naked capitalism

By Edward Harrison of Credit Writedowns.

A reader at Naked Capitalism asked us to respond to a recent article from the Christian Science Monitor asking Does US need a second stimulus to create jobs?

Marshall Auerback has already done some heavy lifting – and taken all of the heat in the comments. He says emphatically yes.

Now I want to take a crack at this. My short answer is no. But before I go into this, as an aside, I wanted to mention Marshall’s new smiling, happy picture up at the great blog New Deal 2.0 where he now writes.  Earlier, when Credit Writedowns was hosted at Blogger, he used a picture best described as a mug shot in his profile, but he has changed that one too (although he smiles there a little less). He thinks we haven’t noticed this sleight of hand.  Well I have! Once upon a time, Marshall wrote with a man I called all bearish, all the time this summer. Take a look at that post; you don’t see him smiling now do you? We have Lynn Parramore, New Deal 2.0’s editor to thank for making Marshall Auerback into an optimist.

Different policy choices

But all teasing aside, I do want to take the opposite side of this trade.  You see I too was a deficit hawk. And while I may have been backing fiscal stimulus, I have felt conflicted for doing so. Here’s how I see it.

You have four options:

1. No stimulus. Let the chips fall where they may. Yves Smith calls this the ‘Mellonite liquidationist mode.’ The thinking here is that trying to avoid the inevitable bust only makes it that much larger. And the economic policies during recessions in 1991 and 2001 seem to bear that out. The Harding Recession of 1921 is commonly seen as gold standard response.
2. Monetary stimulus only. Quantitative easing mania. My understanding is this is what Ambrose Evans-Pritchard has been advocating.   The thinking here is that the flood of money and the low rates will eventually jump start the economy. No deficit spending needed.
3. Monetary and fiscal stimulus.  Full tilt Keynesian. This is the Krugman view. The thinking here is that one needs to credibly commit to higher inflation and close the output gap to avoid a deflationary spiral. If that is insufficient, then one needs to go full bore on fiscal stimulus aka deficit spending. And if that doesn’t work, subsidize jobs. The New Deal is commonly seen as the gold standard response.
4. Fiscal stimulus only. Deficit spending. I have been talking up this view. The thinking here is that we need to both close the output gap to prevent a deflationary spiral and revive private sector savings in order to promote deleveraging.

There is no magic bullet here.  We are living through a situation unique in time with few historical precedents. And there are a lot of competing ideas being tossed about. So policy makers are groping around, desperately seeking the holy grail of depression-busting economic policy.  In that regard, I don’t envy them. They are certainly going to make a lot of mistakes. It may seem at times that I don’t realize this given the harshness of my critiques, but I do.

Deficit hawks are misguided

However, there are some policies which could work and others which are flat out wrong.  One policy which is flat out wrong is the concept that we need to reduce deficit spending in order to avoid a double dip recession. This flies in the face of basic economics which says that more spending and less taxes equals greater demand and recovery/boom. More taxes and less spending equals less demand and recession/depression.

Now, it’s not as if we didn’t see this line of argument coming. As far back as November 2008, I heard the chatter (see my post here). So you knew this we-have-to-stop-or-we’ll be-bankrupt nonsense was coming. The problem is it’s just not true.  Here are a few data points:

• Private sector debt (incl. financial firms) was 292% of GDP as of Q2 but public sector debt (incl. state and local municipalities) was 67.2%. Who’s more indebted – the private sector by a factor of 4.
• Adding unfunded liabilities to any public debt number when talking about spiking treasury rates is inaccurate and artificially inflates the number. A lot of people do this to make the public debt scenario look worse. The issue at hand is whether a supply/demand imbalance in Treasury securities spikes interest rates. Unfunded liabilities have absolutely nothing to do with this.
• Cash and bonds are fungible. They are both obligations of the federal government to be repaid in full with a specific sum of fiat money. The Treasury could literally stop issuing government debt altogether and just start crediting accounts electronically to ‘fund’ its purchases. There is no operational constraint to government spending. the U.S. government is not going broke involuntarily. See my post here.

The real issue with deficits causing a double-dip has to do with inflation and overheating. If inflation increases because the economy begins to overheat, interest rates spike and the Fed raises rates to choke off inflation. That’s not going to happen any time soon – although it may be a problem down the line.  The issue at hand now is deflation not inflation. At least Morgan Stanley understands this when they take a deficit hawk position.

