stimulus

/ / , , , , /

House Prices Drop Slightly

Getting hold of hard economic data right now is difficult. Worse: when we find some it is ambivalent. Today’s Case-Shiller Index report bucks that trend somewhat, home prices dropped 0.7% in October. That’s not ambivalent, it’s just bad.

The problem with housing is not just that it seems difficult to identify the bottom in prices, but that so many unknowns impinge on that calculation. The Case-Shiller Index measures resales of houses in 20 of the country’s top housing markets, so it gives us an excellent reading on the movement of values through time. After picking up a little earlier in the year we are now facing the likelihood that prices will continue to ebb for a few months more. My guess is well into the early summer of next year.

Why?

Because of all the reasons that undid the bubble to begin with plus the pressure of a “shadow” inventory hanging heavily in the background. This latter effect is the great unknown: no one really has a proper notion of its impact, yet we all know that there is such an impact. The shadow inventory consists of all the homes with mortgages in arrears, in foreclosure, or simply in the hands of owners who would dearly love to sell but cannot for a variety of reasons, negative equity being primary among them.

So the openly discussed inventory of unsold homes, which is still large by historic standards, but is down from the peak reached in the immediate aftermath of the crisis, is just the tip of a very large and depressing iceberg. Even if it never transmutes into actual activity to the extent that its shadow suggests, that inventory is choking off any solid recovery in housing. Couple this continued loss of wealth implied by lower home values with the poor income outlook into 2011 and 2012, and it is very hard to see a dramatic upturn in aggregate demand.

Without that we won’t get back to our historic growth pattern any time soon. And the longer we remain below that long termtrend, the more prone we are to reversals and dissatisfaction all round.

Don’t forget that real estate played a disproportionate role in generating jobs over the last decade. Construction is just not going to be a big factor in the near to medium term. Which leaves the great question unanswered: where will the jobs come from?

Who knows?

And that is why we all are stumbling with our forecasts. If we subtract construction from the equation, the US economy has a weak record for job creation for a very long time. So we keep coming back to the same solutions. Devalue the dollar to get jobs from export trade; and boost domestic demand as best we can through reflationary policy actions. Looking beyond that old bag of tricks requires an imagination singularly lacking in our policy and business leadership at the moment.

Meanwhile today’s home price report suggests we are still stuck in a low gear. Unfortunately.

/ / , , , , , , /

What Inflation?

If there is one economic factor that the experts on Wall Street have consistently been wrong about, it is inflation. Ever since the great intervention in the economy after the Lehman implosion these analysts have been explaining that the consequent huge increase in the money supply would inevitable – inevitably – produce a sharp increase in inflation. This line of reasoning has been taken up by the right wing echo chamber and is now approaching full blown cacophony.

For two straight years we have been lectured by these orthodox economists and their various political hanger-on that the policies of the Fed and our neo-socialist government will do nothing but untold harm to our economy. Those policies will, they say, lead not to economic health, but to economic ruin brought on by the debasement of the dollar and an associated, uncontrolled, burst of inflation. It is this prospect, so they say, that is preventing businesses from investing, and is undermining consumer confidence.

Government is the problem.

Where have we heard that before?

Those of us who argue differently are dismissed as crazy interventionists who don’t realize the consequences of this supposedly reckless monetary regime.

Well.

Let’s look at the facts.

Inflation, when we take away the volatile stuff like food and fuel, has steadily chugged down a disinflationary path. The experts have been wrong in their forecasts for twenty-four months and counting. It is this adjusted, or core, measure of inflation that we look at to understand the trend of prices within the economy. Food and fuel prices jump about all over the place and tend to mask the underlying trend. This is not to say that those jumps are not real, but that they do not signify anything of deeper meaning within the overall price structure of the economy.

And what is today’s news about consumer prices?

The unadjusted Consumer Price Index rose just 0.2% in October. Core inflation was flat for the third month in a row, and has risen only 0.6% over the last year. This is the lowest level of core inflation ever reported. The trend line is still downward. We are perilously close to deflation and getting closer each passing month.

In other words the facts completely refute the imminent inflation disaster argument. Utterly and totally refute it.

Not that I expect it to go away. Those who fan fears of inflation do so on the basis of two things:

  1. An ideological dilike of government intervention in the economy
  2. A misreading of the economic situation

The ideology is well known and often drives otherwise sensible people to hold odd and anti-socail policy positions. The second is less well known, but is more pernicious since is based upon wrong headed economic theory.

So, to make my case once again: We are stuck in an odd economic situation. The normal outcomes from an expansionary monetary policy, assuming strong employment and demand, could be upward pressure on prices. That assumes the economy fails to expand in real terms in response to the change in money supply. But. These are not normal times. In fact we are so far from normal that we may not return there for a decade or more. We have an economy with a very large gap between its capacity or potential and its actual level of activity. We are going through a steady reduction in debt, and that implies a loss of cash for spending. We have very weak employment to go with this weak demand. Flooding money into this kind of economy may reduce interest rates enough to stimulate activity, but it will not shift prices.

