In today's NYT column March of the Peacocks, Paul Krugman lays out the progressive/liberal view that government is the ultimate actor in the economy:
The nature of America’s troubles is easy to state. We’re in the aftermath of a severe financial crisis, which has led to mass job destruction. The only thing that’s keeping us from sliding into a second Great Depression is deficit spending. And right now we need more of that deficit spending because millions of American lives are being blighted by high unemployment, and the government should be doing everything it can to bring unemployment down.
This view is open to dispute. The 1929 downturn became a "great" depression during the unprecedented activism of President Hoover, and involved post-WW I debt repayments imposed on Germany as a unique complicating factor. In another sense, the Great D involved a series of events that comprised a perfect storm.
Think of it as a Hurricane Katrina which before the levees gave way, first made a direct hit on New Orleans and devastated it; and then the levees broke. A truly "perfect" storm.
And re the Great D, also remember that candidate FDR harshly criticized Hoover's Federal deficits, and pledged to bring the budget back into balance.
There is no replaying history. No one can disprove the concept that had FDR kept his pledge, the economy would not have recovered just as it recovered from the severe depression of 1920-21 or the Panic of 1873.
All we know is that in the 1930s, the government had a balance sheet that was a fortress founded both on gold and on untapped taxing and borrowing power.
This situation is quite different today, thanks to generations of Krugman-praised policies. The consolidated balance sheet of the Federal Government shows, let us say, $60 T of debt against $2 T of income. That's a 30 to one leverage ratio, and only includes the present value of Social Security and Medicare obligations. It excludes other obligations such as the financial backstops for FDIC and the like, and other implicit obligations.
Why a solution that was tried in the 1930s is the same solution that should be tried after decades of increasing debt and chronic price inflation is unclear. Something about Einstein's definition of insanity being doing the same thing and expecting a different result.
Moving to the recent past, there is no evidence that the disorderly bankruptcy of Lehman Brothers was going to lead to anything worse than we got.
Going farther, remember that one year ago, Mr. Obama's advisers were forecasting 8.5% peak unemployment in the absence of a massive deficit-spending "stimulus" bill.
Were these top-tier economists off by, say, an additional 15-20% unemployment points (these numbers are all U-3 for consistency)?
Could it be that all the activist government--cap and trade and then healthcare reform, for example--inhibited animal spirits amongst small business owners?
Yours truly has an only-partially tongue-in-cheek solution. Let us say that there is, net, 20% unemployment/underemployment (U-6 and then some). The average American with a job works 2000 hours per year. All one has to do is shorten the work week to 4 days, and poof, everyone has a job.
This solution is as obvious as simply taxing fossil fuel use directly rather than going to the sham of cap and trade.
In other words, go more European in work effort. Now, this can be spun in various ways: shorter work days, earlier retirement, etc.
In fact, the more leisure time people have, the more time they can spend consuming (not that consumption is the goal of life in richer countries). For sure, less work means more play.
Now, this is partly satirical, but only partly. America produces about 3000 calories of food a day for a population that needs, on average, only 2000. Our current solution is to stuff people with this overproduction, and the result is an obesity epidemic.
Less food production (less GDP) would be a good thing for our health, economy and environment. One can go down the list. Driving to work 4 days a week would save lots of gas, wear and tear on autos and roadways, and thus have positive aspects. In fact, working 4 ten-hour days a week would create savings over 5 eight-hour days.
In the real world where resources are finite, we need to think creatively and humanistically about practical approaches, not reflexively take Dr. Krugman's approach and turn to Leviathan for fixes.
Dr. Krugman is oriented toward government. In Europe, he would likely be a member of a Social Democrat-type party. Fine, legitimate point of view. But the key is to avoid imbalances such as massive deficits other than in wartime. A Great Recession caused by hot money, mortgage fraud and imprudent borrowing/lending simply does not get "solved" by repaving roads.
Two macro economic solutions are: Win a world war and thus dominate the global economy (the way out of the Great D); or deleverage at all levels (the post-WW II solution until leverage got excessive in the past decade).
Since a world war is not desired, the solution is to simplify our accounts, and as the world turns, commit ourselves to replacing debt with equity.
I would suggest starting with Citigroup.
The disagreement between Dr. Krugman and President Obama is one between similar thinkers. Both advocate government increasing its leverage to a greater extent than the rest of the economy is simultaneous decreasing its own.
There is no current cleared, trodden path away from this roadway, and until there is, I believe that the fundamental case for gold is strong and that new gold buyers can and will easily be found.
Remember: 30 to 1 leverage is a conservative measure of current Federal leverage. Sounds like Bear and Lehman to me. Paul Krugman thinks that raising this to 31 to 1 is the solution for 2010. Barack Obama perhaps prefers 30.8 to 1. I favor bringing it down an order of magnitude to, say, 3 to 1, and then going below that, and rethinking all current economic dogma built on the alleged virtues of an ever-expanding gross domestic product.
Copyright (C) Long Lake LLC 2010
Showing posts with label Great Depression. Show all posts
Showing posts with label Great Depression. Show all posts
Friday, January 29, 2010
Monday, January 25, 2010
Shalom Also Means Goodbye
Dr. Steve Keen of Australia, one of the few economists who predicted the financial crisis, has a concise post out titled The Economic Case Against Bernanke. Mish has also posted on this. Please read this, as it is not lengthy. The focus is debt levels; Dr. Keen correlates the 1920s and Great Depression to the recent past and current situation.
In my very humble opinion, there has to be a reason why the current downturn has lasted so long and why in December, 24 months after the first official recession month, the better part of one million people are reported to have left the job force.
They did not leave because they had successfully played the stock market rally in 2009!