And as for the Chinese, they are not going to pull the plug on Treasuries unless they want to tank their export boom. The reason they must buy Treasuries is the dollar peg; they must re-invest in U.S.-based assets in order to prevent their currency from appreciating. This has caused a huge rise in their U.S. dollar reserves. If they changed the peg, their currency would almost certainly rise and this would choke off exports.

No more stimulus, just jobs

I have said my piece about the need for stimulus in the past. So I won’t repeat it here. If you are interested, see my December 2008 posts “Confessions of an Austrian economist,” “What does Mises say about trying to stimulate the economy out of recession,” and “A brief philosophical argument about the role of government.”

But, on the whole, I look at long-term deficits in a dubious light. There are practical constraints to deficit spending – and they lead to inflation, currency depreciation and lower standards of living. This is not national bankruptcy but it is default by inflation and it makes you and me less well off.

This, of course, is over the long-run. In the short run, it is the spectre of a deflationary spiral we care about. Stimulus was important to stop this. I said in February that Obama was making a big mistake with his stimulus measures.

My view here is that Obama is forging a middle path that leads to a dead-end. The stimulus is not nearly enough by half to get the job done. The proposed deficit reduction measures for 2013 are outright scary as they risk repeating a mistake from the 1930s. And the banking sector and mortgage plans, both of which I failed to mention, are dubious half-measures as well. One needs to act aggressively and proactively or not at all.

If you are going to deficit spend you need to do it in a big way. You need to stop the deflationary spiral.  That means hitting the reset button by promoting private sector savings and deleveraging and purging all built-up malinvestments. The risk in addressing the situation this way, of course, is replacing the imperfect invisible hand of markets with the imperfect hand of politicians and legislative fiat.

This is a risk I no longer see as worth taking. I have bailout and deficit fatigue just like most Americans. It is abundantly clear that this Administration has absolutely zero intention of purging any malinvestment or promoting any deleveraging. All they want to do is continue business as usual and go back to the asset-based economy that caused this mess. This is why we have seen bailout after bailout coupled with easy money. It makes for record profits on Wall Street but it does nothing for the unemployed.

Moreover, the political process in the U.S. is such that any stimulus money will be diverted to pet projects and used to pay off political constituents. While this may increase aggregate demand, it does so at the risk of serious social unrest as the outrage will certainly spill over into populism.

So I say no to a second (third) stimulus package.  What the President needs to focus on is jobs. The reason Obama’s poll numbers are shrinking is because he now owns this economy.  And people are not benefitting from this fake recovery.  They are angry at the bailouts and distrustful of government – and with good reason.

Cut payroll taxes, subsidize job creation, divert some military spending to direct job creation by ending the foreign wars. But stop the madness.

This clip is from an interview with blogger Mike Stark. Apologies for the poor sound quality. While Dodd indicates that he is “inclined to be supportive” of Bernanke, he is surprisingly cautious about making a broader statement, a sign of a shift in sentiment.

By Edward Harrison of Credit Writedowns. Yves is stuffed again today, so I am going to post at least once or twice. Hopefully, we will also see something from Jesse or George as well.

This is a post I wrote overnight about rising delinquencies and shadow housing inventory. I am not convinced house prices in the U.S. are headed higher permanently and this post points out why.

The Mortgage Bankers Association is reporting that nearly one in ten households with mortgages are at least one payment behind.  That is a record, my friends. And it certainly means we cannot believe house prices have permanently stabilized.

The New York Times says:

The delinquency figure, and a corresponding rise in the number of those losing their homes to foreclosure, was expected to be bad. Nevertheless, the figures underlined the level of stress on a large segment of the country, a situation that could snuff out the modest recovery in home prices over the last few months and impede any economic rebound.

Unless foreclosure modification efforts begin succeeding on a permanent basis — which many analysts say they think is unlikely — millions more foreclosed homes will come to market.

Translation: there are a lot writedowns in residential real estate still coming. This is one reason bank credit is not going up significantly despite zero interest rates. Remember when I wrote about “extend and pretend?” This is the kind of thing that is holding up bank balance sheets. The article I wrote in October on short sales in North County San Diego highlights the issues involved. But at some point banks will have to take the hit (unless house prices magically go up to near previous levels – what everyone except renters wants).

