This page is written by a non-specialist mainly for his own consumption.
Like in Soviet Union were people were glued to BBC and Voice of America
but generally distrusted any and all information from official media, few
401K investors trust now CNBC, WSJ or other official media channels. Foreign
source like Financial Times, Telegraph, etc and domestic financial blogs
are better, although far from perfect. Still it's hard for a regular 401K
investor to understand what's happening because CNBC divas, corrupt academics/politicians/regulators
(aka financial industry shills) each day are shouting that they knew what
was going on.
The author is a computer specialist, not an economist so his views of
economic events are based on information provided by the Internet. The main
reporting criteria are event that might affect 401k investments and as such
be taken into account in investment decisions. You cannot do good reporting
of complex events without some framework and if you do not adopt one explicitly
you probably will use the worst available among actively marketed. Author
personal preferences are with
institutionalists.
This analytical
framework retains the fundamental assumption of scarcity and hence competition
from neo-classical economy as well as the related analytical tools of micro-economic
theory. It modifies is the rationality assumption and adds historicism,
the dimension of time. It also views institutions as the constraints that
structure human economic behavior. Such constraints can be formal (rules,
laws, constitutions), or informal (norms of behavior, conventions, codes
of conduct). Each also has its enforcement characteristics. Together they
define the incentive structure of societies and economies. See for example
Douglass C. North - Nobel Prize Lecture
IMHO they are the most realistic school of economic thought. In the same
venue neoclassic economists are too petty and detached form reality with
their models that demonstrate both misunderstanding of the economy and misunderstanding
of mathematics (why they cannot switch to Excel or some standard simulation
language, after all and still use liner equations of dubious relevance ?
) Voodoo economists (aka "market fundamentalists" and, especially, supply
side economists) are wrong.
Galbraith argued that industrial production was being devoted to satisfying
trivial consumer needs, in part to maintain employment, and that the United
States should shift resources to improve schools, the infrastructure, recreational
resources, and social services. The key idea here is to provide a better
quality of life instead of an ever greater quantity of imported goods and
wasting huge amount of resources. The term has lost its original ironic
meaning and is now used simply to indicate the USA-style prosperity with
individual autos, McDonalds, etc.
No attempt is made to stay current or post daily. The delay period for
quotes can be a week or more: with the exception of particular crisis moments
the economic situation is evolving extremely slowly anyway and daily postings
are often just a nuisance that complicates seeing the whole picture (information
overload in action :-)
This quote fully apples to 401K investors including myself. For 401K
investors attempts to benefit from the short-term moves of the market are
pretty typical (close to the top buying in case of bubble). But the same
danger exists in buying on dips without understanding the larger picture
as well as attempts to join "sucker rallies" in case of protracted downturn.
Such "impulsive" stock or bond acquisitions often end poorly (they are called
attempts "to catch falling knife" in professional jargon).
This page is written as a reminder of trends that might logically occur
in some (may be not too distant) future in a hope that understanding larger
trends can helps me to avoid attempts to catch a falling knife. I doubt
about my ability to get the return above inflation for the next three years
at least but I would like to avoid additional, unnecessary losses induced
by Bubblevision or market hype. It is also might present the economic situation
in terms more understandable to programmers and IT specialists. Actually
that's pretty sad that neoclassical economics operates with those primitive
(and obscure) linear models, models which bear no or little resemblance
to reality "in a short run" instead of using programs in some standard simulation
language. For example can't those economic professors just learn Excel and
present their hypothesis in Excel models terms ;-). It's actually pretty
funny how they try to use mathematics...
For those who have 401K plans and are concerned about them here is my
list of few things which probably take longer then many expect (this
100% derivative material, you are warned):
News collected below suggest that it makes sense for 401K investor to
be conservative and try to increase cash position those days. It's bad time
to hunt for bargains. Preservation of capital might be the highest possible
achievement in 2008 and 2009 for 401K investors who were put in
Procrustes bed of
randomly selected stock funds and few bond funds in their 401K accounts.
Especially for baby-boomers.
Speculative runs after a slump like we experienced in April, 2008 are
a dangerous thing to follow. Did Fed unlock the credit crunch at this stage?
The answer is no. Did banks solve securitization and over-leveraging problems
? The answer is: "The major banks are barely holding on to life...".
Regular banks should probably be priced for zero growth. Investment
banks are in real trouble due to off-balance accounts and can experience
negative growth as their business model has been broken. Bear Stearns is
kaput and Lehman Brothers is on the ropes...
Another "sucker rally" can follow this July, 2008 slump (it might be
late autumn "president rally" ), but please remember that cash is probably
the king now for 401K investors.
The Telegraph story that highlighted this development provided additional
detail:
Paul Kasriel, chief economist at Northern Trust, says lending by
US commercial banks contracted at an annual rate of 9.14pc in the
13 weeks to June 18, the most violent reversal since the data series
began in 1973. M2 money fell at a rate of 0.37pc...Leigh Skene
from Lombard Street Research said the lending conderve gave up being
interested in money supply in the early 1980s, when new banking
products made the data behave differently. But that hardly seemed
a reason to abandon a useful tool, at least not without trying to
understand how the new instruments affected monetary aggregates.
Instead, the Fed sets target interest rates in a not-terribly-scientific
fashion.
Note that while the Fed still published M1 (narrow money, currency
plus demand deposits) and M2 (M1 plus time deposits, savings accounts,
and non-institutional money market funds), it stopped reporting
M3 (M2 plus large time deposits, institutional money market accounts,
and short-term repos) in March 2006. However, some economists and
services provide estimates,
The Telegraph tells us today that those private calculations
of M3, like the publicly available monetary aggregates, show a sudden
contraction, a deflationary signal. From the
Telegraph:
Data compiled by Lombard Street
Research shows that the M3 ''broad money" aggregates fell by
almost $50bn (�26.8bn) in July, the biggest one-month fall since
modern records began in 1959."Monthly data
for July show that the broad money growth has almost collapsed,"
said Gabriel Stein, the group's leading monetary economist.
On a three-month basis, the M3 growth rate has fallen from
almost 19pc earlier this year to just 2.1pc (annualised) for
the period from May to July. This is below the rate of inflation,
implying a shrinkage in real terms.
The
growth in bank loans has turned negative to a halt since March.
"It's obviously worrying. People either can't borrow, or
don't want to borrow even if they can," said Mr Stein.
Monetarists say it is the sharpness
of the drop that is most disturbing, rather than the absolute
level. Moves of this speed are extremely rare....
Monetarists insist that shifts
in M3 are a lead indicator of asset prices moves, typically
six months or so ahead. If so, the latest collapse
points to a grim autumn for Wall Street and for the American
property market. As a rule of thumb, the data gives a one-year
advance signal on economic growth, and a two-year signal on
future inflation.
"There are always short-term blips but over the long run
M3 has repeatedly shown itself good leading indicator," said
Mr Stein...
M3 surged after the onset of the credit crunch, but this
was chiefly a distortion caused by the near total paralysis
in parts of the American commercial paper market. Borrowers
were forced to take out bank loans instead. The commercial paper
market has yet to recover
In his speech accepting the Democratic nomination in 1992, a
year in which economic conditions somewhat resembled those today,
Bill Clinton denounced his opponent as someone "caught in the grip
of a failed economic theory." Where Mr. Obama spoke cryptically
in St. Petersburg about a "reckless few" who "game the system, as
we've seen in this housing crisis" - I know what he meant, I think,
but how many voters got it? - Mr. Clinton declared that "those who
play by the rules and keep the faith have gotten the shaft, and
those who cut corners and cut deals have been rewarded." That's
the kind of hard-hitting populism that's been absent from the Obama
campaign...
Of course, Mr. Obama hasn't given his own acceptance speech yet.
Al Gore found a new populist fervor in August 2000, and surged in
the polls. A comparable surge by Mr. Obama would give him a landslide
victory...
Bruce Wilder says...
Krugman on politics is tiresome, indeed.
If he has some evidence for his thesis
that the American People long for a populist vision, he should bring
it forward; otherwise, he should shut up. He doesn't
know what would cause Obama to surge ahead in the polls, and should
not be mind-reading the whole electorate, while pretending that
he does.
Obama has managed to draw a clear contrast on income taxes, and
is fighting to keep it from being completely obscured by our incompetent
Media. Larry Bartels is pretty clear that Obama's tax plan, as simple
as it might seem to this blog's readers, is just the kind of thing
American voters get confused about, and the Media proves incapable
of reporting on accurately. Populism is not as easy a campaign theme
as Krugman imagines.
On a number of other populist themes -- the mortgage crisis,
gas taxes, off-shore drilling -- Obama
would run some serious risks of committing himself to bad policy,
if he tries to out-demagogue McCain on these issues.
Does Krugman have any ideas about how to stop "Drill Here, Drill
Now"? I didn't think so.
Obama is ahead in the polls, which indicate -- surprise! -- that
about a third of the electorate has not paid any attention, yet.
A majority of voters in 2004 elected George W. Bush; those people
and their bad judgment haven't gone away, and their numbers, though
diminished, put a floor under McCain's support, and a ceiling on
Obama's.
Clinton's economic populism may have been a lovely thing, but
not nearly as lovely in terms of his electoral chances, as Ross
Perot. Clinton never achieved an actual majority, but he didn't
need to. Obama will have to have an actual majority to beat McCain,
but he's well on track to achieve that.
NLS says...
Bruce Wilder is on point once again. Most folks still haven't
begun to pay attention and haven't even entered the stadium. (For
example, note the traction Jackass Corsi's slash and bash book grabs.)
PK is no doubt a brilliant economist, but doesn't he understand
that injecting doubt and offering hesitation only steepens the hill?
The object of the game is to beat McCain.
Cyrille says...
Bruce Wilder on Obamania is tiresome. Anyone who speaks his mind
for anything but singing the praise of Obama is immediately rebuked.
Krugman asks to state demonstrable facts, Bruce Wilder calls
that asking to out-demagogue McCain. Uh?
Obama's lead in the polls is considerably smaller than his party's,
so surely he must be doing everything perfectly. Still, Krugman
notes that Obama has not had his acceptance speech yet, and that
it could create a surge, but that won't make him less tiresome since
he's a miscreant, he does not blindly worship.
Republican economics should these days be called names that will
get you censored if children might be watching (they should have
for the past 30 years, but now the conclusions are so obvious and
immediate as to be plain to all, even those who reckon that "in
3 years time" is too far to ever happen). Failure to do so is yet
another worrying sign that Democrats have turned into Republican
light.
They have stolen, looted, lied and ruined a country the size
of a continent for the sole benefit of them and their cronies. It's
not demagogue to hold them accountable. And it's crazy to not attack
them on that when the horrible consequences of their acts are the
main thing on everyone's mind (OK, Iraq should be as well, but now
all the media reports are sterilised and very few people in the
US will get first hand experience).
Bruce Wilder says...
str: "Did a dysfunctional primary system give us two mediocre
candidates?"
The primary systems of the two parties are quite different, and
they produced contrasting candidates. Obama is a an excellent, historic
candidate, leading an extraordinarily capable campaign organization,
and an enthusiastic, motivated Party.
McCain is a pretty typical Republican Presidential candidate:
bereft of principles, callow, stupid, a serial liar, he's really
old and he heads a campaign organization staffed from top-to-bottom
with corrupt lobbyists. But, it wasn't a dysfunctional primary process
that produced McCain, anymore than it was a dysfunctional primary
process that produced Richard Nixon, Spiro Agnew, Ronald Reagan,
Dan Quayle, George W. Bush or Richard Bruce Cheney. The Republican
Party is designed to produce liars and fools and crooks, in service
to the plutocracy.
"Crushed by ballooning debts, the regeneration by the banks' own
efforts is becoming impossible ... I bet stocks will decline further
and U.S. bonds will be downgraded." said
Tetsuhisa Hayashi, chief manager of foreign-exchange trading at
Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo
Bloomberg.com
``Crushed by ballooning debts, the regeneration by the banks'
own efforts is becoming impossible,'' said
Tetsuhisa Hayashi, chief manager of foreign-exchange trading
at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo, a unit of Japan's
largest lender by market value. ``I bet stocks will decline further
and U.S. bonds will be downgraded. Risk aversion among investors
will cause further yen-buying.''
The Japanese currency may rise to 100 per dollar by year- end,
Hayashi said.
For banks it's looking increasingly difficult to refinance their
debt. Outside Fed oxygen lines are cut and for those of life support
this is it.
Lehman is now expected to report a quarterly loss that analysts
peg as high as $2.6 billion. Recall that last quarter's $2.8 billion
loss was a stunner, nearly ten times the expected level, and a dramatic
departure from the convention of preparing investors for earnings
shortfalls.
Comments
- Looking increasingly difficult to get
oxygen. LEH reportedly having problems shopping its CMBS portfolio.
You think? As the cost of debt rises
(Amex 400 bps off treasury on Friday) the choke hold gets tighter.
Bloomberg goes on to wonder what institutions are worth saving?
Earnings season should be interesting.
Clearly the companies are trying to get out in
front with estimate cuts coming earlier by an inch. The upside
surprise will be credit deterioration which will be accretive
to earnings and help offset some of the charges (what a world!).
The cruches are failing, wheelbarrows
next.
Discredited "free marketers" which got the country in the current
mess try to counterattack using Wall street's "fifth column" of
PPP journalists.
Amity Shlaes, who is a nice example of the genre published apologetic
Five Ways to Wreck a Recovery - washingtonpost.com which twists
major facts about Great Depression. She does not have formal economic
education (bachelor degree in English literature from Yale)
Moon of Alabama used this chart to chat about Schlaes.
GDP numbers according to the Bureau of Economic Analysis (bigger
graph)
A.
Smoot Hawley Tarrif Act In March 1932 the United States Senate
Committee on Banking, Housing, and Urban Affairs established hearings
to investigate the causes of the Wall Street Crash of 1929.B.
Democrats took over Congress in November 1932 and in early 1933
appointed
Ferdinand Pecora as commission counselor. Pecora found many
malpractices on Wall Street and his investigation led to the creation
of the Securities and Exchange Commission. We can put these events
at point B of the GDP chart
C. Hoover's tax decrease in 1929/30 was followed by four years
of decreasing GDP. His "misstep" tax increase was enacted in 1932
and took effect only in 1933, point C in our graph. From there on
GDP went up.
D.
New Deal beginnings.
Shlaes, according to her Wikipedia entry "has no formal economic
training." That certainly shows. She also seems to have zero training
in history as she is unable to organize the sequence of events in
a coherent way. Events and policies that obviously led to increases
in GDP are attributed as having deepened the depression.
(reformatted by rdan for a quick take....the original is more
detailed and much longer. I personally would not use wikipedia as
an academic source, but liberties are taken and the articles linked
looked reasonably accurate))
Battered US financial groups
will have to refinance billions of dollars in maturing debt
over coming months, a move likely to push banks' funding costs higher
and curb their profitability, say bankers and analysts. The banks'
push to raise capital to offset mounting credit-related losses is
forcing them to pay higher interest rates to entice investors, which
is likely to put pressure on earnings and could lead to higher lending
rates. Last week, groups including Citigroup, JPMorgan and AIG borrowed
almost $20bn in new long-term debt, paying some of the highest rates
ever in order to lock in funding. The wave of refinancing is set
to continue for several months as billions of dollars in bank debt
come due.
This entry was posted by Gwen Robinson
on Monday, August 18th, 2008 at 5:28 and is filed under
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Middle-class and lower definitely lost a lot of buying power during
the last two years. And with 3% CD and 5% inflation they are losing
their savings in all accounts: taxable, Roth and 401K.
