user396040

U.S. Job Losses Demystified

I generally agree that government regulation of business should be minimized but I think he has the macroeconomics all wrong. There were plenty of times of high unemployment in the 19th century when we had a very laissez-faire economy and rarely had big deficits. At a time like this, deficit spending is essential to restart the economy - Presidents Nixon and Reagan had no problem with deficit spending and, until very recently, it was virtually universally accepted. We have now reached a point at which very few people remember the Great Depression so we hear the mantra of "balanced budgets," "a strong dollar" and "return to the gold standard" and it is not dismissed as the nonsense which it is because very few people are alive who remember 1932. Government borrowing is not "crowding out" business borrowing. The corporate bond market is healthy with new issuances much higher than last year and investment grade rates at very reasonable levels. Small businesses and individuals cannot borrow money because banks are scared to death of defaults due to the weakness of the economy and the very real threat that deflation will make it impossible for borrowers to repay the loans. In this atmosphere, government intervention is absolutely essential to avoid a disasterous meltdown. If we get through this mess, we should try to balance the budget and even run surpluses during the boom years. But, right now, a slavish adherence to tight money and balanced budgets could lead to the kind of disaster that could give capitalism a bad name for a generation.

Understanding the Dollar Debate

Since 1940, the dollar has lost 90% of its purchasing power while the standard of living of most Americans has risen enormously. I have lived through this transition - when I was a boy gasoline cost 25 cents a gallon. In the 1970s, I went to Europe and used a travel guide titled "Europe of 5 Dollars a Day." The policy of slow but steady inflation has seemed to work better than the gold standard. We are fortunate in that we do not import a lot of food so that food prices do not rise when our currency declines against other currencies. Imports are mostly in the form of oil (higher oil prices will lead to more domestic drilling) and consumer durables (importers will try to keep dollar prices the same and in some case - automobiles - may shift production to the US to take advantage of our lower labor costs) - coffee prices will likely go up and that trip to Paris will become more expensive but we are not likely to face dire consequences in this regard. These are complex issues and the question is one of degree. Of course, a precipitous decline in the dollar or hyperinflation could have horrible consequences. But the policy of slowing devaluing the dollar and tolerating moderate inflation has many undeniable benefits.

On Nov 13 04:28 PM SnowCrash wrote:

> How much weaker do you want the dollar to get?
>
> In 2002 we were at parity with the Euro, today it costs us $1.48.
> That's 32% slide for the USD versus the Euro. In 2002 an ounce of
> gold would cost us about $300. Today its $1115. That's a 73% gutting
> that we've taken versus gold on the dollar just in the past eight
> years.
>
> At what point do you think we should consider breaking away from
> the strategy of weakening the dollar for prosperity? We've been cutting
> it off at the knees for the past decade and it's not exactly increasing
> our exports or production of material goods. In fact, our trade deficit,
> debt, and unemployment rate has risen during this dollar weakening
> decade.
>
> When do you propose we abandon the helicopter drops?
>
> Or will things get better and better as our buying power goes from
> $.68 on the dollar toward $.10 on the dollar? Will it help the teachers
> and students more if we take down the value of the dollar to, let's
> say, $.01? Will it help them even more if we take it down to $.001?
>

Dollar vs. Yuan: Exchange Rates Aren't the Problem. Or the Solution

The yuan is outrageously undervalued. My wife and I traveled in central China in 2008 and the prices were ridiculously low - a meal for 65 cents, a room in the best hotel in a middle sized city for $40, a sleeper car train trip across half of China for $18 - most American tourists stay in tourist enclaves and don't experience this but when you go to the "real" China it is obvious that the dollar is ridiculously overvalued against the yuan. Revaluation would have many benefits - increased Chinese tourism in the US, increased US exports to China, etc. On the import front, it is possible that Chinese companies would keep their prices the same in dollar terms - this would likely lead to disputes about "exchange rate dumping"(a failure to raise prices in response to a change in exchange rates) and, after a transitional period, things would sort themselves out but the net effect would definitely be a benefit to US manufacturers who compete with Chinese imports.