Ivy Zelman has the same sinking feeling I do here; we don’t think house prices are necessarily heading up permanently. She even throws in a mixed metaphor to get her point across. She says:

I’ve been pretty bearish on this big ugly pig stuck in the python and this cements my view that home prices are going back down.

Look, the fake recovery is now in full swing.  But I expect the recovery to hit a brick wall by 2011, if not earlier. While the proximate cause of my concern is the likelihood of increased taxes and/or reduced spending by the Obama Administration, it is jobs that concern me. See Calculated Risk’s post showing the correlation between unemployment and mortgage delinquency and you see the connection. The fact is we have a record number of foreclosures and that is a direct result of rising unemployment. Unemployed people don’t have any money, so they don’t pay mortgages. It’s as simple as that.

The interesting bit about the New York Times article was this:

The number of loans insured by the Federal Housing Administration that are at least one month past due rose to 14.4 percent in the third quarter, from 12.9 percent last year. An additional 3.3 percent of F.H.A. loans are in foreclosure.

The fact is the F.H.A is the next Fannie Mae. If you’re looking and wondering where the next bailout will be, take a good look at the F.H.A. Not only is this agency guaranteeing hugely delinquent loans, but the Economic Stimulus Act of 2008 doubled the maximum loan that it could insure to $729,750 in order to cover jumbo mortgages common in cities like New York, San Francisco or D.C.. The purpose was to give liquidity to the frozen jumbo market in high-cost cities.  However, the net effect is that the F.H.A was expanding at exactly the time when loan quality was falling. There will be significantly more losses as delinquencies mount.

To make matters worse, the F.H.A. has an abysmally low 0.53% insurance reserve ratio – that’s the lowest ever. Yes, this ratio includes expected future losses, but you don’t have to be a rocket scientist to know any downside wipes these guys out. And that means more taxpayer money will be forthcoming.

Is this a pretty picture? No. But, is this what is going to happen? Of course it is.  So when the bailouts come because the foreclosures begin again in earnest and politicians start saying, “who could have known?” you will have every right to be disgusted.

the price of water Archein

Lions kill rare white tiger at Czech Republic zoo BBC (hat tip reader Steve L)

Moira man fights off deer attack Press Republican (hat tip reader John L)

Cinema popcorn is nutritional horror show: US study Raw Story (hat tip reader John D)

The jobless rate-interest rate conundrum Tim Iacono

Canada’s sub-prime mortgage time bomb Rabble

Goldman Holders Miffed at Bonuses Wall Street Journal

White House Rebuke: Angry Dems Shut Down Vote Huffington Post (hat tip DoctoRx)

Easy Loans in Expensive Areas New York Times

Leading Economic Indicators Losing Strength EconomPic Data

Tax the windfall banking bonuses Martin Wolf, Financial Times

Short-term US interest rates turn negative Financial Times

The Big Squander Paul Krugman

Antidote du jour:

Reader Doug Smith was not happy with an article in the Christian Science Monitor yesterday, titled, “Does US need a second stimulus to create jobs? His remarks:

Could you, Edward or someone consider reading this article and responding to it? My sense is that it perfectly captures ‘conventional wisdom’ and, in that sense, is a bell weather for what our nation is confronting when it comes to just how far conventional wisdom lies from real insight that matters.

I am up to my elbows in alligators right now, and Ed Harrison and Marshall Auerback have offered to take this one on, with Marshall’s reaction below.

As an aside, I have to say it has been a bit disturbing to see readers resort to knee-jerk reactions when they see the mention of deficit spending, and then badly distort the arguments made in support of it. Marshall has repeatedly made the point that a government is not operationally constrained in running a deficit. It faces a practical constraint, which is inflation. We are so far from having inflation that those concerns seem badly misplaced right now and for the foreseeable future. And before you point to the massive Fed balance sheet, let me remind you of Japan, which has had massive money supply creation and still remains mired in mild deflation (now to me, that suggests we have wrong policy mix, advanced economies rely overmuch on liquidity creation because it’s easy to do, but that’s another topic).