Think about this from a practical business point of view. In the face of weak demand for your products, it makes no sense to raise prices. It makes sense to cut them.

If enough businesses cut enough prices we enter deflation.

If demand for the stuff needed to make consumer goods is sufficiently weak, those prices will drop too. And that includes wages.

The only reason that commodity prices are jumping about at the moment is that many emerging economies are growing well. It is not a reflection of overly strong demand in the developed economies.

So the experts are absolutely wrong. Inflation is nowhere in sight. Those folks who signed the letter published in the Wall Street Journal two days ago were urging the Fed to back away from its “inflation inducing” policies. Their point of view is thoroughly debunked by today’s news.

Will we see them change their mind in view of the new facts?

Of course not. Why let facts get in the way?

Fact based policy making is so yesterday.

/ / , , , , , , /

The Dark Ages Are Back

Here we go. The Dark Ages are upon us. I realize that post modernists have a hard time with the concept of the Dark Ages, but I don’t. They were dark, and filled with a willful ignorance born of an ideological and religious zealotry. Intellectual discourse was suppressed to make way for the only truth – in Europe this was Roman Catholicism. The authoritarian church burned and otherwise disposed of anything that was not within their narrow view of the world. This included the entire corpus of ancient Greek thought which was only rediscovered a thousand years later when Europeans ventured into the middle east and came across the great seats of learning in the Arabian world.

And now, with us?

We have forgotten all the learning of the 1930’s. The Fed is lambasted for doing what it is supposed to do. And the Republicans have now launched an attack on its very reason for being. This is ugly. We are trying to be ignorant. We are trying to expunge alternative ideas. We are falling prey to dumb thinking dressed as cleverness.

Not only is it difficult to press for an all out Keynesian response to the crisis, even though it is the only proven solution that doesn’t consign millions of our citizens to abject poverty, but it has now become difficult to engage anyone seriously about the alternatives. Apparently the forces of free market ideologues are making a stand, and will not concede their error. They prefer to sink America as long as they sink Obama too.

Setting aside the question as to whether Obama deserves to survive. This is nihilism at its very worst. Read your Nietzsche quickly.

So obsessed are the Republicans with ousting Obama that they would gladly advocate policies that undermine the economy. Thus they attack the Fed for daring to undertake QE2: it might succeed and thus bail out Obama. They have now begun a campaign to alter the Fed’s official mandate to strip it of the goal of bolstering employment. Right now the Fed has a dual mandate: keep inflation low, and, at the same time, maintain full employment – which is generally thought to mean an unemployment rate of about 5.0%.

Yes. You read that correctly.

The GOP wants to take the Fed’s unemployment franchise away and force it to focus simply on inflation. According to Senator Corker from Tennessee this would simplify things for the Fed. It would also mean it could not follow policies like QE2 which are designed to stimulate the economy.

I will not defend the Fed’s success or failure. In my view they have failed terribly: they have not kept full employment and they have allowed inflation to drop below their target range. Unemployment is too high and inflation too low according to the Fed’s own targets. The Fed is also the regulator responsible for the mortgage market. I need say no more on that topic.

Nonetheless the GOP attack is extraordinary for its recklessness and total abandonment of the nation’s unemployed. It is vicious. It is deliberate. It is tantamount to plunging us back decades in terms of economic thinking.

The notion that it is Congress alone that should combat unemployment is laughable. Corker knows full well that his party have stalled, gutted, and undermined every single attempt to help the unemployed. His party offered not one plan to stimulate the economy. Other, that is, the failed policy of cutting taxes.

This astonishing attack on our economy has only that one goal: to unseat Obama.

So not only is Keynesian fiscal policy not to be deployed to help our situation. Nor is Friedmanite monetary policy. What’s left? the Bible? Hope, wing, and a prayer?

These zealots are committed to the institution of a modern version of the Dark Ages in which we are cleansed of our ideological errors and are forced to live only by the one good book. The Palin wing, of course don’t even allow books, but that’s anther question.

Is America this stupid?

Yes.

Even erstwhile sophisticated analysts like David Brooks get tangled up in the right wing backlash against modern thought. His column today sent poor old Paul Krugman into fits. I see why. It was replete with a revisionist and totally false history. Brooks accused left of center economists of being model bound and beholden to uber-ratuonalist thinking. Nothing could be farther from the truth: it was the right wing Chicago school who developed the rational model of economics. They did it to unseat the more real world and pragmatic Keynesian mode of thought. Brooks is accusing the left of the sins of the right. Yet he gets published. He either is completely ignorant of modern economic thought, or he is deliberately lying about it. Both explanations of his column are odious.

