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New York Times: "Lack of major war may be hurting economic growth"
Question: Could this be true?
Under our Keynesian ecnomic system, used by both political parties, this headline/thought seems normal. How? Because we measure GDP (the economy) by the consumption of wealth rather than the production of wealth, it must be that manufacturing munitions and using them to blow up people and wealth is a way to generate economic growth.
Read the article here
Showing posts with label GDP. Show all posts
Showing posts with label GDP. Show all posts
Sunday, June 15, 2014
Thursday, October 18, 2012
The Real Debate
October 16, 2012
After watching the debate last night, I had a bunch of questions I thought were important but that were never asked. Here are three of them:
1. Why has the economy (GDP) been trending down for the past two years and the stock market moving up?
The answer of course in that the government has been pumping money into the banks (TARP, QE1, QE2, Twist Program and now QE3 with no limit as to the amount of money they will print.) This money goes to the banks and then the banks use this money to invest in the market (stocks, bonds, foreign investments, etc.). This 65% increase in “green paper” or money has driven the stock market up about 71% from the bottom in February 2009. This is illusionary wealth also called a bubble and like all bubbles, it will pop.
And just to make sure this money will go into assets that raise the value of the market (or what government economist’s call the “wealth effect”) which is suppose to make us run out and spend money; the Federal Reserve has instituted a Zero Interest Rate Policy (ZIRP) to make sure no one saves and is forced to go into the market to earn any interest.
2. How can the government continue to keep spending and driving up debt when mandatory spending (Social Security, Medicare, Medicaid, Other Mandatory spending -like VA benefits, welfare, etc. – and the interest on the debt equal the entire revenue?
In 2012, the government spent $2.5 trillion on mandatory items and interest and received $2.5 trillion in revenues (taxes, tariffs etc.).
That leaves Zero money left for all other discretionary spending ($628t) and defense ($680t). This is more than a trillion dollars a year which means we will likely not even have enough revenues to pay for mandatory spending next year unless the economy picks up.
Follow up question:
So to get to a balanced budget, are you going to cut discretionary spending (education, homeland security, perks for your constituents, etc.) or Defense Spending (even though defense industries are scattered in every State to ensure Congressional votes)?
You know the answer. No and No.
3. Economic data has been very weak and deteriorating; yet this past month, two unbelievable things have happened to make me confused:
A. The Federal Reserve Chairman has been saying for some time that the economy has been slowly improving; and that based on the data, the Federal Reserve stands ready to assist (meaning QE3) if the data shows the economy is slowing further. Yet, two weeks after saying this for the umpteenth time, the Fed surprises the market with potentially the biggest injection of money ever! What about the data? I thought we were improving?
B. The data. This month the data, in contradiction to the Fed action, has been unbelievable: unemployment has dropped, retail sales have jumped significantly higher, housing starts have jumped significantly higher, etc.
We know you have “economic models” to predict the numbers, but the data does not fit the description of the economy provided by the Federal Reserve Chairman prior to injecting money into the banks (QE3). Does this mean the economy is getting worse and the models will reflect the real economy in a month or two or have the models just gone wacky?
Well, I know I’m over the time limit and it’s my opponents turn to talk so I’ll stop.
After watching the debate last night, I had a bunch of questions I thought were important but that were never asked. Here are three of them:
1. Why has the economy (GDP) been trending down for the past two years and the stock market moving up?
The answer of course in that the government has been pumping money into the banks (TARP, QE1, QE2, Twist Program and now QE3 with no limit as to the amount of money they will print.) This money goes to the banks and then the banks use this money to invest in the market (stocks, bonds, foreign investments, etc.). This 65% increase in “green paper” or money has driven the stock market up about 71% from the bottom in February 2009. This is illusionary wealth also called a bubble and like all bubbles, it will pop.
And just to make sure this money will go into assets that raise the value of the market (or what government economist’s call the “wealth effect”) which is suppose to make us run out and spend money; the Federal Reserve has instituted a Zero Interest Rate Policy (ZIRP) to make sure no one saves and is forced to go into the market to earn any interest.
2. How can the government continue to keep spending and driving up debt when mandatory spending (Social Security, Medicare, Medicaid, Other Mandatory spending -like VA benefits, welfare, etc. – and the interest on the debt equal the entire revenue?
In 2012, the government spent $2.5 trillion on mandatory items and interest and received $2.5 trillion in revenues (taxes, tariffs etc.).
That leaves Zero money left for all other discretionary spending ($628t) and defense ($680t). This is more than a trillion dollars a year which means we will likely not even have enough revenues to pay for mandatory spending next year unless the economy picks up.
