rosey99

The Declining Dollar: Is There a Government Solution?

It's not to late to at least act like responsible adults. . .I hope. Or we could continue to talk about the problems we face like drunk teenagers, we'll blow up Harvard, we'll move the capitol, or solve our problems with targeted tax cuts. It's the Left. . .Er, no it's the Right that is the problem. Puhlease.

No matter how many universities we bulldoze, no matter how many bankers are thrown into dungeons, no matter how much stimulus or tax cuts we steal from our children, we will not cure our own lack of conscience. It's a curious state of affairs where every single good thing is the result of our individual wisdom, hard work, and courage. And every problem is the consequence of: the banks, the government, the poor, the rich, the corporations, the unions, the Left, the Right, the RINOs, the Blue Dogs, the teachers, the military, the Chinese, OPEC, etc. Simply choose the group (or better still the groups) from the above list, circle the ones you don't belong to, and the exercise is complete. Extra credit is given for choosing groups that are widely despised. Rinse, repeat.

Obviously, since none of us are responsible for the problems, we as individuals should not make a single sacrifice toward any solutions. We are apparently passive bystanders, utterly powerless to influence government, let alone change it. In terms of our abilities to evade responsibility, every American seems perfectly qualified to run a Wall Street bank.

Manufacturing, Exported Goods Sharply Up: So What's the Problem?

Is this really possible? I remember Warren Buffet bringing up the idea of import certificates some time ago. But I also seem to recall that at the time Buffet mentioned that such a policy would probably violate a number of WTO rules. I'd love to be wrong about this, so where did the author find that import certs are allowed by WTO rules? It beats the hell out of a VAT (IMO) which I think is probably on its way.

This is an interesting piece, but I would be interested in seeing how real manufacturing output has changed (say, since the 1970s) in per capita terms (adjusting for population) and as a share of global manufacturing (the US slice of the manufacturing pie).

Based on what I know (or think I know) people in the US spend a slightly lower percentage of income on consumer goods today than in the 1970s, and a smaller % on food too. The big increases (again, as a % of income) have been for health care, housing, and education. And one could argue that a certain portion of the increase for housing is actually education as home-buyers with kids are willing to compete for, and pay a premium for, good schools. I think we can all agree that the portion of income spent on debt service for the "average" household has also gone up.

As for Old Trader's comment above:
The general tariff level in China is around 9.9%, in most cases it can only go up from there. I don't know what the US "general" level is, but the recent punitive tariff on tires raised the tariff from 4%. And then there is that pesky question of the yuan "peg."

IMO WTO rules are a bit complex, so if anyone could direct me to information describing the conditions under which a deficit nation is allowed to issue import certificates, I'd be grateful. Interesting piece.


On Oct 04 12:18 PM Kimball Corson wrote:

> Perhaps we could charge a bit for foreign access to the US constomer
> base which most want, while at the same time we try to address our
> balance of trade problem, by using auctioned import certificates,
> which are allowable under WTO rules for deficit countries.
> Alternatively, instead of auctioning them for some countries, perhaps
> we could trade them for some political say in those countries economic
> policies or practices. This way we might buy some gains now lost
> by too broadly granting favored nations trading status.

Recession Is Over; Depression Has Just Begun

Interesting, and for its length, very succinct. While I have been trying hard to imagine a way out of the scenario you describe, or something very close, I have been unable to.

I seem to recall reading in another of your posts that your background is in foreign policy. If I am indeed correct, it would be interesting to get your views on what you mean by "muscular government." More precisely, I see grave risks ahead for what we have come to call the "global economy." IMO, complex transnational supply chains are taken for granted, and many do not see just how fragile such systems are, and that specific and benevolent conditions are required. By this I don't necessarily mean old fashioned protectionism (though we're seeing more of that) but rather perceived changes in national interests, as previous relationships based on commerce give way to different domestic priorities. The period leading up to WW1 leaps to mind, lots of social and political changes were contributing to an overall lack of stability in international relations, a big change was in store but people did not see it coming. So there was a war and the map changed a great deal, as did the relationships. There was a lot of speculation then too I am sure, but in the end it was something totally unexpected - the assassination of Franz-Ferdinand. Fragility is a funny thing, sometimes you don't see it until it is too late.

Thanks again for the piece.

