UPDATED
Regular readers of The Daily Capitalist know I think we are headed for a decline in economic growth in 2010 and that the data is starting to show this.
Why isn’t our economy recovering? I ask that question often and have written about it many times. Perhaps a better question is: what needs to happen in order to make our economy grow? I offer some solutions.
There are many problems seen as hindering recovery. Here are the common ones I wish to examine:
- Too much debt encumbering consumers;
- The lack of consumer demand to fuel growth;
- Too much debt encumbering banks; and
- The government’s interference in the economy.
There are a host of other issues that are also important but let me focus on these points and show what can be done to fuel a recovery.
Numbers 1 and 2 (debt/demand) are related.
Our economy is consumer driven and we are reminded over and over again that consumer consumption is 70% of our economy. To put this in perspective, for Germany it is about 57% of GDP.
Our economy is built on consumption which is fine as long as it is supported by real savings, productivity growth, and wage growth. The data reveal that most of the consumption binge of the boom phase of this current cycle was financed directly or indirectly by debt related to rising home values. Personal savings declined to almost zero. Now savings are back up to 4%.
Here is why this is seen as a problem for recovery: PCE will decline as consumers pay down debt and increase savings. Spending drives the economy and the economy will decline.
Is this really a problem?
Saving is a process necessary for a recovery. Consumers are acting rationally to uncertainty and they will give us the signal when they are ready to spend again. About $10 trillion in household net worth was wiped out during the bust. Until consumers see unemployment decrease, wages go up, and their debt go down, they aren’t going to spend anyway.
But savings is never bad for an economy. Economists often fail to look at the other side of savings which is an increase in capital necessary to fuel future growth. In a normal cycle, increased savings reduces interest rates, which sends a signal to producers of capital goods that consumers don’t want to buy consumer goods right now, and that there is opportunity for them to increase production of durable goods such as machines, homes, and basic equipment. They use the loan funds to pay workers who will spend which, as this capital works its way through the economy, will create new and real economic activity.
While manufacturers have been increasing production in response to normal business cycle activity (inventory recovery; weak dollar advantages), they are just utilizing current capacity. If they wanted to expand, unless they are a large company with access to money center capital, they now report they are having trouble getting a bank loan.
What does this mean? It means they can’t expand and hire new workers whose spending will take up the slack from consumers who save. The government and the Fed have confused our ability to make economic decisions because they are artificially lowering interest rates.
What can we do to fix this? Savings is the fix. There is nothing that should be done to prevent this from occurring. In the longer term it will prepare the economy for new growth. See No. 4 for why flogging a dead horse is harmful to recovery.
The question is: why can’t we get loans?
… Continue reading How To Start An Economic Recovery
The recent G20 meeting in Toronto came out with a joint statement endorsing “balanced and sustainable” growth for its members. It was one of those statements that are created by committees to placate all participants and don’t really amount to anything. In this case, no meaningful agreements came out of the G20 meetings. Each government will just go back to doing what they have been doing and mouth high-sounding speeches of solidarity and fraternal love for their world co-leaders.
What really happened in Toronto didn’t come out in the official statements (they never do). But the obvious and deep division between the U.S. and Europe was the main story of the event and that was fascinating to watch.
When Obama chides Merkel for Europe’s (Germany’s) proposed attempts at fiscal responsibility and when Merkel hits Obama for the U.S.’s fiscal profligacy, then you’ve got a good story.
The big split has to do with whether the world should continue fiscal stimulus. The Obama Administration believes that it’s too soon to stop. Recent numbers have them scared about the future of the U.S. economy and it wouldn’t hurt to have some global support when they try to beggar Congress for more spending to promote economic recovery. (“See,” Geithner will say, “even the Germans are begging us to spend so we can rescue the world economy.”)
… Continue reading An Outbreak of Fiscal Sanity in Europe? Insanity in the U.S.?