Follow up question:
So to get to a balanced budget, are you going to cut discretionary spending (education, homeland security, perks for your constituents, etc.) or Defense Spending (even though defense industries are scattered in every State to ensure Congressional votes)?
You know the answer. No and No.
3. Economic data has been very weak and deteriorating; yet this past month, two unbelievable things have happened to make me confused:
A. The Federal Reserve Chairman has been saying for some time that the economy has been slowly improving; and that based on the data, the Federal Reserve stands ready to assist (meaning QE3) if the data shows the economy is slowing further. Yet, two weeks after saying this for the umpteenth time, the Fed surprises the market with potentially the biggest injection of money ever! What about the data? I thought we were improving?
B. The data. This month the data, in contradiction to the Fed action, has been unbelievable: unemployment has dropped, retail sales have jumped significantly higher, housing starts have jumped significantly higher, etc.
We know you have “economic models” to predict the numbers, but the data does not fit the description of the economy provided by the Federal Reserve Chairman prior to injecting money into the banks (QE3). Does this mean the economy is getting worse and the models will reflect the real economy in a month or two or have the models just gone wacky?
Well, I know I’m over the time limit and it’s my opponents turn to talk so I’ll stop.
Thursday, January 26, 2012
Why Is The Market So Optimistic? What’s Changed?
It’s not the economy. Not much has changed there except for a few of the many antidotal data points that are published each month. The expert’s points to three or four of the 30 reports published every month and conclude that they signal that the economy is recovering. Most don’t look at the context surrounding the data point so they don’t know what it means (do you think the guy writing headlines knows how the CPI index is adjusted for quality improvements verses price increases) or even if ”that data point” can be used to forecast the future.
There are two things that have changed. One, we continue to pile up debt (now exceeding 5 times our revenues) at a rate of $4 billion per day increasing the probability that we will have to eventually default on our sovereign debt. Two, the Federal Reserve continues to print money in increasing amounts and in many different ways like helping the European Central Banks with liquidity, or running a “Twist” program here to bring down long term rates, or the Zero Interest Rate Program (ZIRP) to help the banks and hurt savers (and force them into higher risk investment to earn any return on their investment.)
Then, yesterday, Chairman Bernanke announced that he intends to keep ZIRP in place through most if not all of 2014. Remember, both political parties were angry with Chairman Greenspan for the housing bubble because he held interest rates at one percent for a year. Bernanke intends to hold rates at zero for four years! And then, just to make things worse, he said he would be willing to “be more accommodative or in English, print more money) if the economy gets worse. Oh, by the way, he revised his estimate of GDP growth down another quarter percent.
Money supply data shows that the Federal Reserve has continued to increase the money supply and has increased the pace in the past month. In spite of what Bernanke says, this is money printing (QE3) pure and simple. Since we know that increasing money supply is how you increase GDP, the markets are pricing in the increased money supply.
There are two things that have changed. One, we continue to pile up debt (now exceeding 5 times our revenues) at a rate of $4 billion per day increasing the probability that we will have to eventually default on our sovereign debt. Two, the Federal Reserve continues to print money in increasing amounts and in many different ways like helping the European Central Banks with liquidity, or running a “Twist” program here to bring down long term rates, or the Zero Interest Rate Program (ZIRP) to help the banks and hurt savers (and force them into higher risk investment to earn any return on their investment.)
Then, yesterday, Chairman Bernanke announced that he intends to keep ZIRP in place through most if not all of 2014. Remember, both political parties were angry with Chairman Greenspan for the housing bubble because he held interest rates at one percent for a year. Bernanke intends to hold rates at zero for four years! And then, just to make things worse, he said he would be willing to “be more accommodative or in English, print more money) if the economy gets worse. Oh, by the way, he revised his estimate of GDP growth down another quarter percent.
Money supply data shows that the Federal Reserve has continued to increase the money supply and has increased the pace in the past month. In spite of what Bernanke says, this is money printing (QE3) pure and simple. Since we know that increasing money supply is how you increase GDP, the markets are pricing in the increased money supply.
Friday, September 23, 2011
“Print ‘Till You Drop” Update
In Scenario One: “Print ‘Till You Drop” I estimated the market would continue to drop until monetary policy (the Federal Reserve printing money) or fiscal policy (Government spending and borrowing money) began to re-inflate the economy and consequently the markets. The timing of the turnaround would be dependent on the “pain” felt by investors and politicians. My estimate was +/- Labor Day because it takes time to implement these programs and the election cycle begins to heat up.
