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2011 June 18 Saturday
Rasmussen: 66% Say US In Recession

Economists measure a recession by the length of time an economy contracts. By contrast, regular citizens measure a recession by how long unemployment is high, incomes are lower than they used to be, and the economy is not growing much. Therefore it is not surprising that Rasmussen Reports finds 66% of the American people believe the US is in a recession.

The Rasmussen Consumer Index, which measures the economic confidence of consumers on a daily basis, held steady on Saturday at 74.4. Consumer confidence is down four points from a week ago, down three points from a month ago and down four points from three months ago.

Twenty-three percent (23%) of Consumers say the U.S. economy is getting better these days, while 56% say it's getting worse. Two-out-of-three consumers (66%) think the United States is currently in a recession.

With oil prices near a level that will cause another recession and supply worries likely to keep oil prices high (unless China goes into a recession) we are stuck in a long period of slow economic growth or worse. Noted Yale housing economist Robert Shiller believes our risk of double-dip recession is substantial.

Lower your expectations. Fundamentals have shifted in ways that limit the rate of economic growth.

By Randall Parker    2011 June 18 11:05 PM Entry Permalink | Comments (1)
2011 April 09 Saturday
Yet Another Financial Crisis In 2011?

For some years now I've been predicting economic conditions for the US and other industrialized countries will be somewhere between bad and worse for the 2010s. Developments of recent months unfortunately provide plenty of evidence for my expectation. Simon Derrick of BoNY Mellon sees lots of storm clouds building on the horizon.

2011 is beginning to look very like 2008 before the collapse of Lehman Brothers—except the numbers involved are much bigger this time around, according to Simon Derrick, the chief currency strategist at Bank of New York Mellon.

In Derrick's view the eurozone debt crisis, China's currency manipulations, and the oil price spike all work against continued economic growth.

Well-known currency strategist Simon Derrick is concerned that the global recession of 2007-2009 could come back with a vengeance. Analyzing where ‘real money’ comes and goes on a daily basis at the Bank of New York Mellon, Derrick fears that the eurozone debt crisis, crude oil above $100 a barrel and China’s managed currency spell doom for the global economy

Oil in April 2011 is at similar prices as oil in April 2008. In 2008 the US and world economy was already heading into a recession. Now the US economy and other Western economies are slowly (by historical standards for economic recoveries) coming out of a recession. Why? One really big reason: the global economy is now so big that global economic growth pushes up commodities prices. Economic growth bumps up against resource limitations.

Donald Luskin argues the economy can absorb even higher prices before falling back into recession. I hope so. I hope the economy can absorb enough of an oil price increase that Peak Oil Recession #2 does not start until 2012 or 2013. But 2013 seems an excessively optimistic hope given commodities prices. Also on the optimistic side: the housing price-to-rent ratio is much less out of whack than it was in 2006. So we do not still have a large housing bubble to pop.

If we go into another recession in the next 12 months (or even the following 12 months) we will go into it from a lower weaker starting point in several respects. Unemployment is still quite high, governments at all levels are having hard times balancing their budgets (at least those trying to balance their budgets), total public debt has soared, and the percentage of mortgages that are underwater (for more than the house's value) is still quite high. Living standards have declined. For example, 5 years since the 2006 peak US rail freight traffic still hasn't revisited 2006 highs and yet the US population has grown by almost 5% in the last 5 years. So in per capita terms freight traffic (and therefore living standards) has dropped.

Frankly, I do not see how we avoid a premature recession. For every month the global economy can sustain growth the demand for oil will grow faster than supply. There's no supply-side relief for high oil prices in sight. Rising oil prices are already cutting into personal consumption spending. So GDP growth has slowed. Will consumers shift their behavior toward lower energy usage lifestyles fast enough to take enough pressure off of further oil price rises? We should be so lucky.

Richard Heinberg makes the same point I keep making about our perilous economic state: we no longer have the capacity to respond to another recession like we responded to the last one. Peak Oil Recession 1 was (and still is) a very expensive affair.

During the past three years, the Fed’s balance sheet has swollen to more than $2 trillion through its buying of bank and government debt. Actual expenditures included $29 billion for the Bear Sterns bailout; $149.7 billion to buy debt from Fannie Mae and Freddie Mac; $775.6 billion to buy mortgage-backed securities, also from Fannie and Freddie; and $109.5 billion to buy hard-to-sell assets (including (MBSs) from banks. However, the Fed committed itself to trillions more in insuring banks against losses, loaning to money market funds, and loaning to banks to purchase commercial paper. Altogether, these outlays and commitments totaled a minimum of $6.4 trillion.
 
Documents released by the Fed on December 1, 2010 showed that more than $9 trillion in total had been supplied to Wall Street firms, commercial banks, foreign banks, and corporations, with Citigroup, Morgan Stanley, and Merrill Lynch borrowing sums that cumulatively totaled over $6 trillion. The collateral for these loans was undisclosed but widely thought to be stocks, CDSs, CDOs, and other securities of dubious value.

We can't afford to do the financial and fiscal injections in Peak Oil Recession 2 that we need for Peak Oil Recession 1. Once Peak Oil Recession 3 hits our response to Peak Oil Recession 1 will seem luxurious and wasteful.

The stimulus-bailout efforts of 2008-2009—which in the U.S. cut interest rates from 5 percent to zero, spent up the budget deficit to 10 percent of GDP, and guaranteed $6.4 trillion to shore up the financial system—arguably cannot be repeated.

Future rounds of Quantitative Easing (QE3, QE4, QE5) can certainly be repeated. It is just the cost of those rounds will be high inflation. One of the biggest questions about the next 10 years is which governments will try to combat Peak Oil recessions with monetary inflation? I want to know because I want to get my finances and my person out of harm's way.

Update: To predict when rising oil prices will cause the next recession watch energy expenditures as a percentage of consumer spending. In February it was at 5.98%. If energy costs go up another 17% from February then the percentage would go over 7% and I think we'd be in recession territory. That does not mean a 17% rise in oil prices will put us into recession. Consumers use electric power and natural gas. Gasoline and heating oil are just part of the equation.

Update II: Pedro Noronha, a fund manager at Noster Capital in London, says the economy is more like at the 2007 stage rather than already at 2008 stage. That sounds right. The stock market is fully or over valued. Oil prices still have a way to go up yet.

By Randall Parker    2011 April 09 06:26 PM Entry Permalink | Comments (9)
2011 April 03 Sunday
Wal-Mart: Serious Inflation Coming To United States

Wondering when the big US Federal Reserve bond buying sprees would cause consumer price inflation? Or are you more like me and wondering when the meat price increases and clothing price increases you have seen will get reflected in mainstream media discourse? Wal-Mart's US CEO has an unhappy message to deliver: You are going to get poorer.

Still, inflation is "going to be serious," Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY's editorial board. "We're seeing cost increases starting to come through at a pretty rapid rate."

Inflation is already going up faster than earnings. Hard to sustain an economic recovery unless oil prices stop rising.

Average hourly earnings in March were flat compared to the previous month for the second time in a row. On an annual basis, income increased by just 1.7 percent.

Meanwhile, consumer price index data released two weeks from now could show a jump in prices of as much as 2.6 percent year-over-year, according to an estimate from the Bank of Tokyo-Mitsubishi UFJ.

Energy prices are eating up wage increases and then some. So consumer spending can not power an economic recovery. There's a substantial risk of falling back into a recession.

Mark Zandi, an economist for Moody's Economy.com, just met with some consumer products company executives and found they are all getting ready to jack up prices. By June the surges in producer prices, driven by commodity price spikes, will filter thru to the retail level. You have been warned.

"They were all on the verge of jacking up their prices," he said. Price increases are not always seen as bad though. When companies have pricing power, it often means there is some traction in the economy, but it's a fine balance.

So if you were thinking about buying something this summer you might want to buy it now - at least if you think you can count on your job still being there. Which leads me to a quantitative blog I just came across. Cheryl Russell of Demo Memo finds a decline over the last decade in the percentage who think it "not likely" they will lose their job in the next 12 months.

2010: 52%
2008: 59%
2006: 64%
2004: 64%
2002: 63%
2000: 71%

This ties in with why wages are not keeping up with inflation. With a huge world supply of labor capital has the upper hand in wage negotiations.

"Companies are in the dominant bargaining position," said Paul Ashworth, chief U.S. economist at Capital Economics, a consultancy. "They don't have the added problem of paying more for their wages as well."

But even if capital did not have the upper hand Peak Oil is going to cause a big decline in living standards.

The inflation rate in South Korea is almost identical to the inflation rate in the United States in 1971 when Richard Nixon imposed wage and price controls.

In March, the consumer price index rose 4.7% from a year earlier, accelerating from the preceding month's 4.5% rise, according to data from Statistics Korea.

Europeans have greater trust in the Euro central bank's dedication to control inflation than Americans have. Will the European Central Bank keep inflation down even at the lost of losing some Euro zone members? In spite of that faith Euro zone inflation is now well above the under 2% target of the European Central Bank. Also, in the most recent 3 months inflation has been galloping along at 5% due to energy prices.

Annual euro-zone inflation rose to 2.6% in March from 2.4% the previous month, European Union statistics agency Eurostat said, surprising many economists who had expected no change from February.

Euro zone interest rates are going to go up. The Fed has a choice to either follow or let inflation get out of hand. In the next recession caused by an oil spike we are going to into it in much worse shape than we went into the last recession. Governments will be too poor to use fiscal stimulus. It'll be all they can do just to pay unemployment benefits while cutting old age benefits. Will they raise taxes in a recession or slash welfare state spending? Will policy makers opt for inflation to unload some of their debts?

By Randall Parker    2011 April 03 02:03 PM Entry Permalink | Comments (19)
2010 October 17 Sunday
7 More Years Of Weak Economic Growth?

Yale housing economist Robert Shiller, famed for the Case-Shiller housing price index, points to economic research that predicts poor economic performance due to the recent financial crisis.

NEW HAVEN – Much of the talk emerging from the August 2010 Jackson Hole Economic Symposium, attended by many of the world’s central bankers and economists, has been about a paper presented there that gave a dire long-run assessment of the future of the world’s economies.

The paper, “After the Fall,” was written by economists Carmen Reinhart and Vincent Reinhart. Their work draws upon a recent book that Carmen Reinhart co-authored with Kenneth Rogoff, entitled This Time Is Different: Eight Centuries of Financial Folly.

According to the Reinharts’ paper, when compared to the decade that precedes financial crises like the one that started three years ago, “GDP growth and housing prices are significantly lower and unemployment higher” in the subsequent “ten-year window.” Thus, one might infer that we face another seven years or so of bad times.

We have more than just that reason to expect poor economic performance in the next decade and beyond. Huge US government deficits, pressures to raise taxes to pay for them, an aging population, Peak Oil and other problems I've pointed to make me expect economic contraction over the next 10 years.

Over at GNXP Thorfinn points to the rising anti-elitist sentiment as economic stagnation continues. I expect this feeling to become more widespread and intense. The feeling seems justified too. If the elites steered things in a direction where stagnation (or worse) will be the result then the elites do not deserve their high perches.

As Benjamin Friedman laid out in The Moral Consequences of Economic Growth; a tolerant, accepting society is predicated on running the growth treadmill. Simply being prosperous is not enough — people need to feel that conditions will steadily improve over time, or else populism, xenophobia, and other measures of intolerance go up.

So as we enter the a “New Normal” phase where the steady economic growth and low unemployment of the Great Moderation can no longer be sustainably maintained, there will be substantial political upheaval as well.

One manifestation of this is the strongly anti-elitist attitude espoused by anti-establishment political candidates, among others. Barack Obama (Columbia, Harvard Law) and Sonia Sotomayor (Princeton, Yale Law), for instance, have been attacked for holding Ivy League credentials.

Competition between factions for resources is going to become a lot ruder and cruder. Old folks, young folks, races, upper and lower classes, doctors, lawyers, CEOs, capitalists, education bureaucracies, welfare recipients: these people can't all be placated. As each group loses the demand will go out for even greater losses by other groups. What I want to know: How's this going to turn out? Who will lose the most? What sacred cows will cease to be sacred first?

I'm expecting means testing of old age benefits, welfare cut-backs, higher education subsidy reductions, education cuts (look at state and local budget cuts that show this is possible), and even a step back from guaranteed full medical treatment all diseases.

The biggest incentive for governments to pressure their central banks to cause hyperinflation in a contracting economy is that it will allow governments to avoid making explicit direct visible cuts from each faction's pie slice. "Oh sorry, you didn't keep up with inflation. We still boosted our expenditures for you. But the inflation we can't control took away even more. Bad inflation. Not our fault. We sympathize." The cuts will come. But they'll be done in a sort of back door way. Plausible deniability. That's a much more economically damaging way to cause the cuts. But many governments have done it and the US government will be sorely tempted.

By Randall Parker    2010 October 17 08:27 PM Entry Permalink | Comments (21)
2010 January 02 Saturday
Obama Foreclosure Prevention Extends Crisis

Finally the New York Times reports the obvious about US government policies aimed and preventing mortgage foreclosure.

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.

The American people, American corporations, and US governments have too much debt. We can not get out of the financial crisis by finding ways for people to continue shouldering too much debt. People who make too little that they never should have gotten mortgages in the first place should be foreclosed on. People who have lost their jobs and have little prospect for being able to start paying should also be foreclosed on. It isn't nice. Life is cruel. But debt liquidation is necessary for a sustained economic recovery.

Postponing the inevitable is a bad idea when the postponement prevents needed adjustments.

“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”

The road to economic recovery is paved with bankruptcies and foreclosures.

By Randall Parker    2010 January 02 11:25 PM Entry Permalink | Comments (8)
2009 December 01 Tuesday
Tyler Cowen: America Threatened By China Bubble

In a column for the New York Times Tyler talks economic sense on China.

PRESIDENT OBAMA’S recent trip to China reflects a symbiotic relationship at the heart of the global economy: China uses American spending power to enlarge its private sector, while America uses Chinese lending power to expand its public sector. Yet this arrangement may unravel in a dangerous way, and if it does, the most likely culprit will be Chinese economic overcapacity.

China's macroeconomic mismanagement is on a scale similar to the US's macroeconomic mismanagement. Can we avoid a resulting depression?

Developing major economies all experience bubbles.

China has had a 30-year run of stellar economic growth. But it’s only human nature for such expansion to breed too much optimism, overextending an entire economy. Americans have found this out the hard way in their own financial crisis.

History has shown that no major economy has grown into maturity without bubbles, crises and possibly even civil strife or civil wars along the way. Is China exempt from this broader pattern?

Tyler does not predict a crisis. But he thinks we should prepare for the possibility. If it happens Tyler expects interest rates to rise in the United States and for the US government's fiscal situation to become unsustainable.

I doubt the ability of the world's central bankers to manage the huge imbalances in ways that avoid a crisis. We had a crisis last fall. I suspect we will have some more such crises of a similar scale in the next decade.

By Randall Parker    2009 December 01 08:54 PM Entry Permalink | Comments (11)
2009 October 31 Saturday
Economy Switching To New Debt Addiction

Richard Cookson, global head of asset allocation at HSBC, gets to the heart of the matter: Federal Reserve and Executive Branch policy amounts to switching the economy from its private debt addiction to a substitute public debt addiction. Be sure to read the Waldman link too.