This is a guest post by David Stockman who originally wrote this piece for Minyanville. Mr. Stockman was OMB Director during the Reagan Administration, was a founding partner of The Blackstone Group, and left Blackstone to form his own private equity fund, Heartland Industrial Partners, L.P. Mr. Stockman is a regular reader of The Daily Capitalist. — JH
Part 3 of 3
And it is the prospective end to fiscal stimulus that makes the Fed’s abject coddling of Wall Street so feckless. The fact is, what has mainly been going up since last spring, besides the public debt, is various measures of sentiment. The rising PMIs are an example of sentiment trends that are measured on purpose while the soaring S&P 500 index appears to be mainly a sentiment survey by default. In any event, what is not going up much is real measures of Main Street business activity.
The March personal income and spending report shows that private incomes are still stuck deep in recession territory. On the same basis, as I previously reported in Did Washington Save the Economy?, March private-sector incomes (wages, interest, rents, and proprietors earnings) are still $500 billion, or 5.7%, below the pre-Lehman level. Once again, social transfer payments and public sector wages accounted for nearly all the income gain, growing by $27 billion in March compared to a miniscule uptick of $8 billion in private-sector incomes. Indeed, at March’s niggardly rate of gain, private-sector incomes won’t return to third-quarter 2008 levels for another 60 months — March 2015. On the other hand, after another month or so, the governmental transfer payment “make whole” will come to an abrupt halt, meaning that the markets will soon see that the Fed has been pushing on a string all along.
Then the hissy fit will come with a vengeance. Already the recovery “evidence” recently headlined on bubble vision has taken on a thread-bare aspect. Last week, for example, the Fed’s embedded spokesman at CNBC pointed to the “strong” core capex orders for March, which he determined (within five seconds of the release) were up 4%, and then opined that this was surely an omen that new jobs are on the way, too. Had Steve Liesman taken an additional five seconds, however, he might have noted that January orders had been down by 4.4 % from the December level, and that February orders were also lower than the year-end figure by 2.5%.
So what happened in the real world, then, is that first-quarter orders for capital goods excluding defense and aircraft were up a slight 1.1% from the prior quarter. In the realm of second derivatives, however, this figure wasn’t even directionally correct because the fourth-quarter gain had been 3.3% and the third-quarter pickup was 3.4%. More fundamentally, core capex orders during the first quarter were still 17% below peak levels — as well they should be with capacity utilization rates still at the lowest levels since the 1950s. … Continue reading Fed Policy Stealing From Our Future Part 3
This is a guest post by David Stockman who originally wrote this piece for Minyanville. Mr. Stockman was OMB Director during the Reagan Administration, was a founding partner of The Blackstone Group, and left Blackstone to form his own private equity fund, Heartland Industrial Partners, L.P. Mr. Stockman is a regular reader of The Daily Capitalist. — JH
Part 2 of 3 parts
Not surprisingly, the Fed’s first foray into bubble economics between 1923 and 1929 endowed the speculative classes with an immense windfall that self-evidently could not be ascribed to pure market forces. During that six-year period, fully 70% of national income growth went to the top 1% of the population while the bottom 90% got only 15% of the gain.
After the New Deal soaked the rich with taxes and the Fed retreated to a more conservative posture in the immediate post-war period, Mr. Market generated far less egregious distributions of the growth. In the 1960s, for example, the national income pie was whacked up in nearly the opposite fashion, with the bottom 90% getting two-thirds of the decade’s income growth while the top 1% garnered only 10%. Even during the Reagan decade of the 1980s, and notwithstanding the so-called “trickle-down” tax cuts, the top 1% obtained just 40% of the national income growth while a somewhat lesser share went to the bottom 90%.
During the Greenspan/Bernanke bubble of 2002-2007, however, the 1920s windfall to the speculative classes came roaring back: Nearly two-thirds of national income growth accrued to the top 1% while the bottom 90% ended up with comparative crumbs, obtaining just 12% of the gain. And when the figures for 2008-2010 eventually come in, they will undoubtedly best even the Roaring Twenties result: It’s likely that more than 100% of the income gains since 2007 have gone to the speculative classes since the population as a whole will have gone backward.