Understanding the Dollar Debate

A weaker dollar encourages US exports, helps domestic manufacturers compete against importers, encourages foreign tourists to come to the USA and American tourists to stay here, increases the dollar denominated earnings of US companies with foreign operations, and generally makes it easier to repay dollar denominated debt. Some of these advantages are tempered by the fact that China pegs its currency to the dollar and, thus, we do not get these benefits vis a vis China. At any rate, given the economic situation, the above benefits are hard to deny and hard to pass up. I remember the early 1980s when high interest rates produced an ultra strong dollar. I could finance a trip to London with the savings on clothing purchased there. My wife's friend had a son in the Army in Germany and made a business of buying used Mercedes in Germany and shipping them to the US. These opportunities were clear evidence that the dollar was overvalued - I believe it was also seriously overvalued earlier this year. As in the 1930s we have to concentrate on getting our economy out of the ditch and stabilize exchange rates later. In the long run, the strength of the dollar will depend upon the productive power of the economy and that will depend on the quality of our work force. The dumbest move of all that we could make now would be to "balance the budget" and lay off a lot of teachers, stop making student loans, cut back on science research, and reduce training for unemployed workers. What we should do is to guarantee a college education to every qualified student, make educational opportunities available to all Americans throughout their life times, make the academic year 12 rather than 9 months, and pay teachers 6 figure salaries to attract better people to the profession. In the long run, this (not high interest rates, the gold standard, or a balanced budget)is what will make our currency and our nation strong.

The Importance of Economic Discipline

Hyperinflation creates all sorts of problems - I was in Brazil in the 1980's and stayed at a hotel where the rates rose every day; incidentally, the hyperinflation was occuring under a military dictatorship that imposed "discipline" in some very brutal ways but did not seem to have a handle on monetary policy. Obviously, hyperinflation is a disaster which leads to all kinds of inefficiencies. A more difficult issue is the debate between the implicit policy of low and controlled inflation we have had since 1940 and a policy of no net inflation long term which we seemed to have under the gold standard. Between 1800 and 1940, it appears that prices remained stable on a net long term basis although there were wild swings between inflation and deflation over the 140 year period and the deflationary times were characterized by enormous economic hardship. Since 1940, we have tried to avoid deflation at all costs and the result is net long term inflation so that prices now are roughly 10 times higher than they were in 1940. We have avoided hyperinflation, although we got close in the late 1970s and early 1980s - the Fed was able to bring inflation under control by raising interest rates. So it appears that with some use of intelligent monetary policy we can have low inflation without hyperinflation but the price may be periodic recessions brought about by higher interest rates. Anyhow, I am not convinced that the pre-1940 world was better nor that the current policy leads inevitably to hyperinflation. This is a complex issue that cannot be resolved by generalizations like "inflation is bad", "discipline is good," "we must have a strong dollar," etc.

The Unsustainable Lie of Inflation

Let me know if you would like to place a bet on an upcoming match.


On Nov 11 12:25 PM Paco Ahlgren wrote:

> Professional wrestling is fixed?

Why Magazine Covers Are Historically Great Contrarian Indicators

The greatest contrarian indicator is brokerage cold calls. In February this year(right before the bottom), I got a cold call wanting me to open a new account with a short position; the only other cold call I got like that was in the summer of 2002 - not long before the bottom. I got lots of cold calls from commodity brokers near the top of the oil market; recently I got a cold call from a precious metals broker. I think cold calls are a great contrarian indicator because the brokers develop pitches based upon what they think the unsophisticated public is primed to believe. My wife wants us to get on the FCC Do Not Call List, but I have resisted because of the invaluable information I get from broker cold calls.

The End of Safe Havens

You make a very good point. At the bottom, even triple A bonds got slammed. At this point, I personally think that the best option is solid, dividend paying equities (e.g.. PG, T, JNJ, MCD, XOM) that provide a reasonable after tax yield and also provide some protection from inflation.