Cut Ken Lewis Some Slack - For Now

Oops. . .Meant to say BofA-Merrill deal. Not
Citi.

Cut Ken Lewis Some Slack - For Now

Interesting, especially the comparison to Pandit at Citi. I would point out that an ongoing investigation into the Citi-Merrill deal may have played a role. We just don't know yet. I read that Lewis walked out the door with less than $200 million (plus or minus) altogether, and that means he is probably more of a laughing stock than ever to the Wall Street crowd. I think Henry "Hank" Paulson made a lot more than that in tax breaks alone when he left GS and went to Treasury. Compared to the puppetmasters in New York, the guy looks like a piker.

Deflation: U.S. Government Will Do Everything to Make Sure it Doesn't Happen

This is really interesting stuff, and highlights questions that have been slowly migrating to the frontal lobe from the back of my mind: If the current efforts to head off deflation and a deeper recession fail, will the government and the FED pursue their current policies with continued vigor? Will we see trillions more in "stimulus"?

The consensus (at least here on SA) seems to be that there is no end to government chicanery, and no end to the irresponsible printing of money. IMHO, the current policies of stimulus, ZIRP, and QE represent something of a gamble, and there seems to be a widely held assumption that the gambling will not stop until it is either too late to head off hyperinflation, or the policies actually work and the credit-asset inflation-consumption machine comes back to life. This view seems to me to reflect the notion that while the government's (and the FED's) resources are limited, their irresponsibility and tolerance for risk are limitless.

This point of view essentially presupposes that people (the government, and even the FED, are made up of people) will not change their behavior as conditions and perceptions of risk change. Thusly do we hear talk of more stimulus, more QE, etc., and all expected to be in the same general shape and of the same scale as what we have seen so far. And then there are those who would say it is already too late, inflation and a dollar collapse are baked in, a la Marc Faber. I for one am beginning to have doubts. It seems too neat, too pat, and altogether too simple. Put another way, the US is not Argentina or Zimbabwe, the nature of our economy is entirely different. Most of the wealth in the US is tied up in USD denominated financial assets, for example.

Isn't it just possible that the expedient of inflation will not ultimately prevail, and that a certain degree of capitulation to deflationary forces is possible? Simply because income taxes have mostly fallen for thirty years, and that deficits have grown for that time, does not imply that this will be the case forever. At least I'm not convinced that it does.

The view that government will "do whatever it takes" to stop deflation seems to be so widely held that I am forced to consider whether it is really true or not. Government talking heads (and pundits) naturally support this view, as it is key to a return of "confidence." But what happens if more talk like this actually undermines confidence? Granted, it is just a feeling at this point, but the US polity is prone to change every once in a while.

Thanks for the provocative post. It got me thinking about alternatives to the consensus view of possible policy going forward.

Consumer Spending: Have We Learned Nothing?

Patience, and more patience, that's the prescription for what ails you TraderMark. Eventually we will get to see what the economy really looks like without all that government largess sloshing around. IMO, we are closer to that day than most realize, but who can say?

And after that, it will be interesting to see how, for example, the FED unloads all those MBS and other dubious assets. It could get very interesting, and we should all be careful what we wish for. Just a gut feeling - pure speculation, if you will - but the situation seems pretty fragile to me and I don't know how much longer the distorting combination of QE, ZIRP, and consumption subsidies/handouts will last. Something will likely give within months, not years, and the picture will come more into focus. I don't think it will be a very pretty picture, but that's just my opinion. Simply put, in the end I think they will just give up (more or less) and try instead to manage deflation. It could be a big policy fight, but in the end I don't really see that there will be much choice. At this point just about every tool they have is either blunted or broken.

To paraphrase Ross Perot: "The sucking sound you will hear will be the sound of contracting credit." Add higher taxes to the mix, and it could suck, blow, and really hurt all at once. But I guess it has to happen, or at least that's my two cents worth.

So patience my man. . .Soon we'll know if the future will taste bubbleicious or deflationtastic. I honestly don't think it will be a blend.

Wednesday FX View: ISM Contraction Creates Dollar Chaos

I think you mean 89.58 for USD/JPY.

Interesting. With all of the USD-funded carry trades out there, and given recent history, traders are right to be a bit jumpy. Hedges are pretty pricey right now and I wonder how much wiggle room these folks really have. Of course, sleeping with one eye open, and a finger on the trigger, is not terribly restful. I suppose we'll see how long they last in the fullness of time.

