Category Archives: Economic fundamentals

Consumer Stress Continues to Rise While DC Goes into “Mission Enough Accomplished” Mode

The officialdom has moved on to a new form of theater, namely legislative mud wrestling, which serves as a useful distraction from the failure to deliver on what ought to have been the first order of business, namely reining in the financiers. As we’ve said repeatedly, cleaning up the banking system is a necessary precursor for recovery from a serious financial crisis. Instead, whether by dumb luck or design, enough Americans have become fixated with various forms of jealousy over advantages they believe their neighbors have (whether accurate or not) that it is providing a great smokescreen for the oligarchs to continue their looting.

The fact that the economy has moved up up from a serious trough is hailed as a recovery. But to the vast majority of Americans, the talk of better times rings hollow. The top echelons are back to spending smartly, and Wall Street bonuses for 2009 and 2010 were lavish.

But even though spending economy-wide perked up in December, some question whether it was savings fatigue rather than a return of consumerism.

Bernanke Blames the Global Financial Crisis on China

They must put something in the water at the Fed, certainly the Board of Governors and the New York Fed. Everyone there, or at least pretty much everyone who gets presented to the media, seems to have an advanced form of mental illness, namely, an pronounced inability to admit error. While many in public life suffer from this particular affliction, it appears pervasive at the Fed. Examples abound including an overt ones like an article attempting to bolster the party line that no one, and hence certainly not the central bank, could have seen the housing bubble coming, or subtler ones, like a long paper on the shadow banking system that I did not bother to shred because doing it right would have tried reader patience Among other things, it endeavored to present the shadow banking system as virtuous (a necessary position since the Fed bailed it out) because it was all tied to securtization and hence credit intermediation. That framing conveniently omits the role of credit default swaps and how they multiplied the worst credit risks well beyond real economy exposure levels and concentrated them in highly geared financial firms.

Another example of the “it is never the Fed’s fault” disease reared its ugly head in the context of the G20 meetings.

Guest Post: The Price of Oil – Where the Outrage?

By Payam Sharifi, an economics Graduate Student at the University of Missouri-Kansas City

Here in the United States, discussions of our troubled times revolve around any of the following: the housing crisis, the federal debt, unemployment, the fiscal health of particular states, and sometimes even income inequality. Overseas, discussions can include these topics, as well as the plight of the Euro. One issue that I personally feel has gotten the short end of the stick is that of commodity prices, and in particular food and oil. There is a special significance to this issue: its ramifications affect nearly every human being in the world. As seen in prices on the NYMEX and other markets, oil and food prices are beginning to soar again, with the price of WTI futures hitting $90/barrel and Brent crude going over $100/barrel. This issue ought to be discussed again with a renewed interest – but the media and much of the populace at large have simply accepted high food and oil prices as an unavoidable fact of life, without any discussion of the causes of these price rises aside from platitudes. For example, a recent AP report quoted an opinion that gasoline was going to hit $4/$5 a gallon in 2011, but did not mention the possible relevance of speculation in the futures market. It seems that everyday observers (as well as even the financial media) find this issue so complex that they shrink from discussing it. I will now give my opinion on these issues, buttressed by what I have learned from a recent interview with commodities trader Daniel Dicker. His new book “Oil’s Endless Bid” is due out in April.

Wisconsin Governor Uses Police State Tactics (Literally) on Democratic Senators (Updated)

A major row has been under way in Wisconsin as governor Walker has been trying to push through state-union-breaking changes as part of his program to deal with a projected $3 billion shortfall in the state budget over the next two years. (Update: as reader petrograd indicates, an analysis of the state’s finances shows this shortfall to be entirely the result of spending increases planned by Walker. The state ran a modest surplus in the latest fiscal year and the projected falls in tax receipts over the next two years were less than $200 million cumulative. So this budget hysteria is a gross distortion of the state’s true condition).

His state budget plan included ending state worker collective bargaining rights and cutting pay and benefits. He not only said he would not negotiate, but announced he had alerted the National Guard in the event of worker protests (note the last time the Guard was called in to handle a labor dispute was in 1934). Walker since backed down on this particular threat, but has now sent out state police to round up Democratic state senators who are refusing to vote on the latest iteration of Walker’s proposal, From PRWatch:

Mary Bottari reports that the state capitol police are scouring the Wisconsin Capitol in an attempt to track down the Wisconsin Senate Democratic Caucus. The Wisconsin Senate was slated to vote on the budget bill today, but they were prevented from doing so because all Democratic Senators walked out denying the Republicans a necessary quorum. The Republicans issued a “call of the house” empowering the state capitol police to round up missing Senators, but the Democrats were prepared for this and promptly departed the building and may even have left the state.

Boeing’s Multi-Billion Outsourcing Fiasco

We’ve repeatedly said that offshoring and outsourcing are often not the big cost-savers that the industry promoting them, Wall Street, and the stenographers among the business press would have you believe.

Direct factory labor is typically just north of 10% of the cost of most manufactured goods; for cars, we are told it’s 13%. Even if you can extract meaningful savings there, you have significant offsets: the upfront cost of re-orgainzing production (which in the outsourcing scenario include hiring costly outsourcing “consultants” and paying attorneys to paper up the deals), higher ongoing managerial costs, higher shipping and related inventory financing costs. Yes, there are cases like Apple where outsourcing has been a big success, but there are also others where the benefits have been underwhelming and have come at considerable costs to US workers, communities, and the economy (see a very good long form discussion by Leo Hindery).

Moreover, these cost savings come with higher risk.