The second issue is that deficit spending is likely inevitable. If you go into Mellonite liquidationist mode, you see collapsing government revenues versus certain minimum government service requirements, made worse by a vast increase in the debt burden in real terms. So the issue is not fiscal deficit versus no deficit; the issue is how much deficit and how to deploy the funds to maximum effect. Marshall argues for trying to compensate for the fall in private sector demand; other might argue for a lesser goal of simply trying to prevent deflation.

The Christian Science Monitor article says:

Simon Johnson, a former International Monetary Fund economist now at the Massachusetts Institute of Technology, takes a similar view of the challenge.

“With such countries that have ‘lived beyond their means’ … it is a mistake to try to prevent this process of competitive adjustment,” he told a congressional panel last month. “The adjustment can be cushioned by fiscal policy…. But attempting to postpone adjustment with repeated fiscal stimulus is almost always a mistake.”

Marshall Auerback responds:

“First of all, I’m sort of surprised to hear Simon Johnson say this, as he’s made a lot of very astute comments on the financial crisis, but then again, he is an ex-IMF economist and clearly not well versed in Modern Monetary Theory (MMT).

Obama’s attempts at using the public sector to facilitate private sector debt deleveraging to date have been pitiful. There has been very little focused on creating jobs and a lot spent on the top-end-of-town. If I was to give his stimulus package a score out of 10 for effectiveness it would be around 3/10. Doesn’t that tell you something about the quality of his advisors and the sort of connections they have and the theories they are using to design policy initiatives?

Why design inefficient fiscal interventions that have benefitted Wall Street enormously despite the fact they create very little real output or employment and then turn around with this lame story that the Chinese are to blame because our citizens voluntarily buy the junk they make?

What we desperately need to do is to increase our deficit by several percentage points of GDP and offer public sector jobs to all those who want one. Government as Employer of Last Resort is one idea I have been pushing (along with Randy Wray, Bill Mitchell and a host of other people). As I said in an earlier post,

The U.S. Government can proceed directly to zero unemployment by hiring all of the labor that cannot find private sector employment. Furthermore, by fixing the wage paid under this ELR program at a level that does not disrupt existing labor markets, i.e., a wage level close to the existing minimum wage, substantive price stability can be expected. Other benefits could be provided, including vacation and sick leave, and contributions to Social Security and, most importantly, health care benefits, providing scope for a bottom up reform of the current patchwork health care system.

Obama’s attempts at deficit expansion to date have been pitiful. There has been very little focused on creating jobs and instead have constituted a massive subsidy to Wall Street, in effect providing a direct financial incentive to reward bad behaviour. In spite of their pitiful attempts at apology, the likes of Goldman Sachs understand that better than most. To aid the recovery, Goldman launched a scheme to help 10,000 small businesses, to which it will donate $500m over five years. Some were left unimpressed; Goldman pulled in at least $82 billion … trading just in the 2nd & 3rd quarters of 2009. It has set aside $16.7 billion for pay and compensation so far this year, according to the NY Times.

Why design inefficient fiscal interventions that have benefitted Wall Street enormously despite the fact they create very little real output or employment and then turn around with this lame story that the Chinese are to blame because your citizens voluntary buy the junk they make? How is a revaluation of the yuan going to bring back jobs to America? China should not revalue, certainly not abruptly. Slow appreciation may be optimal, since it keeps the foreign money in. A big appreciation yields a capital gain, and would precipitate both a profits crash in the export sector (social disaster) and a rapid outflow as hot money cashes in and checks out. It would do nothing for the US current account, since (of course) any loss of competitiveness in China would be taken up by other countries.

At any rate, what we desperately need to do is to increase our deficit by several percentage points of GDP and offer public sector jobs to all those who want one. We thus have to aim to ensure public spending fills the gap left by non-government saving (a consolidated position combining the private domestic and foreign sectors) and keeps aggregate demand growing at such a rate that it provides scope for the private savings desires to be realised without compromising our public purpose goal to ensure there is sustained full employment and inclusive income distribution outcomes.

But by far the majority of the unemployed workers could be offered a minimum wage job to work on community and environmental care projects for as long as they desired. I would suggest we also raise the minimum wage so that everyone has access to decent housing and health care etc. But the ELR scheme would only be offering a wage to workers who have no market bid for their services by definition. It will give them a job, some income security, will add to aggregate demand and help stimulate a broader recovery and, in itself, will not be inflationary.