"The way to think of it is this: It's not a recovering economy, it's a cross-addicted economy," he told CNBC.

"In other words, all you've done is you've taken the private sector debt and you've bunged it into the public sector. That's all you've done. Now that's not a recovering economy, as it were in addictive parlance, but it's simply the fact that you've got a huge amount of money being whacked into economy."

If I thought they were doing this as a temporary measure to gradually wean the economy off its addiction to spiraling credit card, mortgage, and other private debt I wouldn't object. But Timothy Geither, Ben Bernanke, and company seem so focused on the short term that they are doing reckless things.

If Bill Gross is correct how do we adjust the economy to the end of the asset price inflation (he says appreciation) of recent decades? Again, keep reading down to the Waldman link.

Let me start out by summarizing a long-standing PIMCO thesis: The U.S. and most other G-7 economies have been significantly and artificially influenced by asset price appreciation for decades. Stock and home prices went up – then consumers liquefied and spent the capital gains either by borrowing against them or selling outright. Growth, in other words, was influenced on the upside by leverage, securitization, and the belief that wealth creation was a function of asset appreciation as opposed to the production of goods and services. American and other similarly addicted global citizens long ago learned to focus on markets as opposed to the economic foundation behind them. How many TV shots have you seen of people on the Times Square Jumbotron applauding the announcement of the latest GDP growth numbers or job creation? None, of course, but we see daily opening and closing market crescendos of jubilant capitalists on the NYSE and NASDAQ cheering the movement of markets – either up or down. My point: Asset prices are embedded not only in our psyche, but the actual growth rate of our economy. If they don’t go up – economies don’t do well, and when they go down, the economy can be horrid.

Now, you might wonder why this asset price inflation of recent decades. Steve Randy Waldman has a compelling explanation: The big asset price inflation was due to increasing inequality and the propensity of wealthy people to save and buy assets. Click thru and read this full article. Then tell me in the comments what do you think of his reasoning. Seems sound to me.

Whether an economy generates asset price inflation or consumer price inflation depends on the details of to whom cash flows. In particular, cash flows to the relatively wealthy lead to asset price inflation, while cash-flows to the relatively poor lead to consumer price inflation.

Why? In Keynesian terms, poorer people have a higher marginal propensity to consume. The relatively poor include people who are cash-flow constrained — that is they cannot purchase what they wish to purchase for lack of green, so their marginal dollar gets immediately applied to the shopping list. Also, poorer people may be different, there may be a correlation between poverty and disorganization, lack of impulse control, inability to defer gratification etc. Think of Greg Mankiw's Spenders/Savers model.

Less of economic growth was paid as wages. So more went to wealthier people and they used that increased income to buy assets such as stocks and property. Asset prices soared to the extent that monetary policy was expansive.

The wage share of GDP decreased significantly over the 1970s and 80s. Compensation did not decrease as much, but much of nonwage compensation is retirement savings that is saved rather than consumed.

The people who run the US Federal Reserve and other central bankers didn't see a problem since they only worry about consumer price inflation. They fail to recognize that inflation of housing, commercial buildings, and other assets is as important as inflation in the prices of consumer goods.

Why the blind spot when it comes to asset price inflation? When this happens people feel richer. When the cost of consumer goods goes up people feel poorer. Now, unless the real production of goods and services goes up as fast as asset prices the asset price increase is just an unsustainable inflation. The bubble will burst. The results (some of which we are seeing now) are not pretty.

Update: Meta Finance makes a very similar argument:

If the flood of liquidity provided by central bankers does not go into the labor market, then where does it go? Into asset markets. It is also no coincidence that the last few recessions and jobless recoveries have been followed by asset market bubbles, first in technology stocks, then in housing.

Thus the conventional wisdom, that China ‘exports deflation’ to the world, is only partly true. Over the last twenty-odd years, China has indeed exported deflation, but this has been concentrated in very specific segments of the economy: in the prices of retail goods, and in worker salaries. It so happens that these segments are precisely the ones captured in standard measures of consumer inflation. Central bankers, lulled by this quiescence in measured inflation, have time and again erred on the side of loose monetary policy, leading directly to the asset price bubbles that have done so much harm in recent years.

Right now Fed monetary policy is very expansionist. Unemployment is still dropping but the stock market has soared.

By Randall Parker    2009 October 31 10:06 AM Entry Permalink | Comments (7)
2009 October 05 Monday
High Savings Rate Or Another Bubble?

Get prudent or throw another party?

Savings will continue heading up, perhaps to 8 percent or beyond, some economists say.

“I am unprepared to make numeric predictions without working out some solid numbers, but this sounds right,” writes Jonathan Parker, a finance professor at Northwestern University, in an e-mail. “Why? First, to close the trade gap in normal times (in an accounting sense) would require a saving rate of around 8 percent. Second, more typical saving rates in the US historically are around 8 percent.”

But in August, the personal savings rate fell for the third month in a row to 3 percent of disposable income, the Commerce Department reported Oct. 1. The monthly numbers can jump around a good bit, economists warn: Perhaps consumers were temporarily lured out of savings mode by the “cash for clunkers” program, for example.

But why did the savings rate decline? One possibility: China and other countries forced the US to run a big trade deficit. Then the US government over-inflated the currency in order to get people back to work in spite of manufacturers and even service industries shifting jobs abroad. The loose money policy drove up asset prices and made people think they were wealthier than they really were. People took out second mortgages and saved less as equity markets became overvalued along with housing. Eventually the bubble popped. Bummer.

The American people are crying out for a new bubble that will allow them to avoid living prudent lives. Ian Bremmer and Nouriel Roubini argue that it is hard to avoid a bubble when recoveries are weak. But why are American economic recoveries increasingly weak? Economists do not ask this question enough. But it is the key question. Could the nation be in decline?

As for the exit from monetary easing, the Fed must learn from the fateful mistake it made after the 2001 recession. Then, the central bank cut the federal-funds rate too much and kept it too low for too long. It also moved far too slowly when the normalization occurred—in small increments of 0.25% from summer 2004 until the summer of 2006, when it peaked at 5.25%. Normalization took two full years. It was in that period of slow normalization that the housing, mortgage and credit bubbles spiraled out of control. The lesson learned: When you normalize, move rapidly, or prepare for another dangerous bubble.

Of course, this is easier said than done. From 2002 to 2006, the Fed moved slowly because the recovery appeared anemic and because of significant deflationary pressures. This time around, the recession is more severe—unemployment is at 9.8% and is expected to peak above 10%, and we are experiencing actual deflation. Therefore, the incentive not to exit too soon will be greater and the risk of creating another bubble is greater. Indeed, the sharp increase in the stock market and commodities, and narrowing of credit spreads since March, are partly due to a wall of global liquidity chasing assets and already causing asset inflation.

We need to address root causes. What are the root causes of America's decline? Got some answers?

By Randall Parker    2009 October 05 10:51 PM Entry Permalink | Comments (13)
2009 September 26 Saturday
Spain Unemployment Rate Heading to 25%?

A Madrid research group expects Spain's economy to contract 11% from peak and unemployment to reach 25%. Idea: vacation trips to Spain to see a depression just like grandma lived thru back in the 1930s. Albeit grandma didn't have a welfare state to fall back on.

The Madrid research group RR de Acuña & Asociados said the collapse of Spain's building industry will cause the economy to contract for the next three years, with a peak to trough loss of over 11pc of GDP. The grim forecast is starkly at odds with claims by premier Jose Luis Zapatero, who still says Spain's recession will be milder than elsewhere in Europe.

Spain is going to raise the national value added tax (VAT - like a sales tax) by 2% to pay for welfare benefits for all those unemployed. The Spanish government more optimistically expects unemployment to peak at a mere 18.9%. Time for an extended siesta.

The government expects the Spanish economy, Europe's fifth-largest, will contract by 3.6 percent in 2009 and return to growth by the second half of next year.

But it expects the unemployment rate will rise to 18.9 percent in 2010 after closing this year at 17.9 percent.

Spain went thru a housing bubble much like California's and has a huge overhang of unsold properties. Spain also has a European welfare state with the aforementioned VAT that enables government to achieve a size that California liberals can only dream about. That welfare state puts Spain's unemployment at a higher starting point.

Economist Paul Krugman expects the US unemployment rate still have over a year of increases in store. Though the possibility of America catching up with Spain in terms of increased leisure time still seems low.

"(U.S.) unemployment will peak in early 2011 ... certainly staying very high and possibly rising all next year," Krugman told a business meeting in Slovenia, adding his forecast was based on data from previous U.S. economic crises.

But I expect Peak Oil will prevent a sustained recovery.

If unemployment is going to continue to rise thru early 2011 the eventual peak could be quite high. The US overall is at 9.7% unemployment. But some areas are much higher. Michigan unemployment is already at 15.2% with Nevada at 13.2% and California at 12.2%.

Japan is experiencing deflation. Why buy when things will cost less in the future? Why buy when you might lose your job?

In July, the International Monetary Fund said Japan may face deflation through 2011. The unemployment rate rose to a record high of 5.7 percent and the core consumer price index dropped at an unprecedented pace of 2.2 percent, heightening deflation concerns.

Japan's economy might start growing very slowly in 2010. Then again, maybe not.

The economy will expand 0.8 percent next year after contracting 6 percent in 2009, according to median forecasts, putting assets in the world’s second-biggest economy at a disadvantage to those in countries with higher borrowing costs.

Japan has a government debt of about 200% of GDP. This has got to cause serious problems at some point. With a shrinking population and stagnant economy the cost of paying for that debt could spike. How is Japan going to handle the extended economic contraction that Peak Oil will bring? They seem ill-positioned for it.

By Randall Parker    2009 September 26 12:25 PM Entry Permalink | Comments (2)
2009 July 04 Saturday
Tax Revenues Tanking

US government income tax revenue is declining due to rising unemployment, higher rates of part-time work, declining salaries, and cuts in bonuses.

According to Trim Tabs, income-tax withholdings in the past four weeks are down 6.1% from a year ago; in the last two weeks, they're down an even bigger 8.1% from last year. That marks a sharp deterioration from May, when income-tax withholdings were off "only" 4.8% from a year ago.

You hear a lot of talk about "green shoots". I think "drought", "root fungus", and "blight" a hit closer to reality. There's an angle here for locusts as well.

US states are hard hit too.

Tax collections fell sharply during the 2009 fiscal year just ended on all fronts. Revenues from sales taxes were down 3.2 percent from 2008, from personal income taxes 6.6 percent, and from corporate tax payments 15.2 percent, according to estimates by the National Governors Association. That reflects the nature of the current recession, which has caused consumers to retrench, capital gains for investors to evaporate, and business profits to shrink.

April state tax revenues are done 26% overall.

Albany, N.Y. — States that collect personal income taxes continued to suffer sharply declining revenues as the April 15 deadline for filing tax returns delivered troubling news, according to a Rockefeller Institute of Government report issued today.

The report — “April Is the Cruelest Month” — examined January to April tax collections for 37 of the 41 states that impose broad-based personal income taxes. It showed an overall decline of 26 percent, or $28.8 billion, when compared to the same period a year earlier. April income-tax collections were even worse than those in the preceding quarter, with a drop-off of $18.2 billion when compared to April 2008. April is the month during which states collect the most income tax revenue, because of the filing deadline.

Personal income tax receipts are down 54.9% in Arizona. That's an incredibly large number. What's the real unemployment rate in Arizona?

Overall, 34 of the 37 states covered in the report experienced personal income tax fall-offs, ranging from a high of 54.9 percent in Arizona to a low of only a 0.3 percent drop-off in West Virginia. Three of the 37 states studied — Alabama, North Dakota, and Utah — saw an increase. Data were not available yet for Kentucky, Missouri, Mississippi, and New Mexico.

Preliminary data for May showed further decline. Thirty of 34 states for which data were available reported continuing declines in personal income tax collections. That overall decline was about 25 percent in May.

The states are hit with financial problems greater than any they've seen in the last 30 years.

The National Association of State Budget Officers says 42 states wrestled with budget deficits this spring, the most since the organization began tracking budgets 30 years ago.

"This downturn, even more so than previous downturns, really is affecting every state right now," Sigritz said.

Japan is getting hit by a huge revenue decline as well. Since Japan's economy is doing much worse than the US economy I actually would expect even worse news from them on tax revenue.

The Ministry of Finance said tax revenue stood at 44.3 trillion yen ($458 billion) for the last financial year, below the 46.4 trillion yen forecast in the budget and a 13 percent fall from the previous year, the biggest annual decline ever.

These problems will all pale as compared to what happens when Peak Oil hits.

Economist David Rosenberg says this is not the typical type of recession and a slow recovery should be expected.

Most pundits who crow about green shoots and about an inventory restocking in the third quarter giving way towards some sustainable economic expansion live in the old paradigm. They don’t realize, for whatever reason, that the deflationary aftershocks that follow a post-bubble credit collapse typically last for 5 to 10 years. Businesses understand better than the typical Wall Street or Bay Street economist and strategist that everything from order books, to output, to staffing have to now be restructured to adequately reflect a permanently lower level of leverage in the economy.

Indeed, by our estimates, there is up to another $5 trillion of household debt that has to be eliminated in coming years and that process is going to require that consumers go on a semi-permanent spending diet. Companies see this, which is why they are not just downsizing their payroll, but have also cut the workweek to a record low of 33.1 hours. Fewer people are working and those that are still working have seen their hours dramatically cut this cycle.

Companies are finding other ways to save on the aggregate labour cost bill as well, which may be a factor reinforcing the uptrend in the personal savings rate (see more below). For example, a rapidly growing number of employers are now suspending contributions to worker 401(k) plans. According to a joint survey by CFO Research Services and Charles Schwab, nearly 25% of U.S. companies have either suspended their plans or are planning to do so (this is up from 2% at the turn of the year). Again, how we end up squeezing inflation out of the system when the labour market is clearly deflating wages and benefits for the 70% of the economy called the consumer is going to be interesting to watch.

The party's over for years to come. Welcome to The New Frugality.

By Randall Parker    2009 July 04 12:45 AM Entry Permalink | Comments (1)
2009 June 28 Sunday
Bill Gross Sees More Debt And Lower Economic Growth

Pimco (really big bond manager) managing director Bill Gross says we are at risk of total federal government debt rising to 100% of GDP.

To zero in on the U.S. of A., its annual deficit of nearly $1.5 trillion is 10% of GDP alone, a number never approached since the 1930s Depression. While policymakers, including the President and Treasury Secretary Geithner, assure voters and financial markets alike that such a path is unsustainable and that a return to fiscal conservatism is just around the recovery’s corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington’s hat. Private sector deleveraging, reregulation and reduced consumption all argue for a real growth rate in the U.S. that requires a government checkbook for years to come just to keep its head above the 1% required to stabilize unemployment. Five more years of those 10% of GDP deficits will quickly raise America’s debt to GDP level to over 100%, a level that the rating services – and more importantly the markets – recognize as a point of no return. At 100% debt to GDP, the interest on the debt might amount to 5% or 6% of annual output alone, and it quickly compounds as the interest upon interest becomes as heavy as those “sixteen tons” in Tennessee Ernie Ford’s famous song of a West Virginia coal miner. “You load sixteen tons and whattaya get? Another day older and deeper in debt.”

