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Recent economic data and Chairman Bernanke’s recent statement suggest the economy is slowing down. The “’09 stimulus package” has peaked and its effects will be gone by the end of the year. The G20 agreement reached over the weekend says governments “agree” to cut their deficits by 50% within two years. The U.S. would have to cut almost $800 billion of the $1.5 trillion deficit in 2010 alone. Good luck with that. Here are some reactions:
Keynesian (Demand-Side) economists are up in arms. Paul Krugman in an article in the New York Times today has an article titled, “The Third Depression.” He states that we are worried about inflation when the real problem is deflation; and the failure to stimulate (re-inflate) the economy will result in a long, Japanese style deflationary environment. He has suggested another $one trillion in stimulus.
The Keynesian-lite (Supply-Side) economists are still convinced the economy is turning around (although they have become less passionate in the past week) and that inflation is the potential risk. They do want taxes reduced to create jobs (but without cutting spending, you simply have a different type of stimulus program.)
The Capitalist economists see de-leveraging or deflation which is normal after our world-wide, gigantic credit bubble fighting inflation (low interest rates and the massive printing of money.) If this deflation-inflation struggle continues, it will take a long time to get to price equilibrium (e.g., bottom on home prices) and the amount of money created by that time will cause huge inflation. Therefore, the sooner the government gets out of the way, the sooner the recovery can begin.
Since we have a mixed economy rather than a capitalist economy, I do not expect the government to get out of the way. And since we have Keynesian government and Federal Reserve, I expect more stimulus rather than austerity.
However, many taxpayers are upset with all the spending. I had expected another large stimulus package this year, but one large stimulus package does not seem viable in this climate. Then, I expected to see the large stimulus package broken down into smaller pieces (a $50 billion package for unemployment benefits, a $50 billion package to help the states, an $8 billion package to hold up home prices, etc.). But last week, the Senate was unable to get closure on the unemployment package and therefore could not vote on it.. This might signal that additional stimulus through fiscal policy, may be difficult to do.
However, I think the answer to question posed is no. The government is to frightened of deflation to let it happen. Therefore, the Fed and Chairman Bernanke may be called upon to stimulate the economy through monetary policy (keep interest rates low and print, print, print money.)
Monday, June 28, 2010
Thursday, June 24, 2010
Chairman Bernanke Effectively Downgrades the Economy
Media coverage of the Federal Open Market Committee (FOMC) meeting on Wednesday basically stated that little had changed from the April 28th meeting: interest rates remain at basically zero percent and will remain so for some time, the economy was in recovery, etc. However, there were some serious changes made to Mr. Bernanke’s statement that implied things were deteriorating rather getting better.
Most media coverage focused on what did not change in Bernanke’s statement: they left rates at zero, for an extended period, subdued inflation trends and expectations, continued low rate of plant utilization, unemployment continues to be a concern, etc.
But, here are some significant changes in attitude and content that, I think, effectively downgrades the growth rate for the U.S. economy. For example:
1.Attitude. Less talk about short-term tightening and the timing and plans to do so,
2.Economy. In the previous statement (April), Bernanke stated, “Economic activity has continued to strengthen.” In this June statement, he stated, “The economy continues to recover.” (this is far different from continues to strengthen and I think a downgrade on growth rates)
3.Employment. In April, “Labor markets beginning to improve.” In June, “Jobs are being created, gradually.” (Again, I think a less robust outlook.)
4.Financial System. In April, “Financial market conditions remain supportive of economic growth.” In June, “Financial conditions have become less supportive of economic growth...”
5.Housing. In April, “Housing starts have edged up but remain at d depressed level.” In June, he left out “have edged up” and simply said, “: Housing remains at a depressed level.”
I think this is significant because Bernanke and the Federal Reserve Bank have been trying, very hard, to present the economy as beginning to improve. After all, as good Keynesians, they have already spent a ton of our money and they need those “animal spirits” (I guess that means our greed) to make the handoff from government spending to private spending (or their theory doesn’t work.) Is this a signal that we will get even more government spending?
Most media coverage focused on what did not change in Bernanke’s statement: they left rates at zero, for an extended period, subdued inflation trends and expectations, continued low rate of plant utilization, unemployment continues to be a concern, etc.
