Archive for the 'Economics' Category

The Economic Falacy of Government Job Creation

Published
by
Doug
on July 28, 2008
in Economics
. 0 Comments

The WSJ Political Diary recently had a story about the RINO Senator Chuck Hagel and how he shares a vision with Barack Obama that what America lacks right now is a “national infrastructure bank.” For just a modest $60 billion over 10 years to finance projects, the bank will “create” two million new jobs.

Regardless of whether America needs to work on its infrastructure, the idea that government can create jobs is an economic falacy. This proposed national infrastructure bank is simply a new tax on all citizens. Every dollar taken away from taxpayers is one dollar less they have to spend on other stuff. Thus, for every job that is created by funding from this national infrastructure bank, a private job has been destroyed elsewhere.

In essence, government job creation is simply government sleight-of-hand where at best there is a diversion of jobs from economic sector to another.

Buffett’s Prediction on Effects of Growing Trade Deficit Turning Out to Be True

Published
by
Doug
on July 10, 2008
in Economics and Foreign Policy
. 0 Comments

Chrysler Building

Warren Buffett wrote an article for the November 10, 2003 Fortune about the negative consequences of America’s growing trade deficit. In the article, Buffett tells the story of the citizens of Squanderville and Thriftville. The citizens of Thriftville work hard to produce goods for which the Squanderville are willing to pay.

The Thriftville citizens accumulate a large amount of Squanderville bonds. The Thriftville citizens get nervous about the ability of Squanderville citizens to repay the IOUs, so Thriftville citizens decide to sell some of the bonds back to Squanderville and to use those proceeds to purchase Squanderville land, figuring that it would be harder for the Squanderville government to renege on physical land as opposed to paper IOUs. Pretty soon, Thriftville owns all Squanderville land.

America is Squanderville. Soveriegn wealth funds have been buying hundreds of millions of securities of American companies and American real estate. The New York Times has a recent story on how foreign investors are purchasing “trophies” and choice real estate. The recent purchase of the Chrysler Building by the government of Abu Dhabi is just one example. If we don’t want to be owned by foreign nations and we don’t want our grandchildren working to pay off our debts, per Bufffett’s advice we must attempt to correct the trade deficit.

But maybe we shouldn’t be worried. As Coyote Blog points out, America has experienced similar periods of angst, citing the 1980s panic of the Japanese buying up America. Nothing horrible happened then and perhaps nothing horrible will happen now.

Furthermore, Coyote Blog writes, “The fact is that holding our debt and owning US assets gives China (and other nations) a huge shared interest in our stability and continued prosperity.” This observation is true, but I still think we and our descendants are going to be working a lot harder and much longer in order to pay off our debts than if we had less debt.

Phil Gramm: America Losing Its Competitive Advantage

Published
by
Doug
on June 28, 2008
in Economics and Politics
. 0 Comments

The WSJ has a good interview up with Phil Gramm. One of the things Gramm talks about is how America is losing its competitive advantage in financial markets. One reason is the increase in government regulation post-Enron and now the sub-prime mess. A second reason is our relatively high corporate tax rates.

Also, Gramm says our advantage over the rest of the world has been our more efficient free-market system:

“Why is America the richest country in the world?” he asks. “It’s not because our people are more brilliant; it’s because we have a better free-market system. Why has Texas created 1.6 million jobs in the last 10 years whereas Michigan has lost 300,000 jobs and Ohio has lost 100,000 jobs? Because governance matters, taxes matter, regulation matters. Our opponents in this campaign are so dogmatic in their goal of having more government because they love the power it brings to them that they’re willing to let it impose costs on the working people that they say they want to help. I am not.”

When picking the President this November, consider very carefully the economic policies of the candidates. These policies will have an impact and could mean the difference between a new era of stagnation or a reinvigoration of our economy.

Taxi Driver: The World’s Most Lucrative Film

Published
by
Doug
on May 15, 2008
in Economics and Film
. 0 Comments

FT.com reports that Columbia University’s Nobel laureate economist Robert Mundell says Taxi Driver is the world’s most lucrative film for a very interesting reason:

John Hinckley, the deranged would-be assassin who attempted to kill Ronald Reagan in 1981, claimed that he was inspired by it. He said that his action was an attempt to impress Foster. (The movie features a scene in which a mohawked De Niro attempts to assassinate a politician.)

According to Mundell, the wave of sympathy for President Reagan that was engendered by the assassination attempt deterred Democrats in Congress from voting against his proposed tax cuts. Due to this accident of history, the US administered a big fiscal stimulus at the same time that Paul Volcker at the Federal Reserve was administering tight money. This, for Professor Mundell, was vital in creating the era of prosperity that followed.