The Bureau
of Labor Statistics reported yesterday that its primary consumer
price index CPI-U rose 5.6% over the last year. That's the highest
inflation rate in 17 years, the newspapers all
call to our attention. Just how concerned should we be about
these numbers?
Comments
Posted by:
sonia at August
15, 2008 06:35 PM
How shall we define stagflation?
I suggest whenever unemployment is above 5% and when inflation
is above 5% at the same time.
That's June and July 2008. Houston we have stagflation.
Posted by:
One Salient Oversight at August 15, 2008 08:34 PM
Those expecting diminishing inflation,
please contemplate CD rates of 3% (on which the holder must pay
income tax) when the reported CPI is 5.6%. What person
would lend his savings in such a money-losing proposition? Is this
the result of a free market or of a central bank lending out money
that has never been saved but created out of thin air? MZM & M2
are growing a lot faster than GDP & have been for some time.The
central banks of China, Russia, India, Saudi Arabia, et al are behaving
similarly. The global credit bubble,
Bernanke's savings glut, will collapse in due course. But it seems
to me we aren't there yet & therefore are beset by inflation.
Posted by: Anonymous at August 17, 2008 11:57
AM
Posted by: OER at August 15, 2008 10:49 PM
sjp wrote:Inflation is about the price level moving up.
I am bringing this up because the true mechanics of inflation
must be a combination of (among other things) the extension of money/credit
that algernon refers to and the raising of prices that I posited.
One can't just point the finger at money supply expansion as the
root of inflation. It is clearly an important part, but not the
complete picture.
sjp,
I will pass on your incorrect definition of inflation as price
increases to stay on topic.
Can you give me the mechanism where prices can increase with
a constant money supply without reducing consumption? If you have
an economy of $5 and 5 things how can the price of the each thing
move to $1.10 and consumers still consume 5 things with a $5 money
supply?
Posted by: DickF at August 16, 2008 02:28 PM
DickF - they'd put it on their visas!
When economists talk about wage demands being muted, they don't
seem to understand how much American households have gotten into
the habit of taking their future wages out as borrowed money. If
I have the ability to pay 1.10 with a credit card, I can overlook
that shortfall in my real income. By using behavioral patterns which
were true in the 70s but are not true today to connect commodity
prices to wages, economists are overlooking a central feature of
the economy they have wrought. In fact, dissolving limits on credit
has been the only way that the "grand moderation" could be swallowed
by the American public at large. If they had to live within their
real incomes, the increases in the compensation of the wealthiest
group - the CEOS, the hedge funders - would simply be politically
impossible. As credit is squeezed and Americans have to live within
their real incomes, look for inequality to become a much hotter
issue. It is the credit squeeze more than inflation that is going
to jumpstart pressure to raise wages.
DickF: my definition of inflation is a rise in the price
level. The only point I'm making is to dispute algernon's point;
I took algernon's point to be that inflation comes solely from
money supply expansion. I say that's not true.I believe that
the problem subsequently raised with my thought experiment (0
growth, 0 money supply growth, price increases) is that it is
non-equilibrium. What Anonymous suggested makes sense. On the
other hand, the economy might realize that the price increases
weren't warranted and drop the price back down -- this might
be the outcome DickF sees for his scenario. I thought a non-equilibrium
thought experiment might be worth considering, though, since
the jumping off point for this post is that the oil price increases
we saw in the summer have been followed by price decreases:
we are talking about fluctuations about the equilibrium.
I am most interested in Justin's point, that these oil price
fluctuations might inordinately affect consumers' inflation
expectations. It makes me wonder if certain high-profile products
are weighted highly in consumers' belief formation mechanisms.
Have oil price shocks been associated with shocks to consumers'
inflation expectations, and is this association stronger than
the association with other commodities?
Posted by: sjp at August 17, 2008 02:21 PM
DickF asks "Can you give me the mechanism where prices can increase
with a constant money supply without reducing consumption?"Simple,
the rate of circulation of money can increase or decrease. Thus
even if the supply of money remains the same prices can change.
And of course, there are many types of virtual money that can step
into the gap, taking the place of money, debit accounts, credit
accounts, loans of all descriptions etc.
Posted by:
bill j at August
18, 2008 03:54 AM
Roger,Your comment about Visas did make me laugh, but understand
that credit works within an economy unless the government facilitates
credit expansion with an increase in the money supply so credit
in itself does not create inflation.
sjp,
Inflation is a decline in the value of money. It may lead to
a rise in the price level, but a rise in the price level is not
inflation. This is a huge misconception in economic circles that
leads to serious misunderstandings.
If you introduce other elements into your thought experiment
such as consumption preferences then yes you can create a scenario
where such price increase might be accomodated, but the thought
process must be deeper than a fixed money supply with rising prices.
That simply is not possible without external input meaning consumption
preferences, saving preferences, etc.
This is important to understand because without the complicity
of the monetary authorities an economy cannot experience inflation.
Understand that a change in consumption preferences is not inflationary.
bill j,
A change in circulation of money does not exist in a vacuum.
There must be other changes such as consumption preferences for
this to happen. Dig deeper.
So now we have magazine covers fretting over oil, pundits everywhere
calling for $200 oil, and BusinessWeek articles "Bracing For Inflation"
in spite of a slowing world economy. These are all contrarian indicators.
And as goes oil, so goes the CPI. So unless there is a breakout
of War in the Mideast, the oil bust may be deeper and longer lasting
than anyone thinks.
While even moral hazard hawks generally agree that some sort
of government intervention would be needed in the event of financial
trouble at Fannie and Freddie, the most compelling reason was that
the US, chronically dependent on foreign funding, would be ill advised
to treat its money sources badly.
Of the GSEs' $5.2 trillion in debt (their own corporate bonds
plus MBS),
$1.3 trillion is in the hands of foreign investors and central banks.
The speed with which the powers that be cobbled together a support
program was seen in some circles as an admission of the importance
of reassuring our friendly overseas credit suppliers.
If that was the motivation, it isn't working. As we and others
noted, spreads on
GSE debt have risen to 215 basis points over Treasuries, only
a tad shy of the pre-Bear crisis level of 238 basis points. And
remember, they have reached this stratospheric levels despite the
Paulson rescue package, despite an alphabet soup of new Fed facilities
that accept GSE paper as collateral (as the discount window did)
now in place (although there were raspberries all around for the
bailout bill, due to its failure to make any changes in the operation,
management, or policies of the GSEs and its lack of specificity
as to triggers and what mechanism would be used).
And the reason? A big factor is that
foreign central banks are exiting GSE debt and have pulled back
significantly from purchases of new paper. This vote
of no confidence appears likely to force the Administration's hand
and lead it to take more concrete measures to prop up Freddie's
and Fannie's balance sheets. They are not about to risk a spike
in mortgage rates and further trouble in the housing markets with
elections approaching.
From
Reuters:
An extraordinary Treasury capital infusion may be needed to
restore faltering foreign demand for debt issued by Fannie Mae
and Freddie Mac, the two top home funding sources that the government
is willing to rescue to save the housing market.The companies
rely heavily on overseas investment, often up to two-thirds
of each new multibillion-dollar note offering, to help pare
funding costs and keep mortgage rates low.
But foreign central banks have dumped nearly $11 billion
from their record holdings of this debt in four weeks, to $975
billion, and won't return in force before it's clear if -- and
how -- the government will back Fannie and Freddie, some analysts
say....
The bonds these companies issue in the $4.5 trillion agency
MBS market are near or worse than the weakest levels, set in
March before the government engineered the sale of failing Bear
Stearns to JPMorgan.
... ... ...
Overseas investors took an atypical back seat in Fannie Mae's
three-year note sale this week.
Central banks bought just 37 percent of the $3.5 billion
issue, down from 56 percent in May's $4 billion offering of
the same maturity. Asia accounts took just 22 percent of the
notes, down from 42 percent in May....
Comments
Looks like a weak article which generated interesting comments.
The key question is whether peak oil will negatively influence international
trade. It is clear that distance now matters more.
Will the rising price of oil reduce international trade as some
have suggested? According to this research, which uses a gravity
model of international trade to answer the question, thpntries trade
more on international markets today than ever before � both in absolute
terms and as a proportion of their national output. How can we explain
this phenomenal increase in international trade over the past few
decades? Will the recent
rise in oil prices
reverse this trend of globalisation?
History provides us with a natural comparison. Beginning in the
nineteenth century, the world saw a remarkable rise in international
trade that came to a grinding halt during World War I and later
on in the wake of the Great Depression. This "first
wave of globalisation" from about 1870 until 1913 led to a degree
of international integration � measured by trade-to-output ratios
� that many countries only achieved again in the mid-1990s.
Taking a comparative perspective, we juxtapose the first wave
of globalisation from 1870 to 1913 and the second wave after World
War II. We also study the retreat of world trade during the interwar
period from 1921 to 1939. We are interested in the driving forces
behind these trade booms and trade busts. Was it changes in global
output or changes in trade costs that explain the evolution of international
trade?
Comments
- Trance says...
- "for example, consumers have managed oil prices at almost five
times the going price before the 70s inflation."
but this is done
at the cost of diminishing discretionary income (which is worse
in Europe than US). This discretionary income would otherwise go
elsewhere in the economy. This money now goes into only one pocket,
the oil industry.
- Bruce Wilder says...
- "they find that there is little systematic evidence to suggest
that the maritime transport revolution was a primary driver of the
late nineteenth century global trade boom. Rather, the most powerful
force driving the boom was the secular rise in incomes across countries."
"the key innovations in the shipping industry were induced technological
responses to the heightened trading potential of the world."
I think one would have to have a much better model of international
trade, to sort this out reliably. Talking rather generically and
bloodlessly about "the secular rise in incomes" seems almost a distraction.
What drives trade, international and local, are the productivity
gains from specialization. These gains from specialization can rest
on a variety of quite different bases. By focusing on "international"
trade in particular, we are focusing on goods, where the productivity
gains from specialization are extreme. In common parlance, there
might be a monopoly of technical knowledge, extreme economies of
scale or external economies, or a gift of nature, which can be exploited
in only rare places. Not very many people will find it worthwhile
to go more than a few blocks to get a haircut, even though most
people will go to a professional barber or hairstylist. On the other
hand, prospecting for oil in one's backyard, or refining it one's
self, is rarely worthwhile. Nor do people go to a local craftsman
for a television or cellphone.
The period, 1870-1913, marks the
Second Industrial Revolution, a misnamed third or fourth phase
of industrial revolution that began in Britain in the 18th century.
Steamships were rather famously a central part of this phase --
their ability to keep to a schedule as important as their speed
and capacity, and the ability to adapt them to more efficient means
of carrying specialized cargoes (oil tankers, refrigerated ships,
etc)
In addition, the industrial revolution was widening its geographical
scope in three important respects. First, the industrial revolution
was spreading out, to the Low Countries, Switzerland, France, the
U.S. and Germany. After 1820, the industrial revolution was no longer
occurring in one country only, and it was accelerating. Moreover,
after 1870, the industrial revolution was involving more and more
industries, moving from textiles and steam engines and railroads,
to steel, oil, chemicals, electricity, with leadership often passing
to countries other than Britain.
And, thirdly, as the industrial revolution drove economic growth,
it drove demand for the fruits of the earth, sucking up everything
from guano and bananas to copper and petroleum from distant places.
The ability to wrest enormous factor productivity gains from
specced by the extent of the market, then we shouldn't be surprised
to see the rise of national consumer markets in response to transportation
and communication innovations: this is the period in which J. Walter
Thompson invented magazine advertising (1877), and brandnames emerge,
Nabisco (1901) and Coca-Cola (1886) and Lucky Strike (1871, 1907),
Colgate toothpaste (1872) and Palmolive soap (1898).
Somehow, for me, "the secular rise in incomes" doesn't quite
cover it.
If one is not going to be serious about analyzing what drives
trade, I don't see how empty statements projecting that trends can
continue really mean anything.
The right thing is to think seriously about distinguishing between
the factors driving trade in commodities and fruits of the earth,
and what drives trade in manufactured goods, and, finally, what
drives trade in services. Underlying all of this is what drives
specialization.
Peak oil implies no further gross increases in trade in raw petroleum.
Similar considerations apply to many raw mineral products, like
copper and zinc, and other commodities. Industrial development and
rising population in the Persian Gulf will also result in more trade
in petroleum products, as the expense of raw petroleum.
Peak oil also implies rising relative cost of jet fuel -- air
travel is going to get more expensive, and with vacation travel
to exotic places. (Recreational and business travel is a significant
part of international trade.)
The kind of intense specialization, which yields enormous factor
productivity enhancement, typically involves a coordination and
control, which entails communication. Communication advances were
important complements to the increasing speed and falling cost of
transporation in 1870-1913, as well as now.
A useful analytical exercise might focus on whether falling communication
costs, increasing capability imply more or less physical trade in
goods. McDonald's, Toyota, IKEA, Lenovo -- are the limits to economies
of scale of physical product in one place such that, say, all the
corkscrews in the world should be made in one place?
Or, does falling costs of communication and control imply more
widely distributed physical production of manufactured goods and
less physical transport?
If we could leverage computers to design a washing machine plant,
to flexibly build several different models or designs of washing
machines, would we care to import washing machines from Sweden or
Italy or China, and would they want to import washing machines from
Benton Harbor, Michigan?
How does the financial interact with trade? If a country fails
to invest in the production capacity to make and export goods and
services in sectors where the gains in total factor productivity
are greatest, how does that affect the terms of trade? Median incomes?
If not "protectionism", what is an organizing principle for a national
strategy? (Is there nothing more convincing that pieties about education,
and taxcuts for plutocrats?)
- robertdfeinman says...
- Perhaps the analysis is backwards. The rise of highly efficient
production produced an excess of manufactured goods (or at least
the capacity to make them). This then led firms to seek markets
elsewhere. Because of the efficiency trade costs were not enough
to deter this trend.
As trade increased the efficiency of trade also improved and
its costs dropped as well. The depression caused a loss of markets
and trade dropped. The "protectionism" was a political attempt to
fix something which was misguided effort, just like offshore drilling
is the wrong fix now. The lack of markets caused a drop off in innovation
so trade costs stopped dropping, then the wars intervened and destroyed
productive capacity and markets.
In the latest round, the cycle has repeated, this time there
has been a new set of innovations in IT and supply chain management
and a corresponding rise in efficiency with containerization and
high speed ships. Both these improvements have now stalled so other
factors have started to become more important.
The response to this has been yet another set of political nostrums
designed for their ear appeal to the public, rather than for their
efficacy.
Just a conjecture...
- roger says...
- Huh, is this economics of numerology:
"To answer that question
we set up a gravity model of international trade. This model borrows
Isaac Newton's insight that the gravitational force between two
planets in space is inversely related to their physical distance.
Instead of planets, we consider countries whose "gravitational force"
is the amount of their bilateral exports and imports. Instead of
physical distance, bilateral trade is impeded by trade costs such
as transportation costs, tariffs and language barriers."
Wow, and this is considered serious economics! Why not borrow
their model from, say, Revelations, where the antichrist - protectionists
- put a bar code on their followers heads, with the bar code being
legislation designed to discourage trade. It would make the same
amount of sense.
This doesn't even achieve a low level of chicanery.
- dissent says...
- "overall, history gives us little reason to expect a sharp and
fundamental reaction of international trade in response to changes
in transportation costs."
The problem
with this argument is that all prior history took place prior to
peak oil. Transportation costs will be impacted by peak oil in a
historically anomalous fashion.
Krugnam understanding of politics is definitely limited, but the
observation that there will be more intense struggle for limited natural
resources might be true...
Is the "second great age of globalization" about to end?:
The Great Illusion, by Paul Krugman, Commentary, NY Times:
...as I was reading the latest bad news, I found myself
wondering whether this war is an omen - a sign that the second
great age of globalization may share the fate of the first
... ... ...
