Monday Mash-Up
With the Thanksgiving weekend over and the first taste of the holiday season under our belts – literally after all that turkey – we have a somewhat mixed set of news to deal with. So rather than devote my time to a single topic allow me to surf across the issues:
- Dubai: Given all the media ink spilled on the financial crisis that swamped Dubai anyone would have been forgiven were it the first sign of the end of the world. I suppose, given the ongoing fragility of our banks, that any hiccup in the credit markets is worth attention so there is some justification for the fuss. But not too much. The Dubai story can be summed up simply: building exotic stuff like ski slopes in the desert or by the Red Sea is probably a sign of a bubble. It is not a very sound financial transaction. Any bank with a piece of this particular action needs its head tested. Apparently there are several, with HSBC topping the list. None of the banks looks as if it will fall as a result of this folly. The Abu Dhabi government has underwritten the entire shambles. The signs of growing panic on the world’s bourses last week is a shot across our bows: world finance is in dire need of fixing. Dubai simply reminded us of the urgency in getting reform legislation passed as quickly as we can. Having said that I can’t help but wonder what history would have recorded had a bank fallen foul of this folly. Ski slopes in the desert. Really.
- Health Care: This is going to dominate the headlines for a while longer. There seems to be no end to the folly either. The latest inanity comes from a Senator Hutchinson. Her problem is that the new mammogram guidelines will be caught up with the public option: she claims that any mammogram undertaken earlier than indicated in the guidelines would not be covered either by the public option or by the private insurers. This she says causes confusion and is a sign of the kind of rationing we can all expect after reform. Naturally she fails to note that a very large number of women cannot be screened, no matter what their age is, under the current set up simply because they don’t have insurance at all. So the rationing argument fails to note the extension of essential coverage to a very large number of people. Besides nowhere is it written in the reform that the public option would not cover early mammograms, especially were doctors to recommend them. So Senator Hutchinson is crying foul over a huge red herring. Why am I not surprised by that? The level of ‘debate’ in this reform process has been staggeringly low. This is one of the most important items on our national agenda and all we’ve been treated to is pandering to a few ‘centrists’; name calling and hysteria from the right; and confusion and a lack of clarity from the left. No one has come clean and told the voting public why we need reform: we cannot bankrupt ourselves on health care. That means making choices and cutting costs. The cheapest system will always be the largest – actuarial costs are lower the larger the population covered. That’s a government program of some sort that includes as many of us it can.
- Banking: We are now being treated to the spectacle of international cooperation on the control of systemic risk. Given previous efforts in this regard I hold out little hope of progress. But the back chat is always good for a laugh. For instance: some of the mega banks – those that brought the world to ruin last year – are protesting that they cannot draw up the ‘living wills’ that are being requested from them. The reason? Their businesses are just too complex and so a single ‘will’ would not be adequate. I am sorry … but isn’t this the problem? If their businesses are so damned complex and interconnected that they cannot be killed off easily, they are too complex to manage also. That’s what’s wrong with them. They need to be reduced to simple, maybe smaller, lines of business that we can all understand. My guess is that if you can’t draw up a will for a bank, you can’t draw up a good risk management plan either. I suppose that’s too obvious for these banks to figure out though. In a similar vein I read a very geeky paper written back in 2004 by an MIT professor called Andrew Lo. In it he argued that one failure of our banking system is that it lacks diversity. By this he means all our big banks are the same. So an economic shock that damages one will damage them all. In terms of ecology we have a very thin and fragile ecosystem. A more diverse set of banks, not just smaller banks but banks with different lines of business, would help mitigate the spread of contagion. The entire system would be more robust. This argument seems very sound to me, but it likely won’t get very far in the face of the lobbying power the banks have and the lack of imagination the administration has.
- Black Friday and Retail Sales: The first reports from retailers about their sales last friday is decidedly mixed. Apparently there were far more shoppers in the stores than last year. The problem is that they spent stingily. There was a slight increase in dollar sales, but it was far less than the increase in shoppers. So we can either take heart: people were out and about so the siege mentality seems to be lifting; or we can get worried: people are still not spending freely. I think the good news is more likely to come after today: ‘Cyber Monday’. This obnoxious nomenclature refers to the first Monday after Black Friday – in recent years there has been a noticeable surge in online shopping on the first day back at work. Presumably people continue with their weekend holiday oriented spending even from the workplace. The expectation is that online shopping will continue to blossom, and may well carry the season along with it. The most visited online stores remain Amazon and Wal-Mart which is no surprise, and the biggest online shopping surge comes from all those last minute gifts during the ten days before Christmas. Cyber Monday is merely the precursor to that later splurge. Meanwhile we will get detailed November sales reports from the retail industry this Thursday. My guess is that sales rose a little, but not that much. We have a long way to go.