Large companies, which often have 90%+ gross margins on their products, can show rising profits without sales gains simply by cutting a variety of costs, but it is the continued decline in the labor force that argues that the downturn is not truly over. And this is occurring as government has taken on more debt than the private sector has shed.
It would appear that either governments at all levels of this country need to suddenly find very productive uses of their debt spending, or we are simply going to have to get serious about canceling a number of the debts.
Also, it is time that all financial institutions perform accurate accounting of their assets. If the companies have no equity with proper accounting, their stocks should go to or near zero and the bondholders need to engage in a debt-for-equity swap. If the companies are solvent, then the Fed can cease trying to create inflation by penalizing savers.
One of the relatively subtle Big Lies extant is that the steep yield curve is bullish. Actually, a zero short-term interest rate is bizarre. A 10-year Treasury yield of about 3.7% is hardly predictive of a booming economy.
It is this sort of financial situation along with a rising stock market that has played the dominant role in the economic models such as the Index of Leading Economic Indicators and ECRI's analysis.
At very high and very low temperatures, matter acts strangely. The same is true at extremes of interest rates.
Meanwhile, of course the same Establishment that let TARP pass only after the Senate got to lard it up with a large spending bill that was languishing there, that changed the focus at the last minute when it got back to the House, that predicted a Depression if TARP did not pass and has not explained why the economy promptly imploded, and that hid the final large AIG payout to counterparties at 100 cents on the dollar by the distraction of some relatively small bonuses to the remaining staff at AIGFP has rallied the troops and appears poised to push the second coming of the Maestro to a second term as chairman of the Fed, no matter how abysmal his performance has been as Sir Alan's lieutenant and then as chief enabler of the reckless boom.
I see no reason why gold and low-end retailers will not continue to thrive, given that the same people can be reasonably expected to follow the same policies that brought them to the power to which they tenaciously cling.
Ben Shalom Bernanke should in good conscience say thanks but no thanks and let someone with clean hands guide the Fed.
Copyright (C) Long Lake LLC 2010
In my very humble opinion, there has to be a reason why the current downturn has lasted so long and why in December, 24 months after the first official recession month, the better part of one million people are reported to have left the job force.
They did not leave because they had successfully played the stock market rally in 2009!
Large companies, which often have 90%+ gross margins on their products, can show rising profits without sales gains simply by cutting a variety of costs, but it is the continued decline in the labor force that argues that the downturn is not truly over. And this is occurring as government has taken on more debt than the private sector has shed.
It would appear that either governments at all levels of this country need to suddenly find very productive uses of their debt spending, or we are simply going to have to get serious about canceling a number of the debts.
Also, it is time that all financial institutions perform accurate accounting of their assets. If the companies have no equity with proper accounting, their stocks should go to or near zero and the bondholders need to engage in a debt-for-equity swap. If the companies are solvent, then the Fed can cease trying to create inflation by penalizing savers.
One of the relatively subtle Big Lies extant is that the steep yield curve is bullish. Actually, a zero short-term interest rate is bizarre. A 10-year Treasury yield of about 3.7% is hardly predictive of a booming economy.
It is this sort of financial situation along with a rising stock market that has played the dominant role in the economic models such as the Index of Leading Economic Indicators and ECRI's analysis.
At very high and very low temperatures, matter acts strangely. The same is true at extremes of interest rates.
Meanwhile, of course the same Establishment that let TARP pass only after the Senate got to lard it up with a large spending bill that was languishing there, that changed the focus at the last minute when it got back to the House, that predicted a Depression if TARP did not pass and has not explained why the economy promptly imploded, and that hid the final large AIG payout to counterparties at 100 cents on the dollar by the distraction of some relatively small bonuses to the remaining staff at AIGFP has rallied the troops and appears poised to push the second coming of the Maestro to a second term as chairman of the Fed, no matter how abysmal his performance has been as Sir Alan's lieutenant and then as chief enabler of the reckless boom.
I see no reason why gold and low-end retailers will not continue to thrive, given that the same people can be reasonably expected to follow the same policies that brought them to the power to which they tenaciously cling.
Ben Shalom Bernanke should in good conscience say thanks but no thanks and let someone with clean hands guide the Fed.
Copyright (C) Long Lake LLC 2010
Thursday, August 27, 2009
Comparing 2008's Banking Crisis to Prior Ones
In Banking Crisis Dwarfs Great Depression, John Lounsbury presents a number of facts and interrelationships in a way that is novel to me (link seen on Dr. Ed Harrison's Credit Writedowns). Since much of the reason to read this piece is in the charts, please click on the hyperlink to read it unfiltered by me.
Copyright (C) Long Lake LLC 2009
Copyright (C) Long Lake LLC 2009
Friday, June 5, 2009
For Those Who Doubt The World Is In a Depression . . .
Please see A Tale of Two Depressions, by Barry Eichengreen Kevin H. O’Rourke, which is an update of the authors' 6 April 2009 column comparing today's global crisis to the Great Depression. World industrial production, trade, and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better. The update shows that trade and stock markets have shown some improvement without reversing the overall conclusion -- today's crisis is at least as bad as the Great Depression.
Here ar
e some graphs.
Graphs for industrial output for many other countries show the same pattern. The current downturn is not the Great Depression, or GD 2, in part because less time has elapsed since the onset.
Let's of course hope that it's winding down as the seers predict.
Copyright (C) Long Lake LLC 2009
Here ar
e some graphs.
Graphs for industrial output for many other countries show the same pattern. The current downturn is not the Great Depression, or GD 2, in part because less time has elapsed since the onset.
Let's of course hope that it's winding down as the seers predict.