Consider these facts:

• US capacity utilisation rates are around 70 per cent and even lower in Manufacturing.
• The official unemployment rate was 10.2 per cent in October 2009.
• The BLS U6 broader labour underutilisation rate is at 17.5 per cent in October … can I repeat that … 17.5 per cent. That, as Ed Harrison has pointed out repeatedly, is a depression-like number.
• Foreclosures are still rising and are at dangerously high levels in terms of the viability of the overall housing market
• Our children are increasingly being fed by food stamps. In some black neighbourhoods “around 90 per cent live in homes that receive food stamps at one stage or another” .

The US Government is a monopoly issuer of the US dollar and is not revenue-constrained The facts I presented above would tell anyone who knows the slightest bit about how our currency operates that anyone who talks about “neutral deficit” outcome at present is an irresponsible lunatic.

The recognition of the national accounting relationships which underpin modern monetary theory are not matters of opinion. These include (but the list is not exhaustive):

• That a government deficit (surplus) will be exactly equal ($-for-$) to a non-government surplus (deficit).
• That a deficiency of spending overall relative to full capacity output will cause output to contract and employment to fall.
• That government net spending funds the private desire to save while at the same ensuring output levels are high.
• That a national government which issues its own currency is not revenue-constrained in its own spending, irrespective of the voluntary (political) arrangements it puts in place which may constrain it in spending in any number of ways.
• That public debt issuance of a sovereign government is about interest-rate maintenance and has nothing to do with “funding” net government spending.
• That a sovereign government can buy whatever is for sale at any time but should only net spend up to the desire by the non-government sector to save otherwise nominal spending will outstrip the real capacity of the economy to respond in quantity terms and inflation will result.

Note the last point in bold. I do not, as the caricatures suggest, advocate completely unrestrained government spending, paying no heed to inflation. But inflation is the constraint on government spending, not a uninformed ideas about ’solvency’.

Consider Obama’s claim that “if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a way that could actually lead to a double-dip recession”.

Where did he get that idea from? Did the moronic Larry Summers read it out to you from Greg Mankiw or something? People have already lost confidence in the US economy – that is why they are not spending. That is why your deficit has risen sharply mostly via the automatic stabilisers as your revenue side collapsed.

We don’t need that revenue to allow you to spend. Not in the least. All I am noting is that in an accounting sense, government revenue has fallen off a cliff and our net spending has risen which is a good thing because the automatic stabilisers are not called that for nothing. They start adding to demand as soon as they start working to push our net spending up.

People who think that investors will lose confidence in the US Government and somehow that will stop them spending even more because your spending is helping to put some semblance of a floor into aggregate demand which is retarding the jobs loss somewhat? If you think that tell Larry to close Mankiw for a while and learn something about how your monetary operations actually work.

The other dubious idea is that the government spending gets conflated with some idea of “fiscal insolvency”.

I can certainly see how government overspending creates inflation, but is that what you mean by “fiscal insolvency” in the sense that the inflation represents the de facto default?

That to me is a separate issue.

The inflation would be from too much aggregate demand and a too small output gap.

That would mean that fatefull day would be an economy with maybe 4% unemployment and 90%+ capacity utilization and an overheating economy in general.

Yves here. I have to interject. I imagine some readers will say, “But what about about 1970s stagflation?” We had inflation BEFORE the stagnation. The economy was overheating in the late 1960s. The 1973 oil crisis both kicked up inflation a notch higher (and labor had bargaining power, so wages would rise in response to inflation, creating a self-perpetuating cycle), and businesses and consumer were hit by the combo of not just higher oil prices but also supply uncertainty. Very different facts on the ground here. Back to Marshall:

Sounds like that’s the goal of deficit spending to me- so in fact you are indirectly confirming that deficit spending does work.

And if we do need to raise taxes to cool things down some day, we can start with a tax on interest income if we want to cut payments to bond holders or a financial transactions tax on the “polluter pays” principle.

Regarding the supposed default alternative to inflation, in the full employment and high capacity utilization scenario that might call for a tax increase to cool it down, I don’t see how default fits in or why it would even be considered. So again, I’m confused by the concept of fiscal insolvency, which would only seem to apply if there was an external constraint, such as a currency board, or large quantities of foreign debt.

