Month: August 2010 Page 1 of 3

Let’s have a chat about the economy, starting with a couple articles.

The first is an article from the NY Times noting that small investors have been moving out of the market in droves: 33.12 billion out of mutual funds this year, so far.  This is entirely rational, not only is the market currently fixed (major movers do not make a profit every single day of a quarter in a free market), but inflation is low and deflation threatening.  When risks are high and inflation is low, the smart thing to do is store your money under a mattress since it will lose little value.

Of course, this is only partially true, since inflation numbers are cooked, and it’s not clear that prices of the things which matter most – food and energy (aka. heating) are actually dropping.

The second article I want to highlight is a column in the Financial Times, by Michael Pettis.  Pettis argues that the surge in exports from China and Germany , which has lead to an explosion of the US trade deficit, is dangerous.  He notes that the fall of the Euro plus austerity in Europe, and the availability of extremely cheap credit to Chinese manufacturers, has increased surpluses in China and Germany.  As European countries that have trade deficits try and lower those, this leaves the US as the designated consumers for the surplus since trade deficit countries in Europe can’t afford to borrow due to the European credit crisis.

This isn’t sustainable, and Pettis fears it will lead to a backlash from America, with actual tariffs and trade quotas.

The larger point is simpler: the countries being punished by “bond vigilantes” are countries running balance of payment deficits.  Countries whose finances are in no better shape than, say, Spain, are not getting hit.

But everyone can’t run a surplus.  It is impossible.  As a simple matter of math, the accounts must balance.  The idea pushed by Germany, that everyone should be more like them, and have positive balances of payments, is nonsense.  It is literally impossible.

Everyone fears a massive decline in trade, as in the 30s.  They should, because we are in a Depression.  However, the fact is that if surplus countries refuse to moderate themselves, then the balance will be fixed some other way. It may be through actual protectionism in the US, it may be through a collapse of US demand, but it will happen.

That which cannot go on does not go on.

In terms of the US economy, it’s pretty clear we’re in a second downleg of the Depression, as predicted.  The key issues are that States and municipalities are essentially bankrupt, and that corporations aren’t hiring.  Corporations aren’t hiring because their profits are fine, and because they don’t see where the sustained growth would come from.  States and municipalities are having income issues because the incomes of median taxpayers have not recovered and the number of employed is not increasing (ignore the “unemployment rate”, what matters is how many people are employed and that hasn’t recovered worth a damn.)  Since States and municipalities have limited ability to borrow and can’t print money, in both cases, unlike the Feds, this means they must cut or raise taxes and in general States are ideologically opposed to raising taxes and municipalities don’t feel they can.  Housing prices remain depressed, which is the main source of money for municipalities.

Since there is no chance of a real stimulus being passed (and if there was, Obama would do it badly, like he did the last one) and since Obama refuses to spend the TARP money on the economy until it’s his reelection on the line rather than Congressional Dems, and since there’s no obvious source of new jobs in the US economy, I see little reason to expect the US economy to recover.  Even if the world economy somehow does, it will route around the US, since the US is a high cost domicile and there is no good reason to produce in the US.  In the old days you produced in the US because that was where the next big tech boom occured, the skills were there, and you needed in.  With the deliberate strangling of innovation in the US due to the oligopolization of the economy, the next tech boom (if there is one) is unlikely to occur in the US.

Overall, there isn’t a lot of reason to be cheerful.  If the economy does manage to pick itself up off the floor, that would mean an increase in the price of oil, and inside of two years (and probably inside of one, if it was a good recovery) that increase would spike the recovery in any case.

None of this was necessary, but Obama chose to not just ask for too little money in his stimulus, but spent the money very badly even outside of the hugely useless tax cuts.  The money did not give the economy an obvious medium term direction: either a huge telecom build-out or an energy and conservation build-out, and the huge bailouts for financial firms created a more concentrated financial sector full of zombie banks with no intention to lend money.  The failure to create a workable cram down on housing prices which also rescued underwater home owners has left housing prices underwater and credit markets still sclerotic.  With the House either going Republican in the fall, or if it remains Democratic with the Democratic margin being controlled by hard-core Blue Dogs, even if Obama did buy a clue, there is little chance that a decent restructuring stimulus bill could get through Congress and the actions of regulatory bodies like the FCC, the Justice department, as well as Obama’s implicit recognition of the health oligopoly, make it clear that his administration has no intention of challenging, let alone dismantling, the oligopolies which are draining the life blood of the US polity.

Plus ca change…

An excerpt from January 5th, 2009:

I’ve long observed that the only economic policy that Obama really really believes in is tax cuts. During the election, even when no one really cared, he would keep repeating, over and over and over again, that he was going to cut taxes.

The problem is that giving money to people without pricing power (most middle and working class people) is pointless. People with pricing power, like health care providers, credit card companies (who can and will raise rates) and employers (who will take into account that their workers are now taking home more money and thus don’t need as much from them) will simply take the money away. And at this time workers and ordinary consumers just don’t have pricing power.

Likewise corporations are not going to create real new jobs if there’s no demand. Who wants to invest into this economy? This isn’t an economy where you hire new people, it’s an economy where you take any money you’ve got and you use it to buy up distressed competitors and properties at generational lows. Then you rationalize your new acquisition with your own company by laying people off. We’ve just spent the past few months watching this play out in the banking industry, heavily subsidized by the government, now we’re going to have to watch the government subsidize buyouts of non-financial companies. If at first giving money to corporations (banks) doesn’t work, why not try it with even more companies?

Stimulus at this time should not be tax cuts, it should be spending. Rewire the country’s energy infrastructure, make every building energy efficient, rebuild roads, build high speed train corridors on the west and east costs, then connect them to each other. Give cities money to build the trams or subways they’ve been wanting to build. Push high speed internet out to everyone, and at the same time increase its speed to international standards (i.e. 10x as fast as the crappy “high” speed internet North Americans get). Move to single-payer healthcare and buyout the health insurance companies. Extend UI to 12 months, and create a bunch of programs that folks can work in as was done in the Great Depression.

Spend money and that money will create demand—for all the products needed for all those projects, for the workers to build all the trains, rail lines, roads, power lines, high speed internet, and so on. And you won’t just be giving money away to be spent in all the same ways that got us where we are, you’ll be refitting the economy. The key thing that hasn’t got through the thick skulls of the elites is that the old economy didn’t work for the majority of people. It was broken. Even the “prosperity” which the elites had (and they did, they are richer than they have been in a century) was fake—it was based on profits that didn’t exist. Wall Street’s losses weren’t losses, they were the revelation that every profit they made for the last 10 years was fake and based on fraud.

The economy needs to be restructured, and that means spending on restructuring, not giving money to people to spend in the same patterns as they did before. That doesn’t mean no money shouldn’t be given out, it should. Relief for those who need help should be generous, but the majority of money shouldn’t go to handouts, it should go to creating a new America and creating jobs that Americans can work in to help create that new America.