… Continue reading Fed Policy Stealing From Our Future Part 2
This is a guest post by David Stockman who originally wrote this piece for Minyanville. Mr. Stockman was OMB Director during the Reagan Administration, was a founding partner of The Blackstone Group, and left Blackstone to form his own private equity fund, Heartland Industrial Partners, L.P. Mr. Stockman is a regular reader of The Daily Capitalist. — JH
Part 1 of 3 parts
The zero interest rate policy has disguised the ugly truth our economy faces
We are now well into the second year of green shoots, but in word and deed the Fed remains entombed in the zero interest rate policy (ZIRP). Ultra-low money market rates were allegedly needed 18 months ago to insure that the American people wouldn’t be deprived of the munificent services of Goldie and the Fab Five. Since then, these pillars of prosperity – Goldman Sachs (GS), JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC), Morgan Stanley (MS), and Citigroup (C) — have together posted $62 billion in after-tax profits.
So why are Fed Chairman Ben Bernanke and his red-helmeted lieutenants still scrambling about with water hoses and fire axes? There’s only one answer that satisfies normal standards: The Fed is terrified that the boys and girls on Wall Street will stage a hissy fit if it doesn’t continue to read them the “extended period” fairy tale at the end of each meeting.
By contrast, there’s certainly no sane macroeconomic reason for a zero-cost federal funds rate. Indeed, given its dangerously over-leveraged condition, no element of the American economy should be incentivized to borrow more money (at 370%, the total debt-to-GDP ratio is already off the historic charts).
The deeply indebted household sector, for example, needs to be squirreling away funds for the day (which is coming soon) when its taxes go up and social security benefits get cut, not relapsing toward a zero savings rate as was evidenced by the March personal income report. Likewise, small business shouldn’t be borrowing (on net) because it’s not done shrinking. The national economy is still vastly over-populated by redundant contractors, strip mall retailers, sports barkeeps, and home-canned pickle entrepreneurs — even though the housing ATM from which this legion of boom-time enterprises briefly suckled is long gone.
Big business isn’t borrowing either (except to term-out existing debt) and for good reason: At a subterranean capacity utilization rate of 70%, it doesn’t need external funding for the tepid level of capex needed to replace asset wear and tear or to fund targeted productivity initiatives. In short, the private economy won’t be “stimulated” by cheap interest rates because credit wasn’t previously rationed by high-priced money. Instead, credit is being liquidated, owing to the heavy burden of existing debt on income-challenged households and businesses.
At the same time, what the national economy does need is far less financial speculation and far more real savings. These objectives, in turn, are prerequisites to sustainable full employment and price stability — the Fed’s ostensible dual mandate. Accordingly, higher short-term interest rates — say in the 3%-4% range — would be far more compatible with the Fed’s mission than its current destructive embrace of ZIRP. And the fact is, ZIRP is incredibly destructive because it gives precisely the wrong signal to key economic constituencies, including speculators, savers, and politicians. … Continue reading Fed Policy Stealing From Our Future
Chairman Bernanke reaffirmed again the Fed’s commitment to low interest rates because the U.S. economy is still weak. Bernanke also said that the federal government’s fiscal situation “looks dark” and that he is worried about the ability of the Treasury to sell debt:
“Interest rates might rise because of a lack of confidence by [...]
The answer to the question is that both countries have been given credit watch warnings by credit rating agencies.
Moody’s issued this warning about the U.S.:
The US needs to make significant government spending cuts or else risk losing its gold-plated credit rating that has made extensive borrowing so affordable, Moody’s Investor Service said late Monday.
The announcement was a sobering warning that the country’s burgeoning debt has weakened the country’s economic standing, and that US Treasury Bonds, traditionally a bullet-proof investment, could lose their sterling Aaa-rating if Washington cannot control its federal debt.
