish list tells us is that the dumping of private debt into the public coffers is only stage one of the current shock. The second comes when the debt crisis currently being created by this bailout becomes the excuse to privatize social security, lower corporate taxes and cut spending on the poor. A President McCain would embrace these policies willingly. A President Obama would come under huge pressure from the think tanks and the corporate media to abandon his campaign promises and embrace austerity and "free-market stimulus."
We have seen this many times before, in this country and around the world. But here's the thing: these opportunistic tactics can only work if we let them. They work when we respond to crisis by regressing, wanting to believe in "strong leaders" -- even if they are the same strong leaders who used the September 11 attacks to push through the Patriot Act and launch the illegal war in Iraq.
So let's be absolutely clear: there are no saviors who are going to look out for us in this crisis. Certainly not Henry Paulson, former CEO of Goldman Sachs, one of the companies that will benefit most from his proposed bailout (which is actually a stick up). The only hope of preventing another dose of shock politics is loud, organized grassroots pressure on all political parties: they have to know right now that after seven years of Bush, Americans are becoming shock resistant.
The very people who created this mess want to use it to take us even farther down the road to ruin.
Call your Senators and Representatives and tell them you're not buying it (calling is better than emailing). Do it.
|They're Catching On||Economy Politics|
A new poll shows people get the "bailout," even if Congress doesn't. Bloomberg:
Americans oppose government rescues of ailing financial companies by a decisive margin, and blame Wall Street and President George W. Bush for the credit crisis.
By a margin of 55 percent to 31 percent, Americans say it's not the government's responsibility to bail out private companies with taxpayer dollars, even if their collapse could damage the economy, according to the latest Bloomberg/Los Angeles Times poll.
Poll respondents say Democratic presidential nominee Barack Obama would do a better job handling the financial crisis than Republican John McCain, by a margin of 45 percent to 33 percent. Almost half of voters say the Democrat has better ideas to strengthen the economy than his Republican opponent.
Six weeks before the presidential election, almost 80 percent of Americans say the U.S. is going in the wrong direction, the biggest percentage since the poll began asking that question in 1991.
After market chaos this month drove Lehman Brothers Holdings Inc. into bankruptcy and prompted federal takeovers of American International Group Inc., Fannie Mae and Freddie Mac, most survey respondents said financial companies shouldn't expect taxpayers to rush to the rescue.
"Why should we help companies that can't help themselves?" Tara Rook, 36, a Republican voter in Medford, New Jersey, asked in a follow-up interview. "The government is getting way too involved with private companies."
Congress, you listening?
September 22, 2008
The thesis, in a nutshell, is that recent history has seen a series of conscious, highly-organized efforts to exploit shocks — economic catastrophes, natural disasters, wars, 9/11, Katrina — to jam through "reforms" that people would never tolerate otherwise. Economic shock therapy, suspension of civil liberties, the Patriot Act and Gitmo, etc., etc. But above all, disaster capitalism — privatization of all kinds of formerly public functions, extending now even to privatized war-fighting. Enormous fortunes are being made by companies that now have a vested interested in more and bigger catastrophes. And it's not only about dollars. Each shock drives us further to the right politically. In the event of another shock of national scope — another 9/11, or worse — the groundwork has been laid to fundamentally alter just about everything about how the US government functions and the rights of US citizens.
The draft legislation they're trying to jam down our throats includes provisions like this:
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
This, in a democracy.
And everybody says it’s a $700 billion plan, but the language reads:
The Secretary's authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.
Note that phrase "at any one time." So Paulson can buy $700 billion worth of securities, sell them, and buy some more. They're trying to hand Paulson the keys to the Treasury, with no oversight of any kind, and his actions "may not be reviewed by any court or any administrative agency."
But, you see, it's a crisis. It has to be dealt with today. No time to read the fine print. Just sign here. Otherwise, it's going to be a catastrophe. Never mind that we're handing the Treasury over to the same Masters of the Universe that created the whole mess in the first place. Let's not forget that Henry Paulson used to run Goldman Sachs.
One is even tempted to wonder if they've manipulated the whole thing to exaggerate the suddenness of the crisis and stampede us into believing desperate measures are called for. It's all been years in the making, but now all of a sudden we're told the end of the world is at hand. Could it be they saw they were in the process of eating a trillion dollar shit sandwich and thought how can we pawn this off on the taxpayers and maybe even make some money while we're at it. All it would take is the creation of a sort of financial 9/11 — or at least the appearance of one. Then the "bailout" could be rushed through a Congress stampeded by fear, Patriot Act-style.
Paranoid? Probably. But a trillion dollars is a lot of dough. People will do a lot to get their hands on a trillion dollars.
Even if the crisis hasn't been manipulated, it is certainly being exploited. The whole idea of handing a blank check to one man whose decisions will be "non-reviewable...by any court of law or any administrative agency" is insane. That it's even being entertained is a measure of how supine we've become. A free people would never consider it. Not for a moment.
September 19, 2008
September 17, 2008
The situation on Wall Street is dire. Don't let anyone tell you different. The speed at which events are unfolding is just stunning. The latest victim, AIG, is huge, the 18th largest public company on Earth, with more than a trillion dollars in assets. That's trillion with a t. US taxpayers are now on the hook for some $900 billion, and there are doubtless more bankruptcies and bank failures right around the corner. Even the Fed's balance sheet is increasingly suspect.
I don't have time to write more tonight, but let me quote a couple of articles from Dow Jones Newswires.
There's a run on Wall Street, and that bodes ill for the financial system and hence corporate growth and the stock market. Beyond the damage wrought on American International Group, Lehman Brothers and the financial sector as a whole, the crisis has caused another freeze in short-term lending. Such extended slowdowns in lending combined with banking collapses are associated with some of the toughest times in the U.S. economy and stock market.
Indexes are already trading at their lowest levels in roughly three years and most traders expect more selling ahead, with the only sure refuges Treasurys and gold....A typical bear market involves a loss of roughly 20% to 30%, but there's no guarantee the 50% drop on the S&P 500 during the technology bust will be averted this time around.
Shares of the remaining independent Wall Street firms Morgan Stanley and Goldman Sachs Group are sliding Wednesday - despite reporting profits Tuesday - and fears abound that the two remaining titans will face a similar crisis to those suffered by their peers.
"Their business model just isn't going to work. A stand alone bulge-bracket bank can't work in this environment," said Dave Rovelli, managing director for U.S. equity trading at Canaccord Adams.
This is the first bank panic of this scale in about 78 years and the first on Wall Street since J.P. Morgan bailed the Street out in 1907. This time, shareholders and credit traders are reacting to each failure by yanking their investments from the institution seen as the next most vulnerable. For Lehman Brothers, Merrill Lynch and AIG, the pattern was the same: the price of protecting against defaults on debt rose sharply, the stock price plunged, and all that made it impossible for the institution to negotiate for a capital injection. Merrill was lucky to escape, running into the embrace of Bank of America, which has the base of deposits Wall Street is now sorely missing. [...]
Throughout the crisis, which already lists Fannie Mae, Freddie Mac, Lehman Brother and Bear Stearns among its casualties, the government has taken a reactive, case-by-case approach.
The market rallied after the Fed helped save Bear Stearns. That Lehman was allowed to fail withdrew a perceived safety net under institutions that were struggling with soured mortgage investments.
Many market participants, including Richard Bernstein, chief U.S. investment strategist at Merrill Lynch, maintain the credit crisis is a systemic problem that could not be solved case by case.
"Everybody's sticking fingers in the holes in the dike, not understanding that the problem is much bigger," said a trader at a mid-sized Wall Street firm.
The difference between the Wall Street panic of 1907 and that of 2008, is that Goldman Sachs and its peers are the very heart of the world's financial circulatory system. The crisis that began last summer has already slowed lending activity worldwide, and that's worsened this week. The slowdown in economic growth worldwide is already abundantly evident: several European countries have officially slipped into recession; China cut interest rates this week to stimulate growth.
Six to nine months from now, banks will be even more resistant to lending, which is a real concern to consumer and technology companies, as well as another drag on real estate market.
"What people still are missing is that every growth story of the last five to ten years has been based on credit," said Bernstein, of Merrill Lynch. "China, commodities, real estate, hedge funds, everything was a capital intense endeavor. Global growth was the symptom of the credit bubble," he said.
And this on the US Treasury market:
It was purely panic trade Wednesday. Global investors scrambled for cover as money-fund woes added to already-heightened credit fears. [...]
Treasury bills, the world's most-liquid assets, soared across the board, pushing the bond equivalent yield of the three-month T-bills down a whopping 81.9 basis points to 0.061%, a level not seen since at least 1954.
Demand was so gigantic that at one point, the one-month T-bill's yield dropped below zero, though the yield was recently back up to 0.09%. The 6-month T-bill was down 53.9 basis points to 1.004%. Bond yields move inversely to prices. [...]
Gold, another safe-haven asset, also jumped.
"This is a panic situation," said Charles Comiskey, head of U.S. government bond trading in New York at HSBC Securities USA Inc., a primary dealer. "This is a scary time, because it seems to me that with one money fund going below par, people are getting nervous."
The markets were gripped with fear as redemption worries skyrocketed after Reserve Primary, a $65 billion money market fund, saw its net asset value fall below $1 per share and had to suspend redemptions for one week. The fact that such ultrasafe short-term assets could wobble caused investors to demand the safest assets -- Treasury bills.
Reserve Primary is only the second fund in history to see its NAV drop below $1 a share. The drop came as the fund wrote down its 1.2% exposure to Lehman Brothers and delayed redemptions for as much as seven days.
"There is no confidence right now," said E. Craig Coats Jr., head of fixed income in New York at Keefe, Bruyette & Woods Inc. "Nobody knows who is the next one to blow up. It is hard to borrow securities and it is hard to finance securities. Leverage is coming out of the market. Things are just winding down.
"Everybody is simply pulling the cover over their heads," he added. "This is as bad as I have seen it."
It's bad and it's going to get worse.
September 15, 2008
|Lehman Brothers — The Sheer Scale||Economy|
I doubt many people really grasp the colossal scale of the Lehman Brothers collapse. Lehman Brothers assets totaled $639 billion. Not only is the LB bankruptcy the largest in US history, as has been widely reported, it absolutely dwarfs all previous bankruptcies. The biggest before today was Worldcom. Worldcom's assets were a measly $104 billion. The Lehman Brothers bankruptcy is bigger — by about $104 billion, as it happens — than the sum of what before today were the 15 largest US bankruptcies combined.
Lehman Brothers had $639 billion in assets, but it also had some $613 billion in bank debt and $155 billion in bond debt. So it owed about $130 billion more than it had. A whole lot of banks and other institutions are holding that debt, and they're going to take a huge hit. This isn't over by any means.
September 08, 2008
|Nearly One Homeowner In Ten Delinquent Or In Foreclosure||Economy|
Nearly one American homeowner in ten is delinquent on mortgage payments or in foreclosure. One in ten. Unreal. For subprime ARMs, the rate is greater than two in ten. And the rate of new foreclosures is twice what it was a year ago. USA Today (via Cryptogon):
An industry group says a record 9.2% of American homeowners with a mortgage were either behind on their payments or in foreclosure at the end of June, as damage from the housing crisis continued to mount.
The latest quarterly snapshot by the Mortgage Bankers Association on Friday broke records for late payments, homes entering the foreclosure process and for the inventory of loans in foreclosure.
The percentage of loans at least 30 days past due or in foreclosure was up from 8.8% in the January-March quarter, and up from 6.5% a year earlier.
In one bit of positive news, delinquencies on subprime adjustable-rate loans dipped 1 percentage point from the first quarter to 21%.
The seasonally adjusted foreclosure starts rate, the percentage of loans that entered the foreclosure process during the April-June quarter, was 1.19%, up from 0.99% in the first three months of 2008 and 0.65% in the second quarter of 2007.
The percentage of loans in the foreclosure process at the end of the second quarter was 2.75%, up from 2.47% in the first quarter and from 1.40% in the second quarter of 2007.
It's getting worse, not better. Large banks and mortgage companies will soon be dumping residential properties (that they've acquired in foreclosures) on the market in bulk. Then home prices are really going to tank. Supply and demand.
Lenders have been slow to dump their holdings presumably because most of them are now worth less than the amount of the mortgage. But when other lenders start dumping, the value of their holdings will go down even further. So there's a real incentive to try to get there first — which means it will happen sooner (and faster) than you think. Mr. Mortgage explains:
He uses the term REO. I had to look that one up. It's "Real Estate Owned," which refers to properties that are owned by a bank or other lender because they failed to sell at foreclosure auctions.
June 08, 2008
|State Of The Union||Economy|
The average price of gas here in the US has reached $4 a gallon for the first time. Crude oil is at $138.54 a barrel, up almost $11 in a single day Friday, with Morgan Stanley predicting $150 a barrel by July 4. Unemployment jumped by half a percentage point in May, the largest monthly jump in a generation. And more than a million US homes are now in foreclosure, the most ever.
Tough year to be running as a Republican.
February 26, 2008
|Slip-Sliding Away||Economy Peak Oil|
The price of oil today set a new all-time record — again. It currently sits at $100.88 per barrel.
In related news, the dollar today fell to a new all-time record low against the euro — again. It currently sits at 1.5014 (i.e., it now costs more than a buck and a half to buy what a euro buys).
February 03, 2008
|Annie Leonard's Story Of Stuff||Activism Economy Environment|
Good chance you've already seen this, but if not go check out Annie Leonard's video Story of Stuff, viewable here. Much of it is familiar, but it's got some startling statistics and a great quote or two. Its real strength, though, is the way it pulls together some of the big picture. Recommended.
January 22, 2008
|Fed Hits The Panic Button||Economy|
In Asia, Monday's stock market slide continues. The Fed has hit the panic button, cutting interest rates 3/4 of a point, eight days ahead of its next scheduled meeting. WaPo:
Today's declines in Asia were even more severe than those on Monday, and several markets hit multiyear lows. Indian shares plunged so quickly — nearly 11 percent — that its stock markets halted trading soon after opening. In South Korea, volatile futures prices prompted the main Kospi market to briefly suspend program selling orders at midday. The Australian market suffered its worst one-day fall ever, while Japan's Nikkei fell 5.65 percent to its lowest point since 2005. It is down nearly 18 percent this year.
In Hong Kong, the Hang Seng index was down 8.65 percent today, after dropping 5.49 percent yesterday. It's off 19 percent this year and is 30 percent lower than a peak in late October.
"This is an expression of panic — really nothing less than panic about prospects for the U.S. economy," said Stephen Green, senior economist with Standard Chartered Bank.
Salon's Andrew Leonard has a couple of reactions:
First: Ben Bernanke has proven, once and for all, that juicing the stock market is now considered Job #1 for the Federal Reserve Bank. The material effects of rate cuts do not show up in economic growth statistics for months or even years after their enactment. By making an emergency "inter-meeting" cut a mere eight days before its regularly scheduled meeting, Bernanke is conducting economic policy in order to appease market psychology. The fragile psyches of Wall Street traders who played such a pivotal role in creating this mess by romping through the derivatives wonderland, are now in control of government strategy. That can't be good.
Second: When the "mild" recession of 2001 hit, it was tempting for some to blame George Bush, although fairer minds, no matter how partisan their inclinations, had to acknowledge that, economically speaking, one couldn't pin responsibility for the inevitable fluctuations of the business cycle on a newly arrived President. All one could do is critique how the new president handled the situation. But if the current economic downturn gets anywhere near as bad as some of the more gloomy observers are suggesting, there will be no escaping the verdict of history on this administration. The worst recession since World War II? Just another line on Bush's resumé, highlighted, underlined, in bold and italics.
There's an old saying on Wall Street that fear is a much more powerful emotion than hope, and more contagious, too. Which is why markets go down much faster than they go up. At times like this, you can think of the stock market as a giant theatre that's suddenly on fire. Except in this theatre, you can't leave your seat until you find someone else willing to buy it from you. When the building's on fire, you've got to slash prices in a hurry to find a buyer. Meanwhile, all around you, other people are desperate to get out of the building, too. Hence the P-word.
January 21, 2008
Investors heard Bush's economic stimulus speech, and they're unimpressed. Stock markets around the world are in free fall:
- DJ Euro STOXX 50 — down 7.31%
- FTSE 100 (UK) — down 5.48%
- CAC 40 (France) — down 6.83%
- DAX 30 (Germany) — down 7.16%
- IBEX 35 (Spain) — down 7.54%
- NIKKEI 225 (Japan) — down 3.86%
- HANG SANG (China) — down 5.49%
US stock markets are closed today for MLK Day, but Dow futures are down over 500 points. Tomorrow's going to be ugly.
December 18, 2007
|The Rich Get Richer Much, Much Faster||Economy|
We all know the US income distribution is obscenely skewed. But this is truly grotesque (NYT):
The increase in incomes of the top 1 percent of Americans from 2003 to 2005 exceeded the total income of the poorest 20 percent of Americans, data in a new report by the Congressional Budget Office shows.
The poorest fifth of households had total income of $383.4 billion in 2005, while just the increase in income for the top 1 percent came to $524.8 billion, a figure 37 percent higher.
Got that? In just two years, the increase in incomes of the top 1% was more than a third greater than the total incomes of the bottom 20%. Things haven't been this skewed since 1929, and we all know what happened then.
November 13, 2007
|More Than 50% Chance Financial System "Will Come To A Grinding Halt"||Economy|
Yikes. The head credit strategist at Morgan Stanley figures it's more likely than not that the financial system will grind to a halt. Bloomberg:
There's a greater than 50 percent probability that the financial system "will come to a grinding halt" because of losses from mortgages, Gregory Peters, head of credit strategy at Morgan Stanley, said.
The world's biggest banks and securities firms have written down at least $45 billion in the value of assets linked to subprime mortgages for the third quarter after borrowers with poor credit histories failed to keep up with payments. Structured investment vehicles have defaulted on debt, forcing lenders including Legg Mason Inc. and SunTrust Banks Inc. to prop up their money-market funds to cushion them from possible losses.
"You have the SIVs, you have the conduits, you have the money-market funds, you have future losses still in the dealer's balance sheet in the banks," Peters said in an interview in New York. "That's all toppling at once."
The risk of systemic shock from the current subprime meltdown is quite large in the near term, Peters said. "It's an overarching concern that we have," he said.
Losses stemming from the subprime mortgages have caused a seizure of a lot of other markets, especially the securitization market, Peters said.
The U.S. asset-backed commercial paper market had its biggest weekly drop in two months in the week ended Nov. 7, according to a Federal Reserve report. Debt maturing in 270 days or less and backed by mortgages, credit-card loans and other assets fell $29.5 billion, or 3.4 percent, to a seasonally adjusted $845.2 billion.
Sales of U.S. corporate bonds slowed to $11.1 billion last week, the lowest in two months, according to data compiled by Bloomberg.
"While the near-term concern is the systemic shock of the subprime-related losses, the medium- and long-term concern is the impact on the average consumer," Peters said. "The ultimate irony here is that the U.S. consumer now needs readily available capital more easily than ever, but they're going to have the most difficult time getting it."
If that's what they're saying publicly...
|US Dollar Continues To Fall||Economy|
Nothing like a trip to Europe to make you painfully aware of the dollar's continuing slide. A month ago, people were shocked when the dollar hit 1.42 against the euro. Today it's at more than 1.46. I.e., it takes almost a buck fifty to buy what a euro buys. When Bush took office, it only took about 90 cents. An enormous sea change in a breathtakingly short time.
October 29, 2007
|It's All Downhill From Here||Economy Future Politics War and Peace|
Technocrats are technocrats because they like measurable things. Thus there is a great deal of discussion of peak oil, because oil production is a measurable thing. As someone who has written about peak oil longer than most, and understood its implications better, I would be the last person to diminish the importance of physical scarcity and lessening bandwidth as a problem for the global economy. Particularly in the light of our dependence on petroleum and other carbon based forms of energy. However our present spike in oil has nothing to do with peak oil directly, but instead everything to do with a gush of dollars. Peak dollar capacity, not peak production capacity, is what is making $100/bbl the new "over/under" number among the oil traders I talk to. [...]
The present spike of oil is, to some extent, driven by offshoring and demand. This decade is really like the 1920's not the 1930's. While prosperity has not reached many in the developed world, this has been a boom time for the developing world. When America was a developing nation, we profited from similar consumption binges in the then core nations of France, Great Britain and Germany. We are making the same mistakes they did in their time in the sun.
The real reason for the spike in oil prices is the pouring of dollars into the global economy meant to bail out the banking sector without imposing any accountability on the people who run it.
The coming World War
So Bernanke pumps dollars into the system, those dollars go elsewhere, and the difference - we stagnate while others advance - makes inevitable, and at this point I say inevitable - that there will come a point where military conflict will be used by those others to evict the United States from the privileged position of having 6% of the world's population and using 25% of the world's oil. That day is coming and the question now is how many millions of people will die when it arrives. Americans have declined, and will in 2008 decline again, to do anything to stop the arrival of a real world war, to replace this fake made for cable one. There aren't many any chances left. This same was true in the 1840's and 1920's. The real instability is yet to arrive.
When it does arrive there will be several islamic states with atomic weapons and the means to deliver them. They will, as the underdogs in the conflict, have the ability politically to use these weapons, perhaps assymetrically, to bring down an order that they do not need. New York City and London are simply too tempting as targets, and the counter attack against the oil fields would destroy what we need. The arabs do not need our financial centers for much longer, we will need the oil in such a conflict.
There is at this point nothing that will be done about this. The current leadership of the US, and of Europe, is completely committed to a global conflict in the future in order to keep doing what they are doing in the present. The right that people are willing to kill for is the right to overconsume what is underpriced. The disutility of oil - in physical terms of war, pollution and scarcity - is well under priced. The price of oil will rise to just below the cost of solving the problems. It will always be a little bit cheaper to pay Saudi Arabia an oil tax not to solve the problem, than to pay ourselves to solve the problem. Just as it was always a little bit cheaper to let slavery continue than to buy it out. That is, until such time as it was clear that there were two mouths and one slice of pie. That day is inevitable, because right now many people are happily munching on the pie. Don't exclude yourself.