Copyright (C) Long Lake LLC 2009
Wednesday, May 27, 2009
Economic Banana More or Less Confirmed as Depression
From the WSJ, Sharper Drop Is Forecast for Factory Production:
U.S. manufacturing output is expected to decline 12% this year, a much sharper pullback than the 8% predicted just three months ago and a sign of how the downturn is hitting factories particularly hard, according to a new report.
"Everything has gone to rock-bottom levels that I thought was unattainable," said Daniel Meckstroth, chief economist at the Manufacturers Alliance/MAPI, a public-policy group in Arlington, Va., that published the report.
This downward revision is late coming. As the Government has been reporting and this blog has been one of the few noting in print, wholesale trade figures are closer to a 20% year on year ("yoy") decline, and the dollar volume of this trade is enormous, around one trillion dollars monthly. It is pretty much the whole economy minus such personal services as legal fees, haircuts, etc.
If the conventional differentiation between a recession and a depression is a 10% drop in output, then a manufacturing depression is essentially confirmed. It is not the Great Depression, but if one considers all the outsourced manufacturing to Asia and look at Asia's truly enormous manufacturing/export declines, it is not so clear that this event and the 1929-32 events are all that different. Of course, there is much greater material wealth now, and non-cyclical endeavors such as health care are a much greater part of the economy now. With retail down about 10% yoy, though, I'm inclined to call this downturn a Depression.
Unlike the mid-1970s near-Depression that was caused by an oil embargo and quadrupling of oil prices, or the severe but less severe 1981-2 recession that was deliberately caused by Paul Volcker using very high interest rates and slow money supply growth, this downturn was self-inflicted but not deliberately so and is thus closer to the 1929-32 crash than the more recent severe economic downturns.
Depressions end; this one may soon end, but Depressions are like major hurricanes or earthquakes. Each is its own event. This one is/was a Katrina, hitting our major industries of finance and auto manufacturing with devastating force. Simply knowing that Katrina was passing, or even that the flooding had peaked, did not change the devastation that was wrought on New Orleans.
Live, and invest, accordingly.
Copyright (C) Long Lake LLC 2009
U.S. manufacturing output is expected to decline 12% this year, a much sharper pullback than the 8% predicted just three months ago and a sign of how the downturn is hitting factories particularly hard, according to a new report.
"Everything has gone to rock-bottom levels that I thought was unattainable," said Daniel Meckstroth, chief economist at the Manufacturers Alliance/MAPI, a public-policy group in Arlington, Va., that published the report.
This downward revision is late coming. As the Government has been reporting and this blog has been one of the few noting in print, wholesale trade figures are closer to a 20% year on year ("yoy") decline, and the dollar volume of this trade is enormous, around one trillion dollars monthly. It is pretty much the whole economy minus such personal services as legal fees, haircuts, etc.
If the conventional differentiation between a recession and a depression is a 10% drop in output, then a manufacturing depression is essentially confirmed. It is not the Great Depression, but if one considers all the outsourced manufacturing to Asia and look at Asia's truly enormous manufacturing/export declines, it is not so clear that this event and the 1929-32 events are all that different. Of course, there is much greater material wealth now, and non-cyclical endeavors such as health care are a much greater part of the economy now. With retail down about 10% yoy, though, I'm inclined to call this downturn a Depression.
Unlike the mid-1970s near-Depression that was caused by an oil embargo and quadrupling of oil prices, or the severe but less severe 1981-2 recession that was deliberately caused by Paul Volcker using very high interest rates and slow money supply growth, this downturn was self-inflicted but not deliberately so and is thus closer to the 1929-32 crash than the more recent severe economic downturns.
Depressions end; this one may soon end, but Depressions are like major hurricanes or earthquakes. Each is its own event. This one is/was a Katrina, hitting our major industries of finance and auto manufacturing with devastating force. Simply knowing that Katrina was passing, or even that the flooding had peaked, did not change the devastation that was wrought on New Orleans.
Live, and invest, accordingly.
Copyright (C) Long Lake LLC 2009
Wednesday Afternoon Market Update: Focus on Gold and Treasuries
During this period of price deflation and excess capacity of almost everything except fair treatment of the taxpayer out of Washington, the yield on long Treasuries has skyrocketed. This is now discounting inflation in the out years well above the (say) 3% rate that has existed on average since the formation of the Fed and institutionalization of inflation rather than price stability in this country. If Treasuries are not a buy, then nothing much else is except gold.
Spot gold itself is up 30% since its low of half a year ago at $720/oz. It has also potentially failed against the double top of last July and this February. This may be a bullish portent for Treasuries. The inflation-deflation adjusted (i.e. real) yield on Treasuries is as high as almost any yield that existed during tightening periods in the Volcker/Greenspan eras.
What may be happening in Treasuries and in the economy happened in the Great Depression. Let me refer you to Paul Lamont, a financial historian who has made some marvelous calls this cycle. On Jan. 5 of this year he published on the Web "The Haughty Bond", which pointed out:
The investment herd is currently engaged in a Bond buying frenzy. They believe that inflation will be low for an extended period. We agree. While we may have inflationary countertrend rises, overall we are in a deflationary environment where banks fail, assets fall and the economy deleverages. However as history shows, government bonds were sold in the deflationary spiral of 1930-32. The excuses were two fold: liquidity concerns and inflation fears. Banks sold bonds (their mortgages were frozen) to raise cash reserves in case depositors decided to withdraw funds. In addition, major government interventions at the time (sound familiar?) caused a fear of long term inflation. The dumping of Treasury Bonds finally stopped in June of 1932 (the same month as the stock market bottomed). So Bonds depreciated in the historic deflation of the early 1930’s, but is this relevant today?