John Hussman: We're Speaking Japanese Without Knowing It

"Reinhart reiterated that by propping up unhealthy banks, the U.S. is unwittingly committing the same mistakes as the Japanese did in their decade-long stagnation. . ."

Reinhart is overly generous in his use of the word "unwitting." It's not like the Japanese experience is some relic of ancient history. All politicians have a primary constituency; a base. Our current crop of anointed ones - of both parties - have merely demonstrated who their real constituents are.

Is Arthur Laffer Setting Up Another Debt Bomb?

Thanks for an interesting piece, it really demonstrates to me that I am in the wrong profession. Wouldn't it be great to be an economist? I would love to make a living by wrestling historical speculation into the pose of historical fact. It's wonderful, you can never be wrong, at least not until someone invents a time machine. Fortunately for those devoted to the discipline of Counter-Factual History, most people do not seem to understand that these ideological assertions masquerading as science, can never be proven true either.

To assert that Laffer had nothing to do with the Reagan debt bomb is laughable. While he did not create the conditions necessary all by himself, he did offer the rationalizations required to spend more while taxing less. After all, tax revenues were to rise, so why cut spending when cutting taxes? As rationalizations go, it is one every human being can be proud of. Almost gymnastic in quality. Or perhaps contortionist is a better word.

Ideas, like people, do not want to die, as Mr. Petroski's comment spells out. The current state of discourse in the discipline of macroeconomics more generally illustrates this beautifully. Perhaps the behaviorists will get in on the act. Maybe we will salvage some ideas with actual intellectual heft from the wreckage wrought by too many philosophers. I'm not holding my breath. I don't want to turn blue.

I am always astounded that there are people out there promoting the status quo of ideas. As if the budget deficit were some abstraction, a theoretical symbol in an equation, that could grow to infinity. Sadly, both of the twin deficits are real. They are both the creations of human beings, albeit short-sighted human beings. They, like all things human, have their very definite limits. A blind (visually challenged?) man could see from a mile away that taxes have nowhere left to go but up. And yes, that is the real legacy of Arthur Laffer. It is a gift that will keep on giving for a long time.

On the bright side, the pseudo-science of Laffer, much like phrenology, can only thrive in a specific social context. These ideas require a certain sense of entitlement, mixed properly with equal parts irresponsibility and hubris. All three ingredients are becoming mighty scarce these days.

Thanks again for the post. The travails of economists would be really interesting if they weren't so damn tragic in consequence.

Welcome to the New Normal

Happy birthday.

In 1975 the top marginal tax rate (for an annual income of $200,000) was 70%. In 2008 the top rate ($357,000/year) was 35%. Add to this various exclusions for dividends, and lower cap gains rates, and it is easy to see what the "neo" in "neo-conservative" really means.

While there is much useful information here, it is difficult to reconcile the data you lay out in this piece with your overall sanguine attitude. I especially like the author's comparison of today's difficulties for someone starting out, to 1975 when he was getting his start in the workforce. I guess the author is right, folks will just have to muddle through, of that there can be little doubt.

Too bad the days of deficit financed tax cuts are over, just about everything has been deregulated that can be, and the magic of monetarist economics has managed to push the DOW from 793.88 in July, 1975 to 13,895.63 in July, 2006. While I would love to believe that the market rose 17.5 times in value due to the industriousness, thrift, temperance, and all 'round exceptional nature of the Me Generation, I must admit I find it hard to swallow. But not to worry. . .Times were tough in 1975, and you all made it.

Too bad we can no longer continue the policies that have ushered in our newest Gilded Age, and brought us back to an 1880s style economy with a twist - massive and destructive debt racked up over 30 years. But not to worry. . .Times were tough in 1975, and you all made it.

When I turn 60 years of age - a day too near for my liking - perhaps I too will indulge in the same sort of nostalgic rationalizations. After all. . .Times were tough in 1975, and you all made it.

Perhaps we can once more fire up the credit machine, summon the various alchemists and priests of high finance and economics respectively, and get this party back on track. Maybe we can find the justification to perpetrate that most marvelous - and victimless - of crimes: theft from the future. After reading this, I'm certain that if we are all as frugal, and conscientious as our Boomer forebears, if we unleash the intellectual and moral flexibility within us, we can succeed. Above all, we must first resist the temptation to raise taxes and demonstrate our moral bankruptcy. Yes, thanks to you I'm sure that is a big part of it.