What's next, the short term
Short term, if you see a maniac running down the street randomly shooting people while the police look on, bet that he will keep shooting until he runs out of bullets. George Bush will keep fighting in Iraq until the second he leaves office. Congress will keep handing this maniac bullets, and the Central Bank will keep looking the other way. Don't get too attached, to your kid's left arm. [...]
Coal. Bet on coal. Coal. Coal. Coal. Coal. Why? Because both China and the US have lots of it, and will want to use that to get out of dealing with their energy problems, or face economic contraction. [...]
However, this particular farce doesn't have much longer to run, already the process of buying up the financial sector by arabs and chinese interests is proceding. That means that soon the bankers and the other elite are going to start hating this expansion as much as the rest of the country...Bet that the trough after the recession will be, as the last two have been, long, slow, and hard.
This is why I shout this now: get rid of debt, and work your butt off for every bit of money you can now, because this is the last year or so that it will be really easy to do. After that, we might have an expansion, but you won't see any advantage from it.
What can our current political leadership do? Can? Lots of things. Are? Nothing.
They after all, are getting very well paid. 2004 was the most important election in your lifetime. 2008 is the least important election in your lifetime. Nothing is going to be decided. Nothing. [Emphasis added]
Have a nice day.
October 26, 2007
|Three-Quarters Of ARM Borrowers Are Clueless||Economy|
About $50 billion in adjustable rate mortgages reset this month, driving interest rates up for many borderline borrowers. And despite efforts to raise awareness, it doesn't look like anyone is really prepared for what's to come.
"I don't know if there's anything much [borrowers] can do," said Keith Gumbinger of HSH Associates, a publisher of mortgage related information. "Hopefully, they've been prudent about preparing for it, building a nest egg or refinancing the loan."
But most borrowers are likely to just scramble to pay the higher expenses - some of which will jump by 50 percent and come as a big surprise.
According to a survey conducted last month for the AFL-CIO by Peter D. Hart Research Associates, three quarters of borrowers have little clue about how much their payments will increase when their loans adjust. Nearly half don't know how their loans actually reset. [...]
When asked whether they were confident or worried about making their monthly mortgage payments over the next few years, 41 percent of homeowners whose adjustable rate mortgages (ARMs) had already reset said they were worried. Only 18 percent of pre-reset borrowers were concerned. [...]
But the mortgage situation can't hope to improve until banks tighten lending practices, and it doesn't look like they're quite on track. This past summer, the Mortgage Bankers Association revealed that delinquency rates for loans made in 2006 were rising.
And a new report from investment bank, Friedman, Billings, Ramsey, suggests that as conditions began to collapse during the first half of 2007, lenders still failed to vet borrowers carefully.
According to the report, lenders did not tighten underwriting standards until July or August, when the subprime crisis came to a head. As a result, delinquency rates for these most recent loans are even higher than those for 2005 and 2006.
With so many poorly underwritten loans, future delinquency rates and foreclosures could soar. And while October will be the peak year for resetting ARMs in 2007, new records will be set in early 2008; March will see more than $100 billion in resetting loans. [Emphasis added]
I love that "Hopefully, they've been prudent about preparing for it, building a nest egg or refinancing the loan." Please. If three-quarters of borrowers don't even know how much their payments will increase, I think we can assume they haven't been taking steps to prepare. They took ARM mortgages in the first place because that's all they could afford. Makes building a nest egg a little tough.
October 24, 2007
|IMF Head: "Abrupt Fall" In Dollar Possible||Economy|
The head of the International Monetary Fund, Rodrigo Rato, warned Monday of a potential "abrupt fall" in the US dollar that could roil the global economy.
"There are risks that an abrupt fall in the dollar could either be triggered by, or itself trigger, a loss of confidence in dollar assets," Rato said at the close of annual meetings here of the IMF and the World Bank.
The outgoing IMF managing director spoke here as the European single currency hit a new high of 1.4347 dollars and global equity markets plunged amid renewed fears a US credit crunch could pitch the world's biggest economy into recession.
"The uncertainty ... comes from downside risks that are much higher than they were six months ago. The turbulence in the credit markets is a warning that we cannot take the benign (global) economic environment of recent years for granted," Rato said on the final day of the annual meetings of the IMF and the World Bank.
"We still do not know the full effects of the decline in the housing market and the subprime problems of the US economy. Further disruption in financial markets and further falls in housing prices could lead to a global economic downturn," he said. [...]
US Treasury Secretary Henry Paulson, addressing the plenary session of the 185-nation twin financial institutions, also sounded a note of caution.
"We need to continue to be vigilant, because all of our capital markets are not yet functioning normally," Paulson said.
Rato warned that a global slowdown would exacerbate other existing risks, noting emerging economies' reliance on private capital inflows which are expected to reach a record 620 billion dollars this year, after a 2006 total of 573 billion, according to the Institute of International Finance.
"Some emerging economies that have relied on external financing to fund large current account deficits could be tipped into crisis by a combination of reduced demand for their exports and tighter financial market conditions," the IMF chief said. [Emphasis added]
The US dollar is the ground floor of a gigantic house of cards. If it tumbles, the ramifications will be enormous. It may be inevitable, however, as the US has been living beyond its means for years. Print up enough IOUs, and sooner or later people get fed up and say "Enough already."
October 17, 2007
|Housing Slump Worsens — Again||Economy|
A sampling of today's housing news...
The confidence of U.S. home builders has been shaken to its lowest point since records began 22 years ago, a housing trade group said Tuesday.
The Commerce Department said Wednesday that new home construction fell to its lowest rate in 14 years last month. Housing starts dropped 10.2% to an annual rate of 1.191 million in September. Economists expected a rate of 1.285 million.
Compared to September last year, the number of building permit applications - an indication of future activity in the US housing market - plummeted by 30.8 per cent and fell 7.3 per cent below August. [...]
Building permits fell 7.3 per cent, the sharpest decline since January 1995, to an annual rate of 1.226 million and 30.8 per cent below last year.
October 03, 2007
|Pending Home Sales Drop Is "Big News"||Economy|
Dean Baker, co-director of the Center for Economic and Policy Research:
The 6.5 percent drop in August pending home sales is big news. The drop in the index, which measures the number of contracts signed, follows a 10.7 percent drop reported for July. This is a truly extraordinary two-month decline of 16.5 percent. This is a new index (it began in 2000), so it is easily the sharpest fall on record, but it would likely have been the sharpest two month decline in contracts at any point in the post-war era. The actual falloff in sales is likely to be even larger, since a high percentage of these contracts will not close because buyers cannot arrange financing.
While it's possible that sales may stabilize and even rise back somewhat now that the mortgage markets are in somewhat better shape, they are now down more than 20 percent from year ago levels in this index and by more than 30 percent from the year-round average in 2005. The idea that the economy will somehow brush off a decline of this magnitude and keep moving along at a healthy pace seems almost bizarre. With consumption growth weak, equipment investment flat, and non-residential investment peaking, there is little other trade driven by a falling dollar (and thereby higher import prices) to sustain growth. [Emphasis added]
But what I really want to know is who's going to get custody: Britney or K-Fed.
September 27, 2007
|Dollar Hits All-Time Low||Economy Peak Oil|
The dollar continued its slide, falling to 1.4189 against the euro today, the dollar's all-time lowest point since the euro was invented. The dollar's set a new low each of the last six trading days.
Meanwhile, oil prices rose $2.58 (3.21%) for the day, to close at $82.88 a barrel, after topping $83 a barrel in intraday trading.
But stocks? They're up. Who says markets are rational?
September 26, 2007
|US Home Prices: Worst Drop In 16 Years||Economy|
Housing news keeps getting worse. AP:
The decline in U.S. home prices accelerated nationwide in July, posting the steepest drop in 16 years, according to the S&P/Case-Shiller home price index released Tuesday.
Home prices have fallen by more every month since the beginning of the year.
An index of 10 U.S. cities fell 4.5 percent in July from a year ago. That was the biggest drop since July 1991. [...]
[Robert] Shiller, an economist at Yale University, told lawmakers in written comments last week that the loss of a boom mentality among consumers poses a "significant risk" of a recession within the next year. [Emphasis added]
The big wave of adjustable-rate mortgage resets hasn't even hit yet. The economy has been kept afloat in the Bush years by people taking cash out of their homes and spending it. That spending is coming to a screeching halt, so housing's problems are going to impact a whole lot more than just housing.
September 20, 2007
|US Dollar In Free Fall, Hits All-Time Low Against The Euro||Economy|
When you spend way more than you earn, there comes a time when nobody wants any more of your damn IOUs. True for individuals, true for nations. The US is about to learn a painful lesson.
Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.
"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.
"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.
The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.
As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy.
The Fed's dramatic half point cut to 4.75pc yesterday has already caused a plunge in the world dollar index to a fifteen year low, touching with weakest level ever against the mighty euro at just under $1.40.
There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.
The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit - expected to reach $850bn this year, or 6.5pc of GDP.
Mr Redeker said foreign investors have been gradually pulling out of the long-term US debt markets, leaving the dollar dependent on short-term funding. Foreigners have funded 25pc to 30pc of America's credit and short-term paper markets over the last two years.
"They were willing to provide the money when rates were paying nicely, but why bear the risk in these dramatically changed circumstances? We think that a fall in dollar to $1.50 against the euro is not out of the question at all by the first quarter of 2008," he said.
"This is nothing like the situation in 1998 when the crisis was in Asia, but the US was booming. This time the US itself is the problem," he said. [Emphasis added]
The Canadian dollar rose to parity against the US dollar for the first time since 1976 on Thursday, buoyed by soaring oil prices and broad-based weakness in the greenback. [...]
Late in New York, the Canadian dollar rose 1.4 per cent to C$1.0012 against its US counterpart.
Elsewhere, the dollar dropped to a record low through the $1.40 level against the euro as the US currency continued its slide following the Federal Reserve's decision to cut interest rates this week.
Traders said the euro's rise through the psychologically important $1.40 level – seen as a pain barrier for eurozone exporters – triggered a host of stop-loss buying, sending the single currency higher.
The euro rose 0.8 per cent to $1.4071 against the dollar...
The dollar fell 0.4 per cent to $2.0093 against the pound, lost 1.5 per cent against the yen to Y114.44 and dropped 1 per cent to SFr1.1717 against the Swiss franc.
Some analysts put the dollar's weakness down to speculation that Saudi Arabia was set to abandon its peg against the US dollar. [Emphasis added]
When Bush took office, dollars were worth more than euros. Back then, it took about 90 cents to buy what a euro could buy. Now it takes $1.40.
It's not all Bush's fault, but the war — his war — is an important factor. We pay for it by, in effect, printing more and more dollars. That makes dollars worth less and less, which is a huge hidden tax on everybody who holds dollars. We may be approaching the point where the big dollar holders say "Enough!" and start dumping their holdings. Then, look out.
And then there's this, from today's BBC:
Losses from sub-prime mortgages have far exceeded "even the most pessimistic estimates", US Federal Reserve chairman Ben Bernanke has said. [Emphasis added]
This isn't going to be pretty.
September 18, 2007
|2007 Foreclosures To Top 2 Million||Economy|
Late summer brought no relief from soaring foreclosures. The number of homes in some stage of default jumped 36 percent month-over-month in August, according to a regular monthly survey.
Delinquencies and defaults more than doubled year over year to 243,947, according to August figures released Tuesday by RealtyTrac, a marketer of foreclosed properties. RealtyTrac's forecast is for total foreclosure filings to exceed 2 million this year.
"The jump in foreclosure filings this month might be the beginning of the next wave of increased foreclosure activity, as a large number of subprime adjustable rate loans are beginning to reset now," James Saccacio, chief executive of RealtyTrac, said in a statement
October is expected to be a peak month for hybrid adjustable rate mortgages (ARMs) to reset, with the interest rates on some $50 billion worth of loans poised to go up dramatically. [Emphasis added]
September 06, 2007
|Dire Scenarios From Two Top Economists||Economy|
The US economy has been fueled in recent years by a housing/credit bubble that has made homeowners feel rich, causing them to take equity out of their homes and spend it. Two top US economists warn that that's coming to a screeching halt. FinFacts:
US homes may lose as much as half their value in some US cities as the housing bust deepens, according to Yale University professor Robert Shiller. Meanwhile, Martin Feldstein of Harvard University says that experience suggests that the dramatic decline in residential construction provides an early warning of a coming recession. The likelihood of a recession is increased by what is happening in credit markets and in mortgage borrowing. Feldstein says that most of these forces are inadequately captured by the formal macroeconomic models used by the Federal Reserve and other macro forecasters.
"The examples we have of past cycles indicate that major declines in real home prices — even 50 percent declines in some places — are entirely possible going forward from today or from the not too distant future," Shiller said in a paper presented last Friday at the Federal Reserve Economic Symposium in Jackson Hole, Wyoming.
Falling real-estate values may undermine consumer spending by spurring households to save more and by preventing them from tapping home equity.
Because price gains were larger and more widespread this time compared with past speculative booms, the risk of "substantial" price declines is greater, wrote Shiller. [...]
Last week the S&P/Case-Shiller Home Price Index posted a record annual decline in Q2 2007 - the worst since 1987. [...]
He said that 50 percent declines in the worth of some cities' homes wouldn't be unprecedented. Prices in London and Los Angeles fell by almost that amount from the late 1980s to mid-1990s. [...]
Harvard University Professor Martin Feldstein, who is a member of a group that calls the timing of recessions, said that the housing contraction threatens a broader recession, and the Federal Reserve should lower interest rates. [...]
"The economy could suffer a very serious downturn," Feldstein said. "A sharp reduction in the interest rate, in addition to a vigorous lender-of-last-resort policy, would attenuate that very bad outcome."
Feldstein said that Shiller's analysis began with the striking fact that national indexes of real house prices and real rents moved together until 2000 and that real house prices then surged to a level 80 percent higher than equivalent rents, driven in part by a widespread popular belief that houses were an irresistible investment opportunity. How else could an average American family buy an asset appreciating at 9 percent a year, with 80 percent of that investment financed by a mortgage with a tax deductible interest rate of 6 percent, implying an annual rate of return on the initial equity of more than 25 percent?
"But at a certain point home owners recognized that house prices – really the price of land – wouldn't keep rising and may decline. That fall has now begun, with a 3.4 percent decline in the past 12 months and an estimated 9 percent annual rate of decline in the most recent month for which data are available. The decline in house prices accelerates sales and slows home buying, causing a rise in the inventory of unsold homes and a decision by home builders to slow the rate of construction. Home building has now collapsed, down 20 percent from a year ago, to the lowest level in a decade.
"...[S]uch declines in housing construction were a precursor to 8 of the past 10 recessions. Moreover, major falls in home building were followed by a recession in every case except when the Korean and Vietnam wars provided an offsetting stimulus," Feldstein said.
"Why did home prices surge in the past 5 years?" Feldstein asked.
"While a frenzy of irrational house price expectations may have contributed, there were also fundamental reasons. Credit became both cheap and relatively easy to obtain. When the Fed worried about deflation it cut the Fed funds rate to one percent in 2003 and promised that it would rise only very slowly. That caused medium term rates to fall, inducing a drop in mortgage rates and a widespread promotion of mortgages with very low temporary teaser rates," he said. [Emphasis added]
First, we learn all over again that bubbles are a fool's paradise. Everybody thinks the party will last last forever, and then it doesn't. Suddenly it's the morning after, hangover time. Which is to say, you mostly can't get something for nothing. Duh. Sure, some people get out in time, but most people don't. It cannot be otherwise, since when people start heading for the exits in droves, that's what pops the bubble. Who's going to buy your seat once the theatre's on fire?
Second, this didn't happen all by itself. The Fed and other banks created massive amounts of money out of thin air in the form of credit — i.e., debt (see this). All that new money created an impression of wealth, but since it didn't correspond to increases in actual wealth — since it was just numbers on paper and on computer hard drives — it was just so much hot air. Monopoly money. Which created all manner of market distortions, prompting people to do all sorts of things they otherwise wouldn't have done — building houses that weren't needed, taking out loans they couldn't afford, and so on. People who took the equity out of their homes and spent it all are going to wake up and find they have negative equity when their home value comes back down to earth. And then they're going to spend years digging their way out of the hole. As will a lot of home builders. A form of slavery, self-induced. And people think the Fed's their friend.
August 21, 2007
|Money As Debt||Economy|
With all the turmoil in the markets (real estate, stocks, you name it) and all the talk of a credit bubble, this might be a good time to stop and think about the fundamentals of money and credit. It's a story very few people understand.
Where does money come from? To the extent people think about it at all, they imagine government printing presses cranking out paper currency, like we've seen all those times on the tv. But the overwhelming bulk of money — something like 95% — is just numbers in accounting systems, on checks, or on some bank computer's hard drive. Where does it come from? It is created by banks, in the form of loans.
And where do banks get the money they lend? Again, to the extent people think about it at all, they imagine that banks take in money from depositors and lend that money back out to borrowers. But a moment's reflection tells you that this makes no sense: collectively, we save almost nothing, and our borrowing grows by leaps and bounds — all those unsolicited credit cards in the mail, all those home equity loans and second mortgages. Lending dwarfs saving, more so with every passing day. So it cannot be savings that the banks are lending out. Besides, when has anyone ever tried to take out a loan only to be told that the bank has run out of deposits to cover it? That's not how it works. In reality, banks lend out far more — many times more — money than they have on deposit (it's called fractional reserve banking).
It is debt that creates money. You sign a loan agreement, and they put a number in your account. Presto. Banks have a license to print money, metaphorically speaking — nice work if you can get it — and they'd just as soon you didn't understand what's really going on.
It's a difficult thing for most people to get their heads around: banks just create money out of thin air when people borrow. There's nothing backing up that money other than the borrower's collateral and promise to pay. And since people have to pay back more than they borrowed, the whole system depends, fundamentally, on continual growth in the supply of money — i.e., continual growth in the amount of indebtedness. It's a gigantic game of musical chairs. If the music ever stops, look out.
If you're like most people, you probably think I'm crazy. That can't be how it works. Well, here's an excellent animated video that explains it all in clear and entertaining fashion. Do yourself a favor and invest the time to watch and understand it. We'll come back to this topic in a little bit. Meanwhile, go watch the video.
August 01, 2007
|Visual Aids||Corporations, Globalization Economy|
Evolution has made us especially good at processing visual input. Here are some pictures worth a thousand words:
According to Wikipedia, high-fructose corn syryp (HFCS) "was rapidly introduced in many processed foods and soft drinks in the US over the period of about 1975–1985." Corn subsidies made corn artificially cheap, and since 1982 sugar tariffs have made cane sugar prohibitively expensive. Coke and Pepsi switched to HFCS in 1984, and now it's found in just about every processed food. Agribusiness giants made a pile of money, and a lot of the rest of us got fat — and increasingly unhealthy. Picture a time-lapse picture of the average American over that period, swelling up like a balloon.
Speaking of balloons, slide your cursor along the timescale to see how compensation for American CEOs has changed since 1970. Enough said.
No wonder the financial markets are rattled.
July 20, 2007
Policy Pete points us to a speech by James B. Lockhart III, director of OFHEO, the Office of Federal Housing Enterprise Oversight — no, I hadn't heard of it either. OFHEO's job is to oversee Fannie Mae and Freddie Mac, the "government-sponsored enterprises" that together own a staggering amount of mortgage debt in the US. As Pete says,
OFHEO is a sad case. Nearly every press release, issued with minimal clutter, even austerity, is a sad cry for help: "...won't somebody please look at this frightening report we're sending to you. Yes, we know it is scary and we know we can't do a damn thing about it even though you probably think we are trying to do something, only we can't because our hands are tied."
The problem is the sheer scale of the debt involved. Lockhart:
These Enterprises are huge. To put their size in perspective, as of March 31, the combination of the mortgage-backed securities (MBS) that they guarantee ($3.0 trillion) and their debt outstanding ($1.5 trillion) totaled $4.5 trillion; not that much smaller than the publicly held debt of the U.S. of $5.1 trillion.
Got that? The mortgage debt they own is almost as big as the entire national debt of the federal government. It's a big number.
Too much of that debt is in danger now because of the slowdown in housing and the resetting of adjustable-rate mortgages. Lenders have been taking unreasonable risks, irrationally hoping the housing bubble would last forever. But here's where things stand:
How big are the numbers we're talking about here? A million seconds is 11 and a half days. A billion seconds is 32 years. A trillion seconds is 32 thousand years. 4.5 trillion seconds? 142 thousand years. So if we pay it off at a rate of a dollar a second...
Have a nice day.
June 19, 2007
This can't be good (WaPo):
The percentage of U.S. mortgages entering foreclosure in the first three months of the year was the highest in more than 50 years, according to the Mortgage Bankers Association. [Emphasis added]
April 03, 2007
|Major Sub-Prime Lender Goes Bankrupt||Economy|
Pop goes the housing credit bubble. BBC:
New Century Financial, one of the largest sub-prime lenders in the US, has filed for Chapter 11 bankruptcy.
New Century sought protection from creditors after it was forced by its backers to repurchase billions of dollars worth of bad loans.
The company said it would immediately cut 3,200 jobs, more than half of its workforce, as a result of the move.
Sub-prime lenders, who target customers with poor credit histories, have suffered from a downturn in the market. [...]
Leading US economists warned on Monday that the current tide of defaults in the sub-prime mortgage sector would continue to weigh on the US's slowing housing market.
"We suspect the problem in the sub-prime area is just the tip of the iceberg for the mortgage market as a whole," said senior economist David Shulman, in the University of California's quarterly Anderson Report.
"For all practical purposes, the sub-prime market is in the process of shutting down." [Emphasis added]
The "tip of the iceberg." Stay tuned.