The current bull market in Bonds has lasted since 1980. But only recently has the Treasury Bond market registered a record extreme in bullish consensus according to MBH Commodities' Daily Sentiment Index. Now for the first time in 28 years, 99% of traders believe the upward trend will continue. Remember when everyone thought real estate could only go up in value? At this point, the Treasury Bond market is swaggering around, certain of its own opinion that it cannot fall.
In this scenario, mortgage-backeds should be sold aggressively, as they have been far to strong vs. Treasuries, or held to term. Now that there has been an historic steepening of the Treasury yield curve with an equally historic percentage increase in yields of 85% (from 2 to 3.7%) in about 5 months in the 10 year T-bond, Lamont's analysis suggests that one can now buy intermediate to long-term Treasuries either to hold for the long term or to trade out of on price strength. This was the right strategy during the Great Depression until WW II inflation hit and remains a potentially potent risk-reward strategy for an appropriate portion of a portfolio today.
Copyright (C) Long Lake LLC 2009
Spot gold itself is up 30% since its low of half a year ago at $720/oz. It has also potentially failed against the double top of last July and this February. This may be a bullish portent for Treasuries. The inflation-deflation adjusted (i.e. real) yield on Treasuries is as high as almost any yield that existed during tightening periods in the Volcker/Greenspan eras.
What may be happening in Treasuries and in the economy happened in the Great Depression. Let me refer you to Paul Lamont, a financial historian who has made some marvelous calls this cycle. On Jan. 5 of this year he published on the Web "The Haughty Bond", which pointed out:
The investment herd is currently engaged in a Bond buying frenzy. They believe that inflation will be low for an extended period. We agree. While we may have inflationary countertrend rises, overall we are in a deflationary environment where banks fail, assets fall and the economy deleverages. However as history shows, government bonds were sold in the deflationary spiral of 1930-32. The excuses were two fold: liquidity concerns and inflation fears. Banks sold bonds (their mortgages were frozen) to raise cash reserves in case depositors decided to withdraw funds. In addition, major government interventions at the time (sound familiar?) caused a fear of long term inflation. The dumping of Treasury Bonds finally stopped in June of 1932 (the same month as the stock market bottomed). So Bonds depreciated in the historic deflation of the early 1930’s, but is this relevant today?
The current bull market in Bonds has lasted since 1980. But only recently has the Treasury Bond market registered a record extreme in bullish consensus according to MBH Commodities' Daily Sentiment Index. Now for the first time in 28 years, 99% of traders believe the upward trend will continue. Remember when everyone thought real estate could only go up in value? At this point, the Treasury Bond market is swaggering around, certain of its own opinion that it cannot fall.
In this scenario, mortgage-backeds should be sold aggressively, as they have been far to strong vs. Treasuries, or held to term. Now that there has been an historic steepening of the Treasury yield curve with an equally historic percentage increase in yields of 85% (from 2 to 3.7%) in about 5 months in the 10 year T-bond, Lamont's analysis suggests that one can now buy intermediate to long-term Treasuries either to hold for the long term or to trade out of on price strength. This was the right strategy during the Great Depression until WW II inflation hit and remains a potentially potent risk-reward strategy for an appropriate portion of a portfolio today.
Copyright (C) Long Lake LLC 2009
Tuesday, April 21, 2009
Why the SIGTARP Report Suggests Both Looting and that a Depression Is Underway
Today's Quarterly Report of the Special Inspector General for the Troubled Asset Relief Program is quite troubling. Early on, it summarizes matters:
The Troubled Asset Relief Program (“TARP”) now includes 12 separate, but often inter-
related, programs involving Government and private funds of up to almost $3 trillion
— roughly the equivalent of last year’s entire Federal budget. From programs involv-
ing large capital infusions into hundreds of banks and other financial institutions, to
a mortgage modification program designed to modify millions of mortgages, to public-
private partnerships purchasing “toxic” assets from banks using tremendous leverage
provided by Government loans or guarantees, TARP has evolved into a program of
unprecedented scope, scale, and complexity.
Any effort this immense, "unprecedented" in peacetime, including the Great Depression, will only be done for a truly major catastrophe, not just a "recession". Paul Volcker, who is still at least nominally allied with the Administration, uses the euphemism "Great Recession" to describe the current downturn. Since the word "recession" was introduced solely for PR reasons and means what "depression" meant before the Great D, we must interpret his use of the term for what it is. TARP is response to an economic depression.
The Troubled Asset Relief Program (“TARP”) now includes 12 separate, but often inter-
related, programs involving Government and private funds of up to almost $3 trillion
— roughly the equivalent of last year’s entire Federal budget. From programs involv-
ing large capital infusions into hundreds of banks and other financial institutions, to
a mortgage modification program designed to modify millions of mortgages, to public-
private partnerships purchasing “toxic” assets from banks using tremendous leverage
provided by Government loans or guarantees, TARP has evolved into a program of
unprecedented scope, scale, and complexity.
Any effort this immense, "unprecedented" in peacetime, including the Great Depression, will only be done for a truly major catastrophe, not just a "recession". Paul Volcker, who is still at least nominally allied with the Administration, uses the euphemism "Great Recession" to describe the current downturn. Since the word "recession" was introduced solely for PR reasons and means what "depression" meant before the Great D, we must interpret his use of the term for what it is. TARP is response to an economic depression.
Re the looting charge, SIGTARP has already initiated almost 20 preliminary or full criminal investigations. These may be non-trivial:
. . . the cases include large corporate and securities fraud matters . . . insider trading, public corruption . . .
In addition, six areas of audit are underway. These include special mention of BofA and BofA/Merrill; all 9 initial TARP funds recipients; and the payments to AIG's counterparties.