But then came three decades of war, revolution, political
instability, depression and more war. By the end of World War
II, the world was fragmented economically as well as politically.
And it took a couple of generations to put it back together.
So, can things fall apart again? Yes, they can.
Consider ... the current food crisis. For years we were told
that self-sufficiency was ... outmoded..., that it was safe
to rely on world markets for food supplies. But when the prices
of wheat, rice and corn soared, Keynes's "projects and politics"
of "restrictions and exclusion" made a comeback: many governments
rushed to protect domestic consumers by banning or limiting
exports, leaving food-importing countries in dire straits.
... ... ...
Angell was right to describe the belief that conquest pays
as a great illusion. But the belief that economic rationality
always prevents war is an equally great illusion. And today's
high degree of global economic interdependence, which can be
sustained only if all major governments act sensibly, is more
fragile than we imagine.
Lee A. Arnold says...
The illusion? Keynes' Londoner had no inkling that the reason
he could telephone products from around the world was because
of the British Empire's militarism and imperialism? This seems
a bit disingenuous on JMK's part. Or maybe sarcastic? Then the
very next thing: Your history quiz: Where were the first British
troops sent when Archduke Ferdinand was shot? Answer: To Basra
-- because the German and British navies had both just converted
from coal to oil, and Germany was going to extend the Orient
Express past Constantinople to take all the petroleum in the
area out by rail. When Ferdinand was shot, everything went up
into the air... Starting the ninety-year (so far) resource war.
Now the U.S. is run by climate-denying gasoholics and the American
public apparently hasn't guessed the possibility that their
leaders have handed Iraq to Iran's best friends and the Shi'ites
are merely standing-down and smiling until the Americans leave.
So it looks like Bush and Cheney must change the regime in Iran,
in order to exit Iraq. No wonder David Kilcullen, Petraeus'
counterinsurgency consultant, called the invasion "fucking stupid."
(Later changed to an "extremely serious strategic error.") With
which the entire foreign policy community (except for the numbnuts
neocons) and all the military analysts heartily agree. The U.S.
could be tied-down there for generations. But but but Victory
looms large, baby! So the Russians take a piece, while the right-wing
howls it's totally unjustified. Well of course it is, you dumbasses.
And the Russians might have done it anyway. But you throw things
up in the air, all sorts of people start grabbing.
Alex Tolley says...
But the belief that economic rationality always prevents war
is an equally great illusion. And today's high degree of global
economic interdependence, which can be sustained only if all major
governments act sensibly, is more fragile than we imagine.
Anyone with the slightest sense of history does not have these
illusions. All the knowledge gained in the last 100 years that could
be used to understand how best to manage human affairs is overridden
by base human nature. In our (US) own milieu, we have at least half
the population that is effectively anti-science and prefers to make
emotional decisions and votes for political candidates that do the
same thing. The US congress routinely votes on emotional or ideological
lines only. I see no evidence that the rest of the world is any
less irrational.
A very important book now available for free..
Yet gold crashes. It has failed to deliver on its core promises
as a safe-haven and inflation hedge, at least for now. Why?
Four possible answers:
1) Nobody seriously believes that Russia will over-play its
hand. The world could not care less about Georgia anyway. Ergo,
this is a bogus geopolitical crisis.
2) The inflation story is vastly exaggerated in the OECD
core of countries that still make up 60pc of the global economy.
The price of gold is already looking beyond the oil and food
spike of early to mid 2008 (a lagging indicator of loose money
two to three years ago) to the much more serious matter of debt-deflation
that lies ahead.
3) The seven-year slide of the dollar is over as investors
at last wake up to the reality that the global economy is falling
off a cliff. Indeed, the US is the only G7 country that is not
yet in or on the cusp recession. (It soon will be, but by then
others will be prostrate). As an anti-dollar play, gold is finished
for this cycle.
4) The entire commodity boom has hit the buffers. Looming
world recession (growth below 3pc on the IMF definition) trumps
the supercycle for the time being.
Gold has fallen from $1030 an ounce in February to $807 today
in London trading. It has collapsed through key layers of technical
support, triggering automatic stop-loss sales.
The Goldman Sachs short-position that
I have been observing with some curiosity has paid off.
For gold bugs, the unthinkable has now happened. The metal has
fallen through its 50-week moving average, the key support line
that has held solid through the seven-year bull market. This week
is not over yet, of course. If gold recovers enough in coming days,
it could still close above the line.
Courtesy of my old colleague Peter Brimelow - whose columns on
gold are a must-read - note that
Australia's Privateer point and figure chart has also broken
its upward line for the first time since 2002. This is serious technical
damage.
So have we reached the moment when gold bugs must start questioning
their deepest assumptions. Have they
bought too deeply into the "dollar-collapse/M3 monetary bubble"
tale, ignoring all the other moving parts in the complex global
system? Nobody wants to be left holding the bag all
the way down to the bottom of the slide, long after the hedge funds
have sold out.
Well, my own view is that gold bugs
should start looking very closely at something else: the implosion
of Europe. (Japan is in recession too)
Germany's economy shrank by 1pc in Q2. Italy shrank by 0.3pc.
Spain is sliding into a crisis that looks all too like the early
stages of Argentina's debacle in 2001. The head of the Spanish banking
federation today pleaded with the European Central Bank for rescue
measures to end the credit crisis.
The slow-burn damage of the over-valued euro is becoming apparent
in every corner of the eurozone. The
ECB misjudged the severity of the downturn, as executive board member
Lorenzo Bini-Smaghi admitted today in the Italian press.
By raising interest rates into the teeth of the storm
last month, Frankfurt has made it that much more likely that parts
of Europe's credit system will seize up as defaults snowball next
year.
As readers know, I do not believe the eurozone is a fully workable
currency union over the long run. There was a momentary "convergence"
when the currencies were fixed in perpetuity, mostly in 1995. They
have diverged ever since. The rift between North and South was not
enough to fracture the system in the first post-EMU downturn, the
dotcom bust. We have moved a long way since then. The Club Med bloc
is now massively dependent on capital inflows from North Europe
to plug their current account gaps: Spain (10pc), Portugal (10pc),
Greece (14pc). UBS warned that these flows are no longer forthcoming.
The central banks of Asia, the Mid-East,
and Russia have been parking a chunk of their $6 trillion reserves
in European bonds on the assumption that the euro can serve as a
twin pillar of the global monetary system alongside the dollar.
But the euro is nothing like the dollar. It has no European government,
tax, or social security system to back it up. Each member country
is sovereign, each fiercely proud, answering to its own ancient
rythms.
It lacks the mechanism of "fiscal transfers" to switch money
to depressed regions. The Babel of languages keeps workers pinned
down in their own country. The escape valve of labour mobility is
half-blocked. We are about to find out whether EMU really has the
levels of political solidarity of a nation, the kind that holds
America's currency union together through storms.
My guess is that political protest will mark the next phase of
this drama. Almost half a million people have lost their jobs in
Spain alone over the last year. At some point, the feeling of national
impotence in the face of monetary rule from Frankfurt will erupt
into popular fury. The ECB will swallow its pride and opt for a
weak euro policy, or face its own destruction.
What we are about to see is a race to the bottom by the world's
major currencies as each tries to devalue against others in a beggar-thy-neighbour
policy to shore up exports, or indeed simply because they have to
cut rates frantically to stave off the consequences of debt-deleveraging
and the risk of an outright Slump.
When that happens - if it is not already happening - it will
become clear that the both pillars of the global monetary system
are unstable, infested with the dry rot of excess debt.
The Fed has already invoked Article 13 (3) - the "unusual and
exigent circumstances" clause last used in the Great Depression
- to rescue Bear Stearns. The US Treasury has since had to shore
up Fannie and Freddie, the world's two biggest financial institutions.
Europe's turn will come next. We will discover that Europe cannot
conduct such rescues. There is no lender of last resort in the system.
The ECB is prohibited by the Maastricht Treaty from carrying out
direct bail-outs. There is no EU treasury. So the answer will be
drift and paralysis.
When EU Single Market Commissioner Charlie McCreevy was asked
at a dinner what Brussels would have done if the eurozone faced
a crisis like Bear Stearns, he rolled his eyes and thanked the Heavens
that so such crisis had yet happened.
It will.
Gold bugs, you ain't seen nothing yet. Gold at $800 looks like
a bargain in the new world currency disorder.
[Aug 14, 2008] Making Markets Work for Everyone
This is an important post that shows how free market retoric was
abused to enrich few at the expence of many...
Greg Anrig via Brad DeLong:
Greg Anrig on the GOP, by Brad DeLong: He smells a wind
from out of the west:
McCain's Problem Isn't His Tactics. It's GOP Ideas.:
At long last, the conservative juggernaut is cracking up.
From the Reagan era until late 2005 or so, conservatives
crushed progressives like me in debates as reliably as the
Harlem Globetrotters owned the Washington Generals. The
right would eloquently praise the virtues of free markets
and the magic of the invisible hand. We would respond by
stammering about the importance of regulation and a mixed
economy, knowing even as the words came out that our audience
was becoming bored.
Conservatives would get knowing laughs by mocking bureaucrats.
We would drone on about how everyone can benefit from the
experience and expertise of able civil servants. ... They
offered tax cuts. We talked amorphously about taxes as the
price of a civilized society. ...
But now, seemingly all of
a sudden, conservatives are the ones who are tongue-tied,
as demonstrated by Sen. John McCain's limping, message-free
presidential campaign. McCain's ongoing difficulties in
exciting voters aren't just a tactical problem; his woes
stem largely from his long-standing adherence to a set of
ideas that simply haven't worked in practice.
The belief system and finely crafted policy pitches that
enabled the right to dominate the war of ideas for the past
30 years have produced a relentless succession of governing
failures, from Iraq to Katrina to the economy to the environment.
Largely as a consequence, the public's attitude toward
government -- Ronald Reagan's b�te noire -- has shifted.
A recent Wall Street Journal/NBC News poll found that, by
a 53-to-42 percent margin, Americans want government to
"do more to solve problems"; a dozen years ago, respondents
opposed government action by 2 to 1. Meanwhile, Republican
constituency groups' long-standing determination to put
aside their often significant differences and band together
to support GOP candidates is fracturing: The libertarian
darling Ron Paul and the evangelical Christian leader James
C. Dobson are among the Republican bigwigs who haven't so
far endorsed McCain. ...
As I listen to leading voices and thinkers on the right
pondering the condition of their ideology, it is increasingly
clear to me that they face a fundamental dilemma -- one
that cannot be resolved anytime soon and that might well
leave the conservative movement out to pasture for as long
as we progressives have been powerlessly chewing grass.
That choice is whether to stick with rhetoric and policies
wedded to free markets, limited government and bellicose
unilateralism, or to endorse a more robust role for the
public sector at home while relying more on diplomacy and
international institutions abroad.
Either way, conservative Republicans seem destined
to have a much harder time winning elections for the foreseeable
future. Just ask McCain how much fun he's having.
The single theme that most animated the modern conservative
movement was the conviction that government was the problem
and market forces the solution. It was a simple, elegant,
politically attractive idea, and the right applied it to
virtually every major domestic challenge -- retirement security,
health care, education, jobs, the environment and so on.
Whatever the issue, conservatives proposed substituting
market forces for government -- pushing the bureaucrats
aside and letting private-sector competition work to everyone's
benefit.
So they advocated creating health savings accounts, handing
out school vouchers, privatizing Social Security, shifting
government functions to private contractors, and curtailing
regulations on public health, safety, the environment and
more. And, of course, they pushed to cut taxes to further
weaken the public sector by "starving the beast." President
Bush has followed this playbook more closely than any previous
president, including Reagan, notwithstanding today's desperate
efforts by the right to distance itself from the deeply
unpopular chief executive.
But in practice, those ideas have all failed to deliver...
Conservatives will contest that "President Bush has followed
this playbook more closely than ... Reagan." They'll try to
argue that the problem is the Bush administration, not conservative
ideas. In fact, liberals
make this argument too:
[T]he free-market, supply-side crowd... had behind them
the authority of a vast academic establishment, ranging
from Friedrich von Hayek to Milton Friedman to such contemporaries
as Gary Becker and Robert Mundell... The academic economics
of the 1970s lined up behind the right-wing politics of
the 1980s for a reason. Reaganomics had a logic. ... Deregulation,
above all, would substitute the invisible hand of the "efficient
market" for the dead hand of bureaucracy.
The judicial coup of December
2000 that installed Bush and Cheney brought back some of
Reagan's men and his most extreme policies - tax cuts for
the wealthy, big increases in military spending, aggressive
deregulation. But it didn't bring back the
ideas. Instead, it became clear that Bush and Cheney had
no real ideas, no larger public justification. They cut
taxes to enrich their supporters. ... They were willing
to have the government spend like a drunken sailor in 2003/4
to boost the economy before the election. ...
It was very interesting to me that some of the first
to sense this loss of public purpose were the very conservatives
who had swept in with Reagan. The nemeses of my youth, people
like Bruce Bartlett, Paul Craig Roberts, the late Jude Wanniski,
went over into hard opposition..., at the core they felt
that Bush had no conservative convictions.
The free market rhetoric still has power even when it offers
false hopes. In previous campaigns we heard how tax cuts would
pay for themselves. Cut taxes and get the government out of
the way, the argument goes, and output will grow so much that
taxes will actually rise. That, of course, didn't happen. This
campaign, it's offshore drilling. Offshore drilling won't lower
oil prices, that's a false hope, yet the cry that government
imposed environmental restrictions are causing higher prices
has had some success. Let the market work, we hear, and it will
solve the problem. There are other of signs that politicians
are not yet ready to abandon the free-market message. When it
comes to health care reform, the Obama campaign fears the word
mandates for a reason, and prefers to push a plan that
has "many private health insurance options." Talk of raising
taxes and increasing the size of government is avoided, and
Democrats step very lightly around free trade. The idea that
the market works still has resonance.
So my instinct is different.
Markets do what we expect them to do - they allocate resources
efficiently - when they operate under the proper conditions.
Those conditions include lack of market power among market participants,
the lack of political influence, having the proper regulatory
structure in place, and so on. Using anti-government ideology,
conservatives have undermined rather than supported the market
system, and that's the important message. Take deregulation
as an example. There were certainly places where government
overreached, and removing regulations in those cases was needed,
but thoughtlessly stripping away any rule or regulation pertaining
to business that you encounter is not the way to create a market
system that functions optimally.
I want Democrats to make it clear that we aren't opposed
to markets, not at all, and to say it forcefully. In fact, we
like markets so much we want to fix the ones that are broken
from so many years of neglect by Republican administrations.
We want to make markets work for everyone, not just a few at
the very top who are able to work the system to their advantage.
We have a pretty good idea of what it takes for markets to function
well, and it requires active government involvement to create
the conditions and supporting institutions for markets to flourish.
That type of government oversight has been absent under Republican
administrations - see the financial meltdown - and it's up to
Democrats to step up and fill the void.
The confusion here is simple, I think. Free markets - where
free simply means minimal government involvement - are not necessarily
the same as competitive markets. There is nothing that says
what many interpret as freeing markets - lifting all government
restrictions - will give us competitive markets, not at all.
Government regulation (as well as laws, social norms, etc.)
is often necessary to help markets approach competitive ideals.
Environmental restrictions that force producers to internalize
all costs of production make markets work better, not worse.
Rules that require full disclosure or that impose accounting
standards help to prevent asymmetric information and improve
market outcomes. Breaking up firms that are too large prevents
exploitation of monopoly power (or prevents them from becoming
"too large to fail") which can distort resource flows and distort
the distribution of income. Making sure that labor negotiations
between workers and firms are on an equal footing doesn't move
markets away from an optimal outcome, just the opposite, it
helps to move us toward the efficient, competitive ideal, and
it helps to ensure that labor is rewarded according to its productivity
(unlike in recent years where real wages have lagged behind).