April 02, 2007
Jerome-a-Paris has the skinny. It's not pretty.
February 27, 2007
|The Poor Get Poorer||Economy|
During the Bush years, the fastest growing segment of the US population has been people living in extreme poverty. McClatchy:
The percentage of poor Americans who are living in severe poverty has reached a 32-year high, millions of working Americans are falling closer to the poverty line and the gulf between the nation's "haves" and "have-nots" continues to widen.
A McClatchy Newspapers analysis of 2005 census figures, the latest available, found that nearly 16 million Americans are living in deep or severe poverty. A family of four with two children and an annual income of less than $9,903 - half the federal poverty line - was considered severely poor in 2005. So were individuals who made less than $5,080 a year.
The McClatchy analysis found that the number of severely poor Americans grew by 26 percent from 2000 to 2005....The review also suggested that the rise in severely poor residents isn't confined to large urban counties but extends to suburban and rural areas.
The plight of the severely poor is a distressing sidebar to an unusual economic expansion. Worker productivity has increased dramatically since the brief recession of 2001, but wages and job growth have lagged behind. At the same time, the share of national income going to corporate profits has dwarfed the amount going to wages and salaries. That helps explain why the median household income of working-age families, adjusted for inflation, has fallen for five straight years.
These and other factors have helped push 43 percent of the nation's 37 million poor people into deep poverty - the highest rate since at least 1975.
The share of poor Americans in deep poverty has climbed slowly but steadily over the last three decades. But since 2000, the number of severely poor has grown "more than any other segment of the population," according to a recent study in the American Journal of Preventive Medicine.
"That was the exact opposite of what we anticipated when we began," said Dr. Steven Woolf of Virginia Commonwealth University, who co-authored the study. "We're not seeing as much moderate poverty as a proportion of the population. What we're seeing is a dramatic growth of severe poverty."
The growth spurt, which leveled off in 2005, in part reflects how hard it is for low-skilled workers to earn their way out of poverty in an unstable job market that favors skilled and educated workers. It also suggests that social programs aren't as effective as they once were at catching those who fall into economic despair.
About one in three severely poor people are under age 17, and nearly two out of three are female. Female-headed families with children account for a large share of the severely poor.
According to census data, nearly two of three people in severe poverty are white (10.3 million) and 6.9 million are non-Hispanic whites. Severely poor blacks (4.3 million) are more than three times as likely as non-Hispanic whites to be in deep poverty, while extremely poor Hispanics of any race (3.7 million) are more than twice as likely.
Washington, D.C., the nation's capital, has a higher concentration of severely poor people - 10.8 percent in 2005 - than any of the 50 states, topping even hurricane-ravaged Mississippi and Louisiana, with 9.3 percent and 8.3 percent, respectively. Nearly six of 10 poor District residents are in extreme poverty. [Emphasis added]
Bush gets most of the little support he has left from people who think of themselves as Christians. He and they might want to go back and read what Jesus actually said about caring for the poorest of the poor. Matthew 25:31-46, for instance.
February 22, 2007
|Recycling: Incentives Needed||Economy Environment Politics|
How are Americans doing at recycling plastic bottles? The answer is disappointing. Andrew Leonard, at Salon:
In 1995, nearly 40 percent of all plastic PET bottles sold in the United States were recycled. Ten years later, in 2005, the figure was only 23 percent.
The vast majority of water and plastic soda bottles consumed in the world are made of PET, aka polyethylene terephthalate. And perhaps contrary to expectations, this is one petroleum byproduct that is eminently recyclable. Indeed, and here's a second baffling peculiarity, producers of ground-up recycled PET "flake" cannot keep up with demand. Prices per pound are strong, propelled by Chinese buyers who will buy all the flake or bales of flattened bottles that they can get, to turn into pseudo-polyester and other materials.
So, we are recycling a smaller percentage of plastic bottles than 10 years ago, and yet supply of what is lovingly referred to as "post-consumer PET" can't keep up with demand. What's wrong with this picture? Why hasn't the market solved this problem?
The answer to the first question turns out to be simple. A handy chart provided by the National Association for PET Container Resources reveals that in 1995, the U.S. recycled 775 million pounds of PET bottles, out of a total of 1.95 billion pounds of bottles estimated to be on retail shelves. The actual total poundage recycled over the next 10 years stayed more or less the same, albeit finally beginning to tick up steadily in 2004. But the total amount of bottles produced more than doubled, jumping to nearly 5 billion pounds by 2005. Those of us who do recycle aren't necessarily recycling less as the years go by, we just haven't been able to keep up with the deluge.
But now that we've answered the first question, there's still the second. With so many bottles available to be recycled, why can't we satisfy demand? One reason is that we don't have enough installed capacity to clean the bottles and chop them up into flakes. But another is that voluntary programs for recycling plastic don't appear to work too well. Maybe most people are like me, and didn't realize until today how recyclable the bottles are. Or maybe they don't live in one of the 11 states that mandate refundable deposits for PET bottles.
Because if you want to know why PET bottle recycling rates started to rise again in recent years, the answer appears to be simple: California. In 2004, California enacted a law that increased redemption values for PET containers. As a result, PET recycling in California surged.
Strange: Legislation and financial incentives make a difference! If government properly sets up a system that encourages people, whether you, me or the neighborhood poacher, to ferret out those bottles and turn them in, we can reduce landfill waste and clean up our neighborhoods. [Emphasis added]
The free market, all by itself, won't protect the environment. Regulation is needed — which means government regulation.
Give people an incentive, and they'll do the right thing. Providing that incentive just requires political will. What are we waiting for?
February 19, 2007
|Climate Change And The Future Of The West||Economy Environment Future|
From "The End of the West As We Know It?" by Anatol Lieven (IHT):
Every political, social and economic system ever created has sooner or later encountered a challenge that its very nature has made it incapable of meeting. The Confucian ruling system of imperial China, which lasted for more than 2,000 years, has some claim still to be the most successful in history, but because it was founded on values of stability and continuity, rather than dynamism and inventiveness, it eventually proved unable to survive in the face of Western imperial capitalism.
For market economies, and the Western model of democracy with which they have been associated, the existential challenge for the foreseeable future will be global warming. Other threats like terrorism may well be damaging, but no other conceivable threat or combination of threats can possibly destroy our entire system. As the recent British official commission chaired by Sir Nicholas Stern correctly stated, climate change "is the greatest and widest-ranging market failure ever seen."
The question now facing us is whether global capitalism and Western democracy can follow the Stern report's recommendations, and make the limited economic adjustments necessary to keep global warming within bounds that will allow us to preserve our system in a recognizable form; or whether our system is so dependent on unlimited consumption that it is by its nature incapable of demanding even small sacrifices from its present elites and populations.
If the latter proves the case, and the world suffers radically destructive climate change, then we must recognize that everything that the West now stands for will be rejected by future generations. The entire democratic capitalist system will be seen to have failed utterly as a model for humanity and as a custodian of essential human interests.
Even the relatively conservative predictions offered by the Stern report, of a drop in annual global gross domestic product of up to 20 percent by the end of this century, imply a crisis on the scale of the Great Depression of the 1930s; and as we know, the effects of that depression were not restricted to economics. In much of Europe, as well as Latin America and Japan, democracies collapsed and were replaced by authoritarian regimes.
As the report makes clear, however, if we continue with "business as usual" when it comes to the emission of greenhouse gases, then we will not have to wait till the end of the century to see disastrous consequences. Long before then, a combination of floods, droughts and famine will have destroyed states in many poorer parts of the earth — as has already occurred in recent decades in Somalia.
If the conservative estimates of the Stern report are correct, then already by 2050 the effects of climate change may be such as to wreck the societies of Pakistan and Bangladesh; and if these states collapse, how can India and other countries possibly insulate themselves?
At that point, not only will today's obsessive concern with terrorism appear insignificant, but all the democratizing efforts of Western states, and of private individuals and bodies like George Soros and his Open Society Institute, will be rendered completely meaningless. So, of course, will every effort directed today toward the reduction of poverty and disease.
And this is only to examine the likely medium-term consequences of climate change. For the further future, the report predicts that if we continue with business as usual, then the rise in average global temperature could well top 5 degrees Celsius. To judge by what we know of the history of the world's climate, this would almost certainly lead to the melting of the polar ice caps, and a rise in sea levels of up to 25 meters.
As pointed out by Al Gore in "An Inconvenient Truth," this would mean the end of many of the world's greatest cities. The resulting human migration could be on such a scale as to bring modern civilization to an end.
If this comes to pass, what will our descendants make of a political and media culture that devotes little attention to this threat when compared with sports, consumer goods, leisure and a threat from terrorism that is puny by comparison? Will they remember us as great paragons of human progress and freedom? They are more likely to spit on our graves. [Emphasis added]
The piece makes an essential point, though it could have been made more forcefully: unregulated market capitalism is, by its very nature, incapable of self-restraint, and hence incapable of dealing successfully with an issue like global warming. Capitalism is about the single-minded pursuit of one thing: profit. That single-mindedness is the source of capitalism's dynamism, but it is also, in a world of unregulated markets, going to be the source of capitalism's ultimate undoing. It costs nothing to emit greenhouse gases; it costs money to not emit them. Unless someone can figure out a way to reverse that circumstance, unregulated capitalism will be "successful" the way cancer is successful. It will grow and grow until, in the end, it kills its host.
So capitalism needs to be regulated, to save it from itself, and to save us from it. But a successful worldwide regulatory regime is ultimately going to have to be largely voluntary. Capitalists will have to restrain themselves. They are going to have to not cheat. Unfortunately, buccaneers have always vastly outnumbered saints.
February 16, 2007
|Bottom Falls Out Of New Housing Starts||Economy|
The bottom just fell out of starts for new residential construction in the US. For single-family homes, for example, January starts were down 38.9% compared to January a year ago.
Salon's Andrew Leonard spoke to housing economist Dean Baker. Excerpt:
But why are so many analysts willing to declare the bottom has been reached?
"The long and short of it is: You have a lot of people who are anxious to see the turnaround, and looking desperately at single-month data. But I have a hard time seeing the conditions for that. There is still this huge overhang of unsold homes, along with a huge inventory of vacant homes, which is also an indication of possible financial stress. Foreclosures are rising very rapidly."
Baker's reference to foreclosures brought up the second big question about the ultimate ramifications of the housing bust. The collapse of the sub-prime lending sector has led some financial analysts to wonder whether there will be a cascade effect on Wall Street that hurts the investors who have been buying and selling complicated financial instruments — credit derivatives and other exotic fare — that are directly or indirectly tied to the health of the housing sector. Has risk been spread around enough that Wall Street can ride out any storm? Or has the moment of truth for a largely unregulated and opaque system finally arrived?
First Baker speculated that the trouble currently being experienced by sub-prime mortgage lenders will spread into standard loans. If prices continue to fall, many homeowners will be holding mortgages whose value is greater than what they can sell their home for, he said.
"The problem will go well beyond sub-prime. We are going to see higher default rates on standard loans."
That in turn will increase the pressure on institutions and investors who have been speculating on such things as mortgage-backed securities. It won't just be the riskiest bets that blow up in hedge fund investor faces, but even some that were considered "safe."
"But we really don't have any idea how exposed the hedge funds are. No one knows how much they are leveraged. But there must be a lot of people exposed to far more risk than we understand, because you don't get the really high returns [enjoyed by hedge funds] without exposing yourself to a lot of risk."
So what's going to happen?
Dean Baker doesn't know. No one knows!
"We are just shooting in the dark," he conceded. [Emphasis added]
December's warmth caused a unusual amount of building activity, masking the slowdown. January's weather in the US was normal for a January, though, so the January numbers can't be blamed on the weather.
February 15, 2007
|Pop Goes The Bubble||Economy|
The housing bubble looks to be popping in earnest: the fourth quarter registered the largest drop in home prices ever recorded. Prices are now falling in more markets than they are rising. CNNMoney:
The slump in home prices was both deeper and more widespread than ever in the fourth quarter, according to a trade group report Thursday.
Prices slumped 2.7 percent in the fourth quarter compared to the fourth quarter of a year earlier, according to the report from the National Association of Realtors. That's the biggest year-over-year drop on record, and follows a 1.0 percent year-over-year decline in the third quarter.
In addition, 73 metropolitan areas reported a decline in the fourth quarter, compared to a year earlier. That outpaced the 71 that saw a gain. It was both a record number and percentage of markets showing a decline in the group's quarterly report. Five markets saw prices unchanged.
That decline was a far more widespread than the third quarter, when only 45 markets reported drops and 102 saw gains, or the second quarter when only 26 saw a year-over-year slump in prices. The national median price was still showing a year-over-year gain in the second quarter.
The most recent median prices are down even more — 3.4 percent, since hitting record highs in the second quarter. Almost three-quarters of the markets, reported on by the group, saw declines in median prices over the last six months, with eight reporting double-digit declines. [...]
The nation's leading home builders have all reported declining prices for new homes, which are not captured in this report. [Emphasis added]
Retail sales are highly correlated with housing prices, so falling housing prices will cause significant ripple effects elsewhere. The resulting economic slowdown will reduce housing demand (and hence housing prices) even further, which will cause further economic slowdown, etc., in a self-reinforcing feedback loop.
A year or two ago, lenders were throwing loans at anyone who wanted one. Now they're regretting it. MarketWatch:
Major financial firms like Merrill Lynch, J.P. Morgan Chase, and HSBC Holdings, which bought large amounts of high-risk, high-return mortgage loans in 2005 and 2006, are now trying to force the firms that originated those loans to buy them back, The Wall Street Journal Online reported. The moves reflect the increasing numbers of Americans who are falling behind in their mortgage payments.
The people who can't make their mortgage payments are going to have to start dumping their homes on the market, creating another feedback effect. It's musical chairs, and the music's stopping. If you've already got a seat, you're happy. Otherwise, not so much.
February 12, 2007
|Housing Shock Waves||Economy|
Salon reports on signs that the housing bubble is rapidly deflating. In Florida, January tax revenues fell for the third straight month, coming in at $108 million under budget for the month. Sales taxes alone fell $71 million. Sun-Sentinel:
Amy Baker, the coordinator for the Office of Economic and Demographic Research, attributed the drop in sales taxes to a "spillover effect" from a slumping housing market.
With fewer new homes being built and sold, sales of everything from shingles and sheet metal to washers and dryers are suffering, she said. "[That] is having some feedback into sales taxes," Baker said.
How big a deal is housing in the overall economy? Check this out. Bloomberg:
"Housing and housing-related employment made up a little over 40 percent of all payroll employment from November 2001 to April 2005," she says. "Employment in residential construction declined in nine out of the 10 months ended January 2007," with 104,000 jobs in residential specialty trade contracting lost since the February 2006 peak, according to the Bureau of Labor Statistics. [Emphasis added]
Housing has been keeping the economy afloat, based on a lending bubble that, like all credit bubbles, could not last. Just three years ago, Alan Greenspan opined that "consumers would benefit if lenders provided more alternatives to traditional fixed-rate mortgages." Adjustable-rate mortgages have one problem, though: they adjust. Not coincidentally, the share price of New Century, the second largest provider of subprime mortgages to the US market, fell 36% on Thursday. The bill is coming due.
December 07, 2006
|World Wealth Inequality Study||Economy|
A new study on the world distribution of wealth [PDF], the most comprehensive study of its kind ever undertaken, finds (as of the year 2000):
- the richest 1% of adults own 40% of global assets,
- the richest 2% own more than half, while
- the poorest 50% own barely 1% of the world's wealth.
I knew it was bad, but still.
Trickle-down economics, deregulation, tax cuts for the wealthy, "free trade" agreements, etc., have all contributed to the ever-increasing concentration of wealth into fewer and fewer hands. The lucky few love those policies — which pretty much tells you all you need to know.
October 14, 2006
|Goldman Sachs And The Price Of Gasoline||Economy Energy Politics|
As we've noted in the past, presidential approval ratings historically closely track the price of gasoline. The higher the price of gas, the lower the approval rating (see the graph here). That makes the recent plunge in gas prices good news for the White House, and for Republican candidates generally, going into the November elections.
Why have gas prices dropped so precipitously? Why now?
One significant factor that has gone largely unnoticed is a decision by investment bank Goldman Sachs to restructure its Goldman Sachs Commodity Index (GSCI) in a way that prompted the sudden selling of some $6 billion in gasoline futures. NYT:
Politics and worries about oil supplies may have caused gasoline prices to go up at the pump earlier this year, but one big investment bank quietly helped their rapid drop in recent weeks, according to some economists, traders and analysts.
Goldman Sachs, which runs the largest commodity index, the G.S.C.I., said in early August that it was reducing the index's weighting in gasoline futures significantly. The announcement did not make big headlines, but it has reverberated through the markets in the weeks since and some other investors who had been betting that gasoline would rise followed suit on their weightings.
"They started unwinding their positions, and those other longs also rushed to the door at the same time," said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation.
Wholesale prices for New York Harbor unleaded gasoline, the major gasoline contract traded on the New York Mercantile Exchange, dropped 18 cents a gallon on Aug. 10, to $1.9889 a gallon, a decline of more than 8 percent, and they have dropped further since then. In New York on Friday, gasoline futures for October delivery rose 4.81 cents, or 3.2 percent, to $1.5492 a gallon. Prices have fallen 9.4 percent this year.
The August announcement by Goldman Sachs caught some traders by surprise. [...]
Unleaded gasoline made up 8.72 percent of Goldman's commodity index as of June 30, but it is just 2.3 percent now, representing a sell-off of more than $6 billion in futures contract weighting.
Like many market indexes, trading in the Goldman Sachs Commodity Index is publicly available, allowing individual investors and third-party asset managers to participate in that market. The $100 billion invested comes from brokers, fund managers and individuals, probably including some of the same people who were hurt by high gasoline prices earlier in the year.
Goldman's announcement on Aug. 9 was not the only downward pressure on prices that week, market participants stress. And while it may have played a part in sending prices down, the market would never have continued its downward trend unless supplies had loosened up, they say.
Also during that week, climatologists revised their hurricane forecasts, easing fears that oil supplies could be disrupted. And BP said it would still produce some oil from its field in Prudhoe Bay, Alaska, where leaks were being repaired. Meanwhile, the peak gasoline season was ending, and new supplies of ethanol were coming online. [...]
"We saw gasoline fall 82 cents in the wholesale market over a four-week period, which is unprecedented," he said. Mr. Goldstein said that the decline in gasoline prices helped send prices of the whole group of energy-related products down.
Now, rather than highs, these products are hitting lows — natural gas, for example, traded on Wednesday at its lowest price in four years. [Emphasis added]
There's an element of crowd psychology in commodities futures trading, as there is in the trading of stocks, real estate, etc. A number of factors contributed to the crowd's psychology changing course with respect to gasoline futures. But the fact that Goldman's announcement came on August 9 and gasoline futures plunged more than 8% the following day is hardly coincidence.
It is impossible to know if Goldman's motives were in part political, but one could be forgiven for concluding that Bush administration economic policy is a wholly-owned subsidiary of Goldman Sachs. Henry Paulson, current Secretary of the Treasury, was CEO and Chairman of GS, as was Stephen Friedman, formerly the chair of Bush's National Economic Council and currently the chair of his Foreign Intelligence Advisory Board. Bush Chief of Staff (and former director of the Office of Management and Budget) Josh Bolten is a GS alumnus, as is Reuben Jeffery, chair of the Commodity Futures Trading Commission. It would be the responsibility of the latter to investigate any questions about manipulations of the futures markets. Not for nothing did Tom Wolfe call them "Masters of the Universe".
September 21, 2006
|California Sues Auto Makers Over Global Warming||Economy Environment|
The State of California is suing the big auto makers over the damage caused by global warming. Reuters:
California sued six of the world's largest automakers over global warming on Wednesday, charging that greenhouse gases from their vehicles have caused billions of dollars in damages. The lawsuit is the first of its kind to seek to hold manufacturers liable for the damages caused by their vehicles' emissions, state Attorney General Bill Lockyer said.
It comes less than a month after California lawmakers adopted the nation's first global warming law mandating a cut in greenhouse gas emissions.
California has also targeted the auto industry with first-in-the-nation rules adopted in 2004 requiring carmakers to force cuts in tailpipe emissions from cars and trucks.
Automakers, however, have so far blocked those rules with their own legal action — prompting one analyst to say California's lawsuit represents a way for California to pressure car manufacturers to accept the rules. [...]
Environmental groups hailed the lawsuit, saying it represented another weapon for the state as it seeks to curb greenhouse gas emissions and spur the auto industry to build vehicles that pollute less.
"(California) just passed a new law to cut global warming emissions by 25 percent and that's a good start and this lawsuit is a good next step," said Dan Becker, director of the Sierra Club's Global Warming Program. [...]
The lawsuit seeks monetary damages for past and ongoing contributions to global warming and asks that the companies be held liable for future monetary damages to California.
It said California is spending millions to deal with reduced snow pack, beach erosion, ozone pollution and the impact on endangered animals and fish.
"The injuries have caused the people to suffer billions of dollars in damages, including millions of dollars of funds expended to determine the extent, location and nature of future harm and to prepare for and mitigate those harms, and billions of dollars of current harm to the value of flood control infrastructure and natural resources," it said.
The Center for Automotive Research's Cole said it would be tough for the industry to immediately meet demands from some critics and predicted other states would quickly follow suit should California succeed with the legal action. [...]
In the complaint, Lockyer charges that vehicle emissions have contributed significantly to global warming and have harmed the resources, infrastructure and environmental health of the most populous state in the United States. [Emphasis added]
One of capitalism's fatal flaws: it may just be more profitable to destroy the Earth than to save it. Why doesn't an unregulated market solve environmental crises? Because environmental costs are borne by the public, not by the polluters who cause them. If the market is to function constructively, polluters must be made to pay for the damage they cause. Their profits must suffer. That, and that alone, will give them an incentive to stop.