SIGTARP is specially critical of Treasury's refusal to monitor what has happened to the funds given to large financial institutions in return for preferred stock. On its own, SIGTARP looked into the matter and received significantly detailed responses as to what the companies had done with the funds, sometimes in "granular" detail. Why has Treasury refused such a simple matter?
SIGTARP has numerous complaints about the PPIP, which will be thoroughly analyzed by other bloggers much more expert than I.
There will be multiple "bottom lines" in this mess. It is clear that at best Chairman Bernanke incompetently misdiagnosed matters as rosier than they were. I wonder if Big Hank Paulson also misdiagnosed things. In my humble opinion, he knew exactly how bad things were, given that he had recently run Goldman Sachs, which more or less runs Wall Street. He exposed himself by waiting for the crisis that he knew was coming after he put Fannie and Freddie into receivership, then making sure in a 2 1/2 page document to request immunity for any misdeeds he might be accused of doing in implementing TARP. How well is he sleeping these days?
We have had unprecedented stock market manipulation by the SEC, twice putting short squeezes on to harm those who (correctly) were shorting financial stocks, then taking the pressure off after insiders and favored institutions were allowed to unload a lot of stock at unfairly high prices.
We have a Democratic Congress that would not even investigate a Republican President for alleged contractor abuses in Iraq. One has to worry about how much zeal it will have to investigate a Democratic President's Treasury Department, especially when the Treasury Sec'y has been the glue in this disaster all along.
What is going on has elements of the Great Crash, in its financial and economic dimensions; and Watergate, with its political dimensions; as well as the S&L fiasco writ large. One cannot think of anything like this festering toxic mix within the past hundred or more years in this country. In this situation, where Big Finance and Big Government have been lying both by commission and by omission, there is no way to use historical economic tools to predict the future. We just do not know what we may not know, other than that as a pretty young bride said to Rick in Casablanca, the devil has the people by the throat.
Copyright (C) Long Lake LLC 2009
Monday, March 30, 2009
Auto Makers, Banks, and Bailouts
30 years ago, the Federal Government "bailed out" Chrysler with a loan. Taxpayers eventually made some money on that loan.
Thus began the age of bailouts, with bondholders of the poorly-run bank Continental Illinois being made whole due to years of hard work by the Feds after the bank collapsed, then the bailout of Mexico's bondholders in 1995 in and end-run around Congress, the bailout of Wall Street in the 1998 LTCM collapse, etc.
Now we read this about Chrysler (WSJ):
The government said it would provide Chrysler with capital for 30 days to cut a workable arrangement with Fiat SpA, the Italian auto maker that has a tentative alliance with Chrysler.
...
If the two reach a definitive alliance agreement, the government would consider investing up to $6 billion more in Chrysler. If the talks fail, the company would be allowed to collapse.
Just as with Citigroup and its ilk today, one wonders if it would not have been better if Chrysler had been left to die in 1979. Think of how many investors have lost how many dollars propping this corpse up for the last three decades.
(EBR might praise the administration for making a tough decision on the automakers, except that at least these companies actually make products people use, employ skilled labor, and are victims of the worst economic banana since the Great Depression; whereas those who caused this banana are receiving trillions of dollars in aid. While in the bailout mode, why not give a little less to Big Finance and more so the automakers can ride out this downturn, Mr. President?)
It is past time for a people-centric financial policy built on equity rather than debt. Policies in that direction will in and of themselves render "banking" what it was in the 1950s, a small utility-like part of the economy without the swagger and pretense of all the "Masters of the Universe" bull----.
Copyright (C) Long Lake LLC 2009
Thus began the age of bailouts, with bondholders of the poorly-run bank Continental Illinois being made whole due to years of hard work by the Feds after the bank collapsed, then the bailout of Mexico's bondholders in 1995 in and end-run around Congress, the bailout of Wall Street in the 1998 LTCM collapse, etc.
Now we read this about Chrysler (WSJ):
The government said it would provide Chrysler with capital for 30 days to cut a workable arrangement with Fiat SpA, the Italian auto maker that has a tentative alliance with Chrysler.
...
If the two reach a definitive alliance agreement, the government would consider investing up to $6 billion more in Chrysler. If the talks fail, the company would be allowed to collapse.
Just as with Citigroup and its ilk today, one wonders if it would not have been better if Chrysler had been left to die in 1979. Think of how many investors have lost how many dollars propping this corpse up for the last three decades.
(EBR might praise the administration for making a tough decision on the automakers, except that at least these companies actually make products people use, employ skilled labor, and are victims of the worst economic banana since the Great Depression; whereas those who caused this banana are receiving trillions of dollars in aid. While in the bailout mode, why not give a little less to Big Finance and more so the automakers can ride out this downturn, Mr. President?)
It is past time for a people-centric financial policy built on equity rather than debt. Policies in that direction will in and of themselves render "banking" what it was in the 1950s, a small utility-like part of the economy without the swagger and pretense of all the "Masters of the Universe" bull----.
Copyright (C) Long Lake LLC 2009
Sunday, March 22, 2009
Yesterday . . . and Today
Yesterday, all my troubles seemed so far away
Now it looks as though they're here to stay
Oh, I believe in yesterday.
Suddenly, I'm not half the man I used to be
There's a shadow hanging over me
Oh, yesterday came suddenly.
-McCartney/Lennon
This post is about two yesterdays, the one we enjoyed 2 years ago and that left suddenly, pre-economic downturn; and the one America did not enjoy in the 1930s.
As Krugman explains at the bottom, to find the percentage decline in manufacturing for each downturn, multiply by 100 (12% decline for now vs. 27% then).