There is example after example where government involvement
of some sort helps to ensure markets work better by making sure
they are as competitive as possible.
I don't think it's necessary to give up on the idea of the
market system as the best means of allocating resources in most
cases. But markets can and do fail and it's up to the government
to provide the foundation markets need to perform well (or,
in cases where market failures are substantial such as in health
care and social security, to step in and take a more active
role). That's what has been missing under Republican leadership,
the understanding of how to provide the foundation needed for
markets to work for everyone. Democrats need to stress how that
will change under their leadership, how they will improve the
ability of the economy to function in a way that serves the
interests of all participants in the economy rather than favoring
some groups over others.
[Aug 14, 2008] The Heart of the Economic Mess
The Federal Reserve Board's "beige book" for June and July offers
a clear explanation for why the economy has slowed to a crawl.
It shows American consumers cutting
way back on their purchases of everything from food to cars to appliances
to name-brand products. As they do so, employers
inevitably are cutting back on the hours they need people to work
for them, thereby contributing to a downward spiral.
The normal remedies for economic downturns are necessary. But
even an adequate stimulus package will offer only temporary relief
this time, because this isn't a normal downturn.
The problem lies deeper. Most Americans
can no longer maintain their standard of living. The only lasting
remedy is to improve their standard of living by widening the circle
of prosperity.
The heart of the matter isn't the collapse in housing prices
or even the frenetic rise in oil and food prices. These are contributing
to the mess but they are not creating it directly. The basic reality
is this: For most Americans, earnings
have not kept up with the cost of living. This is
not a new phenomenon but it has finally caught up with the pocketbooks
of average people. If you look at the earnings of non-government
workers, especially the hourly workers who comprise 80 percent of
the workforce, you'll find they are barely higher than they were
in the mid-1970s, adjusted for inflation. The income of a man in
his 30s is now 12 percent below that of a man his age three decades
ago. Per-person productivity has grown considerably since then,
but most Americans have not reaped the benefits of those productivity
gains. They've gone largely to the top.
Inequality on this scale is bad for many reasons but it is also
bad for the economy. The wealthy devote a smaller percentage of
their earnings to buying things than the rest of us because, after
all, they're rich. They already have most of what they want. Instead
of buying, the very wealthy are more likely to invest their earnings
wherever around the world they can get the highest return.
This underlying earnings problem has been masked for years as
middle- and lower-income Americans found means to live beyond their
paychecks. But they have now run out of such coping mechanisms.
As I've noted elsewhere, the first coping mechanism was to send
more women into paid work. Most women streamed into the work force
in the 1970s less because new professional opportunities opened
up to them than because they had to prop up family incomes. The
percentage of American working mothers with school-age children
has almost doubled since 1970 - to more than 70 percent. But there's
a limit to how many mothers can maintain paying jobs.
So Americans turned to a second way
of spending beyond their hourly wages. They worked more hours.
The typical American now works more each year than he or she did
three decades ago. Americans became veritable workaholics, putting
in 350 more hours a year than the average European, more even than
the notoriously industrious Japanese.
But there's also a limit to how many hours Americans can put
into work, so Americans turned to a third coping mechanism. They
began to borrow. With housing prices rising briskly through the
1990s and even faster from 2002 to 2006, they turned their homes
into piggy banks by refinancing home mortgages and taking out home-equity
loans. But this third strategy also had a built-in limit. And now,
with the bursting of the housing bubble, the piggy banks are closing.
Americans are reaching the end of their ability to borrow and lenders
have reached the end of their capacity to lend. Credit-card debt,
meanwhile, has reached dangerous proportions. Banks are now pulling
back.
As a result, typical Americans have
run out of coping mechanisms to keep up their standard of living.
That means there's not enough purhasing power in the economy to
buy all the goods and services it's producing. We're finally reaping
the whirlwind of widening inequality and ever more concentrated
wealth.
The only way to keep the economy going over the long run is to
increase the real earnings of middle and lower-middle class Americans.
The answer is not to protect jobs through trade protection. That
would only drive up the prices of everything purchased from abroad.
Most routine jobs are being automated anyway. Nor is the answer
to give tax breaks to the very wealthy and to giant corporations
in the hope they will trickle down to everyone else. We've tried
that and it hasn't worked. Nothing has trickled down.
Rather, the long-term answer is for us to invest in the productivity
of our working people -- enabling families to afford health insurance
and have access to good schools and higher education, while also
rebuilding our infrastructure and investing in the clean energy
technologies of the future. We must also adopt progressive taxes
at the federal, state, and local levels. In other words, we must
rebuild the American economy from the bottom up. It cannot be rebuilt
from the top down.
NEW YORK (CNNMoney.com) -- John McCain's call for a big push
into nuclear power can certainly be met - if the country is willing
to pay more for power and tolerate the safety risks.
Earlier this week McCain, the presumptive Republican nominee
for president, said he wants to build 45 more nuclear power plants
to make the country more energy independent. That would add significantly
to the nation's current fleet of 104 active plants, which produce
about 20% of the nation's power.
The advantages to nuclear power are primarily two-fold: It doesn't
emit greenhouse gases, and it is a reliable form of electricity
produced from uranium - a fairly abundant domestic resource.
McCain and others have been touting nuclear energy as a possible
replacement for foreign oil, if and when the country shifted to
electric cars.
The utility industry is behind the construction of more nuclear
plants.
"We have been saying for years that we have to not only preserve
our current fleet [of nuclear plants], but enlarge it significantly,"
said Jim Owen, a spokesman for the Edison Electric Institute.
NEW YORK (CNNMoney.com) -- Nearly two-thirds of U.S. companies and
68% of foreign corporations do not pay federal income taxes, according
to a congressional report released Tuesday.The Government Accountability
Office (GAO) examined samples of corporate tax returns filed between
1998 and 2005. In that time period, an annual average of 1.3 million
U.S. companies and 39,000 foreign companies doing business in the
United States paid no income taxes - despite having a combined $2.5
trillion in revenue.
The study showed that 28% of foreign companies and 25% of U.S.
corporations with more than $250 million in assets or $50 million
in sales paid no federal income taxes in 2005. Those companies totaled
a combined $372 billion in sales for the largest foreign companies
and $1.1 trillion in revenue for the biggest U.S. companies.
The GAO report, which did not name any specific companies, said
that some corporations reported zero
income before deducting expenses while others said they had zero
net income after deducting expenses. Either way,
those companies reported no tax liability, the GAO said.
... ... ...
The study was requested by Sens. Byron Dorgan, D-N.D, and Carl
Levin, D-Mich., in an attempt to determine if corporations are abusing
so-called transfer prices.
Transfer prices are charges on transactions between subsidiary
companies within a larger corporate group. Companies may try to
lessen their U.S. tax hit by improperly transferring income to foreign
subsidiaries in countries with lower rates.
The GAO study did not attempt to determine if companies were
abusing transfer prices, but it said that potential abuse of transfers
could reduce the amount of taxes companies pay in the United States.
"The tax system that allows this wholesale tax avoidance is an
embarrassment and unfair to hardworking Americans who pay their
fair share of taxes," Dorgan said in a statement.
How confident are you in the stock market?
Very |
25% |
|
Somewhat |
48% |
|
I've pulled out all my money
|
27% |
|
[Aug 12, 2008] paper-money.blogspot.comThe
Almost Daily 2� - The Next Three Shoes
"I believe that there is a good chance that the S&P 500 will
re-test and drop below the lows set after the collapse of the dot-com
era." What will happens with poor "all stock" 401K investors if the
author is right ?
August 08, 2008Here's my crack at Nostradamusian macroeconomic analysis.
In my estimation the next three systemic shocks will come in the
form of job loss, the foreclosure driven and fiscally irresponsible
government bailout of Fannie and Freddie and a prolonged secular
bear market meltdown of the stock market.
All of these events, if fully materialized, would likely combine
to present the most significant test of Americans' faith and confidence
in their institutions and way of life seen in many generations.
First, although it has been generally the consensus opinion that
the job market will hold up better during this recession as a result
of the weak job growth seen during the last expansion (i.e. less
jobs gained = less jobs to lose), I beg to differ.
My model (simple extrapolation of 90s recession with some tweaks)
puts the unemployment rate at roughly
7% by next March and where we go from there will
depend largely on the other two shoes.
I believe the real job loss from
the 90s-era consumption boom and bust was simply postponed by the
2000s-era credit-debt boom.
Having no other alternative, Americans will now have to face
the reality and own up to their personal fiscal irresponsibility
and tighten belts causing business confidence to erode and inevitably
leading to substantial job loss.
Next, in what has to be the worst fiscal policy blunder in our
history, the federal government has now positioned itself directly
in the line of fire of the largest financial meltdown of modern
times.
Fannie and Freddie are insolvent
and, having operated as an essentially absurd and fraudulent arbitrage
scam in conjunction with sham co-conspirator mortgage originators
like Countrywide Financial for over a decade, are essentially dead
guarantors walking.
Foreclosures are on the verge of explosive growth as near-prime
and prime underwater households relent to the weight of the current
economic crisis.
Treasury Secretary Paulson's promise of bailout of the GSEs will
carry a tremendously high cost for taxpayers and further exacerbating
the economic malaise and erosion of Americans' confidence and sense
of social fairness.
Finally, I believe that there is
a good chance that the S&P 500 will re-test and drop below the lows
set after the collapse of the dot-com era.
This would represent a logical, yet truly significant, failure
of the private sector as the expansion of the 2000s fully gives
way, blending into the dot-com meltdown
forming a secular bear market trend the likes of which we have not
ever seen.
This would, in a sense, be a GM-ization (NYSE:GM)
of the broader stock market and result in a blaring spotlight being
shined on the ludicrousness of constructing a multi-decade economic
expansion based almost entirely on discretionary consumption and
technological hysteria.
"Reid says banks may lose a total of $1.2 trillion when the books
are closed on the Age of Froth".
As the Age of Froth unwound, inflation became
an even greater ravager of personal wealth.
Aug. 11 (Bloomberg) -- One of the most humbling challenges we scribes
face is to attach a meaningful name to an era.
How do you describe a time of obscenely
easy credit; stock and housing bubbles; stratospheric Wall Street
profits, outlandish banker salaries and general prosperity?
Now that the post-bubble age is prompting painful bailouts as
the world economy reels from a credit crunch and writes down bad
debts, it's time to consider what I call the Age of Froth.
Not only will the aftermath of this epoch be ripe with
bankruptcies, foreclosures and bailouts, it will be a time of great
reckoning. Building equity and saving will be vital.
I derive the concept of froth from former Federal Reserve Chairman
Alan Greenspan, who told Congress on July 20, 2005, that ``the
apparent froth in the housing markets appears to have interacted
with evolving practices in mortgage markets.''
Greenspan's
remarks coincided with the peak of the bubble, when U.S. median
home prices hit $230,200 that July. We may not see house values
reach that level for another decade or so.
More disturbing about Greenspan's observation is his acknowledgement
that interest-only adjustable mortgages that were used ``to purchase
homes that would otherwise be unaffordable'' may leave ``some mortgagors
vulnerable to adverse events.''
As it stands now, that was the financial understatement of this
young century. Greenspan and the Fed -- with the exception of former
Governor
Edward Gramlich, who wrote a prescient book about mortgage abuses
-- did nothing to curb these ``exotic'' mortgages, hence the current
crisis.
Profit Froth
Of course, since the housing frenzy was immensely profitable
for the real-estate/construction industry as well as mortgage, investment
and savings banks, Greenspan and his
fellow regulators became notably sheepish, if not cowardly.
To the U.S. financial industry, the froth translated into ``$1.2
trillion in excess profits over the last decade relative to nominal
gross domestic product growth,'' said
Jim Reid, a credit strategist for Deutsche Bank AG in London.
Reid says banks may lose a total of
$1.2 trillion when the books are closed on the Age of Froth.
For homeowners, froth came in the form of home equity. As it
was seen as easy ``money on the house,'' this bubble-inflated bonanza
was mostly cashed out. Now millions are tapped out in their credit
and savings kitties.
Greenspan Knew
Greenspan, who wrote a 2007
report with economist James Kennedy on home-equity extraction
for the Fed, found that American homeowners pulled more than $800
billion out of their properties, most of them going into even more
debt to tap the bubble profits.
Now that the foam of a saucier time has gone flat, some serious
debt reduction and saving are necessary. Better to go from crema
to credit control.
One positive development after the Age of Froth is that lenders
have become conservative and are now requiring sizable home down
payments again.
Putting 20 percent down on a home purchase in most places gives
you instant equity. Provided you're not in an area where prices
will continue to fall, that represents a chunk of savings. You also
still have the option of building equity through paying down mortgage
principal to reduce debt and overall interest.
Money lost in home investments, though, will have to be replaced
by other vehicles. As the Age of Froth unwound, inflation
became an even greater ravager of personal wealth.
Inflation Protectors
Right now, there are only a few investments that will meagerly
compensate you if inflation accelerates: U.S. Treasury inflation-protected
securities (TIPS and I-Bonds) and mutual funds that invest in commodities.
Still, there should be more tools at your disposal because taxes
also eat up returns beyond retirement accounts. A new generation
of tax-free annuities and universal savings vehicles is needed.
It's simply not fair that interest from money-market funds,
bonds and savings certificates is taxed at the highest marginal
federal rates while capital gains are levied at 15 percent. Ordinary
savers are cursed.
Although the Age of Froth has passed, that doesn't mean our debt
problems are behind us. Far from it.
Unless the federal government curbs
its spending, interest on Uncle Sam's debt will be ``the single
largest expenditure in the federal budget'' in about 25 years, according
to the
Peterson Foundation,
a New York-based non-profit organization founded by Blackstone Group
billionaire founder
Pete Peterson.
Baby Boomers Retire
Keep in mind that 77 million baby boomers retiring and demanding
Medicare will make this one of the thorniest fiscal-political debates
in U.S. history.
On a personal level, there's much you can do. Set up a health
savings account and fund it with pretax dollars. Consider a Roth
individual retirement account or 401(k). Those are funded with after-tax
dollars, but are tax-free on retirement. Build a cash reserve for
short-term expenses and emergencies.
Maybe we'll remember the Age of Froth
as a wild-eyed era of financial excess akin to the 1920s. Then again,
it may lead to a great awakening in which saving trumps spending.
Happy days may be here again, but it will take years.
(John
F. Wasik, co-author of ``iMoney,'' is a Bloomberg News columnist.
The opinions expressed are his own.)
To contact the writer of this column: John F. Wasik in Chicago
at
[email protected].
In the beginning of the year, a column I wrote for Real Money discussed
some lessons of the past year. It never was moved over to the free site,
so here is my belated update.
It is a mix of fundamental, economic, technical and even philosophical
lessons that those savvy CEOs, fund managers and individual investors
who were paying attention picked up in the recent turmoil.
1) Ignore market rumors: It seemed every time some
firm was in trouble, the same gossip was floated that Warren Buffett
was about to buy them. Time and again, these tales proved to be
unfounded money-losers. This year's most egregious example was Berkshire's
imminent purchase of Bear Stearns (BSC).
That The New York Times Dealbook got suckered into printing this
just shows you how pernicious these rumors are. The stock was as
high as $123 the day of the rumor.
Anyone who bought homebuilders or Bear Stearns stock on the basis
of either of these rumors -- or nearly any other stock that had
similar rumors floated throughout the year -- lost boatloads of
money.