Who knows if a lawsuit like this will have an appreciable effect, but governments and citizen groups have to bring to bear whatever leverage they can. The automakers won't clean up their act until compelled to do so. They're just following the logic of capitalism: maximize short-term profit, grow or die. Even if they wanted, individually, to reduce pollution, they believe they can't afford to do so unless their competitors simultaneously do so as well. In that sense, they may come to crave regulation as a way to save them from themselves.
[Thanks, Charyn — who likes to be known as "Alert reader Charyn"]
September 04, 2006
|Why We Need Organized Labor||Economy|
And don't need Republican administrations. From Detroit Free Press via Washington Monthly, here's a map showing the percentage change in median incomes by state just in the last six years. Read it and weep. Click the image to view a larger version:
Here in Wisconsin, incomes are down 8.2%. Thanks, Dubya.
August 30, 2006
People tend to have short memories. Since inflation-adjusted housing prices have sky-rocketed for nearly a decade, people think housing always goes up, when the recent situation has actually been an off-the-charts anomaly. NYT (click image for larger version):
Historically, housing has been a good hedge against inflation. What it hasn't been is a way to get rich quick. All those people holding adjustable-rate interest-only mortgages they can't afford who are counting on turning their house over in a few years for a nifty profit, might want to look at that chart. It's a bubble. Bubbles pop. When they do, a lot of people get hurt.
August 24, 2006
|That Giant Sucking Sound||Economy|
The US housing market is starting to tank. CNNMoney:
Home sales slumped more than expected in July, according to a trade group reading that showed the biggest supply of homes for sale in 13 years, coupled with weak prices.
The National Association of Realtors reported that existing homes sold at an annual pace of 6.33 million in July, down from the 6.6 million pace in June, which was also revised lower. Economists surveyed by Briefing.com had forecast a 6.55 million pace. The pace of sales was the slowest since January 2004.
The group said that there was a 7.3 month supply of homes on the market, the largest supply of homes for sale by that measure since April 1993.
The 3.86 million homes for sale is up nearly 40 percent from a year earlier, and is a record high for the group's report.
The increase in supply is due in part to a building boom in 2005, which saw a record number of new homes enter the market. A large percentage of those new homes were intially bought by investors, and home builders have reporting that many of those are now putting those homes up for sale as they attempt to exit the cooling residential real estate market. [...]
The glut of homes on the market has cooled off if not killed the white-hot home price gains of a year ago.
All regions of the country outside of the South saw a year-over-year decline in median home prices in July, and the South posted only a 3.2 percent year-over-year rise in median home price. [...]
While month-to-month declines in home prices in the report are not unusual, a year-over-year decline suggests true weakness in the market. [Emphasis added]
Ok, so? One economist, at least, believes the housing slump will trigger a significant recession as early as next year. MarketWatch (via RawStory):
The United States is headed for a recession that will be "much nastier, deeper and more protracted" than the 2001 recession, says Nouriel Roubini, president of Roubini Global Economics.
Writing on his blog Wednesday, Roubini repeated his call that the U.S. would be in recession in 2007, arguing that the collapse of housing would bring down the rest of the economy. [...]
"This is the biggest housing slump in the last four or five decades: every housing indicator is in free fall, including now housing prices," Roubini said. The decline in investment in the housing sector will exceed the drop in investment when the Nasdaq collapsed in 2000 and 2001, he said.
And the impact of the bursting of the bubble will affect every household in America, not just the few people who owned significant shares in technology companies during the dot-com boom, he said. Prices are falling even in the Midwest, which never experienced a bubble, "a scary signal" of how much pain the drop in household wealth could cause.
Roubini is a professor of economics at New York University and was a senior economist in the White House and the Treasury Department in the late 1990s...While many economists share Roubini's concerns about imbalances in the global economy and in the U.S. housing sector, he stands nearly alone in predicting a recession next year. [...]
Housing has accounted, directly and indirectly, for about 30% of employment growth during this expansion, including employment in retail and in manufacturing producing consumer goods, he said.
In the past year, consumers spent about $200 billion of the money they pulled out of their home equity, he estimated. Already, sales of consumer durables such as cars and furniture have weakened.
"As the housing sector slumps, the job and income and wage losses in housing will percolate throughout the economy," Roubini said.
Consumers also face high energy prices, higher interest rates, stagnant wages, negative savings and high debt levels, he noted.
"This is the tipping point for the U.S. consumer and the effects will be ugly," he said. "Expect the great recession of 2007 to be much nastier, deeper and more protracted than the 2001 recession." [Emphasis added]
As the article notes, the effects of housing's collapse will be much broader than the effects of the stock market's collapse. A lot of people own stocks indirectly through their 401(k)s and pension funds, but not that many people own a lot of stock outright. But more than 70 million families own homes, and many of them have depended on the value of their homes continuing to rise, using home equity loans to turn their homes into ATMs. That will come to a screeching halt.
July 21, 2006
|Brain Food||Economy Environment Science/Technology|
When I was a kid, I used to hear that fish is "brain food." I don't know if people still say that, but they should. George Monbiot:
The more it is tested, the more compelling the hypothesis becomes. Dyslexia, ADHD, dyspraxia and other neurological problems seem to be associated with a deficiency of omega-3 fatty acids, especially in the womb. The evidence of a link with depression, chronic fatigue syndrome and dementia is less clear, but still suggestive. None of these conditions are caused exclusively by a lack of these chemicals, or can be entirely remedied by their application, but it's becoming pretty obvious that some of our most persistent modern diseases are, at least in part, diseases of deficiency.
Last year, for example, researchers at Oxford published a study of 117 children suffering from dyspraxia. Dyspraxia causes learning difficulties, disruptive behaviour and social problems. It affects about 5% of children. Some of the children were given supplements of omega 3 and 6 fatty acids, others were given placebos. The results were extraordinary. In three months the reading age of the experimental group rose by an average of 9.5 months, while the control group's rose by 3.3. Other studies have shown major improvements in attention, behaviour and IQ.
This shouldn't surprise us. During the Palaeolithic, human beings ate roughly the same amount of omega-3 fatty acids as omega-6s. Today we eat 17 times as much omega-6 as omega-3. Omega-6s are found in vegetable oils, while most of the omega-3s we eat come from fish. John Stein, a professor of physiology at Oxford who specialises in dyslexia, believes that fish oils permitted humans to make their great cognitive leap forwards. [...]
Stein believes that when the cells which are partly responsible for visual perception — the magnocellular neurones — are deficient in omega-3s, they don't form as many connections with other cells, and don't pass on information as efficiently. Their impaired development explains, for example, why many dyslexic children find that letters appear to jump around on the page.
So at first sight the [British] government's investigation into the idea of giving fish oil capsules to schoolchildren seems sensible. The food standards agency is conducting a review of the effects of omega-3s on childrens' behaviour and performance in school. [...]
There is only one problem: there are not enough fish. In March an article in the British Medical Journal observed that "we are faced with a paradox. Health recommendations advise increased consumption of oily fish and fish oils within limits, on the grounds that intake is generally low. However...we probably do not have a sustainable supply of long chain omega 3 fats." Our brain food is disappearing.
If you want to know why, read Charles Clover's beautifully-written book The End of the Line. Clover travelled all over the world, showing how the grotesque mismanagement of fish stocks has spread like an infectious disease. Governments help their fishermen to wipe out local shoals, then pay them to build bigger and more powerful boats so they can go further afield. When they have cleaned up their own continental shelves, they are paid by taxpayers to destroy other people's stocks. The European Union, for example, has bought our pampered fishermen the right to steal protein from the malnourished people of Senegal and Angola. West African stocks are now going the same way as North Sea cod and Mediterranean tuna.
I first realised just how mad our fishing policies have become when playing a game of ultimate frisbee in my local park. Taking a long dive, I landed with my nose in the grass. It smelt of fish. To the astonishment of passers-by, I crawled across the lawns, sniffing them. The whole park had been fertilised with fishmeal. Fish are used to feed cattle, pigs, poultry and other fish — in the farms now proliferating all over the world. Those rearing salmon, cod and tuna, for example, produce about half as much fish as they consume....Now I have discovered that the US Department of Energy is subsidising the conversion of fish oil into biodiesel...It describes them as "a sustainable energy supply".
Three years after Ransom Myers and Boris Worm published their seminal study in Nature, showing that global stocks of predatory fish have declined by 90%, nothing has changed. The fish stall in my local market still sells steaks from the ocean’s charismatic megafauna: swordfish, sharks and tuna, despite the fact that their conservation status is now, in many cases, similar to that of the Siberian tiger. [...]
If fish stocks were allowed to recover and fishing policies reflected scientific advice, there might just about be enough to go round. To introduce mass medication with fish oil under current circumstances could be a recipe for the complete collapse of global stocks. Yet somehow we have to prevent many thousands of lives from being ruined by what appears to be a growing problem of malnutrition.
Some plants — such as flax and hemp — contain omega-3 oils, but not of the long-chain varieties our cell membranes need. Only some people can convert them, and even then slowly and inefficiently. But a few weeks ago, a Swiss company called eau+ published a press release claiming that it has been farming "a secret strain of algae called V-Pure" which produces the right kind of fatty acids. It says it's on the verge of commercialising a supplement...The oils produced by some species of algae...are chemically identical to those found in fish: in fact this is where the fish get from them from. [...]
[The algae] had better work. Otherwise the human race is destined to take a great cognitive leap backwards. [Emphasis added]
The race to deplete the fish of the sea is a stark illustration of a fundamental problem with unregulated capitalism: it may be more profitable to destroy the world than to save it. Destroying the world is bad business in the long run, of course. But a population of perfectly rational people out to maximize short term profit can bring about ultimate collapse, even though each of them acted in perfect accord with capitalist economic theory every step of the way.
A combination of factors come into play. There's the "tyranny of small decisions" — the cumulative effect of a number of small decisions can lead to a result that no one wants. So I may think, what's a few fish more or less? But if everyone thinks that way, before long the fish are gone. Forever.
There's the "tragedy of the commons" — when resources are "free", like the air, or the oceans, or the fish in the sea, there is no disincentive to overexploitation. There is, in fact, an incentive to exploit them as quickly as possible: if I don't take the fish, someone else will.
There's the problem that money grows faster than trees, or fish, or what have you. A forest may grow at a rate of 2% per year. That means that if I cut only 2% of it a year, my forest lasts forever. But if I clear-cut it today and invest the proceeds, my forest may be gone, but my money will grow a lot faster than 2% per year. So the economically rational thing is to monetize everything. Right up until the moment when it's all gone.
But, as Wendell Berry said:
Rats and roaches live by competition under the laws of supply and demand; it is the privilege of human beings to live under the laws of justice and mercy.
It is rapidly changing from a privilege to a necessity.
(See also this.)
May 09, 2006
|James Hansen: A Point Of No Return Is Looming||Economy Environment|
James Hansen, perhaps the country's most senior climate scientist, has posted a talk he gave in February at the New School (link via Energy Bulletin). In a nutshell: time is quickly running out. We're about to pass a global warming point of no return. Summary:
The Earth's temperature, with rapid global warming over the past 30 years, is now passing through the peak level of the Holocene, a period of relatively stable climate that has existed for more than 10,000 years. Further warming of more than 1ºC will make the Earth warmer than it has been in a million years.
"Business-as-Usual" scenarios, with fossil fuel CO2 emissions continuing to increase ~2%/year as in the past decade, yield additional warming of 2-3°C this century and imply changes that constitute practically a different planet. Multiple lines of evidence indicate that the Earth's climate is nearing, but has not passed, a point of no return beyond which it will be impossible to avoid climate change with far ranging undesirable consequences.
The changes include not only loss of the Arctic as we know it, with all that implies for wildlife and indigenous peoples, but losses on a much vaster scale due to worldwide rising seas. Sea level will increase slowly at first, as losses at the fringes of Greenland and Antarctica due to accelerating ice streams are partly balanced by increased snowfall and ice sheet thickening in the ice sheet interiors. But as Greenland and West Antarctic ice is softened and lubricated by melt-water, and as buttressing ice shelves disappear due to a warming ocean, the balance will tip to rapid ice loss, bringing multiple positive feedbacks into play and causing cataclysmic ice sheet disintegration.
The Earth's history suggests that with warming of 2-3°C the new equilibrium sea level will include not only most of the ice from Greenland and West Antarctica, but a portion of East Antarctica, raising sea level of the order of 25 meters (80 feet). Contrary to lethargic ice sheet models, real world data suggest substantial ice sheet and sea level change in centuries, not millennia. The century time scale offers little consolation to coastal dwellers, because they will be faced with irregular incursions associated with storms and with continually rebuilding above a transient water level.
The grim "Business-as-Usual" climate change is avoided in an Alternative Scenario in which growth of greenhouse gas emissions is slowed in the first quarter of this century, primarily via concerted improvements in energy efficiency and a parallel reduction of non-CO2 climate forcings, and then reduced via advanced energy technologies that yield a cleaner atmosphere as well as a stable climate.
The required actions make practical sense and have other benefits, but they will not happen without strong policy leadership and international cooperation. Action must be prompt, otherwise CO2-producing infrastructure that may be built within a decade will make it impractical to keep further global warming under 1°C.
There is little merit in casting blame for inaction, unless it helps point toward a solution. It seems to me that special interests have been a roadblock wielding undue influence over policymakers. The special interests seek to maintain short-term profits with little regard to either the long-term impact on the planet that will be inherited by our children and grandchildren or the long-term economic well-being of our country. The public, if well-informed, has the ability to override the influence of special interests, and the public has shown that they feel a stewardship toward the Earth and all of its inhabitants. Scientists can play a useful role. [Emphasis added]
Something I just don't get: the many people, here in the US, especially, who continue to cling to the idea that the private sector is the source of all things good, while public institutions are the parasitic source of nothing but waste, inefficiency, and error. But the atmosphere (and the oceans and wildlife and the commons in all its other forms) shows up on no private sector balance sheet, so the market Titanic speeds full steam ahead toward the iceberg.
Corporations — international corporations, especially, since they owe allegiance to nobody and nowhere — are single-minded machines programmed to pursue one goal: maximum profits. Their focus is short term, and they are by their nature incapable of self-restraint. If governments were to impose regulations that caused all corporations to restrain themselves equally, they might welcome it (it beats suicide), but in the meantime the logic of the market bars them from any form of self-restraint not also being practiced by their competitors. And so, with a cliff looming dead ahead, when you might expect them to be stepping on the brakes, they instead have got the pedal to the floor. Wheeeee!
April 23, 2006
|Peak Tires||Economy Energy Peak Oil|
Economists look at peak oil (and peak copper, peak nickel, and peak everything else) and say the market will provide. As commodity prices rise, producers will be able to make a profit extracting resources from places that previously were unprofitable, in effect increasing the supply.
But it's not that simple. The fundamental problem is the sheer scale of world resource use. It takes more than money. There are physical constraints on how quickly some things can be done. There's a lot of oil in Canadian tar sands, for example, but no amount of investment capital is going to make it possible to extract more than a few million barrels a day in the foreseeable future. Likewise, producers of conventional oil (i.e., oil from wells, not from tar sands or shale) may want to drill lots more wells, but all of the world's oil rigs are already in use. Building more will take time. And there are only a finite number of people with the needed expertise to make these things happen. Training more will take even more time.
Part of the problem is that price signals arrive too late. What causes prices to rise is a shortage in current production. Draining the world's reservoirs doesn't get reflected in prices until the situation has become so dire that producers can no longer pump oil fast enough. By then, it's too late. Investment in alternatives has a long lead time, so it should have started long before shortages show up in prices.
The worldwide thirst for stuff from the ground — materials as diverse as copper and coal, gold and oil — has set off a stunning boom in just about every commodity market. But there is one item that lately has dealers in the global mining industry really scrambling: the supersize tire.
Mining companies are complaining about a shortfall in the supply of the giant tires that go on large dump trucks and other heavy equipment. These outsize tires stand as tall as 12 feet tall and can spread 4 feet wide.
They are used prominently everywhere from the Canadian tar sands to open-air coal mines in the United States and China, but lately they have become almost as precious as gold and silver: prices have quadrupled for some of them in the last year to more than $40,000 a tire.
"This has never happened in the 35 years I've been in this business," said Michael Hickman, 63, who, together with his son, owns H & H Industries in Oak Hill, Ohio, one of the nation's largest retreaders of used mining tires.
"Right now the entire mining industry is going berserk, and we're feeding into it," said Mr. Hickman, whose company has tripled its work force to 160 in the last two years. [...]
[M]ining companies and tire manufacturers say the biggest reason is the rapid industrialization of China, India and other developing countries, which is expanding the appetite for basic commodities. [...]
Given the stress the commodities boom has unexpectedly created in an arcane area of the mining supply chain, some experts suggest that the tire shortage may keep prices higher longer than expected by limiting the ability of mining companies to meet the explosive demand for their products. But in the end, they say, there is little to worry about.
"This tire issue is, I believe, more a symptom of the mining industry's strength than its weakness," said Tibor Rozgonyi, head of the mining engineering department at the Colorado School of Mines. "It may be an acute concern at this moment, but the market has a way of taking care of these imbalances." [Emphasis added]
Eventually, the market will take care of the imbalances, it's true, but not necessarily by continuing to provide more of everything, forever. It may do it via ever-rising prices, which will price a lot of people out of the market. Demand destruction, as it's called. Meanwhile, we plow full steam ahead, as if the current way of doing things can continue indefinitely.
February 06, 2006
|2005 Worst Year Since Great Depression For US Savings||Economy|
2005 was not a good year. On the global warming front, NASA says 2005 was the latest in the recent string of warmest years on record. And as we saw on Saturday, in just the last few years the rate at which atmospheric CO2 increases has been acclerating sharply, indicating that feedback loops are kicking in.
Economic news seems inconsequential in comparison, but there are ominous signs there, as well: 2005 saw a negative savings rate in the US for the first time since the Great Depression. People are trying to get by on borrowing. AP:
Consumer spending rose at a rapid pace in December, far outpacing income growth, a development that helped to push the savings' rate for the year down to the lowest level since the Great Depression.
The Commerce Department said Monday that consumer spending rose by 0.9 percent in December, more than double the 0.4 percent rise in incomes.
To finance the increased spending, Americans dipped further into their savings, pushing the savings rate for all of 2005 into negative territory at minus 0.5 percent. That was the lowest annual savings rate since a decline of 1.5 percent in 1933, a year in which the country was struggling to cope with the Great Depression. [...]
A negative savings rate means that Americans spent all their disposable income, the amount left over after paying taxes, and dipped into their past savings to finance their purchases. For the month, the savings rate fell to 0.7 percent, the largest one-month level since a decline of 3.4 percent in August.
The 0.5 percent decline in savings for the year followed a savings rate of 1.8 percent in 2004. There have only been three years that the savings rate has fallen into negative territory. The savings rate dipped by 0.9 percent in 1932 and the record 1.5 percent decline in 1933, years when Americans exhausted their savings to try to meet expenses in the face of soaring unemployment as the country struggled with the worst economic crisis in its history. [Emphasis added]
The worst savings year since the depths of the Great Depression, but we're supposed to believe everything's just fine. People are taking equity out of their homes at a furious pace, and now the housing market's starting to cool. It's not going to be pretty.
February 03, 2006
|Assorted Links Of Interest||Economy Politics|
Crazy deadline pressure at work, but here are a few links of interest...
- Some people don't know how not to cheat. House Republicans rig their own internal election.
- According to this analysis (via John Robb), GDP growth has been negative for the past five years if housing construction is subtracted out. If the numbers are right, it corroborates James Kunstler's assertion that suburban sprawl is pretty much the only engine driving the US economy lately.
- Now that I've ordered my Prius, Peugeot has announced diesel/electric hybrids that will get 80 mpg. Still in the prototype stage, however, so I don't feel too bad yet.
- A new book claims broadband companies have outright stolen $200 billion of our money by not delivering on already paid-for upgrades. That's $2000 per household involved. The US has fallen to 16th in broadband, with DSL rates 100 times slower than countries like Japan and Korea.
That's it for now. Gotta run.
January 16, 2006
|Superpower No More||Economy Iraq Politics|
A post from last week pointed out that US GDP growth is being fueled entirely by debt. Old-school conservative Paul Craig Roberts (former Senior Research Fellow of the Hoover Institution, former associate editor of the Wall Street Journal, former Asst. Secretary of the Treasury under Reagan — which is to say, no liberal) agrees. He goes further, blaming the Bush administration and its disastrous war for bringing the US to the brink of an economic abyss. Excerpts:
President George W. Bush has destroyed America's economy, along with America's reputation as a truthful, compassionate, peace-loving nation that values civil liberties and human rights.
Nobel Prize-winning economist Joseph Stiglitz and Harvard University budget expert Linda Bilmes have calculated the cost to Americans of Bush's Iraq war to be between $1 trillion and $2 trillion. This figure is five to 10 times higher than the $200 billion Bush's economic adviser Larry Lindsey estimated.
Lindsey was fired by Bush because his estimate was three times higher than the $70 billion figure that the Bush administration used to mislead Congress and the American voters about the burden of the war. You can't work in the Bush administration unless you are willing to lie for Dub-ya.
Americans need to ask themselves if the White House is in competent hands when a $70 billion war becomes a $2 trillion war. [...]
Stiglitz's $2 trillion estimate is OK as far as it goes. But it doesn't go far enough. My own estimate is a multiple of Stiglitz's.
Stiglitz correctly includes the cost of lifetime care of the wounded, the economic value of destroyed and lost lives, and the opportunity cost of the resources diverted to war destruction. What he leaves out is the war's diversion of the nation's attention away from the ongoing erosion of the U.S. economy. [...]
>In 2005, for the first time on record, consumer, business and government spending exceeded the total income of the country.>
America can consume more than it produces only if foreigners supply the difference. China recently announced that it intends to diversify its foreign exchange holdings away from the U.S. dollar. If this is not merely a threat in order to extort even more concessions from Bush, Americans' ability to consume will be brought up short by a fall in the dollar's value, as China ceases to be a sponge that is absorbing an excessive outpouring of dollars. Oil-producing countries might follow China's lead.