Also, my assumption was a new stimulus program would be initiated (and one was introduced by President Obama as a “Jobs Program” for $445 billion) and a new Quantitative Easing (QE3) program from the Federal Reserve. The political mood is against more stimuli at the moment, but the Republicans can’t resist tax cuts so I assumed about $300 or $350 billion would get through the Congress. Net/Net: we basically have two options: Re-inflate the economy and markets (print ‘till you drop) or revert to a capitalist system (small government and a privately run economy.)
Since there is little chance we will go back to a capitalist system, my assumption was that the government would be “accommodative.” This assumption appeared to be correct when the debt ceiling was raised with almost no cut in spending until 2013. Then, a month ago, Fed Chairman Bernanke extended the zero interest rate policy (ZIRP) through at least mid-2013 and a statement that the Fed would remain “accommodative.” He re-iterated that statement when he was in Minneapolis a few weeks ago.
In the meantime, it was leaked that the Fed would, at minimum, initiate a “Twist” program. This program would sell about $400 billion of short-term treasuries and buy $400 billion of long-term treasuries in order to drive down long-term interest rates and help the housing industry refinance. This program would not increase the money supply (sell 400, buy 400) so it would not help re-inflate GDP or the markets. In fact, Since QE2 ended, money supply would actually contract because he did not replace the $600 billion in new money he printed for QE2. As you know, contraction takes away from GDP and thus the markets.
By the way, by itself, “Twist” will not help the housing situation either. It will also cause the yield curve to flatten (not much difference in interest rates between two year bonds and 30 year bonds) which takes the profits out of lending.
Many thought, me included, that the Fed would “surprise” the markets with additional easing or money printing. For example, stop paying banks interest for excess reserves held at the Fed which would force the banks back into the lending business. Also, to push additional money into the financial system to cause inflation (help GDP, help the markets, reduce value of the dollar to help with exports.)
On Wednesday, the surprise was that the Fed did not agree to create more money. Evidently, we have not reached their pain threshold yet. However, within hours of the Fed announcement, European markets began to fall apart again. World GDP growth rates were reduced, including the U.S. So, the question becomes: is this enough pain or do we have to wait until the next Fed meeting in November? Or is the political will to spend more money just not there?
Also, my assumption was a new stimulus program would be initiated (and one was introduced by President Obama as a “Jobs Program” for $445 billion) and a new Quantitative Easing (QE3) program from the Federal Reserve. The political mood is against more stimuli at the moment, but the Republicans can’t resist tax cuts so I assumed about $300 or $350 billion would get through the Congress. Net/Net: we basically have two options: Re-inflate the economy and markets (print ‘till you drop) or revert to a capitalist system (small government and a privately run economy.)
Since there is little chance we will go back to a capitalist system, my assumption was that the government would be “accommodative.” This assumption appeared to be correct when the debt ceiling was raised with almost no cut in spending until 2013. Then, a month ago, Fed Chairman Bernanke extended the zero interest rate policy (ZIRP) through at least mid-2013 and a statement that the Fed would remain “accommodative.” He re-iterated that statement when he was in Minneapolis a few weeks ago.
In the meantime, it was leaked that the Fed would, at minimum, initiate a “Twist” program. This program would sell about $400 billion of short-term treasuries and buy $400 billion of long-term treasuries in order to drive down long-term interest rates and help the housing industry refinance. This program would not increase the money supply (sell 400, buy 400) so it would not help re-inflate GDP or the markets. In fact, Since QE2 ended, money supply would actually contract because he did not replace the $600 billion in new money he printed for QE2. As you know, contraction takes away from GDP and thus the markets.
By the way, by itself, “Twist” will not help the housing situation either. It will also cause the yield curve to flatten (not much difference in interest rates between two year bonds and 30 year bonds) which takes the profits out of lending.
Many thought, me included, that the Fed would “surprise” the markets with additional easing or money printing. For example, stop paying banks interest for excess reserves held at the Fed which would force the banks back into the lending business. Also, to push additional money into the financial system to cause inflation (help GDP, help the markets, reduce value of the dollar to help with exports.)
On Wednesday, the surprise was that the Fed did not agree to create more money. Evidently, we have not reached their pain threshold yet. However, within hours of the Fed announcement, European markets began to fall apart again. World GDP growth rates were reduced, including the U.S. So, the question becomes: is this enough pain or do we have to wait until the next Fed meeting in November? Or is the political will to spend more money just not there?
Tuesday, August 30, 2011
More Hopium On The Way
Our down trending economy and markets may have begun to levitate again with Chairman Bernanke’s Jackson Hole speech last week when he announced the Fed would keep interest rates at zero for two more years (that would be 4.5 years total.) I believe this is just the beginning of “QE3” (generally defined as more money printing.)