2) Buy sector strength (and avoid sector weakness): It's
a truism of real estate: It's better to own a lousy house in a great
neighborhood than a great house in a lousy one. And the same is
true for stock sectors: Buying mediocre companies in great sectors
generated positive results, while great companies in poor sectors
struggled.
The losers are obvious: The homebuilders, financials, monoline
insurers and retailers all struggled this year. The winners? Anything
related to agriculture, solar energy, oil servicing, industrials,
software, exporters, infrastructure plays -- even asset-gatherers
thrived.
3) Never blindly follow the "big money": Why? Because
professionals make dumb mistakes too. Many people chased the
so-called smart money into these trades. Unfortunately, all of these
trades have proven to be jumbo losers.
4) Day-to-day stock action is mostly noise: This is blasphemy
to some people, but it's true: Markets eventually get pricing right.
But the key to understanding this is the word "eventually."
Over the shorter term, markets frequently under- or overprice a
stock before settling into the right approximation of value. This
process typically occurs over broad lengths of time.
... ... ...
6) Ignore deteriorating fundamentals at your peril:
One would think this doesn't need to be said, and yet it does:
When the fundamentals of a given market, sector or consumer group
are decaying, profit gains are sure to slow.
7) Nothing is more costly than chasing yield:
For fixed-income investors, what matters
most is not the return on your money, it's the return of your
money. Reaching down the risk curve for a few
bips of additional yield is one of the dumbest things an investor
can ever do.
8) Know what you own: This very basic issue was mostly
forgotten in recent years, and it was forgotten by pros and individuals.
Investment banks like Bear Stearns, Morgan Stanley (MS) and Merrill
Lynch (MER) , big banks like Citigroup (C) and Washington Mutual
(WM) , and GSEs like Fannie Mae (FNM) and Freddie Mac (FRE)
were scooping up assets apparently without
doing their homework. The complexity of these pools
of mortgages almost guarantees that no one truly knows what's in
them (see the next rule). If you don't know what you own, how can
you properly manage risk?
9) Simple is better than complex: Start with a few million
mortgages of varying credit-worthiness and create a series of residential
mortgage-backed securities (RMBS) from them. Then take the RMBS
and stratify them. Then leverage them up into collateral debt obligations
(CDOs). Once that bundling is complete, make complex bets on which
layers might default, via credit default swaps (CDS).
Gee, how could anything possibly go wrong with that?!
10) Stick to your core competency:
E*Trade (ETFC) is an online broker; what was it doing writing
subprime mortgages?
Why was Bear Stearns running two hedge funds?
Isn't H&R Block a tax preparer? It was making mortgage loans
-- why?
And exactly what was GM's expertise in underwriting mortgages?
(The snarkier among you might be wondering exactly what business
GM's expertise is in.)
Had these companies stuck to what they did best (or least bad),
they wouldn't be in as much trouble today.
11) Fess up! Whenever a company runs into trouble, they
seem to take a page from the same PR playbook: First, they say nothing.
Second, they deny. Finally, they make a begrudging, pitifully small
admission. Eventually, the full truth falls out, and the stock tanks
with it.
12) Never forget risk management: Consider what could
possibly go wrong, and have a plan in place in the event that unlikely
possibility comes to pass. If there is to be upside, then there
must also be a corresponding and proportional downside.
13) The trend is your friend: ...this market clich� was
proven true once again...
Looks even truer 8 months later!
>
Source:
RealMoney.com, 1/2/2008 6:54 AM EST
http://www.thestreet.com/p/rmoney/investing/10396497.html
The Independent
Save the world! Stop having children! Such was the rather drastic
solution to the problem of climate change proposed in an editorial
in the prestigious British Medical Journal, no less, the other day.
And since one of its authors was a distinguished academic � Dr John
Guillebaud, emeritus professor of family planning and reproductive
health at University College, London � we should consider the notion
seriously.
His argument was straightforward. The mushrooming population
of the world is putting extreme pressure on the planet's resources
and increasing the output of greenhouse gases. Every single month
there are nearly seven million extra mouths to feed. And because
a child born today in the UK will be responsible for 150 times more
greenhouse gas emissions than a child born in Ethiopia the obvious
place to start cutting back is here rather than there.
Dr Malthus, thou shouldst be living at this hour. But, actually,
this goes one better. When Thomas Malthus first published his gloomy
Essay on the Principle of Population in 1798 he had others than
himself in his sights. His argument sounded academically neutral.
Human populations grow exponentially whereas food reproduction expands
in a linear fashion (it's the difference in maths between multiplication
and addition) so disaster always looms, in the shape of disease,
war or famine, to balance the population out. But he wasn't looking
to himself for the solution; those he had in his moral scrutiny
were the lumpen poor, breeding mindlessly, careless of the demographic
implications of their lusty loins.
Bloomberg.com
Aug. 7 (Bloomberg) -- U.S. consumers borrowed more than twice
as much as economists forecast in June as a decline in home equity
forced Americans to fund purchases with credit cards and other loans.
Consumer credit rose by $14.3 billion, the most since November,
to $2.59 trillion, the Federal Reserve said today in Washington.
In May, credit rose by $8.1 billion, previously reported as an increase
of $7.8 billion. The Fed's report doesn't cover borrowing secured
by real estate.
American Express Co., the biggest U.S. credit-card company by
purchases, in July withdrew its 2008 earnings forecast after second-quarter
profit fell 37 percent on worse-than-expected consumer defaults.
Yesterday, Chief Executive Officer
Kenneth Chenault said the company will probably take a charge
in the fourth quarter as it cuts jobs and trims expenses.
``Rising fuel prices, rising unemployment, record low consumer
confidence and most critically, housing declines have made this
economic cycle unlike any other,'' Chenault told analysts on Aug.
6 at the company's New York headquarters.
Euro Pacific Capital
As a student of the Great Depression, Fed Chairman Bernanke has
correctly, in my view, sensed that whereas inflation does the greatest
long-term economic damage, it is recession that his political masters
most fear. He is also aware that it was the raising of interest
rates that turned the 1930 recession into the Great Depression of
1933, which lasted until World War II.
Depression, especially in a highly leveraged world that is accustomed
to prosperity, would likely result in serious civil strife. Politically,
it must be avoided no matter what the economic or financial costs.
Despite 'spin-talk' to the effect that the Fed is pursuing a dual
mandate to both fight inflation and promote growth,
in reality they are simply trying to
promote growth pure and simple. This is the reality that few market
analysts or journalists dare to mention.
With 5 million American homes vacant, the "Big 3" auto giants
heading towards bankruptcy and some $4 trillion already wiped off
of American home values, things look bad for American consumer demand.
With consumer spending accounting for 72 percent of GDP, this should
ensure recession. To try to change this
outcome, the Fed stands ready to implement the most inflationary
monetary policy in its history.
... ... ...
Investors should expect falling worldwide
interest rates. Short-term government bonds in inherently strong
currencies, like Swiss Francs, remain attractive.
As hyper-stagflation and acute financial stress becomes manifest,
gold will likely rise significantly.
"such credit contraction (crunch) and house price decline (bust)
episodes on average lasted 6 (10) and 8 (18) quarters, respectively.
" 10 quarters are 2.5 years. 18 quarters are 4.5 years... "the de-leveraging
of US financial institutions would lead to a reduction of credit to
US non-levered entities by about USD1 trillion (4.4% of the total assets
of the US financial sector) and shave about 1.3 percentage points off
GDP growth over the year following the negative credit shock (in addition
to the effects from other transmission channels)." and this slow deterioration
of the situation with some sector rotation might not last long and change
to a rapid slide with the dollar as a catalist
I think that institutionalists right now are the top school which
helps to understand the event as they unfold and the crazy world of
semi-bankrupt banks and bankrupt but on life support hedge fonds like
Freddy and Fannie and all powerful but little ammunition left Fed.
From the abstract of a new paper by Stijn Claessens, M. Ayhan Kose
and Marco E. Terrones, entitled "What Happens During Recessions,
Crunches and Busts?" (paper now online
here):
We provide a comprehensive empirical characterization of
the linkages between key macroeconomic and financial variables
around business and financial cycles for 21 OECD countries over
the 1960-2007 period. In particular, we analyze the implications
of 122 recessions, 112 (28) credit contraction (crunch) episodes,
114 (28) episodes of house price declines (busts), 234 (58)
episodes of equity price declines (busts) and their various
overlaps in these countries over the sample period.
With respect to ongoing events in the United States, they write:
These comparisons suggest that, while the current slowdown
may share some features with the onsets of typical U.S. and
OECD recession, it is worse in some dimensions, particularly
in terms of speed of credit contraction, drop in residential
investment and decline in house prices. We therefore also compare
the developments in credit and housing markets in the United
States to date to those in the past episodes of credit contractions
and house price declines. Tables 2B and 3B showed that such
credit contraction (crunch) and house price decline (bust) episodes
on average lasted 6 (10) and 8 (18) quarters, respectively.
If these statistics, based on a large number of episodes, provide
any guidance, they suggest that the adjustments of credit and
housing markets in the United States are only in the early stages
relative to historical norms and might still take a long time.
The earlier episodes suggest that
the process of adjustment in the United States might persist
in the coming months with further difficulties in credit markets
and drops in house prices. This could bode consequently
poor for the path of overall output,
which, as we showed,
falls more in recessions associated with credit crunches
and house price busts than in recessions without such events.
====
Posted by:
Menzie Chinn at August 6, 2008 02:50 PM
It really makes one wonder what the catalyst for recovery
would be. With much of the world economy reduced by
1.5% through 2011 and the dollar hitting limits for
borrowing, there are painful adjustments ahead.
Posted by:
Charles at August 6, 2008 03:12 PM
The charts and article extracts above don't mention
the labor market. Maybe the full article does.
The recent rapid rise in unemployment, has only been
seen in recessions. A useful chart on this phenomena
is at http://www.hussmanfunds.com/wmc/wmc080805.htm
Posted by:
Mike Laird at August
6, 2008 05:44 PM
The other shoe has yet to drop on housing.
Within a year or 2, Asian
& Petro-state central banks will be forced to quit buying
US debt because of burgeoning inflation in their respective
countries. The rate on the 10 yr Tres
& hence on mortgages will increase substantially.
I suspect Calculated Risk
has the housing recovery about right at 2013.
Posted by:
algernon at August
6, 2008 08:58 PM
Charles- The catalysts for recovery are all around
us... Repair or replacement of transportation infrastructure,
build-out of renewable energy infastructure, rebuilding
of city-center residential housing.
All these projects require capitalization, which
will not occur until the excess leverage is purged out
of the banking system and "players" take their losses.
Algernon's comment regarding 2013 seems like a reasonable
estimate for US housing recovery and credit market stabilization
to begin.
Posted by: James E at August 7, 2008 01:21
PM
Concerning "The catalysts for recovery are all around
us... ", the existence of unmet human needs is constant
& isn't therefore critical to the creation of wealth.
Resources have been grossly misallocated. The existence
of problems to be solved does not erase that fact.
Posted by:
Menzie Chinn at August 8, 2008 11:31 AM
For myself I've never understood the attraction of the
Austrians, they assert that the value of a good is based
on its ability to satisfy a need, or utility.
Yet for a capitalist the only use of a good is its ability
to yield a value above the cost of the inputs that were
required to produce it. In other words its exchange
value, not its use value.
They don't actually use the goods they produce. Hence
if the utility of a good is irrelevent to the seller
- if only the price matters to them - clearly its utility
cannot determine its price.
Logic huh?!
In fact from my reading of Marshall and Jevons (admittedly
English not Austrians) they conceded that in fact the
price of production determined value not utility. Which
rather makes you wonder why they bothered in the first
place.
Sorry for the digression.
It might be that the fact that Reagan crushed the union movement
and started dismantling post Great Depression safeguards in financials
brought us the spiral of greed and incompetence which culminated in
the current crisis.
Economist's View
(from FT )
Martin Feldstein says there are good reasons for the difference
in monetary policy between the Fed and the ECB, the most important
being that unions are stronger in Europe than the US. This means
there is a greater chance of a wage-price spiral developing in Europe
forcing the ECB to adopt a tougher stance on inflation:
The crisis: a tale of two monetary policies, by Martin Feldstein,
Commentary, Financial Times: The European Central Bank and
the Federal Reserve are facing similar problems but pursuing
different policies. The ECB has been raising interest rates
while the Fed has been cutting them. ... Which central bank
is doing the right thing? Or could they both be?
Inflation is a significant problem in both the eurozone and
the US... Both economies are also facing declining economic
activity with falling employment... The sharp rise in the prices
of energy and food ... will undoubtedly spill over into higher
prices... The primary challenge for both central banks is to
limit this inflationary shock to a one-time pass through, avoiding
the ... wage-price spiral that drove inflation rates in the
1970s to double-digit levels. Preventing a repetition of that
requires convincing the public that today's high inflation rate
will soon decline.
Despite the similar problems faced by the two central banks,
there are important differences that justify their separate
strategies. The contrast between the ECB's mandate to achieve
price stability and the Fed's "dual mandate" to balance the
goals of price stability and employment is ... a reflection
of fundamental differences between the two economies. Those
differences make it more difficult to tame inflation expectations
in Europe and therefore require the ECB's tougher policy.
The role of trade unions is the most important difference.
Only 7.5 per cent of US private sector employees are union members...
In contrast, more than 25 per cent of employees in the European
Union are members of trade unions and in some EU countries the
wages set in union contracts are automatically extended to other
companies in the same industry.
Because of this union power, the ECB must persuade union
members and their leaders that it is determined to bring inflation
down to its target level... The ECB's tough stance and exclusive
emphasis on price stability is crucial to shifting inflation
expectations and persuading unions to accept the rise in food
and energy prices without pressing for offsetting wage gains.
There's
another hypothesis that says the reason the
ECB is able to focus more on inflation
is because of the stronger social safety net that is in place in
Europe relative to the US. With a stronger social
safety net, variations in employment are less costly and that allows
more focus on inflation.
Comments
The United States remains firmly in an economic recession in
spite of economic growth figures to the contrary, a leading economist
has warned.
Merrill Lynch's David Rosenberg, the first economist
from a major bank to declare a US recession was underway back in
early January, argues that recent unemployment figures show yet
more evidence that the US economy is a deep recession.
Pointing to last week's news that employment has
now declined for six months in a row, Mr Rosenberg, Merrill's chief
North American economist, says that "at no time in the past 50 years
has this happened without the economy being in an official recession."
The typical definition of a recession is two consecutive
quarters of negative gross domestic product (GDP) growth, something
which the US has yet to have.
However he argues that this is only a matter of
time, given that all four recession determinants "have peaked and
rolled over."
He points to widespread decline in economic activity,
noting that real sales in manufacturing and retail, employment,
industrial production, and real personal income � the four determinants
� are all way below their peaks.
The Merrill Lynch economist estimates that monthly
GDP "peaked in January and has declined at a 2.2pc annual rate since
that time," noting that he believes that the recession started between
October and February.
"We expect the real GDP data are going to undergo
massive revisions, and in fact, that we are going to be on the receiving
end of what could be a significant revision on July 31," Mr Rosenberg
argues, suggesting that these revisions will point to the onset
of recession.
2009 will be worse then 08.
Merrill Lynch economist David Rosenberg,
one of the most bearish Wall Street economists, says to look past
the 1990-91 recession as a guide to the current downturn. The key
difference: the depth of home-price declines.
Mr. Rosenberg says in a note to clients that the current downturn
is hitting more broadly than the credit crunch and real estate meltdown
in the 1990-91 recession, which lasted eight months (as did the
mild 2001 contraction). Home prices today are falling in 85% of
the country vs. 40% during that period, he notes. When prices hit
bottom in 1992, the inventory of new and existing homes for sale
was at 7 months of supply. Now it's at 10 months' supply "with no
improvement in sight," says Mr. Rosenberg, who was among the first
economists to forecast a 2008 recession. He sees average prices
nationwide dropping 20% to 30% more, on top of the 11% decline since
the 2006 peak.