Now that Americans are dependent on imports for their clothing, manufactured goods and even high technology products, a decline in the dollar's value will make all these products much more expensive. American living standards, which have been treading water, will sink.
A decline in living standards is an enormous cost and will make existing debt burdens unbearable. Stiglitz did not include this cost in his estimate. [...]
The ladders of upward mobility are being rapidly dismantled by offshore production for U.S. markets, job outsourcing and importation of foreign professionals on work visas. [...]
This fact is made abundantly clear from the payroll jobs data over the past five years. December's numbers, released on Jan. 6, show the same pattern that I have reported each month for years. Under pressure from offshore outsourcing, the U.S. economy only creates low-productivity jobs in low-pay domestic services.
Only a paltry number of private sector jobs were created — 94,000. Of these 94,000 jobs, 35,800 — or 38 percent — are for waitresses and bartenders. Health care and social assistance account for 28 percent of the new jobs, and temporary workers account for 10 percent. These three categories of low-tech, nontradable domestic services account for 76 percent of the new jobs. This is the jobs pattern of a poor Third World economy that consumes more than it produces.
America's so-called First World superpower economy was only able to create in December a measly 12,000 jobs in goods-producing industries, of which 77 percent are accounted for by wood products and fabricated metal products — the furniture and roofing metal of the housing boom that has now come to an end. U.S. employment declined in machinery, electronic instruments, and motor vehicles and parts. [...]
When manufacturing leaves a country, engineering, R&D and innovation rapidly follow. Now that outsourcing has killed employment opportunities for U.S. citizens and even General Motors and Ford are failing, U.S. economic growth depends on how much longer the rest of the world will absorb our debt and finance our consumption.
How much longer will it be before "the world's only remaining superpower" is universally acknowledged as a debt-ridden, hollowed-out economy desperately in need of IMF bailout? [Emphasis added]
The guy sounds like James Kunstler. Kunstler has long insisted that the US economy consists nowadays of little more than the creation and servicing of suburban sprawl: construction, retail, hair cutting and fast food — the stuff that cannot be outsourced overseas. Roberts' figures bear this out, at least as regards new job creation. When the construction bubble bursts, what then?
January 12, 2006
|Out Of Balance||Economy|
Jerome-a-Paris has some interesting data on the imbalances afflicting the US economy.
The story starts with China. Here are partial data for China's trade balance in 2005:
Exports Imports Total Growth Surplus Total 762 660 1442 +24% 102 Europe 140 77 217 +23% 63 USA 156 51 211 +25% 101 Japan na na 184 +10% na Korea 23 77 100 na -54 ASEAN na 75 na na na
As Jerome says:
From the numbers above, the way world trade is setting itself up becomes clearer: Western companies invest in China, using Chinese labor and Asian parts (and Australian raw materials), and sell on their home markets. [...]
Western jobs are threatened in many sectors, but Western profits are boosted. Nice if your income comes from capital, and not from labor: profits are at record levels.
This arrangement is unsustainable. It depends on American consumption, for one thing, at the same time that it depresses American wages. Hard to consume when you're broke. For now, the US is getting by on foreign debt. This graph is a real eye-opener:
For the past five years, growth in net debt has exceeded growth in GDP. We're losing ground: for every dollar of GDP growth we've had to borrow more than a dollar from overseas. We're buying our GDP growth with borrowed money.
Meanwhile, the Commerce Dept. is projecting that the US personal savings rate will likely be negative for 2005, the first negative year since the Great Depression.
None of this is sustainable, and yet we plow blithely ahead.
January 10, 2006
|China Signals A Move Away From Dollars||Economy|
China's enormous trade surplus with the US provides it with lots of US dollars to invest. To date, China has invested most of those dollars in US Treasury bills and other dollar-based assets: the Chinese central bank holds more than half a trillion dollars worth of such assets. By buying dollar-based assets, China helps to prop up their value. But now, the Chinese are signalling an intention to move some of their money out of dollars, a move likely to depress the dollar's value. Today's WaPo:
China has resolved to shift some of its foreign exchange reserves — now in excess of $800 billion — away from the U.S. dollar and into other world currencies in a move likely to push down the value of the greenback, a high-level state economist who advises [China's] economic policymakers said in an interview Monday.
As China's manufacturing industries flood the world with cheap goods, the Chinese central bank has invested roughly three-fourths of its growing foreign currency reserves in U.S. Treasury bills and other dollar-denominated assets. The new policy reflects China's fears that too much of its savings is tied up in the dollar, a currency widely expected to drop in value as the U.S. trade and fiscal deficits climb.
China now boasts the world's second-largest cache of foreign exchange — behind only Japan — and is on pace to see its reserves climb past $1 trillion later this year. Even a slight diminishing of the dollar as a percentage of those holdings could exert significant pressure on the U.S. currency, many economists assert.
In recent years, the value of the dollar has been buoyed by major purchases of U.S. Treasury bills by Japan, China and oil-exporting countries — a flow of capital that has kept interests rates relatively low in the United States and allowed Americans to keep spending even as debts mount. Some economists have long warned that if foreigners lose their appetite for American debt, the dollar would fall, interest rates would rise and the housing boom could burst, sending real estate prices lower.
The comments of the Chinese senior economist, made on the condition of anonymity because the government disciplines those who speak to the press without express authorization, confirmed an analysis in Monday's Shanghai Securities News stating that China is inclined to shift some its savings into other currencies such as the euro and the yen, or into major purchases of commodities such as oil for a long-discussed strategic energy reserve. [...]
"We believe this adds to the downside pressure the USD [U.S. dollar] is currently facing," Green wrote. "It is the first official expression from [China] that they are looking at switching away" from the dollar. [Emphasis added]
China has to tread carefully or the value of their dollar holdings will fall, but, given the long-term imbalances in the US economy, one can hardly blame them for feeling nervous about piling up dollars ad infinitum.
January 03, 2006
|Kunstler On 2006||Economy Energy Peak Oil|
James Kunstler starts 2006 cheerful as ever. He's got a very long post, full of alarming predictions. The following is a scattering of highlights:
From 2001 through 2005, consumer spending and residential construction had together accounted for 90 percent of the total growth in GDP, while over two-fifths of all private sector jobs created since 2001 were in housing-related sectors, such as construction, real estate and mortgage brokering. Much of the money spent did not really exist except as credit — incomes as yet unearned, hallucinated liquidity, wished-for wealth, all based on the expectation that house values would continue to rise at 10 to 20 percent a year forever. It became a reckless racket, all predicated on sustaining an economy that had lost its other means for generating wealth — foremost its infrastructure for making things besides suburban houses. [...]
The velocity of change in the housing bubble (and the psychology involved) will be greatly affected by oil and gas prices. It seemed to many of us watching the energy markets that the world may indeed have passed through its all-time oil production peak in 2005. Production in 2005 was nearly flat over 2004. The world was producing and also using roughly 82 million barrels of oil a day. Oil coming into new production was not making up for signs of depletion showing among virtually all the world's major producers. Iran, Russia, Mexico, Venezuela, the North Sea, and, of course, the USA, were all past peak. The big mystery was Saudi Arabia, but their inability to boost production from the 50-year-old fields that comprised their main reserves suggested that they were topping out, too. Which left an energy-hungry world with the need to either A.) make other arrangements for powering industrial economies, or B.) contesting for control of the remaining oil reserves, which were substantially concentrated in the Middle East and Central Asia.
Here, I hasten to remind the reader that peak is peak, meaning right now we are all operating on the basis of a lot of oil flowing around the world. The comfort level is still high. The factories are still humming in China, and the six-lane commuting corridors are still full of big cars around Atlanta, Dallas, Denver, and Minneapolis. The problem is that the oil supply will soon steadily diminish at a rate of at least three percent a year, and that necking down of supply is likely to be expressed in greater geopolitical friction and turmoil between the great nations who crave oil. The US entered into the military phase of this turbulence before any other nation. We used our superpower status to set up a centrally-located Middle East garrison in Iraq, under the idealistic cover story that we were removing a dangerous head-of-state and helping to set up a model democracy that would invite us to stick around the vicinity indefinitely, and thus retain some control over the deportment of other oil-rich states in the region. [...]
High gasoline, heating oil, and methane gas prices will absolutely kill the housing bubble...The production home builders will be idle, stuck with huge inventories in places that never should have been suburbanized in the first place. A lot of Americans holding "creative" mortgages — no money down, interest only, adjustable rate, what-have-you — will be crushed by the expense of their obligations. Many of them will go bankrupt under new bankruptcy laws that leave no wiggle room for escaping partial repayment. Their houses will flood the real estate markets in an orgy of distress selling. [...]
With the cratering of the housing bubble, the US economy has to fall on its ass. [...]
The sheer falloff in new mortgages will send a tsunami through financial markets addicted to continuous supplies of new "money" to preserve the illusion of expansion. I'd called for a Dow-4000 late in 2005. I think that was just an error in timing, and still call for the Dow to sink into that range, or worse, in 2006. This will represent a moment of painful clarity for market professionals, as they realize that an industrial economy and the finance that serves it must be based on the expectation of generating real future wealth, not on zero-sum rackets, games of monetery musical chairs, or casino legerdemain. Hedge funds, which depend on predictable stability, will be especially vulnerable. They will certainly take some large banks down with them when they go. I'll call for the so-called government sponsored entities of Fannie Mae and Freddie Mac to groan under and then drown in a sea of non-performing loans, probably with overtones of criminal irresponsibility.
If these things occur, ugly things would happen to the dollar. [...]
The commercial airline industry is already whirling around the drain. 2006 will send it decisively down that drain. [...]
By similar reasoning, I see an excellent chance for General Motors and Ford to go out of business in 2006. Sales of their stupid SUVs were already tailing off in the second half of last year, and they are not positioned to offer much of anything else. [...]
As America roils in economic pain, factory workers in China will be thrown out of work. They will be extremely pissed off, and as their appeals go unappeased, they might start making political trouble in their country. That could easily stimulate Chinese leaders to divert their nation's attention with a compelling military project...Sooner or later, China eventually will go cuckoo from a shortage of fossil fuels. It only remains to be seen how this will express itself. [...]
Which brings us to the extremely sore subject of Iraq. I maintain that our reasons for being there have not changed one bit, namely to make sure that we don't lose access to Middle East oil in any shape or form. Now my stating that does not mean I think we will necessarily succeed...I predict that circumstances will impel us to withdraw from the Iraqi cities but that we will not give up large bases near the oil production areas of the north and south. [...]
Generally, I predict 2006 will see a shift in power to the big energy bear, Russia. [...]
Japan has nearly been forgotten. It now imports 95 percent of the fossil fuel it needs to run itself. God knows what they will do if geopolitical turmoil shuts down the shipping lanes that bring a steady stream of oil tankers to the islands. [...]
Meanwhile, Mexico's premier oil field, Canterall, has entered depletion. They depend on imports of natural gas from us, and under the rather insane terms of NAFTA, we in the US depend on imports of gas from Canada to make up for the stuff we have to sell to Mexico. [...]
Here in USA, I predict that we will be diverted by a fantastic circus of congressional hearings and court proceedings. It will be scandal-o-rama for the Bush administration and the Republican party. [Emphasis added]
There's lots more at the post, including predictions of $100/barrel oil, $4/gallon gasoline, and $20/million BTU natural gas at some point during 2006.
Kunstler seems to revel in making dire pronouncements, but his basic points are, I think, well taken. US economic growth truly has become something of a mirage, based on consumer spending and the housing bubble, financed by debt. The trade deficit tells the story. We no longer make what we need, we buy it from foreigners and pay for it with money loaned us by foreigners. Kunstler's stock market predictions may not pan out — there is a glut of capital worldwide, and it has to go somewhere — but the US can't go on forever with a negative savings rate and a living standard financed by going further and further into debt.
December 30, 2005
|Energy Illiteracy And Jevon's Paradox||Economy Energy Peak Oil|
American affluence hides from us the kind of intuitive, experience-based knowledge we're going to need if we are to move toward a more sustainable energy future. Where does electricity come from? How much do we really use? Who knows. We just flip a switch. Ditto for gasoline, heating oil, natural gas. We have no idea how much energy we use, or what it took to bring it to us.
For the world's poor, the situation is very different. Monte Myers:
[R]esidents of poor nations are acutely aware of every aspect of their energy use; every stick of wood (sometimes carried for miles) and every gallon of cooking fuel is closely watched.
Few Americans ever get close to this kind of awareness, except dimly, perhaps, when camping.
Our obliviousness — our "energy illiteracy," Myers calls it — will work against us as we increase the efficiency of energy use in an effort to conserve. We're likely to encounter a form of unintended consequences known as Jevon's Paradox: increased efficiency can lead to increased, rather than decreased, use of a resource. A more efficient car, for example, costs less per mile to drive, which prompts people to drive more miles, or drive a bigger vehicle, than before. They may — and historically generally do — end up using even more gas than previously, not less.
If we had to carry our own wood, dig our own coal, etc., we'd understand conservation in our bones. But so long as energy is just effortless magic that happens when we flip a switch, so long as the cost of energy is just a number that appears on a monthly bill, it's almost a given that if the cost is reduced, usage will increase. Too bad for us.
December 27, 2005
|Organized Crime||Economy Media Politics|
Once upon a time, a rising tide did lift all boats:
Then came the Reagan Revolution:
The after-tax picture is even worse:
How corrupt is American political/media culture? Ask yourself: how often do you see graphs like these in the mainstream.
December 14, 2005
|US Natural Gas Prices Sets Record||Economy Energy Peak Oil|
Natural gas prices hit a record high yesterday as winter demand kicks in. AP:
Natural gas prices surged to an all-time high Tuesday, as cold weather in the U.S. and disrupted production in the Gulf of Mexico caused traders to worry that supplies of home-heating fuels will be tight this winter.
Natural gas for January rose as high as $15.78 per 1,000 cubic feet, then settled at $15.378 on the New York Mercantile Exchange, up 53.7 cents from Monday's settlement price. The previous record close was $14.994 on Dec. 8.
"The last thing consumers needed to have happen is a cold snap early in the season," said John Kilduff, analyst at Fimat USA, noting that temperatures have been well below normal in many parts of the country.
"With a quarter of natural gas offline in the gulf, it's just stoking the winter supply fears."
By Wednesday, a storm will bring snow to the upper Midwest, while an ice storm will move up the East Coast by Thursday, according to Accuweather forecasters. December has been colder than usual, and many forecasters are saying below-average temperatures will persist throughout the winter.
Natural gas is most commonly used to heat homes in the Midwest, while heating oil is most commonly used in the Northeast.
Kilduff predicted that the price of natural gas could rise as high as $20 per 1,000 cubic feet by the middle of January. [Emphasis added]
If gas does go to $20, a lot of people are going to have a tough time paying their heating bills. $15 is bad enough. The effect will spill over to the economy as a whole, as money spent paying for heating is money not spent elsewhere.
December 12, 2005
|Chinese Activists Take On The Environment||Activism Economy Environment|
The Chinese economic "miracle" is going to seem a whole lot less miraculous when the environmental bill comes due. More and more Chinese agree, and they're mobilizing to do something about it. Boston Globe:
Much of China watched in horror as work crews struggled to contain the recent benzene spill that polluted the northeastern Songhua River and disrupted drinking water supplies to about 12 million people in the region for more than a week.
But even residents of Beijing watching the event unfold on television weren't entirely safe from the effects of China's increasing environmental decay.
China's capital is one of the most polluted cities in the world and lung cancer is now the number one cause of death here, according to China's State Environmental Protection Administration. A thick cloud of sulfur envelops the city most evenings; a recent picture taken from NASA's Terra satellite shows the entire city covered by a nearly opaque band of gray smog.
With more and more people finding themselves directly affected by China's endemic pollution, public awareness of and anger over China's deteriorating environment is growing. So is their willingness to take risks and do something about it, despite the strictures on organized political activity in this authoritarian state.
"People are taking a stand," said Dai Qing, a political and environmental activist who was jailed during the Tiananmen Square massacre of 1989 and who emerged from prison to champion opposition to the giant Three Gorges Dam on the Yangtze River, which she has called "the most environmentally and socially destructive project in the world."
In the years since China's first environmental nongovernmental organization, Friends of Nature, was allowed to register in 1994, more than 2,000 grass-roots environmental nongovernmental organizations have risen all over the country, according to government reports. Once disparate, under-funded, untrained, and badly equipped, many of these groups are now learning how to organize and empower themselves. [...]
[T]he view of many activists here [is that] foreign media coverage, money, and expertise is critical for China's budding nongovernmental organizations to grow. [...]
One reason international nongovernmental groups and leaders are eager to assist the grass-roots ones in China is that while the economic ripple effect of China's booming economy is buoying global markets, the environmental fallout caused by the surge in economic activity also is spreading across the region and beyond.
According to Dr. Tsutomu Toichi, managing director and chief executive economist of the Institute of Energy Economics in Tokyo, "A lot of sulfur dioxide and other pollutants from China are reaching Japan with the western wind and even the West Coast of the United States." [...]
[M]ost Chinese power companies prefer to pay the financial penalties levied by the Chinese government against polluters since that's cheaper than installing the equipment. [...]
Initially, Chinese nongovernmental groups and journalists had focused only on politically safe issues, such as tree-planting campaigns. But now many are engaged in fierce battles with authorities over the construction of dams and other mega-public works projects, and filing lawsuits against polluting factories.
So far, they've had some success. A growing section of the Chinese leadership, led by Deputy Environment Minister Pan Yue, has been vocal in calling for China to make its economic policies more environmentally sensitive.
Earlier this year, China's State Environmental Protection Administration took the unprecedented step of suspending work on 30 projects, worth more than $10 billion collectively, after they failed to meet environmental standards.
On Friday, China's chief environmental regulator, Xie Zhenhua, quit and took the blame for last month's chemical spill, which shut off water to millions.
...[But there has] been little change in Beijing's overall economic and environmental policies, which continue to focus on creating the 7 percent annual growth that analysts say the country needs to avert domestic political turmoil.
What also angers Chinese and activists is that the government, despite its rhetoric, continues to hide critical facts and information from the public. [...]
[T]he government withheld news for 10 days after a chemical plant explosion on Nov. 13 dumped about 100 tons of benzene into the Songhua River near Harbin. The blast occurred at a company owned by a subsidiary of the China National Petroleum Corporation, a state-owned company.
..."China's top priority" remains political stability and economic growth...
The Chinese government's development plans and economic policy remain dedicated to promoting cars instead of public transportation, burning fossil fuels instead of alternate energies, and pampering manufacturers with cheap resources instead of pushing them toward greater efficiencies. [...]
[I]n Beijing alone 70 percent to 80 percent of deadly cancer cases are related to the environment, according to the State Environmental Protection Administration. [...]
"There's this new sense of 'I can,'...[a]nd it's not just with the younger generation. Even older people here have a feeling, a passion to change things...This country's future is at stake." [Emphasis added]
As I've said before, this is a perfect illustration of what is probably the single biggest blind-spot in "neoclassical" economics: the pretense that growth has no cost. Neoclassical economics (i.e., economics as it's usually taught in school) treats environmental damage, damage to people's health, etc., as "externalities" — costs that don't show up on any balance sheet and which therefore might as well not exist.
An honest accounting that treated all such externalities as debits rather than mere footnotes would show that in many cases growth is actually uneconomic, costing more than it's worth. But since the cost is not borne by the people who profit from growth (but rather, in many cases, by people who haven't even been born yet), those who profit see growth as an unalloyed "miracle" as they take the money and run.
December 08, 2005
|American Plan To Destroy European Support For Kyoto||Economy Environment Politics|
The fundamental problem with unregulated capitalism: if it's more profitable to liquidate the global environment than to sustain it, capitalism will liquidate it. Even if it's ultimately suicidal to do so. Corporations are machines programmed to make short-term, tunnel-vision decisions based on a single prime directive: maximize profits. Here's the kind of thing that results (The Independent, via The Oil Drum):
A detailed and disturbing strategy document has revealed an extraordinary American plan to destroy Europe's support for the Kyoto treaty on climate change.
The ambitious, behind-the-scenes plan was passed to The Independent this week, just as 189 countries are painfully trying to agree the second stage of Kyoto at the UN climate conference in Montreal. It was pitched to companies such as Ford Europe, Lufthansa and the German utility giant RWE.
Put together by a lobbyist who is a senior official at a group partly funded by ExxonMobil, the world's biggest oil company and a fierce opponent of anti-global warming measures, the plan seeks to draw together major international companies, academics, think-tanks, commentators, journalists and lobbyists from across Europe into a powerful grouping to destroy further EU support for the treaty.
It details just how the so-called "European Sound Climate Policy Coalition" would work. Based in Brussels, the plan would have anti-Kyoto position papers, expert spokesmen, detailed advice and networking instantly available to any politician or company who wanted to question the wisdom of proceeding with Kyoto and its demanding cuts in carbon dioxide emissions.
It has been drawn up by Chris Horner, a senior official with the Washington-based Competitive Enterprise Institute and a veteran campaigner against Kyoto and against the evidence of climate change. [...]
Mr Horner, whose CEI group has received almost $1.5m (£865,000) from ExxonMobil, is convinced that Europe could be successfully influenced by such a policy coalition just as the US government has been. [...]
Mr Horner believes the moment for his coalition is at hand and has been seeking support for it from multinational companies. In his pitch to one major company, he wrote: "In the US an informal coalition has helped successfully to avert adoption of a Kyoto-style programme by maintaining a rational voice for civil society and ensuring a legitimate debate over climate economics, science and politics. This model should be emulated... to guide similar efforts in Europe."
Elsewhere he claimed: "A coalition addressing the economic and social impacts of the EU climate agenda must be broad-based (cross industry) and rooted in the member states. Other companies (including Lufthansa, Exxon, Ford) have already indicated their interest!" [...]