At the moment though I have a problem. I for one feel somewhat responsible for the state of affairs I will leave behind when I am gone. I know it's misguided and out of fashion. Hopefully I can be cured of this awful condition. I'm sure that if we get creative, if we get downright "innovative," we can come up with new ways to transform future prosperity into present day wealth. After all. . .Times were tough in 1975, and you all made it.

China Deficit Potential Makes Scary Headlines

This is interesting, and implies some limitations to the notion that Chinese GDP can grow faster than domestic Chinese consumption. On the other hand, given the currency regime in place (effective yuan/dollar peg) how much of this may be the result of higher import prices. I'd have to check, but it seems to me that the USD began to capitulate in earnest around the beginning of August.

This is interesting, but I remain skeptical given how much of the Chinese stimulus (AFAIK) has gone into infrastructure/industrial investment and of course asset speculation, especially real estate and stocks. Again, interesting and worth keeping an eye on, but I would look for more confirmation in the Chinese savings rate, and in inflation adjusted income changes. Another point of view, one I also find interesting is here:

mpettis.com/

There are a number of posts that discuss this issue, and how it's all tied together with massive "malinvestment," for lack of a better word.

Follow the Leader: Index of Leading Economic Indicators, August 2009

This one never fails to amuse me. Stock prices and the yield curve are components of the leading indicator. And when the leading indicator rises, stocks tend to rise and the curve tends to steepen. Throw money supply into the mix and the tail is really trying to wag the dog.

Given the surreal times in which we live, one has to wonder if the liquidity driven miracle/tragedy of the last ten years might render this indicator less useful as a predictive tool. I'm not saying it's useless, but IMO a modicum of doubt is more than justified.

This Market to Workers: 'Welcome to the Jungle'

This is an interesting, and sobering, perspective. I wonder what implications this has for politics, especially in the "democratic" countries. Historically, this type of situation has led to social and political change, perhaps "the least popular Marx brother" will come back into vogue, possibly in disguise. It seems to me that the word "class" is already creeping back into American discourse, having been banished for over thirty years. Where are the welfare queens when you need 'em?

And at what percentage of GDP will corporate earnings top out I wonder? What will happen to personal income taxes? I think we all know they will go finally go up, but will it be a "Great Compression" as it was in the 1930s? Does American political machinery even operate as is used to?

Interesting, and visceral piece.

Financial Meltdown: China Blames West, West Blames China

I think people may in fact be surprised by the tone and substance of the summit. Perhaps the tire tariffs coming so close to the summit is just a coincidence, eh?

Why is it that the yuan does not float? Why is USD/CNY stuck where it was back in June, 2008? Doesn't anyone find this a little strange? I expect this question to once again make its way into the media, and there will be many excuses made by the Chinese government (now is not the time for deflation) and US/EU firms manufacturing in China for export to the US and EU.

Chinese currency policy is not sustainable. It's not the only way that the Chinese government promotes economic growth and protects "young industries," but it is a big one. And it affects Europe and Japan in major negative ways too.

seekingalpha.com/artic...

Eventually the remnimbi must float. It's as simple as that. The major problem is that much like the US, China is unwilling to admit to their role in fostering a crisis made much worse by the nature of global trade imbalances. While the US cannot seem to stop relying on debt to fuel growth, the Chinese cannot seem to stop relying on increasing exports to fuel growth. Given that times are precarious to say the least, what we are getting is more and more of the very policies that helped to get us here in the first place. Everyone want to go to heaven, but no one wants to die. And it can't go on forever, probably not even for much longer, we all need to accept a little pain here. Or in the case of China, a "boatload" (no pun intended) of deflation. They have been exporting deflation for many years. Unless the Chinese government will allow the yuan to appreciate at a rate acceptable to the US/Japan/EU I think we can expect more in the way of tariffs and other protectionist measures. To a certain degree, the Chinese are doing this to themselves. In a nutshell, they have the same problem we in the US have: "I can't do that today, it's too painful, maybe next year when things are better." It's more than a little ironic.

Thanks for the piece, and the comments are interesting too. Another SA post on this:
seekingalpha.com/artic...

And some great stuff at mpettis.com:

mpettis.com/category/c.../