In fact, with our countercyclical tax structure, strong growth that follows deficits automatically drives down the deficit, and can even drive it into surplus, as happened in the 1990’s. In that case one must be quick to reverse the growth constraining surplus should the economy fall apart as happened shortly after Clinton ran budget surpluses for 3 straight years.

More on this topic (What's this?)

A new way to protect against inflation? Who cares..? (Intelligent Speculator, 10/30/09)

Inflaton Isn't Here Yet - Here's When You Can Expect It (Blogging the Commodity Bull Market, 11/6/09)

7 Reasons Gold Will Surpass $2,500 - And Inflation Isn’t One of Them (Money Morning, 10/21/09)

Read more on Inflation at Wikinvest

By Edward Harrison of Credit Writedowns

Marc Faber is in a bullish mindset, particularly on gold. In a wide-ranging interview with CNBC TV-18 in India, Faber talked about where he sees markets headed and why he thinks gold will never drop below $1,000 an ounce.

Private sector contracting while public sector expanding

This is the frame that Marc Faber puts on recent events post 2008 panic, namely that we are likely to see an era of increased government intervention. This is an echo of comments Bill Gross has been making for some time. We are seeing this stimulus on both the fiscal and monetary sides through fiscal stimulus programmes and quantitative easing worldwide.

The economy has not responded robustly given the size of stimulus, Faber says. Asset markets, on the other hand have. This sets up a clear dichotomy between ordinary citizens and those who benefit most from asset price appreciation on Wall Street and elsewhere in the financial sector. Moreover, the spill-over of asset price appreciation into commodity prices further constrains purchasing power for ordinary citizens.

Less certain about carry trade

Faber is less certain about the U.S. dollar carry trade. He sees a dollar overhang due to the enormous U.S. current account deficit and $7.7 trillion in U.S. dollar reserves as more the issue. Many are looking to sell these dollars and hedge their exposure in precious metals and other currencies.

Treasury bearish

The one area where Faber is bearish is U.S. treasuries. He says:

There is a risk that at some stage in 2010, the government bond markets (would) weaken considerably because I don’t understand why anyone who would now buy a 10-year US treasury at a yield of less than 3.5%. It’s a losing proposition. I also don’t understand why anyone could buy a 30-year US treasury at a yield of 4.4%. So I think that eventually yields will go up and this could disturb the stock market.

Not as bullish on equities

Given the huge uptick in share prices globally, Faber believes there is now limited upside going forward.  He says the risk/reward in equity markets at present is not favourable. Moreover, profit margins are cyclically high due to cost-cutting. Faber anticipates weakness in profits in 2010, causing earnings to disappoint and precipitating a correction.

Bullish on commodities and precious metals

His logic is as follows: cash is now trash with zero interest rates. So holding cash means underperforming.  Bonds present an unfavourable risk/reward.  Therefore, commodities and precious metals look attractive. One must also have equities exposure.

Interestingly, he makes a fairly explicit statement in favour of peak oil from about 1:40 in the second video below. The world is adding less in oil reserves than it consumes. That necessarily means a tighter supply/demand dynamic, especially given the demand in emerging economies for oil.

He uses a technical argument to make his money quote (in bold):

I believe that whereas in the past the USD 1000 per ounce level was kind of a resistance level, now it becomes a support level. I don’t think that you’ll see gold below a USD 1000 per ounce probably ever again.

So I’m actually quite positive. Maybe gold at this level is a better buy than it was at USD 300 per ounce in 2001.

If videos don’t appear they are also embedded on original post.

Marc Faber Interview: Part 1 (6:19)

Marc Faber Interview: Part 2 (5:42)

Sources

Gold will never fall below $1,000 an ounce: Faber – Live Mint

Gold won’t fall below $1000/oz level ever again: Marc Faber – Money Control

By Edward Harrison of Credit Writedowns.

I want to take a break from banking and macro stuff and talk a little bit about technology. I wrote an article about Android a few weeks back. That was a more personal account on why I was switching from a Windows Mobile phone to Android, the latest whiz-bang operating system running mobile phones. (Don’t ask me why I stuck with Windows Mobile for so long – even I don’t know any more). This article is looking at the Android phenomenon more from a strategic perspective.