The claim by the Obama Administration for an eventual return to fiscal probity is based on their assumption of a healthy recovery from the recession. They expect this recovery to kick in by the end of 2009 or thereabouts. But suppose the recession goes deeper than the Administration projects (it already has) and suppose recovery is slow for years (and Bill Gross expects a slow recovery - see below). Then what happens to the US federal budget? Spending goes up but revenue doesn't. It is as simple as that. So the deficit and accumulated debt go up even faster.

Gross says America's demographics with an aging population mean the problem is even bigger. I'll see him an aging population problem and raise him a declining skills population due to low skilled immigration. America's workforce in the future will be less capable and a smaller percentage of the total population. That spells declining living standards before we even begin to account for Peak Oil.

The current annual deficit of $1.5 trillion does not even address the “pig in the python,” baby boomer, demographic squeeze on resources that looms straight ahead. Private think tanks such as The Blackstone Group and even studies by government agencies, such as the Congressional Budget Office, promise that Federal spending for Social Security, Medicare, and Medicaid will collectively increase by 6% of GDP over the next 20 years, leading to even larger deficits unless taxes are increased proportionately. Collectively these three programs represent an approximate $40 trillion liability that will have to be paid. If not, you can add that present value figure to the current $10 trillion deficit and reach a 300% of GDP figure – a number that resembles Latin American economies such as Argentina and Brazil over the past century.

Gross says funding the US government debt is going to become difficult. He expects higher interest rates. Now's not the time to buy a long term bond.

So the rather conservative U.S. government debt ratio shown in Table 1 will likely be anything but in less than a decade’s time. The immediate question is who is going to buy all of this debt? Estimates suggest gross Treasury issuance of up to $3 trillion this calendar year and net offerings close to $2 trillion – almost four times last year’s supply. Prior to 2009, it was enough to count on the recycling of the U.S. trade/current account deficit to fund Treasury borrowing requirements. Now, however, with that amount approximating only $500 billion, it is obvious that the Chinese and other surplus nations cannot fund the deficit even if they were fully on board – which they are not.

Consumer spending is not going to ride to the rescue. Consumers are trying to cut back on their debt loads.

Although personal spending increased slightly last month, the saving rate climbed to its highest level in 15 years as consumers tried to build a buffer against the threat of job losses and more economic hardships.

By Randall Parker    2009 June 28 12:57 AM Entry Permalink | Comments (5)
2009 May 08 Friday
Taleb Sees Worse Economy Than Great Depression

There's an old Chinese curse about how may you live in interesting times. The times certainly have gotten very interesting. Mr. Black Swan thinks governments so lack control that they can't avoid an economic depression.

May 7 (Bloomberg) -- The current global crisis is “vastly worse” than the 1930s because financial systems and economies worldwide have become more interdependent, “Black Swan” author Nassim Nicholas Taleb said.

But not all doomish prognosticators are as pessimistic. Economist Nouriel Roubini (aka Dr Doom) says we are headed for 3 years of deflation due to excess productive capacity and insufficient demand. But he isn't expecting a downturn as deep as a depression.

“There is already excess capacity in the global economy because of the overinvestment in capacity by China, Asia and other emerging markets,” Roubini said in Singapore today. “Without an increase in global demand, we will have even more excess capacity,” and China “is not building domestic demand,” he said.

Roubini sees the huge US fiscal stimulus as only a short-term fix and says we have to balance trade because the US can't supply all the demand needed to use the world's productive capacity. I agree.

Roubini expects a weak recovery to begin only in 2010. But it looks like we will avoid a depression in his estimation.

Roubini says he doesn’t see much in the way of “glimmers of hope” other economists have noted. Unemployment, capital investment, and exports are all worsening, and while there are a few signs of stability in housing, it’s not much. Overall, he figures, the odds of a prolonged “L-shaped” depression have fallen to less than 20%, from about 30%, thanks largely to the efforts of this administration and, to some extent, the last. He expects global contraction of 2% this year, and expansion of about 0.5% next year, “so small it’s going to feel like a recession still.”

Still, he adds: “I don’t worry as much as six months ago about a near depression.”

Declining prices for 3 years? Or massive monetary expansion by the US Federal Reserve? Do you fear inflation or deflation more? And why?

By Randall Parker    2009 May 08 02:14 PM Entry Permalink | Comments (10)
2009 March 23 Monday
Ron Paul Predicts 15 Year Depression

US Congressional Representative and libertarian Ron Paul (R-TX) tells the Financial Times that we are headed into a long depression.

Unfortunately, cashing out will not protect the value of investments, he insists, because “fiat” currencies will all decline over the coming years as measures to try to haul the world economy out of recession fail. “The current stimulus measures are making things a lot worse,” says Mr Paul.

“The US government just won’t allow the correction the economy needs.” He cites the mini-depression of 1921, which lasted just a year largely because insolvent companies were allowed to fail. “No one remembers that one. They’ll remember this one, because it will last 15 years.”

At some stage – Mr Paul estimates it will be between one and four years – the dollar will implode. “The dollar as a reserve standard is done,” he says. He sees little hope for other currencies where central banks have also created too much liquidity dating right back to the early 1970s.

Also, at the gambling911.com web site after arguing for legalized gambling Paul says we are already in a depression and government is extending it by delaying a needed massive liquidation of bad debt.

CONGRESSMAN PAUL: For some people, we're in a deep depression. I imagine if you live in Detroit, you wouldn't have to argue about when the depression is going to start. Government statistics on unemployment are always more optimistic then they really are; I think today they came out and unemployment is over 10% and that's getting pretty serious. But others in the private sector who count all the people who have quit looking for work - it's probably 17 or 18%. That's huge and the sentiment is so negative and the amount of welfare has been wiped of the books has been into the many many trillions of dollars so I would say that we are in a very very depressed condition - much worse than any recession we've had in a long time. I think we have a long way to go because the proper policies have not been solid. We're doing everything to prop up the bad system rather than allowing the debt to be liquidated and prices to fall. For instance, there are too many houses around; there are 19 million houses unoccupied and still the prices are too high and they're working hard to try to keep these prices up. But you want these prices to go down and people who have money to buy these houses so we can go back to building houses again. However, if the government keep interfering with this liquidation of all of the mistakes made then it just takes that much longer. So I think the economy is going to continue and eventually most people recognize this as a depression.

Paul argues the US needs something like the short deep downturn of 1921. Curiously, that downturn was longer and deeper for Britain whereas Britain had a much shallower downturn in the 1930s than the US did.

You can see lots of manifestations of this political resistance to market corrections. Financial and industrial companies are kept out of bankruptcy with government-provided money. Also, the big injections of federal money to increase mortgage availability and to prop up overpriced housing delays the recovery of the housing market. Obama and others on the Left will argue for affordable housing while trying to prevent prices from dropping.

I do not expect a 15 year downturn due to this financial crisis. But other problems such as the retirement of the baby boomers, the huge unfunded liabilities for old age benefits, Peak Oil, and the lower academic achievement of our growing NAM (Non-Asian Minority) population all argue for lower rates of economic growth and even economic contraction.

Update: Rolfe Winkler argues that Summers and Geithner would prescribe austerity for less developed countries faced with so much debt.

The great Ponzi scheme that is the Western World’s economy has grown so big there’s simply no “fixing” it. Flushing more debt through the system would be like giving Madoff a few billion to tide him over. Or like adding another floor to the Tower of Babel. To what end? The collapse is already here. The question is: How much do we want it to hurt?

Using the public’s purse to finance “confidence” in a system that is already kaput may delay the Day of Reckoning, sure, but at the cost of multiplying our losses. Perhaps fantastically.

Bottom line….We can bankrupt ourselves propping up a system that is collapsing anyway, or we can dig ourselves out of debt, if not with higher interest rates then certainly with fiscal austerity. That would be a hard sell to the American people, I know. But deep down, Summers and Geithner know it is the right thing to do. It is, after all, the prescription they wrote for emerging markets facing financial crises.

The propping up definitely transfers money between groups within our society. Renters and full home owners pay mortgage holders. The prudent pay the profligate. The American taxpayers pay the holders of bank debt and credit default swaps. I fear that reducing the cost of bad decisions by financial firms will cause far larger costs for us in the future.

By Randall Parker    2009 March 23 09:47 PM Entry Permalink | Comments (16)
2009 March 17 Tuesday
Bank Of England Sees Depression Risk

Britain's central bank expects price changes in Britain to go negative in coming months. The Bank of England reports a significant risk of Britain's falling into a depression.

The country is displaying early symptoms of being trapped in a so-called “debt deflation trap” where families find themselves pushed further and further into the red every month, according to a Bank report published today.

The stark warning will cause serious concerns, since it was this combination of falling prices and soaring debt burdens that plagued the US in the 1930s.

If the central bankers can't avoid a depression then they've learned little since the 1930s.

By Randall Parker    2009 March 17 12:18 AM Entry Permalink | Comments (8)
2009 March 15 Sunday
2009 Economic Contraction To Be Bigger Than 2008

The show has just begun. Standard & Poor's expects most of the economic contraction will occur in 2009.

In our current view, we expect the U.S. recession will be deep and long and that it won't bottom out until the second half of 2009 as monetary and fiscal stimulus kicks in. Standard & Poor's expects that GDP will fall for four consecutive quarters, starting with the third quarter of 2008 through the second quarter of 2009. We now expect a peak-to-trough drop in real GDP of about 3.8%, but more will be in 2009 and less in 2008. Signs of recovery would likely show up in late 2009.

We expect GDP to fall 2.5% this year, much worse than the meager 1.1% increase in 2008. Growth will likely improve modestly in 2010, increasing just 2.0%. Housing will likely keep depressing the expansion through early 2010.

S&P do not expect housing prices to bottom until early 2010. This is not a good time to buy a house. Best to wait unless you are in an area where lots of auctions have driven down prices far below the peak.

S&P also see additional downside risk. Foreigners could stop buying US Treasuries and kick up US interest rates and inflation for example. The US has risk of getting stuck in a downturn for a much longer period of time like Japan in the 1990s.

All the property with values below the mortgages held on them will go further underwater this year. This increases the incentives for walking away from mortgages. The problems with walking away from mortgages have gotten smaller and better known. Expect more people to make that choice.

Europe, Japan, and South Korea will be hit even harder.

Europe did not escape the problems that swept the globe in 2008. The recession is hitting every country in the euro zone, where growth is likely to contract 2.7% in 2009, 3.4% less than last year's modest 0.7% performance.

...

We expect that Japan's recession will be its worst since World War II. After seven years of modest expansion, the Japanese economy will likely contract 4.0% in 2009 after already having fallen 0.7% in 2008. Two main engines of Japanese growth in recent years—corporate investments and net exports—have buckled under the credit crisis, the stronger yen, and a tumbling U.S. economy.

A 4% contraction in Japan. Ouch. They expect South Korea to contract 3.5%. South Korea still managed to grow 2.5% in 2008.

S&P expect China and India to grow 6.5% and 6% respectively.

By Randall Parker    2009 March 15 03:55 PM Entry Permalink | Comments (5)
2009 March 09 Monday
No Economic Recovery Until 2011?

Mark Zandi, chief economist and co-founder of economics consulting firm Economy.Com, says economic growth will not start again until 2011. Yes, 2011, not 2010.

For the US economy, things are getting “measurably worse,” Zandi said. He predicted 2009 would be a “very difficult year — washout,” with the economy contracting 2.5 percent. That is twice as big a decline in economic activity as the Obama Administration predicts in its budget.

Growth again in 2011

As for 2010, “I don’t think we go anywhere — basically a flat year,” Zandi says. He added, “I think we get growth in 2011.”

Ouch! So if you lose your job this year plan for an extended period of, er, leisure.

Nouriel Roubini has also become more gloomy about recovery. He's in the 24-36 month range for recession duration.

"We are in the 15th month of a recession," said Nouriel Roubini, a professor at New York University's Stern School of Business, told CNBC in a live interview. "Growth is going to be close to zero and unemployment rate well above 10 percent into next year."

Echoing a speech he made earlier in the day, Roubini said he sees "no hope for the recession ending in 2009 and will more than likely last into 2010."

Roubini sees a one third chance of a 3 year recession.

"We could end up ... with a 36-month recession, that could be "L-shaped stagnation, or near depression," Roubini said. He puts the chance of a severe U-shaped recession at 66.7 percent, and a more severe L-shaped recession at 33.3 percent.

Back in April 2008 Roubini was forecasting a 12 to 18 month recession. So he's definitely gotten more bearish.

I think the stock market's parallel with the early 1930s might continue for a while. Obama's use of the downturn to justify what he wanted to do anyway is not helping. He should stop treating the US economy as a golden goose who will lay eggs no matter what. He's quite capable of making things worse and he needs to figure that out. I'm guessing he'll stay oblivious though, to our detriment.

By Randall Parker    2009 March 09 09:43 PM Entry Permalink | Comments (8)
2009 March 05 Thursday
1 In 5 Chance Of Economic Depression

Harvard econ prof Robert J. Barro says a historical comparison of countries that have had stock market crashes and depressions suggests the US has a 1-in-5 chance of a depression.

The U.S. macroeconomy has been so tame for so long that it's impossible to get an accurate reading about depression odds just from the U.S. data. My approach uses long-term data for many countries and takes into account the historical linkages between depressions and stock-market crashes. (The research is described in "Stock-Market Crashes and Depressions," a working paper Jose Ursua and I wrote for the National Bureau of Economic Research last month.) The bottom line is that there is ample reason to worry about slipping into a depression. There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s.

What about the government policies designed to avoid a depression? Barro doubts these policies will help.

I wish I could be confident that the array of U.S. policies already in place and those likely forthcoming will be helpful. But I think it more likely that the economy will eventually recover despite these policies, rather than because of them.

One has to look at parallels. The 3 month T-Bill rate is at its lowest level since the Great Depression. Look at the graph on that page. We only came that close once since the Great Depression in 2002. If we do go into a depression a global saving glut should be noted as one of the causes. The East Asian money that flowed into the US caused an asset bubble that led to this crisis. There's a lesson here for laissez faire libertarians (not that they'll learn it): free trade and a floating currency do not prevent foreign governments from causing massive distortions in our capital market.

On the bright side the odds are against a repeat of the Great Depression. My guess is the US economy by itself won't go into a depression. The Federal Reserve could go on a massive buying spree and inject tens of trillions of dollars into the economy if that started to happen. But suppose economic panic brings down some other nations into depression. That could pull still more other countries down. A dominoes depression starting on the periphery (e.g. Eastern Europe and other smaller economies) is the one I still worry about.

Update: The Intrade betting market currently puts the odds of a depression at 38%. Another Harvard economist, Kenneth Rogoff, thinks we might just stagnate for a decade.

Fellow Harvard economics professor Kenneth S. Rogoff wrote in an e-mail yesterday that he found Barro’s analysis “highly informative” and “certainly more credible” than quantitative economic forecasts circulated by the Federal Reserve.

“I would guess that the risk of the US having a Japan-style lost decade, where the economy goes in and out of recession for years on end, is more likely than the risk of a catastrophic double-digit output collapse,” Rogoff wrote.

Rogoff and Carmen M. Reinhart argue that banking crises lead to prolonged slumps.

Think snowballing dominoes.