But, here are some significant changes in attitude and content that, I think, effectively downgrades the growth rate for the U.S. economy. For example:
1.Attitude. Less talk about short-term tightening and the timing and plans to do so,
2.Economy. In the previous statement (April), Bernanke stated, “Economic activity has continued to strengthen.” In this June statement, he stated, “The economy continues to recover.” (this is far different from continues to strengthen and I think a downgrade on growth rates)
3.Employment. In April, “Labor markets beginning to improve.” In June, “Jobs are being created, gradually.” (Again, I think a less robust outlook.)
4.Financial System. In April, “Financial market conditions remain supportive of economic growth.” In June, “Financial conditions have become less supportive of economic growth...”
5.Housing. In April, “Housing starts have edged up but remain at d depressed level.” In June, he left out “have edged up” and simply said, “: Housing remains at a depressed level.”
I think this is significant because Bernanke and the Federal Reserve Bank have been trying, very hard, to present the economy as beginning to improve. After all, as good Keynesians, they have already spent a ton of our money and they need those “animal spirits” (I guess that means our greed) to make the handoff from government spending to private spending (or their theory doesn’t work.) Is this a signal that we will get even more government spending?
Wednesday, June 9, 2010
Should we be worried about future deflation or inflation?
There is a lot of worry these days about weather we are in deflation, slipping into deflation or about to enter into an inflationary environment. It obviously makes a big difference in future planning and how investments are allocated. As you can imagine, there are very different views among the different economic philosophies.
Before I get philosophic differences however, I need to provide a simple definition of inflation and deflation. Very simply, inflation means an increase or inflation of the money supply (more money units) and deflation means a contraction in the money supply. In the case of inflation, an increase in money units means that each unit is worth less or one’s purchasing power is diminished. Therefore prices increase. Inflation, the way the word is used today means an increase in prices. Therefore, the cause of inflation is usually misdiagnosed. I’ll talk more about this in other posts. So lets look at the different viewpoints.
Keynesian/Demand-Side View
The big government economists (Keynesians and demand-side economists) are worried that the money spent to date (the stimulus and fiscal and monetary policy) is not enough to fill the spending gap left when consumers and businesses reduced spending.
Influential economists like Paul Krugman, have said all along that the stimulus packages have not been large enough to fill the gap in spending and that now we need a much bigger stimulus package in the neighborhood of $1 trillion more dollars if we are going to turn this economy around. If we do not get that kind of spending, we will slip into a deflationary death spiral that is very difficult to get out of. Therefore, we could end up like Japan in the 1990’s with 10 years or more of almost no growth.
Their definition of deflation is falling prices (due to lack of demand) and they see falling prices everywhere (housing prices, food prices, car prices, etc.) He doesn’t see falling computer prices over the years as detrimental or deflation however. He also does not mention how we are going to repay the loans.
Keynesian/Supply-Side ViewThe opposite position is taken by the less government economists (Keynesians and supply-side economists) who see a marginal improvement in GDP growth, which they have extrapolated into a V shaped recovery. They are worried about the coming inflation because of artificially low interest rates and high debt levels.
They see inflation (a rising consumer price index or CPI) everywhere. They think that unless the Fed raises interest rates very soon and begins to take money out of the system, we will get severe inflation within the next year to eighteen months. Interest rates should be raised to one percent higher then the nominal growth rate of GDP (growth rate before inflation.) So if the economy is growing at 3-4% as they expect, interest rates should be at 4-5% not zero.
Their definition of inflation is a rising CPI index (which is the symptom of inflation, not the cause.) The CPI index as you know is a basket of goods and services the government uses to measure price changes.
Capitalist ViewThe almost no government economists (Capitalists, Austrians, Objectivists) have a much different definition of deflation and inflation. They see deflation and inflation as it was originally defined: expansion or contraction of the money supply. Their view is that the government has been and continues to pump money into the economy (print money), which will be inflationary. However, consumers are currently over-leveraged (too much credit vs. disposable income) and must reduce spending and increase savings in order to b ring their financial lives into balance. This slowdown in spending looks like deflation (prices are being reduced by almost every store advertising.)
Therefore we are currently in a period of de-leveraging, not deflation and until the consumer starts spending again (by using or reducing his savings or expanding his credit) we will not enter an inflationary phase. But based on the money that has been added and expected to be added to the economy, we could be in for serious inflation.
Conclusion
Therefore, your current position should be focused on a de-levering economy, which will take considerable time and considerable pain. However, if the government pumps too much money into the economy (a debatable number) or credit becomes too easy again, too soon, it will be time to reposition yourself for inflation.
