The Simple Accountant

25 Reasons We Will Not Have a Depression

Thank you Mr. Corson,

This posting is a salutary antidote to the excessive pessimism often on display here. The challenges are daunting, but as you say, there is much to be done, and it's time to get on with it.

Velocity of U.S. Money Supply Is Finally Edging Up

It's a curious set of data out there. If V is picking up, the bond market isn't reflecting it (ref. John Jansen's Friday outlook) in the short maturity yields. It does bear watching however. Supply + velocity is a recipe for incipient money inflation, and one would think the bond vigilantes would be all over this.

My own allocation is presently overweight fixed income, but a good portion of this is TIPS; I have been anticipating putting on the inflation trade for some time now. The trigger event for me would be a material increase in yields, but for now the ongoing inflation/deflation debate remains unresolved.

The Distorted Shape of Our Emerging Recovery

The current economic situation is not IMO a discrete event resulting from identifiable policy errors and analytical failures, although they certainly have accelerated and deepened the problems.

The macro trends have been in place for decades, and would play out over time even without the near collapse of the global financial system. Global capital mobility, accelerated technological displacement of established industries, excess labour supply in developing markets, etc.

These would eventually constrain the ability of industrialized nations to maintain standards of living for large segments of their populations, absent significant investment in human capital; even then there is no clear programme and no assurance of success. These nations have, however, proven to be remarkably creative and resilient, so I tend not to worry so much as Mr. Corson.

Structural Unemployment: The Only Cure

Mr. Nielson,

You may have missed Arizona Glen's point: we cannot overlook the fact that the marginal cost to business of additional labour hours per existing worker are lower than the cost of adding headcount. Hence for example the mandatory overtime at automaker plants in the boom years.

Under a work-sharing scheme, which in itself is not a bad idea, there would need to be some kind of policy response to incentivize employers do something along those lines. For example, in several European states, governments are "topping up" wages for employees in firms where hours have been reduced across the board in lieu of headcount reduction. Even this is seen as a temporary measure, until labour markets recover.

Structural Unemployment: The Only Cure

As I have noted elsewhere, the US is turning both European (long term higher structural unemployment) and Japanese (zombie financial institutions mis-allocating capital). This is a result of an accumulation of serious policy errors which will tend to blunt the processes Dave Wrixon and chap08 describe.

It will be interesting to see how US society responds. One possibility is an increase in something that looks more like traditional family structures: one spouse with earned income and one with household responibilites, multiple generations in the same household, etc. Of course, they will not simply return to an earlier time, but will reflect contemporary circumstances

Seen in a longer term historical perspective, the social arrangements over the last six or seven decades, which we have come to view as normal, are really quite exceptional, and may in time prove to have been a temporary aberration. Indeed, simply from a resource consumption standpoint, they never were sustainable over the very long term in any case.

Things will work out, as they always do, and not without some disruption and real pain, but we will come out OK, and probably be a better society for it.

Capitalism Is for the Other Guy

Very thought provoking article and comments. While the hubris in Washington and on Wall Street is not quite as evident to me as, say, Louis XV's "apres moi le deluge," there is an unmistakable note of disillusionment in the zeitgeist. It is certainly evident on this site. However, there are some serious people making serious efforts to come to grips with serious problems in the global economic system.

Giving in to pessimism is the wrong way to go here (and it has been a portfolio killer for most of the last eight months). We might lose faith in government officials or bankers, but we can't lose faith in ourselves. Let's see what happens going forward, but in a cultural sense, failure of courage to confront large challenges is not how modern civilization was built. Marx, Spengler, Toynbee and others have gotten it wrong, repeatedly.

U.S. Wages Are Out of Balance, As We Well Know

We should point out, it's not only global labour arbitrage, but also regulatory and statutory and customary/cultural arbitrage that pressure developed nation wages. One only has to walk through a few Chinese factories to understand this.

Total cost of employment net of tax effect remains lower in most developing nations, so this process will be ongoing. It's a difficult outlook for the developed nations but partially offset by the availability of cheaper imported goods.

Fullermoney: Watch the Yield Curve Indicator

Thinking through this, yield curve flattening would have to happen through (1) rising short maturity yields, (2) falling long maturity yields, or (3) some combination of 1 and 2.

#1 would happen by central bank tightening, #2 primarily through market action. The Fed has repeatedly told us they will not raise rates any time soon, and the market is pushing long maturity yields upwards incrementally, any QE notwithstanding.

My takeaway from that is there is nothing on the horizon which would suggest a flattening yield curve in the US. Of course, we have been surprised by events with some regularity, so stay alert and don't hesitate to close any positions quickly.

On Nov 11 06:27 AM enigmaman wrote:

> How much more can the Yield spread continue, looking at the chart
> it appears current spreads are about where the previous two yield
> spreads topped and rolled over. They both topped a few years before
> the markets corrected in 1999 and 2008. Yield curve is a good leading
> indicator for a bull rally but a lagging indicator for a bear because
> the markets still rose as the yield spread started to compress, though
> the lag time has shortened dramatically. Any conjecture on this most
> recent yield curve spread pattern going forward? What can cause it
> to roll over?