Because there is some opposition to more stimulus and money printing (including three of the Federal Reserve’s Presidents and members of Congress,) the Government and the Federal Reserve have to “justify” more spending. In other words, there has to be enough “pain” to justify more spending and interfering with the economy. I believe we will get more fiscal stimulus and more money printing because we have, over the years, turned our economy (and education, health insurance, parenting, retirement, etc. etc. over to the government) and stimulus and money printing are the only way they know how to fix things. Besides, there is an election coming soon and fixing will take time.
There are two data points coming this week that may give the government the “justification” they need. One is the ISM-Manufacturing Report on Thursday. I suspect it will be more negative than expected. The second is the jobs report on Friday. I think the consensus is for about 75,000 to 100,000 jobs. However, the data over the past month is so negative that we may see a much smaller number and even a negative number for August or September. A negative number will defiantly get attention.
These events will be followed up by President Obama’s speech on September 5th when he will tell us what his “plan” is for restoring the economy and creating jobs. I believe it will be a bigger, more expensive program than we have had to date. It will have to get through Congress, but did I mention an election is coming soon.
Also, on September 21st Chairman Bernanke will announce the decisions made by the Federal Reserve Board. If the data is bad enough, we should get QE3 almost immediately. If the data is not bad enough, we may have to wait. But we should not have to wait very long as the economy is sliding further into recession.
In summary, we may get some bad news with the ISM-Manufacturing Report and the August Jobs Report which would negatively impact the market. But, that would be immediately followed up by the President’s new stimulus plan and the Federal Reserves’ money printing plan. This hopium will levitate the market, if big enough, until +/- next Labor Day. Another short-term “fix” and a worsening long-term problem.
Because there is some opposition to more stimulus and money printing (including three of the Federal Reserve’s Presidents and members of Congress,) the Government and the Federal Reserve have to “justify” more spending. In other words, there has to be enough “pain” to justify more spending and interfering with the economy. I believe we will get more fiscal stimulus and more money printing because we have, over the years, turned our economy (and education, health insurance, parenting, retirement, etc. etc. over to the government) and stimulus and money printing are the only way they know how to fix things. Besides, there is an election coming soon and fixing will take time.
There are two data points coming this week that may give the government the “justification” they need. One is the ISM-Manufacturing Report on Thursday. I suspect it will be more negative than expected. The second is the jobs report on Friday. I think the consensus is for about 75,000 to 100,000 jobs. However, the data over the past month is so negative that we may see a much smaller number and even a negative number for August or September. A negative number will defiantly get attention.
These events will be followed up by President Obama’s speech on September 5th when he will tell us what his “plan” is for restoring the economy and creating jobs. I believe it will be a bigger, more expensive program than we have had to date. It will have to get through Congress, but did I mention an election is coming soon.
Also, on September 21st Chairman Bernanke will announce the decisions made by the Federal Reserve Board. If the data is bad enough, we should get QE3 almost immediately. If the data is not bad enough, we may have to wait. But we should not have to wait very long as the economy is sliding further into recession.
In summary, we may get some bad news with the ISM-Manufacturing Report and the August Jobs Report which would negatively impact the market. But, that would be immediately followed up by the President’s new stimulus plan and the Federal Reserves’ money printing plan. This hopium will levitate the market, if big enough, until +/- next Labor Day. Another short-term “fix” and a worsening long-term problem.
Friday, September 10, 2010
What are banks going to do with their 1+ trillion dollars in excess reserves?
If you follow the money, you know that banks (after bailouts, Fed purchases of toxic assets, guarantees, etc.) now have over $1 trillion in excess reserves per the Federal Reserve. Banks normally lend this money out and with over $1 trillion of reserves; they could create over $80 trillion in new credit. But is this a reality in today’s environment?
The housing problem is still not solved and will require banks to write off billions more in “bank assets.” They could loan this money to businesses, but few of them really want to take on additional loans with the economy in such bad shape. They could lend to consumers but they can’t afford more debt and their FICO scores have dropped making them less “qualified.” Anyway, consumers have decided to become more frugal.
If banks were to pump out trillions of dollars in new credit that went directly into the economy (to companies producing goods and services and consumers buying goods and services), it would certainly cause GDP to spike up and maybe we would be off to another bubble. But, adding that much credit into the economy would significantly reduce the value of the dollar and thereby cause serious inflation.
Yet, this is what a lot of people think will happen. The government continues to spend money hoping to fill the demand gap in the economy. The Federal Reserve keeps “printing money” for the government to spend; and at the same time, keeps interest rates low to encourage spending and to help prop up the housing market. Once everything becomes perfect again, the government can cut spending and the Federal Reserve can contract the money supply eliminating the threat of inflation. Bingo! Utopia.