Before I get philosophic differences however, I need to provide a simple definition of inflation and deflation. Very simply, inflation means an increase or inflation of the money supply (more money units) and deflation means a contraction in the money supply. In the case of inflation, an increase in money units means that each unit is worth less or one’s purchasing power is diminished. Therefore prices increase. Inflation, the way the word is used today means an increase in prices. Therefore, the cause of inflation is usually misdiagnosed. I’ll talk more about this in other posts. So lets look at the different viewpoints.
Keynesian/Demand-Side View
The big government economists (Keynesians and demand-side economists) are worried that the money spent to date (the stimulus and fiscal and monetary policy) is not enough to fill the spending gap left when consumers and businesses reduced spending.
Influential economists like Paul Krugman, have said all along that the stimulus packages have not been large enough to fill the gap in spending and that now we need a much bigger stimulus package in the neighborhood of $1 trillion more dollars if we are going to turn this economy around. If we do not get that kind of spending, we will slip into a deflationary death spiral that is very difficult to get out of. Therefore, we could end up like Japan in the 1990’s with 10 years or more of almost no growth.
Their definition of deflation is falling prices (due to lack of demand) and they see falling prices everywhere (housing prices, food prices, car prices, etc.) He doesn’t see falling computer prices over the years as detrimental or deflation however. He also does not mention how we are going to repay the loans.
Keynesian/Supply-Side ViewThe opposite position is taken by the less government economists (Keynesians and supply-side economists) who see a marginal improvement in GDP growth, which they have extrapolated into a V shaped recovery. They are worried about the coming inflation because of artificially low interest rates and high debt levels.
They see inflation (a rising consumer price index or CPI) everywhere. They think that unless the Fed raises interest rates very soon and begins to take money out of the system, we will get severe inflation within the next year to eighteen months. Interest rates should be raised to one percent higher then the nominal growth rate of GDP (growth rate before inflation.) So if the economy is growing at 3-4% as they expect, interest rates should be at 4-5% not zero.
Their definition of inflation is a rising CPI index (which is the symptom of inflation, not the cause.) The CPI index as you know is a basket of goods and services the government uses to measure price changes.
Capitalist ViewThe almost no government economists (Capitalists, Austrians, Objectivists) have a much different definition of deflation and inflation. They see deflation and inflation as it was originally defined: expansion or contraction of the money supply. Their view is that the government has been and continues to pump money into the economy (print money), which will be inflationary. However, consumers are currently over-leveraged (too much credit vs. disposable income) and must reduce spending and increase savings in order to b ring their financial lives into balance. This slowdown in spending looks like deflation (prices are being reduced by almost every store advertising.)
Therefore we are currently in a period of de-leveraging, not deflation and until the consumer starts spending again (by using or reducing his savings or expanding his credit) we will not enter an inflationary phase. But based on the money that has been added and expected to be added to the economy, we could be in for serious inflation.
Conclusion
Therefore, your current position should be focused on a de-levering economy, which will take considerable time and considerable pain. However, if the government pumps too much money into the economy (a debatable number) or credit becomes too easy again, too soon, it will be time to reposition yourself for inflation.
Friday, April 23, 2010
Consumers Are Beginning to Spend, But Where Is the Money Coming From?
Retail sales were up 1.6% in March and 10% year-over-year. These are not new highs but, the short-term trend offers some hope at least. However, faced with many and much talked about headwinds, the question really is: Where is the money coming from and is it sustainable?
This is very difficult to answer, on a fundamental basis, because the government is so involved in the economy that it’s hard to tell what is real and what is stimulus. None the less, following are the current positions of the three major branches of economic thought.
Keynesians (Demand-Side Economists)
Consumers are spending, and are being helped by government stimulus programs (the $800 billion dollar stimulus program plus cash for clunkers, mortgage modification, home purchase incentives, extended unemployment benefits, etc.) However, consumers are not spending enough and credit is too restricted for the economy to grow again without government help. The problem now is that stimulus money peaks in June 2010 and then trails off. Therefore, we need to keep interest rates low and we need additional stimulus spending to keep consumers and the economy “growing.”