So here we are.

The next phase of the great war has begun. We are plunging rapidly into an intellectual void. The dumber the leader the better. The more outrageous the lie the more easily it is believed. Dialog is expunged and looked at as unnecessary. The cultural wars began as a push from the right to re-assert discredited values or to impose supposedly “family” values on those who dared to think differently. The fear of difference was stoked from being a marginal oddity into the central mass of right wing political ideology.

Nothing is allowed to get in the way of the radical transformation the right wants to impose on middle America.

And that crusade to take us all back to the Dark Ages has now focused on the Fed.

Yesterday I picked up my copy of Gibbon. His conclusion at the end of his epic history was that the decline and fall of Rome was driven by four great forces: the passage of time that undermined the empire’s original vitality; the empire’s abuse of its environment; the rise of Christianity and the concurrent invasion of the barbarians; and above all its eventual loss of civil internal discourse.

And after that decline and fall, Europe was plunged by those same forces into the thousand years of ignorance and poverty we call the Dark Ages.

This sounds all too familiar.

The analogy is stark.

The next two years will be brutal.

/ / , , , , , , , , , /

Bernanke Takes a Beating

Poor old Ben, I feel bad for him. Today’s Wall Street Journal carries an open letter from a long list of right wing leaning economists and other sundry analysts urging him to stop all this QE2 nonsense and get back to the proper course of reducing regulation, helping big business, and thinking of nifty ways to reduce taxes.

Well they don’t quite go that far, but you get my drift. They talk in proper terms: “… we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.”

This is standard right wing fare and nothing new. And I mean nothing new. Not new in this crisis, and not new at any time in the past three decades.

The problem they believe is that “The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed‰Ûªs objective of promoting employment.”

This sounds awful.

Debasement of the currency? Oh, horrors!

Increased inflation? Oh, double horrors!

The end of the earth is nigh because Ben Bernanke, Republican appointee and conservative though he may be, is pushing an agenda that will result in a debased currency and run away inflation.

And what is this evil policy?

Monetary policy.

Plain and simple. Old fashioned monetary policy. Albeit with a twist: instead of intervening in the market to reduce short term rates, the Fed has resorted to buying longer maturity assets. How dare they!

All that money will inevitably create inflation and send the dollar plunging. There will be a tidal wave of debasement, hyperinflation, and civilization will end – at least at the Harvard Club. Egad. Whatever next? Deficit spending? Apocalypse pending.

Setting aside my constant commentary that I don’t see where this inflation will come from – the inflation rate is miniscule and shrinking fast. There seems to be a problem here. What other policy, pray tell, is the Fed supposed to follow in the face of high unemployment and zero interest rates? There isn’t one. It only has one policy option. And let me repeat: it’s called monetary policy. The kind you would find advocated in the text books these people teach from. Indeed one of the signatories is none other than John Taylor the author of his eponymous rule the Fed uses to determine what interest rates should be. Last I looked that rate, according to the Taylor rule, was -5.0%. Which is not possible by any other route than QE2.

I look forward to a forthcoming revision from Professor Taylor. Along with an apology for having created so evidently a stupid rule.

Let’s just be clear about QE2: it may not work because adding boatloads of cash to an economy awash with cash seems like a long shot. Especially when no one wants to invest that cash in the US. So a great deal of that cash will spill over into the global economy where it will annoy people like the Germans, Japanese, and Chinese all of whom are trying to avoid dealing with their own economic imbalances. They don’t want the dollar to fall because that decline would force them to address issues in their various domestic economies. Like reducing their exports and making more stuff for their own populations. Annoying these folks is not a bad thing when our own survival is at stake.

Further, even were it to work, QE2 looks as if it is too small to drive the economy off the rocks by itself. It needs to be complemented by fiscal policy. Which is not going to happen.

Thus the risk of inflation is practically zero. We have an economy stuck in a glut of over capacity. It is suffering rapidly declining core inflation and appears headed towards deflation. Our problems are not at all those suggested by the signatories. The private sector is stuck. There is little sign that it will improve much, if at all, from where it is now. There is one and only one way out: the government.

Therein lies the rub.

The signatories hate the notion – with a near religious commitment – that the government can do anything to help save the economy. So they want to stifle the Fed. It is a “quasi” arm of the government. So it must be stopped before it succeeds else then ideological basis for the right wing collapses.

It doesn’t matter that ordinary people have a huge stake in the success or failure of policy. Or that the policies put forward by the likes of the signatories are exactly those that caused the crisis.

No not at all.

We the people merely exist to support corporate profit making and a sound currency. Even if that means being unemployed. It’s the American way.

Any intelligent observer of the request for more support for business might ask: what should we do to help businesses invest? After all businesses a knee deep in cash and are not currently investing. What else do they need?