Since we know this is a fairy tale, how about another alternative for all those “excess reserves” the bank has. What if this “excess” money in the banking system simply gets re-circulated. Banks could put all that money back into the financial system rather than back into the economy (the goods and service producing segments.) For example, they could buy assets like stocks, bonds, gold, real estate, etc. (GDP wouldn’t go up much.) They could buy these assets around the world (reducing the inflation potential here) and they could finance real things like factories, but overseas (Oh, darn, they couldn’t bring the profits home because of taxes.)
Is it possible? I don’t know. I am not a conspiracy theorist but we have to keep our critical thinking skills sharp and keep looking for possible alternative futures.
The housing problem is still not solved and will require banks to write off billions more in “bank assets.” They could loan this money to businesses, but few of them really want to take on additional loans with the economy in such bad shape. They could lend to consumers but they can’t afford more debt and their FICO scores have dropped making them less “qualified.” Anyway, consumers have decided to become more frugal.
If banks were to pump out trillions of dollars in new credit that went directly into the economy (to companies producing goods and services and consumers buying goods and services), it would certainly cause GDP to spike up and maybe we would be off to another bubble. But, adding that much credit into the economy would significantly reduce the value of the dollar and thereby cause serious inflation.
Yet, this is what a lot of people think will happen. The government continues to spend money hoping to fill the demand gap in the economy. The Federal Reserve keeps “printing money” for the government to spend; and at the same time, keeps interest rates low to encourage spending and to help prop up the housing market. Once everything becomes perfect again, the government can cut spending and the Federal Reserve can contract the money supply eliminating the threat of inflation. Bingo! Utopia.
Since we know this is a fairy tale, how about another alternative for all those “excess reserves” the bank has. What if this “excess” money in the banking system simply gets re-circulated. Banks could put all that money back into the financial system rather than back into the economy (the goods and service producing segments.) For example, they could buy assets like stocks, bonds, gold, real estate, etc. (GDP wouldn’t go up much.) They could buy these assets around the world (reducing the inflation potential here) and they could finance real things like factories, but overseas (Oh, darn, they couldn’t bring the profits home because of taxes.)
Is it possible? I don’t know. I am not a conspiracy theorist but we have to keep our critical thinking skills sharp and keep looking for possible alternative futures.
Wednesday, March 24, 2010
What is going on with the market?
As you know, I understand that stimulus money drives up the GDP numbers making it look like the economy is getting better, but I have been very concerned about 2010 because of many impending headwinds:
1. Mortgage delinquencies about to rise significantly. Note, we are now entering the 2005-07 period when the option-ARM’s made up the majority of mortgages (pay what you want to per month and we will add the unpaid balance of principal and interest due to your mortgage)
2. Banks will have to report, for the first time, off balance sheet assets in their first quarter reports,
3. Unemployment is high and probably getting worse (except for government census workers),
4. Mortgage resets have started to rise and with about 25% of homes underwater, there may be no way for most people to refinance,
5. Home inventories are high (over nine months supply at the current sales pace) plus significant shadow inventory (from banks and home owners) is waiting to come on the market when times improve,
6. Current taxes and fees are poised to increase significantly and new forms of taxes (like a national sales tax) may be required to fund our unsustainable spending,
7. State (and local) budgets are in trouble (estimates are from a $200 to $300 billion deficit) and Governors are asking for more help from the Federal Government (who has no money), and
8. Consumers still very over-leveraged.
That’s enough. I am not trying to get you depressed; I just wanted to make a point.
I am trying to understand why the market continues to rise and why traders are apparently throwing risk out the window again. Bears are down to a low 21%. Then I learned about Richard Russell’s latest newsletter. He publishes the DOW Theory Newsletter and is one of the most respected market analysts anywhere. Plus, almost “everyone” buys his newsletter including Goldman, hedge funds, the Bank of China, etc. In his latest newsletter, he explains that he expected the market to close below a critical number (10,750) last Friday which would have turned the market negative. However, during the final six minutes of trading, volume suddenly surged and lifted the DOW above the critical level of 10,750. This was very unusual and caused him to ask:
“Where did that very late buying come from? I have to think this was one of the most flagrant cases of manipulation that I have every seen. Was it the Fed; was it Goldman or Morgan Stanley buying futures on orders from the Fed?”
Note: he is not enamored with the Fed to begin with. But, it got me thinking.
Fiscal and monetary policy is being run by Keynesians (and has been since FDR.) Keynesians believe that in a crisis, you quickly lower rates, print money and then stimulate the economy to fill the drop or gap in spending. If you stimulate enough, the economy (GDP) will “climb” and soon consumers will believe the economy is coming back and will start growing again. The return of the consumer completes the circle and allows the government to hand off the economy, once again, to the private sector.