Obama Happy to Cut Broad Range of Services to Preserve Pentagon Pork

In another manifestation of Obama’s continuing move to the right, his latest stunt has been to out-Republican the Republicans as a defender of the Pentagon. The GOP, which is out to cut $100 billion more from Obama’s version, has targeted the Department of Defense for $15 billion from an initial request of over $500 billion. From a statement released by the Administration:

The bill proposes cuts that would sharply undermine core government functions and investments key to economic growth and job creation and would reduce funding for the Department of Defense to a level that would leave the department without the resources and flexibility needed to meet vital military requirements….If the president is presented with a bill that undermines critical priorities or national security through funding levels or restrictions, contains earmarks or curtails the drivers of long-term economic growth and job creation while continuing to burden future generations with deficits, the president will veto the bill.

Contrast this stand-fast position on the military budget with Obama’s willingness to throw pretty much anyone else under the bus. John Walker provided a pithy illustration of the guns v. everything else tradeoff in a mock letter to low income Americans. Key section:

Guest Post: The Faulty Economic Development Model Behind America’s Support for Dictators (Instead of Democracies)

American leaders have wrongly assumed that dictatorships are better for emerging economies …

James Galbraith: Deficit Hawks Down – The Misconstrued “Facts” Behind Their Hype

By James K. Galbraith, a Vice President of Americans for Democratic Action who teaches at the University of Texas at Austin. Cross posted from New Deal 2.0.

Economist James K. Galbraith goes behind the scenes at a Pete Peterson gathering of deficit hawks to see what they have to say.

The Fiscal Solutions Tour is the latest Peter G. Peterson Foundation effort to rouse the public against deficits and the national debt — and in particular (though they manage to avoid saying so) to win support for measures that would impose drastic cuts on Social Security and Medicare. It features Robert Bixby of the Concord Coalition, former Comptroller General David Walker and the veteran economist Alice Rivlin, whose recent distinctions include serving on the Bowles-Simpson commission. They came to Austin on February 9 and (partly because Rivlin is an old friend) I went.

Mr. Bixby began by describing the public debt as “the defining issue of our time.” It is, he said, a question of “how big a debt we can have and what can we afford?” He did not explain why this is so. He did not, for instance, attempt to compare the debt to the financial crisis, to joblessness or foreclosures, nor to energy or climate change. Oddly none of those issues were actually mentioned by anyone, all evening long.

Why the Krugman “I See No Commodities Speculation” Analysis is Flawed

Paul Krugman correctly anticipated that I would be unable to resist taking issue with him again regarding his view that the recent increase in commodities prices are warranted by the fundamentals.

Note that I am not saying in this post that “commodities prices have increased as a result of speculation.” That takes more granular analysis of conditions in various markets; we’ll be looking at some that look suspect in the coming days and weeks.

I intend to accomplish something much simpler in this post: to dispute the logic of Krugman’s overarching argument. He professes to be empirical, but as we will show, he is looking at dangerously incomplete data, so his conclusions rest on what comes close to a garbage in, garbage out analysis. And that’s been a source of frustration given his considerable reputation and reach.

Exclusive: Harvard Economists Prove that Bankruptcy is Mythical

This document was leaked to Naked Capitalism by a university economics student who has asked to remain anonymous

Background

Mixed reactions have followed the recent brilliant demonstration by a pair of young Harvard economists that bankruptcy cannot occur. While the community of economists has generally affirmed the correctness of the reasoning at issue, various individuals already distinguished for their carping attitudes have willfully misunderstood the theorem; for example, the controversial blogger Yves Smith has publicly labeled the proof ‘yet another demonstration that economics is the ugly stepsister of astrology.’

This sort of obscurantism is hardly surprising – as Ludwig von Mises pointed out in 1956 in The Anti-Capitalistic Mentality, ‘economics is so different from the natural sciences and technology on the one hand, and history and jurisprudence on the other hand, that it seems strange and repulsive to the beginner.’ Ms. Smith is evidently one of the people who experienced as a student this natural but irrational feeling of aversion, and has since refused to make the effort to think with true economic rigor.

The insight incorporated in the recent theorem is not difficult to explain, although for a full understanding, knowledge of the relevant mathematical techniques is, of course, essential.

UK About to Implement Massive Tax Break for Banks; Is the US Far Behind? (Updated)

The UK is about to implement a tax code change that amounts to a massive subsidy for large corporations, most of all big banks. The remarkable bit is that this is taking place when the UK is projected to fall short of its budget targets, at a time when the government professes to take that sort of thing seriously. Although we don’t hew to the logic of austerity in the wake of a financial crisis (the better course of action is to encourage debt renegotiations/writedowns, and offset the contractionary impact with fiscal stimulus), a big tax break is contrary to the official policy stance.

For those in the US who have steered clear of the budget drama on the other side of the pond, a story from from the Financial Times just over a week ago will give you a sense of the state of play:

George Osborne says he has little option but to push on with the harshest public spending cuts in living memory because a reversal would alarm the bond markets and plunge Britain into “financial turmoil”.

Krugman, Commodity Prices, and Speculators

Paul Krugman was gracious enough to acknowledge our past differences on the matter of commodities speculation, which was specifically about oil markets. It was the subject of a long running ~~argument~~ conversation between his blog and mine in spring 2008, which I recapped in ECONNED.

In brief, Krugman contended that the skyrocketing oil prices of early 2008 were the result of fundamental factors (and we pointed out that we were puzzled by his stance, since he, unlike the vast majority of Serious Economists, has been willing to call some past bubbles in their making). As he reiterates on his blog today, if the prices exceed the level dictated by supply and demand in the real economy, a standard microeconomic analysis would expect there to be inventory accumulation, aka hoarding.