“There’s a domino effect,” said Kenneth S. Rogoff, a professor at Harvard and former chief economist of the International Monetary Fund. “International credit markets are linked, and so a snowballing credit crisis in Eastern Europe and the Baltic countries could cause New York municipal bonds to fall.”

Rogoff says inflation is the cure to prevent for deflation and depression. My guess is he's right.

Professor Kenneth Rogoff, former chief economist of the International Monetary Fund, said the threat of debt deflation called for revolutionary measures as an insurance policy.

"Excess inflation right now would help ameliorate the problem. For that reason, it would be far better to have 5pc to 6pc inflation for a couple of years than to have 2pc to 3pc deflation," he told the Central Banking Journal. The Fed has shifted tentatively to an inflation target, but one anchored nearer "stability".

At some higher level of unemployment the Fed will pull the emergency lever and inflation will burst forth from its den. Alternatively, maybe Obama will copy the FDR policies that prolonged the Great Depression.

By Randall Parker    2009 March 05 10:08 PM Entry Permalink | Comments (6)
2009 February 27 Friday
Economic News Turns Even Bleaker

California unemployment jumped from 8.7% in December 2008 to 10.1% in January 2009.

California's unemployment rate jumped to 10.1 percent in January, the state's first double-digit jobless reading in a quarter-century.

The national unemployment rate is 2.5% lower. But it looks set to get worse and double digit national unemployment is a possibility. The US GDP declined 6.2% in 4Q 2008 according to revised figures.

America’s gross domestic product, the nation’s output of goods and services, plunged at an annual rate of 6.2 percent in the final quarter of 2008, according to revised figures released by the Commerce Department Friday. That’s the sharpest drop in GDP since the first quarter of 1982.

Economists at the investment firm Goldman Sachs estimate that the decline, coupled with another slide in the current quarter, may end up as the US economy’s worst back-to-back quarters in half a century.

The decline in 1Q 2009 might be nearly as large.

Economists are predicting a further annual equivalent drop of as much as 5 per cent is US GDP in the present quarter, which would inflict the sharpest back-to-back decline in output over consecutive quarters since 1958.

Will 2Q 2009 be as bad? When is the bottom?

The "D" word is coming up more often now as the news keeps getting worse.

Economists are not making comparisons with the Great Depression of the 1930s, when the unemployment rate reached 25 percent. Current conditions are not even as poor as during the twin recessions of the 1980s, when unemployment exceeded 10 percent, though many experts assert this downturn is on track to be significantly worse.

Rather, economists are using the word depression — a subjective term with no academic definition — to describe a condition of broad and extreme economic distress that remains stubbornly in place for much longer than a typical downturn.

Will we develop a full-blown depression? The odds have gone up.

Allen Sinai, chief global economist at the research firm Decision Economics, sees a 20 percent chance of “a depressionlike possibility,” up from 15 percent a week ago.

“In the housing market, the financial system and the stock market, we’re already there,” Mr. Sinai said. “It is a depression.”

Capital spending and exports are declining at depression-like double digit rates.

The sources of economic weakness in the fourth quarter were across the board. Consumer spending dropped at a 4.3% pace, its worst performance since 1980. Nonresidential private fixed investment — a.k.a. capital spending — fell at a 21.1% rate, the worst since 1975. Exports fell at a 23.6% annual pace, the worst since 1971. And residential investment was down at a 22.2% pace, but that's the worst only since the first quarter of 2008.

Japan's economy is in much worse shape than America's.

n the circumstances, comments by analysts that the data was "not good" and "seriously bad" were somewhat otiose. The Office for National Statistics confirmed today that the UK economy shrank by 1.5% in the final three months of 2008 and is on course for an annual decline in GDP this year of between 2.5% and 3%. But in Japan, things are much, much worse. Maya Bhandar at Lombard Street Research, says that the economy is contracting at an annualised rate of 14-15% in the current quarter.

Russia is cratering too.

Russia’s economy shrank 8.8 percent in January, compared with a year earlier, with the nation’s energy-reliant economy hit hard by a drop in oil prices. And Japan’s industrial production plunged at a record pace in January, as collapsing trade forced manufacturers to cut jobs.

Downturns after asset bubbles are much worse than downturns after inflation. Asset bubbles built on debt (as compared to stock market manias like the dot com era) are worse still because the eventual downturn makes much of that debt go bad and then banks become too crippled to lend. Downturns after asset bubbles are more deflationary due to excesses in productive capacity and in other assets with long lifetimes. The working off of excessive amounts of factories, office space, and housing is a slow and deflationary process. Hence the threat of a depression.

By Randall Parker    2009 February 27 11:50 PM Entry Permalink | Comments (7)
2009 January 05 Monday
Housing Market Bottom In 2010?

11% unemployment coming to the US?

Economists Kenneth Rogoff of Harvard and Carmen Reinhart of the University of Maryland have a particularly grim view of the economic outlook.

In a fascinating new paper that Mr. Rogoff presented this weekend at the annual meeting of the American Economic Association, they offered some sobering details on what has happened to other countries in the aftermath of severe financial panics like the one the U.S. is now experiencing.

Their bottom line: If history is any guide, the housing market might not bottom until 2010, a stock market rebound isn’t in sight, the unemployment rate could exceed 11% and government debt is about to soar.

The work is an extension of long-running research by the two professors on the history of financial crises. In past work, they compared the U.S. situation to financial crises in developed countries. This time, they are adding in the experiences of developing after concluding that severe emerging-market crises aren’t all that different from crises in developed markets.

They also expect the stock market to stay down for a few years.

Thoughts?

By Randall Parker    2009 January 05 11:51 PM Entry Permalink | Comments (11)
2008 December 27 Saturday
Ben Bernanke Sees China As Cause Of Lack Of US Savings

Enforced savings by the Chinese government causes a lack of savings in the US. It also causes financial distortions that lead to bubbles.

WASHINGTON — In March 2005, a low-key Princeton economist who had become a Federal Reserve governor coined a novel theory to explain the growing tendency of Americans to borrow from foreigners, particularly the Chinese, to finance their heavy spending.

The problem, he said, was not that Americans spend too much, but that foreigners save too much. The Chinese have piled up so much excess savings that they lend money to the United States at low rates, underwriting American consumption.

I've been complaining about this for years. Can the head of the US Federal Reserve get people to take this problem seriously?

Here's how it works: Americans buy something from Chinese exporters. The exporters get dollars and are required by the Chinese government to deposit them in a Chinese bank at a fixed exchange rate. Then the Chinese bank (which is really part of the Chinese government) takes those dollars and buys US Treasury bonds. One effect of doing this is to keep the US dollar strong against the Chinese currency. This cuts US sales to China by making US goods more expensive in China while simultaneously making Chinese goods cheaper in the US.

How does this cause a financial bubble in the US? Easy enough. The Fed sees that US companies aren't generating enough economic activity in the US (what with lots of factories shifted over to China and engineering as well). It expands the money supply to try to generate more economic activity here. Normally an over-expansionary money supply should cause inflation in the US. But the Chinese are keeping goods prices low with cheap imports.

The Chinese purchases of US Treasuries inject money into the US financial system and lower interest rates while also making imported goods cheap at the same time. Since consumer goods inflation is prevented by the cheap Chinese goods the monetary expansion causes inflation in the prices of real estate and financial assets instead. The inflation has to pop up somewhere.

The lower interest rates cause potential investments to look more attractive than a non-distorted money supply would cause them to look. The result was an excessive investment in the financial industry and in real estate. This caused excessive spending in industries that supply construction materials and in luxury goods as well. Eventually the bubble burst. We all see the results.

Other factors contributed to the real estate binge. Foolish deregulation of government-insured banks and really dumb policies aimed at boosting home ownership of non-Asian minorities (NAMs) both played roles in causing the unfolding financial disaster. But this one big monetary distortion caused by mostly East Asian countries played an important role in creating the mess we are in.

By Randall Parker    2008 December 27 08:56 AM Entry Permalink | Comments (10)
2008 November 12 Wednesday
Economic Depression Starting?

John Thain, chairman and CEO of Merrill Lynch, says the US economy is contracting like in 1929.

“Right now, the US economy is contracting very rapidly. We are looking at a per­iod of global slowdown,” he told investors. “This is not like 1987 or 1998 or 2001. The contraction going on is bigger than that. We will in fact look back to the 1929 period to see the kind of slow­down we’re seeing now.”

86 year old former Goldman Sachs chairman John Whitehead says he expects a depression.

"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system." Whitehead encountered plenty of crises during his 38 years at the investment banking firm and was a young boy during the 1930s.

These men are not marginal fringe nutcases. But are they correct? Can't the US Federal Reserve reflate the economy by doing massive buying of financial assets?

The CEO of JPMorgan Chase expects the worst is yet to come.

Nov. 12 (Bloomberg) -- JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the U.S. recession ``could be worse'' than the credit-market crisis that brought lending to a standstill.

...

Still, Dimon said there is reason for optimism about prospects for the economy. ``We're not running this company like we have a Great Depression,'' he said. JPMorgan continues to invest in businesses that benefit clients, including advisory work and raising money for corporations, he said.

But the chief of Britain's central bank only sees a downturn as bad as happened 30 or years ago.

The British economy faces its toughest year in almost three decades, the Governor of the Bank of England said yesterday. Mervyn King gave warning of “very difficult times” ahead and an even sharper recession than that of the early Nineties.

A survey of economists predicts a 4Q 2008 economic contraction rate of 3% followed by 1.5% contraction in 1Q 2009.

The implosion of credit markets last month will cause the economy to shrink at a 3 percent annual rate in the fourth quarter and decline at a 1.5 percent pace in the first three months of 2009, according to the median estimate of 59 economists surveyed Nov. 3 to Nov. 11. Following last quarter's 0.3 percent drop, the slump would be the longest since 1974-75.

``The economy fell off a cliff in October,'' said Richard Berner, co-head of global economics at Morgan Stanley in New York. ``We had a huge financial shock that intensified the credit crunch and triggered a sharp downturn.''

Goldman Sachs sees an even faster contraction: 3.5% followed by 2%.

The economy will shrink 3.5 percent in the fourth quarter and 2 percent in the first quarter, compared with previous estimates of 2 percent and 1 percent, Goldman economists led by Jan Hatzius wrote in a research note today. That would be the biggest back-to-back quarterly contraction since the start of the second year of Ronald Reagan's presidency.

By Randall Parker    2008 November 12 07:54 PM Entry Permalink | Comments (11)
2008 September 24 Wednesday
Jack Welch Sees Deep Recession Coming

Former GE CEO extraordinaire Jack Welch sees a really deep recession in the offing.

"I now believe we are in for one hell of a deep downturn," Welch told the World Business Forum in New York on Wednesday, adding that the first quarter of 2009 would likely be "brutal."

Until recently, Welch said, he had believed the U.S. economy could avoid recession, but he has now changed his mind.

"I am now caving," he said. "Get ready for real tough times. They're coming. There is no credit available."

On the bright side the recession might bring housing prices back down to within historical trend and thereby set the stages of recovery. Though a lot of people in Washington DC want to make people pay more for housing. Even free market economist Tyler Cowen suggests destroying houses as a way to keep up housing prices. This is worse than nutty. It is dumb. Why should people pay more for houses just to save some reckless financial institutions?

Some people's losses from underwater mortgages is other people's gains in the form of cheaper housing. Aren't lower prices beneficial? The housing price-to-rent ratio is still well above historical norms. So is the price of a single family home as a percentage of median household income. These things must correct. Tearing down houses or bringing in immigrants to live in repossessed houses lowers living standards and keeps prices up above their market clearing long term levels. Delaying or slowing corrections just delays recoveries.

Update: Warren Buffett thinks Hank Paulson's plan is a good idea and will earn a profit.

``I think the Treasury will pay back the $700 billion and make a considerable amount of money,'' Buffett said, adding that if he had $700 billion on the government's terms to buy distressed assets, he would. ``Unfortunately, I'm tapped out.''

Warren's judgment counts a lot with me. By contrast, a bunch of non-billionaire economists think the Paulson plan is a bad idea. But they don't know how to invest billions of dollars.

By Randall Parker    2008 September 24 10:25 PM Entry Permalink | Comments (9)
2008 September 08 Monday
Hank Paulson Sees No Recovery Until Real Estate Price Bottom

If the US Treasury Secretary is correct in this claim then economic recovery is years away.

"Our economy and our markets will not recover until the bulk of this housing correction is behind us."
Treasury Secretary Hank Paulson, Sept 7, 2008

Calculated Risk then proceeds to list reasons why the economy won't recover any time soon: housing prices are still well above historical trendline, the housing price-to-rent ratio is similarly well above historical trendline, the housing price-to-income ratio is also above historical its historical ratio, and the supply of unsold housing is high. Federal Reserve and Treasury Department money shoved into financial institutions can not push up housing prices hard enough to prevent the price correction. So more mortgage holders will abandon their mortgages and more home sales will be for less than what is owed.

Mish Shedlock does not expect the Fannie Mae and Freddie Mac bail-outs to cause a recovery. Given that more mortgages are going to go under water (more owed than the declining market prices of the houses) a Fannie/Freddie bail-out by itself can't raise demand for housing enough to fix the liquidity crunch. Americans have been living beyond their means by using mortgage equity withdrawal (MEW) to finance consumption. Well, MEW is gone and housing prices are going to decline even further. So MEW as a source of consumer spending isn't coming back any time soon either.

The United States has been on a credit spending binge financed by East Asian central banks. That binge couldn't last and it was inevitable that living standards would have to decline in the US for years so that we could consume less, import less, and export more. This binge was made worse by the support that Democrats in particular provided for irresponsible Freddie Mac and Fannie Mae lending and for affirmatie action lending that cause the sub-prime debacle. The irony is that by making it so easy for poor people to buy homes the irresponsible lending practices pushed up the prices that poor people had to pay for housing. If the scaling up of credit availability had been done more slowly it still would have been irresponsible. But it would not have driven up prices as high since supply would have had more time to expand.

By Randall Parker    2008 September 08 08:45 AM Entry Permalink | Comments (0)
2008 August 19 Tuesday
Nouriel Roubini Expects Deep Recession

NYU economist Nouriel Roubini called our economic crisis but few believed him.

On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

They didn't believe him. Some economists today even argue that Roubini has been incorrectly pessimistic in the past and now finally a downturn comes along that lets him be right by accident.

The audience seemed skeptical, even dismissive.

Roubini came to his predictions about the US economy by studying economic crises in other countries which were running large trade deficits.

The ’90s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was beset by crisis, beginning with Mexico’s in 1994. Panics swept Asia, including Thailand, Indonesia and Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina’s followed in 2000. Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance.

Roubini expects the current recession to deepen into the worst downturn since the Great Depression. Though he's not expecting a full-fledged depression. He expects we'll hit bottom in 2009. But the recovery will be slow. He expects lot of bank failures and credit problems that extend far beyond mortgages.

I do not see a bottom at least until the US trade deficit vanishes. The US has a lot of bad trends working against it including a disastrous demographic trend.

The recovery will be aborted if world oil production stays on a plateau. If oil production starts declining the downturn will deepen.

By Randall Parker    2008 August 19 09:11 PM Entry Permalink | Comments (4)
2008 July 01 Tuesday
United States In Slow Motion Recession

Have you noticed that the financial institutions are failing slowly and the real estate price drops occur over years? Though oil's rise has been fast and steep. So not everything that is going wrong is happening slowly. But the US economy's slide into recession has happened gradually rather than suddenly.