Here is quote from the Cleveland Federal Reserve that I think sums up the Fed’s position,
“What does all of this bode for a recovery of consumption, the primary driver of the U.S. economy? The data shown here point to a long road ahead for a sustainable recovery. Consumers are paying down loans or defaulting, and those looking for new consumer loans are likely to find that banks are still pulling back on lending, though individuals who can secure a loan face historically low interest rates. Given the hangover of outstanding debt and recent memories of shrinking asset values, consumers may not be motivated to ramp up their expenditures. Rather, consumption will likely recover slowly as households save more and await the return of an improved labor market and the sustainable source of funding—disposable income—that it typically provides for consumption.”
Keynesian Light (Supply-Side Economists)
Consumers are spending more and that spending is becoming broad based. According to Brian Wesbury, Chief Economist at First Trust in Chicago,
“Economic data clearly traces out a V shaped recovery.”
He acknowledges that many headwinds do exist, but not right now --not until some time in the future. His reasons for increased consumer spending include: 1, the pace of debt reduction is slowing (if you pay off less, you have more of your income to spend) and 2, incomes are growing and recovering (a three month trend of incomes show a slight increase.) This is a very short-term view, but Keynesians are focused on the short-term.
Capitalists/Austrian Economists
Capitalists agree that on a short-term basis, consumer spending is increasing, at the margins, but for mostly the wrong reasons. Capitalists look at consumer spending differently. First, the short-term, aggregated numbers do not tell the real story. For example, gasoline prices have gone up about $1.00 over the past year increasing spending in this category. That will/could amount to a lot of consumers spending; but it certainly hasn’t helped the consumer or the economy.
Capitalists contend that it’s not government or consumer spending that is the problem, it’s the lack of investments. Investments and productivity are what generate job creation. That should be our concerned. Savings (ours or foreigners) are needed in order to have investment. Also, the consumer is still deeply in debt and needs time to reduce debt levels (and hopefully save) before meaningful spending can be sustained.
But, where are consumers getting the money?
Here are some other ideas:
1.One source is “strategic defaults.” These are people who are underwater on the value of their homes and can afford to pay their mortgages, but are chose to let their homes go into default and eventually foreclosure. There are currently about 6 million people in the process of foreclosure. These strategic defaults may be adding about $200 billion to annual household cash flows. (Per economist David Rosenberg.) Some of these people have not even been contacted by the bank in over a year.
2.Tax refunds which might be lower than previous years but do fuel consumer spending.
3.Savings rate has dropped from a recent high of 4.6% to 3.1%. That alone would explain a lot of spending.
4.Additional stimulus programs to come.
Short-term, it appears that consumers are spending more and adding to GDP (which certainly looks good ;) but long-term, we need to solve the problems that caused this recession in the first place and that will take time not money.
Comments always appreciated.
This is very difficult to answer, on a fundamental basis, because the government is so involved in the economy that it’s hard to tell what is real and what is stimulus. None the less, following are the current positions of the three major branches of economic thought.
Keynesians (Demand-Side Economists)
Consumers are spending, and are being helped by government stimulus programs (the $800 billion dollar stimulus program plus cash for clunkers, mortgage modification, home purchase incentives, extended unemployment benefits, etc.) However, consumers are not spending enough and credit is too restricted for the economy to grow again without government help. The problem now is that stimulus money peaks in June 2010 and then trails off. Therefore, we need to keep interest rates low and we need additional stimulus spending to keep consumers and the economy “growing.”
Here is quote from the Cleveland Federal Reserve that I think sums up the Fed’s position,
“What does all of this bode for a recovery of consumption, the primary driver of the U.S. economy? The data shown here point to a long road ahead for a sustainable recovery. Consumers are paying down loans or defaulting, and those looking for new consumer loans are likely to find that banks are still pulling back on lending, though individuals who can secure a loan face historically low interest rates. Given the hangover of outstanding debt and recent memories of shrinking asset values, consumers may not be motivated to ramp up their expenditures. Rather, consumption will likely recover slowly as households save more and await the return of an improved labor market and the sustainable source of funding—disposable income—that it typically provides for consumption.”
Keynesian Light (Supply-Side Economists)
Consumers are spending more and that spending is becoming broad based. According to Brian Wesbury, Chief Economist at First Trust in Chicago,
“Economic data clearly traces out a V shaped recovery.”
He acknowledges that many headwinds do exist, but not right now --not until some time in the future. His reasons for increased consumer spending include: 1, the pace of debt reduction is slowing (if you pay off less, you have more of your income to spend) and 2, incomes are growing and recovering (a three month trend of incomes show a slight increase.) This is a very short-term view, but Keynesians are focused on the short-term.