The mid-1970s recession "not only saw a sharp and sustained rise
in food and energy prices, as is the case today, but also saw a
very similar consumer balance sheet squeeze from a simultaneous
deflation in residential real estate and equity assets, which never
happened in the 2001 recession, the 1990-91 recession or the recessions
of the early 1980s for that matter," he writes. "The last time we
had more than one quarter of outright contraction in the value of
both asset classes on the household balance sheet was in the 1973-75
recession." �Sudeep Reddy
Thought on the future of the economy, with David Rosenberg, Merrill
Lynch North American economist
Comments
- Peter | Aug 7, 2008 5:09:22 AM
-
It will be good for people to have to endure some frugality.
The population has had it too easy for too long. Or at least
putting their efforts into unproductive enterprise. They have
become fat, lazy and out of touch. That is how civilizations
collapse.
-
August 6 2008 |
FT.com
The futures market is at odds with Wall Street economists over
the likelihood that the Federal Reserve will raise US interest rates
this year.
An overwhelming majority of private sector economists thinks
the Fed will not raise this year, in spite of its tough talk on
inflation.
... ... ...
Most think the economy will be weak in the second half of this
year as the effects of tax rebates wear off. They expect tight financial
conditions, caused by the credit squeeze, will do the Fed's work
for it � creating enough economic slack to mitigate the risk to
prices.
Guardian.co.uk
Both the left and the right say they stand for economic growth.
So should voters trying to decide between the two simply look at
it as a matter of choosing alternative management teams?If only
matters were so easy! Part of the problem concerns the role of luck.
America's economy was blessed in the 1990s with low energy prices,
a high pace of innovation, and a China increasingly offering high-quality
goods at decreasing prices, all of which combined to produce low
inflation and rapid growth.
President Clinton and then-chairman of the US Federal Reserve,
Alan Greenspan, deserve little credit for this � though, to
be sure, bad policies could have messed things up. By contrast,
the problems faced today � high energy and food prices and a crumbling
financial system � have, to a large extent, been brought about by
bad policies.
There are, indeed, big differences in growth strategies, which
make different outcomes highly likely. The first difference concerns
how growth itself is conceived. Growth ... must be sustainable:
growth based on environmental degradation, a debt-financed consumption
binge, or the exploitation of scarce natural resources, without
reinvesting the proceeds, is not sustainable.
Growth also must be inclusive; at least a majority of citizens
must benefit. Trickle-down economics does not work... America's
recent growth was neither economically sustainable nor inclusive.
Most Americans are worse off today than they were seven years ago.
But there need not be a trade-off between inequality and growth.
Governments can enhance growth by increasing inclusiveness. ...
So it is essential to ensure that everyone can live up to their
potential, which requires educational opportunities for all.
A modern economy also requires risk-taking. Individuals are more
willing to take risks if there is a good safety net. If not, citizens
may demand protection from foreign competition. Social protection
is more efficient than protectionism.
Failures to promote social solidarity can have other costs...
[For example, the] cost of incarcerating two million Americans �
one of the
highest per capita rates (pdf) in the world � should be viewed
as a subtraction from GDP, yet it is added on.
A second major difference between left and right concerns the
role of the state in promoting development. The left understands
that the government's role in providing infrastructure and education,
developing technology, and even acting as an entrepreneur is vital.
...[examples]
The final difference may seem odd: the left now understands markets...
The right, especially in America, does not. The new right, typified
by the Bush-Cheney administration, is really old corporatism in
a new guise.
These are not libertarians. They believe in a strong state with
robust executive powers, but one used in defense of established
interests, with little attention to market principles. The list
of examples is long, but it includes...
By contrast, the new left is trying to make markets work. Unfettered
markets do not operate well on their own... Defenders of markets
sometimes admit that they do fail, even disastrously, but they claim
that markets are "self-correcting." ...
Markets are not self-correcting in the relevant time frame. No
government can sit idly by as a country goes into recession or depression,
even when caused by the excessive greed of bankers or misjudgment
of risks by security markets and rating agencies. But if governments
are going to pay the economy's hospital bills, they must ... make
it less likely that hospitalisation will be needed. The right's
deregulation mantra was simply wrong, and ... the price tag � in
terms of lost output � will be high, perhaps more than $1.5trn in
the US alone.
The right often traces its intellectual parentage to Adam Smith,
but ... Smith recognised the ... need for strong anti-trust laws.
It is easy to host a party. For the moment, everyone can feel
good. Promoting sustainable growth is much harder. Today, in contrast
to the right, the left has a coherent agenda, one that offers not
only higher growth, but also social justice. For voters, the choice
should be easy.
FT.comHow long will the economy stay weak on the current
policy path?
The best available estimates suggest that the American economy
is operating between 2 and 2.5 per cent below its sustainable potential
level. This translates into more than $300bn, or $4,000 for the
average family of four, in lost output. Even if, as I think unlikely,
recession is avoided, growth is almost certain to be so slow that
the gap between actual and potential output comes close to doubling
over the next year or so. Given that unemployment peaked nearly
two years after the end of the last recession, output and employment
are likely to remain below their potential levels for several years
in the best of circumstances.
Given the combined impact of rising commodity prices, falling
house prices, reduced availability of credit and rising uncertainty,
it is surprising that the economy has shown as much strength as
it has in recent months. While it is possible that this speaks in
some way to its enormous resilience, the preponderant probability
is that, as the
effects of tax rebates wear off and those of tighter credit
conditions feed through, the economy will take another downwards
turn.
Just as the bottom was called early a number of times in Japan
in the early 1990s and in the US in the early 1930s, we have seen
and no doubt will see moments of sunlight that create hope that
the worst is past. Yet it bears emphasis that in the current context
there can be no confident reliance on the equilibrating powers of
the market.
There is a danger of excessive regulation (Brezhnev's socialism,
command economy, excessive central planning) and there is a danger of
lack of regulation (voodoo economics, gilded age, crony capitalism).
The real economic mastery is to find the right balance between excesses
of regulation (which kill innovation) and excesses of reregulation which
lead to crony capitalism (private profits, public losses).
August 5 2008 | FT.com
At least eight precepts of sound financial regulation
should be considered.
- First, we should recognize the deregulation illusion.
- A second and related precept is that comprehensive financial
deregulation is impractical as well as politically and socially
intolerable.
- Third, a new regulatory regime should strive to encourage
the highest standards of business conduct.
- Fourth, in formulating sound financial and regulatory
supervision, market participants will push risk-taking to the
marginal edge unless constrained.
- Fifth, regulation lags behind shifts in markets and technologies.
- Sixth, deregulation is making the job of the US Federal
Reserve more challenging.
- Seventh, a new system of financial regulation should
pay less attention to minor matters and more to broad, systemic
weaknesses.
- Finally, in crafting new approaches to financial regulation
we must acknowledge the international dimension of leading institutions
and markets
The writer is president of Henry Kaufman & Company, an economic
and financial consulting firm, and author of 'On Money and Markets:
A Wall Street Memoir' (McGraw-Hill, 2001)
We should not overestimate the severity of the current crisis: "So
how bad will things get? After the slowdown/recession has corrected
the excesses of the past decade, prospects for the overdeveloped part
of the world are quite reasonable, as long as material aspirations moderate
in line with modest prospects for sustained growth in standards of living.
For emerging and developing countries at the right end of the commodity
boom, the potential for prosperity is there, as long as the resource
curse is avoided."
August 5 2008 | FT
From a cyclical perspective, things look bad for Europe, the
US and most of the global economy. My
contribution to summer cheer is to note that longer-term local and
global economic prospects are likely to be worse than expected.
So welcome to boom and bust. Welcome to subdued long-term
growth prospects.
The ancient Greeks knew hubris to be one sin the gods will punish.
When Gordon Brown, the British prime minister, announced "the end
of boom and bust", Jove must have checked his thunderbolts. Capitalist
market econ�omies are inherently cyclical. The private credit system
is intrinsically prone to alternating bouts of irrational euphoria
and unwarranted depression. Busts play an essential role. They clean
up the mess created during the boom by inflated expectations, overoptimistic
plans and unrealistic ventures. These become embodied in unsustainable
household debt, productive capacity with no foreseeable use, excessive
corporate and financial sector leverage and enterprises whose only
asset is hope. The correction is painful, even brutal: unemployment
rises, as do defaults, repossessions and bank�ruptcies. We entered
such a cathartic phase around the turn of the year in both the US
and the UK. Continental Europe is not far behind.
... In the balkanised regulation and supervision regime of the
US, no one was in charge; few were even aware of the dysfunctional
developments that were taking place.
The result, in both the UK and the
US, was overexpansion of the banking sectors, house-price bubbles,
unsustainable construction booms and excessively indebted household
sectors. It will take two or three years to work
off these excesses.
The global increase in the price of commodities relative to core
goods and services represents a redistribution of real income from
net commodity importers to net exporters. The EU and the US are
at the wrong end of this terms-of-trade shock, which also lowers
potential output and is inflationary. The terms-of-trade shock took
the form of a jump in the headline price level. All this limited
the capacity of central banks to act to support demand. For the
non-food-producing poor, this terms-of-trade shock is disastrous.
In the poorest countries it threatens to undermine much of the reduction
in extreme poverty achieved by high growth in China and India.
What relief there has recently been on energy prices is largely
the result of a monetary policy-engineered slowdown in emerging
markets. Across these markets, strong underlying growth potential
was outstripped by excessive demand growth, fuelled by cheap credit
and frequently by undervalued real exchange rates. Even in Brazil
� the most controlled of the Brics (Brazil, Russia, India and China)
� real interest rates are negative and further monetary tightening
is required. India is making determined efforts to regain control
over inflation, Russia is toying with the idea and China blows hot
and cold � but will have to raise rates, appreciate its currency
faster or ration credit a lot more tightly if double-digit inflation
is to be avoided. The global cyclical slowdown benefits the advanced
industrial countries through lower commodity and energy prices,
at the cost of more subdued growth of external demand.
Once the cyclical correction in emerging markets has run its
course, I expect growth in those countries to resume at rates that
are high but no longer stratospheric. The reason is the environmental
constraints on growth in these markets. I am not referring to the
(massive) contribution of China and others to global warming, but
to the local and regional environmental fall-out from unsustainable
industrial and agricultural development: increasing scarcity and
rising costs of clean fresh water, clean air and soil that is fit
for humans. When the last athlete hobbles out of the
polluted Olympic Games of Beijing, black-lunged and gasping
for oxygen, there is likely to be a reassessment of what is sustainable
growth in China. Even totalitarian regimes
require, if not the consent, at least the acquiescence of the populace.
Double-digit rates of growth are a thing of the past.
One way to boost long-term global prospects is further trade
liberalisation. But the World Trade Organisation's Doha round of
negotiations is
suspended and on life support. The Old Protectionists � Europe,
Japan and the US � have been joined by the New Protectionists �
advanced emerging markets wishing to shelter their agricultural
and financial sectors and anything else deemed strategic. Of the
four Brics, all but Russia (which is not a WTO member) took a leading
part in running the Doha round on to the sandbanks.
So how bad will things get? After the slowdown/recession has
corrected the excesses of the past decade, prospects for the overdeveloped
part of the world are quite reasonable, as long as material aspirations
moderate in line with modest prospects for sustained growth in standards
of living. For emerging and developing countries at the right end
of the commodity boom, the potential for prosperity is there, as
long as the resource curse is avoided. For poorer countries at the
wrong end of the commodity boom, the combination of the terms-of-trade
shock and acute environmental challenge will make life very difficult.
The writer is professor of European political economy at the
London School of Economics
OPEC internal oil consumption is increasing at 8% a year and
in ten years will match Saudi Arabian production. Since they cannot
sell what they use at home, world net exports will fall 20% from
their 2005 peak. That oil fell on world markets today tells us about
the time horizon of world markets.
naked
capitalism
When people ask what I do for a living I tell them I do wealth preservation.
If they ask how I do that, I say I do three things:
- read the direction of inevitable changes in the world,
- discover and value investment possibilities in the context
of those changes, and
- allocate risk capital among those possibilities.
Part of what I therefore do from day to day is to cover the intersection
of technology, economics and finance; and I publish most of the
general interest content to
my blog as a sort of public filing cabinet that I can search
for myself as well as refer people to. While Yves' blog is not concerned
with technology per se, and much of what I post is industry specific,
I thought I'd cross post a brief selection of recent technology
news items which I think do have wider economic implications...
... ... ...
An essay in the New York Times called "OPEC 2.0" points out that
communications is just as vital and expensive as gasoline; and
just
as monopolized although, as in the early days of oil, by domestic
monopolies.
AMERICANS today spend almost as much on bandwidth - the capacity
to move information - as we do on energy.
A family of four likely spends several
hundred dollars a month on cellphones, cable television and
Internet connections, which is about what we spend on gas and
heating oil... That's why, as with energy, we
need to develop alternative sources of bandwidth...
Ok. Oil. Exxon Mobil reported a second-quarter
profit of nearly $12 billion -- a number that works out (as many
did) to about $39 for every man, woman and child in America; $90,000
a minute etc.
Mark Thoma
has a think about the future price of gasoline for us. The punch
line:
If past global expansions are a guide, global demand will
recede only gradually. This is a direct implication of the model
underlying this analysis. This suggests that US gasoline prices
will remain high for the time being. Barring a major economic
collapse in emerging Asia, prices will stabilise only as the
world economy learns to economise on the use of oil and gasoline
and as the supply of crude oil expands. Both corrective forces
will take time to gain momentum.
As an investor however I believe that there is a definite skew
in the probability distribution. Who ever heard of an extra 5 million
barrels per day unexpectedly hitting the market? Yet, there is a
distinct possibility of that much being unexpectedly withdrawn.
Better to own the upper tail than the lower.
Brad Setser
revisits the Gulf-inflation story -- single digit interest rates,
double digit inflation.
I'd like to see more game theory applied to the oil price analysis.
If they did peg their currencies to price, the Gulf could be the
world's ultimate monetary authority. They can open the spigots whenever
world growth flags below a targeted rate, and pull back when things
are running a little hot... I'd rather own a currency based on oil
than one based on gold.
Alternatively, they could pull back whenever there is talk of
carbon caps, open up when it looks like alternative energy is getting
too much interest and investment...
If I were advising them, here's my spin: Gulf states announce
that they are voluntarily limiting the production and export of
petroleum in order to contain global warming; and coincidentally
conserving global oil resources for future generations... Home run.
naked capitalism
James Hamilton at EconBrowser further
explains the difference between "inflation" - which only describes
what is produced locally - and let's call it "purchasing power"
- which includes the imported things I also buy - in a way that
even I can understand it, ie. with coconuts and oil.
In 2007, Islandia produced 500 coconuts, which residents sold
to themselves for $1 each, and imported 1 barrel of oil, which
cost $100... Nominal GDP in Islandia for 2007 was $500. If you
wanted to describe that in real terms, you'd call it 500 coconuts.
You don't count the oil in either nominal or real GDP because
Islandia didn't produce any oil...
Here are the numbers for 2008. We grew 510 coconuts, sold them
for $1.01 each, and still imported 1 barrel of oil, paying $125
for it. So nominal GDP was $515.10 (a 3% increase) and real
GDP was 510 coconuts (a 2% increase). The change in the implicit
GDP deflator would be the change in the ratio of nominal GDP
to real GDP, namely, +1%...