Among economists, the sense is broadening that the troubles dogging the economy will be stubborn, leaving in place an uncomfortable combination of tight credit and scant job opportunities perhaps well into next year.

“It’s a slow-motion recession,” said Ethan Harris, chief United States economist for Lehman Brothers. “In a normal recession, things kind of collapse and get so weak that you have nowhere to go but up. But we’re not getting the classic two or three negative quarters. Instead, we’re expecting two years of sub-par growth. Growth that’s not enough to generate jobs. It’s kind of a chronic rather than an acute pain.”

Mr. Harris expects tepid economic growth and a shrinking labor market to persist through the fall of 2009.

Warren Buffett prophesized a long and deep recession. Buffett understand things better than 10 economists. So I'm expecting continued downturn into 2009 just because he says so. But on top of that I expect high oil and food prices to keep economic growth either low or negative.

Though the auto industry is in a faster motion recession.

Detroit automakers were hit hard. Ford Motor was down 28 percent in June, General Motors was off 18 percent, and Chrysler dropped 36 percent. Despite its sharp decline, G.M’s results were better than expected, which industry analysts attributed to a sales blitz with offers of zero-interest, long-term financing deals. The cut-rate loans helped G.M. retain its historic position as the top-selling United States automaker over Toyota, whose sales fell 21 percent.

I do not expect the price of oil to go down until the whole world sinks into a recession. I expect inflation to go up as oil goes even higher. Kevin Hassett reports that economist Mark Zandi expects a big surge in inflation.

Mark Zandi, chief economist for Moody's Economy.com and one of the savviest students of the economy, told me in an interview last week: ``Energy and food prices, which together account for one-fourth of the CPI, will rise nearly 20 percent annualized in the third quarter. Top-line CPI inflation looks destined to top 7 percent annualized in the third quarter. It is very possible that third-quarter inflation will be the strongest since the third quarter of 1981.''

In the early 1980s global oil demand dropped and so did the price of oil. But oil production isn't going to rise much and Asian demand for oil will keep rising faster. So higher oil prices are going weigh more heavily on the US economy every month.

By Randall Parker    2008 July 01 10:46 PM Entry Permalink | Comments (1)
2008 May 20 Tuesday
Why Financial Asset Bubbles Happen

An interesting article in the Wall Street Journal reports on economics researchers at Princeton University who believe market bubbles are caused by conditions that allow the optimists to get the upper hand in driving up asset prices.

Mr. Hong, who came to Princeton two years later, and now is 37, argues that big innovations lead to big differences of opinion between bullish and bearish investors. But the deck is stacked in favor of the optimists.

One who believes a stock is too high can short it, borrowing shares and selling them in hopes of replacing them when they're cheaper. But this can be costly, both in the fees and in the risk of huge losses if the stock keeps rising. Many big investors rarely short stocks. When differences between bullish investors and bearish ones are extreme, many of the bears simply move to the sidelines. Then, with only optimists playing, prices go higher and higher.

Look at Warren Buffett. He's an investment genius. But he rarely tries to make money on falling markets. Bubbles seem like a sign of inefficiency in markets due to flaws in human cognitive processing.

Now Federal Reserve chairman Ben Bernanke recruited many of these researchers while he was at Princeton. So Bernanke obviously understands we are dealing with the popping of yet another bubble.

The debt taken on to drive up prices of assets means that when the downturn comes previously optimistic investors are forced to sell by their needs to raise money to service debt obligations. That makes the downward path steeper than the upturn that preceded it.

At some point in a bubble, optimists' enthusiasm runs its course. Prices turn down. There's an expectation that at this point, investors who were skeptical may see prices as more reasonable and start buying. If they don't, that's a signal that prices had gotten way too high -- and then they tumble.

The insights of bearish investors "are more likely to be flushed out through the trading process when the market is falling, as opposed to when it's rising," Mr. Hong and Harvard's Jeremy Stein write. They say this explains why prices fall more rapidly than they go up. Over 60 years, nine of the 10 biggest one-day percentage moves in the S&P 500 were down.

When a lot of borrowed money is involved -- as it often is in a bubble -- once prices peak, the speed of their fall is intensified as investors sell urgently to pay down debt. That pattern offers a strong argument, in Mr. Hong's view, for government to restrain bubbles and the borrowing that fuels them.

Bubbles can turn a profit for those who do not believe the Panglossian rhetoric of bubble boosters. During the 1990s dot com tech bubble some hedge funds skillfully played both the run-up and the collapse of tech stock prices.

Looking through security filings, Mr. Brunnermeier and Stanford's Stefan Nagel found that hedge funds on the whole "skillfully anticipated price peaks" in individual tech stocks, cutting back before prices collapsed and shifting into other tech stocks that were still rising. Hedge funds' overall exposure to tech stocks peaked in September 1999, six months before the stocks peaked. They rode the bubble higher and got out close to the right time.

Unfortunately the high commodity prices of today do not show signs of being part of a commodities bubble. So we aren't going to get back to cheaper commodity prices just by hitting the limits of a bubble.

Today, there's disagreement over commodity prices: to what extent do they reflect fundamentals like Chinese demand, and to what extent investment mania? Trading points toward a bubble: Daily volume on crude-oil contracts is running 50% above last year. Yet the initial findings of work Mr. Hong has done with Motohiro Yogo of the Wharton School -- comparing cash prices and futures prices -- suggest that "prices for commodities are expensive," but not a bubble, Mr. Hong says.

By Randall Parker    2008 May 20 05:17 PM Entry Permalink | Comments (0)
2008 April 17 Thursday
Warren Buffett Sees Long Deep Recession

Warren Buffett expects a longer and deeper recession.

"It seems everybody says it'll (the economic slowdown) be short and shallow, but it looks like it's just the opposite. You know, deleveraging by its nature takes a lot of time, a lot of pain. And the consequences kind of roll through in different ways."

The deleveraging he speaks of refers to debt. A long recession means this recession might last until oil production starts declining. In that case we'll just segue from recession into depression. Sorry about that.

Paul Krugman sees growth in China as a continuing source of rising pressure on commodities prices. Those high prices are bearish for the US economy and European economies.

Some of the causes of poor economic performance since 2000 are probably beyond any administration’s control. Raw materials were cheap in the 1990s, but in the years ahead the rise of China and other emerging economies will place increasing pressure on world supplies of oil, copper and so on, no matter what the next president does.

Zero sum games? Or negative sum games? But this is the free market. Where'd I misplace my Panglossian sunglasses?

Krugman thinks rising oil prices and flat production are what Peak Oil looks like.

This is what peak oil is supposed to look like — not Oh My God We’ve Just Run Out Of Oil, but steady pressure on the economy and the way we live from rising energy prices and their consequences. And it doesn’t matter much whether we’re literally at the peak, or whether production can rise by a few million more barrels a day; unless there are big sources of oil out there, we’ll be feeling peakish for the foreseeable future.

Yes, it doesn't matter whether we still have a few million barrels a day of potential world oil production increases possible. Though I doubt it. Texas oil billionaire T. Boone Pickens says world oil production can't rise above the current production plateau.

Pickens said he thought oil was approaching $125 a barrel. Oil will eventually reach $150 per barrel, he said, while cautioning ``I won't be investing in $150 oil.''

...

``There is only 85 million barrels of oil globally in the market coming a day and I don't think you can increase that 85 million,'' Pickens said.

That production plateau is bumpy and January 2008 world oil production finally surpassed the previous monthly record set in 2005. But our prospects for going above that level are not good because a growing list of nations have declining production.

The big credit fiasco with subprime mortgages, the real estate bubble, and excess consumer indebtedness by itself would just cause a recession. But rising Asian commodities demand and declining oil production can cause inflation and declining living standards combined with lots of layoffs. Lay on top of all that America's twin demographic problems of unfunded old age liabilities. The Panglossian view is that economic growth will prevent the old age pension liabilities from becoming too heavy a burden. But that only works if the economy grows a lot. That might not be in the cards. Plus, Third World immigration is lowering the average skill level of the US labor force. All these factors seem like reasons for pessimism about the economy.

By Randall Parker    2008 April 17 10:56 PM Entry Permalink | Comments (9)
2008 March 18 Tuesday
Will Federal Reserve Tame The Financial Panic?

Are you all aware of how monumental the recent events in financial markets have become? MIT economist Paul Krugman thinks the total losses in housing might range between $6 trillion and $7 trillion. That's equal to about half a year's GDP of the United States.

Fortune: By year-end, 15 million Americans could have mortgages worth more than the value of their homes. What happens then?

Krugman: Actually, I think home prices will fall enough for us to produce about 20 million people with negative equity. That's almost a quarter of U.S. homes. If home prices are rising, or if there's positive equity, you can refinance or sell. But if you have negative equity, you can end up being foreclosed on, and then some people will just find it to their advantage to walk away. We're probably heading for $6 trillion or $7 trillion in capital losses in housing. Some fraction of that will fall on owners of mortgages. I still think the estimates people are putting out there - $400 billion or $500 billion in losses - are too low. I think there'll be $1 trillion of losses on mortgage-backed securities showing up somewhere.

Such a large drop in housing prices will, if it comes to pass, cause an extended recession as people spend less in response to feeling poorer. I think the Fed is ill placed to prevent it without causing general price inflation. Currently the Fed is putting prevention of financial panic ahead of stopping inflation. But I do not think prevention of financial panic alone will stop a big drop in housing prices.

Alan Greenspan says our current economic crisis is going to be the worst one since the Great Depression. (and notice how he used WWII rather than the obvious Great Depression as the time end-point)

The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war. It will end eventually when home prices stabilise and with them the value of equity in homes supporting troubled mortgage securities.

Home price stabilisation will restore much-needed clarity to the marketplace because losses will be realised rather than prospective. The major source of contagion will be removed. Financial institutions will then recapitalise or go out of business. Trust in the solvency of remaining counterparties will be gradually restored and issuance of loans and securities will slowly return to normal. Although inventories of vacant single-family homes – those belonging to builders and investors – have recently peaked, until liquidation of these inventories proceeds in earnest, the level at which home prices will stabilise remains problematic.

Nouriel Roubini says conventional Federal Reserve monetary policy has become useless to stop the panic.

Since the onset of the liquidity and credit crunch last summer this column has been arguing that monetary policy would be impotent to address such a crunch because, in part, of the existence of a non-bank “shadow financial system”. This system is composed of conduits, SIVs, investment banks/broker dealers, money market funds, hedge funds and other non bank financial institutions.

The Fed has responded by becoming a massive lender and even to non-bank financial institutions.

The response of the Fed to this run has been radical and in the form of the extension of the lender of last resort support to non bank financial institutions. Specifically, the new $200 bn term facility allows primary dealers – many of which are non banks – to swap their toxic mortgage backed securities for US Treasuries; second, the Fed provided emergency support to Bear Stearns and following the purchase of Bear Stearns by JPMorgan, is now providing a $30 bn plus support to JPMorgan to help the rescue of Bear Stearns; finally, now the Fed is allowing primary dealers to access the Fed discount window at the same terms as banks.

Yet long term interest rates are going up and the Fed is fighting against a market that fears it will generate inflation on top of the commodity-driven inflation.

Gotta say the Fed decided to set new precedents and made radical departures from past practices without first waiting for a new economic depression to break out. The big $200 billion Fed loan to security dealers in exchange for dubious financial instruments amounts to an attempt by the Fed to counter the credit tightening effects of a flight to quality. Ben Bernanke is a student of the Great Depression and doesn't want another one on his watch.

These bold departures from past practice have not ended the fear in high finance. The "TED Spread" is still too large as of this writing. TED spread stands for Treasury Euro Dollar interbank loan interest rate difference or spread. The bigger that spread the more fear that banks have about loaning to other banks.

In his excellent essay "The $1.4 Trillion Question" in The Atlantic James Fallows explores the massive trade deficit of the United States and the massive trade surplus of China and says this imbalance has to end somehow and it might end in a panic.

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.

Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.

I see one big problem looming on the horizon that might outweigh all this financial engineering: Peak Oil. The US Federal Reserve and its equivalents in Canada, Britain, and the Euro zone can't financially engineer their way around declining supplies of energy.

Update: If we are facing only a liquidity problem then the Fed can handle it. But if we are facing an insolvency problem (i.e. lots of asset holders have greater liabilities than they have market value in their assets) then the Fed can't stop what is happening. The Fed can try to inflate away debts by expanding the money supply. But either the Fed causes a huge inflation or lots of financial firms and other firms go under. Some analysts think we are near a liquidity trap. But if insolvency is our real problem then the fear of a liquidity trap is, strangely enough, an optimistic interpretation.

By Randall Parker    2008 March 18 10:22 PM Entry Permalink | Comments (22)
2008 February 21 Thursday
Mild Stagflation Makes A Return

The Federal Reserve has put fighting the credit crisis and threat of recession ahead of fighting inflation.

With the credit markets in disarray from the collapse of the housing bubble, Bernanke is cutting rates in a headlong rush to blunt the risks of recession.

But in putting its emphasis above all on reviving growth, America's central bank may face a bigger inflation problem down the road, according to some economists and even a few Fed officials.

"They are cutting rates with a bill to be paid later," said John Ryding, chief U.S. economist at Bear Stearns. "The question is not, will we get inflation, but how much will it cost to stuff the genie back in the bottle. This has the feel of 1970s stagflation."

Is the Federal Reserve making the right decision? I'm thinking the inflation problem is going to worsen because oil production is going to stay flat or decline. Plus, the US trade deficit is still too large and so the US dollar will drop further, raising the costs of imports and the foreign demand for US products (and hence their prices).

Amidst lowering forecasts for economic growth inflation is up.

Even as Fed officials ratchet down their forecasts, acknowledging that growth will be almost stagnant in the first six months of this year, investors are pushing up long-term interest rates and mortgage rates out of fears about bad debt and rising inflation.

On Wednesday, the central bank disclosed that Fed policy makers now expect the United States economy to expand between 1.3 percent and 2 percent in 2008. That would be the slowest growth in five years.

Making matters more difficult, the Labor Department reported on Wednesday that consumer prices are rising faster than analysts had expected and faster than the central bank’s unofficial comfort zone.

Consumer prices jumped 4.3 percent in January, compared to one year earlier, the fastest year-over-year jump since September 2005.

US inflation over the last 3 months has risen at an annualized rate of 6.8%. How big was your last raise?

The consumer price index rose 0.4 percent in January from the previous month, topping economists' expectations of a 0.3 percent increase. Over the past 12 months, the index has risen an unsettling 4.3 percent, and the pace is increasing: Over the past three months, it has been increasing at an annualized rate of 6.8 percent.

Even more disconcertingly, the "core" index, which excludes volatile food and energy costs and is generally a more restrained measure, also topped expectations in January with a 0.3 percent month-over-month increase, rather than the 0.2 percent advance economists had been anticipating.

But inflation was much higher in the 1970s.

However, some inflation watchers were also quick to point that the current situation is a long way from the stagflation seen in the 1970's, when interest rates and inflation both climbed into the teens. To put that in perspective, the federal funds rate is now at 3%.

What are good investments for protecting your assets against inflation? Any suggestions?

But Zimbabwe is worse.