You may have seen the Verizon commercials on TV. They’re everywhere: Droid has arrived. And this happens to be a big problem for Apple Computer. In case you haven’t seen the commercials, one is embedded in the version of this post on Credit Writedowns.

As you may know from reading my blog, I am a bit of a technophile.  I’m that guy you remember from high school who was taking AP Computer Science and programming in Pascal, the guy you remember who always had the latest gadget. And I’ve done my stint in technology companies too.

But, at heart, I am a finance guy and when I look at technology, I do so from a finance guy’s point of view. That’s why I see the emergence of Android phones as significant. The recent flurry of announcements about hardware manufacturers adopting the Android platform has me thinking about Apple Computer and the 1990s again – and that’s not good for Apple.

The Macintosh

From the mid-1980s to the mid-1990s, I was a Macintosh user and an avid fan of Apple Computer and its products. I started using PCs only because incompatibility with my colleagues’ work product forced me to do so.  The Macintosh was miles ahead of the PC in user-friendliness and platform robustness. And Apple is a company that cares about customer service too.

But, forced to do so or not, I did switch to the PC, as did millions of others.  The reason: one company cannot compete against 100s. Apple refused to open its system and that limited production to Apple alone. Meanwhile, in PC world, you saw Compaq, Gateway 2000, HP, Dell, IBM, Toshiba, NEC, Packard Bell and a host of other vendors jumping onto the PC platform. Eventually, the PC was ubiquitous – and often incompatible with the Macintosh. How could Apple compete?  It couldn’t. Eventually, the Macintosh lost market share and became a niche product for die-hards, education and design.

Digital Music

But, Apple maintained its core competencies of user-friendliness, platform robustness and customer service. While PC makers were technology companies run by engineers, Apple was a consumer product company run by design and marketing. So, when Apple hit upon the digital music scene with iTunes and the iPod, it instantly became a success.

I am a big music fan. Because I tend to be an early adopter, I went all-in for digital music and CDs, buying my first CD player in 1988 – a top-rated Kyocera DA-610cx. When digital music hit the portable device market, I was there as well with my portable supposedly skip-free CD player plus car adapter. But, eventually I switched to Mini Disc and then on to Digital Audio Players. Remember the Diamond Rio 500?

The iPod

Then came the iPod. This was a ground-breaking product which was to digital music players what the Macintosh was to computers. It revolutionized the industry, bringing Apple Computer back to prominence as a technology company. The iPod became the dominant digital audio player (the hardware) – and with it, iTunes became the dominant digital music player (the software). It was almost like Intel and Microsoft rolled into one. Again, it was the product design and robustness of the iPod and the user-friendliness of Apple which made the difference.

Since then, Apple has successfully branched out into all manner of related spheres: video, podcasts, and most crucially digital music purchases and mobile telephones. They have also been very successful at integrating all of the platforms.

The iPhone – Android wars

But, everyone knows the standalone digital music player is passé. And iTunes, the digital music software application is a loss leader. The real money is going to come from digital music purchases and Apple’s mobile telephone, the iPhone. So, strategically speaking, this is why I see the flurry of announcements about Android phones as a problem for Apple.

Android is the Linux-based operating system developed by Google. it is now being implemented on a number of different platforms from internet tablets to low-end personal computers to mobile telephones.

What I question is how Apple is going to compete in mobile telephones. Don’t let the hype around the Verizon Droid fool you. The phone, manufactured by Motorola, is a very good phone. But, it is only one of many that are now coming to market. There are also phones in the works from Sony Ericsson, Samsung, HTC, Dell, Garmin, LG, and a host of other manufacturers. Even Google is supposed to be coming forth with the much anticipated Google Phone – the phone designed to prevent the splintering of Android which doomed Unix as a consumer-based operating system.

To my eyes, this is looking like a repeat of the Macintosh-PC Wars of the 1990s which Apple lost. On the one side, you have Apple, competing at the high end and very concerned about platform integrity and control, and preventing other manufacturers from building its hardware. On the other side, you have another operating system designed for the lower end and installed on a host of manufacturer systems – which may or may not cause serious platform integrity problems down the line.  Who wins that battle?