If Moody’s were to downgrade the country’s rating, the impact could be severe. It would signal to lenders worldwide that the US is no longer one of the safest places to invest money.
That, in turn, would threaten the country’s ability to borrow freely and extensively from other countries on favorable terms. Investors would likely demand a higher interest rate to finance US debt, which would push federal debt higher still. …
“The ratings of all Aaa governments are currently well positioned despite their stretched finances,” Moody’s quarterly Sovereign Monitor reported.
Although it hasn’t yet taken any action to downgrade US ratings, Moody’s announcement will likely rattle investors and decrease investor confidence in US bonds. …
“At the current elevated levels of debt, rising interest rates could quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility,” Mr. Cailleteau said in the report.
In it’s report, Moody’s said debt levels in the US were to blame for its threatened economic standing. …
The Obama administration estimates US deficit (the difference between how much money a government takes in and how much it spends) will rise to 10.6 percent of GDP this year, the highest level since 1946. Federal debt (money the government owes lenders) will likely reach 64 percent of GDP.
The US can straighten up its balance sheet – for example, raising taxes and cutting spending – to stave off a downgrade, says Moody’s.
“A key issue is whether governments are able and willing to implement such unprecedented adjustments,” said Mr. Cailleteau, in a statement.
I look in my crystal ball and I see … VAT. See here, here, and here. … Continue reading What Do China and The United States Have In Common?
America has now joined Europe as just another quasi-socialist state with the passage of the health care bill. Our new system is similar to France’s. No one believes the Democrat’s promises about cost containment or the true cost of this legislation. The result will be higher costs for everyone, higher taxes for almost anyone [...]
Comments on President Obama’s State of the Union Speech
I will say that President Obama is pretty good at this speech stuff. Remember last year when Professor Obama said that the adults are now in charge and we’re going to clean up the mess the kids made? This year had a [...]
Even the Congressional Budget Office is conceding that things aren’t turning out as expected:
The Congressional Budget Office hiked its forecast Tuesday for how much the stimulus bill will add to the nation’s deficit, raising its estimate by $75 billion to $862 billion.
The American Recovery and Reinvestment Act, passed in February 2009, was [...]
The U.S. and Japan face similar economic problems and they are trying to solve them in the same way: fiscal and monetary stimulus. It hasn’t worked for Japan and it won’t work for the U.S. Japan just received a downgrade warning from S&P over their credit rating and the U.S. [...]
By Jeff Harding.
This video was sent to me by Dan Mitchell at Cato. Dan presents an excellent summary of why government spending is harmful to the economy and prosperity. Whether or not it results in deficits, the greater the spending by government as a percentage of GDP, the greater is the negative impact on the [...]
By Jeff Harding.
*See disclosure at end
I’ve been thinking a lot about gold lately. Especially now that Nouriel Roubini has come out and trashed the noble metal (see Tyler Durden’s article). Anyone who tells you they know what’s going to happen with gold is guessing. Roubini is guessing.
Roubini also makes some fundamental errors in his analysis, and his assumptions are flawed. Since he’s my favorite playboy economist, I should point out that he did study at the Mises Institute, but he must have cut class. He is ½ Keynesian, ½ Monetarist, and ¼ Austrian (according to Keynesian econometrics).
My conclusion, an admitted guess, is that the trend for gold is up. But … it depends on what the government and the Fed will do. The short term is a trader’s nightmare, so I don’t have a clue if it’s going up or down tomorrow. The bubble seems to be subsiding. If I were to really go out on a limb, I would guess that the fiscal stimulus bump will continue through Q1 2010, but will wear off by Q2–Q3 2010. Good GDP numbers would have negative effect on gold.
Let me explain why I think the way I think. In part it is an answer to Roubini. I could go through his report point by point, but I would rather make my own case. I don’t mean to sound pedantic, but reviewing the basics helps give perspective to the issue.