- Debt Hysteria: By now I have thrashed this to death. No one should be surprised by the never ending warnings of debt doom from the deficit hawks, but it does get tiresome. Here’s the deal: deficits are fine as long as they represent a response to a crisis. That’s because a government’s revenues tend to go way down in a crisis, just as its expenditure goes up. Things get all out of balance. Think of it as a dampening effect on the private sector’s fear driven shut down. The problem deficits are those that are gratuitous. These do not act as dampeners. On the contrary they tend to act as accelerators. A big government deficit during non-crisis times acts to inflame rather than retard the economy’s own direction. Such deficits add to the debt without having any beneficial impact. They should be avoided at all costs. Governments should keep a balanced budget – or close to – during economic booms so that they can spend freely during recessions and offset the private sector’s collapse. This is not what we have done in America. We have run up huge deficits as a permanent feature of our fiscal policy and thus boxed ourselves in just when we need to go hog wild. The oddity is that the deficit hawks all seem to have been fine with the gratuitous deficits of the 1980’s and 2000’s, but are now in panic over the very sensible deficits of today. Politics gets in the way of sound economics far too often. This is an egregious example. An example? The cost, or the interest we pay on our national debt. The hawks are in a tizzy over its rising cost, which looks set to grow to over 3% of GDP over the next year or two. This upward trend will be accelerated as interest rates rise from their current low levels. Is this a big deal? Well, not really. The projected level is close to that we saw back in the years of George Bush senior, when we were digging out from underneath the Reagan debt load. It was manageable then and it will be manageable now. Still the hysteria lingers on as a convenient ideological tool to fight the Obama agenda [whatever that is!].
- The Dollar: The debt hysteria is paralleled by a dollar panic. Often the two coalesce. Usually the same people occupy the two positions. And, again, ideology laps over the underlying arguments. The dollar has fallen and looks set to continue its decline. The drop so far this year has been in excess of 16%. Those who pay attention to these things will notice that this decline is not quite as large as that we witnessed during the Bush years, but it is significant. There are a couple of thing going on here. First the dollar was unduly strengthened by the financial crisis as foreign investors crowded into dollar based assets because they deemed them safer than the more speculative currencies they were invested in previously. Second: as the crisis has subsided this trend has been reversed and revealed the longer term decline that the gains made during the panic had masked. This long term decline is a result of the steady rise of solid alternatives to the dollar, especially the Asian currencies, and the endemic deficits that the US has run for the past thirty years. The dollar is finally wearing out its welcome. The deficit hawks have a point here, the flood of US debt will inevitably act to cheapen the dollar. My take on this is: good. Let the dollar decline. That way we can slowly erode the value of the debt ,and pay it back in cheaper currency. This is a time honored way in which debtor countries like the US avoid a default. In effect they ‘default’ over time. The world used to need a strong dollar so that international trade and investment could be secure and stable. Nowadays there are better ways to achieve that same goal: most likely a package of currencies including the dollar, the euro, the yen and various other Asian currencies. It might even include the ‘standard drawing rights’ quasi-currency from the IMF. In any case the days of dollar hegemony seem numbered. So it goes for all currencies, especially when the issuer becomes a major debtor. It is a little noticed historical oddity that the US is the first world power to be a debtor rather than a creditor. Throughout history, starting with the Roman Empire, the world’s foremost political power has also been a lender to the rest of the world. The US is a borrower. It maintains its standard of living by borrowing rather than through creating wealth. Sometime this ability has to end as the world gets sated with US debt. The financial crisis and the fiscal imbalance that resulted from it seems to have brought that date forward. So look for a continued steady decline in the dollar – over the long haul of course because there will always be short term blips back up as the adjustment to a new regime is worked out.
So there you have it. My ‘Monday Mash-Up’.
Lots to think about as we wait for the economy to slip into a higher gear.
This holiday season is crucial. Let’s hope it goes well.