While there is nothing illegal about the lobbying, the documents reveal a rare insight into the well-funded efforts within the US to influence opinion at senior levels of European corporations. Campaigners say the campaign is similar to a notorious lobbying effort carried out during the 1990s to undermine support for Kyoto within the US.
The revelation comes as international negotiators in Montreal are discussing the next step within Kyoto and the possibility of introducing new emissions targets. The Bush administration which has rejected the treaty has insisted it will not agree to any measures that legally bind it to reduce emissions. Mr Horner has been present this week in Montreal. [Emphasis added]
Individual corporations and their shareholders get to make a profit, but everyone on earth pays the price. The fatal flaw in the logic of (unregulated) capitalism: the entities acting on the environment don't bear the resulting costs, so they act as if the costs are zero. Right up until the day the world ends.
November 16, 2005
|Demand Destruction||Economy Energy Peak Oil|
High fuel prices cause demand destruction, but not because people suddenly change their driving habits and become conservationists. Rather, plants close and people lose their jobs. High natural gas prices are already taking a toll. NYT:
Unexpectedly warm weather has bathed much of the United States in recent weeks, but fears persist that a classic energy shock may be unfolding as the nation heads into winter.
This time, though, the coming squeeze is in natural gas rather than oil.
Executives at companies that consume large amounts of natural gas are warning — almost screaming — about the costs they expect to face over the coming months.
"Our monthly natural gas bill has doubled since August, from $700,000 to $1.4 million," said Fletcher Steele, president of Pine Hall Brick in Winston-Salem, N.C. Mr. Steele said he planned to shut half of his production in January, when natural gas prices are expected to resume climbing again because of cold weather.
It is a problem that has been building for several years.
Thanks to a huge buildup of natural-gas-fired electricity plants in the 1990's even as exploration has slowed, demand has outstripped supply; the nation now depends on natural gas for 24 percent of its energy requirements, compared with 23 percent for coal and 40 percent for oil. [...]
And with more than half of the nation's homes heated by natural gas, millions of Americans are already bracing for big price increases this winter. The Energy Information Administration recently predicted that the cost of heating a typical home with natural gas could rise by more than 40 percent in coming months, or an average of $306 a household.
At the same time, officials are warning businesses that they face possible disruptions in the natural gas supply in some states this winter. Under long-established rules, utilities will give the highest priority to supplying natural gas to homes, possibly cutting off some companies and forcing some manufacturers to turn to other energy sources.
Beyond the fear of supply disruptions, higher natural gas prices have stoked concern of price increases cascading through the economy, with the most recent monthly inflation gauge at 1.2 percent in September, the largest increase in a quarter-century. The United States now has the highest natural gas prices of any industrial country, surpassing those in Germany, the Netherlands and China.
The prices have been pulling back from a post-hurricane spike in October that sent them above $14 per thousand cubic feet, but they remain at unusually high levels, with the futures contract for December closing at $11.61 on Monday. Only three years ago, during a glut, natural gas was selling for as little as $2 per thousand cubic feet.
High prices are inflicting pain across the country, hitting hard at utilities in the mountain states, grain elevators in the Midwest and chemical manufacturers along the Gulf Coast. Announcements of job losses in energy-intensive industries are mounting.
For instance, Lyondell Chemical of Houston said last month that it was shutting a foam chemicals plant in Lake Charles, La., cutting about 280 jobs. The reason was higher energy costs, the company said, though Lyondell also cited damage from Hurricane Rita.
Other companies unable to pass all their higher natural gas costs to customers are starting to announce big losses. For example, CMS Energy, Michigan's largest natural gas utility, reported a $263 million loss this month.
The hurricanes made a bad situation worse. The American Chemistry Council estimates that 100,000 jobs at companies that rely largely on natural gas have been lost since prices for the fuel began climbing in 2000. Chemical companies have been particularly outspoken in calls for the Bush administration and Congress to focus on curbing consumption and repairing energy infrastructure in the Gulf of Mexico.
"We need to declare a national crisis," Andrew N. Liveris, the chief executive of the Dow Chemical Company, said in recent testimony before the Senate. Dow, the nation's largest chemical maker, has shut 23 plants in the United States in the last three years...as it shifted production to Kuwait, Argentina, Malaysia and Germany, where natural gas is cheaper.
"Call it demand destruction," Mr. Liveris said. "Dozens of plants around the country have closed their doors and gone away, and are never coming back." [Emphasis added]
Natural gas is different from oil or coal in that it is extremely difficult to ship overseas, requiring special ships and ports that simply don't exist in significant numbers, at present. As a result, we're pretty much stuck with whatever is present on the North American continent, and North American natural gas production has already peaked.
One-fourth of our energy comes from natural gas, and supplies are declining. So it is small wonder that our prices are the highest in the industrialized world, and the situation is only going to get worse. The result will be a very unpleasant sort of demand destruction.
October 30, 2005
|The King Of Real Estate Is Cashing Out||Economy|
Tom Barrack, arguably the world's greatest real estate investor, is methodically selling off his U.S. real estate holdings as prices drive the market to nosebleed levels.
He likens the current real estate market to a game of polo.
"I feel totally safe playing polo on a field full of pros," says the bronzed 58-year old. "But when amateurs are all over the field, someone can get killed. They have more guts than brains. They charge after every ball and don't know when to hold back."
It's the same with U.S. real estate right now. "There's too much money chasing too few good deals, with too much debt and too few brains." The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them.
Says Barrack: "That's why I'm getting out." [...]
Arguably the best real estate investor on the planet, he runs a $25 billion portfolio of trophy assets, from the Raffles hotel chain in Asia to the Aga Khan's former resort in Sardinia to Resorts International, the largest private gaming company in the U.S.
Barrack's Colony Capital, one of the largest private equity firms devoted solely to real estate, has racked up returns of 21 percent annually since 1990, handing investors, chiefly pension funds and college endowments, 17 percent after all fees.
Barrack bought the Fukuoka Dome, Japan's Yankee Stadium, in part because he calculated that the titanium in the retractable roof was worth as much as the purchase price. [...]
Right now, Barrack's view of the U.S. market couldn't be clearer: It's a great time to sell, and a terrible time to buy. [...]
And he sees the bubble deflating soon. Barrack thinks the catalyst will be a trend few others are talking about, a steep rise in the price of building materials and labor. "Construction costs have spiked 20 percent in the past nine months," he says. The reasons: Shortages of labor and materials like lumber because of the building boom, and increases in the price of oil, needed to produce everything from plastic piping to insulation to shingles. [...]
"It's the busted deals caused by construction costs that will cause the turn in the market," he says. [Emphasis added]
This is a big deal because so many people have gone so deeply into debt based on an assumption that their homes will continue to appreciate in value. The housing bubble is supporting a bubble in personal indebtedness, which in turn is supporting much of the consumer economy.
October 19, 2005
|Greenspan On Oil||Economy Energy Peak Oil|
I know from emails and comments I receive that more than one regular reader of Past Peak thinks Alan Greenspan walks on water and all talk of oil production shortfalls and impending peak is bunk. What happens then when Alan Greenspan starts to talk, in his usual veiled prose, about chronic shortfalls in world oil production and possible peak? Will those readers' heads explode?
Here are excerpts from a speech Greenspan gave Monday in Tokyo. First, Greenspan acknowledges that the world has pretty much run out of spare production capacity:
Even before the devastating hurricanes of August and September 2005, world oil markets had been subject to a degree of strain not experienced for a generation. Increased demand and lagging additions to productive capacity had eliminated a significant amount of the slack in world oil markets that had been essential in containing crude oil and product prices between 1985 and 2000. In such tight markets, the shutdown of oil platforms and refineries last month by Hurricanes Katrina and Rita was an accident waiting to happen. In their aftermath, prices of crude oil worldwide moved sharply higher, and with refineries stressed by a shortage of capacity, margins for refined products in the United States roughly doubled. Prices of natural gas soared as well.
Oil prices had been persistently edging higher since 2002 as increases in global oil consumption progressively absorbed the buffer of several million barrels a day in excess capacity that stood between production and demand....Although the global economic expansion appears to have been on a reasonably firm path through the summer months, the recent surge in energy prices will undoubtedly be a drag from now on. [...]
How did we arrive at a state in which the balance of world energy supply and demand could be so fragile that weather, not to mention individual acts of sabotage or local insurrection, could have a significant impact on economic growth? Even so large a weather event as August and September's hurricanes, had they occurred in earlier decades of ample oil capacity, would have had hardly noticeable effects on crude prices if producers placed their excess supplies on the market or on product prices if idle refinery capacity were activated. [My emphasis]
In a short recap of the history of twentieth century oil production, Greenspan notes that early on the US was by far the world's greatest supplier of oil and therefore was able to control prices. But, he notes:
[T]hat historical role ended in 1971, when excess crude oil capacity in the United States was finally absorbed by rising world demand.
This is an interesting formulation, since what actually happened in 1971 was that US oil production peaked. It has been declining ever since. Surely Greenspan knows this, and the fact that he cites that specific year as the turning point cannot be an accident: he knows that knowledgable listeners will recognize the date. Greenspan tends to speak in a sort of code. It's worth noting, then, that his code for peak is "excess capacity finally absorbed by rising demand".
Greenspan then turns his attention to the current state of production outside of OPEC, where he acknowledges that new sources of oil are getting scarce:
Much of the innovation in oil development outside OPEC, for example, has been directed at overcoming an increasingly inhospitable and costly exploratory environment, the consequence of more than a century of draining the more immediately accessible sources of crude oil. [...]
In early August, prices for delivery in 2011 of light sweet crude breached $60 per barrel, in line with recent increases in spot prices. This surge arguably reflects the growing presumption that increases in crude oil capacity outside OPEC will no longer be adequate to serve rising world demand going forward, especially from emerging Asia. Additionally, the longer-term crude price has presumably been driven up by renewed fears of supply disruptions in the Middle East and elsewhere.
But the opportunities for profitable exploration and development in the industrial economies are dwindling... [My emphasis]
The text highlighted in red sounds an awful lot like Greenspan's coded description of the US peak in 1971, quoted above. I.e., Greenspan could be saying that non-OPEC production has peaked, as many observers believe. Whether or not you buy that interpretation, it's clear that Greenspan is at least saying that if world oil production is going to keep pace with demand, the needed production increases will have to come primarily from within OPEC.
But, he says, OPEC countries are failing to make the investments needed to increase production adequately:
In such a highly profitable market environment for oil producers, one would have expected a far greater surge of oil investments. Indeed, some producers have significantly ratcheted up their investment plans.
But because of the geographic concentration of proved reserves, much of the investment in crude oil productive capacity required to meet demand, without prices rising unduly, will need to be undertaken by national oil companies in OPEC and other developing economies. Although investment is rising, the significant proportion of oil revenues invested in financial assets suggests that many governments perceive that the benefits of investing in additional capacity to meet rising world oil demand are limited. [My emphasis]
So non-OPEC countries can't meet surging world demand, and OPEC countries won't, because they are not making the needed investments. Taken together, these statements imply that world production will continue to be inadequate for some time.
Greenspan also notes that the oil that is being produced is increasingly heavier oil containing greater amounts of sulfur, the lighter, "sweeter" oil having been used up first:
[There is a] growing mismatch between the heavier and more sour content of world crude oil production and the rising world demand for lighter, sweeter petroleum products.
So the supply side's not looking too good. What about demand? Greenspan indicates that higher prices will start to move people in the US and Europe toward more efficient usage patterns. But then he slips in this little doozy:
[A]t present, China consumes roughly twice as much oil per dollar of GDP as the United States, and if, as projected, its share of world GDP continues to increase, the average improvements in world oil-intensity will be less pronounced than the improvements in individual countries, viewed separately, would suggest. [My emphasis]
In other words, as China's oil usage continues to surge, the fact that China's usage is roughly twice as inefficient as usage in the US and Europe means that efficiency gains in the West will be more than erased by China's insatiable appetite: demand is going to keep growing.
Greenspan has faith that market pressures will eventually correct the current imbalances. But his closing words indicate that the changes won't happen overnight. In the meantime, it's going to continue to be rough sledding:
In fact, the development and application of new sources of energy, especially nonconventional sources of oil, is already in train. Nonetheless, the transition will take time. We, and the rest of the world, doubtless will have to live with the geopolitical and other uncertainties of the oil markets for some time to come.
Greenspan is always careful not to speak too plainly lest he upset the markets, but I think the import of this speech is pretty clear. World oil demand is going to continue to grow and production won't be able to keep pace. Stay tuned for shortages and ever-higher prices.
October 10, 2005
|It's Bear Time||Economy|
There has to be a lot wrong with market action to provoke me to increase hedges when the market is down rather than up. There was a lot wrong on Wednesday — it was singularly the worst technical showing I can recall in years.
Other veteran market-watchers had similar comments. The Dow was down 123 points, which wasn't in itself so unusual, but the internal action was terrible. Richard Russell commented after the close that the action was "a really mean mark today, with my PTI [Power Trend Index] close to a bear signal, and Lowry's also close to a major sell signal. I still get the feeling that complacency rules. Today was what I call a semi-crash day." On the subject of complacency, Investors Intelligence reports that the majority of investment advisors have been bullish now for 154 weeks, which is the longest bullish stretch in the 42 years the figures have been tracked. Joe Granville described Wednesday as having "the most bearish reversal patterns that I have ever seen in one day," which is an interesting statement even for a perennial bear. [...]
You can think of good internals like pillars under a beautiful mansion. If you want to gauge the structural health of the mansion, you don't look at the furniture, the window trim, or the expensive, overpriced paintings on the wall. You look underneath at the integrity of the pillars. A crack in one or two, unconfirmed by the others, might be a cause of some concern, though it can probably be repaired. But you should run like a screaming monkey when you see a large collection of pillars getting whacked out at once. [My emphasis]
There are so many things working against the market at this point that it's hard to imagine there's much of an upside. Be careful out there.
|Playing Make-Believe||Economy Energy|
Following Katrina and Rita, Gulf of Mexico oil and gas production is still largely shut down. The US is getting by — temporarily — on borrowed oil. We are in for a rude awakening. Jim Kunstler:
For the moment, it's back to business-as-usual for Easy-motoring Nation.
Yet 73 percent of oil from the Gulf of Mexico remains "shut in" or unavailable because of hurricane damage, and about 63 percent of natural gas production. Prior to the hurricanes, 24 percent of the nation's non-imported supply of crude came from the gulf. There are also eight refineries still shut down representing 2.1 million barrels a day of refined product capacity...
For the past month, the European Union has been sending two million barrels of crude a day to the US out of its own emergency reserves...The EU imports over 15 million barrels of oil a day itself, somewhat more than the US did in pre-hurricane times.
The Federal government has loaned the oil companies crude from the Strategic Petroleum Reserve. [...]
These actions have beaten down the price of crude oil on the various futures markets. At the same time, gasoline pump prices have leveled off from the refinery squeeze. I doubt that the motoring public is driving a whole lot less. The commutes haven't magically gotten any shorter out in Dallas and Denver over the past month. The national fleet of SUVs has not been changed out either.
What's happening, therefore is that we have entered an eerie hiatus. Some band-aids have been applied to our oil and natural gas supply injuries and the bleeding seems to have stopped. But the truth is that our energy supplies are badly compromised and at the worst time of the year — just as we slide into the home heating season. Here in the northeast, we have barely had to turn on the furnaces yet, but that will change in a week or two. [...]
When the furnaces go on, the WalMart aisles will be empty. If there is any reduction in car trips, it will be because Americans are making fewer visits to the Big Box stores. There will also be fewer trips out to visit the model homes in the new subdivisions.
Another unpleasant truth about the situation is that the US public wants to pretend that everything is okay as much as its leaders do. The public is not so much being misled as demanding that its leaders in government, business, and the news media continue a game of make-believe — that we can still run a cheap oil economy without cheap oil. [My emphasis]
If Kunstler is right, this winter is going to come as a shock to a lot of people, especially people who heat with natural gas and who have low, fixed incomes. And if Kunstler is right, this winter will come as a shock as well to the economy as a whole. Money spent heating the house is money not spent elsewhere.
September 19, 2005
|MIT: Environmental Regulation An Enormous Net Boon To Economy||Economy Environment Politics|
Republicans are fond of portraying environmental regulation as a drag on the economy. But they're wrong. A new MIT study finds that just the public health benefits alone of pollution reduction make environmental regulation an enormous net boon to the economy. MIT:
Epidemiological studies have shown that specific pollutants cause specific health problems ranging from cough to congestive heart failure and even premature death.
"Such adverse health outcomes are not just quality-of-life issues," said [MIT's Kira] Matus, [a member of the research team]. "They incur a real cost to the economy, both in the provision of health services and in the labor and leisure time that's lost every time an individual becomes ill."
Thus, while regulation that cuts pollution can be costly, it also can bring economic gains by improving people's health as well as labor productivity — gains that must be recognized in cost-benefit analyses. "In fact, the biggest economic benefits of an environmental policy are often those associated with improved human health," said [MIT's] John Reilly. [My emphasis]
Previous studies of the health effects of pollution reduction have been criticized for making overly-simplistic assumptions. The MIT study used a far more sophisticated model, but still shows enormous net gains. They used the model to estimate the net gains from pollution reduction dues to environmental regulation in the US from 1975 to 2000. From the study report (PDF):
The estimated welfare gain rises steadily from about $50 billion in 1975 to about $400 billion in 2000 (in 1997 dollars). [...]
"Looked at another way, our estimated benefit in 2000 of reduced
pollution is equal to about a quarter of total health care expenditure in the US," said [one of the study's authors]. [My emphasis]
If the grownups were in charge, this kind of research would guide policy. But with gangsters in charge, policy is determined by what lines the pockets of the administration and its allies.
August 31, 2005
|Gas To Hit $4 Per Gallon||Economy Energy|
Expect to pay $4 for a gallon of gas soon. CNN:
Consumers can expect retail gas prices to rise to $4 a gallon soon but whether they stay there depends on the long-term damage to oil facilities from Hurricane Katrina, oil and gas analysts said Wednesday.
"There's no question gas will hit $4 a gallon," Ben Brockwell, director of pricing at the Oil Price Information Service, said. "The question is how high will it go and how long will it last?" [...]
Brockwell said with gasoline prices now exceeding $3 a gallon before even reaching the wholesale level, it "doesn't take a genius" to expect retail prices to hit $4 a gallon soon. [My emphasis]
August 30, 2005
|MarketWatch's Assessment||Disasters Economy Energy Peak Oil|
From what little is known, MarketWatch offers a sobering assessment of the potential economic/energy fallout from Hurricane Katrina. Excerpts:
"There is a real sense of foreboding about the economy now that Katrina has struck with full force," said Bernard Baumohl, executive director of Economic Outlook Group. "The Louisiana and Mississippi Gulf region represent the soft underbelly of the U.S. energy industry."
Katrina took aim at a vulnerable chokepoint for U.S. energy markets. The region not only produces a large percentage of domestic oil and gas, it is also a transportation hub for both imported and domestic production.
And much of the petroleum that Americans use is refined at facilities along the ravaged Gulf coast. [...]
Even in the best-case scenario, production of crude petroleum, natural gas and refined gasoline are likely to be severely stunted for at least several weeks as Gulf production and refineries go back on line.
Last year, Hurricane Ivan, which tracked further east than Katrina, knocked out about 10% of U.S. energy production for about four months. [...]
If disruptions in Gulf energy supplies are limited, retail gasoline prices could top $3 a gallon for a couple of months, said Nariman Behravesh, chief economist for Global Insight. High energy prices would likely cut consumption and knock 0.3 to 0.5 percentage points off U.S. gross domestic product.
"We are not at the worst-case scenario," Behravesh told MarketWatch. "But we are moving in that direction" as companies assess the damage to their facilities.
In a worst-case scenario, the storm could shut down deliveries of as much as 25% of U.S. energy needs for several months.
In that case, gasoline prices would average $3.50 a gallon for the next four to six months, Behravesh said, cutting U.S. growth to zero in the fourth quarter. [...]
The key unknown is how much damage petroleum refineries suffered. The U.S. could conceivably import more crude petroleum to replace Gulf production, but it's almost impossible to replace lost refinery capacity.
Americans could be swimming in crude, but wouldn't have a drop of gasoline to run their cars. [...]
The vital Louisiana Offshore Oil Port, the only U.S. port that can handle supertankers, apparently escaped major damage, the manager of the port told Dow Jones NewsWires.
The major onshore port at Port Fourchon, also escaped major damage, according to Dow Jones NewsWires. The port is the base for oil service operations for oil rigs in the Gulf.
However, the channel leading to the port may have suffered severe silting from the storm surge. Dredging the channel could take weeks or longer. There could be a "very large impact to the energy supply," if the port can't reopen, port manager Ted Falgout told CNBC. [My emphasis]
It should be stressed that an awful lot remains unknown at this point.
August 16, 2005
|House Of Cards||Economy|
Suppose you have a neighbor who's living large — fancy new car every year, major home additions, fancy yacht, lavish vacations, the whole nine yards. Suppose your neighbor pays for all this by an endless succession of maxed-out credit cards, bank loans, home equity loans, and when that runs out, visits to the local loan sharks. You wouldn't think of your neighbor as prosperous, you'd think of him as recklessly self-destructive and headed for disaster.
The IMF has a new report out that paints, in customarily muted language, a similarly alarming picture of US indebtedness (link via PolicyPete). The following graphs and commentary are excerpted from the report:
Unusual financial flows
The [US economic] expansion has...been marked by a relatively unusual — and likely unsustainable — set of domestic and external imbalances that is characterized by:
An unprecedented external current account deficit. With the U.S. economy outperforming most of its trading partners in recent years, the external current account deficit has widened to an unprecedented 6!/2 percent of GDP, compared to an average of around 2 percent of GDP over the past two decades. Despite the dollar’s depreciation in recent years, import demand has remained strong, with higher oil prices also contributing to the trade gap.