“Taxi Driver is the most important movie ever made from the standpoint of creating GDP,” Mundell told delegates. “It’s the movie that made the Reagan revolution possible. That movie was indirectly responsible for adding between $5 trillion and $15 trillion of output to the US economy.”

Wii Shortage Caused by Weak Dollar

Published
by
Doug
on March 29, 2008
in Asides, Economics and Money
. 0 Comments

Apparently, the Wii shortage is the result of a weak dollar. And before I had just thought Nintendo had just underestimated consumer demand. Shows how much I know.

Overlooked Factors That Have Contributed to the Dollar Demise

Published
by
Doug
on March 26, 2008
in Commentary, Economics and Money
. 0 Comments

Thebulltrader.com has created a list of five overlooked factors that have contributed to the demise of the U.S. currency. They are petrodollars, weather, Wal-mart, the U.S. Treasury Secretary, and public perception. I’m not sure about the weather or Wal-mart, but maybe they are very small factors.

A Re-creation of the 70s to Avoid the 30s

Published
by
Doug
on March 24, 2008
in Banks, Business, Credit, Economics and Politics
. 0 Comments

The Financial Times on banks and regulatory backlash:

Wall Street crises have consequences. By 1932, John Maynard Keynes viewed financiers as “subhuman” and “of gangster mentality”. In 1933, at his inauguration, President Franklin Roosevelt told America that “the money changers have fled from their high seats in the temple of our civilisation”. The next two years saw the Glass-Steagall Act, which split commercial and investment banking, and the birth of the Securities and Exchange Commission.

The severity of the fallout from today’s crisis partly depends on the scale of loss borne by the public sector. So far central banks can, just about, present their activity as that of lenders of the last resort: lending to banks (and now dealers) in return for good collateral. Even the UK Treasury says nationalised Northern Rock’s assets exceed its liabilities.

But it is easy to imagine scenarios in which the public sector bears large and explicit costs. The collateral’s value could fall; central banks might feel obliged directly to prop up the prices of risky assets; bailouts of clearly insolvent banks might occur. High inflation might conceivably be tolerated to cut the real value of private debt – as Professor Niall Ferguson puts it, a re-creation of the 1970s to avoid the 1930s. Such public costs could render peripheral today’s regulatory debate. This is dominated by technical goals: making banks’ capital positions less pro-cyclical and boosting their liquidity. Faith in voluntary codes to reform bankers’ pay, such as that hinted at by Deutsche Bank’s Josef Ackermann, or credit ratings, might come to be seen as hopelessly naive.

Last week Barney Frank, chairman of the House committee on financial services, proposed a new US risk regulator. But the backlash could be more radical. Its objectives? Try these two. First, in an echo of Glass-Steagall, to prohibit some risky business lines at any institutions with implicit state guarantees. Second, to require central banks to take action to limit asset bubbles as well as conventional inflation. If the private losses “socialised” by the public sector do become drastic, so will the proposed remedies.

Business Activity Will Save the Economy, Not Consumer Spending

Published
by
Doug
on March 24, 2008
in Business, Economics and Economy
. 0 Comments

Rich Karlgaard of Forbes.com writes about how South Korea’s newly elected President seems to understand economics better than any of our own presidential candidates:

Wouldn’t it be cool if America elected a president in November who said things like this:

“Business is the foundation of the economy, and the economy will recover only when business activities are re-energized,” Mr. Lee said in a wide-ranging interview over the weekend. “And business here means big and small companies–and the workers and management of the companies.”

Unfortunately, this guy is not available. He is South Korea’s President Lee Myung-bak, the former CEO of Hyundai Construction.

How is it that some foreigners understand the ideas behind freedom and capitalism better than America, the country that once believed in and acted upon such ideas and ideals?

More Bad News: CFO Survey Says Economic Recovery Not Expected Until Late 2009

Published
by
Doug
on March 12, 2008
in Banks, Economics, Markets, Recession and Retail
. 0 Comments

According to the most recent Duke University/CFO Magazine Global Business Outlook survey, which asked more than 1,000 CFOs from a broad range of global public and private companies about their expectations for the economy, the economy doesn’t sound too healthy.

Optimism among chief financial officers in the United States has plummeted, with three-fourths of the CFOs saying the economy is either currently in recession or will be at some point during 2008. Nearly 90 percent of CFOs say the economy will not rebound until 2009. They expect inflation will increase to 3 percent this year.