The Zimbabwean dollar collapsed Thursday in parallel market dealings following the announcement that the official inflation rate has topped 100,000%. The country's Central Statistical Office said 12-month inflation in January was 100,580%.

By Randall Parker    2008 February 21 09:46 PM Entry Permalink | Comments (5)
2008 January 24 Thursday
Was Recent Prosperity Illusory?

An article in BusinessWeek captures the mood among business writers and an increasing portion of the general public in an article entitled How Real Was the Prosperity?

Sometimes consumers would get ahead of the economy for a few years, and sometimes fall behind, but never for very long.

That pattern changed in the 1990s. As of the third quarter of 2007, the 10-year growth rate for consumption was 3.6%, vs. GDP growth for the same period of 2.9%. This difference represents an enormous gap.

That adds up to $3 trillion dollars worth of living beyond our means. I've been writing about this problem for years and now I take no joy out of finding more agree with me. The seriousness of the problem outweighs being right about it. It is ultimately dissatisfying to watch people wake up to the economic fears that a smaller group of us have been voicing for years. The horse has left the barn as suddenly the business press is writing about our economy in ways reminiscent of Warren Buffett's term for America: Squanderville. Suddenly Buffett isn't just rich. His views have become conventional wisdom.

Some optimists pointed to higher corporate earnings as an argument for why we could afford to run up our debts. But turns out the improvement in profit margins were concentrated in the financial industry. Well, how many of those profits were due to temporary luck of investing in a financial bubble?

Corporate Earnings. Yes, there's been a profit boom in recent years. Corporate earnings, as measured by government statisticians, have averaged 8% of GDP over the past decade, up from a low of 6.5% in the early '90s. That has helped propel stocks upward.

But here's an unfortunate truth—the profit surge has been mainly in one area, financial services. Financial institutions have benefited from the consumer credit boom, the proliferation of new financial instruments, and relatively low rates. By contrast, the earnings of nonfinancial companies over the past decade have averaged about 5.3% of GDP, about the same since the mid-1980s. There are few signs of any acceleration, even after years of restructuring.

Will financial companies regain their position as high profit earners? Or will they end up losing as much as they earned in recent years?

David Leonhardt of the New York Times examines how much of the last 10 years of economic growth came from improvements in fundamentals in an article entitled Worries That the Good Times Were Mostly a Mirage.

The recent financial turmoil has many causes, but they are tied to a basic fear that some of the economic successes of the last generation may yet turn out to be a mirage. That helps explain why problems in the American subprime mortgage market could have spread so quickly through the world’s financial system. On Tuesday, Mr. Bernanke, who is now the Fed chairman, presided over the steepest one-day interest rate cut in the central bank’s history.

The great moderation now seems to have depended — in part — on a huge speculative bubble, first in stocks and then real estate, that hid the economy’s rough edges. Everyone from first-time home buyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn’t go bad. For the past 16 years, American consumers have increased their overall spending every single quarter, which is almost twice as long as any previous streak.

Now, some worry, comes the payback. Martin Feldstein, the éminence grise of Republican economists, says he is concerned that the economy “could slip into a recession and that the recession could be a long, deep, severe one.”

Leonhardt says three factors argue for a deeper and longer lasting recession: Wall Street financial institutions still haven't revealed the full depth of their losses; stock and home prices are still above their historical norms; and consumer debt has accumulated to levels that will require a substantial period of lower spending to pay down what's owed.

If the correction comes slowly it will last longer like Japan's downturn that started in the early 1990s and lasted well into this decade (and some argue is still in effect). Attempts by political leaders to cushion the downturn could make the downturn last longer. Then again, intervention by the US Federal Reserve might prevent a depression too. Hard to say.

Certain rickety but key components of financial markets have attracted a lot of regulatory attention as governments seek to prevent vicious cycles of failures of financial institutions. Notably, regulators are looking to prevent failures of bond insurance companies.

Regulators fear a possible chain of events in which the troubled bond insurers, MBIA and Ambac, might be unable to keep their promise to pay investors if borrowers default on their debt.

That could leave the buyers of the bonds — including many banks and pension funds — on the hook for untold billions of dollars in losses, shaking confidence in the financial system.

To avoid a possible crisis, insurance regulators met with representatives of about a dozen banks on Wednesday to discuss ways to shore up the insurers by injecting fresh capital, much as Wall Street firms have turned to outside investors recently after suffering steep losses related to subprime mortgages.

A New York Times article by Floyd Norris also captures the mood of the day: Familiarity Breeds Gloom Among Financial Experts

But the pessimism is much greater among those closest to the financial system. While some take a functioning financial system for granted, in the same way they view highways or indoor plumbing, others see a system in crisis.

“We’re entering a perfect storm, a period of financial turbulence and very limited capital,” said one executive, whose company needs to borrow money to grow.

“What’s driving everyone crazy,” another executive said, “is, you don’t know who you can trust.” Both are well-known executives who did not want to call attention to themselves.

The commercial bankers and investment bankers are going to emerge from current events looking pretty dangerous. They've set up houses of financial cards that now require government intervention to prevent cascades of failures. I'm not going to forget this. Are you?

By Randall Parker    2008 January 24 08:53 PM Entry Permalink | Comments (11)
Peter Schiff Proposes Debit Cards As Fiscal Stimulus Tool

Peter Schiff C.E.O. and Chief Global Strategist of Euro Pacific Capital, Inc. makes a modest proposal for a powerful government fiscal stimulus tool with cash cards.

Fortunately, the government has very modern and effective tools available to deliver funds and micromanage spending. Just recently, the Treasury Department launched a program to streamline Social Security payments through the use of debit cards. The same idea could be used for fiscal stimulus. The Government could distribute millions of "Economic Stimulus Cards" to citizens, which could function more like retailer gift cards rather than debit or credit cards. Here's how they would work:

When the government wants a quick, fast stimulus, it authorizes expenditures on the cards which can only be used for consumer purchases and only for a set time frame. Knowing that they must use or lose their newly authorized funds, Americans will run to their nearest retail outlet and spend, spend, spend. The beauty of the system is that the consumers will spend exactly how much the Government deems necessary. What's more, the government could decide to direct the spending to specific areas of the economy that it deemed particularly strapped. For example, it might target specific types of merchandise that may be purchased or particular retailers where those expenditures would be authorized, with the political benefits being the icing on the cake.

Debit cards would allow governments to translate more of a fiscal stimulus into actual spending. Plus, by controlling what can be purchased the cards could selectively boost demand for domestically produced products so that the resulting sales don't just swell the trade deficit.

Mind you, I don't think that government attempts to stimulate spending are a good idea. The US government is already too in hock to the world. But if the government is going to hand out cash it might as well do this in a way that boosts demand for domestically produced goods and services.

By Randall Parker    2008 January 24 07:02 PM Entry Permalink | Comments (5)
2008 January 22 Tuesday
US Federal Reserve Freak Out On Interest Rates

We have to go back over 23 years for a similar rate cut.

"It's a once-in-a-generation event," Mark Zandi, chief economist at Moody's Economy.com, said. In recent years, the Fed has rarely acted between scheduled meetings of the committee, and almost always in increments of one-quarter or one-half point. It was the biggest single cut since October 1984.

You'll be able to tell your grandchildren "They don't make rate cuts the way they used to. Before the world Borg mind took over the economy things didn't use to be such smooth sailiing. Why I remember that big rate cut the US Federal Reserve made in January 2008. There's been nothing like it since except for the bigger one they made in response to the world depression that came later".

The Times of London argues that the Fed made its move due to the threat of a looming bond insurance market implosion.

Fears that America’s bond insurance market could implode triggered the US Federal Reserve’s biggest interest rate cut for more than a quarter of a century, Wall Street economists claimed yesterday.

Market analysts said that Wall Street had spent last week gradually realising the grave consequences of a major bond insurer defaulting on its commitments and attributed the surprise rate cut to averting such a crisis.

As soon as some bond insurer goes bust all of the bonds it has insured up to an A, AA, or AAA status have to get sold by institutions that are only allowed to own highly rated bonds. This will cause big bond price drops and more financial institutions to fail. There's a real fear of a domino effect. Um, shouldn't we have financial markets that are not built up like dominoes? I'm just asking.

Allan Sloan of Fortune thinks the Fed responded to what it perceives as a market panic.

Forget all those rational explanations about why foreign stocks markets, especially in Asia, have been melting down for two days. Despite what you've read, seen and heard, those declines weren't caused by fears of what a recession in the U.S. would do to the profits of companies whose stocks trade in places like India, China and Russia.

Rather, the meltdowns were flat-out market panics, where rationality gets tossed out the window as everyone tries to head for the door at once and gets trampled. Go-go markets, especially in Asia, had risen to ridiculous heights - they were going up because they were going up, and momentum fed on itself. Now, they're going down because they're going down, and momentum is feeding on itself again.

The fact that the Federal Reserve Board announced an emergency cut of 0.75 percent in short-term rates shows that the Fed thinks the problem is a market panic rather than economic fundamentals.

That is worrisome. Panics and the madness of the crowds are scarier than mere inflation or a correction of an over built sector of the economy. But maybe the panicking is rational. Maybe lots of financial institutions are in worse condition than we know so far. That's certainly been the trend of the last year.

Do you think this recession might catalyze a critical mass in the growing opposition to globalism? Some think so.

As the prospect of a U.S. recession overshadows a tense and drawn-out election campaign in the world's most emblematic market economy, a corrosive cocktail of factors is eating away at old certainties: Power is steadily leaking from West to East. Income inequalities are rising in rich countries.

And signs of a protectionist backlash are multiplying as worries about climate change, the rise of state-run investment funds and the bursting of the recent credit bubble give novel ammunition to those in the West who question free markets and clamor for more shelter from globalization.

What exactly will emerge when the dust settles is hard to predict, economists and executives say. But this much seems clear: With the frontier between state and market once again up for grabs, the era of easy globalization is over - and big government in one form or another is back.

"The pendulum between market and state is swinging back," Pascal Lamy, director general of the World Trade Organization, said by telephone before traveling to Davos. "The year 2008 is a crucial year that could end up setting the tone for some time to come. What we need is an ideological mutation without falling into the trap of protectionism."

I don't want a severe recession or depression. It is not clear to me, however, that all the central banks are as powerful and wise as they are supposed to be.

Did you notice my (at least till this point) total lack of mention of details of a certain Congressional and Presidential plan to stimulate the economy? That was intentional. I do not think it will matter at all.

By Randall Parker    2008 January 22 09:26 PM Entry Permalink | Comments (3)
2007 December 24 Monday
Stephen Roach: Yet Another Asset Bubble Recession

Remember when recessions were caused by the Federal Reserve clamping down on excessive consumer goods inflation? Stephen Roach of Morgan Stanley opines that the United States is headed for its second post-bubble recession in 7 years.

THE American economy is slipping into its second post-bubble recession in seven years. Just as the bursting of the dot-com bubble led to a downturn in 2001 and ’02, the simultaneous popping of the housing and credit bubbles is doing the same right now.

It is very important that the last two downturns are not for the typical reasons. Globalization brought so many cheap goods to market that foreign suppliers kept US consumer prices in check. So excess money supply growth manifested as inflation in housing prices and financial assets. Roach is correct to argue that the Fed made a big mistake by not acting against asset market inflation.

America’s central bank has mismanaged the biggest risk of our times. Ever since the equity bubble began forming in the late 1990s, the Federal Reserve has been ignoring, if not condoning, excesses in asset markets. That negligence has allowed the United States to lurch from bubble to bubble.

Basically when people spend more to buy food or clothes or appliances it feels bad. But when the value of one's house or stocks go up it feels good to a great many people. Never mind that new buyers have to pay more. There are more existing owners than new buyers. Even the new buyers expect to reap gains from ever rising asset prices. So the buyers do not complain about big asset price inflation as much as they ought to.

The Fed basically acts as if only non-durable goods inflation matters. Therefore the Fed lets asset price inflation get out of hand. The Fed claimed soundness of bank lending was not a Fed responsibility.

As housing prices soared in what became a speculative bubble, Fed officials took comfort that foreclosure rates on subprime mortgages remained relatively low. But neither the Fed nor any other regulatory agency in Washington examined what might happen if housing prices flattened out or declined.

Had officials bothered to look, frightening clues of the coming crisis were available. The Center for Responsible Lending, a nonprofit group based in North Carolina, analyzed records from across the country and found that default rates on subprime loans soared to 20 percent in cities where home prices stopped rising or started to fall.

“The Federal Reserve could have stopped this problem dead in its tracks,” said Martin Eakes, chief executive of the center. “If the Fed had done its job, we would not have had the abusive lending and we would not have a foreclosure crisis in virtually every community across America.”

The Fed has decided it really does have the authority to force banks to more carefully qualify mortgage loans. They came to this conclusion a few years too late.

Greenspan acknowledges what happened but argues he was powerless to stop it.

“The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when market capitalism quietly, but rapidly, displaced much of the discredited central planning that was so prevalent in the Third World,” Mr Greenspan argued in an article printed in The Wall Street Journal yesterday.

“The resulting growth of fairly educated low-cost workers in those countries, together with an increase in their exports, combined to keep down wages and inflation in the developed world.

“Interest rates are, in part, designed to reduce the impact of inflation, which erodes an asset’s value in real terms. As the outlook for inflation continued to remain low, so interest rates came down and borrowing for mortgages and other assets went up.”

Interest rates came down in part because he drove them down. He went too far to prevent deflation.

By Randall Parker    2007 December 24 10:53 PM Entry Permalink | Comments (10)
2007 December 16 Sunday
United States Headed For Stagflation?

We can not move from running a huge yearly trade deficit of 5+% of GDP to a balance or surplus without a decline in living standards. The day of reckoning has to come sooner or later. Either living standards stagnate for several years or the correction is severe enough to cause a decline in purchasing power. Well, the decline in the dollar and rise in fuel, food, and imports (due to the dollar decline) are starting to cause noticeable inflationary effects. Alan Greenspan fears stagflation.

"Because of the tremendous geopolitical shifts that occurred at the end of the Cold War, we've had a period of remarkable disinflation," he said. "That period is now coming to an end, and the evidence is clearly there in rising export prices coming out of China. It's showing up in a slowed rate of productivity growth in the United States and elsewhere, and we are beginning to get not 'stagflation,' but the early symptoms of it."

Do I seem distracted from the topics I typically cover? Well, I see lots of storm clouds gathering. Many long running bad economic and demographic trends are starting to catch up with us. We might go through a period of rising unemployment and rising inflation. Just like the 70s. So then are people going to get back into wearing polyester?

Greenspan observes higher inflation in consumer and producer prices.

"Core inflation is up. Wholesale prices had their highest increase I think in a generation. That raises the specter of stagflation again," said Greenspan, referring to a simultaneous stagnant economy and upward pressure on prices.

Greenspan has been worrying about the return of inflation for a while. He saw this coming before it started to show up in the most visible statistics.

An inflation rate of 4.3% put us in territory we haven't been in for a long time.

US inflation hit a two-year high of 4.3 per cent in November, underlining the problems facing the Federal Reserve as it fights to free the economy from the grip of the credit crisis.

Rising inflation could delay further cuts in interest rates as the headline US CPI rate has more than doubled in just over a year, rising from a four-year low of 1.3 per cent in October 2006.

Pricing pressures on food and energy costs show no signs of slackening.