But wait a minute, Islandia's pundits decry. How can your crummy
accounting claim that inflation was only 1%? Last year we bought
500 coconuts and 1 barrel of oil for $600, but this year if
we tried to buy the same thing it would cost us $630. The inflation
rate, they tell you, is obviously 5%, not 1%.
Now I understand. But since I buy at least some imports every year
my purchasing power is not even meant to be described by the "inflation"
number. So TIPS aren't really going to do me any good are they.
What I need is a "purchasing power" protected bond. Likewise, if
I want to know if my wealth is growing in "real" terms it does me
no good to compare it to inflation - a production basket which only
includes part of what I need to buy.
Socialized capitalism of the sort the Fed and the Treasury are now
practicing, consisting of private gains and public losses, is untenable.
On the other hand, it's also true that giant Wall Street investments
banks as well as Fannie Mae and Freddie Mac are too big to fail.
How to reconcile these conflicting principles?
Here's a modest proposal: When taxpayers insure a giant entity
against loss -- as we now are with Freddie, Fannie, and Wall Street
investment banks -- those entities must agree that:
(1) for the duration of the bailout, their top executives cannot
receive total annual compensation higher than that received by the
President of the United States, and
(2) the government gets five percent of their current valuation
as shares of stock (roughly representing the benefit to their shareholders
of the federal insurance) -- so that if and when the entities become
profitable again, taxpayers are compensated for the risk they've
taken on.
According to Phillips the root an increasing dependence on trading
and speculation (a phenomenon he calls "financialization") was that
"Elements of the U.S. government decided, back in the late 1980s, that
finance, not manufacturing or even high technology, had to be the sector
on which Washington would place its strategic chips"
The problems besetting America today are ones Phillips has identified
before: an increasing dependence on trading and speculation (a phenomenon
he calls "financialization"), the Bush family's friendliness to
oil producers, and the bond between evangelical Christians and the
Republican Party. Today, these factors - along with the weak
dollar and a financial sector in shambles - have created a toxic
mix that he calls "bad money."
The ascendancy of finance in national efforts is no accident.
"Elements of the U.S. government decided, back in the late 1980s,
that finance, not manufacturing or even high technology, had to
be the sector on which Washington would place its strategic chips,"
he writes. And so the Reagan supply-side go-go years begat the Clinton
Rubinomics go-go years, with both presidents deferring to bond markets
and deregulating the financial system. Increasingly, Phillips says,
credit has been used less to finance virtuous commercial activity
and more to make bets on financial outcomes. After 9/11 and the
dot-com bust, the powers that be decreed that "real estate assets
and home prices had to be the follow-up strategy."
Aug 3, 2008 |
FT.com
US lawmakers last month began efforts to revitalise corporate
defined benefit plans, amid worries that Americans are not saving
enough for retirement. The effort comes as numerous companies are
closingDB pensions and offering new employees defined contribution
plans, which provide much less in retirement.
A joint economic committee hearing on the issue
in early July followed two years after the
Pension Protection Act was introduced to ensure companies' pension
plans had enough money to pay retirees - a law many say has backfired
and helped fuel DB scheme closures. The act took effect this year
and, among other things, requires companies to maintain a higher
funded status to cover their liabilities.
Lawmakers and the experts they interviewed at the
hearing said those closures could undermine the economy.
Defined benefit plans offer a guaranteed payout throughout retirement
and are typically managed by professional investors who benefit
from economies of scale. Defined contribution plans leave the onus
on individuals to save and manage their own assets.
But some doubt lawmakers will be able to make DB
plans anywhere near as robust in the corporate sector as in the
public sector, where defined benefit is the primary structure and
not considered to be in danger of extinction.
... ... ...
Senator Bob Casey, a Democrat from Pennsylvania
and member of the
Joint Economic Committee, convened the hearing because he said
US workers were on edge amid the market downturn and worried about
retirement stability.
Numerous DB plans have been closed to new employees
in recent years, especially in such beleaguered sectors as the airline
and automotive industries. A new report by the
Government Accountability Office says half of plan sponsors
of all sizes have frozen their defined benefit plans.
Company officials often say they closed their DB
plan because they wanted to decrease volatility. Defined benefit
plans invest about 60 per cent of their assets in the equity markets
but are federally required to maintain a consistent funding level.
They also have to make up any deficit within seven
years - more quickly than before. And under new accounting rules,
they must value assets on a mark-to-market basis, adding more volatility
to the balance sheet.
"The uncertainty is that you don't know what your
contribution is going to be," says
Bob Collie,
Russell Investments' director of research and strategy. "So
the corporate statement and the cash contributions are both more
volatile. The impact of market uncertainty is felt much more than
it used to be."
Companies that close their DB plan usually offer
new employees a defined contribution plan, also called a 401(k)
plan.
That tactic is mired in problems, lawmakers said.
First, DC plans do not build up enough money. After 30 years in
a 401(k) plan, the average worker retiring in her 60s would have
about $193,700 in 2006, according to the most recent
Employee Benefit Research Institute data - about $6,450 a year
if she lives until she is 90.
Comparatively, every $100 invested in a DB plan
earns about $200 more over the same 30 years than the same amount
invested in a DC plan, according to
CEM Bench�marking.
The extinction of defined benefit plans would also
mean wiping out an important source of capital for fuelling entrepreneurship
in the economy. Defined contribution plans do not invest in venture
capital, for example. Sherrill Neff, partner at the venture capital
firm
Quaker BioVenture, says the loss of venture capital assets from
DB plans could cripple the industry and eliminate new jobs.
Earl Pomeroy,
North Dakota Democratic representative, forcefully told the
committee Congress had "made all the wrong moves" in trying to strengthen
retirement savings.
In an interview following the hearing, Mr Pomeroy
said Congress must try to get companies to revamp their retirement
offerings.
He suggested a solution might be "hybrid" plans,
using target-date funds for example, that require worker contributions
but have better supervision so enough money is saved. Mr Pomeroy
also suggested tax incentives.
William Quinn, chairman of
American Beacon Advisors, which manages
American Airlines' $20bn (�10bn, �12.8bn) in pension assets,
suggests Congress could write legislation allowing pensions to take
a longer view on assets andliabilities to remove short-term volatility,
such as averaging interest rates over severalyears.
Corruption of the society by "free marketers" has profound consequences.
Second round of enthusiasm after dot-com bubble -- now in real estate
corresponded to the desire of power to be to inflate the bubble. There
is an important historical distinction between Versailles Treaty
and Marshall plan. Keynes resigned from British delegation in
protest against too harsh treating Germany by victors and wrote the
economic consequences of peace. And it really generated tremendous resentment.
After World War II the brilliant move was to establish Marshall plan.
Shiller sees strong parallels with the subprime crisis and argues that
we should deal with the problem in the style of Marshall plan.
He calles for A New "New Deal"...
There are two parts to the CRE bust: 1) less investment in non-residential
structures, especially hotels, offices, and malls, and 2) rising
delinquency rates for existing CRE. The first leads to less employment,
the second to more write downs for lenders (and more bank failures
since many small to mid-sized institutions are overexposed to CRE).
... ... ...
Delinquencies among prime loans,
which account for most of the $12 trillion market, doubled to 2.7
percent in that time...
While it is difficult to draw precise parallels among various
segments of the mortgage market, the
arc of the crisis in subprime loans suggests that the problems in
the broader market may not peak for another year or two, analysts
said.
Defaults are likely to accelerate because
many homeowners' monthly payments are rising rapidly.
The higher bills come as home prices continue to decline
and banks tighten their lending standards, making it harder for
people to refinance loans or sell their homes.
Of particular concern are "alt-A" loans, many
of which were made to people with good credit scores without proof
of their income or assets.
- Ignoring Catalysts
- Catching the Falling Knife
- Failing to Consider Macroeconomic Variables
- Forgetting About Dilution
- Not Recognizing Seasonal Fluctuations
- Missing Sector Trends
- Avoiding Technical Trends
Jun 1, 2008 | The Sunday Times
Taleb's top life tips
1. Scepticism is effortful and costly. It is better to be sceptical
about matters of large consequences, and be imperfect, foolish and
human in the small and the aesthetic.
2. Go to parties. You can't even start to know what you may find
on the envelope of serendipity. If you suffer from agoraphobia,
send colleagues.
3. It's not a good idea to take a forecast from someone wearing
a tie. If possible, tease people who take themselves and their knowledge
too seriously.
4. Wear your best for your execution and stand dignified. Your
last recourse against randomness is how you act - if you can't control
outcomes, you can control the elegance of your behaviour. You will
always have the last word.
5. Don't disturb complicated systems that have been around for
a very long time. We don't understand their logic. Don't pollute
the planet. Leave it the way we found it, regardless of scientific
'evidence'.
6. Learn to fail with pride - and do so fast and cleanly. Maximise
trial and error - by mastering the error part.
7. Avoid losers. If you hear someone use the words 'impossible',
'never', 'too difficult' too often, drop him or her from your social
network. Never take 'no' for an answer (conversely, take most 'yeses'
as 'most probably').
8. Don't read newspapers for the news (just for the gossip and,
of course, profiles of authors). The best filter to know if the
news matters is if you hear it in cafes, restaurants... or (again)
parties.
9. Hard work will get you a professorship or a BMW. You need
both work and luck for a Booker, a Nobel or a private jet.
10. Answer e-mails from junior people before more senior ones.
Junior people have further to go and tend to remember who slighted
them.
naked capitalismIf anyone needs any any evidence that the
Wall Street Journal is a mere prenteder in comparison to Pearson's
Financial Times, they need look no farther than
Dancing The Freakout - Was Jim Cramer Right?. Of course one
piece doesn't make a newspaper, but attributing early call of The
Arrival of The Big One to Mr Cramer - a mere housetop weatherwane
- albeit a Tourette's-affected one - is absurd, though perhaps not
an unexpected one for The Journal.
The primary difference begins with both media organizations obviously
need to serve their respective audiences. The quality of the output
initially reflects this. But why should the FT feel compelled to
constantly scratch under the skin of capitalism (and prevailing
politics) whilst the WSJ cheerleads, rarely ruffles feathers, and
maintains the narrowest (and most dogmatic) of political lines -
the former evidenced again in this piece by asking the most fatuous
of questions, rather entertaining pre-emptive thoughts about how
"the market" might be wrong?
I believe that it is a function of "class", eschewed as the term
may be in America, and most American analyses. For in Britain, the
City readers of the FT knew their class inherently. Mobility
was poor, and along with one's class, one's political interests
were implicitly understood. And so a far more factual, unintermediated
approach evolved, with opinion segregated and flagged. The readers
of the Wall St. Journal being aspirational, were far amorphous and
without solid class affiliations and attendant interests, far more
politically malleable. And so the Journal editors took it upon themselves
to shape and mold the opinion of numerous fence-sitters into the
dubious but doctrinaire fold of the inviolable primacy of the free
market, with all its political baggage. In perfect markets, this
may be tolerable, but in a modernity where business interests have
captured the flag, investment in rent-seeking is often more attractive
than capital investment, oligopoly's are rife, the potential for
the mouthpiece of the market to morph into something not dissimilar
from Radio Pyangyang is a clear and present danger.
It is precisely the FTs confidence that gives it the freedom
to critical analyse anything and everything pursue systemic faults
objectively. For despite their role as protaganist for capitalism,
there are no sacred cows that threaten their, and their reader's
position. It is understood implicitly that ironing out the kinks
in the market and the system, however inimical to one special interest
or another enhances the their positions. It is this same confidence
that allows it to comfortably inject collegiate humour, satire and
parody - as seen in Lex, or FT Alphaville - something completely
absent from the strident, over-earnest, near-paranoid dogmatism
one witnesses in the Journal.
So one year on, asking whether Cramer is "Da' Man" for his syphilitic
rant really misses the point, which should be: Where was he (and
this refers to all Cramers and their mindless ilk) during the prior
four years? Why wasn't he ranting about the sheer stupidity of Americans
withdrawing equity from their homes en masse at increasingly
inflated prices? Why, pray tell was he not doing angry cartwheels
in regards to the PBoCs absurd accumulation of USD reserves to prevent
a classical BW correction of the USD relative to the RMB? Why was
he not flagging the Bush tax cuts and lack of US energy policy as
massively shortsighted endeavors with imminent and meaningful negative
consequences for the entire nation (and perhaps the financial system
of the entire world)?? Where was the outcry when AGs fed sat at
nearZIRP, woefully behind the curve? And one can go on, but I've
already beaten it to death.
There is a reason I eschew The Journal except when I am stranded
without my own material and find a copy laying about upon the airline
seat next me, which is rarely if ever...
naked capitalism
The Wizard of Oz was originally written around the turn of the century
(last one) as a
populist allegory railing against the banks and railroads and
Yip Harburg, the lyricist for the 1939 movie, specifically stuck
to that intention. I believe the tin man was the factory worker,
the straw man the farmer, the cowardly lion was William Jennings
Bryan, the fake wizard was Wall Street (as today) and the witches
the monopoly trusts. The munchkins were the "little people". Dorothy
was you and me.Plus ca change...
GDP for Q407 was revised to a negative 0.25%, Q108 to 0.9%, but
Q208 was reported at 1.9%. The big story in the data was net exports.
Dean Baker (via DeLong):
Exports grew at a 9.2 percent annual rate. More importantly,
imports fell at a 6.6 percent annual rate. Together, the change
in net exports added 2.42 percentage points to GDP growth for
the quarter...
Jobs
are
weak.
Nonfarm payrolls fell for the seventh straight month in July,
while the nation's unemployment jumped to 5.7%, a four-year
high, according to the Labor Department. Underemployment, a
more comprehensive measure of the extent of labor market weakness,
rose to 10.3%, its highest level since 2003 and two points above
its July 2007 level. Since December, 463,000 jobs have been
lost, the strongest signal yet that the economy is in a recession.
Tourism is
not
responding as strongly as one would hope to the weak dollar.
The world's long-haul international travelers have jumped
by 35 million since 2000, yet America has been largely overlooked
by those new travelers, despite favorable exchange rates resulting
from a weak dollar and attractions like Disney World and the
Grand Canyon. In fact, the annual number of foreign visitors
to the US is about 2 million lower than in 2000, leading travel-industry
experts to figure that from 2000 to 2007, the US economy took
a hit of about $150 billion... Foreign visitors to Orlando,
Fla., dropped by one-third from 2000 to 2006; by nearly 40 percent
over the same period to Anaheim, Calif. (read Disneyland); and
by 22 percent to Las Vegas, a frequent entry point for foreigners
to the Southwest... in all 50 states, travel and tourism figure
somewhere among the top four industries by economic impact.
New York
may go broke (again).
Costs are rising and revenues are falling fast. In June 2007
the 16 banks that pay the most taxes on their profits remitted
$173m to the state treasury. Last month this dropped to $5m,
a 97% decrease. This is a frightening fall given how much the
state's coffers rely on Wall Street taxes: 20% of all state
revenues come from financial companies... Wall Street lost 4,300
jobs during the month of June alone... In less than 90 days,
the projected deficit over the next three years has jumped 22%
to $26.2 billion.
Peter Bernstein has
added his voice to the chorus, waxing apocalyptic.
In 2007, as if some kind of secret signal went out among
them, housing prices accelerated their decline while the prices
of oil and food rocketed higher... the most unusual feature
of our current problems: the primary impact of all of them has
been on consumers, not on businesses... Today, a halt in the
decline of home prices seems the necessary condition to transform
the system from despair to hope and to turn the financial sector,
now embattled and disorganized, back into the functioning organism
the economy needs so badly... To sit back and let nature take
its course is to risk the end of a civil society.
Too many developed economies got
addicted to asset inflation - the increasing valuations were the
only source of yield to service the debt incurred in their purchase
- a Ponzi scheme in the Minsky sense. Now that bubble has burst.