1. People want gold.
People flee to gold when they believe the future is uncertain. And you can’t tell me people like gold jewelry just because it’s pretty. It has always been that way. There is no secret to its value. People want it, it’s in short supply, you can’t make it, it’s been used as money for millennia, and, well, people want it. Accept this fact.
If you thought your paper money was going to be devalued, or worse, worthless, you’d get into some hard asset. Gold works pretty well in these situations. It’s value will be maintained while fiat money could be wallpaper. People will take anything to get rid of their paper: bread, cigarettes, candy, grenades. Whatever. Gresham’s Law.
This underlies the value of gold.
2. Fear is driving gold.
The big fear out there is that the U.S. will eventually face high inflation, perhaps hyperinflation, and sovereigns and investors who hold dollars see gold as a hedge against that event. Stability in an unstable world.
If it were all trader-driven speculation, the bubble would pop and gold would be back to $*** (pick a number). But when you have China doubling its gold reserves, and India buying tons of gold, when guys like John Paulson, Paul Tudor Jones, and David Einhorn reveal they’ve been loading up on gold, you know something is going on.
There appears to be enough demand to create a floor which would limit a collapse of the price of gold.
3. Perspective.
According to the NBER, this is my 8th cycle. My mother sold her stocks at the bottom of the 1962 cycle (down about 12%). She confided that fact to me later that year when I came home from college after starting Econ 101. She went through the Depression and was afraid. I told her we’d never have another depression: my professor told me so. That was my first cycle.
The point of the experience thing is that during almost every big cycle I’ve been through, the gold bugs came out in force and predicted dire things. Look at the ads on a lot of blogs. Check out the survivalist sites. Gold, guns, and food. Atlas Shrugged. It is not a new thing. The predictions you see today are the same as in the past. It has a big impact on (younger) people who haven’t been through a major cycle before. Everything is new in their eyes.
Also, for the most part, gold bugs always like gold. They believe the world will come to an end, soon.
Because people say it, doesn’t mean it’s so.
4. Is this cycle different?
Yes, it’s different. It’s huge. … Continue reading Whither Gold, That Barbarous Relic
By Jeff Harding.
The new jobs bill negotiations are apparently getting under the skin of our politicians. As reported in the Wall Street Journal Wednesday, the Republicans and Democrats were rather testy with each other during a meeting with the President. Here’s part of their exchange:
Republicans pushed Mr. Obama to freeze federal spending, [...]
By Jeff Harding
Here’s the schedule for this week’s Treasury auctions:
$31 Billion in 13 Week Bills, August 24
$30 Billion in 26 Week Bills, August 24
$27 Billion in 52 Week Bills, August 25
$42 Billion in 2 Year Notes, August 25
$39 Billion in 5 Year Notes, August 26
$28 Billion in [...]
By Jeff Harding
To follow up on yesterday’s article on China’s dilemma—the $1.5 trillion is US debt they hold—it seems that this week’s Treasury auctions ran into trouble:
Shaky auctions of Treasury notes this week reignited concerns about whether the government can attract buyers from China and elsewhere to soak up trillions in new [...]
By Jeff Harding
Fair warning: this is one of those ad hominem attacks on President Obama, just so you’ll know.
I question the motives of a politician who says things like government-run national health care will bring good medical care to everyone, that it’s a cost savings measure, it’s a budget balancing program, and that it will not require an increase in taxes on the middle class.
On July 7, 2009, President Obama said:
I am pleased by the progress we’re making on health care reform and still believe, as I’ve said before, that one of the best ways to bring down costs, provide more choices, and assure quality is a public option that will force the insurance companies to compete and keep them honest,” the president said in the statement. “I look forward to a final product that achieves these very important goals.
President Obama knows these statements are lies.