Capitalists/Austrian Economists
Capitalists agree that on a short-term basis, consumer spending is increasing, at the margins, but for mostly the wrong reasons. Capitalists look at consumer spending differently. First, the short-term, aggregated numbers do not tell the real story. For example, gasoline prices have gone up about $1.00 over the past year increasing spending in this category. That will/could amount to a lot of consumers spending; but it certainly hasn’t helped the consumer or the economy.
Capitalists contend that it’s not government or consumer spending that is the problem, it’s the lack of investments. Investments and productivity are what generate job creation. That should be our concerned. Savings (ours or foreigners) are needed in order to have investment. Also, the consumer is still deeply in debt and needs time to reduce debt levels (and hopefully save) before meaningful spending can be sustained.
But, where are consumers getting the money?
Here are some other ideas:
1.One source is “strategic defaults.” These are people who are underwater on the value of their homes and can afford to pay their mortgages, but are chose to let their homes go into default and eventually foreclosure. There are currently about 6 million people in the process of foreclosure. These strategic defaults may be adding about $200 billion to annual household cash flows. (Per economist David Rosenberg.) Some of these people have not even been contacted by the bank in over a year.
2.Tax refunds which might be lower than previous years but do fuel consumer spending.
3.Savings rate has dropped from a recent high of 4.6% to 3.1%. That alone would explain a lot of spending.
4.Additional stimulus programs to come.
Short-term, it appears that consumers are spending more and adding to GDP (which certainly looks good ;) but long-term, we need to solve the problems that caused this recession in the first place and that will take time not money.
Comments always appreciated.
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.
Friday, March 12, 2010
Are Our Economic Woes Behind Us Or Ahead Of Us?
The way the market has been performing (Dow hitting a high of 10,750 in September and now six months later, with volatility, it is almost flat at 10,550.) Does that mean our woes are behind us or still in front of us? Following are a Macro and Micro view of what is occurring and what might occur.
The Aggregated or Macro View of the Economy
There seems to be two overriding views of the economy. The first is that both demand-side and Supply-side economists (Keynesians) see the economy through the lens of an aggregated economic model or the GDP. When you look at the economy this way, you see the “big picture;” but you don’t see the depth or interrelationships among elements within the economy.
For example, you see the economy growing at 5.9% in the fourth quarter---exactly what, you as a Keynesian, expect. This gives you confidence that the government is doing the right things to fix the economy. First, monetary policy: lowering interest rates and expanding the money supply and than fiscal policy: providing stimulus to get the economy back to normal and subsequently growing.
Now, with the economy focused in Washington (where the money is) and the math looking better: 5.9% growth; you could see our woes as being behind us. Even though Q4 inventory adjustments contributed 3.4% of the 5.9% GDP growth and inventories actually fell $39 billion. That’s the way the GDP model works and you could say that since it fell at a slower pace, things are getting better.
I think the macro conclusion is that things are turning around and with some additional stimulus; the government can keep this economy growing.
The Capitalist or Micro View Of the Economy
The other view, the capitalist view, sees the economy as interactions between individuals (micro view) rather than as an aggregated model (macro view.) Therefore, they look at how the pieces of the economy work on a supply-demand basis with constantly adjusting prices to achieve equilibrium.
This view sees the 5.9% GDP growth but looks at the longer-term implications. For example, in 2010 we are going to get another peak in mortgage resets (July) at a very high level of about $97 billion and remain high through September of 2011. Once this second wave of resets begins (which was in November of 2009) it takes about three months to get delinquencies reported and another three months before we get foreclosure notices. How many mortgages actually go into foreclosure we can only guess? But it will be in the millions.
The government could forestall some of these foreclosures through various programs (loan modification, not letting homes go into foreclosure until they have been rejected by a loan modification program, continuing to allow buyers to make 4% down payments and subsidizing them with $8,000 cash, etc.)
Also, bank credit remains very tight. Banks are not only restricting loans, the Federal Reserve is telling them not to increase dividends or buy back stock so they can continue to build up reserves. If this doesn’t make it difficult to get loans, the a new accounting rule that goes into effect in the first quarter of 2010 which requires banks to disclose their off balance sheet investment vehicles, will make it even more difficult. The only company we’ve heard from so far is Freddie Mac and they said they may be considered insolvent when they report. They are however; going to continue buying mortgage backed securities that are at least four months delinquent (no worry, they are tax payer owned.)