The data showed the continued pressure on prices from high food and energy costs and highlighted the risk the economy will face at least a brief period of "stagflation" as growth slows and inflation rises.

Policymakers worry that persistently high prices could unsettle inflation expectations, leading workers and businesses to factor higher inflation into their wage and price-setting decisions.

"The pick-up in prices may not only be sustained next year, but we could see even higher rates of inflation," said Conrad DeQuadros, economist at Bear Stearns. "In an environment where monetary policy is going to become easier, it's going to give businesses the chance to pass on higher prices to consumers."

The cost increases show up in many categories.

Boosting the rate, not surprisingly, was energy, up a huge 5.7% after a 1.4% push in October. Gasoline prices climbed 9.3% and are up 37.1% year-over-year. Transportation costs were up 2.9%. Housing costs rose 0.4%, with a 0.3% increase in owners' equivalent rents and a 1.5% gain in fuels and utilities.

Rounding out the ugly picture, apparel prices were up 0.8%, food rose 0.3%, and education increased 0.1%.

On a year-over-year basis, the headline rate accelerated to 4.3% from a 3.5% rate in October. The core rate was up 2.3% from 2.2%, and above the Fed's implicit 2% ceiling for inflation.

Wholesale prices increased the most since 1973? Wow.

And costs may only go up. Wholesale prices, which are passed on to consumers, rose last month at their fastest rate in 34 years. Import prices recorded their biggest monthly gain since 1990.

The stagflation of the 1970s was not fun. If oil production stays on a plateau then we might be living with stagflation for years to come.

Not everyone sees inflation as the biggest risk however. Some see big deflationary forces emanating out from the credit crisis. For example, Mike "Mish" Shedlock thinks bank losses, real estate price declines, and declines in value of commercial debt instruments mean that deflation is the far bigger risk. We might go through a period of a mix of deflation in real estate and inflation in manufactured goods, energy, and food. We import a much larger fraction of our manufactured goods and the US dollar is declining due to the trade deficit. Rising Asian demand for food and US government engineered demand for corn ethanol are both pushing up the price of food. Plus, oil production constraints are pushing up energy prices. So a mix of rising and falling prices seems quite possible.

By Randall Parker    2007 December 16 05:45 PM Entry Permalink | Comments (5)
2007 December 11 Tuesday
Morgan Stanley Foresees 2008 Recession

Richard Berner and David Greenlaw at Morgan Stanley say a recession will hit the United States for the first 3 quarters of 2008.

We’re changing our calls for US growth and monetary policy. Since the shock of tighter financial conditions surfaced in August, we’ve incrementally reduced our outlook for future growth. But the time for incremental changes is over. A mild recession is now likely: We expect domestic demand to contract by an average 1% annualized in each of the next three quarters, no growth in overall GDP for the year ending in the third quarter of 2008 and corporate earnings to contract by 5-10% over that longer period. Three factors have tipped the balance to the downside: Financial conditions continue to tighten, domestic economic weakness is broadening into capital spending, and global growth — for us, long the key bulwark against a downturn — is slowing.

Time to put aside money to ensure you can make it through a period of unemployment.

Lenders are cutting back on available credit.

First, compared even with a few weeks ago, financial conditions have tightened significantly further as the price of credit has risen and lenders have made credit less available. Money-market rates have risen significantly, and yield spreads over those money-market rates on loans have stayed high or widened. Three-month dollar Libor-OIS spreads have jumped by 60 bp to 100 bp over the past month, so that Libor rates in that tenor are merely 20 bp lower than where they were in the spring. Some of that jump in Libor rates reflects the transitory impact of year-end precautionary demands for liquidity. But we think that some also represents a more fundamental deleveraging and re-intermediation of the banking system that will last well into 2008 (see “Funding Pressures: More Fundamental than Turn of Year,” Global Economic Forum, November 19, 2007).

Leveraged loan and credit default swap spreads over Libor, meanwhile, have been mixed: They have tightened appreciably over the past fortnight but have widened by 40 bp or more over the past month, measured by either the LCDX leveraged loan index or the S&P secondary LCD/LSTA measures. High-yield and CMBS spreads have widened even more significantly, increasing the cost of borrowing appreciably for lower-rated borrowers, including those in commercial real estate. As a result, the absolute cost of borrowing is higher than in June.

They expect further decreases in credit availability even as the US Federal Reserve lowers rates.

They expect a huge contraction in home construction and continued high oil prices.

While investors are expecting that an ongoing housing downturn and threats to consumers already menace growth, it’s worth noting some lesser-plumbed features of the domestic scene. First, we think tighter lending standards will depress housing demand further. But even if demand stabilizes, so large is the supply-demand mismatch that builders must slash single-family housing starts by 40% from current levels to eliminate the inventory of unsold homes. As a result, we think overall housing starts will run below one million units in each of the next two years — a level not seen in the history of the modern data since 1959. The housing downturn will likely subtract 0.9% from growth in the next four quarters, and the housing recovery in 2009 will hardly merit the name.

Second, while energy prices have come down from their recent peaks and may continue to slip, the rise in energy and food quotes between June and December of 2007 likely will have drained about $45 billion, or 0.4%, from consumer discretionary income. Moreover, long-term relief is unlikely; Doug Terreson and our oil team expect that crude oil quotes (measured by WTI) will average about $83/bbl in 2008, or about $10 higher than this year (we translate that into a $7 increase for Brent to $79.40).

Oil could go higher than that if Saudi Arabia can't maintain exports at current levels.

I think commodity price inflation makes a US recession much harder to avoid.

Overall, commodity prices are showing the largest sustained gains since the late 1970s and early 1980s. The Reuters (RTRSY) CRB index, which measures the price of a basket of basic foodstuffs, metals and fuels, has soared 18% in the past 12 months, and 121% since Dec. 31, 1999.

Rising Asian demand combined with the approaching world peak in oil production seem very inflationary. If this starts translating into an increase in general inflation then the Fed is going to run out of room to maneuver.

By Randall Parker    2007 December 11 10:12 PM Entry Permalink | Comments (0)
2007 December 09 Sunday
Inflation To Force Recession In Europe?

Germany's inflation rate is in a danger zone.

Oil prices have risen 83 percent since mid-January, reaching a record $99.29 a barrel on Nov. 21. In Germany, inflation accelerated to 3.3 percent in November, the fastest pace since records began in January 1996.

Adding to inflation concerns, M3 money-supply growth, which the ECB uses as a gauge of future price pressures, accelerated to the fastest pace in more than 28 years in October.

The European Central Bank (ECB) wants to lower interest rates in order to cushion the effects of the credit crisis and in order to prevent any further rise in the Euro against the US dollar. But the ECB might be forced to raise interest rates instead in order to lower inflation. Such a move would likely force Europe into a recession.

Food and energy prices are going up most dramatically.

Consumer price increases are clearly evident in stores. In the western state of Hesse, the cost of butter has jumped by 48 percent over the past year and fuel prices have shot up by 26 percent.

Lettuce, meanwhile, costs 74 percent more in eastern Saxony than it did in November 2006.

Inflation is a problem for the entire Euro currency zone.

A figure for the entire 13-nation zone is due for release on Friday, with Broyer forecasting it could now hit 2.9 percent, up from 2.6 percent in October.

The ECB is worried about inflation.

European Central Bank President Jean-Claude Trichet threatened to raise interest rates if an oil-driven jump in inflation spurs pay increases.

There is ``strong short-term upward pressure on inflation,'' Trichet said at a press conference in Frankfurt after the ECB left its benchmark interest rate at 4 percent. The ECB ``will not tolerate second-round effects'' on wages and some policy makers wanted to raise rates as early as today, Trichet said.

But the southern European countries are voting against higher interest rates. The conflict between southern and northern Europe on inflation and interest rates could eventually lead some European countries to exit the Euro. Megan McArdle places only 50:50 odds on the survival of the Euro.

Overall, I'd place the odds on the survival of the euro at about 50%, which makes me definitely a euro-skeptic. Europe is not an optimal currency zone. America isn't either, but we have a lot of things that make it tenable: high labor mobility (so depressed regions depopulate rather than stagnating), high capital mobility, and automatic fiscal stabilizers that transfer federal money, in the form of things like unemployment benefits, to depressed areas. These are no panacea, but they make the dislocations of central monetary policy bearable. Europe, on the other hand, is full of people who stay where they are no matter what the economy does, and the EU government does not, broadly speaking, transfer money by local need. At some point, I find it easy to imagine that the costs of exit could be outweighed by the costs of staying, particularly as euro-enthusiasm wanes.

Since Trichet and the ECB face such conflicting pressures from different European countries one has to take what the ECB members say with a grain of salt. They can't speak as confidently as US Fed members can. Their institution is walking a tightrope of sorts. So observers tend to see the ECB has more restrained in terms of what it might do.

"Trichet's remarks can't be taken seriously," said Jörg Krämer, an economist at Commerzbank. The reality is that the ECB has cut its growth forecast for next year from 2.3pc to 2pc and expects inflation to fall back to 1.8pc by 2009.

Dario Perkins, an economist at ABN Amro, said the tough tone was intended to cool wage demands in Germany, now reaching the highest in a decade. "He was threatening the unions directly," he said.

Can the ECB get away with forcing the Euro zone into a recession?

Some European economic analysts hoped that Europe has become decoupled from the US economy since so little European exports go to the United States (we use East Asian producers in order to live beyond our means). But Nouriel Roubini is having none of that. He argues that Europe's economic fortunes are still closely linked to that of the United States in his post Global Recoupling Rather than Decoupling as the US Heads towards a Recession.

Recoupling or contagion is also evident in financial markets. Certainly European financial markets did not decouple from the summer and fall financial turmoil in US financial markets; rather there was massive contagion: the ECB was forced to inject liquidity faster and more than the Fed. And the lingering liquidity and credit crunch has been as severe – if not more severe – in Europe than in the US. Thus, based on recent European loan officer surveys, the credit crunch – especially towards corporate lending – is now more severe in Europe than in the US. This is no surprise as the relatively more bank-based financial system of continental Europe – relative to the capital markets-based financial system of the US and UK – is more vulnerable to credit crunches when there is a seizure of liquidity and credit that flows to the corporate sector.

The ECB faces a big problem: Europe is hard hit by a credit crunch. But high inflation is preventing the ECB from following in the footsteps of the US Federal Reserve to lower interest rates. Europe's higher inflation combined with the credit crunch might force Europe into a recession before the United States. Since salaries haven't been keeping up with inflation in Germany for years that's going to be a pretty bitter pill to swallow.

By Randall Parker    2007 December 09 11:00 AM Entry Permalink | Comments (5)
2007 November 30 Friday
Some Measures Of Credit Down In US

Some forms of credit are shrinking.

The combined value of two leading sources of credit — outstanding commercial and industrial bank loans, and short-term loans known as commercial paper — peaked at about $3.3 trillion in August, according to data from the Federal Reserve. By mid-November, such credit was down to $3 trillion, a drop of nearly 9 percent.

Not once in the years since the Fed began tracking such numbers in 1973 has this artery of finance constricted so rapidly. Smaller declines preceded three recessions going back to 1975; at other times such declines tended to occur in conjunction with an economic downturn.

Credit contraction increases the odds of a recession.

Mortgage payments are falling behind.

Moody's U.S. Home Equity Index Composite showed that the rate of loans at least 60 days past due or that entered the foreclosure process was 16.53 percent in September.

That's more than double the 7.93 percent rate a year earlier, and more than triple the 4.99 percent level in June 2005. The rate was 15.23 percent in August.

Henry Paulson is trying to keep Humpty Dumpty from falling apart. I hope he succeeds.

Treasury Secretary Henry Paulson is scheduled to make remarks on housing Monday, though it is unclear whether a deal could be in place by then.

Regulators have been grappling all year with how to stem the record wave of foreclosures, caused in large part by rising monthly requirements on subprime adjustable rate mortgages, or ARMs. Regulators and industry officials are focusing in on a plan that would possibly make it much easier to extend starter rates on certain existing ARMs for five to seven years, the people familiar with the matter said.

This would be aimed at borrowers who are living in their homes, not on speculators and investors. And policy makers are trying to figure out a way to do it broadly to expedite the slowed case-by-case loan modification process.

The credit instruments built up to sell packages of mortgages make renegotiation of credit terms really difficult. That pushes more people into default than ought to be necessary. Paulson and some banks are trying to come up with ways to make renegotiation of terms easier to do so that fewer people give up trying to pay their mortgages.

Fed Vice Chairman Donald Kohn says that we need to prevent some people from paying the full costs of bad lending decisions.

"To be sure, lowering interest rates to keep the economy on an even keel when adverse financial market developments occur will reduce the penalty incurred by some people who exercised poor judgment," he said in a speech at the Council on Foreign Relations. "But these people are still bearing the costs of their decisions and we should not hold the economy hostage to teach a small segment of the population a lesson."

There is a moral hazard problem here. If people don't pay the full cost of their mistakes then they will make more mistakes and live more recklessly. On the other hand, we don't want the markets to build up so much fear that a stampede away from risks becomes a vicious cycle where each pull-back reduces economic activity so much that successively more businesses fail and lenders become so risk averse that all lending stops. A depression is one character building experience that I'd just as soon do without.

By Randall Parker    2007 November 30 12:22 AM Entry Permalink | Comments (2)
2007 November 18 Sunday
Goldman Sachs Warns On $2 Trillion Credit Hit

My guess: recession in 2008. As financiers worry the entire credit market could freeze up Goldman Sachs chief economist Jan Hatzius, in a note entitled "Leveraged Losses: Why Mortgage Defaults Matter’", argues that housing loan losses might range of $200 billion to $400 billion and that an amplifying effect of those losses might reduce financing by $2 trillion dollars.

The sub-prime mortgage crisis in the US could lead to the opening up of a $2 trillion (£978bn) black hole as banks and financiers stop lending money because of mounting losses, the leading Wall Street bank Goldman Sachs warned yesterday.

The bank's chief economist, Jan Hatzius, who is regarded as an expert on the domestic housing market, warned that losses on outstanding loans could balloon to $400bn as borrowers struggled to repay debts. That figure is well ahead of the $50bn or so losses already announced by major banks including Citigroup and Merrill Lynch, and well ahead of the Federal Reserve's own estimates. In July the Fed chairman, Ben Bernanke, estimated that losses on loans could be up to $100bn.

Why a recession? Consumers are experiencing declining home values, rising oil prices, and some are experiencing a big reduction in credit availability. Plus, many have mortgages with interest rates which are going up and increasing their monthly payments. Worse, the trend in world oil production (the second graph is really bad news) suggests we can't expect any relief on oil prices and gasoline prices.

The bright news? Technology continues to raise productivity and the declining dollar is increasing export demand. Want job security? Get into an industry (if it exists) that exports energy. If such an industry doesn't exist then come up with a discovery that produces exportable energy. Then you can make money off selling to the Chinese.

The losses by financial companies get amplified in the larger economy because they cut back much more in lending.

And leveraged investors react to losses by actively cutting back lending to keep capital ratios from falling -- A bank targeting a constant capital ratio of 10 percent, for example, would need to shrink its balance by $10 for every $1 in losses.

So then total losses of $400 billion would possibly shrink available credit by $4 trillion. Though in theory the Federal Reserve could inflate the US economy out of the dampening effects such a loss caused. What I want to know: How much of the exposure to these losses is for foreign investors?