Two more quick points. One: Our economy is less oriented to manufacturing now. The current massive declines in exports of manufactured goods out of Asia demonstrate that the U. S. decline would have been much worse now had we not outsourced so much manufacturing.
Two: There was a major spurt in manufacturing in the 1920s, similar to that of the 1990s. Manufacturing and "non-house" consumption growth from 2002-7 were not at boom levels, thus a smaller fall-off in percentage terms would get to the same "baseline" or below trend levels.
Here's the entirety of the Krugman posting from March 20:
The Great Recession versus the Great Depression
Reading this article about the global manufacturing plunge, I wondered: how does the current slump stack up against the early stages of the Great Depression? The US has consistent industrial production data back to 1919, so it’s a fairly straightforward exercise. Below is the change in industrial production, measured in logs, from the previous peak in 1929-30 and 2007-9.
At first, the current recession didn’t hit industrial production all that hard. But the pace accelerated dramatically last fall, so that at this point we’re sort of experiencing half a Great Depression. That’s pretty bad.
Clarification: Those are natural logs — sorry, economists use them so frequently I forgot to explain. So basically multiply by 100 to get the percent change.
Copyright (C) Long Lake LLC 2009
Friday, March 20, 2009
Bushbama as Hoover
I have been reading at out-of-print book titled, "Age of Depression". In keeping with the current Age of Frugality, I obtained the book for free at www.scribd.com and thus the only costs associated with reading it are the electricity to power the computer and the minimal wear and tear on the computer itself. Regardless of whether the current "Big Banana" of an economic slowdown approaches the horrors of the "Great" Depression, which the book points out was different from the other economic depressions that came before in this country, the macro aspect that this one is the first to stem from wildly speculative borrowing and lending practices, and actual and potential bank failures, makes the past worth reviewing.
The book, which appears as fair-minded to all parties as one could imagine, makes the point that Hoover believed in the trickle-down theory that the most important role for the Federal Government was to sustain the financial structure.
This is so "right-on" in relevance to the failures of the multiple Fed, Bush/Paulson and Obama/Geithner, and Congressional actions that it is scary.
In the Depression vein, perhaps the most widely-read book on the Great D ("The Great Crash of 1929") was written by John Kenneth Galbraith, a Canadian economist who helped administer wage-price controls during WW II for FDR and ended up a hugely influential liberal economist in the post-War era.
His son, James Galbraith, is another economist, and is similarly liberal.
In "No Return to Normal" in the current Washington Monthly, Dr. Galbraith fils implicitly accepts the argument made in this blog that we are looking at an emergency similar to, though currently milder than, the Great Depression, and argues for massive government spending.
His article is quite long and "important" and thus not an easy read. Here is a partial summary with (of course) EBR editorial comments:
First, he argues that the Obama/Geithner team is far too enamored of the Larry Summers/Robert Rubin Hoover-like approach toward favoring the big financial institutions over direct assistance to individuals and smaller governmental units that are dealing in various ways with this economic Banana.
Ed: Good for him!
He then goes on to praise World War II for helping the economy by forcing people to live so penuriously that they had to save and thus could spend later. He proposes more of the same now, potentially for decades.
Ed: This is wrong-headed. Starve now, prosper later is his prescription. Simpler and favored: do take down the corrupt self-serving financial institutions that are basically vehicles to enrich the insiders by financializing everything they can, but create a balanced economy built upon savings but not to the level of non-consumption imposed by the Government on a suffering populace in the War.
It is also wrong-headed in that he also perpetuates the myth that it was War spending that brought on prosperity. Just ask any German or Japanese if they enjoyed post-War prosperity, even though their governments also spent big-time during the War. No, Dr. Galbraith, War is Hell and is horrible for the economy. Winning the biggest War in history and being essentially the only undamaged major economy did, however, allow the winner to enjoy the spoils. It was the big win in the War in both the Western and Pacific fronts that brought prosperity to this country, which has now largely been squandered by decades of living beyond our means.
The Galbraith article goes on to say:
A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around.
This is a direct attack on Barack Obama's own words, which have been criticized in this blog, that credit is the fundamental factor that makes the U. S. economy run. Instead, the current answer, it is argued here, is profits and savings are the key to a successful capitalist economy. Out of those efforts come the capital that can then be lent should there be worthwhile projects that deserve capital. Unfortunately, Galbraith describes the current situation as well as the past:
During the 1930s public spending was large, but the incomes earned were spent. And while that spending increased consumption, it did not jumpstart a cycle of investment and growth, because the idle factories left over from the 1920s were quite sufficient to meet the demand for new output.
Ed: There are plenty of shopping malls, houses, condos, auto factories, domestic and foreign clothing suppliers, food growers (and too much food consumption), etc. That is why less production is "OK" for now; in such times of adjusting to a more sustainable balance between production and ability to pay for that production, support for those who would like to work but can't find work due to the economic slack is important. Just think of all the hundreds of billions of dollars spent on AIG, Citi, BofA, Deutsche Bank etc. by the Fed and the Feds that could have been spent directly on individuals. It makes the blood boil. It is the Hoover approach, and it continues under Barack Obama and a Democratic Congress. Even the AIG bonus diversion is exactly wrong in that it deliberately ignores the vastly larger Federal payments to AIG and its (often foreign) counterparties, while penalizing the individuals involved, who at least have flesh and blood and may or may not have been responsible for the malfeasance at AIG.
The good doctor and I agree on one point that this blog has advocated, which is the importance of small-to-medium-sized banks that act conservatively, as many such banks have done over the past several years:
Ultimately the big banks can be resold as smaller private institutions, run on a scale that permits prudent credit assessment and risk management by people close enough to their client communities to foster an effective revival, among other things, of household credit and of independent small business—another lost hallmark of the 1950s. No one should imagine that the swaggering, bank-driven world of high finance and credit bubbles should be made to reappear. Big banks should be run largely by men and women with the long-term perspective, outlook, and temperament of middle managers, and not by the transient, self-regarding plutocrats who run them now.