In the 1990s it was Intel and Microsoft. And they went on to reap massive rewards as Apple foundered.  Today, Apple risks a repeat of this if it does not come out with a credible solution to deal with its burgeoning Android problem.

I hope there are some technophiles out there that appreciate this departure from the norm and want to chime in.

Pathology of a Crisis Eric Dash, New York Times

Charitable Capitalism William Greider, The Nation

Joe Biden: Even rattlesnakes are more popular than bankers Raw Story (hat tip reader John D)

Fears of China property bubble Financial Times (hat tip reader Michael)

The Rise and Fall of Empires Paul Kedrosky

Antidote du jour:

Many readers have complained of credit card issuers raising interest rates on their cards, even if the customer has pristine credit and never or rarely carries a balance. Now we are finally seeing some efforts to see how significant this is across all card users.

A Rasmussen survey puts the total at 50% of all respondents. Now one can argue, correctly, that banks were too profligate in handing out credit, and some sort of reversal is in order. Yes, but the nature of the banks’ action here is pretty sus. And consumers agree. 77% say banks take unfair advantage (note the wording, not just advantage, but “unfair advantage”) of customers.

First, if the issue was primarily giving too much credit to the wrong people, the first move is to cut back credit to them. There were reports on that activity, but the moves to jack up rates appear to be far more extensive than those to restrict credit (I am still getting offers for new credit cards and both attractively priced and some not so hot balance transfer offers. One from Citigroup was a 3% balance transfer fee and a 1.99% rate for a full year).

More important, these increases appear to be indiscriminate, across broad swathes of customers, and in anticipation of legislation that will restrict their ability to raise rates.

Now I know some readers will argue that people should not use credit cards for borrowings at all. But things are far from black and white. First, credit cards are a very important source of credit for small businesses (indeed, they are an important type of startup funding). Some important issuers who targeted that market, namely American Express and Advanta, have withdrawn completely. Businesses at all levels of the food chain routinely borrow to fund operations and buffer fluctuations in cash inflows and outflows. Second, there is an element of bad faith dealing here. The banks were given TARP funds and other, extensive types of support so they could support the economy via lending. Raising rates to beat the impact of new rules was predictable (the long lead time for implementation of the rules was no accident) but the brazenness of the banks is still remarkable.

From Rasmussen:

Fifty percent (50%) of Americans say interest rates on their credit cards have been raised in the past six months, as Congress seeks to limit the ability of banks to raise those rates.

A new Rasmussen Reports national telephone survey finds that just 31% say the interest rates have not been raised on any of their credit cards in that period. Nineteen percent (19%) aren’t sure.

Sixty-nine percent (69%) of adults say an increase in the interest rate on a credit card makes them less likely to use that card. Twenty-five percent (25%) disagree and say they are not less likely to use a credit card after the interest rate has been raised.

But then 51% of adults say they pay their credit cards in full each month, thereby avoiding any interest payments. However, nearly as many (45%) say they sometimes carry a balance on their cards.

Yves here. The interesting bit is that if consumers follow through with their intentions, some consumers who never carry balances will shift their purchases away from a credit card company that raises rates, maybe out of general principle (or perhaps a view that if the company behaves badly on this front, it may not be accommodating on other fronts, like dealing with billing disputes). Back to the report:

In May of this year, nearly one-out-of-four Americans said they were at least somewhat likely to miss a credit card payment in the next six months

Only 16% say they are carrying more credit card debt than they did a year ago. That’s down five points from December of last year. Thirty-four percent (34%) say they have less credit card debt now, and 46% say their level of debt is about the same.

Twenty-six percent (26%) say they do not know the interest rate their pay on their primary credit card. Sixty-one percent (61%) say they do know that interest rate, but 13% are not sure…

Fifty-seven percent (57%) of Americans say there is a need for more government oversight of the credit card industry…

Twenty-four percent (24%) of Americans say they personally need to cut back on their use of credit cards and other borrowing anyway.

The knives are starting to come out. DeFazio claims the discontent among the progressive wing has become acute. The Democratic Congressmen who have a operating brain cell know the considerable failings of Obama’s economic policies will be visited on them unless serious corrective action is taken in pretty short order. And that won’t happen with Summers and Geithner in place.