Now to complete this conspiracy theory, imagine the Fed and the Treasury sitting around wondering how they are going to get the economy going again when “the demand-side” or consumer is over leveraged and can’t buy or borrow money and the banks can’t lend because of impending asset losses and the capital asset requirements needed to remain solvent.
I am not a conspiracy theorist by nature, but I am having a difficult time understanding this market and continue to search for answers.
1. Mortgage delinquencies about to rise significantly. Note, we are now entering the 2005-07 period when the option-ARM’s made up the majority of mortgages (pay what you want to per month and we will add the unpaid balance of principal and interest due to your mortgage)
2. Banks will have to report, for the first time, off balance sheet assets in their first quarter reports,
3. Unemployment is high and probably getting worse (except for government census workers),
4. Mortgage resets have started to rise and with about 25% of homes underwater, there may be no way for most people to refinance,
5. Home inventories are high (over nine months supply at the current sales pace) plus significant shadow inventory (from banks and home owners) is waiting to come on the market when times improve,
6. Current taxes and fees are poised to increase significantly and new forms of taxes (like a national sales tax) may be required to fund our unsustainable spending,
7. State (and local) budgets are in trouble (estimates are from a $200 to $300 billion deficit) and Governors are asking for more help from the Federal Government (who has no money), and
8. Consumers still very over-leveraged.
That’s enough. I am not trying to get you depressed; I just wanted to make a point.
I am trying to understand why the market continues to rise and why traders are apparently throwing risk out the window again. Bears are down to a low 21%. Then I learned about Richard Russell’s latest newsletter. He publishes the DOW Theory Newsletter and is one of the most respected market analysts anywhere. Plus, almost “everyone” buys his newsletter including Goldman, hedge funds, the Bank of China, etc. In his latest newsletter, he explains that he expected the market to close below a critical number (10,750) last Friday which would have turned the market negative. However, during the final six minutes of trading, volume suddenly surged and lifted the DOW above the critical level of 10,750. This was very unusual and caused him to ask:
“Where did that very late buying come from? I have to think this was one of the most flagrant cases of manipulation that I have every seen. Was it the Fed; was it Goldman or Morgan Stanley buying futures on orders from the Fed?”
Note: he is not enamored with the Fed to begin with. But, it got me thinking.
Fiscal and monetary policy is being run by Keynesians (and has been since FDR.) Keynesians believe that in a crisis, you quickly lower rates, print money and then stimulate the economy to fill the drop or gap in spending. If you stimulate enough, the economy (GDP) will “climb” and soon consumers will believe the economy is coming back and will start growing again. The return of the consumer completes the circle and allows the government to hand off the economy, once again, to the private sector.
Now to complete this conspiracy theory, imagine the Fed and the Treasury sitting around wondering how they are going to get the economy going again when “the demand-side” or consumer is over leveraged and can’t buy or borrow money and the banks can’t lend because of impending asset losses and the capital asset requirements needed to remain solvent.
I am not a conspiracy theorist by nature, but I am having a difficult time understanding this market and continue to search for answers.
Wednesday, December 16, 2009
If we could just spend more on interest, we could really stimulate GDP growth
This may not sound right, but give me a second and I’ll show you that this statement is true.
The economy, as defined by most politicians and economists, is a mathematical model called Gross Domestic Product or GDP. This model is based on consumption (spending by consumers, businesses and the government.) rather than wealth building or production. So every dollar spent is a dollar of GDP and every new dollar spent is GDP growth.
Now, if you are in Congress or the President, you could catch on to this real fast. The more you spend, the more GDP goes up and the better your chances for reelection. But it gets even better.
But, we have one speed bump to get over first. To spend a dollar you have to produce a dollar. But the government doesn’t produce anything so it has no money to spend. No problem, it just has to get its dollars from somewhere else.
The government has to take a dollar from producers in order to spend a dollar; or it has to borrow the money with interest from someone else. It doesn’t matter where the dollar came from in the GDP model because every additional dollar the government spends is counted as an increase in economic growth (GDP.)
Now, if the government takes a dollar in taxes from a producer to spend. You could argue that the net is the same; you subtract a dollar from the economy in taxes and then spend that dollar. This could hurt down the road when you have to increase taxes to pay for the dollars you are spending now; but who cares. Many think they will be out of office by then.
You would think tax payers would catch on to this, but remember you elected them because they were clever and great communicators. So they just change the meaning of the word spending to investment and everyone is happy. Long-term you try to convince tax payers that you are only doing this because the government can spend dollars more wisely than the producer or because the government can buy something the producer cannot.