He agrees with EBR and the non-partisan Economic Cycle Research Institute about the low risk of high inflation in the short to medium term:
Third, in the debt deflation, liquidity trap, and global crisis we are in, there is no risk of even a massive program generating inflation or higher long-term interest rates. That much is obvious from current financial conditions: interest rates on long-maturity Treasury bonds are amazingly low. . . They are . . . worried, as I am, that the larger economic outlook will remain very bleak for a long time.
Dr. Galbraith makes a lengthy justification, as do Paul Krugman and Nouriel Roubini, for massive deficit spending, near the end of his piece. While he and I part company on that point, what is striking is how broadly across the political spectrum come the criticisms of the current Administration on its handling of the financial crisis and also how widespread are the fears of longer-term economic malaise.
Dr. Galbraith and DoctoRx at EBR agree that the Bush-Obama approach of "large complex financial institution uber alles" and their policy of trying to resume unsound lending practices is a huge mistake.
Until this huge mistake is corrected, it follows that from an investment standpoint, I just can't convince myself that becoming an owner American corporate enterprise through the rigged, insider-run casino known as the stock market is a prudent use of anyone's capital at prices anywhere near today's.
Copyright (C) Long Lake LLC 2009
Saturday, March 14, 2009
No Good Reasons to Buy Stocks Now
This image of the Dow Jones Industrial Average, dating from 1929, may be most usefully analyzed by mentally or physically turning it upside down. (Click on it to enlarge.) Turning the graph upside down will put the downtrend that is now on the top right pointing down, instead on the bottom right pointing up. The Great Crash of 1929-32 will still be on the left but will point upwards and thus look like a "Good Thing". The smaller crash of 1973-4 will look like a small bull market.
Now, let's perform a thought experiment. Assume that there was a company that had been in existence as a publicly-owned entity all this time, and that it had kept its identity, but that business had in general been difficult. Perhaps there was incessant foreign competition, perhaps it mined a material was superseded by a cheaper material, or perhaps management was just not so hot. Now, the fundamentals had changed over the past 2 years as follows:
1. Rapidly rising sales and earnings;
1. Rapidly rising sales and earnings;
2. Rapidly rising dividends;
3. Stock priced well below tangible book value;
4. Senior management owns large stakes in the company;
5. Senior management has no "heads-I win but tails-I-don't-lose" options in the stock;
6. Senior management has been so underpaid and so used to difficult business conditions that it has sold stock after price surges in the past year;
7. Rapidly becoming free of government ownership and suddenly not needing subsidies;
8. Rapidly rising profit margins from the long-depressed levels;
9. Similar companies in similar business all over the world were suddenly experiencing booming business with similar early-stage stock breakouts to the upside.
All these points are of course the opposite of today's situation regarding general business conditions.
Obviously, professionals would buy this stock hand over fist, or with both hands and both fists.
If they wanted to buy it enough, they would remind the public that this stock had been a dog for a long time and they should be very skeptical about buying this rally.
To use another analogy, the plain and simple fact is that not only does the economy stink, but the two best forward-looking predictors of the economy and the stock market in this cycle have been the credit markets, which do not confirm the recent stock pop, and the ECRI's Weekly Leading Indicator of the economy, which yesterday dropped to a new cycle low, and is now at 1995 levels- not adjusted for inflation.
Also, for those who missed EBR's mention, the Commerce Department's advance report of business in the US of A was that $1 Trillion worth of business (pretty much the whole economy) was done in January. This was down 14-15% from January 2008. Considering all the inflation in the first half of 2008, this number should properly be adjusted to reflect the inflation, and thus would be more like a 17% decline in physical business year on year. It is said that adjusted for the deflation of the time, business in the 32 months or so of the Great Depression dropped 25% peak to trough. One therefore wonders if this about 17% real drop year on year even has a precedent in the Great Depression.
Conspiracy theorists amongst us would even wonder why no one seems to have heard of this report, though the mere 9% year on year drop in retail sales was cheered as "better than expected" (it was still a horrible double digit drop adjusted for inflation).
In any case, back to the Dow: it's a screaming buy only in a looking-glass or Bizarro world.
Copyright (C) Long Lake LLC 2009
Sunday, February 15, 2009
What does Austria Have to do with Stalingrad?
In Failure to save East Europe will lead to worldwide meltdown;
The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point, Mr Ambrose Evans-Pritchard reports and opines about new things about which to worry:
If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.
Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.
"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.
The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East.
In 1931, the failure of the Austrian bank, the Creditanstalt, is credited with setting off round 2 of the Great Crash and the Great Depression. The first year and a half (or so) of the Crash was, from stock market terms, similar to the last year and a half here, or "not so bad" and not unprecedented. In less than a year and a half following the chaos of the Creditanstalt's collapse, stocks were down another about 80%. This is where the historic nature of the Great Crash and Great Depression came.
When one sees reference in what I hope is reputable press worrying about a monetary Stalingrad, then I worry too. Stalingrad is infamous for the extensiveness and brutality of the German siege during World War II.
More generally, what has received too little publicity Stateside is that the large EU financial institutions are much more heavily leveraged than their equivalent companies here.
The financial speculation was not limited to the U.S. More and more areas are revealed to have been part of the wildness.
As l'affaire Madoff has now perhaps led to the uncovering of l'affaire Stanford, which could be a multi-billion dollar scam, so too has the awareness of the scale of overpriced subprime securities been supplemented by the awareness of more and more risky borrowing and lending and other forms of speculation.