 Why is it that no one in the government can come up with an idea for delivering health care to people other than through a government-run plan? Just on the face of it you would have to question their premise. If they can’t run the post office, Medicare, or anything else efficiently, what makes anyone think they can run the 16% of the economy that is health care?
Yet they continue to press for some form of government-run national health care. To be fair, they have quite a bit of support from their voters who are frustrated with the current “free market” system.
What everyone wants is a system that gives them good health care, insurance coverage at a fair price, choice as to doctors, access to the best technology, and the knowledge that they won’t go broke because of medical bills. Sounds fair.
What is the best way to deliver that to consumers? Or, to put it the way President Obama would, “what works?”
To come up with the best system possible, why don’t we first take a critical look at the systems around the world that are run or sponsored by governments. Do some research and find out what works and what doesn’t.
Of course the reason the Administration doesn’t want to do that is because all these public health care systems have problems containing costs, have some form of care rationing, and are raising taxes to cover budget shortfalls.
It is clear from a survey of current systems around the world that the programs that offer the best chance of achieving our goals are the ones that have the least amount of government control. The systems that have the most top-down government control are the ones that least meet these goals. … Continue reading Obamacare
This is a great chart that speaks for itself. Thanks to Financial Armageddon for this.
By Jeff Harding
Fed Chairman Ben Bernanke warned Congress about the risks of Obama’s massive spending schemes:
Federal Reserve Chairman Ben Bernanke warned Congress and the White House that the U.S. economy will suffer if they don’t move soon to rein in the federal budget deficit, which the Fed chief blamed for helping to push long-term interest rates higher. …
Yields on long-term Treasury bonds have been rising despite the Fed’s efforts to push them down by purchasing Treasury securities. The Fed wants Treasury yields lower because they are a benchmark for many other private-sector interest rates — such as rates on mortgages or corporate bonds.
“Concerns about large federal deficits,” Mr. Bernanke said, are one cause of the unwanted rise in yields. The wider the deficits, the more the Treasury borrows and the higher rates go. Wider deficits also stir inflation fears, which also push Treasury yields up.
“Unless we demonstrate a strong commitment to fiscal sustainability in the longer run, we will have neither financial stability nor healthy economic growth,” Mr. Bernanke said in prepared testimony to the House Budget Committee.
The White House estimates the budget deficit will exceed $1.8 trillion this year and shrink to about $900 billion by 2011. That, the Fed chairman said, would push debt to 70% of gross domestic product by 2011 — which would be the highest level since the early 1950s — from 40% of GDP before the financial crisis began.
[Emphasis added]
Secretary of the Treasury Tim Geithner has been doing a dog and pony show in China at the same time. He said on June 2:
Speaking on the second day of a closely watched visit to Beijing, Tim Geithner said there was “a very sophisticated understanding” in China about why the US needs to run large budget deficits in the short term, although he repeated the pledge to sharply reduce deficits when the crisis is over.
“I sense a fair amount of confidence not just in the basic underlying strength of the US economy but in our capacity not just to solve this crisis, to get growth back on track, but to go back to living within our means,” Mr Geithner told reporters.
These two events are not coincidental.
On May 21 S&P threatened to cut Britain’s AAA sovereign rating because their debt level was approaching 100% of GDP. On the same day Geithner said:
“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television. He added that the target is reducing the gap to 3 percent of gross domestic product or smaller, from a projected 12.9 percent this year. …
“The important thing to recognize is that growth will stabilize and start to increase first before unemployment peaks and starts to come down,” he said. “These early signs of stability are very important” although “this is still a very challenging period for businesses and families across the United States.”
I think now you know why Geithner took off for China the following week. China and Japan hold 23% of US debt. … Continue reading Why Bernanke and Geithner Aren’t Sleeping Well
By Jeff Harding
Do you think a national sales tax is so far-fetched? We originally wrote about the possibility of a national sales tax in March, 2009.
President Obama appointed Paul Volker to head up a new task group to study tax reform. The problem they are studying is not to figure [...]
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