Massive foreign capital inflows. The counterpart of the high current account deficit has been massive foreign capital inflows, with U.S. net international liabilities estimated to have risen to over 20 percent of GDP — an unusually high level for large industrial countries.
Record net lending by the corporate sector. Businesses have used high profits to strengthen balance sheets. This, along with large foreign inflows, has contributed to low long-term
Significant public sector borrowing. Tax cuts and government expenditure increases have turned the public sector into a significant borrower in recent years, with the federal government budget recording a 3 1/2 percent of GDP deficit in
Low household saving. The U.S. household saving rate has recently fallen to zero — a record low. Although partly reflecting a boost from strong asset markets (which tend to reduce the incentive to save out of personal income), such a low saving rate is inconsistent with current levels of household income and wealth. [My emphasis]
I.e., America's economic expansion is like your imaginary neighbor's "prosperity" — it's all being paid for by going further and further into debt.
This cannot continue indefinitely. Millions of Americans are living right on the edge, having borrowed massively against their homes (with variable-rate mortgages), counting on housing prices continuing to rise — and interest rates staying low — forever.
But nothing is forever. It's a house of cards. A sudden gust of wind — peak oil sends oil prices skyward or the housing bubble finally pops — and we're going to see it all come tumbling down.
July 27, 2005
|Dropping The Other Shoe||Economy Politics|
Republicans (and a number of Democrats) gave the credit card companies what they wanted by making it much harder for people to declare personal bankruptcy and make a fresh start. Now they are dropping the other shoe. Yahoo News:
If you have a high balance on your credit cards, you may be in for a shock when the next bill comes.
Within the next month, Bank of America, MBNA and Citigroup will raise minimum monthly payments on their cards from 2 percent of the balance to up to 4 percent, not including interest. Other card issuers are expected to make similar changes by the end of the year. [...]
Credit card companies are under mounting pressure by the government to raise the minimum monthly payments to help Americans get out of debt more quickly. If you can't afford the increase, experts recommend that you contact your credit card company and try to negotiate a lower interest rate, which could offer some relief. [My emphasis]
So if you're one of the many unfortunate people who can manage only to make the minimum payment each month, your payment is about to double, all at once, without warning. It's not going to be pretty.
July 20, 2005
|Riots In China Over Environmental Damage||Activism Economy Environment|
China provides a perfect example of the way mainstream Western economics ignores the "external" costs associated with economic "growth": everyone hails China's economic "miracle", and the enormous accompanying environmental damage is relegated to footnotes. China's citizens, however, see the environmental damage first-hand and have begun to riot in the streets to combat it. NYT:
XINCHANG, China — After three nights of increasingly heavy rioting, the police were taking no chances on Monday, deploying dozens of busloads of officers before dusk and blocking every road leading to the factory.
But the angry residents in this village 180 miles south of Shanghai had learned their lessons, too, they said, having studied reports of riots in towns near and far that have swept rural China in recent months. Sneaking over mountain paths and wading through rice paddies, they made their way to a pharmaceuticals plant, they said, determined to pursue a showdown over the environmental threat they say it poses.
As many as 15,000 people massed here Sunday night and waged a pitched battle with the authorities, overturning police cars and throwing stones for hours, undeterred by thick clouds of tear gas. Fewer people may have turned out Monday evening under rainy skies, but residents of this factory town in the wealthy Zhejiang Province vow they will keep demonstrating until they have forced the 10-year-old plant to relocate.
"This is the only way to solve problems like ours," said a 22-year-old villager whose house sits less than 100 yards from the smashed gates of the factory, where the police were massed. "If you go to see the mayor or some city official, they just take your money and do nothing."
The riots in Xinchang are a part of a rising tide of discontent in China, with the number of mass protests like these skyrocketing to 74,000 incidents last year from about 10,000 a decade earlier, according to government figures. The details have varied from incident to incident, but the recent protests all share a common foundation of accumulated anger over the failure of China's political system to respond to legitimate grievances and defiance of the local authorities, who are often seen as corrupt. [...]
In Xinchang, as with many of the recent protests, the initial spark involved claims of serious environmental degradation. An explosion at the Jingxin Pharmaceutical Company this month in a vessel containing deadly chemicals reportedly killed one worker, and previous leakages contaminated the water supply for miles downstream, said villagers and one chemical plant worker who was injured in the accident. [...]
"Our fields won't produce grain anymore," said a 46-year-old woman who lives near the plant. "We don't dare to eat food grown from anywhere near here." [...]
"They are making poisonous chemicals for foreigners that the foreigners don't dare produce in their own countries," the man said. Explaining why he had been willing to rush into the plant, despite signs warning of toxic chemicals all about, he said, "It is better to die now, forcing them out, than to die of a slow suicide." [...]
In many of China's other recent riots, word has spread fast among organizers and protesters by way of mobile phone messages, allowing crowds to mass quickly and helping demonstrators to coordinate tactics and slogans.
In Xinchang, however, residents say new technology, like the cellphone, has played little part. Instead, many residents say they were moved to action after years of unhappiness about industrial pollution by copies of newspaper headlines from Dongyang. That city, a mere 50 miles away, was the scene this spring of one of China's biggest riots, in which more than 10,000 residents routed the police in a riot over pollution from a pesticide factory.
Despite tight controls on news coverage of the incident, the riot in Dongyang, where the chemical factory remains closed months later, has firmly entered Chinese folklore as proof that determined citizens acting en masse can force the authorities to reverse course and address their needs.
"As for the Dongyang riot, everyone knows about it," a man in his 20's exulted. "Six policemen were killed, and the chief had the tendons in his arms and legs severed. Perhaps they went too far, but we must be treated as human beings." [My emphasis]
Lessons in grass-roots activism and democracy from the citizens of communist China. We live in interesting times.
June 27, 2005
|Another Cheery Note From Kunstler||Economy Peak Oil|
James Howard Kunstler has posted his weekly bundle of cheer. He sees us teetering on the brink.
One does get the feeling that things have already begun to unravel, and while they may not become quite as dire quite as quickly as Kunstler supposes, there seems to be no escaping the conclusion that harrowing times are on their way. Excerpt:
The public indeed may be losing its appetite for the Iraq project, but not for Nascar racing, fried chicken buckets, car trips to Six Flags, and round-the-clock air conditioning. What shock of recognition will flash across the TV screens when the connection is finally made that keeping all these things going is why we're in Iraq? War is the answer. [...]
Oil's remorseless up-ratcheting past $60 is as much a symptom of a weak dollar as a strained global energy allocation system, and the dollar is weakening because the way of life it represents is becoming more and more unreal. The harsh truth is that we've reached the limit of our ability to expand our suburban sprawl economy and there is no alternative US economy in the background ready to take its place. The world can't fail to notice this weakness. The inability to generate even fake wealth, in the form of ever more WalMarts, will take its toll on the consensus that the American Dream has enduring value.
The stock market contraction ought to reflect this reality — apart from desperate attempts by US government proxies to levitate share prices — and it is hard to imagine a rally in the face of $60 oil. I'm inclined to predict a gruesome journey down for the Dow Jones into the 4000 range by the end of the year. Until now the dollars created by the Federal Reserve's supernaturally loose credit policy have sought shelter in the "hard assets" of houses. A meltdown of the stock markets will translate into vanishing leverage in all other areas of finance, especially in real estate (as well as a swath of destruction through hedge funds, retirement accounts and, eventually, the entire creaking superstructure of the hallucinated mortgage industry). A few Americans are actually going to get the message that this is not a good time to buy an overpriced raised ranch house. A lot of real estate geniuses are going to witness their own ruin with wonder and nausea.
The striking aspect in all this is that the US appears to be reaching a breaking point in the absence of any precipitating disaster. Apart from the daily meat-grinder in Iraq, the geo-political scene is temporarily placid. The potential for disaster is huge, of course. Five pounds of Semtex in a crucial spot could crater the global economy. Sooner or later something will blow. But the US slide is commencing without a big shove. Phase change is a curious condition. Things just slip. Lahar rules.
Lahars are masses of mud and rock flowing down the slopes of a volcano or river valley. They are inexorable, unstoppable, and destroy everything in their path. A sobering metaphor.
June 14, 2005
|Africa "Debt Relief" = Extortion||Economy|
If you only scan the headlines, you'd think that the world's seven leading nations just did a noble thing by offering debt relief to African nations. So you'd think, but you'd be wrong.
As always, one has to read the fine print. Britain's George Monbiot sets us straight in today's Guardian. Excerpt:
To qualify for debt relief, developing countries must "tackle corruption, boost private-sector development" and eliminate "impediments to private investment, both domestic and foreign".
These are called conditionalities. Conditionalities are the policies governments must follow before they receive aid and loans and debt relief. At first sight they look like a good idea. Corruption cripples poor nations, especially in Africa...The powerful nations are justified in seeking to discourage it.
That's the theory. In truth, corruption has seldom been a barrier to foreign aid and loans: look at the money we have given, directly and through the World Bank and IMF, to Mobutu, Suharto, Marcos, Moi and every other premier-league crook. Robert Mugabe, the west's demon king, has deservedly been frozen out by the rich nations. But he has caused less suffering and is responsible for less corruption than Rwanda's Paul Kagame or Uganda's Yoweri Museveni, both of whom are repeatedly cited by the G8 countries as practitioners of "good governance". Their armies, as the UN has shown, are largely responsible for the meltdown in the eastern Democratic Republic of Congo (DRC), which has so far claimed 4 million lives, and have walked off with billions of dollars' worth of natural resources. Yet Britain, which is hosting the G8 summit, remains their main bilateral funder. [...]
The difference, of course, is that Mugabe has not confined his attacks to black people; he has also dispossessed white farmers and confiscated foreign assets. Kagame, on the other hand, has eagerly supplied us with the materials we need for our mobile phones and computers: materials that his troops have stolen from the DRC. "Corrupt" is often used by our governments and newspapers to mean regimes that won't do what they're told.
Genuine corruption, on the other hand, is tolerated and even encouraged. Twenty-five countries have so far ratified the UN convention against corruption, but none is a member of the G8. Why? Because our own corporations do very nicely out of it. In the UK companies can legally bribe the governments of Africa if they operate through our (profoundly corrupt) tax haven of Jersey. [...]
The idea, swallowed by most commentators, that the conditions our governments impose help to prevent corruption is laughable. To qualify for World Bank funding, our model client Uganda was forced to privatise most of its state-owned companies before it had any means of regulating their sale. A sell-off that should have raised $500m for the Ugandan exchequer instead raised $2m. The rest was nicked by government officials. Unchastened, the World Bank insisted that — to qualify for the debt-relief programme the G8 has now extended — the Ugandan government sell off its water supplies, agricultural services and commercial bank, again with minimal regulation.
And here we meet the real problem with the G8's conditionalities. They do not stop at pretending to prevent corruption, but intrude into every aspect of sovereign government. When the finance ministers say "good governance" and "eliminating impediments to private investment", what they mean is commercialisation, privatisation and the liberalisation of trade and capital flows. And what this means is new opportunities for western money.
Let's stick for a moment with Uganda. In the late 80s, the IMF and World Bank forced it to impose "user fees" for basic healthcare and primary education. ... School attendance, especially for girls, collapsed. So did health services, particularly for the rural poor. To stave off a possible revolution, Museveni reinstated free primary education in 1997 and free basic healthcare in 2001. Enrolment in primary school leapt from 2.5 million to 6 million, and the number of outpatients almost doubled. The World Bank and the IMF — which the G8 nations control — were furious. At the donors' meeting in April 2001, the head of the bank's delegation made it clear that, as a result of the change in policy, he now saw the health ministry as a "bad investment".
There is an obvious conflict of interest in this relationship. The G8 governments claim they want to help poor countries develop and compete successfully. But they have a powerful commercial incentive to ensure that they compete unsuccessfully, and that our companies can grab their public services and obtain their commodities at rock-bottom prices. [...]
That's not the only conflict. The G8 finance ministers' statement insists that the World Bank and IMF will monitor the indebted countries' progress, and decide whether they are fit to be relieved of their burden. The World Bank and IMF, of course, are the agencies which have the most to lose from this redemption. They have a vested interest in ensuring that debt relief takes place as slowly as possible.
Attaching conditions like these to aid is bad enough. It amounts to saying: "We will give you a trickle of money if you give us the crown jewels." Attaching them to debt relief is in a different moral league: "We will stop punching you in the face if you give us the crown jewels." The G8's plan for saving Africa is little better than an extortion racket. [My emphasis]
Kick 'em when they're down, then empty their pockets. It's loan sharking, on a scale no loan shark ever dared imagine. Compared to these guys, the Mob's just a bunch of nickel and dime amateurs.
May 26, 2005
|Wal-Mart Employees: The Working Poor||Economy|
Wal-Mart employees don't get health insurance until they've been on the job for 180 days. Two years, if they're part-time. As a result, many Wal-Mart employees here in Wisconsin (the story's the same elsewhere) have to rely on taxpayer-funded programs for medical care. AP:
Wisconsin's tax-supported BadgerCare health care program for the working poor spends millions of dollars each year covering the health costs of employees of some of the state's largest companies, a new report says.
The state Department of Health and Family Services said in the figures released to the Milwaukee Journal Sentinel that the 10 employers with the most participants in the program cost the state about $6.4 million a year.
About 3,000 employees and their dependents were enrolled in the state program from those companies in April, with more than 40 percent of the employees working for discount retailer Wal-Mart.
Wal-Mart had 809 of its employees and 443 of employee dependents enrolled in the state program during April, with the cost of providing that care projected at about $2.7 million a year. [...]
Robert Kraig, political director for Service Employees International Union Wisconsin State Council, said employers "are now building business models around paying employees as little as possible, providing few benefits and expecting taxpayers to pick up the tab." [My emphasis]
These taxpayer-funded programs are an indirect subsidy to parasitic companies like Wal-Mart. Meanwhile, the Walton family, who inherited their wealth from Wal-Mart's founder, are collectively worth some $100 billion dollars. Enough said.
May 22, 2005
|Interest Rates And The Price Of Oil||Economy Peak Oil|
As the graph shows, interest rates have tracked the price of oil pretty closely. Until now, that is. Clearly, what's going on at present is unprecedented. We can expect, however, that interest rates will rise significantly from their current low levels, to prop up a dollar weakened in part by high oil prices that generate a large outflow of dollars.
The effects of rising interest rates on consumers won't be pretty, with consumer debt at record levels. It's no coincidence that a new, tougher bankruptcy law has just been passed. As Policy Pete notes:
[H]igher oil prices mean that consumer debt levels keep setting new records only to be repaid by home refinancing that harvests the equity accumulated from bubble housing prices, which in turn result from the very low real interest rate.
A house cards barely held together by unnaturally low interest rates. It can't last.
May 17, 2005
|James Howard Kunstler Interview||Culture Economy Peak Oil|
Several weeks ago, I heard James Howard Kunstler, author of The Long Emergency, speak here in Madison. He's funny, blunt, insightful, and visionary. If you get a chance to hear him speak, don't miss it, but the next best thing may be to read his interview in Salon. You should read the whole thing, but here are some excerpts:
We have now become a people who believe that wishing for things makes them happen. Unfortunately, the world just doesn't work that way. The truth is that no combination of alternative fuels or so-called renewables will allow us to run the U.S.A. — or even a substantial fraction of it — the way that we're running it now. [...]
These immensely hypertrophic organisms like Wal-Mart are products of the special economic growth of the late 20th century, namely an unusually long period of relative world peace and extraordinarily cheap energy. If you remove those two elements, all large-scale enterprises — corporate farming, big-box shopping, big government, professional sports — are going to be in trouble. [...]
The housing bubble is a perverse form of financial behavior. It's a consequence of capital desperately seeking a way to increase in an industrial economy that has ceased to grow. America is no longer producing wealth in the conventional sense. And so the housing bubble is a way for residual capital to produce wealth. But like all bubbles, it's a delusional thing that will probably end in tears. [...]
One of the main characteristics of the suburbs is that everyone can lead an urban life in a rural setting. But land is simply not going to be available for suburban development anymore. So what we're going to see in the years ahead is the return of a much firmer distinction between what is urban and what is rural, between what's the town and what's the country. Because we're going to have to grow so much more of our food close to home, we're going to have to value rural land differently than we have for the past half century. [...]
One thing that I'm predicting is that there will be a vigorous and futile defense of suburbia and all its entitlements, no matter what reality is telling us to do. And this will translate into a lot of political mischief. You can quote me: Americans will vote for cornpone Nazis before they will give up their entitlements to a McHouse and a McCar. [...]
The dirty secret of the American economy for more than a decade now is that it is largely based on the continued creation of suburban sprawl and all its accessories and furnishings. And if you remove that from our economy there isn't a whole lot left besides hair cutting, Colonel Sanders' chicken, and open-heart surgery. [...]
[W]e're going to have to let those things go, whether we like it or not. Just don't expect to be led through this in an orderly way. The key to understanding what we face is turbulence. We're going through big changes attended by a lot of turbulence, disorder and hardship. [...]
I think that we've overshot our window of opportunity to have an orderly transition. [...]
One of the great tragedies of the Wal-Mart fiasco has been the destruction of the social and economic roles of businesses in communities. Those roles were pretty complex and created deep webs of culture that we've allowed to be systematically dismantled and destroyed. We're going to get some of them back. [...]
I also think we will cease to be a nation of TV zombies who are merely entertaining ourselves to avoid being bored. [...]
Americans are suffering so much from being in unrewarding environments that it has made us very cynical. I think that American suburbia has become a powerful generator of anxiety and depression. If we happen to let it go, we won't miss it that much. Very few people are going to feel nostalgic about the parking lot between the Chuck E. Cheeses and the Kmart. [My emphasis]
May 13, 2005
|The "Price" Of Being Neighborly||Economy Environment Essays|
The other night, I heard part of an interview with author and environmentalist Bill McKibben on NPR's "On Point". McKibben is the author of The End of Nature and Enough, two books that are pretty pessimistic about the environment and our future prospects, but he's got a new book, Wandering Home, that's rather more hopeful, at least at the local level.
McKibben took a 200 mile walk across Vermont's Champlain Valley and into New York’s Adirondack wilderness on the other side of Lake Champlain. He writes about what he encountered along the way: lots of people busy working at the local level to create sustainable food and timber economies based in local production and distribution.
First, a few statistics he mentioned. The average bite of food in America travels 1500 miles before it arrives on our tables. In some parts of the country 40% of trucking is devoted to transporting food. One calorie's worth of California iceberg lettuce requires 90 calories of petroleum energy to bring it to your table. (Maybe we should visualize our typical salads as swimming in a big bowl of diesel fuel. Now, that's appealing.) Clearly, a local food economy is a lot more rational than what we have now, and, as the age of cheap oil winds down, it's going to become increasingly necessary for our very survival. Any other way of doing things will come to seem crazy.
One phrase McKibben used really caught my attention. He agreed that seeking out local, organic, sustainably produced goods — i.e., buying from our neighbors — can take a little more time than rushing out to Wal-Mart, but that, as he put it, is "the price of being neighborly."
As it happens, I've just come back from a long weekend spent with my dear friends Kent and Kathy Tenney (Kent's the photographer who provides the daily Gumpagraphs on this site) and their daughter Erin and grandson Sebastian. They live on 120 beautiful acres outside Ashland, Wisconsin, a stone's throw from Lake Superior.
It was a wonderful visit and a deep learning experience. The Ashland area is rural, northwoods Wisconsin, and people generally have a lower economic standard of living there than many people do here in Madison. They have chores that urban folks don't even think about. But they also have deep bonds of community and a progressive ethos that suffuses every aspect of their lives. They are happier, more grounded, more connected with their environment and with one another — by far — than the great majority of city-dwellers. In their neck of the woods, community is an absolute good, friendships are deep, and newcomers are welcomed.
I got to meet a wonderful assortment of Kent and Kathy's friends and neighbors, and they are, without exception, interesting, authentic individuals. There seems to be something in the rural experience that gives people more space to be who they truly are, quirks and all, and they're truly delightful. The Ashland area has attracted a great many talented and principled folks — artists, environmentalists, activists of all stripes — who've settled in alongside the locals, put down roots, and become locals themselves. The result is a marvelous human mix, and everywhere you turn, you meet the most wonderful people. I can't wait to go back.
So, back to "the price of being neighborly." One evening Kent, Erin, Sebastian, and I took a little ride to buy some tea and ice cream. For the tea, we stopped off to see a neighbor named Harry Demorest who runs a coffee, tea, and spice business out of a little workshop out back of his farmhouse. When we turned into the gravel driveway, we were greeted by Harry's dog, barking excitedly. Harry heard the barking and emerged from a shed in back. He took us into his fragrant, impeccably organized workshop, filled with containers of coffee, tea, and spices from all over the world. Organic products, handled with a craftsman's care.
|© Kent Tenney|
Harry's a down-to-earth, good-natured man, quick to smile and in no particular hurry otherwise. He regaled us with stories about the different blends Kent was buying or considering, about coffee roasting, and lots more besides. Meanwhile, Fritz, another of Harry's neighbors/customers, came in to pick up some coffee, and the conversation broadened to include Fritz and what he'd been up to. Lots of laughter and good-natured ribbing. The whole transaction took maybe a half hour, which by city standards might seem inefficient, but I left feeling enriched and enlightened. Nourished. Instead of a completely forgettable and soul-killing mega-store experience, I had experienced something that I'll remember — happily — for a long, long time.
|© Kent Tenney|
From Harry's, we drove a short distance to another neighbor with an on-site business: Tetzner's dairy. Tetzner's is a family farm that supplies much of the area with milk, and they make their own ice cream on the side. You pull into their farm, and among the splendid barns and pens and tractors, there's a shop where you can serve yourself to ice cream sandwiches, bulk ice cream, and milk. You take what you want and leave money on the honor system. In this case, there wasn't the opportunity to shoot the breeze with neighbors, but still it was a rich and unique experience — no supermarket visit. And, as in Harry's case, there was the satisfaction of knowing you were supporting a neighbor, someone you knew.