Houses are a non-productive asset, a consumption good. Values have
to fall to where they can be serviced from current incomes - whether
via a mortgage payment or rent - or incomes have got to rise via
wage inflation. I still don't see any other way out. The first decimates
(many) banks, the second decimates the dollar.
(Paul Davis at Technology
Investment Dot Info.
IT WAS the extreme greediness of privileged Americans that caused
hundreds of thousands of their fellow citizens to lose their homes,
undermined the economies of not only the U.S., but of nations around
the world, and sabotaged the stock-market
investments of heaven only knows how many million grey-haired pensioners
like me.
Were it not for rotten governance in Washington, however, the
greedsters could never have gotten away with their highway robbery.
In the case for the prosecution, let us present, as Exhibit A,
two government-chartered, U.S. companies: Fannie Mae and Freddie
Mac.
IMHO a very incoherent thinking as the main danger might be
stagflation. First of all, the USA is not an isolated country and now
if dollars will be thrown in the face (aka exchanged into euro or yen)
can import inflation (like in too much money chasing too few goods).
Whether commodities prices come down remain to be seen. That means that
producer might have no alternatives but to raise prices.
"If American households are losing ground
to inflation," said Adam S. Posen, deputy director of
the Peterson Institute for International Economics in Washington,
"and they can't resort to automatic cost-of-living
adjustments or union power, they'll find some other way, through
their demands on the political process and through their expectations."
Among the Fed's policy makers, the majority argue that the wage
pressures that Mr. Fisher and a few others see as imminent are still
well down the road. Dealing with a nonexistent problem by raising
interest rates now, they say, could push a still growing economy
into outright recession.
But those holding this majority view, among them
Ben S. Bernanke, the Fed chairman, invariably add a significant
caveat: They could be wrong. Wage pressures could somehow erupt,
catching them off guard. Given that risk, they say, they would prefer
to raise interest rates from their present very low level rather
than do so too late.
... ... ...
We could be in a world," Mr. Sack said, "where workers will have
limited ability to negotiate higher pay and companies will have
limited ability to raise prices."
Nice illustration of the fact that Krugman sometimes is a sloppy
mathematic (none of variables are defined) and is unconvincing as an
economist (printing press speed, which in case of US might be just a
repatriation of dollars, is a variable which affects inflation as Weimar
republic experience demonstrates)
Just about every economist believes that wage increases reflect
both the state of the labor market - high unemployment suppresses
wage demands - and expected future inflation. But expected future
inflation in what? One school of thought, going back to Keynes,
says that workers basically look at other workers as a reference
point, so that wages reflect expected future wage changes:
(1) % change in wages = A - B*(unemployment rate) + expected
rate of wage increase
The other, driven largely by the experience of the 1970s, says
that it's the overall rate of consumer inflation that matters:
(2) % change in wages = A - B*(unemployment rate) + expected
rate of increase in the CPI
Lou Uchitelle has a
great piece in today's Times highlighting the extent to which
the difference between (1) and (2) is driving disputes about monetary
policy. If you believe (1), inflation is well under control: wages
aren't taking off, the labor market is weak, and
once oil and food price spikes end we'll
be, if anything, in a deflationary environment. If
you believe (2), oil and food will spill over into general inflation,
and the Fed needs to raise rates despite the lousy economy to head
inflation off at the pass.
Now here's the thing: all of the recent evidence points to (1).
I'd argue that the logic of the situation does the same: without
cost-of-living allowances in wage contracts (we've got an un-COLA
economy), there's no reason either workers or employers should regard
the price of gasoline as relevant to their bargaining. That, fundamentally,
is why I'm a monetary policy dove right now: I don't think there's
any fundamental inflation problem, just a one-time hit on food and
energy.
I suspect that Ben Bernanke believes the same, but he has a problem
- namely, that many people inside and outside the Fed believe in
(2), even though there's no sign of it in the data. Any day now,
they warn, inflation is going to break out all across the economy,
and the Fed needs to take the punchbowl away NOW NOW NOW, never
mind the weak economy.
Sometimes, it's not easy being Ben.
An important concept of revolutionary power: "The
distinguishing feature of a revolutionary power is not that it feels
threatened...but that absolutely nothing can reassure it (Kissinger's
emphasis). Only absolute
security - the neutralization of the opponent - is considered a sufficient
guarantee"..
Paul Krugman
is currently on a tour promoting his new book,
The Great Unraveling: Losing Our Way in the New Century.
The book is basically a collection of Krugman's
columns at the New York Times.
Kevin Drum of CalPundit
ran a long quote from Krugman's introduction to the book. Here's
the quote, because yes, I think it's that important:
Most people have been slow to realize just how awesome a
sea change has taken place in the domestic political scene....The
public still has little sense of how radical our leading politicians
really are....Just before putting this book to bed, I discovered
a volume that describes the situation almost perfectly....an
old book by, of all people, Henry Kissinger....
In the first few pages, Kissinger describes the problems
confronting a heretofore stable diplomatic system when it is
faced with a "revolutionary power" - a power that does not accept
that system's legitimacy....It seems clear to me that one should
regard America's right-wing movement...as a revolutionary power
in Kissinger's sense....
In fact, there's ample evidence that key elements of the
coalition that now runs the country believe that some long-established
American political and social institutions should not, in principle,
exist....Consider, for example....New Deal programs like Social
Security and unemployment insurance, Great Society programs
like Medicare....Or consider foreign policy....separation of
church and state....The goal would seem to be something like
this: a country that basically has no social safety net at home,
which relies mainly on military force to enforce its will abroad,
in which schools don't teach evolution but do teach religion
and - possibly - in which elections are only a formality....
Surely, says the conventional wisdom, we should discount
this rhetoric: the goals of the right are more limited than
this picture suggests. Or are they?
Back to Kissinger. His description of the baffled response
of established powers in the face of a revolutionary challenge
works equally well as an account of how the American political
and media establishment has responded to the radicalism of the
Bush administration over the past two years:...."they find it
nearly impossible to take at face value the assertions of the
revolutionary power that it means to smash the existing framework"....this
passage sent chills down my spine....
There's a pattern...within the Bush administration....which
should suggest that the administration itself has radical goals.
But in each case the administration has reassured moderates
by pretending otherwise - by offering rationales for its policy
that don't seem all that radical. And in each case moderates
have followed a strategy of appeasement....this is hard for
journalists to deal with: they don't want to sound like crazy
conspiracy theorists. But there's nothing crazy about ferreting
out the real goals of the right wing; on the contrary, it's
unrealistic to pretend that there isn't a sort of conspiracy
here, albeit one whose organization and goals are pretty much
out in the open....
Here's a bit more from Kissinger:
"The distinguishing feature of a revolutionary power is
not that it feels threatened...but that absolutely nothing can
reassure it (Kissinger's emphasis). Only absolute security -
the neutralization of the opponent - is considered a sufficient
guarantee"....I don't know where the right's
agenda stops, but I have learned never to assume that it can
be appeased through limited concessions. Pundits who predict
moderation on the part of the Bush administration, on any issue,
have been consistently wrong....
I have a vision - maybe just a hope - of a great revulsion:
a moment in which the American people look at what is happening,
realize how their good will and patriotism have been abused,
and put a stop to this drive to destroy much of what is best
in our country. How and when this moment will come, I don't
know. But one thing is clear: it cannot happen unless we all
make an effort to see and report the truth about what is happening.
Now... With all that in mind, here's a link to
Drum's
interview with Krugman.
With all due respect for his views this guy should really reread
J.K.Galbright and apologize. Better late then never...
July 18, 2008 | NYTHome prices are in free fall. Unemployment
is rising. Consumer confidence is plumbing depths not seen since
1980. When will it all end?
The answer is, probably not until 2010 or later. ....
...According to the widely used Case-Shiller index, average U.S.
home prices fell 17 percent over the past year. Yet we're in the
process of deflating a huge housing bubble, and housing prices probably
still have a long way to fall.
Specifically, real home prices, that is, prices adjusted for
inflation in the rest of the economy, went up more than 70 percent
from 2000 to 2006. Since then they've come way down - but they're
still more than 30 percent above the 2000 level.
Should we expect prices to fall all the way back? Well, in the
late 1980s, Los Angeles experienced a large localized housing bubble:
real home prices rose about 50 percent before the bubble popped.
Home prices then proceeded to fall by a quarter, which combined
with ongoing inflation brought real housing prices right back to
their prebubble level.
And here's the thing: this process took more than five years
- L.A. home prices didn't bottom out until the mid-1990s. If the
current housing slump runs on the same schedule, we won't be seeing
a recovery until 2011 or later.
What about the broader economy? You might be tempted to take
comfort from the fact that the last two recessions, in 1990-1991
and 2001, were both quite short. But in each case, the official
end of the recession was followed by a long period of sluggish economic
growth and rising unemployment that felt to most Americans like
a continued recession.
Thus, the 1990 recession officially ended in March 1991, but
unemployment kept rising through much of 1992, allowing Bill Clinton
to win the election on the basis of the economy, stupid. The next
recession officially began in March 2001 and ended in November,
but unemployment kept rising until June 2003.
These prolonged recession-like episodes probably reflect the
changing nature of the business cycle. Earlier recessions were more
or less deliberately engineered by the Federal Reserve, which raised
interest rates to control inflation.
Modern slumps, by contrast, have been hangovers from bouts of
irrational exuberance - the savings and loan free-for-all of the
1980s, the technology bubble of the 1990s and now the housing bubble.
Ending those old-fashioned recessions was easy because all the
Fed had to do was relent. Ending modern slumps is much more difficult
because the economy needs to find something to replace the burst
bubble.
The Fed, in particular, has a hard time getting traction in modern
recessions. In 2002, there was a strong sense that the Fed was "pushing
on a string": it kept cutting interest rates, but nobody wanted
to borrow until the housing bubble took off. And now it's happening
again. The Onion, as usual, hit the
nail on the head with its recent headline: "Recession-plagued nation
demands new bubble to invest in."
beat_the_press_archive
The reason for asking is that the Washington Post is
reporting that Greenspan believes the housing market is nowhere
near the bottom. While I strongly agree with this assessment, it
is worth pointing out to readers that Greenspan spent his tenure
as Fed Chairman avidly denying the existence of a bubble in the
housing market.
Greenspan is certainly entitled to change his mind, but readers
should realize that Greenspan has an
abysmal record in assessing trends in the housing market,
so they may want to weigh his views accordingly.
--Dean Baker
While new hotels open, occupancy rates are falling across much of
the United States.
"We're really on the verge," said Charles Snyder of Smith Travel
Research, a firm based in Hendersonville, Tenn. "It hasn't turned
into a hotel recession just yet, but we're certainly keeping an
eye on the economy."
... ... ...
Hotels, of course, are not the only victims of the softening
in consumer spending. Restaurants that offer casual dining are suffering,
too, as are midlevel department stores and retailers of discretionary
goods, like
Starbucks.
G.M. and Ford also had expected economic conditions to improve in
the second half of this year, but now are forecasting an even more dismal
sales environment. GM bonds were trading on Friday at 48 cents on the
dollar.
Goldman Sachs put out a research note late today lowering their
projections for the second half.
"[W]e are on the cusp of a renewed deceleration in growth."
Comments:
Anonymous writes:
Anyone have a collection of quotes promising recovery in
2H 2008?
Anonymous | 08.01.08 - 11:08 pm
Eng-101 writes:
Let's see if we can translate this phrase, this mangling
of the language
"[W]e are on the cusp of a renewed deceleration in growth."
into proper English:
- The economy is about to fall of a cliff (cliche),
- You ain't seen nothin' yet (too vague and too colloquial),
- Hold on to your seats-- we're going down fast (too Hollywood)
- Assume crash positions (again Hollywoodish),
- It's wearing off man, I'm crashing (too 60's)
- ?
Eng-101 | 08.01.08 - 11:19 pm
The Grinch writes:
Consumers will be facing price hikes of up to 15 percent
on holiday goods, from toys to European luxury handbags. Many
retailers had resisted passing along higher prices to consumers,
but escalating costs - fueled by rising energy prices, higher
labor costs in China and a weak dollar - are forcing stores,
from warehouse clubs to high-end merchants, to pass more of
the burden to shoppers.
THE IMPACT: The price increases could make shoppers buy fewer
holiday gifts to keep to a budget. That could mean a serious
hit for the economy, since consumer spending accounts for two-thirds
of all economic activity and for the holiday period, which accounts
for about 40 percent of merchants' profits and 50 percent of
sales.
The Grinch |
Homepage | 08.01.08 - 11:23 pm
The Grinch writes:
"Americans are driving less, cutting into federal fuel taxes,
which help pay for maintenance of highway and mass transit systems,"
said American Association of State Highway and Transportation
Officials Executive Director John Horsley. "The cost of construction
materials -- steel, concrete, asphalt -- is skyrocketing and
at the same time that people are driving less, and that means
less revenue. We're in a double whammy."
Others blame more than just a lack of money.
"Lack of vision, lack of leadership and lack of investment.
Infrastructure is something that's been easy to ignore," said
Urban Land Institute senior Resident Fellow for Sustainable
Development Ed McMahon.
It's especially easy to ignore if you consider the latest
estimates on how much it would cost to repair all 590,000 in
America: $140 billion.
The Grinch |
Homepage | 08.01.08 - 11:32 pm
John Kenneth Galbraith
The Affluent
Society Summary and Study Guide - John Kenneth Galbraith
Amazon.com- The Affluent Society- John Kenneth Galbraith-
Books
Resources on John K. Galbraith
Institutional economics
Central banks and international institutions
Reviews 'Economic with the truth' by John Kay Prospect Magazine October
2000 issue 56
One of the problems faced by economists is that everyone knows about
economics. Most people are ready to accept that a physicist, or
a lawyer, or a historian knows something they don't. Economists
encounter no similar deference. If you introduce yourself as an
economist, you will probably be asked for a prediction about what
is going to happen to interest rates, which the recipient will-rightly-not
take very seriously.
Politicians regularly express views on economic matters. Not
just on the objectives of economic policy, but on technical questions
such as the relationship between the money supply and the level
of output. When they express similar opinions about questions in
hard sciences-as with Stalin's adoption of Lysenkoism or Mbeke's
opinions on Aids -- it is understood that they have overstepped
the mark. Not so in economics.
Maybe economists do not deserve the professional respect accorded
to physicists, lawyers or historians. Perhaps economics is tosh,
like spiritualism or scientology; perhaps what students learn in-demanding
and sought-after-undergraduate and postgraduate courses is mumbo-jumbo:
perhaps the language of economics is useful only in talking to other
economists. But if I were writing an...
FSO Editorials Tainted Research Lysenkoism - American Style by Antal
E. Fekete06-10-2003
by Antal E. Fekete,
Professor Emeritus, Memorial
University of Newfoundland. [June 10, 2003]
Hobson's Choice
Unfortunately, the use of "Lysenkoism" as an epithet has been
degraded by overuse, especially in absurd situations.
I propose to restrict "Lysenkoism" to circumstances
where a clear case can be made for coercive enforcement of the belief
system from outside
the system (e.g., by state patronage). For example, if
a concept spreads concurrently among the scientific communities
of several countries, it is almost certainly not Lysenkoism. One
might feel like calling it that, but the analogy with Lysenko would
fail to apply.
Asset allocation
Pensions problem
I think the interaction between unions and inflation is U-shaped (I vaguely remember reading a paper that made this point, but the citation eludes me): weak unions can't push up wages, but also if you have very strong unions with centralized wage bargaining, they take into account the economy-wide externalities when they negotiate national agreements. It may be that the intermediate degrees of union power that are more problematic in this regard (and maybe Europe as a whole falls into that intermediate category).