A week ago some major banks put together a fund to help stabilize credit markets. Will it help?

The country’s three biggest banks have reached agreement on the structure of a backup fund of at least $75 billion to help stabilize credit markets, a person involved in the discussions said yesterday, ending nearly two months of complicated negotiations against a worsening economic backdrop.

Officials from Bank of America, Citigroup and JPMorgan Chase reached agreement late Friday, settling on a more simplified structure than had been proposed, said this person, granted anonymity because he was not authorized to talk for the group.

BusinessWeek says the decline in housing prices should cut consumer spending.

The question, though, is just how much consumers will restrain their free-spending ways. Research by economist Carroll suggests that every $1 decline in house prices lops about 9 cents off of spending. The current value of residential housing is about $21 trillion, according to the Federal Reserve. So if home prices fall by 10%, as many people expect, that would lead to roughly a $200 billion hit to spending over the next couple of years. A 15% tumble in home prices would produce a $300 billion pullback in spending, or about 3% of personal income.

That accords well with calculations by BEA economists. They figure that households took out $340 billion in cash from mortgage and home-equity financing in 2006. That source of funding could largely disappear over the next couple of years.

Still, always look on the bright side of life. New York Times columnist David Leonhardt argues that the news about stocks, housing prices, and oil prices all are really good news for many people.

So unless you’re about to retire or sell stock for some other reason, you shouldn’t get too upset about the market’s fall. As long as you are planning on more buying than selling over the next decade or two, a market correction is your friend.

It’s also likely to improve the nation’s long-term economic prospects. The bull market of 1990s, combined with the housing boom, fooled many people into thinking they didn’t need to save money. They evidently figured that their existing assets would continue to soar in value and could serve as their nest egg. Last year, Americans saved only 0.4 percent of their disposable income, down from 7 percent in 1990.

This decline in personal savings has set the stage for all kinds of problems. The biggest may be that less savings, by definition, equals a smaller pool of capital available for overall investment. Less investment — be it in medical technology or software — will mean slower economic growth and lower standards of living down the road.

Cheaper housing prices are good news for people who don't own a house. Cheaper stock prices are great news for people who need to buy lots of stocks in the future to save for their retirement. I personally want to see the stock market lose half its value so that I can buy cheaply. So I agree.

The high oil prices are a very useful signal that we need to move away from using oil. In fact, high oil prices are causing a boom in venture capital funding of cleaner energy alternatives. That is great news.

By Randall Parker    2007 November 18 06:08 PM Entry Permalink | Comments (2)
2007 November 17 Saturday
Financial System Could Come To Grinding Halt?

A guy at Morgan Stanley thinks we are at very high risk of an enormous financial melt down as a result of fall-out from the sub-prime mortgage debacle. This really does not sound good.

There's a greater than 50 percent probability that the financial system ``will come to a grinding halt'' because of losses from mortgages, Gregory Peters, head of credit strategy at Morgan Stanley, said.

I really do not want to live through a worldwide depression. I don't feel the need to wash off my sins in extreme poverty, to suffer, to atone with a "Grapes Of Wrath" sort of existence. I'm not bored and in need of the excitement of a huge disaster. I don't get off on fantasies of doom and gloom.

The problem involves "structured investment vehicles" (SIVs). It sounds pretty bad.

``You have the SIVs, you have the conduits, you have the money-market funds, you have future losses still in the dealer's balance sheet in the banks,'' Peters said in an interview in New York. ``That's all toppling at once.''

The risk of systemic shock from the current subprime meltdown is quite large in the near term, Peters said. ``It's an overarching concern that we have,'' he said.

How long is this "near term" of which he speaks? If we make it past Christmas without a Black Friday (or Black Tuesday?) are we then out of the woods?

Anyone know how to watch this one? What particular indicators to watch? Came across any particularly telling statistics about things financial?

Click through and on the right click to watch the 8 minute interview of Gregory Peters. His fear is that securitization of debt has basically frozen up. So then how quickly does that start cutting spending by businesses or consumers? Will this cause a huge credit crunch and therefore a deep recession?

Will bond buyers go away because they will no longer trust the ratings of bonds assigned by credit ratings agencies?

Update: So how did we get into this mess? A massive market failure. James Surowiecki argues in a New Yorker piece that we are in this difficult financial situation because money managers were presented with incentives to take too much risk.

The havoc on Wall Street following the collapse of the subprime-mortgage market boils down to a simple truth: for years, lots of very smart people took lots of very foolish risks, betting borrowed billions on dubious mortgage derivatives, and eventually the odds caught up with them. But behind that simple truth is a more surprising one: the financial whizzes made bad decisions in part because that’s what they were paid to do.

Fund managers are much more rewarded for success than they are punished for failures.

Fund managers get bonuses at the end of each year, and they keep those performance fees even if the fund eventually goes south. So if a billion-dollar hedge fund rises twenty per cent in its first year and falls twenty per cent in its second, its investors will have lost money, while the fund’s manager might earn forty million dollars in performance fees. Hedge funds do have a rule that’s meant to deal with this problem: when a fund loses money, it yields no performance bonus until investors get back to even. The catch is that nothing prevents a hedge-fund manager from simply shutting down after a bad year and walking away with the fees he’s already accrued.

Even CEOs are incentivized to take too much risk.

To a shareholder, the difference between a stock that’s at thirty dollars and a stock that’s at twenty means a lot. But to a C.E.O. who has a pile of options with a strike price of thirty-one dollars, the difference means much less. As a result, that C.E.O. is likely to embrace projects that promise big rewards, even if they also entail a significant chance of failure.

That piece is worth reading in full.

Tyler Cowen responds to Surowiecki by saying we are taking the wrong kinds of risk.

With hedge funds, are we now above or below the optimal amount of risk? The answer of course is "we are taking the wrong kinds of risk." We are finding more and more ways to (implicitly) write naked puts in highly leveraged forms. Yes this has brought us new products but it all seems to be new mortgage products. Could those products possibly justify the financial carnage we have seen? That is the critical question but I suspect the answer is "no," that in this sphere we stepped beyond the bound of optimal risk-taking.

That financial carnage is so huge that the Federal Reserve is trying to prevent a total melt down and some guy from Morgan Stanley warns us that our credit markets are at high risk of entirely freezing up. I'd say these financial products haven't so sped up economic growth that they could possibly outweigh the costs of the added risks. Plus. as Tyler points out money has been misallocated to the wrong kinds of risks. Money lost in subprime lending could otherwise have funded venture capital start-ups or capital expansions of industrial corporations.

Update II: What is the mechanism by which the credit markets could freeze up? One part of it: Massive downgrades of debt. Hundreds of billions of dollars of bonds could (actually are) get downgraded from AAA or AA to junk levels of ratings. Worse yet, the ratings agencies that gave so many collateralized debt obligations (CDOs) AA and AAA in the first place are losing credibility with potential bond buyers. If you want to buy high grade debt and you find that AAA handed out to new debt last year means something between squat and zilch why trust what Fitch or Moody's claims is AAA this year?

The scope of this crisis is breathtaking. If you haven't been paying attention to it I strongly urge you take the time to do so now. Stoneleigh at The Oil Drum has a pretty good round-up of articles about debt downgrades and the possible collapse of private mortgage insurers. If this chokes off new mortgage availability the price slump we've seen so far in housing will seem pretty mild in comparison to what is coming. Take away sources of new mortgages and housing prices will plunge and that plunge will make mortgage companies even less willing and less able to loan. The vicious spiral could take the US economy down into a real depression. So the stakes in this financial crisis are enormous. Can the financial people in the US government and Wall Street figure a way out of this mess that avoids a huge downturn in real estate?

The financial guys do not sound confident.

The US mortgage crisis is “deeper” and “scarier” than anyone expected, Tony James, president of Blackstone, said on Monday, as shares in the US private equity group fell on news that its revenues had fallen sharply below expectations in the third quarter.

...

“The mortgage black hole is, I think, worse than anyone saw. Deeper, darker, scarier. [The banks] are now looking at new reserves and my sense . . . is they don’t have a clear picture of how this will play out and confidence is low.”

Is there a way to somehow firewall the effects of this crisis?

By Randall Parker    2007 November 17 10:20 PM Entry Permalink | Comments (4)
2007 September 09 Sunday
Unexpected Jobs Drop Signals Possible Recession

After an uninterrupted monthly increase in jobs since 2003 the US economy has produced a net job loss in August 2007.

The nation's employers eliminated 4,000 jobs in August, the Labor Department said yesterday, bringing an end to four years of uninterrupted job growth.

...

The employment report jolted the stock market because economists had predicted an August increase of about 110,000 jobs.

Notably, governments cut back in large numbers.

Construction and manufacturing were the hardest-hit industries last month, losing a combined 68,000 jobs. That offset hiring in education, health and retail. About 28,000 government positions were eliminated as well.

Those cuts in government positions at state and local levels come as a result of dips in sales and property taxes. People who can't pay their mortgages can't pay their property taxes either. The stampede of home equity loans to do home upgrades generated big sales tax revenues from building materials sales as did construction of new homes. All that has hit the skids. Lots of state and local governments are singing the deficit blues: Chula Vista California, the state of Maryland and its counties, Arizona, Indiana school districts, Florida, and Michigan are all wrestling with budget deficits. That just scratches the surface. Many more county and local governments are trying to cut back spending and the Republicans are fighting with the Democrats over whether to raise taxes. At the local and state level the differences between the two parties becomes clearer when spending increases suddenly outrun tax collections. This is a good time to write a letter to your state representatives and governor telling them to cut back on unnecessary spending. Otherwise expect your taxes to rise even as your job security goes down.

The unemployment rate didn't rise because over a half million people gave up trying to find jobs. Why do they reach helplessness seemingly so quickly? What is really going on here?

June and July payrolls were revised down by a combined 81,000.

The jobless rate held steady at 4.6%, near a six-year low, according to the separate household survey. But that was because 592,000 people left the work force.

More financial sector cuts are coming.

Countrywide Financial, the nation’s largest mortgage lender, said late yesterday that it would eliminate as many as 12,000 jobs, which would be the biggest round of layoffs in the troubled housing industry.

Some economists think the US might already be in a recession.

The August jobs decline is a "very serious" development, which indicates "the economy is struggling and very near, if not already in, recession," said economist Mark Zandi at Moody's Economy.com.

Merrill Lynch economist David Rosenberg offered an even more pessimistic take. "Today's employment report was very clearly the weakest of this cycle and vividly portrays a recession-bound economy."

Officially a recession doesn't start until the economy contracts for at least 2 quarters. But is the economy already contracting and are we already in those 2 quarters?

The 4,000 contraction in jobs is even worse than it looks because it comes while legal and illegal immigrants surge into the country. Natives are getting displaced on a massive scale by Hispanic immigrants.

Here are the August job numbers from the household survey:

  • Total: -316,000 (-0.22 percent from July)
  • Non-Hispanic: -584,000 (-0.46 percent)
  • Hispanic: +268,000 (+1.32 percent)

More than a quarter of a million Hispanics found jobs in August, the largest monthly increase since March 2004, and the third highest since the start of the Bush Administration in 2001. Meanwhile, the nearly 600,000 reduction in non-Hispanic employment was the biggest hit this group took since April 2005.

This recession is going to elevate the battle over immigration. Unemployed people aren't going to be interested in the economic rationalizations of the supporters of large scale immigration.

By Randall Parker    2007 September 09 03:44 PM Entry Permalink | Comments (2)
2007 April 14 Saturday
Capital Spending Biggest Worry Of Economists

A survey of economists by the Wall Street Journal found their biggest worry about economic growth revolves around expected capital spending levels.

A new WSJ.com survey found that 20 of 54 economic forecasters responding to a query cited soft capital spending as the chief risk to their forecast that the U.S. economy will grow slowly but avoid recession this year.

Only 11 of the economists cited housing; the rest cited other threats, including inflation and oil prices.

Probably more economists didn't cite housing because housing is already a factored in negative which by itself hasn't pushed the US economy into a recession. They are looking for changes that could bring on a recession and aren't expecting those changes to come from the housing industry.

The three pluses driving the US economy at this point: capital spending, consumer spending, and exports.

Capital spending, along with consumer spending and exports, has been supporting economic growth in the U.S. amid a housing slump, so signs of weakness aren't welcome.

"If there's something that keeps me up at night, it's the potential of corporate America really pulling back," said Nariman Behravesh of forecasting firm Global Insight. "We had expected 5%-to-6% growth in capital spending in the first half of 2007, but now that's down to 1.5%."

The Commerce Department says overall business investment fell an inflation-adjusted 3.1% in the fourth quarter, the first drop since early 2003. And government measures of orders for and shipments of capital goods so far this year have been unexpectedly weak.

The economists are expecting an acceleration of the rate of inflation. Energy and food have the fastest price rises. Basically, food prices are now getting driven by energy prices due to corn's use to make ethanol. Farmers are planting less of other crops in order to plant more corn. The price of corn has nearly doubled in the last few years.

The full article reports a large assortment of mixed signals on the US economy and capital spending. Hard to figure out what it all portends.

The US trade deficit unexpected decreased after months of increases.

The gap fell to $58.4 billion from $58.9 billion in January, the Commerce Department said. Economists had forecast an increase to $60 billion. Imports from China fell to the lowest level since May 2006.

Slower growth in the U.S. might mean lower demand for imported consumer goods and business equipment, while expanding economies in Europe and Japan will add to U.S. exports, economists said.

No, the improvement was not due to an increase in exports. In fact, exports actually fell. The US manufacturing sector isn't becoming more competitive in international markets. Imports fell even more than exports in part due to a decline in oil demand.

The improvement came even though exports fell by $2.8 billion during the month, reflecting lower sales of a variety of manufactured goods from computer accessories to industrial machinery and civilian aircraft.

But imports declined by an even larger $3.2 billion, with the tab for foreign oil falling to the lowest level in 20 months.

People and companies are changing their behavior in order to use less energy. The cost of gasoline has been high enough for long enough that people are beginning to make choices which treat expensive gasoline as a permanent fixture.

At some point the dollar has to decline enough to cause a balance of the huge US trade deficit. But that deficit's size, at over $700 billion per year, means that a substantial part of our living standard comes from living beyond our means. On the one hand, when the party ends we have to shift toward consuming less. On the other hand, when that happens we should find that we'll have greater demand for what we do make. But there's no way to allow that increased foreign demand without slowed wage and/or profit increases. Increased foreign demand must get balanced by decreased domestic demand.

At some point Asian governments will stop buying US debt. The attractiveness of investments in the rest of the world will help bring about a decline in the US dollar.

``The income account is a leading indicator for investors about sustainability of the current-account deficit,'' Wilmot says. ``Paradoxically, the time to begin to worry about the current-account deficit is when it begins to improve, because growth and investment opportunities outside the U.S. are beginning to look more attractive.''

In the fourth quarter, the U.S. current-account deficit amounted to 5.8 percent of gross domestic product, down from 6.9 percent in the third quarter and a record 7 percent of GDP in the last three months of 2005. Yet from 1990 through 1997, it was never worse than 2 percent.

When will the shift come? Will it come gradually? Will it come with the next recession?

By Randall Parker    2007 April 14 06:31 PM Entry Permalink | Comments (2)
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