So the "price" of being neighborly turns out not to be a price at all (which of course McKibben knows full well), but a boon. The experience is richer, more human, more memorable by far than any trip to Stop-N-Go or Wal-Mart. It is nourishing and enriching, not taxing. It feeds the soul. The products are superior. One knows where they came from. There are real people — neighbors — associated with them.
On a global scale, things do look grim. Too many other nations are copying our mistakes. According to McKibben, every year China adds electrical generation capacity equal to all of Southern California's, nearly all of it coal-fired. And here in the US, there are more people in prison than there are full-time farmers. But, it's also true that all over the country people are spontaneously developing small-scale, local alternatives. Ten or fifteen years ago, US farmers' markets numbered in the hundreds. Now there are some 10,000. (To put that in perspective, there are only 3,086 counties in the US.) And people are taking it upon themselves to develop communities where a sensible, sustainable way of living can be re-learned.
And the beauty of it is that it's no grit-your-teeth-and-be-noble sacrifice. Exactly the opposite. It's a better way to live. Richer. Happier. Healthier. More human. More real.
You don't have to move to the country to play a part. Buy local. Support local farmers' markets and CSAs. Support neighborhood businesses. Get out, meet your neighbors, give them your business. Never set foot in a Wal-Mart again. When the cheap oil's gone, local and regional economies will be keys to our survival.
[And if you want some great organic coffee, tea, or spices from an honest craftsman who knows his business inside-out, go to Harry's website at http://nwcoffeemills.com/. He's got a great assortment and he'll ship to you wherever you are. If you've got a locally-owned alternative, go for it, but if your alternative is Starbucks or a supermarket chain, consider throwing some business Harry's way. He'll take good care of you.]
May 07, 2005
|Sign Of The Times||Economy|
General Motors and Ford are in such bad shape that S&P has lowered the rating on their bonds to junk bond status. Reuters:
Standard & Poor's cut General Motors and Ford debt to junk status Thursday in a move that will reduce the automakers' avenues for raising funds as they struggle with global competition and rising healthcare costs.
The cuts could raise borrowing costs for the nation's two biggest automakers as investors seek higher rates on the bonds they buy in return for the elevated risk of default.
Investors have dreaded a cut to junk for GM, in particular, for fear it may cause turmoil in the market for investment-grade as well as junk bonds. Investment funds prohibited from owning junk bonds could be forced to sell billions of dollars of GM and Ford debt.
Standard & Poor's cut GM's long-term credit ratings by two notches to "BB," the second highest junk rating. The outlook on the new rating is negative. [My emphasis]
Not a good sign, but, as Kent pointed out to me, if rising healthcare costs are indeed a significant factor in GM's and Ford's troubles, maybe they and other companies like them will finally get on board to support national health insurance.
April 14, 2005
|An Economy On Thin Ice||Economy|
In Sunday's Washington Post, former Fed Chairman Paul Volcker, in an op-ed called "An Economy On Thin Ice" wrote (excerpts):
Altogether the [economic] circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it. [...]
As a nation we are consuming and investing about 6 percent more than we are producing.
What holds it all together is a massive and growing flow of capital from abroad, running to more than $2 billion every working day, and growing. There is no sense of strain. As a nation we don't consciously borrow or beg. We aren't even offering attractive interest rates, nor do we have to offer our creditors protection against the risk of a declining dollar.
Most of the time, it has been private capital that has freely flowed into our markets from abroad — where better to invest in an uncertain world, the refrain has gone, than the United States?
More recently, we've become more dependent on foreign central banks, particularly in China and Japan and elsewhere in East Asia. [...]
And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency.
The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.
I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change. [My emphasis]
We skate blithely on; the ice gets thinner and thinner.
(See also: this)
March 27, 2005
|The Interest Rate Dilemma||Economy|
Stephen Roach, investment bank Morgan Stanley's chief economist, offers a sobering appraisal of the interest rate dilemma that confronts the Federal Reserve and the US and world economies.
The problem: US inflation is on the rise and the US current account deficit is at record levels and growing rapidly. The solution, theoretically, is to increase real (inflation-adjusted) interest rates. The Fed has, in fact, slowly begun to raise interest rates, but inflation is rising almost as fast, so real interests rates remain only slightly above zero. Roach:
[T]he acceleration of the core CPI [Consumer Price Index] from its early 2004 low of 1.1% y-o-y to 2.4% in February 2005 has offset fully 74% of the 175 bp [basis points] increase in the nominal federal funds rate that has occurred during the current nine-month tightening campaign. At the same time, America’s current account deficit went from 5.1% of GDP in early 2004 to a record 6.3% by the end of the year — a deterioration that begs for both higher US real interest rates and a further weakening of the dollar.
Roach estimates that the Fed may have to double interest rates to make the kind of difference that's needed, but that's if inflation stands still in the meantime. Given the slow pace at which the Fed is ratcheting up rates, inflation may continue to erase most of the effect. Then even greater increases will be required. Bottom line: the Fed has to raise real (inflation-adjusted) interest rates, and right now the it's making little headway in its footrace with inflation. Expect steeper increases to come.
And that sets the stage for the real test: the sensitivity of the US economy and a US-centric global economy to higher real interest rates.
What worries Roach is that the US economy — and, by extension, the world economy — is living off of the US consumer, who in turn is living not on increased wages but on gains — on paper, anyway — in the value of assets: in the 1990s, the stock bubble; since then, the real estate bubble. Roach:
From my perspective, this is where the rubber meets the road for the Asset Economy. Lacking in support from labor income generation, America's high-consumption economy has turned to asset markets as never before to sustain both spending and saving. And yet asset markets and the wealth creation they foster have long been balanced on the head of the pin of extraordinarily low real interest rates. The Fed is the architect of this New Economy, and most other central banks — especially those in Japan and China — have gone along for the ride. Lacking in domestic demand, Asia's externally led economies know full well what's at stake if the asset-dependent American consumer ever caves. And so they recycle their massive build-up of foreign exchange reserves into dollar-denominated assets, thereby subsidizing US rates, propping up asset markets, and keeping the magic alive for the overextended American consumer.
The catch in all this is that bubbles eventually pop. What then? Roach:
Asset markets around the world are now quivering at just the hint of an unwinding of this house of cards. And they quiver with the real federal funds rate barely above zero. What happens to these markets and to an asset-dependent US economy should the Fed actually complete its nasty task of taking its policy rate into the restrictive zone? It wouldn't be at all pretty, in my view.
A great many Americans are in debt up to their eyeballs. By keeping interest rates low, the Fed has encouraged borrowing and spending rather than saving. Many Americans have treated their homes like ATMs, converting equity to cash, often via variable-rate loans. When interest rates begin rising in earnest, an awful lot of people are going to find it hard to make their payments. Not good.
[Link via Atrios]
March 19, 2005
|Livin' In The USA||Economy|
The US Department of Labor reported in March that 373,000 discouraged college graduates dropped out of the labor force in February, a far higher number than the number of new jobs created.
March 04, 2005
|Greenspan The Hack||Economy Politics Social Security|
From Paul Krugman:
Four years ago, Alan Greenspan urged Congress to cut taxes, asserting that the federal government was in imminent danger of paying off too much debt.
On Wednesday the Fed chairman warned Congress of the opposite fiscal danger: he asserted that there would be large budget deficits for the foreseeable future, leading to an unsustainable rise in federal debt. But he counseled against reversing the tax cuts, calling instead for cuts in Social Security, Medicare and Medicaid.
Does anyone still take Mr. Greenspan's pose as a nonpartisan font of wisdom seriously? [...]
To put Mr. Greenspan's game of fiscal three-card monte in perspective, remember that the push for Social Security privatization is only part of the right's strategy for dismantling the New Deal and the Great Society. The other big piece of that strategy is the use of tax cuts to "starve the beast." [...]
[C]onservative intellectuals proposed a bait-and-switch strategy: First, advocate tax cuts, using whatever tactics you think may work - supply-side economics, inflated budget projections, whatever. Then use the resulting deficits to argue for slashing government spending.
And that's the story of the last four years. In 2001, President Bush and Mr. Greenspan justified tax cuts with sunny predictions that the budget would remain comfortably in surplus. But Mr. Bush's advisers knew that the tax cuts would probably cause budget problems, and welcomed the prospect.
In fact, Mr. Bush celebrated the budget's initial slide into deficit. In the summer of 2001 he called plunging federal revenue "incredibly positive news" because it would "put a straitjacket" on federal spending.
To keep that straitjacket on, however, those who sold tax cuts with the assurance that they were easily affordable must convince the public that the cuts can't be reversed now that those assurances have proved false. And Mr. Greenspan has once again tried to come to the president's aid, insisting this week that we should deal with deficits "primarily, if not wholly," by slashing Social Security and Medicare because tax increases would "pose significant risks to economic growth."
Really? America prospered for half a century under a level of federal taxes higher than the one we face today. According to the administration's own estimates, Mr. Bush's second term will see the lowest tax take as a percentage of GDP since the Truman administration. And don't forget that President Clinton's 1993 tax increase ushered in an economic boom. Why, exactly, are tax increases out of the question? [My emphasis]
And let's not forget that it was Greenspan who, in the early 80s, convinced Congress to raise the Social Security payroll tax and stash the resulting Social Security surplus in a trust fund that Greenspan said would finance the coming baby boom retirement — the same trust fund that he and others on the right now claim to be an illusion and a fraud.
What these people are up to is a multi-trillion dollar transfer of wealth from the low and middle classes to the wealthiest sectors of society. They get tax cuts, we get program cuts. They get us to pay trillions into the Social Security trust fund, we get benefit cuts when they eventually declare the trust fund's holdings null and void (which is where this is headed). And Greenspan's their mouthpiece.
And now I read that the Democrats' leader in the Senate, Harry Reid, agrees. WaPo:
Federal Reserve Chairman Alan Greenspan generally gets accolades for his public pronouncements. Yesterday he got a brickbat from Senate Minority Leader Harry M. Reid (D-Nev.), who blasted Greenspan as "one of the biggest political hacks we have here in Washington."
Reid ripped Greenspan during an interview on CNN's "Inside Politics." He said the Fed chairman has given President Bush a pass on deficits that have built up in the past four years and should be challenging Republicans on their fiscal policies, rather than promoting Bush's plan to introduce personal accounts into Social Security.
"I'm not a big Greenspan fan -- Alan Greenspan fan," Reid said when asked about the Fed chairman's testimony this week urging Congress to deal quickly with the financial problems facing Social Security and Medicare. "I voted against him the last two times. I think he's one of the biggest political hacks we have in Washington."
Reid said that when Bill Clinton was president, Democrats had confronted the deficit problem by enacting a tax increase in 1993, which helped bring about a balanced budget and strong economic growth later in the decade.
"Why doesn't he respond to the Republicans and tell them the big problem here is the debt that this administration [has] created?" he said. "We had a $7 trillion-dollar surplus when Bush took office. Now we have a $3 or $4 trillion-dollar deficit. That's, in fact, what Greenspan should be telling people." [My emphasis]
Right on, Harry.
Update: [4 Mar 5:11PM] James Wolcott sums it up: "Alan Greenspan, pompous hack. Harry Reid, blunt hero."
February 23, 2005
|Look Out Below...||Economy|
See Billmon on dollar holdings by Asian central banks.
The US blackmails the world: buy our dollars or the bottom will fall out on the dollars you already hold. When will America's creditors decide it's time to cut their losses?
February 22, 2005
|Why SS Privatization Can't Possibly Work||Economy Politics Social Security|
In an earlier post, I argued that assertions that Social Security privatization will yield higher rates of return are based on a violation of the principle of "no free lunch".
Michael Kinsley expands the argument, in beautifully clear fashion. Here's his reasoning, paraphrased:
Higher returns can come from only two sources: 1) greater economic growth, or 2) other people. Let's take them one at a time.
1) Greater economic growth could come from: a) more capital investment, or b) smarter capital investment. Privatization, however, will accomplish neither.
a) More capital investment: For every dollar diverted from the Federal treasury into private accounts, the government (whose budget hasn't changed, and which has to get funds from somewhere) will have to borrow a dollar by selling bonds. A dollar spent buying bonds is a private investment dollar that cannot be spent on stocks. Net result: investment in stocks is unchanged.
b) Smarter capital investment: There is no reason to think privatization will result in smarter capital allocation. If anything, privatization is likely to lead to less intelligent allocation of capital, as millions of inexperienced investors enter the market.
2) If privatization doesn't cause greater economic growth, higher returns must come from other people. I.e., other people have to get lower returns.
a) Proponents of privatization assume that stocks will outperform bonds. If that's true, stocks' better long-term returns must come from fools who sell stocks (you can only buy stocks from someone who's selling them) — so they can buy bonds, for example.
b) "In other words, [Kinsley says,] privatization means betting the nation's most important social program on a theory that cannot be true unless many people are convinced that it's false."
c) And even if stocks do initially yield a higher return, the market will adjust. I.e., if stocks are a bargain, people will bid up their price until they are no longer a bargain. It's Econ 101, what I called the principle of "no free lunch."
Social Security privatization is smoke and mirrors. Snake oil. You can't create something out of nothing.
There's no free lunch.
December 15, 2004
|US To Become Net Importer Of Food||Economy|
In Oval Office remarks today, President Bush brought his considerable economics acumen to bear on the mushrooming US trade deficit:
There's a trade deficit. That's easy to resolve: People can buy more United States products if they're worried about the trade deficit.
So we've got that going for us.
An aspect of the trade picture that's gone largely unnoticed is that the US is about to become a net importer of food for the first time in generations, despite the fall in the dollar. The Peoria Journal Star:
For nearly two years, U.S. farmers and ranchers watched as the second shoe grew bigger and bigger.
On Nov. 22, it officially dropped. According to U.S. Department of Agriculture Economic Research Service estimates released that day, 2005 will be the first year in nearly 50 that America will not turn an agricultural trade surplus.
The dubious milestone was met with odd silence at USDA. Odd because throughout the fall presidential campaign, Secretary of Agriculture Ann Veneman talked herself hoarse each time some farm community in a swing state dedicated a new, USDA-sponsored street light.
Now, as America is about to become a net food importer for the first time in generations, Veneman has no explanation of how Bush administration economic and trade policies have taken American agriculture from a $13.6 billion trade surplus in 2001 to a flat line in four short years. [...]
In reporting the change, ERS chose language more suitable to politics than economics. Yes, 2005 ag imports will rise by $3.3 billion over 2004. "But, this 6 percent gain in import value," it noted, "is less than half the 15 percent import pace in 2004 import value."
Translation: While both of your shoes were on fire in 2004, only one will be on fire in 2005.
Ironically, the very thing farmers have been told for years would be their savior — a cheaper dollar — is worsening the ag trade balance. Despite the dollar now falling to new lows against most of the world's major currencies, 2005 ag exports will be $6.3 billion less than in 2004.
Simultaneously, the fast-cracking dollar has not slowed more expensive imports. Indeed, says ERS, the 2005 "import volume (will be) unchanged," but "their higher prices will continue to push the total U.S. import bill up." [...]
Imagine the flood to hit when the World Trade Organization kicks the American door open even more.
On second thought, little imagination is necessary. Three news items — all tied to Brazil and combined with the trade report — paint a clear picture of where U.S. farmers and ranchers will find themselves in a more open global food market: further behind.
Remind me again how corporate globalization and "free trade" are going to make us all better off?
|Insider Selling: Not A Good Sign||Economy|
Top executives and directors of major corporations have access to information that you and I do not. When they start dumping their companies' stock en masse, it's noteworthy. Last month saw more of this insider selling than any month since August 2000. Not a good sign. AP:
Talk about a double standard. While corporate leaders tout the benefits of investors owning their stocks, many executives seem to be running for the [exits] themselves.
Selling of shares by insiders — which includes executives and other top officers and directors at a company — has been rampant in recent months, with sales rising to their highest level in more than four years in November.
While no one can pinpoint an exact reason for that run-up, the implication is troubling since big insider selling is often considered bearish for the overall market as well as for individual stocks. [...]
[I]nsider-trading trackers at Thomson Financial say the recent selling bonanza is "particularly noteworthy."
Some $6.6 billion in insider stock sales took place last month, the highest level since the $7.7 billion in sales tallied in August 2000, according to Thomson. Contrast that with the $144 million worth of stock that was bought by insiders last month.
If you've got money in the stock market, watch your back.
November 24, 2004
|Economic Precipice Ahead||Economy|
The US imports (buys) much more than it exports (sells). It makes up the difference by paying (indirectly) with "IOUs" (Treasury bills and bonds). China, in particular, which sells far more to the US than it buys, has so far been willing to accumulate American IOUs. Lots of them.
Now put this in personal terms for a minute. Suppose every month you spend far more than you earn in salary and wages. Suppose you do this by giving IOUs to the merchants where you shop. Merchants may be willing to go along with it for a while if they think you're going to be able to pay them back and they want to keep you as a customer. Maybe they think your prospects for income growth in the future are good. Maybe they just figure that if they bankrupt you, they'll never get paid for the IOUs they already hold.
If you continue, however, month after month, year after year, to spend wildly beyond your means, and there's no indication that your salary and wages are ever going to grow at a pace that will let you get your finances under control (i.e., you won't be able to grow your way out of the hole you're in), sooner or later your creditors are going to get scared. They'll start selling your IOUs if they can, even if they cannot get full value, because something is better than nothing.
Well, the US current account deficit (the difference between what the US spends abroad and what it earns) is reaching the point where our creditors are getting worried. One sign of this is the falling dollar, now at record lows against the Euro. The dollar's slide is both cause and effect. It's an effect of the fact that people are less enthusiastic about taking on more dollar-denominated IOUs. It's a cause in that it makes it even less attractive to own dollar-denominated IOUs, since their value is declining and appears likely to continue doing so. The process feeds on itself, and there is always the risk that it will spiral out of control in a panic of selling.
One way to keep foreigners buying our IOUs is to raise interest rates (i.e., promise to pay back more when the IOUs come due). This would have its own disastrous consequences, however, because of the historically high level of indebtedness of American consumers and businesses.
Economists on both the left and the right are getting worried.
Liberal economist Paul Krugman recently spoke with Reuters. Excerpt:
[The administration's unwillingness to listen to dissenting opinions] could spell serious trouble for the U.S. economy, which under Bush's first term was plagued by soaring deficits, waning investor confidence and anemic job creation.
"This is a group of people who don't believe that any of the rules really apply," said Krugman. "They are utterly irresponsible." [...]
The most immediate worry for Krugman is that Bush will simultaneously push through more tax cuts and try to privatize social security, ignoring a chorus of economic thinkers who caution against such measures.
"If you go back and you look at the sources of the blow-up of Argentine debt during the 1990s, one little-appreciated thing is that social security privatization was a important source of that expansion of debt," said Krugman.
In 2001, Argentina finally defaulted on an estimated $100 billion in debt, the largest such event in modern economic history.
Crisis might take many forms, he said, but one key concern is the prospect that Asian central banks may lose their appetite for U.S. government debt, which has so far allowed the United States to finance its twin deficits. [...]
"The break can come either from the Reserve Bank of China deciding it has enough dollars, thank you, or from private investors saying 'I'm going to take a speculative bet on a dollar plunge,' which then ends up being a self-fulfilling prophecy," Krugman opined. "Both scenarios are pretty unnerving." [My emphasis]
Ok, but Krugman's a liberal, sharply critical of Bush administration policies in many areas. What does Wall Street say? Better yet, what does Wall Street say behind closed doors? Boston Herald:
Stephen Roach, the chief economist at investment banking giant Morgan Stanley, has a public reputation for being bearish.
But you should hear what he's saying in private.
Roach met select groups of fund managers downtown last week, including a group at Fidelity.
His prediction: America has no better than a 10 percent chance of avoiding economic "armageddon."
Press were not allowed into the meetings. But the Herald has obtained a copy of Roach's presentation. A stunned source who was at one meeting said, "it struck me how extreme he was - much more, it seemed to me, than in public."
Roach sees a 30 percent chance of a slump soon and a 60 percent chance that "we'll muddle through for a while and delay the eventual Armageddon."
The chance we'll get through [and avoid Armageddon altogether]: one in 10. Maybe.
In a nutshell, Roach's argument is that America's record trade deficit means the dollar will keep falling. To keep foreigners buying T-bills and prevent a resulting rise in inflation, Federal Reserve Chairman Alan Greenspan will be forced to raise interest rates further and faster than he wants.
The result: U.S. consumers, who are in debt up to their eyeballs, will get pounded.
Less a case of "Armageddon," maybe, than of a "Perfect Storm."
Roach marshalled alarming facts to support his argument.
To finance its current account deficit with the rest of the world, he said, America has to import $2.6 billion in cash. Every working day.
That is an amazing 80 percent of the entire world's net savings.
Meanwhile, he notes that household debt is at record levels.
Twenty years ago the total debt of U.S. households was equal to half the size of the economy.
Today the figure is 85 percent.
Nearly half of new mortgage borrowing is at flexible interest rates, leaving borrowers much more vulnerable to rate hikes.
Americans are already spending a record share of disposable income paying their interest bills. And interest rates haven't even risen much yet. [...]
A source who heard the presentation concluded that a "spectacular wave of bankruptcies" is possible.
Smart people downtown agree with much of the analysis. It is undeniable that America is living in a "debt bubble" of record proportions. [My emphasis]
That statistic that the US' debt financing consumes 80% of the net savings of the entire planet is truly staggering. To some degree the US is blackmailing the rest of the world, holding a loaded gun to its head, since an economic perfect storm for the US will become an economic perfect storm for the world. Keep buying our T-bills or else. It's a global game of chicken, in which the stakes are incalculable.
It's stunning that these issues are not being publicly discussed and debated in any meaningful way. It may be a question of not wanting too many people to understand what's going on because that may precipitate the feared panic. Or maybe it's just denial: let's ignore the problem and hope it goes away on its own. It's madness.
There's a very bumpy road ahead.