Great Depression II, with cellphones, is possible.
Copyright (C) Long Lake LLC 2009
The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point, Mr Ambrose Evans-Pritchard reports and opines about new things about which to worry:
If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.
Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.
"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.
The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East.
In 1931, the failure of the Austrian bank, the Creditanstalt, is credited with setting off round 2 of the Great Crash and the Great Depression. The first year and a half (or so) of the Crash was, from stock market terms, similar to the last year and a half here, or "not so bad" and not unprecedented. In less than a year and a half following the chaos of the Creditanstalt's collapse, stocks were down another about 80%. This is where the historic nature of the Great Crash and Great Depression came.
When one sees reference in what I hope is reputable press worrying about a monetary Stalingrad, then I worry too. Stalingrad is infamous for the extensiveness and brutality of the German siege during World War II.
More generally, what has received too little publicity Stateside is that the large EU financial institutions are much more heavily leveraged than their equivalent companies here.
The financial speculation was not limited to the U.S. More and more areas are revealed to have been part of the wildness.
As l'affaire Madoff has now perhaps led to the uncovering of l'affaire Stanford, which could be a multi-billion dollar scam, so too has the awareness of the scale of overpriced subprime securities been supplemented by the awareness of more and more risky borrowing and lending and other forms of speculation.
Great Depression II, with cellphones, is possible.
Copyright (C) Long Lake LLC 2009
Friday, January 16, 2009
CPI Understates Deflation; or, Requiem for a Heavyweight?
The Bureau of Labor Statistics has released the CPI data today.
The annualized rate of prices for the last three months is a negative 12.7%. This is Great Depression-level deflation.
This report understates current deflation because of the following:
"Continuing decreases in the indexes for lodging away from home, airline fare, and new and used motor vehicles, along with downturns in the indexes for apparel and recreation, offset increases in other indexes including rent and owners' equivalent rent, medical care, and education." (emphasis added)
Housing is NOT making a positive contribution to the cost of living. It is making an important negative contribution. Even if we understand and agree that the Government goes out of its way to make matters look less inflationary than they really are, I think that we can agree that currently there is no price increase almost anywhere that can "stick" except whatever is imposed by law or regulation.
The markets "get it" and are taking stock prices down, especially the financials, the latest rally of which has vanished. I suspect that a lot of Governmental and Fed officials have been talking to the Swedes about their nationalization of their banking system in the early 1990s following a real estate bubble. We appear to remain in the teeth of the economic storm.
While what is happening in economics and finance is disastrous, the continuity vibes coming out of the incoming Administration do not encourage me. In my opinion, Mr. Obama needs to bring into his Administration and amongst his advisers those who foresaw that the TARP bailout was hastily and wrongly designed. The complaints about its implementation ring hollow when the complaints come from those who crafted and fought for the legislation. Mr. Obama and his people need to come out hard in favor of equity and not debt. This is not an issue du jour but rather the key to long-term economic recovery. If he does not embrace this issue, the Republicans might do so and unexpectedly gain the edge in what could the most important economic theme of the next supercycle (though it takes time to build such a movement). The productive capacity of the U.S. is unimpaired; the cost of imported goods is plummeting; the people are eager to work; there are no major state enemies; Al Qaeda is on the run and its financial backers are going broke.
Therefore these can be the best of times, and soon. However if the new Administration persists on the failed long-term path of a debt-based economy rather than a true ownership society, not the Bush version that was based on debt (we know Obama will fight for a "fair" society as well), Econblog Review predicts that the best it is going to do is patch the aging fighter up to survive to fight another round or two.
Copyright (C) Long Lake LLC
The annualized rate of prices for the last three months is a negative 12.7%. This is Great Depression-level deflation.
This report understates current deflation because of the following:
"Continuing decreases in the indexes for lodging away from home, airline fare, and new and used motor vehicles, along with downturns in the indexes for apparel and recreation, offset increases in other indexes including rent and owners' equivalent rent, medical care, and education." (emphasis added)
Housing is NOT making a positive contribution to the cost of living. It is making an important negative contribution. Even if we understand and agree that the Government goes out of its way to make matters look less inflationary than they really are, I think that we can agree that currently there is no price increase almost anywhere that can "stick" except whatever is imposed by law or regulation.
The markets "get it" and are taking stock prices down, especially the financials, the latest rally of which has vanished. I suspect that a lot of Governmental and Fed officials have been talking to the Swedes about their nationalization of their banking system in the early 1990s following a real estate bubble. We appear to remain in the teeth of the economic storm.
While what is happening in economics and finance is disastrous, the continuity vibes coming out of the incoming Administration do not encourage me. In my opinion, Mr. Obama needs to bring into his Administration and amongst his advisers those who foresaw that the TARP bailout was hastily and wrongly designed. The complaints about its implementation ring hollow when the complaints come from those who crafted and fought for the legislation. Mr. Obama and his people need to come out hard in favor of equity and not debt. This is not an issue du jour but rather the key to long-term economic recovery. If he does not embrace this issue, the Republicans might do so and unexpectedly gain the edge in what could the most important economic theme of the next supercycle (though it takes time to build such a movement). The productive capacity of the U.S. is unimpaired; the cost of imported goods is plummeting; the people are eager to work; there are no major state enemies; Al Qaeda is on the run and its financial backers are going broke.
Therefore these can be the best of times, and soon. However if the new Administration persists on the failed long-term path of a debt-based economy rather than a true ownership society, not the Bush version that was based on debt (we know Obama will fight for a "fair" society as well), Econblog Review predicts that the best it is going to do is patch the aging fighter up to survive to fight another round or two.
Copyright (C) Long Lake LLC
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