Are our woes behind us or ahead of us?
We don’t know. If the government continues to kick the can down the road on mortgages and allows the banks to continue to increase assets, it could keep the economy going in the short term. But if mortgage foreclosures become a major problem (number of, no credit, continued unemployment, etc.) we could get another step down. Watch the GDP numbers, watch the delinquency filings, and watch the first-quarter bank results.
The Aggregated or Macro View of the Economy
There seems to be two overriding views of the economy. The first is that both demand-side and Supply-side economists (Keynesians) see the economy through the lens of an aggregated economic model or the GDP. When you look at the economy this way, you see the “big picture;” but you don’t see the depth or interrelationships among elements within the economy.
For example, you see the economy growing at 5.9% in the fourth quarter---exactly what, you as a Keynesian, expect. This gives you confidence that the government is doing the right things to fix the economy. First, monetary policy: lowering interest rates and expanding the money supply and than fiscal policy: providing stimulus to get the economy back to normal and subsequently growing.
Now, with the economy focused in Washington (where the money is) and the math looking better: 5.9% growth; you could see our woes as being behind us. Even though Q4 inventory adjustments contributed 3.4% of the 5.9% GDP growth and inventories actually fell $39 billion. That’s the way the GDP model works and you could say that since it fell at a slower pace, things are getting better.
I think the macro conclusion is that things are turning around and with some additional stimulus; the government can keep this economy growing.
The Capitalist or Micro View Of the Economy
The other view, the capitalist view, sees the economy as interactions between individuals (micro view) rather than as an aggregated model (macro view.) Therefore, they look at how the pieces of the economy work on a supply-demand basis with constantly adjusting prices to achieve equilibrium.
This view sees the 5.9% GDP growth but looks at the longer-term implications. For example, in 2010 we are going to get another peak in mortgage resets (July) at a very high level of about $97 billion and remain high through September of 2011. Once this second wave of resets begins (which was in November of 2009) it takes about three months to get delinquencies reported and another three months before we get foreclosure notices. How many mortgages actually go into foreclosure we can only guess? But it will be in the millions.
The government could forestall some of these foreclosures through various programs (loan modification, not letting homes go into foreclosure until they have been rejected by a loan modification program, continuing to allow buyers to make 4% down payments and subsidizing them with $8,000 cash, etc.)
Also, bank credit remains very tight. Banks are not only restricting loans, the Federal Reserve is telling them not to increase dividends or buy back stock so they can continue to build up reserves. If this doesn’t make it difficult to get loans, the a new accounting rule that goes into effect in the first quarter of 2010 which requires banks to disclose their off balance sheet investment vehicles, will make it even more difficult. The only company we’ve heard from so far is Freddie Mac and they said they may be considered insolvent when they report. They are however; going to continue buying mortgage backed securities that are at least four months delinquent (no worry, they are tax payer owned.)
Are our woes behind us or ahead of us?
We don’t know. If the government continues to kick the can down the road on mortgages and allows the banks to continue to increase assets, it could keep the economy going in the short term. But if mortgage foreclosures become a major problem (number of, no credit, continued unemployment, etc.) we could get another step down. Watch the GDP numbers, watch the delinquency filings, and watch the first-quarter bank results.
Thursday, February 18, 2010
Do We Need Another Jobs Bill?
Most everyone agrees that the unemployment problem is bad (unemployment at 17%, black men at 25% and youth at 30%.) The problem is affordability. There is plenty of work to do; it is just too expensive to pay for the work to be done.
However, since the $800 billion stimulus package was passed, employment has deteriorated. Now, the President wants a new “Jobs Bill” using temporary tax credits of $13 billion to create jobs. The president wants this bill passed immediately, so I thought its time to take a look at the bill from all three points of view.
From the Keynesian (more government) point of view, they say the original stimulus bill was aimed at increasing GDP and from that growth, creating jobs. The problem was that the stimulus package was not big enough to fill drop off in consumer spending. Therefore, we need an even bigger stimulus bill this time. Unfortunately, that would be difficult to get through Congress at this time.