Wait. I’m not done. Here is the BINGO. You borrow lots of the money because if you pay-as-you-go, tax payers could catch on. And you get to pay huge interest payments on the borrowed money—you got it. Every new dollar paid is an increase in GDP.
Now, think of the GDP growth we are going to get when our deficits go up by 10 trillion or more over the next few years. PLUS, if interest rates rise significantly because of all the debt, BINGO –even more GDP growth.
If you think this is a sane approach to our economy, do nothing. If not, support politicians who are sane.
The economy, as defined by most politicians and economists, is a mathematical model called Gross Domestic Product or GDP. This model is based on consumption (spending by consumers, businesses and the government.) rather than wealth building or production. So every dollar spent is a dollar of GDP and every new dollar spent is GDP growth.
Now, if you are in Congress or the President, you could catch on to this real fast. The more you spend, the more GDP goes up and the better your chances for reelection. But it gets even better.
But, we have one speed bump to get over first. To spend a dollar you have to produce a dollar. But the government doesn’t produce anything so it has no money to spend. No problem, it just has to get its dollars from somewhere else.
The government has to take a dollar from producers in order to spend a dollar; or it has to borrow the money with interest from someone else. It doesn’t matter where the dollar came from in the GDP model because every additional dollar the government spends is counted as an increase in economic growth (GDP.)
Now, if the government takes a dollar in taxes from a producer to spend. You could argue that the net is the same; you subtract a dollar from the economy in taxes and then spend that dollar. This could hurt down the road when you have to increase taxes to pay for the dollars you are spending now; but who cares. Many think they will be out of office by then.
You would think tax payers would catch on to this, but remember you elected them because they were clever and great communicators. So they just change the meaning of the word spending to investment and everyone is happy. Long-term you try to convince tax payers that you are only doing this because the government can spend dollars more wisely than the producer or because the government can buy something the producer cannot.
Wait. I’m not done. Here is the BINGO. You borrow lots of the money because if you pay-as-you-go, tax payers could catch on. And you get to pay huge interest payments on the borrowed money—you got it. Every new dollar paid is an increase in GDP.
Now, think of the GDP growth we are going to get when our deficits go up by 10 trillion or more over the next few years. PLUS, if interest rates rise significantly because of all the debt, BINGO –even more GDP growth.
If you think this is a sane approach to our economy, do nothing. If not, support politicians who are sane.
Tuesday, November 10, 2009
Market Rising Faster Than Economy: Five Reasons Why
The market has significantly outperformed the economy recently. It seems confusing because of all the headwinds making economic recovery so difficult. For example: housing and commercial real estate continuing to decline, an over-levered consumer, growing unemployment, etc. However, the market does not seem to be concerned about these headwinds (at this time) so what are traders and investors using to bid up this market? You see and read a lot about the recession being over or that we’ve avoided a depression or consumer attitudes are improving etc. But it appears there are five major reasons the market is outpacing the growth of the real economy.
1. The “economy” is assembled and dissected as a Statistical Model
Remember, most people see the market through the lens of the conventional, statistical model of Gross National Product (GDP.) This model looks at the economy from a consumption point of view: a dollar spent, no matter who spends it, represents a dollar of GDP. This of course is why many people see green shoots all over the place and hear so many declarations from politicians, economists and the media that the positive GDP growth in the third quarter means the recession is over. They don’t seem to consider that a dollar spend today (increase in GDP) is a dollar that has to be subtracted (from GDP) through taxes later. Nor do they seem to consider that the dollar will be taken from someone who could probably use it more effectively.
2. U.S. fiscal policy is out of control
Government spending is out of control and congress has every intention of spending more and more. The government will pump in at least $1 trillion (above tax collections) this year and probably each year for the next ten years. That’s a lot of GDP “growth.” Add to that any new programs that might be enacted like health care spending or cash for clunkers. Also, the $800 billion stimulus package has not worked (business revenues still falling and unemployment has gone from 5% to 10%.) Yet, according to demand side economists (preferred by most politicians) like Paul Krugman at Princeton, we need another, bigger stimulus package if we really want to turn this economy around.
The government may not (at this time, be able to get another big, trillion-dollar stimulus package through Congress. However, they may be able to get a lot of “little, very targeted stimulus packages” through congress like: $11 billion more for home buyers, $33 billion for businesses on tax losses 3-5 years ago, $250 for each Social Security recipient at a cost of $14 billion, how about another “successful” cash for clunkers program because GM needs money, etc. All of this money will push up the GDP.
3. U. S. monetary policy is out of control
The Federal Reserve has reduced interest rates to 0-.25 percent (basically free money for banks); expanded its balance sheet by $1.75 trillion dollars and guaranteed the financial community $4.3 trillion to make sure banks will trade with other banks. The Fed, at its meeting last week, stated again that it intends to keep interest rates low (where they are) for an extended period of time (until the economy turns around or until they see inflation.)