Holding Cash? Might as Well Hold TIPS Instead

The Fed has consistently signaled that deflation will not be allowed, come what may, so the inflation trade is the order of the day. Few things have ever been more obvious for the portfolio manager

An easy, and relatively lower risk, inflation trade for those uncomfortable with the volatility of the commodity markets: TIP + TBT

4 Possible Market Scenarios, Updated

Agree with this. US turning Euro AND Japanese at the same time, in limited fashion. Permanently higher structural rate of unemployment seems likely, as does perpetuation of zombie banks hoarding capital, and large fiscal deficits.


On Nov 05 02:03 PM Alex_G wrote:

> Alex,
>
> I would swap the probabilities of GD 2.0 and an amended Japanese
> disease. I think the govt will do anything (including severely debasing
> the currency) to avoid GD 2.0, which will result in the substantially
> higher taxes you talk about. What this will do is make our economy
> look a lot like the Euro Zone’s, much slower growth, with lower levels
> of private investment and a higher level of unemployment going forward.
> Full employment might have a bottom 6-7% unemployed.

A New Economic Indicator?

OK, lets see...
Gold run - check
Ammo run - check
Canned goods must be next?

Are we supposed to think the US proletariat is arming itself against...what?
Does this explain all the empty seats at recent NASCAR Cup races too?
What does Ted Nugent have to say about all of this?

How Hyperinflation Can Accompany a Deepening Recession

1970s stagflation was fairly conclusively demonstrated to have been a result of cost push input price shocks, namely (1) lifting of wage & price controls, and (2) petroleum embargo. The monetarist explanation seems to me less compelling.

We did experience energy price shock from Q4 2007 through Q2 2008 at the outset of the most recent recession, but are there any other common factors?


On Oct 29 04:33 AM W.E. Heasley wrote:

> Mr. Corson:
>
> Excellent article.
>
> If you did not live in the 1970's then its much harder to understand
> StagFlation. Can remember going into the store, picking up a package,
> peeling off the price tag, on top of the price tag, on top of yet
> other price tags to see what the price was when the package first
> entered the store (no bar codes then). It got to be a hobby to see
> "what the item cost a short time ago".
>
> That "price tag" hobby was real life. Plus people were using this
> line all the time: "better buy it before the price goes up".
>
> Maybe your equation should be y = mx + b. That way you can quickly
> plot your point on the weird-econo-poop-o-meter- curve brought to
> you by the Council of Economic Advisors (Romer, Bernstein, Summers,
> and Goolsbee). You know, the people that brought you "Jobs Saved".
>
>
> Understand you reference to Hyper-Inflation and what context you
> are meaning. Maybe Hyper-Debt needs some consideration as well.

Bill Gross Thinks All Assets Appear to Be Overvalued Long-Term

What Gross advocates, and US policy makers appear to be counting on, is something analagous to Voltaire's famous remark that "the art of medicine consists in amusing the patient while nature cures the disease." Which is to say, they are buying time for what they hope will be a natural recovery. Reduction of excess debt through steady inflation, gradual repayment, manageable default rates, etc.

America Uncoupled: Wall Street and Main Street at a Fork in the Road

Seen in historical perspective, the United States is internally returning to something more like the "robber baron" era. The establishment of what a previous commentator refers to as "Middle class centered participative democracy" was in reality a transient phase created by two primary elements: the hard won gains of the working class through organized labor action, and the US supplanting of Britain as the dominant world economic power. There are many volumes of labor and economic history which document these.

In both of those developments was contained the seeds of their own undoing. The very success of American labor in winning a solid middle class lifestyle for industrial workers led to their their abandonment by relatively unconstrained capital mobility, with de-industrialization beginning much earlier than most of us realize (the population of Detroit peaked in the early 1950s).

The burden of being the world's dominant power has severely constrained the policy options of the government. In the macro process of globalization, the US has had much to lose, and its industrial, financial and political elites have not provided particularly good leadership. They have too often sold the nation down the river for their own short term gain.

Is Capitalism in Its Death Throes?

Well, certainly anything like the "ideal" or "pure" form of capitalism likely to be put forward by most people, would be a kind of entrepreneurial capitalism consisting mainly of small proprietors. The problem of an advanced industrial society is a structural one, because a world of small proprietor capitalism can't achieve the scale required to innovate and produce the goods and services required. So, something like the Pareto principle (a.k.a. the 80/20 rule) holds, where a small number of large firms utterly dominate the much larger number of small firms.

The downside of this is that large institutions are required, and that creates a massive agency problem. Poor governance and managerial self-serving at the expense of shareholders, in a broad sense, explain much of what we have seen as recurring problems of capitalism over that past decades. In a sense, the agency problems appear in a similar form in representative government, where elected officials look after their own interests before those of their constituents. Therefore ownership, the basis of capitalism and democracy in theory, is weaker than management, which produces all sorts of distortions.