We also had three major clothing retailers with weak reports: Talbots reported a loss on Wednesday, while American Eagle Outfitters and Men’s Wearhouse reported lower earnings. It seems to me that people are wising up a little and choosing to save more of their money by putting off new clothing purchases.

And yet another story on a crisis in the financial sector. This time its overseas: “Irish banks may need life-support as property prices crash.” There’s talk of nationalization of some banks as the property slump over there is leading to a wave of defaults.

Things still don’t look good here in the U.S. or in the rest of the world.

Market Bounce is Another Opportunity for Bears

Published
by
Doug
on March 11, 2008
in Economics, Federal Reserve, Markets and Money
. 0 Comments

Today, the U.S. Federal Reserve and four other central banks teamed up to get hundreds of billions of dollars in fresh funds to the credit markets. The Fed allowed financial firms to use securities backed by home mortgages as collateral for these central bank loans. The markets were up sharply as a result: e.g., the Dow climbed 416.66 for its biggest gain in over 5 years.

A Bounce or a Rally?

So, will this bounce turn into a meaningful rally? I seriously doubt it. There is a still a lot of bad news out there; some of it lurking out in the open, temporarily forgotten, and I bet there is still a lot more bad news people are keeping to themselves, hoping they won’t have to make any announcements, betting they can ride this storm out, but this storm has yet to shake out all the bad apples from the tree. The arrogant and unprincipled will fall while the modest and prudent will rise to take their place in the end.

Bad News is Still Out There

Let me give you a sample of some of the bad news still out there. For starters, Standard & Poor’s and Moody’s Investors Service have not cut ratings on any of the AAA securities that track subprime bonds; this despite downgrading over 10,000 of the lesser-rated subprime-mortgage bonds. When one of these ratings agencies decides it has to cut a rating on of their AAAs, I think the market will react adversely, and I don’t think it will be much longer before this happens. The Fed is running out of ammunition to correct the markets and I don’t think it can keep dropping the money bombs ad infinitum.

Also, all the highly-leveraged hedge funds are reeling from this credit crunch, some unable to meet margin calls, as lenders are asking for more collateral and Bloomberg is reporting that the Fed has lost control of inflation when you look at the negative yields for the TIPS. I could probably go on, but I just don’t have the time.

With all this in mind, I think the traders and financial institutions were very grateful for this slight reprieve from all their troubles, but I feel that this will be a small bounce, leading to yet another great opportunity for going short.

An Interesting Theory

One last thing I want to mention is Market Ticker’s analysis of what he thinks really happened today. Here is a large excerpt from his post:

We were almost certainly on the verge of the collapse of one or more of the primary dealers AND international banks FOR THE SECOND TIME IN JUST A FEW DAYS!

Remember, The Fed just took an “extraordinary” action in expanding the TAF!

Their only defense the primary dealers had to being forced to buy back those treasuries at a huge loss is to borrow even more of them from The Fed.

BUT THEY WERE OUT OF COLLATERAL TO POST OTHER THAN THESE MORTGAGE AND OTHER “AAA” BONDS!

What’s worse, this short squeeze was being fed by people who did NOT want agency paper at any price; they were generating it by dumping the agencies and buying Ts. They have figured out that its contaminated (see below) and are freaking out about the potential for serious shortfalls or outright defaults.

Remember - “AAA” means “as safe as the US Government.”

Except that lately, we’ve learned that its not - that the claim is a lie.

So The Fed decides that they’re going to put in place a “swap” and let the primaries exchange Treasuries (of which they have several hundred billion) for “Agency and other AAA” paper - mortgages. The intent is to “pair” the two, thereby halting the spread widening and thus stopping the short squeeze.

The action today was nothing more or less than an attempt to stabilize Agency spreads which were blowing wide in a historic short squeeze that was threatening to collapse major financial institutions!

Yet if you listen to CNBS, including Fast Money, you hear these guys saying that “The Fed Injected 200 billion in money.”

NO THEY DID NOT! IN FACT, THEY EXPLICITLY INJECTED EXACTLY ZERO DOLLARS INTO THE SYSTEM; A SWAP OF ONE SECURITY FOR ANOTHER OF IDENTICAL SIZE AND FACE IS A BIG FAT NET ZERO IN TERMS OF BALANCE SHEET AND MONEY SUPPLY IMPACT.

I find this analysis simply amazing. It is something you would never see reported by the mainstream media. This to me seems like an extremely plausible explanation for today’s events. And even if this analysis is wrong, I still just wanted to highlight it as a shining example of the great thinking powers some people possess.