Paul Krugman, in an article in the NY Times, argues that government must help. It can’t just do nothing. He suggest that for a few hundred billion dollars, we could get things going by:
1. Transferring monies to state governments so they can continue to maintain and/or create new jobs,
2. Hiring people to work for the government directly like they did in the 1930’s with programs like the Workers Progress Administration (WPA),
3. Giving companies temporary tax credits (for example, pay employers share of payroll taxes up to $5,000 for each new hire.)
The Supply-Side (less government) economists have a different point of view. Brian Wesbury, Chief Economist at First Trust in Chicago, argues that the labor market is improving and will continue to improve in the year ahead. That unemployment is simply a lagging indicator. His argument is based on the following reasons:
1. Civilian employment, based on the household survey, shows that 785,000 jobs were created in December (second month of job creation.)
2. Hours worked increased over the past three months and increased hours are an early indicator of future employment.
3. Unemployment has fallen from a peak of 10.1% to 9.7%, and
4. Employment has expanded into more industries recently.
Therefore, I conclude from his argument that permanent tax reductions would help make companies more globally competitive, but more stimulus money at this time would only fuel inflation.
The third point of view, the Capitalist view, sees the unemployment problem differently, according to Henry Hazlitt, Austrian economist:
1. The goal should be maximizing production, not employment. With full production comes full employment. By separating production and employment, you make employment the goal. That’s what they did in the 1930’s with the WPA. Projects were selected by how unproductive they were or how much labor they required.
2. We need to help the unemployed get into other growing industries,
3. We need to eliminate as many barriers to employment as possible. Here are a few of Liewellyn Rockwell’s suggestions:
A. Get rid of the minimum wage,
B. Payroll taxes rob employers of resources,
C. Laws that threaten firms if they fire an employee,
D. Unemployment subsidies that pay people not to work.
Over the next few weeks as the debate begins in the House and Senate over the type of jobs bill we need and the amount of money (we need to borrow) to pay of the jobs bill, you may need to adjust your plans accordingly.
However, since the $800 billion stimulus package was passed, employment has deteriorated. Now, the President wants a new “Jobs Bill” using temporary tax credits of $13 billion to create jobs. The president wants this bill passed immediately, so I thought its time to take a look at the bill from all three points of view.
From the Keynesian (more government) point of view, they say the original stimulus bill was aimed at increasing GDP and from that growth, creating jobs. The problem was that the stimulus package was not big enough to fill drop off in consumer spending. Therefore, we need an even bigger stimulus bill this time. Unfortunately, that would be difficult to get through Congress at this time.
Paul Krugman, in an article in the NY Times, argues that government must help. It can’t just do nothing. He suggest that for a few hundred billion dollars, we could get things going by:
1. Transferring monies to state governments so they can continue to maintain and/or create new jobs,
2. Hiring people to work for the government directly like they did in the 1930’s with programs like the Workers Progress Administration (WPA),
3. Giving companies temporary tax credits (for example, pay employers share of payroll taxes up to $5,000 for each new hire.)
The Supply-Side (less government) economists have a different point of view. Brian Wesbury, Chief Economist at First Trust in Chicago, argues that the labor market is improving and will continue to improve in the year ahead. That unemployment is simply a lagging indicator. His argument is based on the following reasons:
1. Civilian employment, based on the household survey, shows that 785,000 jobs were created in December (second month of job creation.)
2. Hours worked increased over the past three months and increased hours are an early indicator of future employment.
3. Unemployment has fallen from a peak of 10.1% to 9.7%, and
4. Employment has expanded into more industries recently.
Therefore, I conclude from his argument that permanent tax reductions would help make companies more globally competitive, but more stimulus money at this time would only fuel inflation.
The third point of view, the Capitalist view, sees the unemployment problem differently, according to Henry Hazlitt, Austrian economist:
1. The goal should be maximizing production, not employment. With full production comes full employment. By separating production and employment, you make employment the goal. That’s what they did in the 1930’s with the WPA. Projects were selected by how unproductive they were or how much labor they required.
2. We need to help the unemployed get into other growing industries,
3. We need to eliminate as many barriers to employment as possible. Here are a few of Liewellyn Rockwell’s suggestions:
A. Get rid of the minimum wage,
B. Payroll taxes rob employers of resources,
C. Laws that threaten firms if they fire an employee,
D. Unemployment subsidies that pay people not to work.
Over the next few weeks as the debate begins in the House and Senate over the type of jobs bill we need and the amount of money (we need to borrow) to pay of the jobs bill, you may need to adjust your plans accordingly.
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