This “liquidity” not only helps the banks recapitalize, it punishes savers and forces them to buy risk assets if they want to earn a return on their money (or simply spend it and help GDP.) All of this liquidity helps consumption, but it also causes malinvestment and the current “carry trade.”
4. Stable, low-cost money encourages a Carry Trade
This simply means you capitalize on the returns you can get by borrowing money at low rates in one country and investing the funds in another country for a higher return. Remember reading about this when people were borrowing the Japanese yen at zero percent interest and investing in the U.S. at a higher rate of interest. Well, you can do that right now without leaving the U.S. We are now the carry trade. Banks can borrow from the Federal Reserve at zero percent and buy longer term Treasuries and make the difference. Or, some can short the dollar (it’s down over 10 percent this year) and use the money to buy higher risk assets (equities, gold, etc) and make even more.
5. Global funds still streaming into the U.S.
This carry trade is not just being done by Americans, it’s global. Countries around the world have more growth than ever and are taking advantage of the declining dollar and the rising assets like equities, commodities, etc. As we saw in the Technology bubble and the housing bubble, the world is awash in money looking for a place it will be treated well.
These are certainly not all of the reasons the market is rising faster than the economy, but they are some of the more significant reasons. Also they may stay in place until the headwinds become too strong.
1. The “economy” is assembled and dissected as a Statistical Model
Remember, most people see the market through the lens of the conventional, statistical model of Gross National Product (GDP.) This model looks at the economy from a consumption point of view: a dollar spent, no matter who spends it, represents a dollar of GDP. This of course is why many people see green shoots all over the place and hear so many declarations from politicians, economists and the media that the positive GDP growth in the third quarter means the recession is over. They don’t seem to consider that a dollar spend today (increase in GDP) is a dollar that has to be subtracted (from GDP) through taxes later. Nor do they seem to consider that the dollar will be taken from someone who could probably use it more effectively.
2. U.S. fiscal policy is out of control
Government spending is out of control and congress has every intention of spending more and more. The government will pump in at least $1 trillion (above tax collections) this year and probably each year for the next ten years. That’s a lot of GDP “growth.” Add to that any new programs that might be enacted like health care spending or cash for clunkers. Also, the $800 billion stimulus package has not worked (business revenues still falling and unemployment has gone from 5% to 10%.) Yet, according to demand side economists (preferred by most politicians) like Paul Krugman at Princeton, we need another, bigger stimulus package if we really want to turn this economy around.
The government may not (at this time, be able to get another big, trillion-dollar stimulus package through Congress. However, they may be able to get a lot of “little, very targeted stimulus packages” through congress like: $11 billion more for home buyers, $33 billion for businesses on tax losses 3-5 years ago, $250 for each Social Security recipient at a cost of $14 billion, how about another “successful” cash for clunkers program because GM needs money, etc. All of this money will push up the GDP.
3. U. S. monetary policy is out of control
The Federal Reserve has reduced interest rates to 0-.25 percent (basically free money for banks); expanded its balance sheet by $1.75 trillion dollars and guaranteed the financial community $4.3 trillion to make sure banks will trade with other banks. The Fed, at its meeting last week, stated again that it intends to keep interest rates low (where they are) for an extended period of time (until the economy turns around or until they see inflation.)
This “liquidity” not only helps the banks recapitalize, it punishes savers and forces them to buy risk assets if they want to earn a return on their money (or simply spend it and help GDP.) All of this liquidity helps consumption, but it also causes malinvestment and the current “carry trade.”
4. Stable, low-cost money encourages a Carry Trade
This simply means you capitalize on the returns you can get by borrowing money at low rates in one country and investing the funds in another country for a higher return. Remember reading about this when people were borrowing the Japanese yen at zero percent interest and investing in the U.S. at a higher rate of interest. Well, you can do that right now without leaving the U.S. We are now the carry trade. Banks can borrow from the Federal Reserve at zero percent and buy longer term Treasuries and make the difference. Or, some can short the dollar (it’s down over 10 percent this year) and use the money to buy higher risk assets (equities, gold, etc) and make even more.
5. Global funds still streaming into the U.S.
This carry trade is not just being done by Americans, it’s global. Countries around the world have more growth than ever and are taking advantage of the declining dollar and the rising assets like equities, commodities, etc. As we saw in the Technology bubble and the housing bubble, the world is awash in money looking for a place it will be treated well.
These are certainly not all of the reasons the market is rising faster than the economy, but they are some of the more significant reasons. Also they may stay in place until the headwinds become too strong.
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