The Unsustainable Lie of Inflation

Way over the top rhetoric dealing with some complex economic issues.One general point is correct - since about 1940, the economic policy, whether explicitly stated or not, has been slow and controllable inflation. Anyone who hasn't figured this out by now and is outraged by his feeling that he has been "lied to" is unbelievably gullible and probably also believes that Professional Wrestling isn't fixed. Whether or not this is a good policy is an interesting and complex question. The alternative is not stable prices - prior to the abandonment of the gold standard, we had periods of substantial inflation followed by periods of serious deflation - this resulted in prices in 1940 being roughly equivalent to prices in 1800. But prices swung wildly from year to year and decade to decade during those 140 years. Since 1940, we have almost never experienced deflation and the result is prices than are roughly 10 times higher now than 70 years ago. Is this bad? Who benefits? These are tough questions. Generally, the middle class does surprisingly well under inflation because for many middle class households the biggest asset is the house which goes up with inflation. For wealthier households a higher percentage of assets are generally held in the form of financial instruments which tend not to do as well under inflation - these generalizations are very broad and there are all sorts of exceptions but the inflationary 1970's tended to be a comparatively good decade for middle class Americans. The problem with returning to the pre-1940 model of alternating inflation and deflation is that deflation tends to produce severe unemployment because wages are "sticky" on the down side. As compelling as the case may be, it is very hard to convince a group of employees that, although their nominal wages are being cut, they are really doing just fine because each dollar that they earn is worth more due to deflation. The specter of deflation also discourages investment and long term loans. On balance, I think we are better off with the existing policy but it is a fairly debatable issue. Over time, most people have picked up on the fact that there is a long term inflationary trend and have adjusted their behavior accordingly. If anyone hasn't picked up on it by now(after 70 years) and thinks he is being "lied to", I have sympathy, but not intellectual respect, for him.

Six Striking Trends Emerge from Third Quarter Earnings

The article makes some very good points. It looks like companies and analysts have been gaming the system a little by low balling earning estimates so as to create positive "surprises" rather than negative disappointments. This is understandable but after a while will be discounted by the market. This should probably be taken into account when assessing estimated future earnings

Ticking Away: The Inflation Time Bomb

If monetary policy is tight enough, it can reduce inflation even in the face of a big deficit - this is what happened in the early 1980's. The problem is that the price for the reduction of inflation is a severe recession. I think that this is quite possibly a problem down the road, but focusing on it now would be like worrying, in 1942, about the potential unemployment that will result when we win the war and all the troops come home. We have a much bigger immediate problem to deal with - the possibility of a deflationary downward cycle.

Don't Believe Long-Term Oil Forecasts

Long term energy consumption and production projections have been notoriously inaccurate. In the early 1970's, Project Independence projected a 200 Quad (quadrillion btu) US economy by the year 2000- I think we barely made it to 100 QUAD. Several trends do appear to be inescapable: 1. oil has gone and will continue to go from being a source of cheap btus used to generate electricity, heat homes, etc. to being a specialty transportation fuel used for those applications for which its density, and ease of transport give it a competitive advantage, 2. while tar sands, deep off shore drilling, heavy oil and other increasingly exotic sources may be sufficient to clear the market for some time to come, these sources are not inexpensive and thus it is unlikely that the market will clear for any length of time below $50 a barrel.

The Consequences of the U.S. Monetary Base Bubble

There are legitimate reasons to be concerned about inflation at some point in the future and higher interest rates as well but I am not sure this chart is one of them. As I understand it, the monetary base is the amount of reserves the banks hold, including amounts which banks have on deposit at the Federal Reserve (e.g. Citibank's funds held at the Federal Reserve). Because of the extreme financial panic, many banks have been extraordinarily conservative in the deployment of cash and have decided to deposit funds at the Federal Reserve rather than lend them out. This has led to a big increase in the "monetary base" but is not, in itself, deflationary because the funds deposited at the Federal Reserve are not really available for anyone to spend. If and when conditions improve, the banks will withdraw these funds and lend them out or use the deposits as a base for leveraging more loans and deposits. I think that the issue of how to play this whole thing as an investor is a very interesting one. But what concerns me about this blog is that many participants seem to be more interested in ranting about public policy than figuring out how to make money in this admittedly challenging environment. I sense in some of these comments a kind of fencesitter's remorse on the part of investors who have missed the rally. As economists often say, bygones are bygones; the important question (for at least some of us) is how do we make money from here.

Altria: Tobacco Stock at a Discount

The politics of this issue are interesting. The states have a large settlement with Altria and other tobacco companies and rely on continuing payments as a source of revenue so that state governments have a strong interest in avoiding a situation in which Altria is driven into bankruptcy by a lawsuit.

John Hussman: The Second Wave Begins

I would like to see an analysis of this problem in terms of cash flow. Presumably, the banks have been collecting the low teaser rates of interest prior to the reset. If the lender agrees to let the borrower extend this teaser rate, presumably there would be no effect on cash flow; if lenders can get a somewhat higher rate of interest but not the contract rate, cash flow would improve. It will be interesting to see if there is a pattern of renegotiation.