Bernanke answers that by lowering rates in order to induce spending.

The right wingers don’t want to go that route. They want to boost profits by giving out tax breaks. This is despite the fact that profits are good and cash flows sufficient. They want us to believe that throwing more breaks to business will somehow set them in motion.

Why? If they are not in motion now?

So I repeat: the problem is not a supply side problem. It is a demand side problem. People are not buying. So businesses are being cautious. Throwing all the cash in the world onto business balance sheets won’t change a darned thing.

One last gripe: the policy Bernanke is pursuing is straightforward monetary policy with that twist I mentioned. It is monetarism. As in Friedman, doyen of the right. Are these signatories abandoning their intellectual leader?

I wish.

/ / , , , , , , , , /

Retail Sales Versus Debt Liquidation: Which Wins?

The phase of the recovery we are now in can be described as a tussle between two opposing sentiments for households. Do they go out and buy? Or do they pay down debt? Of course this is an aggregate view because there will be plenty of households in both camps. So it is the balance between these two opposing forces that we will need to track, especially as we go through the traditional year end selling season.

More to the point, this is a global tussle as well – more on that in a moment.

First: retail sales bounced up nicely, by 1.2%, in October. That makes it four straight months of growth and gives us a little room for maneuver as government spending tails away in the first part of next year. If we look at year on year growth the trend line is good, but not stellar. The bulk of the acceleration occurred earlier in the year, and even though we have consolidated that gain, we have not broken free of the constraints set during the crisis.

Still this is good news and helps us redefine what to expect over the next year. At this pace GDP growth should touch the upper boundary of a 2.0% to 2.5% range. That’s not enough to cure our problems, but it isn’t a collapse back either. All that talk of a double dip recession seems a long time ago now. After the stimulus stopped the rot, consumers have returned with just enough energy to keep us all afloat.

The big risk to all of this is the continued overhang of debt.

As long as the indebtedness of the economy runs at the extraordinary levels reached during the 2005 through 2008 period we will be hampered by the diversion of incomes into debt pay down and thus away from consumption. It is this aggregate shift towards savings – a debt pay down and a deposit into savings are the equivalent and both reduce consumption – that is currently setting the boundary on how fast we can escape the crisis.

Those GDP growth rates of around 2.0% to 2.5% are simply not enough to allow us to reconstruct a strong economy, reduce debt, and lower unemployment all at once. So when businesses look into the future to make expansion plans and set sales goals they are still expecting slow growth. Thus they pull back on investment and keep a tight lid on expenses and their workforce levels. Once an economy slips into this kind of mediocrity it is very hard to escape. The velocity is never sufficient to move to a higher orbit, and the dull outlook begets more dull results.

This story is being repeated on a global scale.

At this level the argument is between expansionists who want economic policy to be positive and apply the force necessary to create that “escape velocity”; and those who see dangers of inflation, currency devaluations, and a tide of deficits from such positive actions. The first group want more active policies. The second group want to retrench and shrink the worldwide economy.

The central issue is to achieve a fruitful balance between productive capacity, and the demand for goods or services produced by that capacity. The expansionists frame the discussion around the lack of demand. They see the problem as a need to induce more spending. The retrenchers want to shrink the economy back into alignment by curbing demand and, presumably, allowing idle capacity to linger on. The biggest part of that idle capacity is, of course, unemployed workers. What the retrenchers are not saying too loudly is that the only quick way to achieve balance through contraction is to reprice the value of the assets or labor that constitute the spare capacity downwards such that is can be absorbed at a lower level of activity.

Naturally I am an expansionist and advocate stimulating demand rather than imposing more wage and asset price reductions.

Yet the austerity, fiscal hawk, retrenchment argument is gathering force. The terrible financial difficulties in Ireland are being used as a stalking horse for more draconian policies elsewhere – even in places like the US where there are many more options than in Ireland.

What this all amounts to is an extraordinary misreading of history and a victory for long ago debunked economic theories. That we are even having this discussion is a symptom of the bankruptcy of those policy elites who drove us onto the rocks, and are now wanting to impose harsh and anti-social measures to counteract the consequences of their earlier mistakes. It is no coincidence that the creditors who are supposedly baying for austerity, else they won’t lend to us anymore, are the self same folks who bloated their incomes by peddling toxic assets a few years back. Having bailed them out we are now supposed to bend to their will and slash our wrists so as not to impose a cost on them. This is exactly the situation Ireland finds itself in. That we and others are beginning to cave in as well is scandalous.

So an epic struggle is unfolding, most people are unaware of it, yet its outcome will determine the livelihoods of hundreds of millions of people. Will we expand or contract? Will we stimulate or slash and burn? Will we spend or save? Will we invest or will we cry poverty and cutback? This is not trivial.

And right now the wrong people have the upper hand.

«< 10 11 12 13 14 >»